Is the First Sale Rule a Strategic Defense Against Rising Tariffs?

When L'Oréal's CEO Nicolas Hieronimus recently told Reuters that his company was exploring an obscure U.S. customs provision to combat rising tariffs, he wasn't alone. Major European brands like Golden Goose, Moncler, and Ferragamo are all turning to the same strategy. They're using what's known as the first sale rule—a decades-old customs valuation method that could slash your tariff costs by 20% or more.

With tariffs reaching as high as 15% on EU imports and threatening to climb higher, business owners are scrambling for ways to protect their margins (without passing increased costs to customers). The first sale rule offers a path to significant duty savings, but it's not a simple fix. Understanding when and how to use this strategy could be the difference between thriving and merely surviving in today's challenging trade environment.

What Is the First Sale Rule?

The first sale rule is a U.S. customs provision that allows importers to calculate tariffs based on an earlier transaction in their supply chain rather than the final import price. Established over 30 years ago through court decisions, this rule recognizes that in multi-step transactions (called multi-tiered transactions), the "transaction value" for customs purposes doesn't have to be the last sale before goods enter the United States.

Here's how it works in practice. Your foreign manufacturer sells products to a middleman for $50 per unit. That middleman then sells the same products to your U.S. company for $80 per unit. Traditionally, you'd pay tariffs on the $80 import price. Under the first sale rule, you could potentially pay tariffs on the lower $50 factory price instead. On a $750,000 annual duty bill, that difference could save you $150,000 per year.

The beauty of this approach lies in its simplicity and impact. Companies implementing first sale valuation typically see duty reductions of 20% to 40%, depending on their supply chain markup structure. For businesses importing goods particularly affected by duties like apparel, footwear, or certain industrial products, these savings can be substantial enough to maintain competitive pricing even in a high-tariff environment.

How Multi-Tiered Transactions Create Opportunities

Most businesses already operate in supply chains that involve multiple parties. This creates a natural opportunity for first sale valuation. The typical structure involves three key players: a foreign manufacturer, a foreign middleman or distributor, and the U.S. importer. This arrangement is common across industries, from fashion brands working with overseas factories and trading companies to electronics importers dealing with regional distributors.

What makes this strategy particularly attractive is that many companies don't need to restructure their existing supply chains dramatically. If you're already working through intermediaries, agents, or regional distributors, you may have the foundation for a first sale program already. The key is ensuring your current structure meets the strict requirements that U.S. Customs and Border Protection demands.

The timing couldn't be better for exploring this option. As tariff rates increase and trade tensions continue, the potential savings from first sale valuation become more significant. A 5% duty savings might not have justified the administrative complexity a few years ago, but when you're facing 15% or higher tariffs, that same structure could save hundreds of thousands annually.

Requirements: What Your Business Must Meet

Successfully implementing the first sale rule requires meeting three non-negotiable criteria that U.S. Customs scrutinizes carefully. Each element must be thoroughly documented, and you must be able to defend them under audit. Missing any component can result in penalties and enforcement actions that exceed your potential savings.

Bona Fide Sales Throughout the Chain

Every transaction in your supply chain must represent a genuine sale. That means ownership must actually transfer between parties. Translation: your middleman can't just be a pass-through entity—they must truly own the goods, bear the risk of loss, and have the legal right to sell them. This is where documentation becomes critical: contracts, purchase orders, invoices, bills of lading, and proof of payment all serve as evidence that real ownership exists and has been transferred.

Customs looks for red flags that suggest sham transactions. Flash title transfers—where goods pass through a middleman only momentarily—will disqualify you. They'll also look to see if the manufacturer and middleman share business addresses or if the middleman fails to insure goods. These things, among others, raise serious questions about whether the transaction is legitimate.

Arms-Length Pricing

All sales must occur at arm's length, meaning the pricing wasn't influenced by special relationships between parties. For unrelated companies, meeting this requirement is easy. If any parties in your supply chain are related entities, though, you'll need to demonstrate that their relationship didn't affect the pricing structure.

This is where transfer pricing documentation is invaluable. You may need economic analyses showing that your intercompany pricing aligns with what unrelated parties would charge for similar transactions. The burden of proof lies squarely with you as the importer. Keep in mind if you pursue a first sale strategy that thorough documentation is essential.

Clear U.S. Destination

The final requirement is that the goods must be clearly destined for the United States at the time of the first sale. It's not enough that they eventually ended up here—you must prove that when your middleman purchased them, the U.S. was the only possible destination. Back-to-back sales agreements, unique product specifications for the U.S. market, and direct shipment arrangements all help establish this requirement.

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Is the First Sale Rule Right for Your Business?

Let's be very clear from the start: the first sale rule isn't a universal solution. For businesses with the right characteristics, however, it can be transformative. The companies that typically benefit the most:

• sell imported merchandise with high duties
• import significant volumes
• use established multi-tiered supply chains

That means if you're paying more than $100,000 annually in customs duties and work with overseas intermediaries, this strategy deserves consideration.

Industries that typically see strong results include apparel, footwear, handbags, certain foods, and various industrial products—essentially, any sector where duty rates are substantial and supply chains naturally involve multiple parties. The key is having enough volume to justify the implementation costs and ongoing administrative requirements.

Calculating Your Potential Savings

Before diving in, run a preliminary cost-benefit analysis. Take your annual customs duty payments and estimate potential reductions based on the markup between your price paid at first sale and import price. A company importing $5 million in goods facing 15% tariffs pays $750,000 annually in duties. If the first sale price reduces the sale valuation by 20%, you're looking at $150,000 in annual savings.

However, using the first sale rule isn't free. Legal and consulting fees, ongoing documentation requirements, and additional administrative processes all create costs that must be weighed against potential savings. Most experts recommend having at least $100,000 in duty annually before considering this strategy.

Implementation Challenges and Risks

While this rule offers significant benefits (including significant savings and a competitive edge), using the first sale rule with real challenges that require careful planning and ongoing management. The administrative burden alone can be substantial, requiring detailed documentation for every transaction and maintaining compliance with complex customs regulations.

U.S. Customs places the burden of proof entirely on importers. You must demonstrate that every requirement is met and provide comprehensive documentation supporting your valuation methodology. Insufficient records or inability to prove compliance can result in penalties, back duty assessments, and potential criminal referrals in extreme cases.

Tax and Compliance Considerations

There's one area of complexity that gets ignored a lot, but is crucial for businesses looking to use the first sale rule: the interaction between customs valuation and federal income tax reporting. When you use first sale pricing for U.S. customs, your import cost will be lower than the actual price you paid your supplier. This creates valuation differences, and those need to be properly managed under Section 1059A of the Internal Revenue Code.

The applicable regulations around transfer pricing may also require you to document that related-party transactions reflect arm's length pricing for both customs and tax purposes. Yes, this means dual compliance. And, as you might guess at this point, that often necessitates working with specialists who understand both customs law and international tax regulations.

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Where 3PLs Add Strategic Value

Using the first sale rule successfully requires expertise across multiple disciplines: customs law, international tax, supply chain management, and ongoing compliance monitoring. This is where partnering with an experienced 3PL like All Points becomes invaluable—we help coordinate these complex requirements while managing your day-to-day logistics operations.

Our customs expertise ensures proper documentation flows through your supply chain from the initial factory sale through final U.S. delivery. We work with qualified customs brokers who understand first sale requirements and can ensure compliance on entry documentation for your imported merchandise. More importantly, we help maintain detailed audit trails because we know U.S. customs authorities expect to see those during reviews.

From a supply chain perspective, we can help optimize your multi-tiered transaction structure to maximize first sale benefits without sacrificing efficiency. This includes coordinating with overseas suppliers and related parties, ensuring proper risk allocation, and maintaining the genuine commercial substance that U.S. customs requires.

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