Disclaimer: this blog post is not legal advice and is for informational purposes only. Please seek guidance from your own legal counsel before utilizing any information you see here.
How should brands using a direct supply chain model appraise their goods for US tariffs?
With the recent announcement of worldwide tariffs on goods being imported into the United States, many ecommerce merchants are wondering how to appraise their goods for purposes of US tariffs. This blog post aims to shed light on this subject, and will be divided into 4 sections for clarity:
Section 1: Traditional supply chain vs. Direct supply chain
In a traditional supply chain model, a retailer buys merchandise from a factory overseas. The retailer typically buys the merchandise “FOB [Port City X]” (for example, FOB Shenzhen Port), meaning the factory is responsible for delivering the goods in a shipping container “Free on Board” to the Shenzhen Port. The retailer would then work with a freight forwarding company to import the shipping container into the US. 6-8 weeks later, the container would arrive at the retailer’s warehouse or 3PL and the goods would become available for sale.
In a direct supply chain model, such as the one employed by Shein, Temu, and ecommerce merchants that leverage Portless, this looks very different. The ecommerce merchant still buys the goods from a factory overseas. However, instead of having them delivered to a port, they have them delivered to a fulfillment center near the factory. The goods are then inbounded and immediately made available for sale on the ecommerce merchant’s website. When the ecommerce merchant sells an item to an end customer, the fulfillment center picks, packs, and ships that item directly to the end customer in the US (and if they’re using Portless, that shipment is done with a completely domestic shipping experience and a 6-8 day average delivery time). The reason it is called direct supply chain is because it cuts out all the middle steps, allowing brands to shorten the time between production and sale from months to just a few days.
Section 2: How direct supply chain merchants should appraise their goods
In a traditional supply chain model, the importer uses the “transaction value” - the amount actually paid to the factory for the goods - as the appraisal price.
What about in a direct supply chain model, where the ecommerce merchant has already sold the goods to an end consumer prior to the importation?
Here’s the great news: the merchant can still use the transaction value, i.e. the amount they paid the factory for the goods.
Why?
All merchandise imported into the United States must be “appraised” in accordance with Section 402 of the Tariff Act of 1930, as amended (19 U.S.C. § 1401a). The preferred method of appraisement is transaction value, which is defined as: “the price actually paid or payable for merchandise when sold for exportation to the United States,” plus certain specific additions.
And here is the key: there is a presumption by the CBP that “transaction value” is the price actually paid by the importer for the imported merchandise.
Therefore, as long as the ecommerce merchant or an entity acting on their behalf is listed as the importer of record, the fact that there is an additional sale to an ultimate consignee (the end customer) is irrelevant; CBP cares about the value the importer paid for the goods, not the price at which they ultimately sold the goods.
Please note that it is important to use a reputable fulfillment center that understands these rules, as there are some additional complexities (like ensuring that the original sale was “for exportation to the United States”) that can trip you up if you are not careful. In particular, using the correct Importer of Record is critical to getting this right.
For additional clarity, here is a clip of Portless CEO Izzy Rosenzweig and Lenny Feldman discussing this on our recent tariffs-focused webinar. Lenny is a Principal at Sandler, Travis & Rosenberg and one of the nation's leading experts on import and export compliance, having served on the Commercial Customs Operations Advisory Committee (COAC) for U.S. Customs and Border Protection — appointed by three different Secretaries of the Treasury.
(Want to see the full webinar recording? Sign up here >>)
Section 3: How does this differ from the “First Sale” methodology?
For almost all merchants, using transaction value is sufficient; this allows them to use the price they actually paid their factory for their goods as the appraised value for US tariffs.
However, in certain unique instances, merchants can take advantage of the “First Sale” methodology to pay tariffs on a value even lower than the standard transaction value.
How?
In 1988, the U.S. Court of Appeals for the Federal Circuit decided the case of E.C. McAfee Co. v. United States, which established the "first sale" rule in U.S. import law. This rule allows importers to base the dutiable value of merchandise on the price paid in the initial sale, typically between the manufacturer and a middleman, rather than the price paid by the importer to the middleman. This can result in significant duty savings. The middleman can sometimes be a third party but is often a secondary entity (such as a Hong Kong corporation) set up by the factory itself for expressly this purpose.
Len Rosenberg, a senior attorney at Sandler, Travis & Rosenberg, P.A. (the same firm as Lenny Feldman from our webinar!), represented E.C. McAfee Co. in this landmark case. The court held that the price paid by the middleman to the manufacturer was the proper basis for transaction value, provided that the transaction was conducted at arm's length and involved goods clearly destined for export to the United States.
In other words, if there are multiple sales between the factory and the importer, the importer is allowed to use the value of the “First Sale”. This enables the importer to shift ~10-20% of the costs of the item (typically costs unrelated to manufacturing, like marketing, finance, etc.) to a middleman, and reduces their dutiable rate accordingly.
Importantly, this is generally only relevant for larger merchants that are buying significant quantities of goods from a single factory. Setting up a proper first sale methodology requires expert guidance from tax professionals. The 10-20% savings on tariffs would generally not pay for the overhead of running a proper First Sale program unless a merchant is buying $1-2M of goods from a single factory annually.
Section 4: How Portless enables ecommerce merchants to defer their tariffs
Merchants using Portless have a major advantage over other ecom merchants when it comes to tariffs:
In addition to tariff deferment, Portless has been working on other methods to support our merchants and reduce complexity. In our merchant portal, we now have a way to easily comply with CBP data requirements, including:
