First Sale Valuation Method Often Worth the Risk, Experts Say
The first sale valuation method can be an effective means of minimizing tariff liability but does not come without risks, said James Mulvehill, trade and customs managing director at KPMG, during a Feb. 16 KPMG webinar.
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First sale allows imports to be valued at previous sale prices in the transaction chain, usually sales to middlemen in the originating country and almost always at a lower value, potentially saving importers tariff expenses, said Mulvehill. There is a misnomer that first sales must capture the "actual first sale," said Mulvehill, but the practice can actually cite any sale price in the transaction chain. "Ideally, importers want to get the lowest appraisal value," he said, but transactions early in the chain often lack the documentation required by Customs to affirm that lower value.
There are inherent risks of "running afoul" of CBP's various compliance programs, so importers need to weigh the risks of lower appraised value vs. what they can prove, said Mulvehill. Suppliers control most of the required records, said Regina Topolinskaya, KPMG trade and customs manager. Therefore, suppliers partnering in first sale programs need to be reliable and trustworthy. Documentation like product descriptions and item numbers must match down the chain for compliance reasons and that documentation is largely out of the hands of the importers, she said.
Companies need to keep "ongoing diligence" over their first sale programs in partnership with their suppliers, said Mulvehill. Vendors are sometimes reluctant to share previous sale information for a variety of reasons, such as being afraid of being cut out of purchases or sharing proprietary finances. However, suppliers can be coaxed into partnering in first sale processes, said Mulvehill. Long-term partnerships and savings sharing can coax suppliers into sharing data and participating in first sale programs, he said, and being a good first sale partner is a competitive advantage against other suppliers.
For all the risk, said Mulvehill, both Customs and the courts have consistently upheld first sale as a legitimate and useful practice. Recently, the Federal Circuit upheld the use of first sale even in nonmarket economies and Customs headquarters rulings have largely upheld first sale uses when proper documentation is provided, he said.