An Intro to First Sale: How to Reduce Duty

On January 20th, the United States is expected to introduce a slew of new tariffs targeting imports from various countries. For importers, this is a wake-up call to proactively manage costs. If you haven’t started running cost models against your tariff classifications, you’re already behind.

The writing has been on the wall for years now. The first wave of Section 301 tariffs that hit Chinese goods was your wake-up call. With more changes looming, it’s time to revisit the basics and explore some advanced strategies to lower landed costs.

Basic Areas of Review

1. Tariff Classifications Ensure your goods are classified correctly in the Harmonized Tariff Schedule (HTS). Classification drives everything.
2. Reimagining Components Shipping products in subassemblies or changing how goods are packed and what work is done in America matters. There are plenty of case studies out there.
3. Strategic Packaging Sometimes, the way you configure shipments can reduce costs. The little things add up—pay attention to the details.
4. Origin Engineering Review manufacturing processes to identify opportunities to qualify for preferential origin to take advantage of trade agreements (if they still matter). Consider sourcing alternatives and strategic relocations. It’s old news, but still noteworthy.

First Sale Rule: Complicated but a Game-Changer

Importers often get confused by customs jargon—let’s be honest, the First Sale Rule is complicated. However, it allows importers in multi-tiered transactions to base duties on the lower price between the manufacturer and the middleman, rather than the higher price paid by the importer.

How It Works

Imagine your product is made in China and sold to a middleman in Vietnam, who then sells it to you in the U.S. Normally, duties would be calculated on the price you paid the middleman. Under the First Sale Rule, duties can be calculated on the price the middleman paid the manufacturer, which is often much lower.

What You Need to Qualify

1. Two Genuine Sales: Goods must pass through two legitimate transactions (e.g., from the manufacturer to the middleman, then from the middleman to you).
2. Arm’s Length Transactions: The sales must be conducted independently, without influence from related parties.
3. Clearly Destined for Export: The goods must be intended for U.S. export at the time of the first sale.

Documentation Checklist

To use the First Sale Rule, you’ll need airtight documentation and trust.

• Purchase orders, invoices, and proof of payment.
• Contracts and agreements between all parties.
• Bills of lading and shipping documents.
• Evidence the goods meet U.S. industry standards, including labeling and packaging.

Reimagined Duty Amounts

Let’s consider a shipment with a value of $100,000, where the middleman paid the manufacturer $70,000. At a 60% duty rate (yes, this is absurdly high, but it’s been floated), the savings are dramatic:

Without First Sale: Duty is calculated on $100,000, resulting in $60,000 in duties.

With First Sale: Duty is calculated on $70,000, resulting in $42,000 in duties.

By using the First Sale Rule, you save $18,000 on this single shipment. Scale that across multiple transactions, and the savings become transformative for your business.

Final Thoughts

The First Sale Rule is not a quick fix—it requires effort, collaboration, and trust with vendors, as well as meticulous documentation. But with new tariffs on the horizon, the potential savings make it a strategy worth exploring.

For those navigating high duty rates, the First Sale Rule isn’t just a tool—it’s a competitive advantage. Take control of your costs, but don’t mess around. There are plenty of examples of hefty penalties for non-compliant players in this space.

Stay informed, stay compliant, stay legal, and stay competitive.