The first sale rule lets an importer declare customs value based on the price in the first sale in a multi-tiered transaction, the factory's price, rather than the price paid to the middleman, when three conditions are met. The rule comes from Nissho Iwai American Corp. v. United States, 982 F.2d 505, decided by the Federal Circuit in 1992. The three-part test is that the goods were clearly destined for the United States at the time of the first sale, the sale was at arm's length, and there were no distortive nonmarket influences on the price.
The middleman's markup is not your customs value
Most importers buy through a middleman: a trading company, an agent, or a related distributor that buys from the factory and resells to the importer. Customs' default position is that the value is the price the importer paid, the middleman's price. The first sale rule is the exception. When the three-part test is met, the importer can declare value based on the factory's price, the price in the first sale, and the duty is calculated on that lower figure.
The arithmetic is the reason the rule matters. A factory price of $8 and a middleman price of $10 means duty on $2 less per unit. On a shipment of 100,000 units at a 20 percent duty rate, that is $40,000 in duty saved. The saving scales with volume, which is why the rule is standard practice for large importers and almost unknown among small ones.
Related reading on this site: TariffTrack HQ and Section 232 Exclusion Requests: How the Steel and Aluminum Process Differs cover the neighbouring problems in more depth.
The three-part test from Nissho Iwai
The rule comes from Nissho Iwai American Corp. v. United States, 982 F.2d 505, decided by the Federal Circuit in 1992. The court set a three-part test. First, the goods must have been clearly destined for the United States at the time of the first sale, meaning the factory knew the goods were bound for the US market. Second, the sale must have been at arm's length, meaning the factory and the middleman were independent parties dealing on market terms. Third, there must have been no distortive nonmarket influences on the price, meaning the factory price was a real market price, not a number set to minimize duty.
The test is the whole rule. A bona fide sale is presupposed, and the importer has to prove it. The documentation is the evidence: the factory invoice, the middleman invoice, the purchase orders, the payment records, and any correspondence showing the goods were destined for the US at the time of the first sale. Without the paper, the rule does not apply, whatever the prices say.
The presumption that works against you
Customs starts from the opposite presumption. Under Treasury Decision 96-87, Customs presumes that the importer's price, the middleman's price, is the correct value, and the importer has to overcome that presumption with evidence. The presumption is not a rule. It is a starting point, and the importer who brings the factory invoice and the proof of the three-part test can rebut it. The importer who brings only the middleman's invoice cannot.
Disclosure is the other requirement. The importer must disclose both sales to Customs, the factory sale and the middleman sale, and the first sale declaration has to be made at entry. A first sale claim raised for the first time during an audit, with no prior disclosure, is a claim Customs will treat with suspicion. The rule rewards the importer who documents the chain from the start, not the importer who discovers it after the audit notice arrives.
One warning from the case law: China-origin claims face harder scrutiny. The Meyer Corp. decision, widely cited in trade write-ups, shows Customs applying the three-part test more strictly to goods from China, where the factory and the middleman are more likely to be related or to operate under nonmarket influences. An importer sourcing from China should expect a closer look at the arm's length test and the nonmarket influence test, and should have the documentation ready before the entry is filed.
Frequently asked questions
What is the first sale rule?
It lets an importer declare customs value based on the factory's price in the first sale, rather than the middleman's price, when the goods were clearly destined for the United States, the sale was at arm's length, and there were no distortive nonmarket influences. It comes from Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992).
How much duty does the first sale rule save?
The saving is duty on the middleman's markup. A factory price of $8 and a middleman price of $10 means duty on $2 less per unit. On 100,000 units at a 20 percent duty rate, that is $40,000 saved.
What is Customs' presumption on first sale?
Under Treasury Decision 96-87, Customs presumes the importer's price, the middleman's price, is the correct value, and the importer has to overcome that presumption with evidence: the factory invoice, the middleman invoice, and proof of the three-part test.
Does the first sale rule work for China-origin goods?
It can, but Customs applies the three-part test more strictly to China-origin goods, where the factory and middleman are more likely to be related or to operate under nonmarket influences. Have the documentation ready before the entry is filed.