Businesses are finding a workaround for tariffs — and it's entirely legal

Faced with renewed tariffs, companies are increasingly utilizing the "first sale rule," a decades-old U.S. customs law, to minimize import duties by basing them on the initial price in a multi-tiered transaction, rather than the price paid by the U.S. importer. Luxury goods companies like Moncler and biotech firms like Kuros Biosciences have cited the rule as providing significant cost benefits, while BBQ-maker Traeger and manufacturing firm Fictiv also noted it as a supply chain mitigant; however, increased adoption of this rule could undermine the intended revenue generation and onshoring efforts of the U.S. tariff policy.

Analysis

Businesses are increasingly leveraging the "first sale rule," a provision within U.S. customs law since 1988, to mitigate the financial impact of tariffs by calculating import duties on the initial transaction price from an overseas producer rather than the subsequent, higher price from an intermediary to the U.S. importer. This strategy has regained prominence amid renewed tariff discussions, with companies like Italian luxury brand Moncler reporting "significant benefit" from the rule, noting its first cost is approximately 50% of the intercompany price. Swiss biotech Kuros Biosciences (KUBI) is altering its operations to adopt this policy, and U.S. BBQ-maker Traeger (COOK) along with manufacturing firm Fictiv have cited it as a "supply chain mitigant" and a means to "minimize tariff and duty costs." The application of the first sale rule, while legally permissible, requires fulfilling specific criteria: at least two arm's length sales, proof of U.S. destination, and documented first sale price, which can be challenging due to vendor reluctance to disclose sensitive pricing data. Despite these complexities, the potential for substantial cost savings, particularly for higher-value consumer and luxury goods, is driving adoption, although this could potentially undermine the U.S. administration's tariff revenue and onshoring objectives.

Key Decisions for Investors

• Investors should monitor companies, particularly in consumer goods, luxury, and biotech sectors with complex international supply chains, for disclosures regarding the adoption of the 'first sale rule', as this can materially improve cost structures and gross margins in a tariff-heavy environment.
• Consider the operational sophistication and strength of supplier relationships as key differentiators for companies seeking to implement the 'first sale rule', as successful execution is complex and not universally achievable.
• Evaluate portfolio companies exposed to U.S. tariffs for their ability to utilize the 'first sale rule', as its application could offer a competitive advantage by reducing landed costs compared to peers unable or unwilling to implement it.
• Be aware that widespread adoption of the 'first sale rule' could partially offset the intended economic impact of U.S. tariff policies, potentially influencing sector-level profitability and trade dynamics.