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Sourcing Products and the Benefits of First Sale Customs Valuation


By Ira Cooperman

Each year companies create new and exciting fashion designs which must be transformed into product that can be shipped and sold to customers throughout the world. Going from drawing board to tangible product can be a difficult path, but with a well-structured supply chain, that path is manageable.

The first step for many people is an internet search for suppliers. While online reviews and ratings are useful, speaking directly to a supplier or a sourcing company can give additional insight and build a stronger relationship.

One great opportunity to meet face to face is the MAGIC tradeshow – a massive, Las Vegas-spanning semi-annual event that takes place each February and August. While MAGIC started out as a menswear trade show, it now has sections devoted to menswear, ladieswear, swimwear, footwear, and bags and accessories.

MAGIC also has a sourcing section which focuses on the global supply chain, offering individuals the chance to meet directly with global suppliers and sourcing companies with good reputations, and learn about their companies, products, production capacity and quality control procedures. This helps buyers feel more comfortable having met a representative of the company, without the need to travel to multiple locations in the United States or to China, India, and other sourcing countries.

A full listing of exhibitors, including a map, is available online before the show. To maximize productivity, meetings with important vendors should be scheduled ahead of time.

The tradeshow also provides attendees with information about the newest trends in strategic sourcing and supply. For example, the current movement towards sustainable sourcing sees suppliers decreasing their impact on the environment and improving working conditions at factories. In response to public outcry, major retail stores are requiring their suppliers to meet standards addressing overcrowding, child labor, and overall working conditions. There are severe ramifications for the suppliers if code violations are discovered including the loss of all sourcing to the supplier. These upgraded standards may increase costs, but the public demands transparency in how companies source their products and to whom.

Another trend in strategic sourcing and supply is implementation of a first sale program. As companies face an increase in production costs overseas, they are employing strategies to minimize these expenses. These include legally lowering the landed costs of goods when they enter the United States. Sourcing transactions often include multiple layers of activity by third party middlemen and agents that build in a profit at each layer. Therefore, the importer typically pays the customs duties for the production process plus the profit margins of the individuals along the way.  A concept known as “first sale” allows an importer to declare the value of the goods on the first layer of a layered transaction. As such, the import value is reduced and customs duties similarly reduced.

Certain considerations must be taken into account for the first sale concept to work:

  • There must be two bona fide sales in order for the transaction to qualify. A middleman serves as a buyer in the first sale and then as a seller in the subsequent sale of goods that are exported to the United States.
  • The goods must be destined for export to the United States at the time of the first sale.
  • The middleman buyer and the factory must not be related, and must negotiate at arm’s length.

There needs to be a very good working relationship with the vendor as the vendor has to provide detailed documents for a first sale transaction to work properly. These documents include the vendor’s profit margins, which can cause reluctance on the part of some vendors. WeiserMazars’ clients have benefited from taking advantage of the first sale concept for a number of years. The key to success is getting the right professional involved at the start in order to help plan and implement a process that is both compliant with all regulations and achieves lower overall costs.

 


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