First Sale Rule: Cutting Through the Hype and Misconceptions

 

Three weeks ago, CNBC posted an article that caused quite the storm. Importers and shippers jumped on it the second they saw the word “loophole” and that it’s completely legal. But industry professionals and customs attorneys? Not so much. Everyone had their take, but they all had issues with the article not being 100% truthful or compliant.

 

So I decided to do what I do best — cut through the noise. I’m writing this not to repeat what you’ve already read, but to make clear what’s legal, what’s commonly perceived as legal but isn’t, and where people are getting this wrong.

 

And just so we’re clear: nothing here is legal advice. If you need that, I’ll introduce you to the right attorney. Reach out.

 

What Is the First Sale Rule?

The First Sale rule says that if there are multiple parties involved in a transaction for one shipment, the dutiable value can be the first sale — the amount paid to the manufacturer — not the higher price paid by the U.S. importer.

Sounds great, right? But what customs defines as a sale, who the parties are, and what qualifies is where this gets tricky. So let’s break it down.

Bona Fide Sale — The One Everyone Gets Wrong

The first thing customs looks at is whether there’s a bona fide sale. In plain English: was this a real, legitimate transaction?

What makes it bona fide? Title passed, Risk transferred, Payment made, A clear sale happened from Party A to Party B — and then from B to C.

What is NOT bona fide? When you’re working with a sourcing agent who’s just a messenger between you and the factory. They don’t take title, don’t own the goods — that’s not a sale. That’s a passthrough. Customs calls it exactly what it is: a paper transaction.

What IS bona fide? When Party A sells to Party B, and Party B has a warehouse in the U.S., and then Party B sells to Party C from that warehouse — it’s clear. Ownership was first transferred from Party A to Party B, and only after Party B took possession did they sell to Party C. That means the markup from Party B can be excluded from the declared value.

Now, that same example works even if Party B has a warehouse in Shanghai. The point is that ownership transferred — hence bona fide.

I Know What You’re Thinking — EXW to FOB

I thought the same thing when I first learned this. Buy under EXW terms, sell under FOB, and I’ve got a change of ownership from when it leaves the factory until it’s loaded on the vessel.

Could be legal — but only if you can prove it.

If the middleman is the one who handles the pickup, arranges freight, holds risk during inland transit, and shows they were responsible from factory to port, you may be okay. But if you, the importer, are the one booking the freight, paying EXW pickup fees, buying insurance that covers the inland leg, and the insurance is in your name — then what did the middleman actually do? Nothing. So customs says that’s not a bona fide sale. That’s just paper.

 

Arm’s Length — Not Just a Phrase

 

Customs also cares whether the sale was made at arm’s length — meaning the pricing wasn’t influenced by relationships.

What fails? Company A manufactures a product and ships it to its own Company B in the U.S. Company B declares First Sale value based on what it paid to Company A (a subsidiary). Then Company B sells it to Company C.

According to customs, the value is “the price actually paid or payable for the merchandise when sold for exportation to the United States.” If that price is influenced by a related-party relationship, the dutiable value is what Company C paid to Company B.

Also, if Company B isn’t buying from other vendors, this likely makes them an agent instead of a buyer. And for agents, First Sale does not apply. The value must include the fee charged by the agent — unless there’s a buyer’s agreement between Company C and Company B (which is outside the scope of this post).

What passes? Company B buys from multiple vendors and isn’t limited to Company A. Company A sells to multiple customers. The pricing is consistent. That proves the price paid or payable is at arm’s length — and eligible for First Sale.

 

Price Paid or Payable for Export to the USA

This is a big one.

If you go to a flea market, buy a bunch of stuff, and then sell it — or you use an agent in China who sources from multiple sellers in different ways — but can’t prove that the contract was written with the intent to export to the U.S., it won’t qualify.

Even more common: grey market importers. For example: If someone buys branded product off a European marketplace and resells it to you at a discount, and you try to declare the manufacturer’s price from three transactions ago — doesn’t work. Those goods weren’t originally headed for the U.S. The First Sale rule doesn’t apply.

 

Burden of Proof — You Own It

 

Last but not least: the importer carries the burden of proof. You have to prove to customs that the price the middleman paid qualifies for First Sale.

In regular clearance, customs generally accepts the declared value unless something looks off. But with First Sale, it’s the importer’s job to prove:

• The transaction was bona fide
• The price was at arm’s length
• The goods were U.S.-bound at the time of First Sale

If customs doesn’t like the paperwork or the proof, they’ll deny First Sale treatment.

What Should You Do?

If you work with a middleman and plan to claim First Sale, make sure all documents point to the same thing: clear transfer of ownership.

That includes:

• Purchase orders
• Bills of lading
• Commercial invoices from first seller to middleman
• Commercial invoices from middleman to final buyer
• Evidence that the pricing is fair (same price offered to other buyers, for example)
• Documentation that the goods were ordered for the U.S.

I’ve gone through many rulings in the customs database, and I can’t stress this enough: First Sale gets denied most often because the paperwork contradicts itself.

That’s why it’s highly recommended to bring in a customs attorney before claiming First Sale. They’ll walk the chain of custody and clean up the documentation to make sure it clearly proves ownership and responsibility changed hands.

First Sale is a powerful tool if done right. But don’t treat it like a loophole. CBP is watching.

 

And if you need help with your shipping, import customs and overall supply chain management reach out to our team, we would love to help you!