How The 'First Sale Rule' Is Helping Many Businesses Work Around Tariff Costs

U.S. companies are using a 1988 customs law called the "first sale rule" to get around new tariffs
The law allows importers to use the price of the first sale in a series of transactions rather than its import price to calculate potential levies
Mocler and Traeger are among the companies that have openly discussed implementing the law to lower tariff impacts

A decades-old piece of legislation is helping many businesses mitigate the worst effects of the tariffs, CNBC reports.

Part of U.S. customs law since 1988, the "first sale rule" allows importers to use the price of the first sale in a series of transactions to calculate tariff duties instead of the final sale price before that item was introduced into the U.S.

For example, if a piece of clothing was manufactured in China and then sold to another international vendor for $5, before that vendor turned around and sold it to a U.S. company for $10, the U.S. retailer would only have to pay the lower tariff on that $5 price rather than the tariff on the $10 price.

Don't Miss:

Hasbro, MGM, and Skechers trust this AI marketing firm — Invest before it's too late.
Maximize saving for your retirement and cut down on taxes: Schedule your free call with a financial advisor to start your financial journey – no cost, no obligation.

"What the rules allow you to do is use that initial sales price from the factory to the vendor to determine the final duty price," Brian Gleicher, a senior lawyer and member at Miller & Chevalier Chartered, told CNBC.

There are four criteria laid out by the rule that businesses must fulfill in order to use the rule, CNBC says:

There must be at least two sales involved— one from an overseas producer and at least one from an intermediary
The sales must be carried out at arm’s length and by independent and totally unrelated parties
There must be proof that the item was intended for the U.S. and didn't simply end up there
There must be documentation of the first sale price

Today's Best Finance Deals

In some cases, meeting these criteria is easier said than done. The burden of proof is on the importer of an item, meaning that U.S. retailers are responsible for showing the chain of custody and demonstrating the original sale price.

"If you're an importer… you need to have data. Vendors may not want to give that information," Gleacher told CNBC.

Trending: Invest where it hurts — and help millions heal: Invest in Cytonics and help disrupt a $390B Big Pharma stronghold.

Rich Taylor, a corporate business development consultant, told CNBC the additional complexities can still be worth it for vendors, given potential cost savings.

"There has to be a level of trust between all parties" because of the risks involved, he said. "[Suppliers] are keeping your customer. You're showing them that you're trying to give them every tool to reduce their cost. 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," Taylor told CNBC.

Brands that have already begun implementing the rule include Moncler, an Italian luxury fashion company, which said the first sale rule provided a "significant benefit" to its cost structure on its April 16 earnings call, and grill manufacturer Traeger. COOK, which called the rule a way to "minimize tariff duties and costs" on its May 2 earnings call.

Read Next: