As the US-China trade war continues, tariffs put in place have raised costs for many businesses. Some have produced efforts to restructure their supply chains, but deep levels of supply chain integration in China have caused the conversation to open up to other potential ways to reduce import/export costs, such as the First Sale rule.
The First Sale rule is a U.S. rule that can apply to the international supply chain in general. It can substantially reduce duties and taxes for multi-tiered import transactions. According to the rule, the value of a product that is subject to tariffs can be declared with Customs based on its initial selling price rather than its final one. This is true as long as there are at least two sales in the transaction, all rules justifying first sale are met, and documentation is established.
As an example, let’s say an importer from the U.S. purchases 20,000 units of a product from a vendor for $20 a piece. That’s $400,000 worth of product. If there is a 25% tax on this particular item, that would result in the importer having to pay $100,000 in duty.
Now let’s say the vendor purchased that product from the factory for $15 per unit. This is the first sale of the product, resulting in $300,000 worth of product. If the importer receives first sale treatment, the dutiable value would be based on the $300,000 instead of the 400,000. This would result in a much lower tax of $75,000, a savings of $25,000.
This type of scenario can occur if a few requirements are met:
- A “middleman” must be a buyer in the first sale (from the manufacturer) and must be a seller in the second sale of the product that will be exported to the US.
- The product must be clearly bound for export at the time of the first sale.
- The foreign manufacturer and middleman must be unrelated, or at least conducting transactions at arm’s length.
- The importer can obtain the original invoice from the first sale and show other required documents.
While incorporating the First Sale rule into an import strategy does have some clear benefits, it must be noted that it is not for everyone. The use of the rule is subject to a strict assessment by US Customs, so anyone considering using it should closely study their eligibility first.
It is also a bit more complex than it may sound. A considerable amount of time and resources is needed to ensure transactions go smoothly and meet all requirements. Much of the necessary information and documentation is often kept with various partners throughout the supply chain, therefore a trusted and cooperative relationships must be had between all parties. Part of this required information involves the disclosure of sensitive documentation and data such as the price of the “first sale” to the importer. To keep that kind of information safe and secure, tight control over the process is required.
In addition, errors and non-compliance in regards to the First Sale rule could be misconstrued and result in penalties such as a fine and being overturned by Customs.
Although it is not necessarily a universal solution for all companies that are feeling the impacts of changes in tariffs, the First Sale rule can still be an effective tool for those whose business model fits. Every tier of a transaction has the potential to benefit. Factories and vendors do not have to lower their prices in order to attract buyers, and U.S. importers can reduce their landed costs. In this regard, with some pre-planning, this rule could be an effective option for some businesses to lower costs without having to alter existing supply chains significantly.