Circumstances of Sale Test: Proving Related-Party Prices

Key Points

• When buyer and seller are related, CBP may question whether the relationship influenced the transaction value price; the importer must then pass the circumstances of sale test under 19 CFR 152.103(l) or use an alternative valuation method.
• The test has three independent prongs: consistency with normal industry pricing, consistency with prices to unrelated buyers, and a cost-plus-representative-profit analysis; satisfying any one prong is sufficient.
• Documentation is the make-or-break factor: CBP expects contemporaneous records, not after-the-fact reconstructions assembled during an audit.
• Failure to pass any prong does not automatically defeat transaction value; it triggers examination of the alternative valuation hierarchy, but penalties for misvaluation are a separate and serious risk.
• Related-party relationships are defined in 19 CFR 152.102, covering family members, officers, partners, and entities with shared ownership or control thresholds.

On this page

1. What the circumstances of sale test is and when it applies
2. Prong one: consistency with normal industry pricing practice
3. Prong two: consistency with sales to unrelated buyers
4. Prong three: cost recovery plus representative profit
5. Building and maintaining the documentation package
6. Interaction with the broader valuation framework
7. What importers should do
8. Key references

When an importer and its foreign seller are related parties, CBP is entitled to scrutinize whether that relationship drove the invoice price down (reducing duties) or otherwise distorted value. The circumstances of sale test, codified at 19 CFR 152.103(l), gives importers a structured path to demonstrate that a related-party price is nonetheless acceptable for transaction value purposes. Passing any one of the three prongs under that regulation is sufficient to preserve transaction value as the declared basis of appraisement.

The links in this article go to the primary documents: the regulations, statutes, and official agency guidance themselves. Read the source.

What the Circumstances of Sale Test Is and When It Applies

Transaction value is the preferred, first-in-line method for appraising imported merchandise under 19 U.S.C. 1401a. It equals the price actually paid or payable for the goods when sold for export to the United States, adjusted for certain statutory additions. But that price is only acceptable when, among other conditions, the buyer and seller are not related, or when the relationship did not influence the price.

Relatedness is triggered by the definitions in 19 CFR 152.102: family relationships, employer-employee relationships, shared officers or directors, partnership interests, ownership or control of five percent or more of voting stock, and similar arrangements. When any of those connections exists, CBP may raise a relatedness concern on entry review or during a focused assessment.

Once relatedness is established and CBP questions whether the price was influenced, the importer faces two options: demonstrate acceptability through the circumstances of sale test, or accept that CBP will move down the valuation hierarchy to transaction value of identical or similar merchandise, deductive value, computed value, or the fallback method. For most importers, preserving transaction value is the goal, and the circumstances of sale test is the vehicle.

For background on how transaction value itself is structured, see our article on Related Party Customs Valuation: The Acceptance Framework.

Prong One: Consistency with Normal Industry Pricing Practice

The first prong asks whether the price was settled in a manner consistent with normal industry pricing practices for the class or kind of merchandise. The underlying logic: if an entire industry prices goods a particular way, a related-party transaction priced the same way is unlikely to reflect relationship-driven distortion.

What "normal industry pricing practice" means

This is an industry-wide standard, not a company-specific one. CBP looks for evidence that arm's-length sellers in the same product category use the same pricing methodology: list-price-minus-discount structures, cost-based formulas with standard markup tiers, commodity-index-linked pricing, or other recognized commercial conventions.

Documentation examples for prong one

• Industry trade publications or pricing indices showing that sellers in the relevant market price on a particular basis (cost-plus, index-linked, etc.) and that the related-party price aligns with that convention.
• Published price lists or catalogs from unrelated competitors or industry associations showing comparable pricing structures for comparable goods.
• Third-party market research reports from recognized industry analysts describing standard commercial terms in the product sector.
• Supplier contracts with unrelated buyers in the same industry (with confidential details redacted) showing that the same formula governs pricing across the seller's entire book of business.
• Written pricing policy documents from the foreign seller that predate the challenged entries and apply uniformly to related and unrelated customers alike.

A critical point: the evidence must show structural consistency, not merely that the resulting number is within a general market range. CBP wants to see that the method is the same, not just that the outcome happens to look reasonable.

Prong Two: Consistency with Sales to Unrelated Buyers

The second prong compares the related-party price to prices at which the same seller sold the same or similar merchandise to unrelated buyers. If the related-party price is the same as, or not materially different from, what arm's-length customers pay, the relationship plainly did not depress the price.

Selecting the right comparables

The comparison must be to sales at the same or substantially the same commercial level and in the same or substantially the same quantities. Comparing a large intercompany bulk purchase to a small spot sale to an unrelated distributor is unlikely to persuade CBP without adjustments for volume and trade-level differences.

Documentation examples for prong two

• The foreign seller's invoice records for sales to unrelated buyers of the same goods during the same or immediately surrounding time period, showing unit prices, quantities, and terms of sale.
• Sales ledger extracts or ERP reports from the seller's accounting system showing the price population across the customer base for the relevant SKUs or product lines.
• A statistical summary, ideally prepared by a transfer-pricing economist or trade counsel, showing the mean, median, and range of arm's-length prices and where the related-party price falls within that range.
• Contracts and purchase orders with unrelated buyers that confirm pricing terms comparable to the intercompany arrangement.
• Freight-equalized or terms-adjusted comparisons when the related-party sale is on different Incoterms than the unrelated sales, demonstrating that the underlying price is equivalent once logistics costs are normalized.

Importers should be aware that CBP may request the seller's records directly during a verification. Cooperation and transparency from the foreign seller are practically essential for this prong.

Prong Three: Cost Recovery Plus Representative Profit

The third prong is the most analytical and is often the fallback when comparable unrelated sales are unavailable or when the product is unique. It asks whether the price is adequate to cover all costs of production plus a profit representative of the seller's overall profit realized over a representative period.

Breaking down the cost-plus analysis

The cost base should include all direct and indirect costs attributable to the goods: raw materials, direct labor, manufacturing overhead, and allocable general and administrative expenses. The profit element must be representative of the seller's actual realized profit, not a theoretical or aspirational margin. CBP is looking for internal consistency: does the seller actually make money on this product line at this price, or is the related-party price a below-cost transfer designed to shift value offshore?

Documentation examples for prong three

• Audited or reviewed financial statements of the foreign seller for the representative period, establishing overall profitability.
• Product-line or segment profit and loss statements showing that the specific goods sold to the related importer generate a margin consistent with the seller's broader operations.
• Standard cost sheets or bill-of-materials records itemizing material, labor, and overhead inputs that together constitute the full cost of production.
• Transfer pricing documentation, such as a local file or benchmarking study prepared under the Organisation for Economic Co-operation and Development guidelines or comparable standards, demonstrating that the intercompany price produces an arm's-length margin. CBP is not bound by tax transfer pricing rules, but a well-prepared study is persuasive evidence that the economics are sound.
• Management accounts or internal margin reports showing that the seller allocates shared costs consistently across product lines and that the subject goods bear their proportionate share.

One practical caution: a seller operating at a net loss for a period does not automatically fail this prong, but the importer will need to explain the commercial rationale convincingly and show that the loss is not the product of relationship-driven underpricing.

Building and Maintaining the Documentation Package

The circumstances of sale test is won or lost on documentation, and that documentation must be contemporaneous. Records assembled months or years after importation, in response to a CBP inquiry, carry far less weight than records that existed at the time of entry.

Timing and format

Best practice is to establish a valuation file for each related-party supplier at the start of the commercial relationship or annually thereafter. The file should capture the chosen prong, the supporting evidence, and a written analysis tying the evidence to the regulatory standard. When pricing is renegotiated or market conditions change materially, the file should be updated.

Record retention

CBP's general record-retention requirement runs five years from the date of entry. Related-party valuation files should be retained for at least that period and should be organized so they can be produced quickly in response to a request for information or during a focused assessment. For guidance on building a self-audit program that catches valuation issues before CBP does, see Post Entry Audit Program: Build a Monthly Self-Review That Catches Errors.

Coordination with the foreign seller

Because several prongs require seller-side records, importers should address document cooperation in their intercompany agreements. A clause requiring the seller to maintain and provide pricing records, cost data, and financial statements in a form acceptable to CBP is a practical safeguard that avoids scrambling when an inquiry arrives.

Interaction with the Broader Valuation Framework

The circumstances of sale test sits within a layered valuation system. Transaction value is the default; the circumstances of sale test is the mechanism for keeping transaction value viable when parties are related. If the importer cannot satisfy any prong, the entry may need to be re-appraised using a different method, which almost always results in a higher dutiable value and, depending on how the original entry was filed, potential exposure under the penalty statute.

Importers should also understand that passing the circumstances of sale test addresses only the relatedness question. CBP may still examine other aspects of transaction value: assists, royalties and license fees included in the price, proceeds of resale that accrue to the seller, and packing costs. Each of those is a separate inquiry under the same regulation. For a full picture of how transaction value is built up from the price actually paid or payable, see Customs Transaction Value: The Default Valuation Method Explained.

Finally, the circumstances of sale test is separate from the test of value for identical or similar merchandise, which CBP may use as a cross-check even when the importer passes the circumstances of sale test. Maintaining awareness of what comparable goods actually trade for in the marketplace is prudent for any related-party importer.

What Importers Should Do

• Select and document your prong before importation begins. Decide which of the three prongs under 19 CFR 152.103(l) best fits your commercial reality, assemble the supporting evidence, and reduce the analysis to writing as a contemporaneous valuation file.
• Coordinate with your foreign seller on records access. Build a data-sharing obligation into the intercompany supply agreement covering cost data, financial statements, and unrelated-buyer sales records so that evidence is available if CBP requests a verification.
• Review and refresh annually. Market conditions, cost structures, and product mixes change. Update your valuation file each year and whenever intercompany pricing is renegotiated to ensure the chosen prong remains supportable.
• Run a periodic self-audit. Cross-check declared transaction values against your documentation file on a regular cycle so that gaps are found and corrected before a CBP inquiry, not during one.

Key References

• 19 CFR 152.103 - CBP regulation on transaction value, including the circumstances of sale test at paragraph (l).
• 19 CFR 152.102 - CBP definitions, including the related-party definitions that trigger the circumstances of sale inquiry.
• 19 U.S.C. 1401a - The statutory basis for customs valuation, establishing transaction value as the primary method.
• CBP Informed Compliance Publications - CBP's library of plain-language valuation guidance, including publications on transaction value and related-party issues.
• Harmonized Tariff Schedule of the United States (hts.usitc.gov) - Official HTS, relevant for identifying the correct classification underpinning any valuation analysis.