Footwear, Apparel Importers Get First Sale Treatment in Two CBP Rulings

CBP recently issued two rulings granting first sale valuation to two importers of footwear and apparel, respectively. CBP held in HQ H295538 that, based on documentation submitted by the footwear importer, Fashion Major Brands, its Spanish parent company’s bona fide arm's length sale was destined for the U.S. at the time of that sale, and may be used to set the transaction value. Similarly, in HQ H291762 CBP found the price Direct Sourcing paid to a Chinese apparel manufacturer can be used by that sourcing company’s downstream customer as the transaction value.

For CBP to accept as transaction value the sale between a foreign manufacturer and a middleman the importer must present evidence that the sale between the foreign manufacturer and the middleman was a bona fide arm’s length sale and that it was a sale for export to the United States. In Treasury Decision 96-87, the U.S. Customs Service said any importer requesting first sale treatment must provide a description of the parties involved in a transaction and supply relevant documentation addressing each transaction so as to create a “complete paper trail.”

The footwear importer, Fashion Major Brands, submitted a purchase order from its U.S. customer; a purchase order from Fashion Major Brands to its Spanish parent; a purchase order from the Spanish parent to the Chinese manufacturer indicating freight on board (FOB) terms of sale and that the merchandise will be shipped to California; an invoice from the Chinese manufacturer to the Spanish parent indicating the goods will be produced for Fashion Major Brands and shipped to California; and an invoice from the Spanish parent to Fashion Major Brands indicating FOB China terms of sale.

Because Fashion Major Brands’ Spanish parent and the Chinese manufacturer are not related, CBP presumes the sale is at arm's length, satisfying one criterion for first sale treatment. The sale was also bona fide, as demonstrated by the Spanish parent company taking title and risk of loss ex-factory at the Chinese manufacturer, and title and risk of loss then passing to Fashion Major Brands on FOB terms at the port of Ningbo. Also, because the purchase order indicates the destination as California, the transaction meets the requirement that the goods are clearly destined to the U.S.

The apparel sourcing company’s transaction in the second ruling was structured somewhat differently. It submitted a purchase order from its U.S. customer Forever C, indicating delivered duty paid (DDP) terms of sale and passage of title and risk of loss upon arrival of the apparel at a delivery location in Los Angeles. That purchase order also said Direct Sourcing must ensure compliance with U.S. regulatory requirements, such as those of the Consumer Product Safety Commission. A second purchase order, from Direct Sourcing to the Chinese manufacturer, Zhuji Star, specifies the delivery term FOB at the Port of Shanghai, with a Los Angeles delivery location, and that Zhuji Star will be responsible for meeting those U.S. regulatory requirements.

Thus, title and risk of loss passes from Zhuji Star to Direct Sourcing aboard a vessel in the Port of Shanghai, and then from Direct Sourcing to Forever C upon delivery in Los Angeles. The U.S. customer, Forever C, acts as importer of record for the goods.

Again, CBP presumed the sale from the foreign manufacturer to the middleman was at arm's length because Direct Sourcing and Zhuji Star are unrelated. It also found the sale was bona fide, because Direct Sourcing assumes title and risk of loss, at least until the apparel is delivered to Forever C. As for whether the sale between Zhuji Star and Direct Sourcing was destined for export to the U.S., not only did the purchase order indicate ultimate delivery to Los Angeles, but the style numbers and descriptions of the wearing apparel are in English. And CBP has held that manufacturing products abroad to specifically comply with CPSC regulatory requirements, as is the case for Direct Sourcing’s apparel, is evidence that the products were destined for the U.S.