Tariff reduction opportunity for produce importers

If your business imports produce, you likely have never worried about tariffs, until now. With the new reciprocal tariff announcement, products that have traditionally been duty-free are now suddenly facing a minimum 10% tariff. Since there is little margin for businesses in the food sector, these increases are especially challenging.

Fortunately, U.S. Customs and Border Protection (CBP) allows the “first sale rule,” which enables importers to declare the customs value based on the initial transaction price paid in an earlier sale, such as the price a trading company pays a farmer, rather than the higher price paid to the trading company. The use of this rule often reduces the dutiable value, thereby lowering duties. By leveraging first sale valuation, importers can mitigate some of the financial impact of these elevated tariffs, preserving profit margins and maintaining competitive pricing in a market facing rising costs.

For the first sale rule to apply, the transaction between the farm and the trading company must meet the following key conditions:

• Bona fide sale: There must be a legitimate sale from the farm to the trading company that includes title transfer, not just a pass-through arrangement.
• Arm’s length transaction: The farm and trading company must be unrelated parties, or if related, they must prove that the relationship didn’t influence the price (i.e., the transaction was conducted at fair market value).
• Clearly destined for the U.S.: The products must be intended for export to the United States at the time of sale from the farm to the trading company, and documentation stipulating such must be available. Some examples include a purchase order specifying the U.S. as the destination, labeling or crate/carton markings indicating that the produce is intended for the U.S. market or special instructions that the produce meets U.S. quality standards.

If these conditions are met, an importer could declare the customs value based on what the trading company pays the farm rather than what the importer pays the trading company. This process is beneficial because the farm’s price is typically lower, excluding the trading company’s markup, which reduces the dutiable value and, consequently, the duties paid. However, there are practical steps and challenges to consider:

• Documentation: When leveraging the first sale doctrine, importers must be prepared to share supporting documentation with CBP upon request. This documentation includes detailed records from the initial farm-to-trading-company sale (e.g., invoices, contracts, payment proof) and their purchase from the trading company. CBP requires importers to substantiate the first sale price, meaning the trading company and farm must cooperate in providing this information.
• CBP scrutiny: The rule is strictly evaluated. If CBP determines the first sale doesn’t meet the criteria (e.g., the produce wasn’t clearly destined for the U.S. at that point), they could reject the claim and assess duties on the purchase price instead.
• Commercial feasibility: Since the importer is not buying directly from the farm, they’ll need a strong partnership with the trading company to access pricing data, which they might be unwilling to share due to commercial sensitivity.

While this sounds positive, CBP scrutinizes first sale valuation. It is imperative for importers to ensure that they strictly comply with customs regulations as well as have the requisite documentation to support their claims.

What’s next?

Businesses should consider the following to address first sale rule opportunities:

• Review purchase orders, invoices, contracts and payment records to ensure the initial sale is fully documented, arm’s-length and reflects a bona fide sale for export, as required by CBP.
• Assess whether the goods are clearly destined for the importing country at the time of the first sale, a key criterion for eligibility.
• Ensure that your business has a clear audit trail to confirm compliance with regulations, mitigating risks of audits or penalties.
• Quantify duty savings and compare them to implementation costs to determine whether pursuing first sale valuation is economically viable.
• Obtain a ruling from CBP confirming the application of first sale valuation.

Leveraging the first sale rule can provide significant tariff savings for produce importers by reducing the dutiable value of goods. However, it is crucial for businesses to ensure strict compliance with CBP regulations and maintain thorough documentation to support claims, thereby mitigating the risk of audits and penalties.