Companies from a diverse range of sectors have been taking advantage of the first sale rule to avoid the brunt of the thicket of U.S. tariffs. Specifically, U.S. importers are now allowed to calculate customs duties based on the price of the first sale in a series of transactions. The use of this rule has garnered increased scrutiny in light of the recent series of tariff hikes. Smart companies like Moncler, Kuros Biosciences, Traeger and Fictiv are adopting this playbook. To grow their bottom lines, they need to reduce expenses, including their administrative burdens.
The digital first sale rule has been on the books since 1988. Retaliatory trade measures captured the public’s eye during President Donald Trump’s administration, most notably when tariffs increased in response to China’s trade practices. Wise companies will find ways to benefit from this rule. They can import products by paying duties based on the initial cost of a product, not the excessive amounts negotiated by middlemen. As the nuance of international trade grows, companies are learning how to position themselves favorably with this decades-old regulation.
Moncler, an Italian luxury fashion brand, even recently identified the first sale rule as one of its “major advantages” to its overall expense structure. The company uses this rule to calculate the import duties that they are required to pay. These duties are calculated on industrial costs, which are about 50% lower than retail prices. Luciano Santel, speaking on behalf of Moncler, stressed the benefits of using the first sale rule in their business model.
“First cost [sale], of course, the industrial cost … is much lower than the retail price, and it is about 50% of the intercompany price. So, of course, it’s a significant benefit.” – Luciano Santel
The first sale rule requires at least two sales: one from an overseas producer to an intermediary and another from that intermediary to a U.S. retailer. This framework allows firms to assign a sale price to the first sale much more easily. Brian Gleicher, cross-border expert on customs regulation and technology, says good data is key. Finally, companies need accurate and trustworthy information to be able to implement this rule effectively.
“If you’re an importer, you need to get that first sale price. You need to have the data.” – Brian Gleicher
We wish this rule were the case for all products and all sectors. The flip side is that it provides big advantages to companies that sell more valuable consumer goods and premiums/luxury products, since they usually have greater profit margins. Kuros Biosciences has seen strong advantages in changing its business practices to follow this policy. Their hope is to use that improvement to enhance their overall cost structure along the way.
Rich Taylor, a veteran consultant in the space, stressed the need for trust between everyone at the table. He emphasized that this trust is particularly important given the dangers involved with adopting the first sale rule. He said it’s important for manufacturers and distributors to equip their customers with the tools they need to save money in the most efficient way.
“You [suppliers] are keeping your customer. You’re showing them that you’re trying to give them every tool to reduce their cost.” – Rich Taylor
In 2018, tariffs in goods imported from China rose up to 25%. More and more companies began seeking expert advice on how to best take advantage of the first sale rule. This focus has only grown with the rollout of new Section 301 tariffs by the current administration. Industry expert Sid Paruthi mentioned an increase in questions regarding the first sale rule. The rise is especially notable in light of all that’s going on these days.
“When the first administration had 25% tariffs [on China in 2018], that’s when we started getting calls. Now with the new tariffs, the first sale rule has started coming up again.” – Sid Paruthi
More and more companies are jumping into this approach with both feet. They are looking for solutions to maintain their price-point when faced with increasing costs from imports. In a recent piece about this widespread trend, our Brian Gleicher noted that private businesses are already looking for ways to avoid costs.
“Everybody’s beginning to explore it with more interest.” – Brian Gleicher
The implications of the first sale rule extend beyond individual companies. They influence overall market dynamics as businesses strive to remain competitive. Rich Taylor summed up the danger of not using this rule with his comment that it would lead to greater expense and lost market identity.
“If you don’t use it, then the end cost is going to go up. And if your competitor is using the [first sale] rule, then you’re going to lose that advantage over them.” – Rich Taylor