If U.S. Tariffs Can Be 'Legally' Reduced? 'First Sale Rule' Popular

[Financial News] As the second Trump administration in the United States raises the import threshold with tariff barriers this year, a legal 'backdoor' to circumvent it is gaining attention again. Companies around the world see that by using the U.S. tariff regulations established about 40 years ago, they can significantly reduce tariffs, albeit with some hassle, and are adjusting their supply chains.
U.S. economic media CNBC reported on the 26th (local time), citing industry insiders, that the 'First Sale Rule' applied by U.S. customs to imports is popular as a legal tax-saving method. This rule, implemented under U.S. customs law since 1988, allows importers to report the taxable price based on the initial transaction price excluding intermediary distribution margins. For example, if a factory owner in China sells a T-shirt to a Hong Kong distributor for $5, and the Hong Kong distributor sells it to a U.S. retailer for $10, with the U.S. consumer ultimately buying it for $40, the U.S. retailer must pay tariffs based on the import price of $10. However, by using the First Sale Rule, the U.S. retailer can pay tariffs based on the initial transaction price of $5.
Brian Glaiher, a senior attorney at the U.S. trade law firm Miller & Chevalier (M&C), said, "Although this rule has been around for a long time, everyone is showing interest." Sid Paruti, a partner at the U.S. accounting consulting firm Moss Adams, mentioned the start of the trade war against China during Donald Trump's first term in 2018. He said, "When the Trump administration applied a 25% tariff (to China), inquiries started coming in," adding, "Now, with the emergence of new tariffs, the First Sale Rule is resurfacing."
Although this rule is a significant way to save on tariffs, it has not been frequently used due to stringent conditions and paperwork. According to M&C, only 2.4% of U.S. imports in 2009 utilized this rule. Imports applying the First Sale Rule must undergo at least two independent sales processes, including foreign producers and intermediate sellers. Additionally, the tariff declarant must prove that the independent sales processes were conducted between unrelated parties and that these transactions were made for U.S. export. Furthermore, documents proving the initial transaction price are required.
CNBC pointed out that importers bringing products into the U.S. find it difficult to determine the initial transaction price of imports. Both producers and distributors are reluctant to disclose prices due to trade secrets.
After the first Trump administration, Rich Taylor, a corporate consultant known to have advised the top 500 companies selected by Fortune in the Ningbo region of China, told CNBC, "To reduce tariffs, all parties in the supply chain must trust each other." He pointed out that the later the First Sale Rule is used, the more one falls behind, emphasizing the need to use every means to capture consumers.
CNBC noted that while most companies can benefit from using the First Sale Rule, products with a large difference between manufacturing cost and retail price, such as high-end consumer goods or luxury items, can gain even greater benefits. Italian luxury brand Moncler announced last month on the 16th that it achieved significant profits by using the First Sale Rule. Swiss pharmaceutical company Kuros Biosciences announced on the 13th of this month that it is considering relocating its supply chain to utilize the First Sale Rule. Both U.S. barbecue equipment manufacturer Traeger and U.S. online manufacturing platform Fictive positively mentioned the First Sale Rule in their first-quarter earnings announcements this year.
CNBC pointed out that the First Sale Rule contradicts the tariff policy and manufacturing revival strategy of the second Trump administration. The U.S. White House did not respond to CNBC's request for comment.







pjw@fnnews.com Jongwon Park, Reporter