Customs Valuation Methods: How CBP Determines Dutiable Value

Why Valuation Matters

Customs duties are calculated as a percentage of the declared value of imported merchandise (for ad valorem duties). This means that how you determine and report the value of your imports directly affects how much duty you pay. Undervaluing goods — whether intentionally or through error — is one of the most common violations CBP investigates, and penalties for valuation fraud can reach the full domestic value of the merchandise. Conversely, many importers overpay duties by including non-dutiable charges in their declared value, or by failing to use legitimate valuation methods like first sale.

The Six Valuation Methods Under US Law

US customs valuation law (19 USC 1401a) establishes six methods for determining the dutiable value of imported merchandise. These methods must be applied in a specific order — you start with Method 1 and only move to the next method if the previous one cannot be used. This hierarchy is mandatory; you cannot skip methods or choose the one that produces the lowest duty.

Method 1: Transaction Value

Transaction value — the price actually paid or payable for the goods when sold for export to the United States — is the primary valuation method and is used for the vast majority of imports. It includes the invoice price plus certain statutory additions: packing costs, selling commissions paid by the buyer, assists (tooling, dies, molds, engineering, design work, artwork furnished by the buyer to the seller), royalties and license fees that the buyer must pay as a condition of the sale, and proceeds of subsequent resale that accrue to the seller. Transaction value cannot be used when: there is no sale (consignment, gifts, samples), the buyer and seller are related and the relationship influenced the price, or certain restrictions on the buyer's use of the goods exist.

Method 2: Transaction Value of Identical Goods

If transaction value cannot be used, the next method is the transaction value of identical goods — goods that are the same in all respects (physical characteristics, quality, reputation) as the goods being valued, produced in the same country, and exported at or about the same time. The transaction value of a previous import of identical goods serves as the basis for valuation. Adjustments are made for quantity differences and level of trade.

Method 3: Transaction Value of Similar Goods

If identical goods are not available, similar goods can be used. Similar goods are not identical but have like characteristics: same materials, same function, commercially interchangeable, produced in the same country. As with Method 2, the transaction value of a previous import of similar goods is used, with adjustments for quantity and level of trade.

Method 4: Deductive Value

Deductive value works backward from the US resale price. You start with the price at which the imported goods (or identical/similar goods) are sold in the US in the greatest aggregate quantity, then deduct: commissions, profit, and general expenses; transportation, insurance, and related costs within the US; customs duties and federal taxes; and the value of further processing if the goods were processed after import. Deductive value is complex but can be useful for related-party transactions where the import price is questioned.

Method 5: Computed Value

Computed value builds up from the cost of production. It includes: materials, fabrication, and processing costs; an amount for profit and general expenses equal to that reflected in sales of goods of the same class from the same country; and the cost of containers and packing. Computed value requires detailed production cost information from the foreign manufacturer, which can be difficult to obtain. The importer may request that Methods 4 and 5 be applied in reverse order.

Method 6: Fallback (Derived Value)

If none of the first five methods can be used, value is determined using reasonable means consistent with the principles of the valuation statute. Method 6 is the most flexible — CBP can use any of the previous methods with reasonable adjustments. However, Method 6 cannot use: the selling price of US-produced goods, the higher of two alternative values, minimum values, or arbitrary or fictitious values.

First Sale Valuation: A Legitimate Duty-Saving Strategy

In multi-tiered supply chains where goods pass through a middleman before reaching the US importer, the first sale rule allows the importer to declare the value of the first arm's-length sale (from manufacturer to middleman) rather than the last sale (from middleman to importer). This can significantly reduce the dutiable value when the middleman's markup is substantial. CBP requires documentation proving that the first sale was a bona fide sale for export to the US, including purchase orders, invoices, payment records, and evidence that the goods were clearly destined for the US at the time of the first sale.

“Transaction value is the cornerstone of customs valuation — but it requires disclosure of the complete price. If you are not declaring assists, royalties, or other price adjustments, your transaction value is incomplete and your duties are underpaid.”

— CBP Valuation Encyclopedia