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Bureau of Customs and Border Protection Proposes to Eliminate the "First Sale" as a Method of Determining the Value of Imported Merchandise

A recently published Federal Register Notice by the U.S. Bureau of Customs and Border Protection, interpreting the law by which imported merchandise is valued for Customs purposes, will reverse a 1992 Court ruling and could increase Customs duty liability for U. S. importers. Comments to the Customs proposal are returnable April 23, 2008.

The proposal by Customs will effectively reverse the holding of the U.S. Court of Appeals for the Federal Circuit in Nissho-Iwai American Corp. v. United States, 982 F. 2d 505 (CAFC 1992), which interpreted the critical statute by which imported goods are to be valued.

In the Nissho Iwai case, a U.S. importer purchased goods from a Japanese trading house, which had, itself, purchased the goods from the Japanese producer. At the time that the goods were produced, all parties to the agreement (producer, middleman and importer) understood that the goods were destined for export to the United States. The goods, in fact, were subway cars, built to the precise specifications of the New York City Transit Authority. The Japanese producer’s price to the Japanese middleman (after conversion for currencies) was approximately $800,000. per unit. The middleman’s price for export to the United States importer was approximately $844,500 per unit.

Since both prices were prices “for export to the United States” and since U.S. law directs Customs to appraise imported merchandise at the price “when sold for exportation to the United States,” both values fell within the technical definition of the statute. The question that our Court had to decide was which price would be used for Customs purposes. The Nissho Iwai Court held that the “first sale” price would be used for Customs purposes, and goods sold under these “middleman agreements” are appraised at the lower of the two values. The Federal Register Notice, which seeks public comment, now proposes a “change of interpretation” to hold that goods sold under what are sometimes referred to as middleman or “three-cornered sales arrangements” are to be appraised at the last sale price for export to the United States, effectively overruling the decision of the Court of Appeals for the Federal Circuit.

Companies which now purchase under three-cornered sales arrangements will likely face the elimination of that favorable view of the statute. The ostensible reason for the change in interpretation is that the World Trade Organization Committee on Valuation has eliminated the “first sale theory” and our government proposes to follow the lead of the Technical Committee of the WTO. Of course, the distinction relevant to American law that is not applicable in WTO administrative committees, is that the first sale ruling in the United States comes in the form of an order of a Federal Appellate Court, which Customs proposes to circumvent by the agency principle of limiting the opinion of the Court to the facts of the case only.

Thorp Reed & Armstrong attorneys are actively monitoring the situation and there is a growing opposition by both corporations and interest groups to the proposed change. If you are buying merchandise pursuant to a three-corner sale, and if you believe you can be adversely affected by the proposed change in interpretation, please contact John P. Donohue at 215.829.9900 for more information or a copy of the Federal Register Notice.

This Thorp Reed & Armstrong, LLP Communiqué is prepared in summary form and is not to be construed as legal advice or opinion on any specific fact or circumstance. We do not assume any responsibility to revise this Communiqué if there are subsequent changes in the law.