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Dan Loney: Well, as you hear
companies report their quarterly earnings statements, you're
hearing them talk quite a bit
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about the impact of tariffs, but
there may be a workaround that some companies are focused on.
It's called first sale rule, and
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it is helping to ease some of
the financial impact for firms. David Zaring is a Professor of
Legal Studies and Business
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Ethics here at the Wharton
School. David, great to talk to you again. How are you, sir?
David Zaring: I'm doing well. How are you?
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- I'm doing well. Thank you for doing
this. This is obviously a very unique time for so many
businesses because of the
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tariffs and how they are
impacting, but this idea of this first sale rule was something
that I hadn't heard about. It's
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being brought up more and more
by companies. Kind of give us an idea as to what exactly it is.
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- The first sale rule basically
provides that, for certain kinds of transactions, you can only
pay a tariff on the first sale
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in the supply chain, rather than
on the amount that is paid when the product is imported. So, you
know, an example might be a t
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shirt manufactured in China and
then sold to a Hong Kong middleman, and then the Hong
Kong middleman sells it to an
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American retailer, and the
retailer sells it in the store. And the first sale rule provides
that the tariff need only be
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paid on the sale between the
Chinese manufacturer and the Hong Kong middleman, rather than
the sale of the Hong Kong -- from
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the Hong Kong middlemen to the
importer in the United States. - And that's the trick of it, that you
have to have that third
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entity kind of involved in the
process. - Yep, you need to be
well documented, and you need a
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supply chain. You need multiple
sales and you need the product to be made for sale
in the United States.
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- So you mentioned the
documentation. Is that kind of a challenge, or, you know, an
element that could be a trip up
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for some of these companies if
they don't have that real good documentation to be able to, you
know, claim that lower cost
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number so that they don't have
to pay more on the tariff side? - Yep, that is an issue. It's sort
of bureaucratically simpler to
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just pay the tariff on the basis
of what the end user pays for it to get it into the United
States. And the first sale rule
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requires those end users to sort
of keep their supply chains open, clear, and documented, so
that they can instead pay the
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tariff on the basis of the sale
from China into Hong Kong in our example. And you know, that can
present some challenges. Maybe
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the Hong Kong middleman doesn't
want to tell you how much they paid for the t shirt in China.
You can see business
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reasons why they may not want to
share that information with their customers, but they have
to if the customer is going to
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take advantage of the first sale
rule. - But from the business
perspective here in the United
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States, this process is legal
as long as you kind of follow along a lot of these processes
that we've just laid out here.
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- Yep, it's legal. It's been legal
since the early '80s, and some people went to court to try to
clarify that the first sale rule
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was an accurate interpretation
of American customs laws. They won that legal challenge,
and so the first sale rule's
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been around ever since, and
that's how it sort of works. It's this sort of
interpretation of Congress's
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basic tariff statute. And
since then, importers have been able to take advantage of the
first sale rule, you know, given
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that documentation and
everything else. - And so right now, when you're
talking about a time where
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tariffs are seemingly at the
forefront of a lot of conversations, this can be a
very important cost savings for
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a lot of firms, especially if
they're doing it this way. And even if they're not, maybe this
is a new path for them to think
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about, you know, ways to import product. - Yeah, I think that's
right. There's two ways in which
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importers can really benefit
from the first sale rule. For starters, the really big tariffs
that are being imposed on the
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nation's borders, those are
going to be reduced if you only have to pay tariff on the first
sale. It's also a way of maybe,
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if your supply chain is set up
this way and is bona fide, works this way, to pay a lower tariff.
So, you know, there's very high
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tariffs in China for stuff that
comes into China, and there may be lower tariffs for stuff that
comes from other countries. And
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so if a Chinese manufacturer
sells to a, you know, Vietnamese middleman or something like
that, then the American retailer
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who eventually ends up importing
the good may pay a much lower tariff because they're paying
the -- they're not
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paying the Chinese tariff.
- Right, right. And that's the other
thing, is that, in terms of
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those supply chains, this
seemingly has the opportunity not to force companies to
have to maybe change how they
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are getting product. They are
able to work through this kind of path to be able to still get
the products that they need.
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- That's right. And, you know,
companies that can sort of document the supply chain sales
carefully can take advantage of
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this to, you know, lower their
tariff payments, you know, in an era of higher tariff payments.
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- Do we know how frequent this
type of of path is used by companies, and is this something
that we may see more of,
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especially if we're in more of a
tariff environment, especially over the next several years?
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- Yeah, I think there's increasing
interest in this sort of thing. And I was looking around to see,
there's been a few law firm
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memos that have been sort of --
you know, firms are like, "We can work with you on trying to make
sure that you can take advantage
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of this rule to the extent you
possibly can." So I predict we'll see more of this in the future.
It's generally something that I
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think has been really
interesting about American companies, is the
supply chains are often
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really long and involve lots of
different countries and different aspects of, you know,
the manufacturing process. And
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so if you can get to the bottom
of what's going on in your supply chain, there's all these
things you can do. You can worry
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a little bit about the climate
impact of your supply chain. That's been controversial. You
can sort of end up dealing with
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different kinds of rules about
countries of origin in your supply chain, depending on where
things come from. And then you
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may be able to take advantage of
this for sale rule to lower your overall tax compliance. And all
of this is a function, I think,
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of the fact that supply chains
have gotten so global. And, you know, goods that are ultimately
manufactured, it's almost hard
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to say where it is they were
made because of the way -- you know, we hear this about cars as
so much of it, the value added
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comes from Canada, Mexico, and
the United States, and all pulled together and then
involving the assembly of parts
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made all over the world. - You mentioned t shirts, but are
there -- just off the top of your
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head, are there products that
seemingly, like potentially card, that are maybe even built
for a process like this? - Yeah,
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if anything, I think for sale
rule, might be Walmart's closest, you know,
that might be the company that
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might be able to take the most
advantage of it. What you're kind of looking for is a
consumer product designed for
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sale in the United States,
assembled somewhere else, with a middleman involved. And so
that's what you're really
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looking for. And so
it's those retailers, in particular, that are selling
consumer goods and that were
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made for the American market,
but made somewhere else. If their supply chain has a couple
of links in it, they can take
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advantage of the first sale
rule. And I think those are the companies that might be most
able to take advantage of this
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kind of rule. - David, great to talk to
you and get your insight. Thank you, sir. - Happy to do it. - You
got it. David Zaring, Professor
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of Legal Studies and Business
Ethics here at the Wharton School.