Supply Chain Commentary: The Advantages of First Sale
Today’s supply chains are complex, and companies are constantly on the lookout for ways to lower the cost of doing business. The border represents an area for potential cost savings, with various duty-reduction methods available, such as free trade agreements (FTAs) and preference programs.
However, the rules for FTAs can be complicated, and most imports coming into the United States simply don’t qualify. There is, however, one technique that allows companies to take advantage of their complex supply chains: First Sale.
Each year, millions of dollars are paid in Customs duties unnecessarily because importers fail to take advantage of the First Sale rule. How does it work?
Typically, Customs applies duties to the price of the item when it enters the United States. But due to the complexity of supply chains, that price may be far different from the manufacturer’s price, with costs such as services rendered and transportation factored into the entry price. Valuation law in the United States allows companies to use the “First Sale” price of the merchandise, or the actual price of producing the item by the manufacturer, for duty calculation. This represents huge potential for cost savings.
Show me the money
For instance, take a product with an original invoice from the manufacturer to the middleman of $80 million. Add the costs of logistics, sales, marketing, labelling, and transportation, and the invoice from the middleman to the importer becomes $100 million. Without first sale, the importer pays duties on the full $100 million. But under the First Sale rule, duties are only assessed on the manufacturing costs, a reduction in dutiable value of 20 percent, or $20 million.
And when implementing First Sale for your company, you can not only look forward to duty savings, but backward as well. First Sale can be retroactive, so there’s a chance to go back and get a duty refund for more than a year’s worth of imports, with a caveat–there must be a paper trail, and the items in question must still meet Customs’ criteria for First Sale.
Is this even legal?
Despite the potential for massive cost savings by implementing First Sale, many importers are hesitant to do so. Some suffer under the false perception that claiming First Sale means cooking the books, because it requires creation of two invoices–one with the total cost paid by the importer to the middleman, and one with the First Sale cost for Customs valuation at the border. While this may seem shady, First Sale was initially established in the Trade Agreements Act of 1979, and has been upheld by several legal decisions and guidance from Customs in the 35+ years since.
Historically, importers first sought approval to use First Sale by going through the Customs Service Office of Regulations and Rulings (OR&R). This process was lengthy, however, and could take 1 to 2 years to complete. Now, Customs allows importers to use “reasonable care” to self-certify. Another option is to go through the port of entry, or through the Customs Centers of Excellent and Expertise (CEEs). While Customs approval for using First Sale is not mandatory, it can help make audits go smoother.
Making it work
If you’re sold on First Sale, the next stop is determining how to implement the practice within your own organization. Having clear visibility into your entire supply chain is a prerequisite to getting started, so that qualified vendors are easily identified, and the First Sale price is easily calculated. For a product to be eligible, it must meet three requirements: the first sale must be Bona fide, clearly destined for export to the United States at the time of the first sale, and the transaction must be at “arm’s length,” or free from non-market influences.
A company must establish internal procedures and controls so that the program stands up to scrutiny from Customs. A well-documented First Sale program will make audits less burdensome, with a clear paper trail and evidence showing the product meets the First Sale requirements. With full transparency and close supply chain relationships, the importer can trust that their factories are properly determining the first sale value. And regular assessments should be conducted to ensure that the three requirements for First Sale continue to be met down the road.
Using the right tools
First Sale is not for everyone, but it represents an excellent opportunity to improve your bottom line. Having the right organizational structure in place to assess, implement, manage, and maintain a First Sale program requires digitization of records via cutting-edge global trade management software (GTM). The best GTM solutions will have the ability to automate First Sale invoices, with customizable functionality that allows companies to create a second invoice for First Sale, automatically turning it on and off for different vendors, since not all factories may qualify for First Sale. A flexible GTM prevents the need to keep a second, separate set of invoices showing the First Sale value, since the vendor still needs to be paid the full amount.
Implementing the First Sale rule also requires a level of collaboration with your supply chain that GTM software can simplify. Using the same system, importers, middlemen, and manufacturers can communicate about the product and the specific information required to meet the First Sale rule, ensuring the mitigation of compliance risk.
First Sale represents an opportunity to reduce the landed cost of imported merchandise, increase profits, and improve vendor relationships by working more closely together. While it requires a serious self-assessment and continual follow-up, these tasks can be greatly simplified by implementing a GTM solution that offers First Sale program management.