© [2019], Sandler, Travis & Rosenberg, P.A. Originally published in the [07/17/2019] issue of the Sandler, Travis & Rosenberg Trade Report. Reprinted by permission.

The U.S. is moving toward the imposition of higher import tariffs on a wide range of goods from the European Union due to several ongoing trade disputes, raising concerns among EU exporters about their access to an important market. However, the first sale rule is a proven tool that can be used to not only mitigate the impact of any such tariffs but also lower costs well into the future.

Under the first sale rule, the dutiable value of a qualifying transaction may be based on the purchase price between the middleman/vendor and the manufacturer rather than the price paid by the importer to the middleman/vendor, resulting in a lower duty bill. Various criteria must be met to use this method, including ensuring that the first sale price reflects a sale clearly destined to the U.S. and conducted at arm’s length. This rule was established in litigation by Sandler, Travis & Rosenberg more than 30 years ago, and its legality and importance to the U.S. economy and trade community were reaffirmed by legislation first proposed by ST&R and enacted in 2008. 

The first sale rule has long been useful to industries subject to high U.S. tariffs, such as apparel and footwear, which use it to save millions of dollars in import duties each year. Its utilization has increased dramatically over the past year as companies seek to lessen the impact of the Section 301 tariffs on imports from China as well as Section 201 and 232 tariffs on steel, aluminum, and other products.

The U.S. is now considering 100 percent tariffs on imports from the EU in a long-running World Trade Organization dispute on aircraft subsidies. A new Section 301 case involving French digital services taxes could yield tariff increases as well, and Section 232 tariffs could be imposed on automobiles and auto parts from EU and other countries later this year.

The time-tested first sale rule could help EU exporters ease the burden of any such measures, particularly at a time when volatility in trade policy has left some traditional methods of lowering costs unavailable and is threatening to eliminate others. Beyond the current trade tensions, however, first sale can also serve as a type of long-term annuity; i.e., even once additional tariffs expire, use of first sale valuation would continue to provide a lower declared value and thus reduce the regular duties assessed on a company’s products.

At the same time, EU companies must take care to ensure compliance with first sale requirements. U.S. customs authorities are scrutinizing imports that use this methodology more closely as part of a broader increase in enforcement efforts. The key is to take proactive steps to ensure that multi-tiered transactions meet first sale requirements and that there are internal controls and procedures in place to sufficiently document compliance.