• When It Comes to Imports, Companies Must Remember the Basics: Valuation, Classification, and Country of Origin
  • September 18, 2008 | Authors: Frederick L. Ikenson; Peggy A. Clarke
  • Law Firm: Blank Rome LLP - Washington Office
  • Although, in recent years, much of the focus at U.S. Customs and Border Protection (“CBP”) has been on border security, CBP retains its traditional customs role of managing imports as they cross the border. Several recent developments highlight the importance to importers of paying attention to the basics: the valuation, classification, and country of ­origin of their imports. In our Customs and International Trade Alert of August 15, 2008 (available at: http://www.blankrome.com/index.cfm?contentID=37&itemID=1647), discussed CBP’s proposal to codify country of origin determinations under a rules based tariff-shift approach. In this alert, we look at new developments in CBP’s proposal to change its practice of relying on the “first sale” in valuing certain import transactions, while in future alerts we will review other CBP practices, such as those applying to related party transactions, that could create problems for the unwary importer. Importers should assess their current practices in these areas. Diligence will not only ensure compliance with CBP requirements, but by addressing concerns proactively importers may well create oppor­tunities and benefit economically.

    First Sale: In the Federal Register of August 25, 2008, CBP initiated a “First Sale Declaration Requirement,” as mandated by section 15422(a) of the Food, Conservation, and Energy Act of 2008 (the Farm Bill). Published as an interim rule and solicitation of comments (due by October 24, 2008), this new requirement imposes a duty on importers to “enter an ‘F’ next to the declared value . . . when the declared transaction value of the imported merchandise is determined on the basis of the price paid by the buyer in a sale occurring earlier than the last sale prior to the introduction of the merchandise into the United States.” While the Federal Register Notice indicated that the new requirement was to take effect on August 20 (and expire on August 19, 2009), CBP provided a quasi thirty-day grace period by ­waiving use of the new declaration protocol until September 19, 2008, but requiring importers to go back and amend the grace period entries at a later time.

    There is a rich history behind this latest regulatory change. For at least 15 years, federal courts have required CBP (or its predecessor, the U.S. Customs Service) to base the transaction value of imported merchandise on the first sale for exportation to the United States in transactions involving a series of sales. Last year, an international group, the Technical Committee on Customs Valuation, opined that the U.S. interpretation conflicted with the international Valuation Agreement. On January 24, 2008, in an effort to achieve consistency with the Technical Committee’s interpretation, CBP announced its intention to change the U.S. practice and base transaction value on the last sale rather than the first sale. 73 Fed. Reg. 4,254.

    Given the increase in dutiable value that such a shift would mean for those using “first sale” to determine the declared value, the import community rallied and secured Congressional support to derail CBP’s effort to abandon the first sale approach to valuation. In the recently enacted Farm Bill, Congress included a sense of Congress provision advising that CBP not amend its interpretation of “sold for exportation to the United States” before January 1, 2011. Congress also imposed constraints on CBP’s ability to change its interpretation after that date, viz., CBP was subjected to several consulting requirements and to the requirement that it first receive the explicit approval from the Secretary of the Treasury prior to publishing any change in interpretation.

    Additionally, Congress required CBP to (1) require, for one year, importer declarations as to their use of “first sale” as the basis for a declared transaction value (hence, the new interim regulation) and (2) provide the collected information to the U.S. International Trade Commission (“ITC”) on a monthly basis. Congress also directed the ITC to submit a report to the House Ways and Means and Senate Finance Committees within 90 days of receipt of CBP’s final monthly report.

    While affected members of the importing community have been granted a stay of execution of the first sale rule, January 2011 is not that far off. Importers should determine now where their interests lie with respect to this issue and what, if anything, they should be doing to protect those interests. They should also now be reviewing their compliance practices with respect to import transactions involving a series of sales.