US Court of International Trade Suggests Customs May Reject Declared Value Based on "First Sale" Rule or "Related-Party" Prices If Non-Market Economy Might Have "Influenced" Buyer or Seller
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A recent (March 1, 2021) Court of International Trade ("CIT") opinion, Meyer Corp. v. United States,1has potentially wide-ranging implications for global supply chains, because it calls into question use of the "first sale" rule with respect to "related-party" transactions involving non-market economies such as China or Vietnam.
The importer in Meyer purchased China-origin cookware sets and Thailand-origin cookware sets including China-origin components. Both sales channels involved a related middleperson in Thailand, although a second middleperson in China also sometimes participated. One of the questions at issue was whether the importer's calculation of dutiable vale could lawfully use the "transaction value" price that a related middleperson paid to a related manufacturer, even if both were located in Thailand (i.e., the "first sale" price).
The court in Meyer suggests that U.S. customs law might prohibit importers from basing reported dutiable value on the "transaction value" of the goods, if the sale to a middleperson is between related parties and the goods were either—
- Produced in a non-market-economy country like China and Vietnam;
- Produced in a market-economy country like Thailand, but incorporating non-market-economy inputs; or
- Bought or sold by a non-market-economy entity, regardless of where the goods or the inputs that they incorporate originated.
The language at issue is broad with potentially widespread implications for global supply chains: ". . . this court has doubts over the extent to which, if any, the ‘first sale' test . . . was intended to be applied to transactions involving non-market economy participants or inputs."2
If subsequently upheld by a higher court for the same reasons that the CIT expressed, the decision could affect many global supply chains, which often involve not only related-party transactions but also non-market-economy inputs, processing, suppliers, and middlepersons Importers may have to reassess either their valuation methodologies or their sourcing patterns.
Current Legal Framework for U.S. Customs Valuation
The statutorily preferred method for appraising imported goods' dutiable value is the "transaction value" method.3 "Transaction value" is defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions and minus certain statutorily required deductions. An importer may use the "transaction value" method, however, only in certain circumstances. Specifically, the importer ordinarily must be able show:
(1) That the invoiced transaction used to determine the imported goods' value was a bona fide sale—i.e., that in the transaction, someone actually "sold" the imported goods;
(2) If so, that this sale of the imported goods—even when located at the upstream end of a multi-tiered chain of sales and resales—was "for exportation to the United States" (a.k.a. the "first sale" rule);
(3) That "sufficient information" supports any statutorily required additions to and deductions from invoiced prices for this sale; and
(4) If the imported goods' buyer and seller were "related" entities, that "the price actually paid or payable" nevertheless reflects arm's-length principles.4
Meyer Court's Reframing of the Current Legal Framework Regarding Goods That Non-Market Economies Might "Influence"
Regarding the four main prerequisites for applying the "transaction value" method, the Meyer court ultimately held that the "first" sales at issue in the case:
(1) Were bona fide, and
(2) Were for exportation to the United States; but
(3) Did not have sufficient documentation to disprove the existence of any possibly hidden subsidy resulting from China's non-market economy, and
(4) Did not have prices that the importer could prove reflected arm's-length principles.5
The Meyer court's decision on points (3) and (4) relies on an expansive reading of one phrase in Nissho Iwai Am. Corp. v. United States,6which states that the buyer and seller must have reached their price "at arm's length, in the absence of any non-market influences that affect the legitimacy of the sales price."7 The Meyer court interprets the phrase to refer to larger economic forces and seemingly treats the "absence of non-market influence on price" as an additional required element, distinguishable from the fourth element. CBP and the courts have previously interpreted that fourth element as requiring only that the relationship between the seller and buyer not improperly cause one of them to act against its own best interests.8
In addition, the Meyer court assumed that, because the United States does not yet recognize China as a market economy, an importer of goods either (a) originating in China, (b) incorporating China-origin inputs, or (c) obtained from a China-based middleperson has an added "burden of demonstrating" that the buyer procured the goods "at undistorted prices."9 The court seemed to presume distortion, writing, "the real costs of inputs from the PRC are suspect, given its status as a nonmarket economy country."10
Due to this presumed distortion, the court concludes that the non-market-economy context makes it too difficult to determine if a related-party price truly reflects arm's-length principles. That said, the decision examines only related-party pricing, the facts of the case having presented no sales between an unrelated buyer and seller. Thus, the court questioned the costs of China-origin inputs because they are "obviously critical" to the "all costs plus profit test," which concerns related-party pricing only.11 Similarly, when the court notes that "the broader concern here is over market-distortive influence, either with respect to the plaintiff directly or the provision of inputs generally," it is within the context of analyzing the holding parent company's possible influence over its subsidiaries.12
Importers should take note of the Meyer decision (and any ensuing history) but need not necessarily act on it yet, for several reasons.
- First, the decision could be interpreted as limited to the factual circumstances in the case (i.e., the importer did not provide sufficient documentation in the form of financial statements to show that related-party prices reflected arm's-length principles). Under this interpretation, the Meyer court's broad concluding statements constitute mere dictum or speculation and do not stand for the proposition that similarly situated importers may never use "related-party" prices or apply the "first sale" rule.
- Second, the importer may appeal the decision to the U.S. Court of Appeals for the Federal Circuit, which could overturn it.
- Third, even if it upheld the decision, the higher court could provide different reasoning, focusing on specific information and documents that the circumstances here lacked, rather than suggesting that importers' calculations of dutiable value may never use the "first sale" rule when related-party transactions involve non-market economies such as China or Vietnam.
The CIT's opinion in Meyer Corp. v. United States can be viewed here.
1 Slip Op. 21-26 (Ct. Int'l Tr. No. 13-00154, Mar. 1, 2021).
2 Slip Op. at 120.
3 19 U.S.C. §§ 1401a(a)(1)(A) and 1401a(b).
4 19 U.S.C. § 1401a(b).
5 Slip Op. at 116-20.
6 982 F.2d 505, 509 (Fed. Cir. 1992).
7 Slip Op. at 13 (quoting Nissho Iwai, 982 F.2d at 509) (emphasis added).
8 See Slip Op. at 2-3, 106, and 115.
9 Slip Op. at 15-16 and 106.
10 Slip Op. at 117 (emphasis added).
11 Slip Op. at 107 and 117.
12 Slip Op. at 118.
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