CUSTOMS VALUATION | 2026-10-27

Customs Valuation Between Related Parties: The Circumstances-of-Sale and Test-Value Rules of 19 U.S.C. §1401a(b) Explained for California Importers

When a California importer buys from a related foreign manufacturer — a parent, subsidiary, or affiliate — U.S. Customs will not accept the declared transaction value unless the importer can show the relationship did not influence the price. Two statutory tests govern: the circumstances-of-sale test and the test-value comparison. Understanding them is the difference between a clean entry and a value-advance assessment.

When a California company imports goods from a related foreign seller — a parent company, a subsidiary, or an affiliate under common control — U.S. Customs and Border Protection does not automatically accept the price the parties put on the invoice. The primary method of appraisement, transaction va

For a California importer that sources from a foreign parent or affiliate, the single most important customs question is often not classification or origin but value. Duties are assessed as a percentage of the appraised value of the merchandise, so the declared value drives the duty owed. When the buyer and seller are related, CBP is concerned that the parties may set an artificially low price to reduce duties, and the law places the burden on the importer to show the price is reliable. This article explains how related-party transaction value works under 19 U.S.C. §1401a(b), the two tests that validate it, and how an importer builds the documentation that keeps its entries clean.

Transaction Value Is the Preferred Method of Appraisement

U.S. customs valuation follows a hierarchy set out in 19 U.S.C. §1401a. The preferred and primary method is transaction value — the price actually paid or payable for the merchandise when sold for export to the United States, plus certain statutory additions such as packing costs, selling commissions, assists, royalties, and proceeds of resale accruing to the seller. Only if transaction value cannot be used does CBP move down the ladder to the transaction value of identical merchandise, then similar merchandise, then deductive value, then computed value, and finally the "fallback" method. Importers overwhelmingly prefer transaction value because it rests on their own invoice price and is the most predictable. Preserving the right to use transaction value is therefore the central goal of related-party valuation planning.

The Related-Party Problem

Under 19 U.S.C. §1401a(g), parties are "related" in a range of situations — among them a corporation and its officers or directors, business partners, an employer and employee, any person owning or controlling five percent or more of the voting stock of both parties, and parties where one controls the other or both are controlled by a third party. A California subsidiary buying from its foreign parent, or two sister companies under a common corporate umbrella, are classic related parties. The concern is straightforward: related parties may not bargain at arm's length, and a group with a high U.S. duty rate has an incentive to set a low transfer price to shrink the dutiable value. Because of this, §1401a(b)(2)(A)(iv) provides that a related-party transaction value is acceptable only if the requirements of §1401a(b)(2)(B) are satisfied.

CBP Cannot Reject Value Solely Because of the Relationship

An important protection for importers appears in 19 CFR §152.103(l)(1): the fact that the buyer and seller are related is not in itself a basis for rejecting transaction value. The relationship triggers scrutiny, not automatic rejection. If CBP has doubts about whether the relationship influenced the price, it must communicate those doubts and give the importer an opportunity to respond. The importer then shows acceptability through one of the two statutory routes — the circumstances-of-sale test or the test-value comparison. This structure means a well-prepared related-party importer that can document its pricing is on solid ground; the danger falls on importers who have never analyzed the question and cannot answer a CBP value inquiry.

The First Route: The Circumstances-of-Sale Test

Under §1401a(b)(2)(B)(i) and 19 CFR §152.103(l)(1)(i), transaction value between related parties is acceptable if an examination of the circumstances of the sale indicates that the relationship did not influence the price actually paid or payable. CBP looks at how the parties organized their commercial relationship and how they arrived at the price. The regulation and CBP's published guidance recognize three principal ways to make this showing. First, that the price was settled in a manner consistent with the normal pricing practices of the industry in question. Second, that the price was settled in a manner consistent with the way the seller settles prices with unrelated buyers. Third, that the price is adequate to ensure recovery of all costs plus a profit equivalent to the firm's overall profit realized over a representative period of time in sales of merchandise of the same class or kind. Meeting any one of these demonstrates the relationship did not drive the price down.

Documenting the Circumstances of Sale

The circumstances-of-sale test is only as good as the documentation behind it. CBP ruling practice makes clear that a bare recitation of how a transfer price was calculated — without supporting facts — is insufficient. In Headquarters Ruling Letter 545669 and similar rulings, CBP found the importer had not met its burden where it merely described how the transfer price was reached without validating factors. Importers therefore assemble concrete evidence: the group's transfer-pricing study prepared for income-tax purposes under IRC §482 (which CBP may consider, though it is not dispositive on its own), cost build-up records showing all costs plus profit, comparisons of prices to unrelated customers if the seller has any, and industry benchmarking. The all-costs-plus-profit method is often the most workable for a captive manufacturer that sells only to its U.S. affiliate, because it does not require unrelated-buyer comparables.

The Second Route: The Test-Value Comparison

The alternative route, under §1401a(b)(2)(B)(ii) and 19 CFR §152.103(l)(1)(ii), is to show that the transaction value closely approximates one of several "test values." A test value is a value previously accepted by CBP in an actual appraisement of imported merchandise. The permitted test values are the transaction value of identical or similar merchandise in sales to unrelated buyers, or the deductive value or computed value of identical or similar merchandise. Critically, the comparison merchandise must have been exported to the United States at or about the same time as the merchandise being valued. The test values are used only for comparison; they do not replace transaction value. If the declared value closely approximates an established test value, the relationship is treated as not having influenced the price.

Limits on the Test-Value Route

The test-value route is narrower than it first appears. By statute, a test value must derive from an actual, previously accepted appraisement — it cannot be a hypothetical or constructed figure the importer generates for the occasion. In practice this means an importer can rely on test values only where genuinely comparable, unrelated-party or previously appraised transactions exist close in time. 19 CFR §152.103(l)(2) directs CBP, in deciding whether a transaction value "closely approximates" a test value, to account for the commercial level, the quantity, the statutory additions to value, and costs incurred by the seller in sales to unrelated buyers that are not incurred in sales to related buyers. Because the data requirements are demanding, most related-party importers rely primarily on the circumstances-of-sale test and treat the test-value comparison as a secondary option.

What Happens When Transaction Value Is Rejected

If the importer cannot satisfy either test, CBP rejects transaction value and moves down the valuation hierarchy. The next methods are the transaction value of identical merchandise, then similar merchandise (both based on contemporaneous unrelated-party sales), then deductive value (the U.S. resale price less permitted deductions), then computed value (the cost of materials and processing, plus profit and general expenses, plus packing), and finally the fallback method under §1401a(f), a flexible application of the earlier methods. The appraised value under these alternatives is frequently higher than the related-party invoice price, producing a duty advance. Worse, if the under-valuation is attributable to the importer's lack of reasonable care, CBP may pursue penalties under 19 U.S.C. §1592. The incentive to get valuation right the first time is substantial.

Reasonable Care and the Importer's Burden

The Customs Modernization Act makes valuation a shared-responsibility obligation: the importer must use reasonable care to declare value correctly, and CBP is responsible for fixing the final appraisement. Reasonable care in the related-party context means analyzing the relationship before entry, selecting and documenting the applicable test, and maintaining records that can answer a CBP inquiry. An importer that files entries at a transfer price without ever analyzing whether the relationship influenced the price has not exercised reasonable care, even if the price turns out to be defensible. Building a valuation file at the outset — and updating it when the group changes its transfer-pricing policy — is the practical expression of the reasonable-care duty.

Transfer Pricing and Customs Value Are Not the Same

A frequent and costly misunderstanding is that a transfer price blessed by the IRS for income-tax purposes automatically satisfies customs. It does not. The income-tax arm's-length standard under IRC §482 and the customs circumstances-of-sale test overlap but are governed by different statutes and agencies. CBP may consider a transfer-pricing study as evidence, but it is not conclusive, and a study prepared solely for tax purposes may not address the customs factors. A further wrinkle arises from retroactive transfer-pricing adjustments: when a group makes a year-end adjustment that changes the price after importation, CBP treats upward adjustments as potentially dutiable and has issued guidance on when post-importation adjustments may be taken into account. Coordinating tax and customs positions is a core part of related-party planning.

Assists, Royalties, and Other Additions

Even when the related-party price itself is accepted, the importer must still add the statutory additions to arrive at the correct transaction value. Assists — tooling, dies, molds, materials, or engineering performed outside the United States and supplied free or at reduced cost to the foreign seller — must be added under §1401a(b)(1). Related-party arrangements frequently involve assists because the U.S. affiliate often supplies designs, components, or equipment to its foreign manufacturer. Selling commissions, packing costs, royalties, and license fees that the buyer must pay as a condition of sale are also added. An importer that documents an acceptable related-party price but omits a required assist has still under-declared value. The valuation file should therefore address both the price and every statutory addition.

Responding to a CBP Value Inquiry

CBP commonly tests related-party valuation through a CBP Form 28 Request for Information, a value questionnaire, or a Focused Assessment audit. A prepared importer responds with its valuation file: the statement of relationship, the chosen test, the supporting documentation, and the treatment of additions. A disorganized or absent response invites CBP to reject transaction value and advance the value. Where an importer discovers that past entries were under-valued, a prior disclosure under 19 U.S.C. §1592(c)(4) — filed before CBP commences a formal investigation — can sharply reduce penalty exposure and limit the assessment to the loss of duties plus interest. The decision whether and how to disclose is a legal judgment that should be made with counsel.

Practical Steps for California Importers With Foreign Affiliates

The sound approach is preventive. Before importing from a related seller, the importer should (1) confirm whether the parties are "related" under §1401a(g); (2) select the applicable acceptability test — usually circumstances of sale; (3) assemble the documentation that proves the relationship did not influence the price, including an all-costs-plus-profit analysis for a captive manufacturer; (4) identify and quantify any assists, royalties, or commissions that must be added; (5) reconcile the customs position with the group's transfer-pricing policy, including the treatment of year-end adjustments; and (6) maintain the file so it can answer a CBP inquiry on short notice. Importers that do this treat related-party valuation as routine; those that do not often first confront the issue during an audit, when options are narrower and exposure is larger.

Frequently Asked Questions

Does being related to my supplier mean Customs will reject my invoice price?

No. Under 19 CFR §152.103(l)(1), CBP may not reject transaction value solely because the buyer and seller are related. The relationship triggers scrutiny, but the price is acceptable if you can show through the circumstances-of-sale test or a test-value comparison that the relationship did not influence the price.

What is the circumstances-of-sale test?

It is the showing, under 19 U.S.C. §1401a(b)(2)(B)(i), that the relationship did not affect the price. You can demonstrate this by proving the price was set consistent with normal industry pricing practices, consistent with how the seller prices to unrelated buyers, or in a way that recovers all costs plus a representative profit.

What are "test values"?

Test values are values CBP previously accepted in actual appraisements — the transaction value of identical or similar merchandise sold to unrelated buyers, or the deductive or computed value of such merchandise — exported to the United States at or about the same time. If your declared value closely approximates one, the relationship is treated as not having influenced the price.

Can I just use my IRS transfer price for customs?

Not automatically. Customs valuation and income-tax transfer pricing are governed by different statutes. CBP may consider an IRC §482 transfer-pricing study as evidence but it is not conclusive, and a tax study may not address the customs circumstances-of-sale factors. The two positions should be coordinated, including the treatment of year-end adjustments.

What happens if Customs rejects my related-party transaction value?

CBP moves down the valuation hierarchy — to identical-merchandise value, similar-merchandise value, deductive value, computed value, and finally the fallback method. The resulting appraised value is often higher than the related-party price, producing a duty advance, and may expose the importer to penalties under 19 U.S.C. §1592 if reasonable care was not used.

Do I still have to add assists if my related-party price is accepted?

Yes. Assists — tooling, molds, materials, or engineering supplied to the foreign seller free or at reduced cost — must be added to transaction value under §1401a(b)(1), as must royalties, selling commissions, and certain other amounts. An accepted price with an omitted assist is still an under-declaration.

How does Customs test my related-party valuation?

Typically through a CBP Form 28 Request for Information, a value questionnaire, or a Focused Assessment audit. The best response is a prepared valuation file documenting the relationship, the chosen acceptability test, the supporting evidence, and the treatment of statutory additions.

What if I discover I under-valued past entries?

A prior disclosure under 19 U.S.C. §1592(c)(4), filed before CBP begins a formal investigation, can substantially reduce penalty exposure and generally limits the assessment to the lost duties plus interest. Whether and how to disclose is a legal decision that should be made with experienced customs counsel.

Related Guides

For related reading, see our guides on CBP duty-evasion investigations under the Enforce and Protect Act and our international trade and customs practice overview. California importers facing a CBP value inquiry or Focused Assessment should treat the valuation file as the centerpiece of the response.

Speak With a California Customs Attorney

If your company imports from a related foreign supplier and faces a CBP value inquiry, a Form 28, or a Focused Assessment — or if you want to build a defensible related-party valuation file before you import — Trembach Law Firm can help. We analyze the relationship under 19 U.S.C. §1401a(g), select and document the applicable acceptability test, address assists and other additions, and manage prior disclosures where past entries were under-valued. Call (213) 645-2246 to discuss your related-party valuation strategy with an attorney who handles customs matters. Anatolii Trembach holds an LL.M. and is admitted to the California Bar.

This article provides general information about customs valuation law and is not legal advice. Customs valuation is fact-specific, and CBP ruling practice evolves. Consult a qualified customs attorney about your particular import transactions.

Contact Trembach Law Firm at (818) 514-7680 for a confidential consultation.

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