On March 1, 2021, the U.S. Court of International Trade (“CIT”) issued an opinion that could signal a coming sea-change in whether goods imported into the United States from non-market economies (e.g., the People’s Republic of China) are properly eligible for “first sale” appraisement.
CIT Senior Judge Thomas Aquilino, in Meyer Corporation, U.S. v. United States, Slip Op. 21-26 (Ct. Int’l Trade Mar. 1, 2021), explicitly stated that the 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.” Meyer Corp., in which the court considered the proper customs valuation of 125 imported sets of cookware (pots and pans), essentially puts into question whether transactions involving Chinese parties, products or parts may benefit from first sale appraisement.
First sale treatment represents an opportunity for importers to save on duty spend where they order and purchase goods in multitiered transactions. While Customs presumes that transaction value is based on the price actually paid or payable by the importer for the goods, a viable first sale program permits the importer to declare the manufacturer’s price (which, in multi-tiered transactions, is paid by a middleman or trading company), instead of the middleman/trading company’s price paid by the importer. The implementation of a first sale program effectively reduces the dutiable value of imported goods.
To claim the first sale price, the importer must demonstrate that the transaction meets the standard set forth in the 1992 case at the Court of Appeals for the Federal Circuit, Nissho Iwai American Corporation v. United States, 982 F.2d 505 (Fed. Cir. 1992). Based on Nissho Iwai, a first sale claim requires (1) bona fide sales that (2) are clearly destined for the United States and that (3) are transacted at arm’s length, absent any distortive non-market influences that affect the legitimacy of the sales price. In Meyer Corp., the CIT essentially rearticulates the rule to require (1) bona fide sales that (2) are clearly destined for the United States, which (3) are transacted at arm’s length; however, because the goods were produced in China, which is a non-market economy, the court questioned whether and how the importer could establish the manufacturer’s price could be absent any distortive nonmarket influences. Historically, U.S. Customs & Border Protection (“CBP”) and the courts have applied the statutory tests for transaction value (e.g., circumstances of sale) to determine if a product sold by a Chinese manufacturer is at arm’s length, and have not examined potential distortive non-market factors. For example, if an importer buys a product directly from an unrelated Chinese producer, the price paid by the importer is presumed to be the appropriate customs value under the transaction value method, and CBP need not consider China’s status as a non-market economy. Meyer Corp. casts doubt on how to determine transaction value when buying product from a Chinese entity.
In Meyer Corp., the court stated that, given China’s status as a non-market economy, the real costs of inputs were suspect. The court identified concerns regarding market-distortive influences based on, e.g., the lack of financial statements, without which “the court has no concept of the extent to which the finances of the Meyer group units are truly independent ‘silos’ of one another, or the extent to which there might have been state influence or assistance to some degree.” While the plaintiff, as a subsidiary to its parent corporation, could claim an inability to obtain financial information from the Meyer parent, the court surmised that given that the parent has an interest in a favorable resolution to such matters and is presumed to be forthcoming to provide whatever CBP requires to assist in this resolution, “the fact that in that regard there has apparently been considerable ‘resistance’ throughout this case to that not-unreasonable discovery request and the ‘assistance’ that the parent could have provided its subsidiary to address necessary questions with respect to concerns over non-market influences, speaks volumes.” The court ultimately ruled that it had doubts as to whether the true value of the price paid or payable at the first sale level had been demonstrated in this case.
Further, the Meyer Corp. court noted that China is a non-market economy and proposed a standard by which companies can establish the absence of non-market influence, for purposes of first sale, by applying tests developed by the U.S. Department of Commerce in the context of antidumping duties (“AD”) cases. Specifically, the court proposed the factors used for establishing AD rates for specific entities within a non-market economy, i.e., the non-country-wide AD rates. According to the CIT in Meyer Corp., such entities must satisfy the following de jure and de facto factors to obtain a separate rate in the AD context:
The de jure factors are (1) an absence of restrictive stipulations associated with an individual exporter’s business and export licenses, (2) any legislative enactments decentralizing control of companies, and (3) other formal measures by the government decentralizing control of companies. . . . Typically considered de facto factors include (1) the ability to set export prices independently of the government and without the approval of a government authority, (2) the authority to negotiate and sign contracts and other agreements, (3) the possession of autonomy from the government regarding the ‘selection’ of management, and (4) the ability to retain the proceeds from sales and make independent decisions regarding the disposition of profits or financing of losses.
Notably, while the court proposes the application of these factors as part of the first sale appraisement analysis, these factors are not specifically provided within the customs valuation statute, 19 U.S.C. § 1401a.
The potential impact of Meyer on the importing community is, as of yet, unclear. Judge Aquilino stated that the appellate court “could provide clarification” as to the nexus between first sale appraisement and non-market economies. Importers should carefully monitor not only whether this case is appealed and other court cases in this space, but also future determinations by U.S. Customs and Border Protection regarding the eligibility and standard applied for first sale appraisements involving transactions with ties to non-market economies.