California Apparel News

U.S. apparel and textile importers are worried that a proposed adjustment in customs regulations will add 8 percent to 10 percent to the cost of bringing in goods from outside the country.

Importers are rallying to fight a change in something called the “First Sale Rule,” which has been in effect for 20 years.

Basically the ruling allows importers to pay duties on the initial value or first sale price of an item coming out of a factory for export rather than its value once it has passed through several middlemen or distributors.

The change in the law was suggested by the World Customs Organization, an independent intergovernmental group in Brussels, Belgium, set up in 1952 to enhance the efficiency of customs administrations and bring together customs rules and regulations.

The World Customs Organization suggested the United States alter its decades-old method of determining the value of import items and calculate tariffs on the last sale of an item.On Jan. 24, Customs and Border Protection officially proposed doing away with the “First Sale Rule,” which prompted protests from importers of all stripes. A comment period on the issue is open until April 23.

A transaction using the rule would go like this: Company A in the United States makes a $1,000 purchase order for clothes to a middleman in China. That person turns around and purchases $900 of goods from a factory, charging Company A a $100 commission. Company A would only pay duties on the $900 value of the goods and not the full $1,000 paid to the vendor.

Without the “First Sale Rule,” Company A would pay duties on the full $1,000 order issued to the middleman. With import duties running as high as 20 percent to 33 percent on some apparel items, the “First Sale Rule” can save importers a considerable sum.

Several factions have lined up to protest the change to the “First Sale Rule.” The American Apparel & Footwear Association, a trade group based in Arlington, Va., is forming a coalition to challenge any changes to one of the most commonly used import valuations.

“The practical impact will be to raise prices at a time when we are trying to give consumers more money to spend,” said Steve Lamar, AAFA’s senior vice president. “We think it will completely undercut the tax stimulus [proposed by President Bush].”

Customs attorneys around the country are lining up to fight the change. That includes lawyers from Sidley Austin LLP; Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP; and Sandler, Travis & Rosenberg LLP.

“Our desire is to see if we can fix it administratively, if not that then through legislation and if not that then through litigation,” said Nicole Bivens Collinson, an attorney with Sandler, Travis & Rosenberg in Washington, D.C.

The “First Sale Rule” has been legally challenged before when the matter was contested more than 20 years ago. Some of the cases before the U.S. Court of International Trade were argued by Sandler, Travis & Rosenberg.

In E.C. McAfee Co. v. the United States (1988), the case involved the importation of made-to-measure suits. The U.S. purchaser ordered the suits from a Hong Kong distributor who then contracted with a tailor in Hong Kong to assemble the clothing. After receiving the completed clothing from the tailor, the Hong Kong distributor delivered the clothing to the freight forwarder for transport to the purchaser in the United States. The issue presented was whether transaction value should be determined on the basis of the price the U.S. purchaser paid to the distributor or the lower price the distributor paid to the Hong Kong tailor, who assembled the clothing.

The American Air Parcel Forwarding Co. Ltd. v. the United States (1987) and Synergy Sport International Ltd. v. the United States (1993) cases were about importing apparel. A fourth case, Nissho Iwai Corp. v. the United States (1992), involved subway cars.

In these cases, the courts ultimately found that Customs and Border Protection must appraise merchandise and assess duties based on the manufacturer’s price as opposed to the higher price paid by the importer or the U.S. customer.

“If customs looks at it from a fact-based point of view,” Lamar said, “I think we have an excellent chance of preventing it, considering all the legal precedence.”—Deborah Belgum