Congress Blocks Customs Revocation of First Sale Rule

Following a deluge of comments from angry American businesses, legal associations, and government officials, Congress moved to stop U.S. Customs and Border Protection (CBP) from revoking the tax-friendly First Sale Rule (FSR). The conference version of the five-year farm bill, which was agreed on by House and Senate negotiators, includes several provisions that forestall any immediate action to revoke the First Sale Rule and impose a number of roadblocks to any such action in the future.

"We consider this a major victory -- a preliminary victory, but a victory nonetheless," asserts customs attorney David Cohen, who heads the Save First Sale Coalition on behalf of international law firm Sandler, Travis & Rosenberg, P.A. "Congress has stated loudly and clearly: 'Customs, we don't like what happened here, we don't like the way it happened, and we're putting a lot of hurdles in place to ensure that you're not successful and that you don't try anything like it again.'"

In a nutshell, the FSR allows for duty to be assessed on the "first sale" for export to the U.S., which may be the initial sale from the factory where specific conditions are met. In January, based on the suggestion of a Brussels-based World Customs Organization's Technical Committee on Customs Valuation, CBP proposed to eliminate this favorable valuation methodology, forcing businesses to value goods based upon the "last sale" prior to import.

The proposal--which is widely lambasted as ill-advised, ill-timed, and even illegal--disregards 20 years of federal judicial precedent and could raise import tariffs by as much as 15 percent.

Not surprisingly, CBP has been inundated with opposition from the private sector, including the industry coalition spearheaded by Sandler, Travis & Rosenberg, P.A. This pressure--combined with lawmakers' concerns about the lack of transparency in the process CBP used to develop this proposal and its potentially devastating effects on an already struggling domestic economy--have resulted in the provisions included in the new farm bill.

The most important section of the bill is a "sense of Congress" provision indicating that the two committees that authorize CBP's budget will not support a revocation of the First Sale Rule on their watch. Specifically, the provision advises CBP to drop the issue until at least Jan. 1, 2011, giving the agency time to review its proposal and its potential effects. If CBP still wants to proceed after that date, it must first clear a number of hurdles, as the provision urges the agency to consult with Congress and the trade community and receive the explicit approval of the Treasury Secretary.

"This is strong and clear direction from Congress, and while it is non-binding, CBP would ignore it at its peril," Cohen asserts.

The "sense of Congress" provision also urges CBP to consider a report created by the International Trade Commission should it decide to move forward after Jan. 1, 2011. This report would be based on entry data submitted by importers to CBP over a one-year period indicating whether the transaction value of their merchandise is based on the first sale. Each month during that period CBP would have to report to the ITC on the number of importers using the First Sale Rule, the tariff numbers of the goods so valued, and the transaction value of those imports. The ITC would then submit to Congress a report aggregating and analyzing the information supplied by CBP.

"This reporting requirement reflects Congress' disapproval of the approach CBP has taken on this issue," says Cohen. "It highlights the fact that CBP went forward with its proposal without having done any sort of analysis on what its economic effects might be. The farm bill provision makes it clear that Congress wants a thorough review of this information by an outside agency before any further action is taken."

Of course, while Cohen and the rest of the Save First Sale Coalition are cautiously optimistic about the implications of the Congressional slap on the wrist, they are also aware that FSR supporters aren't out of the woods yet. First of all, the farm bill could still be vetoed. Second, even if the bill is passed, it doesn't definitively prevent Customs from doing anything.

Cohen urges business leaders and other interested parties to voice their support of this recent Congressional action and to continue expressing their concerns about the First Sale Rule revocation at savefirstsale.com.

"We believe that the proposal should be withdrawn and we will continue our efforts to ensure that importers may utilize the FSR indefinitely. Regardless of whether the farm bill becomes law, we hope that CBP heeds this strong bipartisan message from Congress."