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CIT Issues Important Decision on the Application of the "First Sale" Rule

The U.S. Court of International Trade's ("CIT") decision calls into question the application of the "First Sale" rule to goods imported from China.

The CIT in Meyer Corporation, U.S. vs. United States weighed in on the First Sale rule, which importers typically use to reduce ordinary customs duties on imported goods, and called into question whether the rule can ever apply to sales from China or other nonmarket economies. 

The First Sale rule allows importers to use the price paid for goods by a "middleman" or first purchaser, as opposed to the price paid by a later buyer, for valuation purposes. This typically results in a lower valuation for the goods, which means the importer will pay less duties.

To be eligible for the First Sale rule, an importer must establish: (i) the first sale was a bona fide sale of goods; (ii) the goods are clearly destined for the United States; (iii) the first sale was transacted at arms' length; and (iv) there are no distortive market influences that may impact sales price. 

In Meyer, the court held that the importer could not use the First Sale rule to obtain a lower duty on cookware sets imported from China. The court first found that China was a "non-market economy" based on the United States' refusal to recognize China as a "market economy." China's status, the court found, indicated a high likelihood of distortive market influences, and thus, the importer carried the burden of demonstrating that the transactions in China did not involve distorted prices. Even though the importer produced numerous witnesses that testified that they were "unaware" of any market-distortive influences by the Chinese government, the court found that the importer failed to meet its burden.

Notably, at the end of its opinion, the court questioned whether the First Sale rule might ever apply to "transactions involving non-market economy participants or inputs," and invited the Court of Appeals for the Federal Circuit to weigh in on this important issue.

It is not clear how Customs and Border Protection ("CBP") will respond to the Meyer case or whether CBP will decline first sale treatment to goods from China. At a minimum, the court's decision raises serious questions about what, if any, evidence an importer of goods from China can produce to establish eligibility for the First Sale rule. Companies should carefully consider the implications of the Meyer decision and how best to establish the absence of distortive market influences for goods imported from nonmarket economies.

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