In my previous blogs, we discussed the critical first steps for small and medium-sized businesses (SMEs) facing tariffs: understanding your true exposure, actively diversifying your supply chain, and financial and strategic trade mechanisms. Let’s talk about a specific tariff rule used by large companies with complex supply chains that is also available to small and medium-sized businesses (SMBs).
The First Sale Rule applies when a product is sold multiple times before reaching a U.S. importer. Instead of calculating tariffs on the final sale price, businesses can instead use the price at the first commercial sale—typically a lower cost—reducing duty payments.
- Key Requirements – To qualify for the first sale rule, businesses must meet specific criteria:
- There must be at least two sales involved (manufacturer → intermediary → importer).
- The transactions must be at arm’s length (between unrelated parties).
- Documentation must prove that the item was destined for the U.S. from the outset.
- Challenges & Considerations – While the rule is completely legal, importers must maintain meticulous records, including purchase orders, contracts, and invoices—to prove compliance. Customs brokers and trade attorneys have reported a surge in interest as companies look for ways to navigate the latest tariff increases.
- Eligibility Requirements for the First Sale Rule – To legally use the First Sale Rule, your company must meet strict requirements enforced by U.S. Customs and Border Protection (CBP)
- The first sale must be a bona fide arm’s-length transaction, meaning the manufacturer and intermediary are independent parties setting fair market prices.
- Goods must be destined for the U.S. from the first sale, proven through documentation.
- Required Documentation – Importers need to maintain detailed records to prove eligibility for the First Sale Rule
- Purchase Orders & Contracts: Agreements demonstrate independent transactions.
- Manufacturer’s Invoices: Show the first commercial sale price.
- Financial Records: Payments made to the manufacturer and intermediary.
- Shipping Documents: Bills of lading confirming U.S. destination from the first sale.
- Customs Filings: Accurate classification and country-of-origin reporting.
- All documentation must be readily accessible for audits by CBP.
- Application & Implementation – Evaluate your existing import structure to determine whether transactions qualify for the First Sale Rule.
- Since First Sale Rule implementation requires compliance precision, collaborate with customs brokers who have experience managing first sale transactions.
- Ensure contracts between manufacturers, distributors, and importers reflect independent transactions, avoid clauses that may suggest pricing manipulation.
- Establish an Internal Compliance Process
- Create a workflow to validate each transaction, maintain documentation, and track U.S. Customs rulings.
- Implement audit procedures to ensure compliance with CBP regulations.
- 2GO Advisory Group and its network of experts can assist.
- File Using First Sale Pricing
- When submitting import entries to CBP, declare goods using the first sale price and provide supporting documentation.
- Engage in periodic CBP consultations to verify adherence to regulations.
- Risk Management & Compliance Considerations
- Customs officials closely review first sale transactions. Inconsistent documentation or failure to prove eligibility can lead to duty reassessments or penalties.
- Certain pricing structures or agreements may disqualify transactions. Legal teams should vet contracts before implementation.
- Trade policies are fluid, and future tariff adjustments may impact first sale eligibility. Maintain agility in your sourcing strategy to adapt to evolving customs laws.
- An Example – Is the effort worth it? First Sale Rule for Textile Imports
- A French textile manufacturer sells fabric to a Turkish distributor for $8 per yard.
- The Turkish distributor processes it into garments and sells them to a U.S. importer for $15 per unit.
- The U.S. imposes 16% tariffs on apparel imports from Turkey, but 25% tariffs on direct textile imports from France.
- Without First Sale Rule: Tariff is 16% of $15 = $2.40 per unit. 🔹 With First Sale Rule: Tariff is 16% of $8 = $1.28 per unit, a 53% reduction in the tariff.
Conclusion:
The First Sale Rule presents a substantial cost-saving opportunity for importers, especially those working with multi-tiered supply chains. By focusing on eligibility verification, documentation control, and compliance management, companies can legally lower tariff expenses while maintaining a competitive edge.
At 2GO Advisory Group, we specialize in providing the guidance you need that is based on expertise, integrity, collaboration, agility, accountability, and resourcefulness to every client engagement.
We help companies like yours meticulously analyze tariff exposure, identify strategic supply chain alternatives, implement robust financial mitigation plans, and unlock the benefits of sophisticated trade programs with in-house expertise and a network of external specialists. Don’t let tariffs erode your profitability. Contact 2GO Advisory Group today for a consultation and let us help you build a more resilient and profitable future.
If you find this information helpful and want to learn more, contact Francis at francis@cfos2go.com.
Francis Ota, co-lead of the International Business Practice group, is a seasoned financial executive with more than 40 years of experience in finance, accounting, and business operations. Born in Tokyo, Japan, and raised in multicultural communities in the United States, Francis brings a unique international perspective to his work. Francis has held senior financial roles at prominent companies such as Hewlett-Packard, Medtronic, and Quest Diagnostics. His expertise spans various industries, including technology, healthcare, and telecommunications.
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