Save Millions with the First Sale Program | Sandler, Travis & Rosenberg | PI Apparel

You've got to ask yourself, well, why did I spend $10 million while he spent $8 million? And that's really the— that sale price is something that you really need to keep in mind because that's what the first sale is all about. Why not use a lower value and save duties? Oh, get on the stage. All right, great. This is great for someone of my height. This is really terrific. LeBron, watch out. So again, going to the point of what we're going to be talking about is how do we— I mean, does it make sense for you to use the first sale? Because take my word for it, your competitors are all using it. We've been doing this for 30 years and virtually no problems with customs when we do it. So that's of course why we do it. And we've set up teams in Asia and here in the United States to help implement it. In a really efficient way. So one of the questions I think you've got to ask yourself is, why aren't we doing it in our organization? If we're doing it, why aren't we exploiting it the way we could to save the maximum amount of money? And I think the answer is, based on my experience doing 1,000 of these things over the last 30 years, is that it comes down to the customs function. It's sort of like one of those things where you delegate it to somebody else and you're really not familiar with it. With it. So what I hope to, to, to help explain today is that it's not that complex to take advantage of this program. You pretty much delegate it and we do most of the work. It won't change anything in terms of pricing with the vendors. That's important because they're going to be looking at this thing and they're going to say, well, wait a minute, are you just using this as a way to reduce the pricing to me, the seller, to you, the buyer in the United States? And the answer is no. If it would, if that were the case, no one would participate in fur sale. And virtually all the big companies are, and frankly, a lot of the small ones. So what we're going to try to do today is explain again how to do this. And let's see if this is working correctly. Do you want to do it manually or— Try it now. Okay. And again, I don't need the slides, but— oh, there they are. But to the extent that you guys don't have a hard copy or want one electronically, please don't hesitate. We'll send it right over to you. So the key topics are how to talk with your colleagues and say, hey, listen, I was here. At PI Forum, and I really heard something interesting. Are we taking advantage of this? And if we're not, can we do it? And of course, there's a way to do it without stepping on other people's toes and politely doing it. And frankly, one, maybe it wasn't appropriate for the company 10 years ago, but now it is and can really offer you a competitive advantage. Ask yourself, how much of your merchandise do you have to sell in the United States in order to generate the profits that you get just by adopting Fair Sale. That's probably one of the easiest ways to think of it. You don't have to worry about inventory. You don't have to worry about all the things that come with the supply chain to get the goods here. Just merely working to take advantage of this program. And it applies to virtually all products. So it doesn't matter whether your footwear, it doesn't matter if your tops or blouses, man-made fiber or cotton, all those issues other issues, but the main point is, and we'll try to explain it to you, is that it will apply and it will go on year after year after year. So again, I think one of the more important parts to understand is that today, as everyone realizes by attending this conference, is that the different silos in a company, in the apparel or footwear or any field, frankly, are sort of being destroyed. And hopefully the companies will be more efficient in terms of working with IP and with tax and logistics, with operations, with sourcing. All of these have got to coordinate. The better you're coordinated, the less silos, the more efficient the company ordinarily. And that's what first sale can do. Everybody's a winner. The finance people are going to be happy because they're going to make more money for the company. The tax people, this will not interfere with the tax folks. Logistics folks, it won't complicate their lives. Operations and sales will be happy because again, they'll see a few more points and everybody throughout the supply chain should view this as a winner. So I think in terms of— I'm not in your shoes, but whether you're— whatever your function at a company, whether you're the CEO or you're a first-year person in logistics, everybody should benefit by doing first sale. So again, we'll talk a little bit about this. And again, particularly with regard to China goods and all the Trump tariffs, this makes it even more important to adopt this program. So, you know, again, one of the things that we've tried to do is we develop a portal so that it allows us to sort of work with you and the people who are involved in this first sale program so that no one is out of the loop. You're all aware of information that's appropriate to you. So in other words, the Customs compliance function folks of the company would be aware of things like the margin and the documentation and so forth. That affects their business, their responsibilities. But the people in, let's say, buying function would not necessarily see how much of the margin is because— why? The temptation would be there to say, I've got a first sale invoice at $8, I've got a second sale invoice at $10. How come we're not getting the $8 invoice? Well, there's a good reason why. And again, that's what we're going to try to get across, which is everybody, including the vendor, is going to work with this program because they're going to benefit. They'll be sourcing more goods to you. So you're going to probably put that— give them a gold star and they're more likely to get more, more orders. So what is the first sale rule? The rule is, again, generally speaking, that you're probably doing the right thing right now. You pay the seller whatever the seller charges. So if the seller charges you $1 million or $100 million, you're paying that money to the seller and the seller says, thank you very much, and I'll ship your goods. I got— you got an invoice for $10 million. You paid them $10 million. You pay duty at 20%. You paid the government $2 million. And that's the end of it. Okay. Our firm, however, was successful in developing something called a first sale valuation. So where there's multiple sales. So for example, in the case that we first used to adopt first sale involved purchasing from a Hong Kong men's suit provider, and that Hong Kong company then bought the goods from a tailor in China. Our importer was paying duty on the price paid to Hong Kong. We convinced customs through the courts that the price between Hong Kong and China, which was much lower, was the proper value. So in other words, instead of paying 20% on the the $10 million, let's say, paid to Hong Kong, we paid 20% on the $8 million that Hong Kong paid to China. We say, well, why doesn't that— gee, that seems pretty easy. If all I can do is be able to get the invoices from China. Well, the real world is that it's a little bit more difficult than that. But again, it can be done. And frankly, we're doing it in probably 99% of the cases right now. It's successful. So, and a lot of it has to do with a lot of things that we'll talk about today. But again, visualize it like this. The factory, the factory can be anywhere. Factory can be in Thailand, can be in Vietnam, can be in China. Let's say that there are 3 factories and you're buying from the vendor and you're the importer. Now you're paying on whatever the vendor price is. Let's say the vendor is in Korea. Or let's say the vendor's in China and it's a parent company. The parent company then sources to their factories. You're paying duty on the $10 million. So in that example we just described, we used a 10% margin. We're paying the 10% of $10 million, which is $1 million. And we're saying, well, why don't we get, if there is, an earlier sale from the parent company to the— or a middleman company, they don't have to be related— to the factory at $8 million, we'd pay $800,000 in duties and we'd have a pocket of savings of $200,000. Obviously with all the Trump tariffs, we call, you know, and the 301 duties. Again, these additional duties can be an additional 25% on goods that might even be duty-free normally. And you'd have paid $2.5 million in duties on the $10 million the second sale. And again, if we use the first sale, we'd pay $2 million and we'd pocket $500,000 on those shipments. For that vendor. So again, the first sale, whether it's 301 or not 301, benefits the importer. What are the 3 requirements for first sale? These are the 3 requirements, and this is if someone says to you, well, what are those 3 requirements? One, it's arm's length. In other words, if I'm buying the goods from a company in, let's say, I don't know, in Hong Kong and they are sourcing from their related factory in China, Vietnam, doesn't matter where, then the customs service wants to know that that price is good. It's arm's length. We'll talk a little bit about that. If they're buying from a non-related company, it's obviously more easy to demonstrate because they are at arm's length pretty much automatically. They've got to show the goods are for sale for export to the United States. So I— on this morning, I was dealing with a company that sources goods globally. So it gets a little bit more complicated if you have a PO that comes from the United States for, let's say, $10 million and the goods are for— are for markets in Europe, in the United States, Canada, and so forth. You have to sort of demonstrate that the goods subject to first sale are for export to the US. Why is that also important? It's because only one country, one country in the whole world accepts first sale, and that's here. Aren't we lucky? It used to be applicable in Europe, but they got rid of those rules and it doesn't apply there. So again, we are the only country that accepts it. So when you talk to people, abroad, they often think, "Oh, this is a scheme. You guys are trying to figure out some way to pull it over on the government, and we don't want to be part of that." And the answer is no. This is 30 years of law in the United States. You can do it. So if we show that we have that basic documentation, our purchase order to the middleman, the middleman's PO to the factory, The factory's invoice to the middleman, the middleman's invoice to you, the payment to the middleman, let's say $10 million, the middleman's payment to the factory is $8 million. We're halfway home. And again, that the goods are clearly destined for the United States. It truly is that the goods are destined to the United States and that there are two sales. It can't just have a transfer. Truly, the middleman has got to take title and risk of loss. So in other words, he doesn't have— that company doesn't have to have the goods shipped to Hong Kong. They can be shipped directly from China or wherever to the United States. No requirement that anything changes in logistics. So the people say, oh, there's going to be more transportation. No, no, no, no. So again, what's interesting is A lot of companies that say, "Oh, we're buying directly from the factory," they don't even appreciate that there are usually multiple layers already in the transaction. And, you know, no one really explains it or deals with it. But how do you determine whether or not you're going to seek for a sale? Well, one is the product type. Figuring out what is the merchandise, how is it classified, what is the duty rate, how much do you import in the United States. If you're importing $1,000 worth of goods, it probably doesn't make sense unless there's an 80% tariff or something. So you figure out that. The business relationship is something that you guys, we can all appreciate. In other words, If there isn't trust, if there isn't a good relationship with the vendor, if the vendor feels like every year you can, you know, he's on tenterhooks whether you're going to use him or not, he's probably not going to make this effort because, you know, this again requires some effort on their part, not yours, but mostly on their part to work with us. And it won't change their IP systems or, you know, anything like that. But it does mean that they're going to have to help us. To adopt it. So the relationship that you have will be impacted. One client we worked with, they started with probably 800 vendors when they started the first sales program. They adopted the first 100, and those 100 have now become virtually everything to this big company. In other words, they shrunk their supply chain down to a fewer number of vendors because these vendors participate in the program and they're benefiting vastly by having a lot more orders. So future sourcing plans are very important. And whether there's existing multi-tier structure, it's easier, right? If it's already set up, I mean, that's great. But don't let that discourage you because oftentimes we get over there and they say, "Oh, so what? You mean you want to buy through our Hong Kong company? We have a dormant company or we'll set up a company in 2 weeks in Hong Kong." You'll buy through them. You legitimately will buy through them for the same price. And then some of the profits and responsibilities will be in the new co. And then the new co will buy from the factory that you've been dealing with. So again, how do you assess first sale savings? Well, there's something called ACE. I don't know if anyone is familiar with it, but it's really easy. Custom Service has automated and they call it Automated Commercial Environment or ACE. And we could get this information through your broker really quickly. And what it does is it gives a list of all your vendors and how much they're sourcing and how much the duties are and all that. So very quickly in a phone call, we can talk with you and say, hey, listen, you've got 30 vendors, but only 5 of them really make sense to do for a sale. Let's do those 5. So, you know, you're not, you're not going to companies that are sourcing, you know, $10,000 worth of goods. Leave them. They're not, you know, the low-hanging fruit. But those 5 make it worthwhile. So again, I mean, you— we try to do this in 2 steps. It's called feasibility and implementation. The feasibility Again, you don't have to do feasibility if the vendor says, oh, I've already done this with ST&R last week for your competitor. We're in it. We're definitely going to give it to you because how are we not going to give it to you when, you know, they're already doing it for someone down the block from you? So you say, oh, you know what, that's great. I don't have to do feasibility. But for a company that says, oh, sounds kind of funny. I don't know if we can do it or not. We'd like to. We're more than happy to talk to to STNR in same language, same culture and all that, in same time zone. And then we reach out to them and we say, listen, here's how we do it. And they will tell us whether they're going to cooperate and collaborate or they're not. If they're not, guess what? We don't go any further. We stop at feasibility. No big, no harm, no foul. Very, very little fee. And we leave it at that. Maybe they say, "We'll come back to us in 6 months." I don't know. Then if they say, "Yeah, absolutely, let's do this. You're going to provide protection so all my data won't be shown to the buyers. I'm okay. I'm down with this. This is a great way to source more goods to you without having to pay any more money." But we, you know, we will implement. And implementation fee is frankly very, very, very reasonable compared to the savings. So again, a lot of times there's already a single structure. In other words, I am sourcing from the factory and, you know, there is that price, let's say $100, and you're paying duty at $25. And the total is $125 directly from the factory. And then they say, hey, listen, fine, we'd like, love to do a first sale. We never heard about this. Let's do it that way. And we'll set up an intermediary company in wherever. Usually, frankly, it's a place that has lower taxes than the company where the factory is located. And so that they're saving taxes as well. So then we'd be buying the goods at $100, the same price we did before. But then we'd have on the second invoice the invoice at 80. So we'd be paying duty on 120, or rather duty of— on— let's see if this is right here. Price paid 100, price paid 80. Okay. Duty paid 20. Okay. So really the duty savings would be would be $5. That's right. So again, how is the first sale margin created? We go through the books and records of the companies, the factory and so forth, and we work with them to take out a portion of their profit and general expenses that are not dutiable, and these are attributed properly to the middleman company. So again, they're oftentimes tax savings. So when they hear about this, they're saying, wow, I can do this and save taxes too. Why would— why don't we do this? And again, that's, by the way, an interesting thing that I found over the years. Somebody tells you, well, why didn't we do this last year? And you're like, your boss is angry because he or she is saying we should have done this 10 years ago. That's not the way to look at this. It's constantly evolving. Your vendor relationships are changing. It's becoming more and more conservative with each year. So what was, you know, maybe not doable last year is doable today. So it's not— let's not look in the past. You know, let's find the solution, not the problem. And as the business grows, as your vendor relationship grows, the savings are going to continue to be greater. Internal controls and so forth, procedures. I mean, like in anything, when you deal with any bureaucracy, the government has the right to say, okay, well, you're saving $1 million. How do we know that you're doing it correctly? So what we do is, hey, what— you know, this justifies the existence for lawyers like Amanda and myself here and is that we make sure that the whole program is compliant. This is critical. And that's why a lot of our people are former auditors from U.S. Customs or former U.S. attorneys from U.S. Customs, because we can say, yeah, we will give everyone in the company a green light that this is proper and therefore you don't have anything to worry about. You save the duties every year and it will everyone feels comfortable with it. So we go through a sample transaction, your PO, and we work all the way back to the factory. And we, again, we work with your broker and your logistics folks to make sure that there are no questions. This is not something funky going on here. Again, all the— most of the major companies take advantage of this. Why this needs to be updated though, from time to time, is that your vendor sources change. You know, you were sourcing goods from China last year, maybe more now in Vietnam. Maybe last year you had a great vendor and he went out of business and now you got a new vendor. Why aren't they on the first sale program? So again, what we do is we annually take a look at it to make sure that it's being done properly, that everything that we set up when we started the program is continuing to be maintained. For example, let's say that the middleman is related to the factory and Customs says, well, show us that that price between the factory and the middleman is good. Is fair. Well, in order for us to do that, we need to take a look at the profitability of the two companies, because if the factory is losing 50% and the middleman is making 100%, well, that doesn't necessarily reflect an arm's-length transaction. So we have got to work with them so that there are comparable profits. And again, there are lots of ways to do that so it doesn't disadvantage the guys on the other side. And again, we work with your broker to make sure that they have everything needed. So this is not going to impede your supply chain, not by a moment. So compliance, you know, it's important. Sourcing, important. All those other folks, legal, tax, financial, important. But, you know, again, this is no— there's no reason why your company shouldn't feel like everyone benefits. If people are saying, "Oh, how come we can't seem to meet our target profitability?" This could be the way to do it. And again, means folks working together. So when I say creating the right mindset, if people say, "You know what?" it ain't broke, don't fix it. This is not necessarily meaning that you've got to change anything in your IT systems or anything like that. It just means that you got to be sort of open-minded towards adopting First Sale and doing it in a compliant manner. If you wanted to try to do it on yourself, good luck with that. That will not usually work very well. Because again, we're asking for a lot of very confidential information from the vendors, and they're very likely to provide it to us, but they're not necessarily going to provide it to your buyers because your buyers have a function, which is to get them down as low as possible on the pricing. And of course, there are risks if you did it by yourself and someone said, oh, Well, we subject to a penalty. The penalties are absolutely outrageous. So you really don't want to go near there. 200% to 800% of the loss of revenue. So you're putting it all together. Again, working with us is only one part of the picture. Frankly, it's getting people at the company to be aware of this program and getting them to use it when it's a— when it's Correct. Again, going on the back of a matchbook, say, listen, the number one vendor we're sourcing from in, I don't know, in Italy represents 80% of all our sourcing. That party makes sense. The other 10 do not. And working with that vendor, we could save $1 million or $100,000. Doesn't matter how much per year. And we want to continue to grow. So again, I mean, that's really what it's all about. That's the first sale program. More than happy to answer your questions. Does this apply on cut, make, trim transactions? Yes. Does it apply all over the world? Yes, in terms of imports. And, you know, again, let's— if anybody has any particular questions, I'm more than happy to answer them. Thank you very much. Sure.

I've been following this for a long time. I know, I feel like it's always a discussion about whether it's under threat. I was gonna ask you about that Meijer case that recently was like the latest threat, but then as you were talking, I Googled it and saw that it was vacated or nullified or whatever. So it seems like it's pretty, is this working, is it? Yeah. It sounds like it's pretty well established and not really under risk, at least for now.

Yes. Yeah, absolutely. And what you're talking about is a court case where one of the justices said, "Hey, can anyone ever trust anything China does because they're a non-market economy?" And the court said, "Come on, knock it off. You can't question everything China does." Of course, you have to accept that there are accounting rules and some deal reliability with regard to valuation with China or anybody, even in non-market economies like China or Vietnam. So you're right. I'm glad you looked it up. That's great, isn't it? We Google everything. What do we need experts? But anyway, yeah, I guess the reason why you bring on anybody to help you adopt this is because you're not paying for the millions of dollars that I've devoted over 30 years to learning every single aspect of this, every problem that could possibly arise. For example, in China they have VATs and, you know, you've got to get them comfortable that it's not going to affect their VAT refund. And it won't if you do follow the steps. But again, if they are suspecting it's going to cost them more in any country or it's going to affect their profitability, they're not going to do this. But do you have any other questions? Because I love this stuff.

I do have another question, actually.

Yes.

All right, so there we go.

Great.

The other question, in all your models you talked about vendor middleman. I work with a lot of companies that have set up a trading company, and I'm curious if the same doctrine can be used for that transaction from the trading company to the brand.

The answer is yes. You can do it with trading companies. Always the issue with trading companies is oftentimes, The trading companies are so reluctant to tell their U.S. counterparts. You know, let's say that we're talking about Japanese trading company. A Japanese trading company is reluctant to tell what their U.S. folks are, what the margin is between themselves and sometimes their related factories. And, you know, again, you've got to explain that this is not going to hurt anybody. It's going to help. But trading companies can be buyers and sellers. If they're agents, there's another way of saving the duties called buying agency agreements, but not for sale. You can't— you got to make a choice, one or the other. And one of them for sale means that the middleman is taking title, the risk of loss. They're buying the goods and selling them. The other one is they're— the buying agent is working for you, the importer, and there's a separation between the seller and the agent. That agent is for you. If the agent is for the seller, then what their markup is, their commission is dutiable. If they're working for you, it's not dutiable. So, you know, there are a bunch of factors to demonstrate whether it's an agent or trading company, but most of them are trading companies. And again, particularly with regard to the major Japanese trading companies. So we've done that. The thing is that trading companies generally, The margin is very, very small. So the difference usually has to be in FOB or volume or in the duty rates because the margin will be smaller than a normal transaction where the margin will be 10 to 20%. Okay. And then you're saving, let's say, 20% on 10 to 20%, the difference between the factory and the middleman. With a With a trading company, it might be 5%. But again, if the volume is big, it makes sense there too. So again, I hope that answers your question. Yes, sir. So Charles, what have you found were the best-case scenarios for vendors to be incentivized to join the program? So sharing cost is obviously a big concern for them, right? So you set up a middleman to say, hey, the brand's not going to know the cost, or the US entity will not know the cost. But apart from that, —what from your experience is the best case? Yeah, I think there are 4 reasons that they'll be best case. One is, are we already working with them? We've done this for 1,000 different vendors now. Okay. So a lot of them, and we represent, let's say, 75% of all the first sale that's done in the United States. So is it somebody we already have a relationship with? If they do, how are they going to deny you the first sale program but help your competitor. That won't fly with you. You'll find out sooner or later, and that won't be nice. So, a level playing field. Two, it doesn't cost them anything. You know, again, it's offering you the first sale invoice. It doesn't mean that they're offering you any discounts or anything that's cost coming out of their pocket. They already have this process. Down or we help them with the process. It's a, you know, when we first started this, I can remember that this is going back, you know, 30 years ago, people would say, I've got to hire 30 people, you know, to do this. And of course, that wasn't the case and it never was the case. And, and now no one ever says that anymore. So there's no real additional expense on their part. They have to sit down with us maybe one or twice. Now it's generally via Zoom. Or teams. So we don't even have to show up necessarily unless they want us to. And 3, they will be offering you savings. So their goods landed duty paid will be less than their competitors. And yet the price will be identical to the other vendors. So if they're competing on a global scale, most of them are, they're saying, wait a minute, I can come in and less, and I didn't have to change my pricing. Why wouldn't I want to be on your good side? And next year when you're thinking of an order, why wouldn't you give them a gold star? You know, again, one of our bigger clients said, they said to their vendors they had such market power that they said, tell us who's going to participate, who's not. The people who are going to participate are in category 1. The people who are not are in category 2. It was hard love, but boy, I'll tell you, it did work. I mean, you know, I'm just the messenger, right? So does that help at all? Or again, the tax advantages too. Some of them really do save a lot of taxes by setting up the middleman company in a tax advantageous place like Singapore. Yep. Okay. Well, thank you very much. Again, I really appreciate you guys coming out here. I know how busy you are, and it really, really means a lot to me. Thank you very much. Do not hesitate. I think you got all my information. Call me anytime. I think you got my cell phone. I don't have a social life. Please call me. Thank you.