How the First Sale Rule will save you

by | Sep 24, 2019 | Compliance, Supply Chain Dictionary

Importer that is happy he recovered his duties

Ever-increasing tariff or duty rates are having a dramatic impact on US importers’ landed cost. These additional expenses negatively impact sales and restrict business growth. Perhaps it would be wise to consider potential cost-saving alternatives. One option is known as the First Sale Rule. 

Established in 1988 with the help of international trade attorneys Sandler, Travis & Rosenberg, this ruling was implemented as a legal channel to reduce duty liability.  The First Sale Rule applies to importers that buy products through a middleman, known as a trading company in this scenario. The trading company purchases the product from a manufacturer and resells it to the importer. What you may not know is that you are only required to pay duties on the first sale of the good. Here is an example. 

  • Manufacturer in China produces widgets and sells to a Chinese trading company for $4 
  • Trading company marks widgets up 50% to $6 and sells to the importer 
  • Assuming a 10% duty, the importer would only have to pay 10% on the manufacturers selling  price of $4 ($.40) rather than on $6 ($.60)
  • The result is a $.20 savings per widget. 

Let’s look at how the First Sale Rule results in significant savings on duty rates,

thereby improving your landed costs.  

 

Trade Company Total Sale 

(Last Sale) 

 

Duty Rate 

 

Duty Paid by Importer 

$150,000 

10%

$15,000 

Manufacturer Total Sale

(First Sale) 

 

Duty Rate 

 

Duty Paid by Importer 

$100,000 

10%

$10,000 

 

As illustrated above, the importer will save $5,000 in duties by asserting the First Sale Rule. But not so fast! Specific documentation must be set up to take advantage of this approach. The importer must be prepared to follow specific guidelines.  

As you can see, applying the First Sale Rule will save you significantly on duty payments thereby improving landed costs. However, to ensure you qualify for this ruling, it is important to work with an international freight forwarder with a robust network of compliance experts. 

With over 40 years in the business, Dedola Global Logistics has the experience and knowledge to be your partner in success. 

For a free consultation, visit us here!

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