Legal and compliant! Enterprises have found a "lifeline" in the tariff war

In the face of high tariffs, companies have turned to the "1988 old rule" to counter new policies.

On Monday, May 26, according to media reports, American companies are using a decades-old rule to bypass some tariff impacts and save on import costs, known as the "first sale rule."

For example, a factory in Vietnam sells a T-shirt to an Indian intermediary for $5, and the Indian intermediary then sells the T-shirt to an American retailer for $10 (adding profit), while the American retailer sells it to consumers for $40. Normally, the American retailer would have to pay tariffs based on the $10 price when importing and clearing customs (since this is the invoice price they received for the import).

However, under U.S. customs law, the "first sale rule" allows American companies to use the price of the first transaction, which is the $5 that the Vietnamese factory sold to the Indian intermediary, as the basis for paying tariffs. This way, they can pay significantly less in tariffs. The markup profit of the intermediary is stripped away, and they do not have to pay taxes on it.

Although the "first sale rule" is an old regulation, it resurfaces every time the U.S. engages in a tariff war. It has once again become a popular method for companies to save on taxes and hedge against risks.

How does the "first sale rule" work?

This rule has actually existed since 1988, but it wasn't until tariffs began to rise under Trump, such as in 2018 and now, that companies started to pay renewed attention to this old tool.

Sid Paruthi, a partner at the American consulting firm Moss Adams, stated:

"As soon as the tariffs came in 2018, our phones started ringing off the hook. Now, with the new round of tariffs introduced by Trump, this rule has been brought back out for everyone to study."

Brian Gleicher, a senior attorney at Miller & Chevalier Chartered, said:

"This rule has actually been around for a long time... but now everyone is starting to really study it seriously."

However, to use this tax avoidance trick, four conditions must be met:

1. There must be at least two transactions. This means there must first be a foreign factory selling goods to an intermediary, and then one or more intermediaries selling to American importers.

2. All parties involved must be independent companies that are not related. It cannot be an internal operation where you sell to yourself; it must be a genuinely market-based independent transaction.

3. It must be proven that the goods were originally intended for export to the U.S. It cannot be said that they just happened to end up in the U.S.; there must be evidence showing that the initial shipping destination was indeed the U.S.

4. There must be documentation of the price of the first sale (such as invoices or contracts). This is crucial because the default rule for U.S. customs is to calculate tariffs based on the price paid by the importer, for example, the $10 paid to the Indian intermediary. To use an earlier price, such as the $5 paid to the Vietnamese factory, evidence must be provided.

Senior attorney Gleicher put it very plainly:

"If you want to save money using the first sale rule, you must obtain the data for the initial 'first price.'"

But the problem is, intermediaries may not be willing to tell you their true procurement prices because it involves their profit margins and business secrets. Gleicher stated:

"The core difficulty is obtaining evidence of the 'first-hand price,' which is precisely what intermediaries least want to disclose to you."

Although the "first sale rule" is somewhat complex to operate, many companies still feel it's worth a try to save money.

Rich Taylor is a business consultant based in Ningbo, China, and has been providing "first sale rule" consulting for Fortune 500 companies since Trump's first term. He stated:

"Due to the risks involved, this operation is actually very much about trust."

If suppliers are willing to cooperate with clients using this rule, they are expressing to the clients:

"You see, I am willing to help you find ways to save money; we are in a long-term partnership."

Taylor warns:

"Without using this rule, your final costs will increase."

"If your competitors use this rule and you do not—you will suffer in price competition."

Although the "first sale rule" is not simple to operate, those who use it save money. In today's era of high tariffs, whether to use it may directly determine whether you have a competitive advantage.

Who is using the "first sale rule" to save money?

More and more companies are realizing the value of this rule, especially high-priced consumer goods and luxury brands, which are particularly suitable because they have high gross margins, large price differences, and significant tax-saving potential.

For example, Luciano Santel, Executive Director and Chief Corporate and Supply Officer of the Italian luxury brand Moncler, publicly stated during a financial report conference call last month (April 16):

"The first sale rule greatly helps our cost structure."

"The price of the first sale, which is the factory cost, is much lower than the retail price, roughly only half of the internal pricing, saving a significant amount in tariffs, with very considerable savings."

High-end brands like Moncler are most suitable for using the "first sale rule" to reduce import tariffs because the difference between the factory price and the retail price is substantial .

More and more companies are using the "first sale rule" to save on tariffs, even proactively adjusting their operational structures to facilitate its use.

The CFO of Swiss biotech company Kuros Biosciences stated during a financial report conference call on May 13:

"The company is preparing to turn Zurich into a transit wholesale center, so it can meet the conditions of the 'first sale rule' and legally enjoy lower tariff costs."

The company stated earlier this month that we are making this operational change to be able to use the first sale method.

Not only Kuros, but other American companies are also using it. American barbecue equipment company Traeger and manufacturing company Fictiv refer to the first sale as a "supply chain buffering method" and a "means to minimize tariffs and tariff costs," respectively Although the use of the first sale rule is completely legal, it may undermine the Trump administration's efforts to increase tariff revenue and promote the return of manufacturing. U.S. Customs and Border Protection (CBP) stated that it could not provide the latest usage data on the "first sale rule."