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02 April 2021
On 1 March 2021 Judge Thomas J Aquilino, Jr of the US Court of International Trade (CIT) issued a lengthy opinion in Meyer Corp, US v United States (slip op 21-26) which was sceptical of the longstanding use of first sale appraisement in non-market economies (NMEs), causing an uproar in the import community – but is this much ado about nothing?
Under 19 US Code 1401a(b), imported merchandise is presumptively appraised for customs purposes according to its "transaction value" or the "price actually paid or payable for the merchandise when sold for exportation to the United States", subject to certain additions. In a multi-tiered transaction (ie, a transaction with a manufacturer, one or more middlepeople and an importer), more than one sale takes place. The decisions in Nissho Iwai America Corp v United States (982 F2d 505 (Fed Cir 1992)) and Synergy Sport International, Ltd v United States (17 CIT 18 (1993)) authorise first sale appraisement, which is the principle that an importer may value the merchandise based upon the first of the sales (ie, from the manufacturer to the first middleperson), provided that:
This arrangement can significantly reduce the US Customs and Border Protection (CBP) declared value of merchandise – and thus duty liability, which is most often proportional to value (ad valorem) – by disregarding the profit and other overhead costs that are included in the price that the importer pays the middleperson. By way of an example, certain merchandise is subject to a duty rate of 25%, ad valorem, where the first sale price between the factory and middleperson, vendor or trading company is $70 and the second sale price between the vendor to a US importer is $100. Under the first sale appraisement, the $30 of profit and overhead costs attributable to the middleperson or vendor would not be dutiable, realising a savings of $7.50 or 30%.
Use of first sale appraisement has become increasingly popular among importers of Chinese goods, most of which are subject to additional duties under Section 301 of the Trade Act 1974 imposed by the Trump administration and still effective today.
In addition to court cases, countless CBP rulings across nearly 30 years have vetted first sale appraisement. Generally, when CBP audits an importer's use of first sale, the importer must produce a detailed description of the roles of each of the parties involved in a multi-tiered transaction and a complete paper trail relating to the imported merchandise that shows the structure of such transaction (Determining Transaction Value in Multi-Tiered Transactions, TD 96-87, 30 Cust Bull 52 (2 January 1997)). These are the same documents that are required to set up the first sale programme and should be retained in the normal course as part of the importer's record-keeping obligations. Validating the arm's-length nature of the transaction and pricing can be more complicated in cases where the manufacturer and middleperson are related because the circumstances of sale must establish that the relationship did not influence the price paid or payable.
In Meyer, the court reviewed first sale transactions involving related parties and questioned the ability to validate arm's-length pricing for manufacturers based in non-market economies, such as China or Vietnam, where the government exercises significant control or influence over prices. The plaintiff, a US importer, imported certain cookware from China and Thailand purchased through middlepeople or resellers. In this case, all of the parties in the transaction were related: the Chinese and Thai manufacturers, the third-country middlepeople and the importer were all subsidiaries of the same parent company, Meyer Holdings.
The case began as a first sale audit. CBP auditors determined that the sales from the Chinese and Thai manufacturers to each of their respective resellers (middlepeople) were genuine and that the goods in both sales were clearly destined for the United States. Nonetheless, CBP rejected the use of first sale appraisement because Meyer had failed to demonstrate that the sales were conducted at arm's length and that the prices were not influenced by the relationship between the parties. CBP relied in part on the unwillingness of Meyer Holdings to release financial information for the various companies involved in the transaction – because a comparison of the operating margin of the parties is generally part of the arm's-length review. The court sustained CBP's rejection of first sale appraisement for the same reason – namely a lack of evidence to show the independence of the manufacturers from the middlepeople. The court found that the parent company, although not a plaintiff, was not "forthcoming" with the documentation necessary to show an arm's-length transaction, despite having "an interest in seeing these types of matters resolved favorably". Accordingly, the court determined that the relationship between the parties had influenced the price.
The novelty in the Meyer decision is the judge's interpretation of the requirement that the arm's-length transaction be free "of non-market influence", which creates a presumption that transactions involving a non-market economy are inherently compromised for purposes of first sale appraisement. The third Nissho Iwai factor requires that the "manufacturer and middleperson deal with each other at arm's length, in the absence of non-market influence that affect the legitimacy of the sale price". However, this requirement has traditionally been viewed, by both CBP and the industry, holistically as a single factor. Notably, the Meyer's court separated the "absence of non-market influence" into a separate fourth factor, which is nearly impossible to satisfy in the case of non-market economies. The court observed that the "real costs of inputs from the PRC are suspect, given its status as a non-market economy country" and expressed its "doubts over the extent to which, if any, the 'first sale' test of Nissho Iwai was intended to be applied to transactions involving non-market economy participants or inputs".
This position is unusual, in that neither CBP nor other court decisions have ever suggested or considered that the Nissho Iwai non-market influence requirement indicates influence by the government in a non-market economy, rather than a distortion of prices by the companies themselves.
First sale appraisement remains a legally viable duty savings avenue, including for transactions with vendors in NMEs. Meyer presents an original interpretation of the Nissho Iwai first sale factors at the trial-court level. The court itself noted that "the Court of Appeals for the Federal Circuit could provide clarification" on the application of first sale to NMEs, which, if the case is appealed, could take years. Moreover, the case was ultimately decided on a separate, fact-specific basis limited to the related parties involved. Therefore, the breadth of the opinion and implications for businesses whose supply chains operate under a first sale model in NMEs is uncertain, but unless and until clarified by the Court of Appeals, likely extremely limited.
Companies that have implemented first sale, including those with vendors in NMEs, should rest assured that the programme is legally sound. Companies that purchase goods through a trading company or middleperson should continue to consider the implementation of a first sale programme because the duty savings can be significant, particularly for importers of Chinese goods subject to the Section 301 tariff.
Nonetheless, this decision may trigger increased CBP scrutiny of the first sale programme. Companies with such a programme should study the implications of the Meyer case and, at a minimum, audit existing programmes for compliance and ensure that implementation is not vulnerable to a CBP audit. Often, first sale programmes are implemented but not monitored for continued compliance and can result in CBP inquiries and penalties. Importers should ensure that they continue to retain supporting documents for five years and review transactions to ensure that they continue to satisfy the arm's-length pricing tests. Companies may consider, however untested, the Meyer's court suggestion that the method to establish the absence of non-market influence in anti-dumping duty proceedings may also be used in the customs first sale context.
For further information on this topic please contact Angela Santos at Arent Fox LLP's New York office by telephone (+1 212 484 3900) or email (firstname.lastname@example.org). Alternatively, contact Russell A Semmel at Arent Fox LLP's Washington DC office by telephone (+1 202 857 6000) or email (email@example.com). The Arent Fox LLP website can be accessed at www.arentfox.com.
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