US Customs Alert

US Customs Alert!

Proposed Change to U.S. Import Valuation Procedures
US Customs Says Higher Duties Should Apply on Purchases from Distributors

On January 24, 2008, US Customs and Border Protection ("CBP") proposed the elimination of a longstanding rule of import valuation. If adopted, this proposal will increase the duties paid by importers that make their purchases through a foreign distributor or middleman instead of directly from a manufacturer.

At the end of this alert, you will find two easy ways to express your opposition to CBP and your Congressional representatives.

Current CBP Practice: First Sale Rule
Currently, CBP applies the "First Sale" rule to value imports and assess duties on merchandise purchased from a foreign distributor or other foreign middleman for shipment to the United States. The First Sale rule allows importers to declare the price paid by the middleman to the manufacturer as the US import value of the goods, rather than declaring the price paid by the importer to the middleman. To use this rule, the importer documents that the sale from the manufacturer to the middleman was made at arm's length with the merchandise clearly destined for the United States. Over the past twenty years, this rule has been approved repeatedly by US courts and CPB and many importers rely on the rule to reduce import duty liability.

CBP Proposal: Last Sale Rule
CBP proposes to eliminate the First Sale option and instead to use only the last sale price before importation to determine the value of imported goods and the US duty owing. The example below illustrates the proposed change.

Terrific Tile Floors USA, Inc. orders certain unglazed, Italian ceramic tiles from a distributor in Rome.

Price paid by the distributor to the manufacturer $100,000
Price paid by Terrific Tile Floors USA to the distributor $150,000

This type of tile is subject to a U.S. import duty of 10%. Under the First Sale rule, CBP would calculate:

$100,000 x 10% = $10,000 duties owed

BUT, if CBP's proposed rule goes into effect, the same duty rate would be applied to $150,000, that is, to the "last sale" price before importation:

$150,000 x 10% = $15,000 duties owed

Impact of CBP's Proposed Rule
As the example illustrates, the proposed "Last Sale" rule would significantly increase the U.S. duty owing. Terrific Tile's duty liability has increased by $5,000 on this hypothetical shipment. Some analysts have estimated that most importers currently using the First Sale rule will face duty increases in the range of 8 to 15 percent, depending on the product and the foreign distributor's margin.

Affected Companies
Under this proposal, companies that import products from a foreign distributor or middleman would be required to pay the increased duty amount to CBP, regardless of whether the additional cost can be pushed back to suppliers or passed on to customers. Also, the proposed rule would put importers who use a foreign distributor at a commercial disadvantage against companies importing the same goods under a contract made directly with a foreign manufacturer. Whether due to their size or the nature of the products they are importing, companies that source directly from a manufacturer, without any intermediate sales, will not be affected.

Act Now
CBP's complete description of its proposal was published in the Federal Register on January 24, 2008, available at the GPO website:

CBP requested comments and feedback from interested parties. The deadline for comments is April 23, 2008.

We have prepared draft comments for you. Please enter your Zip code next to the "Take Action Now" button. Once you hit enter, a draft letter will be generated that you can use to submit comments to your representatives in Congress. You can also find a draft letter to send comments to CBP at this link. Comments to CBP can also be submitted online using the Federal e-Rulemaking Portal at www.regulations.gov. Comments should be submitted via docket number USCBP 2007-0083.