CNBC's Karen Gilchrist explains how businesses are utilizing a quirk in U.S. customs law, known as the 'first sale rule,' to mitigate the biggest impact of tariffs.

Washington

Donald Trump has signed an order to impose tariffs imports into the U.S. from countries including China, Mexico and Canada.

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Businesses are increasingly utilizing a longstanding U.S. customs law provision called the 'first sale rule' to mitigate the financial impact of tariffs. This rule permits companies to calculate import duties based on the initial sale price of goods, often from the manufacturer, rather than the higher price paid by U.S. retailers after intermediary markups. 

The rule, in place since the late 1980s, has gained renewed attention due to recent tariff increases, especially those targeting goods from China and other countries. To qualify, transactions must involve at least two unrelated parties and the goods must be destined for the U.S. Sectors making use of this rule include luxury goods, electronics, retail, and pharmaceuticals, with companies such as Moncler, Cora Biosciences, and Traeger cited as examples. The White House has not commented on the rule's use, which can significantly reduce tariff-related costs for businesses.

Legal loophole helping businesses mitigate tariffs

Good morning. Yes, this is an interesting quirk in U.S. customs law that more and more companies have been flagging as a means of mitigating the largest impact of tariffs. It's a decades old provision known as the first sale rule. And this essentially allows a company to claim its import duty based on the initial price of a good in a series of transactions. So let's say for instance a Chinese manufacturer produces a T-shirt for five dollars a Hong Kong vendor then sells that on for ten dollars to a U.S. retailer that U.S. retailer then selling it on to the consumer. Now typically that U.S. retailer would claim its duty based on that larger ten dollar cost. But under the first sale rule they can claim against the initial five dollars essentially cutting out the costs associated with the middle man's profits. Now this rule like I say has been around since the late 1980s but it has gained renewed attention under President Trump's tariff agenda. And this is seen a spike in use both in his first term when he introduces 25 percent levies against China and certainly now renewed attention again as he's imposed these new tariffs against countries more broadly. Now there are a few criteria of course that a company must fulfill in order to be eligible to use this rule. There must be at least two sales. So this from the initial manufacturer and then an intermediary. It must be conducted at arm's length so these parties cannot be related. And the item must ultimately be destined for the U.S. Now of course this adds a little bit of complexity to the reporting process for these companies. And it can be problematic in that potentially a vendor may not want to reveal its margins so it may not want to provide that information to the ultimate importer. But certainly legal experts and businesses I've spoken to have said it might just be worth that added hassle because it will allow these companies to continue that relationship and remain competitive where other companies might be using this too. And could seriously mitigate the impact of the tariffs if they're only having to absorb a small a smaller rate if that the cost of the goods are talking about is considered much lower. What companies are utilizing this rule. Yeah it's a great question. They really do span a variety of sectors and those particularly with larger margins. So we're talking about luxury goods electronics retail pharmaceuticals. So Moncler in its first quarter earnings flagged the use of this rule. So this Italian luxury company we've also had Cora Biosciences. This is a Swiss biotech and also a U.S. barbecue maker Traeger. So it really does span a broad range. You talk about potentially not wanting to reveal their margins to their end. You know the end importer. But what about to customers when you talk about when you actually look at the margin that these luxury companies are making seeing on the screen here. You know if you talk about those margins. But I assume Karen you can almost not afford to not use the rule. You have to. If everyone's doing it you're going to have to use it too. Otherwise you're at a competitive disadvantage. Exactly. This is what the legal advisors have said. You know a lot of these competitors will be doing it. So it's in a company's interest to go around these added hurdles. Even if it is a little bit more reporting they will be willing to do it. The White House has not responded to a request for comment from CNBC on the use of this rule because it could certainly have an impact on Trump's tariff agenda and margins of the to the tune of 80 percent in some of these cases. So you certainly if you're a company it is probably worth your while. Yeah. Great reporting as always. Thank you so much for more. Check out Karen's article on CNBC dot com.

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