As Tariffs Rise, U.S. Firms Revive Obscure Rule to Slash Import Costs
A 1988 customs provision known as the 'first sale rule' is helping companies legally lower duties on goods from China and elsewhere.
As Washington raises tariffs, major corporations are dusting off a little-known legal provision to save millions of dollars. The “first sale rule,” a customs loophole dating back to 1988, has become a favored tool for multinationals looking to legally and drastically reduce their import costs.
Consider this example: a Chinese manufacturer sells a T-shirt to a wholesaler in Hong Kong for $5. That wholesaler then sells it to an American retailer for $10, who in turn sells it to consumers for $40. Under the first sale rule, the U.S. retailer can pay import duties based on the original $5 price, effectively bypassing the costs associated with the middleman’s markup.
“What the regulations allow you to do is use that first sale price from the factory to the middleman to establish the basis for duty calculation,” Brian Gleicher, a senior counsel and member at Miller & Chevalier Chartered, told CNBC.
A Renewed Interest
While the first sale rule has been available since 1988, it regained prominence during the first Trump administration and is seeing another surge amid the latest wave of tariffs.
“When the 25% tariffs [on China in 2018] went into effect, that’s when the phone started ringing,” said Sid Paruthi, a partner at U.S. advisory firm Moss Adams. “Now, with the new tariffs, first sale is coming back into the spotlight.”
Gleicher added, “It’s been around for a long time, but now everyone is starting to look at it with more interest.”
Meeting the Criteria
To leverage the rule, however, a company must meet several strict criteria. The transaction must involve at least two sales: one from a foreign producer and one or more from intermediaries. These transactions must be conducted at arm’s length between independent, unrelated parties. There must also be clear proof the goods were always destined for the United States and documentation of the original sale price.
For some companies, this is easier in theory than in practice. Normally, import duty is calculated on the price of the goods when imported, so the burden of proving the initial factory price falls on the importer—a figure a supplier may be reluctant to disclose.
“If you’re the importer, you have to secure that first sale price. You have to have the data,” Gleicher noted. “Suppliers may not want to give that information up.”
Rich Taylor, a Ningbo, China-based business development consultant who has advised Fortune 500 companies on the rule since the first Trump presidency, stressed that “there has to be trust between all parties” due to the risks involved.
The Benefits
Despite the added complexities, the potential cost savings often make the effort worthwhile.
“[Suppliers] keep their customer. They’re showing their customer that they’re doing everything they can to mitigate their costs,” Taylor said. “If you don’t use it, then your end cost goes up. And if your competitor is using the rule, you lose the advantage.”
Who Is Using the Rule
Businesses appear to be taking notice. While the first sale rule can be applied to a wide range of products and industries, it is particularly useful for high-value and luxury goods where profit margins are larger.
Last month, Italian luxury house Moncler reported that the rule provides a “significant benefit” to its cost structure.
“The first sale cost — of course the industrial cost — is much lower than the retail price and is around 50% of the intracompany price. So of course, it’s a significant benefit,” Luciano Santel, a senior executive at Moncler, told investors during an April 16 earnings call.
Swiss biotech firm Kuros Biosciences announced earlier this month it is adjusting its operations to implement the rule. “What we will do now is we will move our wholesale hub to Zurich… which basically means we can apply the so-called first sale rule,” said Chief Financial Officer Daniel Geiger on May 13.
During their first-quarter earnings announcements, U.S. barbecue company Traeger and industrial firm Fictiv also cited the first sale rule as a “supply chain management tool” and a way to “minimize tariff and duty costs,” respectively.
