Tax News Update    Email this document    Print this document  

March 5, 2021

US Court of International Trade Decision questions first sale principle applicability to Chinese- and Vietnamese-origin goods

A United States (US) Court of International Trade (CIT) decision issued on 1 March 2021 questions the applicability of the first sale principle to transactions involving non-market economies,1 including China and Vietnam. In instances where merchandise is subject to multiple sales for export to the US prior to importation, the first sale concept allows the US importer to declare the price paid on an earlier sale for custom purposes, provided certain criteria are met. The criteria, set forth by the Court of Appeals for the Federal Circuit (CAFC) decision Nissho Iwai America Corp. v. United States, 982 F.2d 505 (Fed.Cir. 1992), requires that the sale from the manufacturer to middleman be a bona fide sale for export, the goods be clearly destined for the US, and that the "manufacturer and middleman deal with each other at arm's length, in the absence of non-market influence that affect the legitimacy of the sale price."

Meyer decision

Meyer Corporation, US v United States2 deals with a multiple sale for export scenario. Meyer Industries, Ltd, a Thai company, and Meyer Zhaoquing Metal Products Ltd, a Chinese company, both manufacture cookware. The manufacturers sell cookware to related Meyer companies in Macau and Hong Kong, respectively, who act as middlemen and then resell the cookware to Meyer Corporation, the US importer. The importer's use of the manufacturer to middleman sale as the customs value was challenged by US Customs and Border Protection (CBP) as not meeting first sale requirements. The Court found that the sales from the manufacturers to the middlemen met the "bona fide sale" and "clearly destined for the US" criteria, but did not satisfy the Nissho Iwai requirement that "the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influence that affect the legitimacy of the sales price."

In its analysis, the Court viewed the Nissho Iwai requirement as necessitating two separate considerations: (1) whether the sales price is at arm's length, and (2) whether the sales price is determined absent any distortive non-market influences. The Court concluded that Meyer had not demonstrated either, eliminating the application of first sale valuation. With regard to the "distortive non-market influences" consideration, the Court shared its concern as to whether products made in a non-market economy could be shown to be free of non-market influences, noting:

"as a result of its consideration of the issues presented here, this court has doubts over the extent to which, if any, the 'first sale' test of Nissho Iwai was intended to be applied to transactions involving non-market economy participants or inputs. In that regard, the Court of Appeals for the Federal Circuit could provide clarification."

Two factors or one?

While the Court reads the phrase "at arm's length, in the absence of any non-market influence that affect the legitimacy of the sales price" as necessitating two separate factors, the phrase has been commonly considered by businesses as single factor, with "non-market influences that affect the legitimacy of the sales price" simply defining the meaning of arm's length. CBP also seems to view this phrase as single requirement. Indicia of this date to 1996 guidance, Treasury Decision (TD) 96-87, which specifies information to be presented in any ruling request to CBP on first sale. TD 96-87 includes the entire quote from the Nissho Iwai case referenced in the Meyer decision:

"The manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and the middleman deal with each other at arm's length, in the absence of any non-market influence that affect the legitimacy of the sale price * * * [T]hat determination can be made on a case-by-case basis."

TD 96-87 then specifies that the information needed to satisfy the arm's-length criterion is the same as in other instances requiring support for related party pricing for customs purposes as provided in 19 USC 1401a(b)(2)(B); i.e., that the circumstances of sale indicate that the relationship did not influence the price or that the transaction value closely approximates certain test values. CBP guidance on related-party pricing does not reference non-market economies.3

Numerous CBP first sale rulings also treat the phrase as a single factor, generally referring to it as requiring an arm's-length determination. And, CBP rulings have approved first sale from Chinese and Vietnamese manufacturers without reference to non-market influences.4 Additionally, one prior CIT case, Synergy Sport LTD v. United States, 17 CIT 18 (1993) approves first sale valuation for a first sale made by a Chinese manufacturer.

Transaction value and non-market economies

The concept of first sale is premised on there being two or more sales that each qualify for transaction value. The World Trade Organization Customs Valuation Agreement, which is the basis for US customs valuation rules, does not contemplate any consideration of market or non-market economy status for transaction value eligibility. The introductory comments to the Valuation Agreement state that "customs valuation should be based on simple and equitable criteria consistent with commercial practices and that valuation procedures should be of general application without distinction between source of supply." Technical Committee on Customs Valuation5 Commentary 2.1 provides further guidance, stating that valuation of goods subject to government subsidies are to be valued the same as any other goods, and are eligible for transaction value.

The concept that sales from a non-market economy may be ineligible for first sale raises additional questions. If determining whether a sale is subject to "non-market influences" is a separate test for first sale, it would appear to apply to both sales between related and unrelated parties. Moreover, as the first sale principle is premised on eligibility for transaction value, if non-market influences are viable considerations in determining transaction value, then the same reasoning could be applied to single sales for export- — potentially preventing any import from a non-market economy country from eligibility for transaction value. The Court suggests this possibility in its conclusion:

"All of the foregoing leads the court to doubt that accurate ascertainment of the "true" value of the "price paid or payable" at the first sale level in the customs duty sense has been demonstrated in this case. Whether the same can be said with respect to the second-level "price paid or payable", i.e., by Meyer itself as importer, the court need not opine, for no party has proposed an alternative method of appraisement in any event. Such matters are best left to the parties in any further negotiations as a result of this opinion."


To date, CBP has not provided any specific guidance on potential implications of the Meyer decision. The CIT itself notes that clarification from the CAFC is needed. In the meantime, it is noteworthy that the CIT also found Meyer did not demonstrate arm's-length pricing for the first sale under the traditional customs tests, which invalidates first sale for Meyer regardless of whether a non-market economy was involved in production. The case serves as a reminder for any importers using transaction value for related-party imports, whether under the first sale principle or not, to be sure there is adequate customs support in place for this pricing. In addition, all importers of products from non-market economy countries, such as China or Vietnam, will also want to carefully monitor further developments in the Meyer case.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), Global Trade


Currently, the US considers as non-market economies: Republic of Armenia (see 57 FR 23380), Republic of Azerbaijan (see 57 FR 23380), Republic of Belarus (see 57 FR 23380), People's Republic of China (see 82 FR 50858), Georgia (see 57 FR 23380), Kyrgyz Republic (see 57 FR 23380), Republic of Moldova (see 57 FR 23380), Republic of Tajikistan (see 57 FR 23380), Turkmenistan (see 57 FR 23380), Republic of Uzbekistan (see 57 FR 23380), and Socialist Republic of Vietnam (see 68 FR 37116).

2 Slip Opinion 21 — 26.

3 See, e.g. 19 CFR 152.103(l); Informed Compliance Publication Determining the Acceptability of Transaction Value for Related Party Transactions

4 See, e.g., HQ H295538 (May 31, 2018), HQ H291762 (May 7, 2018, HQ H268741 (February 27, 2018), HQ H278748 (March 17, 2017).

5 The Technical Committee on Customs Valuation is established in the Valuation Agreement and is charged with providing guidance on application of the Valuation Agreement.