California Apparel News

U.S. apparel and textile importers are rallying to push back a new proposal that would require more stringent record-keeping requirements to bring in goods under the so-called “First-Sale Rule,” which went into effect more than 25 years ago.

Basically, the First-Sale Rule allows importers to pay duties on the initial or lower price of an item charged by the factory rather than the higher value charged by a middleman or distributor who acquires the goods and then exports them to the United States.

U.S. Customs and Border Protection officials would like to see importers produce a host of documents and invoices that start at the factory and go all the way up the ladder to the middlemen. Documents would have to be in English, which means factories in places such as China and Vietnam would have to translate their invoices into English to verify the cost of the goods.

Import specialists believe the proposed changes require so much paperwork that people would stop using the First-Sale Rule, which would result in prices rising by at least 10 percent at the store level. Others believe it would be expensive and time-consuming to get all the necessary documents to prove the exact price paid at the factory level.

“I had a client who contacted me a few weeks ago and was in a panic,” said Robert Krieger, president of Los Angeles customs brokerage company Krieger Worldwide. “He uses the First-Sale Rule to sell to big-box chains. He was concerned that the changes would majorly affect him.”

Customs has never been very happy with the First-Sale Rule. In 2008, it tried to eliminate the rule, which would have meant the government could have collected higher duties on imported goods. Apparel and footwear importers are two of the top users of the rule because tariffs on clothing can reach as high as 33 percent.

Recently, customs officials put together a draft document to modify the so-called “Informed Compliance Publication,” which shows how to comply with the various customs regulations. But trade groups and attorneys are trying to keep the rule from being altered.

“We think this attempt is going overboard and could have a chilling effect on the utilization of the First-Sale Rule,” said Tom Travis, a partner in the international trade and customs law firm Sandler, Travis & Rosenberg. “A good deal of the products that are assigned the highest duty rates are in apparel and footwear.”

Many apparel and footwear factories don’t want to open up their finances to outside scrutiny. “I don’t believe that most importers are going to be able to get the books and records of their vendors, much less the factories,” said Richard Wortman, a Los Angeles customs attorney with Grunfeld, Desiderio, Lebowitz, Silverman, Klestadt. “Factories don’t want it because it will show who else they are doing business with and what other people are paying.”

Wortman’s law firm is putting together a formal response to the proposed revisions as is Sandler, Travis & Rosenberg. Attorneys believe that customs does not have the authority to rewrite the recordkeeping requirements to include third-party, foreign entities. To do what it wants to do, the law firms maintain, customs needs to get some kind of legislation to achieve its goals.

The American Apparel & Footwear Association recently weighed in on the matter, stating that no revision was necessary. “Trade relationships based around the First-Sale Rule now lay the foundation for many U.S. jobs in the apparel and footwear industries and for valuation structures that ultimately benefit millions of U.S. consumers with affordable fashion,” noted Juanita Duggan, the new AAFA president.

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 the 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.

In 2009, the U.S. International Trade Commission analyzed the First-Sale Rule. The group found that between Sept. 1, 2008, and Aug. 31, 2009, some 23,520 separate importing entities used the First-Sale Rule. That accounted for 8.5 percent of all importing entities.

Out of all the imports, totaling $1.63 trillion, some $38.5 billion, or 2.4 percent, was imported under the First-Sale Rule. The top five categories using this rule were machinery and computers, electrical machinery, woven apparel, knitted apparel, and mineral fuels.