CBP First Sale Update Process 'Inadequate,' More Clarity Needed, Say Commenters

The addition of "new and extensive obligations under threat of penalty for non-compliance in an ICP does not insulate such changes from formal notice and comment procedures," it said. "The proposed changes are significant and must be done with full transparency and in accordance with the provisions of the [Administrative Procedure Act]. The current notice to a select group of interested importers and trade associations is simply inadequate." CBP has not returned requests for comment on the ICP changes or whether the agency plans to make the industry comments public.

CBP's revised ICP would also change the statutory requirement of "reasonable care" when entering goods into the U.S., created in the Customs Modernization and Compliance Act of 1993 the firm said. "Only Congress has the authority to (directly or indirectly) impose a requirement that records maintained by non-importing foreign parties are subject to mandatory presentation," it said. The ICP would essentially replace the reasonable care standard "with a near certainty standard," something which Congress specifically did not do in 1993. Nothing in a House Ways and Means Committee Report on the law "suggests that Congress ever intended for an importer to obtain detailed accounting records or financial statements from foreign parties or to conduct an independent verification of cost elements provided by the seller, especially where there is no overt reason to suspect that costs reported by the seller are inaccurate," the firm said.

The National Customs Brokers and Forwarders Association of America, through Alan Klestadt, the group's customs counsel and a lawyer at Grunfeld Desiderio, also expressed concerns. While brokers are not directly impacted first sale changes, they "are required to review and digest first sale documentation in order to properly make entry on behalf of their importer clients" and are often consulted with on appraisement issues, including first sale valuation, it said. After CBP goes through the comments and decides first sale updates are necessary, "CBP should conduct the requisite economic impact study and publish a notice of proposed rulemaking so that the resulting changes and reasons for those changes are matter of public record," it said.

The agency's claims that confusion exists on the issue aren't compelling, said NCBFAA. "We do not believe that the Trade is confused about recordkeeping or documentation requirements," though there is confusion as to acceptable related party pricing, it said. CBP should instead "review and reconcile the related party pricing standards developed in recent rulings to establish a coherent set of principles that comports with business realities," it said. The first sale rule allows importers, when there are multiple transactions prior to import into the U.S., to use the price paid in the 'first or earlier sale' as the basis for the customs value of the goods rather than the price the importer ultimately paid for the goods. The existing ICP on bona fide sales, last updated in 2005, makes little mention of first sale.

More Clarity Necessary

CBP should provide additional guidance as to exactly when the agency can seek the documents listed within the draft, said other industry comments on the draft. "The proposed changes are somewhat imprecise and may leave many with the impression that the documents listed in the Appendix are always required to establish the validity of a first sale transaction," said the U.S. Fashion Industry Association in comments (here). It seems "the documents described in the proposed changes to the ICP are limited to the audit context," said the association. "The ICP should include an unambiguous statement to that effect." The ICP should make clear that the documents listed in the appendix will not be requested by port officials in CBP Form 28 or other requests, are not required to support a ruling request on protest, will not need to be reviewed by importers to exercise reasonable care, said the USFIA. CBP should also note that the documents do not have the same recordkeeping requirements as document found within 509(a)(1)(A) of the Tariff Act.

USFIA members commonly use third parties, such as accounting and law firms, to analyze related party transactions and the manufacturer's or middleman's books, it said. CBP should be willing to rely on such analysis as proof that a relationship between the parties did not affect price, it said. "With the review, Regulatory Audit can determine whether a further review is necessary or whether access to specific documents rather than the entire panoply of the foreign books and records is necessary." USFIA also had issues with specific documents listed in the draft ICP, such as payment information for hangers and records "related to the manufacture, design, unique specifications or characteristics of the merchandise," which would seem to make sense for a classification issue but not a first sale review, it said.

There's potential for the document list to become a default for CBP requests, said the National Retail Federation in its comments. "The approach to the appendix is misdirected," but if CBP proceeds in creating such a list, it should "identify the needed purpose for the document," the trade group said. Among the other changes of concern to the NRF is one of CBP's possible solutions for verifying a sale between a related middleman and manufacturer, it said. The draft suggests that the importer could provide a complete financial statement for the middleman, but "importers will not have access to “complete” financial statements for middlemen as requested," said the NRF. The NRF also questioned the singling out of hangers within the documentation list. "The specific listing of hangers in point 29 (whether as a material, an assist, or a reusable hanger) is, we suppose, accurate, but truly random," it said.

The Retail Industry Leaders Association also found CBP's draft to be lacking important information on what and when the agency will seek the items on the document list. Among open questions are what CBP actions can be defined as a first sale audit and whether there will be different levels of documentary proof depending on the transaction and middleman relationships, it said. Also unclear is who would be responsible for keeping the records at issue, it said. "RILA suggests that importers should have access to records needed to support a [first sale] claim, but should not be expected to maintain documents." CBP's handling of non-disclosure agreements would also be an issue as "a neutral 3rd party would need to have access to records and submit them directly to CBP," the group said. It may also be useful for CBP to separate the documents list based on what specifically the agency is seeking to validate, it said.

Email ITTNews@warren-news.com for a copy of comments from RILA, NRF, Grunfeld Desiderio, and/or NCBFAA. ITT is interested in hearing views from others that have filed their comments with CBP. Send comments to ITTNews@warren-news.com.