Controversial Updates to 'First Sale' ICP Point to Coming Increased Scrutiny, Say Industry
CBP's draft changes to an Informed Compliance Publication (ICP) that expands on the use of first sale valuation likely points to plans to increase scrutiny of such claims, even if the agency doesn't adopt the entirety of the revisions, said law firms and other industry members. While there's already been some vocal opposition to the proposed changes, "the bottom line is that companies that utilize first sale should expect CBP to be taking a closer look at their programs," said Baker & McKenzie customs lawyer Ted Murphy in a blog post (here). CBP recently circulated a draft version of the ICP changes, including a controversial list of documents the agency might ask for to verify the use of first sale pricing, to the industry (see 14071025).
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While the first sale principle won't be eliminated, "the bar is going to be raised" and importers that make use of first sale should begin to review their compliance programs, said Murphy. "Companies who have robust first sale programs, and use it where appropriate (which, unfortunately, is likely not with every vendor), should be ok. Companies who overreach, will likely have issues." OHL, a third-party logistics company, also advised caution moving forward. While CBP has said it does not consider the updates to mark a policy change, importers may "see these revisions as requiring corporate policy changes evaluating their readiness for making and defending first-sale declarations," said OHL (here).
Customs law firm Grunfeld Desiderio said the planned changes are problematic on a number of fronts (here). The draft updates would "threaten the continued viability of the first sale program," the firm said. "The CBP Auditors are proposing to require that the importer provide full access to these third party records notwithstanding the facts of the underlying transactions or the due diligence used by the importer to set up the first sale structure. This would be a substantial departure from current practice." The issue has set off somewhat of a "firestorm" in recent weeks (see 14061317).
The proposal would likely make the majority of vendor-importer relationships that use first sale untenable, the firm said. "Unless vendors agree to provide unprecedented access to their books and records, importers will effectively be denied the ability to validate their first sale transactions in accordance with the standard required by CBP." Grunfeld vowed to pursue the issue further, noting that it believes "that the proposed changes can be successfully challenged." The ICP in question, on “Bona Fide Sales & Sales for Exportation to the United States” (here), has not been updated since 2005.
Lawyers with Drinker Biddle's customs and international trade practice said the changes may also result in hurting the bottom line of companies involved in the import of clothing from smaller manufacturers (here). "With increased emphasis placed on such business records, CBP’s approach to vetting first sale transactions is likely to become too burdensome for participation by smaller textile and apparel manufacturers, thereby preventing importers from avoiding high duties paid on such products from countries with which no Free Trade Agreements or other Duty Preference Programs exist (e.g., China)," it said. It's clear CBP plans to use far more scrutiny when looking at first sale claims, said the firm's lawyers. "In those instances where the importer is not able to provide air-tight supporting documentation, the underlying first sale claims will most likely be denied by CBP and determined to be valued at the higher second sale."