First Sale Valuation: The Hidden Traps Most Importers Miss

TL;DR

First Sale valuation lets the importer of record declare CBP duty on the factory-to-middleman price instead of the middleman-to-importer price — savings are typically 15-40% of duty spend.

The three-part legal test (Nissho Iwai): (1) bona fide sale, (2) goods clearly destined for export to the US at the time of the factory sale, (3) arm's-length transaction free of non-market influences.

The audit trap is year-three: CBP's Focused Assessment window looks back 5 years — every entry filed under First Sale during that window has to survive re-proof on demand.

Documentary requirements: factory commercial invoice, middleman invoice, purchase orders showing US destination at the factory-sale moment, transfer-pricing study (for related-party middlemen), payment/wire records, and shipping documents connecting the three parties.

The rate-advance risk on a failed First Sale claim is asymmetric — CBP can re-liquidate the last 5 years of entries at the higher middleman-price value, plus interest, plus penalties under 19 U.S.C. § 1592 if the mis-declaration is deemed negligent or worse.

Key stat: First Sale savings compound: on $10M of Chinese-origin apparel imports at 25% duty with a 20% middleman markup, First Sale trims ~$500K/year in duty — enough to justify a full-time trade-compliance FTE plus audit-defense retainer.

A first-sale program that survives a Focused Assessment isn't the one with the best duty savings on paper — it's the one built to be unwound and re-proven at any moment, by someone who wasn't in the room when it was designed.

The Year-Three Problem

Every first-sale program looks great in year one. The consultant runs the numbers, the middleman markup gets stripped out of the dutiable value, duty spend drops 15-30%, and everyone signs off. Year two is quieter — the savings compound, nobody's asking questions, the program becomes background infrastructure. Then year three shows up as a CF-28, or worse, a Focused Assessment letter, and CBP starts asking for the factory invoice, the middleman invoice, the TP study, and proof the goods were destined for the US before anyone touched them.

This is where the trouble starts, and it's never new trouble. It's old trouble that was structural from day one and nobody stress-tested it, because in year one the only question anyone asked was "does this reduce dutiable value," not "does this survive discovery." The transfer-pricing true-up that happened at year-end and quietly repriced the middleman invoice — nobody flagged it as a customs problem because it lived in a different department. The production run that got allocated across three markets after the fact — nobody flagged it because the goods still ended up here. The tooling the importer supplied to the factory for free — nobody flagged it because it wasn't on any invoice at all.

None of these are exotic. They're the ordinary residue of how multinational supply chains and multinational tax departments actually operate, colliding with a valuation methodology that demands a much cleaner story. When CBP unwinds a program retroactively, the "savings" become a prior-disclosure calculation plus interest, and the consultant who built the program is the first call. This piece is about the three traps that do the damage, and how to build a program that doesn't need luck to survive an audit.

The 60-Second Refresher: [Nissho Iwai](https://law.justia.com/cases/federal/appellate-courts/F3/982/505/595820/) and the Three-Part Test

You know this, but let's align vocabulary before we go deeper, because half the disputes in this space are actually disputes about which "sale" people mean when they say "the sale."

Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), is the case that made multi-tier transaction value possible under 19 U.S.C. § 1401a. Before Nissho Iwai, CBP's default position was that in a factory-to-middleman-to-US-importer chain, only the last sale — middleman to importer — counted for transaction value. Nissho Iwai (building on the earlier E.C. McAfee line and cementing the standard from Treybal/Synergy progeny) confirmed that an earlier sale in the chain, the one between the factory and the middleman, can be used as the basis for transaction value instead, provided it clears three hurdles:

Bona fide sale — a genuine transfer of title and risk for a price, not a cost allocation, a consignment, or an intercompany bookkeeping entry dressed up as a sale.

Clearly destined for the United States at the time of that sale — the goods weren't produced for general distribution and later routed here; the US was the destination when the factory sold them.

Arm's length — the price reflects the value of the merchandise, undistorted by a relationship between the parties. For related parties this doesn't disqualify the sale, but it does shift the burden to prove the relationship didn't affect the price.

Meet all three and you get to declare the lower, upstream factory price as the basis for duty instead of the middleman's marked-up resale price. That's the entire mechanism. It's a real doctrine, it's decades old, CBP recognizes it, and it works — right up until one of these three legs gets kicked out from under the program by something that happened in a different department for reasons that had nothing to do with customs compliance. That's the rest of this article.

Trap #1: The Related-Party Middleman and the Transfer-Pricing Collision

Here's the trap in one sentence: customs law and income-tax law want two different, sometimes incompatible things from the same invoice.

Customs valuation under Nissho Iwai wants the factory-to-middleman sale to be a real, arm's-length transaction, fixed at the time of sale, where the middleman is a genuine buyer-reseller earning a real trading margin that reflects its function and risk. Transfer pricing, under OECD guidelines and IRC § 482, wants the middleman's margin to land within an arm's-length range determined by a TP study — and critically, wants that margin trued up if actual results drift outside the range, often at year-end, often retroactively, often with a formal TP adjustment that reprices the intercompany transactions after the fact.

Those two systems were not designed to talk to each other. A TP policy that says "the trading company earns a 4-6% operating margin, tested annually, with a compensating adjustment if it falls outside that band" is a completely normal, defensible, IRS-friendly transfer pricing structure. It is also a direct threat to the first-sale program built on top of the same invoices, because a retroactive price adjustment that changes what the middleman actually paid — or actually charged — after the goods have already cleared customs, undermines the "price actually paid or payable at the time of sale" foundation the whole methodology sits on. If the price wasn't fixed and final when the goods were sold for exportation, you don't have the clean, static transaction value CBP wants to see; you have a number that moved after the fact for reasons unrelated to the merchandise.

Worse, a compensating TP adjustment often runs through a global cash pool or a single true-up invoice covering a whole fiscal year across multiple product lines and multiple import entries. Try explaining to a CBP import specialist which dollars of that adjustment touched which entry, on which HTS line, in which quarter. Most companies can't, because the TP true-up was never built with entry-level traceability in mind — it was built to satisfy the IRS and the company's auditors, full stop.

The fix isn't "don't do transfer pricing" — every multinational has to. The fix is deliberate alignment at the design stage, before the program launches, not after CBP asks the question. Three structures actually work in practice:

No retroactive adjustments touching first-tier invoices. Set the TP policy so the tested party is somewhere else in the chain (the US distributor, for instance) and the factory-to-middleman price stays fixed and untouched by the annual true-up. This is the cleanest answer and the one most consultants should be pushing clients toward.

A documented, reconciled adjustment mechanism. If the true-up has to touch the first-tier price, build a contemporaneous methodology that maps the adjustment back to specific entries and treats it as a price adjustment requiring a post-entry amendment (and potential duty reconciliation), rather than something that quietly happens in the ERP system three months after the goods cleared.

Contractual anchoring. A written intercompany agreement that fixes the transfer price at time of shipment, separate and severed from the annual TP true-up, with the true-up settled through a mechanism that doesn't restate the shipment-level invoice price (a service fee, a separate adjustment account, whatever your tax counsel prefers) — as long as it's documented as genuinely separate from the price of the goods.

If your client's TP policy and their first-sale program were designed by two teams that have never had a joint meeting, assume this trap is already live in their existing entries. It usually is.

Trap #1 Continued: Evidencing Arm's Length When the Middleman Is Related

Related-party sales aren't disqualified from first-sale treatment — plenty of legitimate programs run through a related trading company — but the burden of proof flips. CBP's long-standing approach (reflected in its Informed Compliance Publication on related-party transaction value, and consistent with the "circumstances of sale" framework under the transaction value regulations) asks you to show either that the relationship didn't influence the price, or that the price closely approximates a test value (comparable sales to unrelated buyers, or a computed value built from cost plus a reasonable profit and general expenses).

In practice, most first-sale programs lean on the circumstances-of-sale route, and the analysis has to answer a question that sounds simple and isn't: would this price have been set the same way if the parties weren't related? That means showing the middleman priced the goods the way an unrelated trading company would — covering its costs, earning a market-consistent margin for the function it performs, and bearing real commercial risk on the transaction. An "all-costs-plus-reasonable-profit" showing — the middleman's full cost base (product cost, freight, financing, overhead allocable to the trading function) plus a defensible margin — is the workhorse evidence here, and it should look uncomfortably similar to what the TP study is already producing. When it doesn't resemble the TP study at all, that's a five-alarm fire, not a coincidence to explain away.

But the deeper, more frequently fatal issue is substance: is the middleman a real trading company, or a re-invoicing shell?

CBP and courts look past the paperwork to function. A middleman that survives scrutiny typically:

Takes actual title and bears real transit/inventory risk (loss, damage, unsellable goods, FX exposure on the purchase leg) rather than merely passing paper through.

Has employees performing real functions — sourcing, quality control, logistics coordination, credit risk management — not a mailbox and a shared services contract.

Negotiates terms independently, even if within group policy, rather than mechanically forwarding whatever price the factory sets.

Has its own bank accounts, pays the factory on its own terms (not simultaneously back-to-back with collecting from the US importer on identical terms, which is the classic tell of a pass-through), and carries the goods on its own books during the period it holds title.

A shell that exists purely to generate a lower invoice price for customs purposes — no employees, no independent negotiation, payment terms that mirror the downstream sale dollar-for-dollar and day-for-day — will not survive a Focused Assessment, and honestly shouldn't. The tell CBP looks for hardest is simultaneity: if the middleman's payment to the factory and the importer's payment to the middleman happen on the same day, in the same currency, for a fixed spread that never varies with market conditions, that's not a trading company taking risk — that's a wire transfer with an invoice stapled to it. Before you certify any related-party first-sale program, get the middleman's standalone financials, confirm it has payroll and a P&L that isn't just a pass-through, and if it doesn't, tell the client the program is a liability, not an asset, no matter what the savings model says.

Trap #2: "Clearly Destined" and the Multi-Market Supply Chain

The "clearly destined for the United States" leg gets less airtime than arm's-length pricing, but it's the one that quietly breaks in modern, efficient supply chains — precisely because modern supply chains are built to avoid committing product to a single market too early. That's good operations and bad customs facts, and the two goals are in direct tension.

Here's the pattern that kills this leg: the factory doesn't produce against a US purchase order. It produces against a rolling forecast, builds to a demand plan that spans the US, EU, and other markets, and the middleman allocates finished units to specific markets after production — sometimes after the goods have already left the factory and landed in a regional distribution hub. Add postponed allocation logic (goods sit in a Free Trade Zone or bonded warehouse in a third country, unlabeled, waiting for a market-specific pick), and you've built an operationally excellent, commercially rational supply chain that cannot show the goods were "clearly destined" for the US at the moment the factory-to-middleman sale occurred — because at that moment, nobody had decided yet.

This is not a hypothetical edge case; it's increasingly the default for large consumer goods and electronics importers running lean, responsive supply chains, and it's exactly the kind of program that looks fine until an auditor asks for the production order tied to a specific entry and there isn't one.

Documentation patterns that actually survive scrutiny share one trait: they show destination intent baked in at or before production, not bolted on after the fact.

US-specific purchase orders that flow upstream to the factory. The cleanest fact pattern is a US importer PO (or a US-market-specific forecast commitment with real teeth) that the middleman passes to the factory before the relevant production run, with quantities that tie out.

US-market labeling, packaging, or regulatory specs applied at production. UL marks, US-specific voltage, English-only packaging with US compliance text, FCC/FDA markings baked in at the factory — these are hard to argue around, because a shirt that says "goods intended for another market" was never intended for another market.

Direct shipment or a documented, trackable hub-to-US movement. A shipment that moves from factory to a US-bound vessel with a bill of lading naming a US port doesn't have the destination problem. One that transits an undifferentiated regional hub and gets allocated later does — and the more that hub inventory is fungible and interchangeable across markets, the worse the fact pattern.

Contemporaneous allocation records, if postponed allocation can't be avoided operationally — at minimum, timestamped records showing when and why specific units were assigned to the US market, even if that happened after production. It's not as good as pre-production commitment, but it's better than nothing and better than reconstructing the story after a CF-28 arrives.

If your client's supply chain runs on postponed allocation — and increasingly, the good operators do, because it's more efficient — the honest conversation is that first-sale treatment on that flow is fragile by design, and the program should either be restricted to SKUs or production runs where US destination is locked in early, or built with enough contemporaneous allocation documentation to tell a coherent story. Don't let the savings model assume clean facts the supply chain team never actually delivers.

Trap #3: The Leaky Price — Assists, Royalties, and Everything Off-Invoice

This trap doesn't attack the structure of the first-sale program at all — it attacks the number. And it's the one most likely to turn a defensible program into a straightforward undervaluation case, because it's not really a first-sale issue; it's a "you didn't declare the full price actually paid or payable" issue that happens to live inside a first-sale program.

Under 19 U.S.C. § 1401a, transaction value isn't just the invoice price — it's the price actually paid or payable, plus statutorily enumerated additions, whether or not they show up on the commercial invoice. The ones that trip up first-sale programs most often:

Assists. Tooling, molds, dies, materials, components, or engineering/design work the importer (or the middleman, on the importer's behalf) supplies to the factory free or at reduced cost, for use in producing the imported merchandise. The value of the assist has to be added to the price of the goods it helped produce, apportioned reasonably across the production run. A factory-to-middleman first-sale price that ignores $400,000 of importer-supplied tooling isn't an aggressive-but-defensible first-sale position — it's an undervaluation case wearing a first-sale costume, and CBP will treat it that way.

Design and engineering work performed abroad. If the importer's team (or a contracted third party) does product engineering, tooling design, or specification work outside the US and provides it to the factory for use in production, that value is generally dutiable as part of the price actually paid or payable, unless it falls within the narrow US-origin engineering exclusion. Multi-market consumer goods and electronics importers run into this constantly and often don't realize the engineering spend is a customs issue at all — it lives entirely in a product development budget that nobody on the trade compliance team ever sees.

Commissions. Buying commissions (paid to an agent who represents the buyer's interests) are generally excludable from dutiable value; selling commissions (paid to an agent representing the seller) generally are not. First-sale programs that route payments through a "buying agent" that functions more like a seller's sales arm are a recurring audit target — the label on the contract doesn't control, the actual function does.

Royalties and license fees. Dutiable if paid as a condition of sale of the imported merchandise and related to the merchandise itself. A licensing arrangement that sits alongside a first-sale program — trademark royalties, patent license fees tied to the imported product — needs its own dutiability analysis; it doesn't get a pass because the base transaction value was calculated at the factory tier.

Retroactive rebates and post-importation price adjustments. Related to Trap #1 but distinct: even in a non-related-party first-sale structure, a rebate paid back to the importer after the fact that effectively reduces the real price paid needs to be reconciled against the declared value, not quietly booked as other income.

The unifying lesson: a first-sale program can nail the structural test — bona fide sale, clearly destined, arm's length — and still be wrong, materially wrong, because the price used as the base wasn't actually complete. Every program audit needs an assist and off-invoice-payment inventory as a standing line item, not a one-time setup exercise, because tooling refreshes, new SKUs, and engineering spend don't stop after year one.

The Documentation Architecture a Program Needs to Survive Audit

CBP's expectation, consistent with its guidance on related-party and first-sale transactions, is that you can produce the full paper chain on demand, for both tiers of the sale, not just the tier you're declaring. In practice that means:

Tiered purchase orders — the US importer's PO to the middleman, and the middleman's PO (or production order) to the factory, with quantities, specs, and timing that actually tie out to each other.

Tiered commercial invoices — factory-to-middleman and middleman-to-importer, matched by shipment, showing the price differential the program depends on.

Proof of payment at both tiers. This is the one programs most often can't produce under pressure. CBP wants to see that the middleman actually paid the factory the invoiced price — wire records, not just an invoice sitting in a file. A "sale" nobody can prove was paid for isn't a bona fide sale.

Access to factory cost data, or at minimum the middleman's cost-build supporting the factory price, sufficient to support the arm's-length showing under a circumstances-of-sale or computed-value approach.

Middleman financial statements demonstrating it's a going concern with real trading margin, not a shell (see Trap #1).

Transportation and routing documents supporting the "clearly destined" showing — bills of lading, packing lists, US-market labeling proof (see Trap #2).

The TP study and any true-up documentation, cross-walked against the customs valuation file so the two tell a consistent story (see Trap #1).

Assist and engineering-spend ledger, apportioned to production runs and entries (see Trap #3).

Who maintains it, and how often, matters as much as what's collected. The recurring failure mode is a program set up beautifully at launch with a binder full of documentation for the pilot shipments, and then nothing — no refresh when the factory changes, no refresh when a new SKU launches, no refresh when the TP policy is renegotiated two years later. Assign ownership explicitly: trade compliance owns the customs-side file and entry reconciliation; tax/TP owns flagging any policy change that could touch first-tier pricing before it's implemented, not after; and someone — ideally a named person, not "the team" — owns a quarterly reconciliation confirming new POs, new SKUs, and new suppliers are still generating the required documentation. A first-sale program is not a project with an end date. It's a standing control that decays the moment nobody owns it.

Case-Law Temperature Check: Meyer Corp. and What It Actually Changed

If you've had a first-sale program flagged in the last few years, someone has mentioned Meyer Corp. v. United States to you, usually with more confidence than the actual record supports. Here's the honest version.

Meyer involved a first-sale program on cookware sourced from a related factory in a non-market economy (China), sold through a related Hong Kong trading company to the US importer. At the Court of International Trade, the government challenged the arm's-length showing, and the CIT's 2021 decision leaned skeptical of the program on the facts presented — including, notably, wading into whether pricing from a non-market-economy producer could be reliably tested as arm's length at all, a detour that alarmed a lot of consultants running China-sourced first-sale programs, because it suggested NME sourcing might face a structurally higher bar regardless of how good the documentation was.

The Federal Circuit's review in 2022-2023 walked that back in important ways. Without putting words in the court's mouth on specifics I won't pretend to recall precisely — check the actual opinion before you cite it to a client — the broader signal from the appellate handling was that first-sale valuation as a doctrine remains intact and available, including for NME-sourced goods, and that the CIT's more sweeping skepticism about non-market-economy pricing wasn't the last word. The case did not kill first sale, and it did not create a categorical bar for China-origin programs.

What Meyer actually stands for, in the way that matters for a working consultant, is narrower and more useful: the doctrine survives, but weak proof loses. The litigation is a case study in what happens when the documentation, the TP alignment, and the substance-of-the-middleman evidence don't hold up to adversarial scrutiny — not a case study in first sale being disfavored as a matter of law. If you're running or evaluating a program today, the lesson isn't "avoid NME sourcing" or "first sale is dead." It's "assume your file will get the Meyer treatment — hostile expert review of every gap between your documentation and the three-part test — and make sure it survives that, not just a friendly internal audit." Get current on the actual opinions before you brief a client on specifics; this is a fast-moving area and secondhand summaries (including this one) are a starting point, not a citation.

Surviving a CBP Attack: CF-28s, Focused Assessments, and Prior Disclosure

The attack rarely opens with a bang. It opens with a CF-28 Request for Information, often narrow-sounding — "provide the purchase order and payment documentation for entry X" — that's really a probe for whether the first-sale documentation exists at all. How you answer the first CF-28 sets the tone for everything after it. A complete, organized, tiered-document response signals a program worth taking at face value. A scramble that produces mismatched invoices and a defensive cover letter signals the opposite, and invites a Focused Assessment.

A Focused Assessment on an importer with a first-sale program will almost always sample first-sale entries specifically, because the revenue delta per entry is large and the documentation burden is high — it's an efficient place for CBP to spend audit hours. The FA team will typically pull a sample, trace both tiers, check for TP adjustments touching the sample period, and test the destination and assist questions independently. If the sample fails at a meaningful rate, expect the finding to extrapolate across the full population of first-sale entries for the audited period, not just the sample — that's where "the program was fine" becomes "the program owes seven figures" very quickly.

The real decision point for a consultant is prior disclosure versus defend, and it has to happen early, ideally before CBP formally opens an inquiry, because a valid prior disclosure under 19 U.S.C. § 1592 filed before CBP starts an investigation caps the penalty exposure to interest on the underpayment, versus a penalty framework that scales with culpability (negligence, gross negligence, fraud) if CBP gets there first. The moment your own internal review — or a CF-28 response process — surfaces a real gap (a TP true-up that touched first-tier pricing, an assist that was never added to value, a destination story that doesn't hold up), the clock on "still eligible for prior disclosure" is running, and it's a legal call, not a consultant call, on when the disclosure has to be perfected. Loop in customs counsel the moment you find something real; don't keep digging quietly hoping it resolves itself, because that's how a disclosable issue turns into a discovered one.

Quantifying exposure before deciding how hard to defend is the analytical work a consultant should own: take the duty differential the program has been claiming (declared first-sale value versus what the resale-tier value would have been), multiply by the years the exposure has been open (generally a five-year lookback horizon under the applicable statute of limitations framework, though get counsel to confirm the specific period at issue), and layer in interest. That number — not the annual savings number — is the one that should drive whether a program with a real, provable gap gets fixed quietly through disclosure or defended entry by entry. Defending a program with a genuine structural flaw, hoping CBP doesn't find it, is not a strategy; it's a bet against professional auditors whose entire job is finding exactly this.

Program Economics, Honestly: A Break-Even Table

First-sale programs aren't free to run, and the consultant's job includes telling a client when the answer is "don't," not just "yes, and here's the invoice." Compliance cost has real components: customs counsel to structure and periodically re-certify the program, a documentation system (or a meaningful chunk of someone's job) to maintain the tiered paper trail, and negotiation time with the middleman or factory to get pricing and documentation cooperation, which is not always a given, especially with independent (non-affiliated) factories who see no reason to open their books to a foreign buyer's customs program.

A reasonable hypothetical range for an established mid-size importer: $40,000-$90,000 in first-year setup (legal structuring, TP alignment review, documentation system build-out) and $15,000-$35,000 annually to maintain it (periodic re-certification, ongoing documentation review, entry sampling). These are illustrative planning figures, not a quote — actual costs vary enormously by program complexity, number of factories, and how contentious the middleman relationship is.

The savings side depends on two levers: the markup between the factory price and the middleman resale price (the bigger the spread, the more there is to strip out), and the duty rate applying to the HTS classification (the higher the rate, the more each point of markup is worth). Here's a hypothetical break-even table showing annual duty savings at different markup/duty-rate combinations, against $10 million in annual middleman-tier import value, to make the maintenance cost comparison concrete:

| Middleman Markup | Duty Rate 5% | Duty Rate 15% | Duty Rate 25% (incl. 301) | Duty Rate 45%+ (stacked 301+232+other) | |---|---|---|---|---| | 5% | $23,810 | $65,217 | $100,000 | $155,172 | | 10% | $45,455 | $130,435 | $200,000 | $310,345 | | 20% | $83,333 | $250,000 | $400,000 | $620,690 | | 30% | $115,385 | $346,154 | $576,923 | $931,034 |

Hypothetical illustration only, at $10M annual middleman-tier import value. Savings = duty rate × (markup / (1 + markup)) × import value, i.e., duty saved on the portion of the middleman price attributable to markup. Actual results depend on real invoice data, HTS classification, and program structure — do not use these figures for a real client without recalculating from actual numbers.

Read against the $15,000-$35,000 annual maintenance cost, the table tells the real story: at a 5% markup and a 5% duty rate, a program is marginal — the savings barely clear the maintenance cost, and one bad audit year wipes out several years of net benefit. At a 20-30% markup and stacked tariff rates north of 40%, the savings are transformative and the compliance spend is a rounding error. The honest advice, and the one a lot of consultants are reluctant to give because it's a smaller engagement: if the markup is thin and the duty rate is low, tell the client to skip it. The exposure from a botched program — prior disclosure, interest, reputational cost with CBP on future entries — dwarfs a marginal savings number, and a thin-margin program is disproportionately likely to have thin documentation behind it too, because nobody invested properly in a program that was never going to save that much.

The 2026 Stakes: Stacked Tariffs, Bigger Prizes, Bigger Targets

Everything in the break-even table above gets more extreme as tariff regimes stack. A product facing a base MFN rate plus a Section 301 China tariff plus Section 232-derived content duties plus whatever the newest action adds isn't paying 5% anymore — it's paying 30, 40, 50+ percent in combined duty, and every point of markup stripped out through a first-sale program is worth proportionally more. That's the upside case for the program.

It's also, mechanically, the same reason CBP has more institutional incentive to scrutinize these programs than it did five years ago. Enforcement resources follow revenue at risk, and a first-sale program on a product now facing stacked duties represents a much bigger prize per entry than the same program did when the applicable rate was a flat 5% MFN line. A program that was a rounding error to CBP's audit-selection algorithm in 2019 is a priority target in an environment of stacked 2025-2026 tariff actions, simply because the dollars per entry are so much larger.

That cuts both ways for the consultant's advice. First, it strengthens the economic case for building or maintaining a rigorous program — the savings math in the table above only gets better as rates climb. Second, it raises the cost of getting any of the three traps wrong, because the same stacking that inflates savings also inflates the unwind exposure if the program fails: duty differential × years × interest, on a much bigger duty differential than the program assumed when it was designed against last year's rate schedule.

The practical implication is that a first-sale program's underlying assumptions — which HTS lines it applies to, what rate differential it's capturing, whether the economics still clear the maintenance-cost hurdle — can't be a set-once decision. A program built around a 2023 duty rate schedule needs to be re-run against the current regime whenever a new tariff action lands on the relevant HTS codes, because both the size of the opportunity and the size of the enforcement target move every time Washington adds a new tariff line. A program is a snapshot of an assumption set; the assumptions don't hold still anymore.

The First-Sale Program Stress Test

A one-day audit a consultant can run on an existing program, start to finish:

Pull 5 entries spanning at least two different fiscal quarters and, if possible, one period before and one after any known TP true-up event. Don't let the client pick the sample.

Trace both-tier documents for each entry — factory PO/invoice, middleman PO/invoice, proof of payment at both tiers. Flag any entry where you can't produce all four documents within the day.

Check for TP adjustments touching the entry period. Pull the TP true-up schedule and cross-reference dates against the sampled entries. Any true-up that lands in the same fiscal year as a sampled entry and touches first-tier pricing is a flag.

Run the assist inventory. Ask specifically — not generally — whether the importer supplied tooling, molds, materials, or engineering/design work to the factory for any of the sampled SKUs, and whether that value was added to the declared first-sale price. Assume the answer is "we didn't check" until proven otherwise.

Pull destination evidence for each entry — the US-specific PO or forecast commitment, US-market labeling/spec documentation, and routing/BOL showing the shipment path. Flag anything that transited an undifferentiated multi-market hub.

Confirm middleman substance — standalone financials, evidence of employees and independent function, payment timing versus the downstream sale (flag same-day, fixed-spread pass-through payments).

Verdict matrix:

Green — all 5 entries produce complete tiered documentation, no TP true-up touches the period, assist inventory is clean or properly valued in, destination evidence is contemporaneous, middleman substance is real. Action: maintain current cadence, re-verify annually.

Yellow — documentation gaps in 1-2 of 5 entries, or a TP true-up exists but doesn't clearly touch first-tier pricing, or destination evidence is present but thin (allocation happened but is documented). Action: remediate the specific gap, tighten the weakest control, re-test in 90 days. Don't touch prior disclosure yet — this is a control failure, not necessarily a value understatement.

Red — 3+ of 5 entries have documentation gaps, or a TP true-up demonstrably touched first-tier pricing without reconciliation, or an assist wasn't valued in, or the middleman shows shell characteristics. Action: stop relying on the program for new entries until counsel reviews; quantify unwind exposure (duty differential × years × interest) immediately; get customs counsel involved on prior disclosure timing before doing anything else.

Related reading: TariffWatch Section 232 checker First Sale save $50K CBP duties CBP valuation methods guide Section 232 playbook

FAQ

Can a first-sale program coexist with a cost-plus TP policy? Yes, and it's actually one of the more compatible TP structures, since cost-plus naturally documents the middleman's cost base and margin — useful evidence for the arm's-length showing. The risk isn't the cost-plus method itself, it's whether the annual true-up retroactively repriced the first-tier invoice. Structure the true-up to settle elsewhere in the P&L, and cost-plus and first sale get along fine.

Does a year-end TP true-up automatically kill first sale? Not automatically, but it's the single most common way programs actually fail. If the true-up demonstrably changes what the factory was paid for goods already sold and shipped, you've got a "price wasn't fixed at time of sale" problem. If the true-up is documented, reconciled to specific entries, and treated as a post-entry price adjustment rather than ignored, it's survivable — just make sure someone is actually doing that reconciliation.

Can the middleman be in the same country as the factory? Yes — nothing in Nissho Iwai requires the middleman to sit in a third country. What matters is function and substance, not geography. A domestic (to the factory) trading company that takes title, bears risk, and earns a real margin can support first sale the same as a Hong Kong or Singapore entity. Co-location can actually make the substance easier to evidence, or easier for CBP to suspect as a shell — depends entirely on whether it has real operations.

How does Meyer affect China-origin programs specifically? The CIT's 2021 decision raised real alarm by questioning whether NME pricing could be reliably tested as arm's length at all; the Federal Circuit's later handling walked that back and kept the doctrine available for NME-sourced goods. Net effect: China-origin first-sale programs remain viable, but should expect the Meyer fact pattern — thin arm's-length proof, related-party structure — to get exactly the scrutiny it got in that case. Build the file assuming a hostile expert will review it.

Are assists dutiable under first sale? Yes, unconditionally. Assists get added to the price actually paid or payable regardless of which tier of the transaction you're using as your valuation basis. Using the lower factory-tier price doesn't create an exemption from assist dutiability — if anything, assist gaps are more commonly missed in first-sale programs because the assist inventory process gets built around the middleman-tier invoice, which never shows the assist at all.

What's the difference between a buying commission and a selling commission in a first-sale structure, and why does it matter? A buying commission (paid to an agent acting for the importer's benefit in sourcing/negotiating) is generally excludable from dutiable value; a selling commission (an agent effectively representing the seller) is not. It matters because first-sale programs sometimes route a party through a "buying agent" label to keep a fee out of dutiable value when the party's actual function looks more like a seller's representative. CBP looks at function, not the contract's title.

How far back does exposure go if a program unwinds? Generally tied to the statute of limitations framework for customs penalty and duty recovery actions — commonly discussed as a five-year horizon, though the exact period depends on the specific facts (including whether fraud is alleged, which can extend it). Get counsel to confirm the applicable period before quantifying exposure; don't assume a flat number.

Is a prior disclosure always better than defending the entries? Not always, but a valid prior disclosure under 19 U.S.C. § 1592, filed before CBP starts a formal investigation, caps exposure to interest on the underpayment rather than exposing the company to the full penalty framework. If there's a real, provable gap, disclosure is usually the right call. If the program is actually sound and CBP's inquiry is a fishing expedition, defending with a complete documentation file is the better answer. The decision point is whether your internal review found something real — that's a legal call, made with counsel, not a solo consultant judgment call.

What's the single most common reason first-sale programs fail an audit? Incomplete both-tier documentation — specifically, missing proof of payment at the factory tier. Companies keep the invoices because invoices are easy to file; they don't keep wire confirmations tying the middleman's actual payment to the factory invoice, because that lives in accounts payable, not in the trade compliance folder. No proof of payment, no bona fide sale, no first-sale basis — it's the simplest leg of the three-part test and the one most programs actually fail on.

Should every importer with a related-party middleman run a first-sale program? No. If the markup between tiers is thin, or the duty rate is low, the compliance cost and audit exposure can exceed the savings — see the break-even table above. It's also a bad idea if the middleman can't demonstrate real substance (employees, independent function, genuine risk-bearing), because that fact pattern doesn't get better with more paperwork; it gets fixed by restructuring the middleman or not claiming first sale at all.

Primary sources referenced

CBP Informed Compliance Publication on Bona Fide Sales (First Sale doctrine): www.cbp.gov/document/publications/what-every-member-trade-community-should-know-about-bona-fide-sales-bona-fide.

19 CFR § 152.103 (transaction value): www.ecfr.gov/current/title-19/chapter-I/part-152/subpart-E/section-152.103.

Customs Rulings Online Search System (CROSS): rulings.cbp.gov — the primary CBP rulings database importers cite when relying on prior First Sale determinations (secondary index; the specific rulings themselves are the primary).

Primary sources

19 CFR § 152.103 (Transaction Value) — the CBP regulation First Sale is built on.

19 U.S.C. § 1592 (Penalties for false statements) — the penalty exposure if First Sale fails.

Related reading

First Sale valuation — save $50K+ in CBP duties

Section 301 vs 232 vs MTB — a comparison

BIS Section 232 playbook for SMB importers

TariffWatch — Section 232/301 monitoring & alerts

TariffWatch pricing

FAQ

Can a first-sale program coexist with a cost-plus TP policy?

Yes, and it's actually one of the more compatible TP structures, since cost-plus naturally documents the middleman's cost base and margin — useful evidence for the arm's-length showing. The risk isn't the cost-plus method itself, it's whether the annual true-up retroactively repriced the first-tier invoice. Structure the true-up to settle elsewhere in the P&L, and cost-plus and first sale get along fine.

Does a year-end TP true-up automatically kill first sale?

Not automatically, but it's the single most common way programs actually fail. If the true-up demonstrably changes what the factory was paid for goods already sold and shipped, you've got a "price wasn't fixed at time of sale" problem. If the true-up is documented, reconciled to specific entries, and treated as a post-entry price adjustment rather than ignored, it's survivable — just make sure someone is actually doing that reconciliation.

Can the middleman be in the same country as the factory?

Yes — nothing in Nissho Iwai requires the middleman to sit in a third country. What matters is function and substance, not geography. A domestic (to the factory) trading company that takes title, bears risk, and earns a real margin can support first sale the same as a Hong Kong or Singapore entity. Co-location can actually make the substance easier to evidence, or easier for CBP to suspect as a shell — depends entirely on whether it has real operations.

How does Meyer affect China-origin programs specifically?

The CIT's 2021 decision raised real alarm by questioning whether NME pricing could be reliably tested as arm's length at all; the Federal Circuit's later handling walked that back and kept the doctrine available for NME-sourced goods. Net effect: China-origin first-sale programs remain viable, but should expect the Meyer fact pattern — thin arm's-length proof, related-party structure — to get exactly the scrutiny it got in that case. Build the file assuming a hostile expert will review it.

Are assists dutiable under first sale?

Yes, unconditionally. Assists get added to the price actually paid or payable regardless of which tier of the transaction you're using as your valuation basis. Using the lower factory-tier price doesn't create an exemption from assist dutiability — if anything, assist gaps are more commonly missed in first-sale programs because the assist inventory process gets built around the middleman-tier invoice, which never shows the assist at all.

What's the difference between a buying commission and a selling commission in a first-sale structure, and why does it matter?

A buying commission (paid to an agent acting for the importer's benefit in sourcing/negotiating) is generally excludable from dutiable value; a selling commission (an agent effectively representing the seller) is not. It matters because first-sale programs sometimes route a party through a "buying agent" label to keep a fee out of dutiable value when the party's actual function looks more like a seller's representative. CBP looks at function, not the contract's title.

How far back does exposure go if a program unwinds?

Generally tied to the statute of limitations framework for customs penalty and duty recovery actions — commonly discussed as a five-year horizon, though the exact period depends on the specific facts (including whether fraud is alleged, which can extend it). Get counsel to confirm the applicable period before quantifying exposure; don't assume a flat number.

Is a prior disclosure always better than defending the entries?

Not always, but a valid prior disclosure under 19 U.S.C. § 1592, filed before CBP starts a formal investigation, caps exposure to interest on the underpayment rather than exposing the company to the full penalty framework. If there's a real, provable gap, disclosure is usually the right call. If the program is actually sound and CBP's inquiry is a fishing expedition, defending with a complete documentation file is the better answer. The decision point is whether your internal review found something real — that's a legal call, made with counsel, not a solo consultant judgment call.

What's the single most common reason first-sale programs fail an audit?

Incomplete both-tier documentation — specifically, missing proof of payment at the factory tier. Companies keep the invoices because invoices are easy to file; they don't keep wire confirmations tying the middleman's actual payment to the factory invoice, because that lives in accounts payable, not in the trade compliance folder. No proof of payment, no bona fide sale, no first-sale basis — it's the simplest leg of the three-part test and the one most programs actually fail on.

Should every importer with a related-party middleman run a first-sale program?

No. If the markup between tiers is thin, or the duty rate is low, the compliance cost and audit exposure can exceed the savings — see the break-even table above. It's also a bad idea if the middleman can't demonstrate real substance (employees, independent function, genuine risk-bearing), because that fact pattern doesn't get better with more paperwork; it gets fixed by restructuring the middleman or not claiming first sale at all.