Every product imported into the United States must be assigned a value for customs purposes. That value determines how much duty the importer owes, and getting it wrong — whether intentionally or through simple misunderstanding — can trigger penalties, additional duty assessments, and compliance investigations by U.S. Customs and Border Protection (CBP).
Great Lakes Customs Law helps importers navigate the complexities of customs valuation. Whether you’re dealing with a related-party transaction, an assist that needs to be declared, a CBP challenge to your declared value, or a penalty stemming from a valuation error, we have the experience to guide you through it.
How Customs Valuation Works
When goods enter the United States, the importer is responsible for classifying and declaring the value of the merchandise. CBP then reviews that declaration and sets the final appraised value — a process known as “appraisement.” The appraised value is the foundation for calculating duties owed, and CBP has the authority to adjust or reject the importer’s declared value if it determines the valuation was incorrect.
Valuation disputes are among the most common sources of friction between importers and CBP, and they can result in significant financial exposure. Understanding how CBP determines value — and how to properly declare it — is essential for any importer.
The Six Methods of Appraisement
U.S. customs law establishes six methods for determining the value of imported merchandise. These methods are applied in a strict order of preference — CBP must use the first method that can be applied, and can only move to the next method when the previous one cannot be used.
1. Transaction Value
Transaction value is the preferred method and applies to the vast majority of imports. It is defined as the price actually paid or payable for the merchandise when sold for export to the United States, with certain additions. This is the price the buyer actually pays the seller, adjusted for specific cost elements that must be included.
The following must be added to the price actually paid or payable when calculating transaction value:
- Packing costs incurred by the buyer — The cost of containers, coverings, labor, and materials used to pack the merchandise for shipment to the United States
- Selling commissions — Any commission paid to an agent who is related to, controlled by, or works on behalf of the manufacturer or seller
- The value of any assist — Materials, components, tools, dies, molds, engineering, development work, or other items provided by the buyer to the seller, either free of charge or at a reduced cost, for use in the production or sale of the merchandise. The value of assists must be apportioned across the imported goods as appropriate.
- Royalties and license fees — Any royalty or license fee that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise
- Proceeds of subsequent resale — Any proceeds from a later resale, disposal, or use of the imported merchandise that accrue back to the seller
2. Transaction Value of Identical Merchandise
When transaction value cannot be used, CBP looks to the transaction value of identical merchandise — goods that are the same in all respects, produced in the same country, and sold for export to the United States at or about the same time as the merchandise being appraised. Adjustments are made for differences in quantity and commercial level.
3. Transaction Value of Similar Merchandise
If identical merchandise values are not available, CBP uses the transaction value of similar merchandise — goods that are not identical but closely resemble the imported merchandise in characteristics, components, and function, and are commercially interchangeable.
4. Deductive Value
Deductive value works backward from the price at which the imported merchandise (or identical or similar merchandise) is sold in the United States after importation. CBP starts with the resale price and deducts certain costs — including commissions, general expenses, profits, transportation, insurance, duties, and processing costs — to arrive at a customs value.
5. Computed Value
Computed value is built up from the cost of production. It includes the cost of materials and fabrication used to produce the merchandise, an amount for profit and general expenses, and the cost of packing. This method requires access to the foreign producer’s cost and production data, which can make it difficult to apply in practice.
6. Fallback Value
When none of the first five methods can be applied, CBP uses a flexible approach based on the principles of the other methods, adjusted as necessary. This method cannot use arbitrary or fictitious values, the domestic selling price of U.S.-produced goods, minimum customs values, or a price from a system that provides for the use of the higher of two alternative values.
What Is Excluded from Transaction Value?
Certain costs are specifically excluded from transaction value and should not be included in the declared customs value. These exclusions are important because including them would result in overpayment of duties:
- Post-importation costs — Charges for construction, erection, assembly, maintenance, or technical assistance provided after the goods arrive in the United States
- International transportation and insurance — Freight, insurance, and other charges incurred in shipping the merchandise to the United States (the U.S. uses FOB value, not CIF)
- U.S. inland freight — Transportation costs within the United States after importation
The distinction between what must be included and what must be excluded is not always intuitive, and errors in either direction can create problems. Over-declaring value means paying more duty than required. Under-declaring value can trigger penalties under 19 USC § 1592.
When Transaction Value Cannot Be Used
There are specific circumstances under which CBP will reject transaction value as the basis for appraisement:
- Restrictions on disposition or use — If the sale is subject to conditions that restrict how the buyer can use or resell the merchandise (with limited exceptions)
- Unascertainable conditions — If the sale is subject to conditions or considerations for which a value cannot be determined
- Unadjustable resale proceeds — If proceeds from a subsequent resale accrue to the seller and an appropriate adjustment to transaction value cannot be calculated
- Related-party transactions where the relationship affected the price — If the buyer and seller are related and that relationship influenced the price actually paid or payable
Related-Party Transactions
Related-party transactions receive particular scrutiny from CBP. When the buyer and seller are related — through ownership, control, family relationships, or other connections defined by law — CBP must examine whether the relationship affected the price. The mere existence of a relationship does not automatically disqualify transaction value, but the circumstances of the sale must demonstrate that the price was not influenced by the relationship.
Importers can establish the acceptability of a related-party transaction value by demonstrating that the price closely approximates one of several test values, including the transaction value of identical or similar merchandise in unrelated-party sales. In practice, related-party valuation issues are among the most complex areas of customs law, and they are a frequent focus of CBP audits and investigations.
Why Valuation Matters
Customs valuation affects every import transaction. An incorrect valuation — whether too high or too low — has direct financial consequences. Importers who undervalue merchandise face potential penalties for negligence, gross negligence, or fraud under 19 USC § 1592, plus retroactive duty assessments with interest. Importers who overvalue merchandise are paying more in duties than they owe.
Valuation issues also arise in the context of CBP audits, focused assessments, and requests for information. When CBP questions a declared value, the importer must be prepared to substantiate it with documentation and a clear understanding of the applicable valuation method. Having proper valuation procedures in place — and experienced legal counsel to help when questions arise — is an essential part of import compliance.
How Can We Help?
The methods of valuing imported merchandise into the United States can be complicated. What is included in transaction value and what is excluded is not always intuitive, and transactions between related parties are full of potential problems. Great Lakes Customs Law can help you determine the appropriate value to declare to customs. Contact us at our Michigan office at (734) 855-4999 or call our Chicago office at (773) 920-1840.