The First Sale Rule is a powerful but often underutilized provision in U.S. customs law that allows importers to potentially reduce the amount of duties they owe on imported goods. At its core, the rule permits an importer to base the calculation of duties on the price paid in the first sale of goods in a multi-tiered transaction — typically, the sale between the manufacturer and a middleman — rather than the higher price paid by the U.S. buyer in the final transaction.
To benefit from this duty-saving opportunity, three key requirements must be met: the sale must be bona fide, conducted at arm’s length, and involve goods that are clearly destined for the United States at the time of the first sale.
First, the transaction between the manufacturer and the intermediary must be a bona fide sale. This means it must be a legitimate, documented exchange of goods — not just a transfer on paper or an internal movement of inventory. The goods must change ownership, and payment must be made or obligated. Customs will look for commercial documents such as contracts, invoices, and proof of payment to verify this.
Second, the transaction must be conducted at arm’s length, which means that the pricing must reflect a market-based rate agreed upon by independent parties. If the manufacturer and the middleman are related entities (such as two subsidiaries of the same parent company), the importer will have to provide evidence that the relationship did not influence the price. Customs authorities will assess whether the price was set in a commercially reasonable way, possibly using transfer pricing documentation or other benchmarks.
Third, and perhaps most critically, the goods must be clearly destined for export to the United States at the time of the first sale. This requirement ensures that the goods weren’t initially intended for another market and only later redirected to the U.S. To prove this, importers need to provide documentation such as purchase orders, shipping instructions, or bills of lading that explicitly show the U.S. as the final destination from the outset.
When all three of these conditions are satisfied, an importer can declare the lower first-sale value to U.S. Customs and Border Protection (CBP) rather than the final price paid to the middleman. This can lead to a significant reduction in the dutiable value of the goods, and therefore, lower tariffs owed.
Example
If a manufacturer sells a product to a trading company for $40, and that trading company sells it to the U.S. importer for $60, duties can be assessed on the $40 amount — not the $60 — as long as the rule’s conditions are met. That difference adds up quickly, especially for high-volume or high-duty-rate goods.
Conclusion
While the First Sale Rule presents a clear opportunity for cost savings, it’s not without risk. Importers must be prepared to support their use of the rule with robust documentation and legal justification. Improper application or insufficient proof can lead to retroactive duty assessments, fines, and heightened customs scrutiny.
Used properly and responsibly, however, the First Sale Rule is a strategic tool that can improve margin, enhance competitiveness, and lower the cost of doing business across borders.
For questions, please contact Partner, Sean Breheney at sbreheney@saxadvisorygroup.com or (973) 554-6959.