In 2008 U.S. Customs and Border Protection embarked on an effort to eliminate the First Sale Rule, a customs valuation methodology used by many U.S. importers to lower the duties they pay on shipments from abroad, particularly textiles, apparel and footwear. In the face of enormous opposition from industry and an unusually rapid response from lawmakers, CBP withdrew the proposed revocation last summer. While use of the First Sale Rule may thus proceed unimpeded for the time being, U.S. government agencies are already setting the stage for what could be another campaign. If successful, such an effort could have a substantial impact on sourcing decisions by U.S. companies.
Last spring Congress advised CBP to postpone any action on the First Sale Rule until at least 1 January 2011 in order to allow more time to determine the potential impact. Congress also imposed a year-long reporting requirement on industry users of this methodology to generate the information that CBP will be required to consider as part of any future effort to revoke or otherwise modify the rule. CBP began collecting this data in September and is reporting it to the U.S. International Trade Commission each month.
The USITC, in turn, is required to submit to the House Ways and Means and Senate Finance committees by 10 February 2010 a report aggregating the data CBP is collecting. The USITC has recently opened a formal investigation through which it will compile this report, which will provide a general overview of the use of the First Sale Rule and include the following information.
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the aggregate number of importers using the First Sale Rule, including a description of the frequency of use
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the tariff classification of merchandise valued according to the First Sale Rule on an aggregate basis, including an analysis by sector
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the aggregate transaction value of such merchandise, including an analysis by sector
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the aggregate transaction value of all merchandise imported into the U.S. during the specified one-year period
The USITC does not plan to hold a public hearing in the course of this investigation, but interested parties may submit written comments no later than 30 April.
Hong Kong and mainland Chinese manufacturers should remain attentive to this issue, as any change to the First Sale Rule could have a major effect on how and where U.S. importers source their production. If the USITC report finds that the use of the First Sale Rule in relation to overall U.S. imports is small, CBP could be more inclined to make another attempt to revoke it and Congress may not be as sympathetic to industry opposition. If the report determines that the use of the rule is widespread, CBP could make the case that the government is losing out on a substantial amount of duty revenue, an argument that could gain traction at a time of economic uncertainty and growing budget deficits.
