Viewpoint -- Customs Proposal Ignores Precedent And Taxes Imports

Thanks to a recent move by Congress, manufacturers, businesses and consumers are less likely to have to pay increased prices on imported goods and products. That's because after a deluge of comments from angry American businesses, legal associations, and government officials, our friends on the Hill recently moved to stop U.S. Customs and Border Protection from revoking the tax-friendly First Sale Rule-a court sanctioned valuation practice that reduces the cost manufacturers (and ultimately, consumers) pay for certain products.

In a nutshell, Customs' proposal would force importers to value goods based upon the "last sale" prior to import instead of allowing them to use the "first sale" in transactions involving more than one sale. Using the "first sale" is clearly preferable from a cost standpoint. That's because the "first sale" does not include expenses related to the "last sale."

This sudden (and seemingly arbitrary) change in the rules would have a huge negative impact not only on the manufacturers who use the First Sale Rule to keep the prices on their products as low as possible, but also on the businesses and consumers who buy those products. That's because it will lead to big increases in the amount of import duties, fees, and taxes paid by many U.S. importing companies and would likely jack up prices on everyday consumer goods such as clothing and shoes.

To better understand just how prices are affected take a look at this real world example: Let's say a company imports footwear into the U.S. and the transaction involves two sales-one from the manufacturer to a middleman and the other from the middleman to the importer. The manufacturer sells the footwear to the middleman at $9 per pair and then the middleman sells to the importer at $10 per pair. Under the rule, the importer can use the $9 cost paid by the middleman when assessing duties-if the duty rate is 10%, duties will be $0.90. In the absence of First Sale, duties would be $1.00 ($10 x 10%). Multiply that 10 cent difference by 5,000,000 units and you're talking about a savings of $500,000.

The call for First Sale Rule revocation caught many in government and the business world by surprise. First of all, it seeks to overturn 20 years of sound judicial precedent. Second, Congress wasn't consulted before the proposal was made. And, perhaps most surprisingly, Customs based its decision in large part on the suggestion of a foreign advisory board that has no authority over the United States.

To defend its proposal, Customs relies on arguments previously dismissed by U.S. courts and points to a non-binding international commentary, which it quietly helped create. The agency also contends that First Sale is too "difficult" to administer and too complicated to regulate because it requires a review of transactions that occur solely outside of the U.S. But Customs' claims just don't hold up. Difficulties in administering a rule are not a valid basis for ignoring the court rulings that established them. Businesses have been using First Sale without a problem for 20 years and it is certainly no more difficult to administer than other valuation practices, which also require a review of foreign financial information.

In the early '90s Customs made these and similar claims-claims which were consistently rejected by the courts. Customs' arguments simply do not provide any support for nullifying the courts' consistent decisions to uphold First Sale. Essentially, Customs stated at a WCO committee proceeding in Brussels that the current U.S. practice, though based on decades-old court decisions, was incorrect. If that weren't enough, Customs then brought this non-binding commentary back to the U.S. and has attempted to use it as the lynchpin in its effort to nullify First Sale!

This isn't Customs' first attempt to ignore precedent. In the past couple of years, on at least two other occasions, Customs has sought to change long-standing positions without any change in the law. (Another recent attempt concerns Customs' effort to prevent certain duty-free warehousing arrangements historically allowed under subheading 9801.00.20.) In each instance, supply chains, import practices, and manufacturing operations have been arranged to comply with, and take advantage of, this precedent, which in the First Sale context was initiated by U.S. Courts.

Fortunately for manufacturers and consumers alike, Congress took strong and immediate action on our behalf. First, 17 Senators sent a letter in opposition to Secretary Michael Chertoff making the business case for the importance of First Sale. The letter stated, "If this rule is reversed, it would undermine nearly 20 years of U.S. Federal Court jurisprudence, raise U.S. consumer prices and have a significantly negative impact on U.S. companies who have relied on this practice and who may be forced to restructure and possibly eliminate business units that have been built around this practice of valuation." This letter was later followed up by one from Senator Schumer, who responded separately in opposition to express the concerns of New York businesses.

Next, 51 Members of the House sent a letter in opposition to Treasury Secretary Michael Chertoff, calling the proposal an affront to the economic stimulus package recently implemented by Congress and the Administration. The letter labeled the proposal "a hidden tax on the U.S. consumer, hitting our businesses and families with an increase in the costs of goods they buy at a time when the domestic economy is already struggling."

Also, Congress included provisions in the recently passed Farm Bill that are intended to forestall any additional Customs' action on the proposal. The provisions seek to protect manufacturers and other importers who use First Sale by preventing any immediate action to revoke the rule and impose a number of roadblocks to any such action in the future. Specifically, Customs is asked to drop the issue until at least January 1, 2011. Most importantly, the legislation includes a "sense of Congress" provision indicating that the two committees that authorize Customs' budget will not support a revocation of the First Sale Rule on their watch.

The Farm Bill provisions represent a significant initial victory for U.S. businesses and consumers and send the message that Customs cannot and should not impose unpredictable new taxes on imported consumer goods for alleged administrative convenience. The results would be too detrimental to businesses, manufacturers and consumers who may already be struggling in a slow economy.

Still, while the first battle may have been won, the war is not yet over. Until Customs heeds the calls of the import community and Congress to withdraw its proposal, business leaders and other interested parties should voice their support for the recent Congressional action and continue to express their concerns about the First Sale Rule revocation at www.savefirstsale.com.

Larry Ordet is a member of Sandler, Travis & Rosenberg, P.A. Sandler, Travis & Rosenberg, P.A. is an international trade and customs law firm concentrating serving clients including; governments, manufacturers, importers, exporters, retailers, and trade and logistics service providers. The staff includes former senior U.S. Customs and Border Protection officials; former officials from the State, Labor, and Commerce departments. For more information, visit www.strtrade.com and www.savefirstsale.com.