Importers Beware: Trade Court Again Denies “First Sale” Treatment for Importer

In a decision handed down by the United States Court of International Trade (CIT) on February 9, 2023 in Meyer Corporation, U.S. v. United States, the CIT again ruled against the application of the “First Sale Rule” (FSR) for cookware imported from China or Thailand and manufactured with Chinese components, but on different grounds from its first decision issued in 2021.

One issue centered on whether the FSR could be used for customs value appraisement purposes. The FSR permits importers to use the factory invoice price to enter goods into the U.S. when a sale to a middleman takes place before the middleman’s sale to the U.S. importer. The benefit of applying the FSR is that a lower valuation for the goods typically results so that less duties will be due by the importer. To apply the FSR, U.S. importers must provide a detailed description of the roles of all parties involved in a multi-tiered transaction, as well as a complete paper trail that shows the structure of such transactions. In sum, importers must demonstrate that all prices leading to the import transaction constitute viable arm’s length transaction values.

In Meyer case, the cookware or its components originated in China. The CIT ruled on March 1, 2021 that the importer’s calculation of dutiable value could not apply the FSR if the “related party” transactions involved non-market economies, such as China or Vietnam. The CIT based its conclusions in part on a 1992 decision of the United States Court of Appeals for the Federal Circuit (CAFC) (Nissho Iwai Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992)), in which the CAFC held that the importer properly based the transaction value of certain imported subway cars on the “first sale” price that a foreign agent had paid to a foreign manufacturer, rather than the higher price a U.S. importer had paid to a wholly owned U.S. subsidiary of the foreign purchasing agent. The CAFC stated that “[t]he manufacturer’s price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and middleman deal with each other at arm’s length, in the absence of non-market influences that affect the legitimacy of the sales price.” 

In its 2021 decision in Meyer, the CIT focused on the “absence of any non-market influences” language. The court separated the “absence of non-market influence” into a new fourth factor required for an importer to qualify for application of the FSR, i.e., in addition to showing a bona fide sale, that the goods were destined for export to the U.S. and that the sale from the manufacturer to the middleman and the middleman to the importer were at arm’s length, the CIT required the importer to demonstrate the absence of any non-market influence that could impact the legitimacy of the sales price. This would be a difficult standard to satisfy in the case of a non-market economy. Although the case was decided on a separate, fact-specific basis limited to the parties involved, the CIT decision had a potentially broad impact on the application of the FSR in instances where the related party transactions involved non-market economies.

On appeal, the CAFC concluded that, in requiring the importer to show the absence of any “distortive nonmarket influences,” the CIT misinterpreted the Nissho Iwai decision as imposing a requirement beyond what was required by the statute and regulations. The CAFC ruled that nothing in the statute required Customs or the courts to take into account the effects of a non-market economy on the transaction value and require that parties demonstrate the absence of all distortive non-market influences. Accordingly, in its decision released on August 11, 2022, the CAFC vacated the CIT decision and remanded the case to the CIT to reconsider whether the importer could use the FSR as the basis for the dutiable value of the goods. 

In its remand decision issued on February 9, the CIT focused on Meyer Corporation’s failure to produce the necessary financial information from its parent company as requested by the government to demonstrate a true first-sale value lacking influence, “not from a non-market-economy country per se, but from the relationships of the related parties.” The CIT noted that Meyer Corporation did not supplement the information it provided despite being warned by the CIT. Thus, the CIT affirmed its 2021 decision. 

What this Means for Companies Sourcing from China

The CIT’s remand decision eliminates the need to demonstrate a total absence of distortive non-market influences and reaffirms the CAFC’s ruling that the production or sale of a good in a non-market economy does not result in a presumption of a distortive influence. This will allow companies purchasing goods from non-market economies such as China through middlemen to use the FSR, provided the requirements are met. However, because the CIT still denied the application of the FSR, potentially affected companies may want to maintain detailed documentation to establish an arm’s length relationship and lack of any distortions in transactions involving related parties—especially given Customs and Border Protection’s increasingly aggressive stance in seeking suppliers’ financial records in related party transactions from non-market economies.

How BDO can help

Customs duties, VAT and trade policy present unique challenges that businesses face when conducting regulated cross-border transactions. BDO’s Customs and International Trade Services practice can help businesses navigate the complex rules governing cross-border product movements to minimize duty and tax payments and maximize import and export compliance.

Our services include: 

  • Tariff classification reviews 
  • FTA qualification
  • Customs valuation and transfer pricing analysis
  • Import and export compliance assessments
  • Supply chain planning 
  • Customs rulings, protests, and other administrative filings
  • VAT registration