A Chinese Furniture or Lighting Factory Selling to Its Own U.S. Company: Transfer Pricing, Customs Value and Section 1059A

When a Chinese factory sells furniture, lighting or building materials to a U.S. company it controls, the sale is a related-party transaction, and the price is watched from three sides. The IRS can adjust it under IRC §482 so the U.S. company earns an arm's length profit, with 20% or 40% penalties on large adjustments. U.S. Customs checks whether the relationship pushed the declared value down. And IRC §1059A says that for goods imported from a related party, the purchase cost in the U.S. company's inventory can't exceed the customs value. You need one documented price that works for the IRS, Customs and the Chinese tax authorities at the same time.

Why home goods factories need to pay attention

More Chinese makers of furniture, lighting, bath fixtures and building materials are forming U.S. subsidiaries that act as importer, hold goods in U.S. warehouses, and sell to customers on Wayfair, Walmart and Amazon or to designers and contractors. After Shop Houzz closed in May 2026, many factories that relied on marketplaces are also restructuring their U.S. sales. The price on the leg from the factory to the U.S. company decides where profit sits, how much duty is paid, and how much U.S. income tax is due.

There are two common temptations. One is to set a high price so the U.S. company shows little profit and pays less U.S. income tax, but a high price also raises the customs value and the duty. The other is to declare a low price at the border to save duty while booking a higher cost in the ledger to save income tax. That second approach fails on both sides, and §1059A is aimed squarely at it.

How the IRS looks at the price: §482 and the arm's length standard

IRC §482 lets the IRS adjust prices between related parties to match what unrelated parties would agree to in similar circumstances. For sales of goods, common methods include the comparable uncontrolled price method (the factory's price for the same goods to unrelated customers), the resale price method (the gross margin a distributor should earn), the cost plus method and the comparable profits method. A U.S. company that only imports, warehouses and distributes, with limited functions and risks, is generally expected to earn a steady, reasonable margin, not to lose money year after year.

Penalties. An underpayment caused by a §482 adjustment can draw the valuation misstatement penalties in IRC §6662(e) and (h): 20% of the underpayment if the price claimed is 200% or more, or 50% or less, of the correct price, or if the net adjustment for the year exceeds the lesser of $5,000,000 or 10% of gross receipts; 40% if the price is 400% or more, or 25% or less, of the correct price, or the net adjustment exceeds the lesser of $20,000,000 or 20% of gross receipts.

Contemporaneous documentation. To avoid the net-adjustment penalty, transfer pricing documentation must exist when the return is filed and be provided within 30 days of an IRS request. A small company may not need a full transfer pricing study, but the purchase agreement, pricing support and calculations should be in place before filing.

How Customs looks at the price: related-party transaction value

U.S. Customs values imports primarily at transaction value, the price actually paid. When buyer and seller are related, transaction value can still be used if the relationship did not influence the price, for example when the price was set the way the industry normally prices, or when it closely approximates the price for sales to unrelated buyers at about the same time. Customs can ask you to show this.

As of November 2026, most Chinese-origin furniture, lighting and building materials still carry Section 301 tariffs, so the declared value directly drives the duty; check current rates by HTS code in the latest CBP and USTR notices. Tariffs imposed under IEEPA ended with the Supreme Court's February 20, 2026 decision, and only the importer of record can seek refunds. The $800 de minimis exemption has been suspended since August 29, 2025.

Section 1059A: inventory cost can't exceed customs value

IRC §1059A provides that for property imported from a related person, any costs taken into account in the importer's inventory cost or basis that are also taken into account in the customs value can't exceed the amount used for customs value. Put simply, the purchase price in your books can't be higher than the price you declared to Customs.

Costs that are not part of the customs value aren't capped. The U.S. values imports on an FOB basis, so international freight and insurance are generally outside the customs value, as are duties, broker fees and domestic freight. Those still go into inventory cost.

The rule ties the two sides together. Declare low at the border and your book cost is capped at that low figure, raising U.S. income tax. Book a higher cost in the U.S. and the customs value has to follow, raising duty. There can only be one price, and it should be arm's length.

An example

Example (hypothetical numbers, to show the method): a Chinese lighting factory owns 100% of B Inc., a U.S. C corporation. B is the importer of record and in 2026 imports 10,000 chandeliers, selling them in the U.S. for $100 each to retail customers and through platforms. The factory sells the same model to unrelated overseas distributors at $38 FOB.

Option one: price at $38 FOB, customs value $380,000. Ocean freight and insurance are $40,000, duty at an assumed 25% is $95,000, and U.S. warehousing, logistics and platform fees are $300,000 on revenue of $1,000,000. B's pre-tax profit is $1,000,000 − $380,000 − $40,000 − $95,000 − $300,000 = $185,000, about 18.5% of revenue.

Option two: declare $30 FOB at entry (customs value $300,000, duty $75,000) but book purchases at $45. Under §1059A, book purchase cost is capped at $300,000, not $450,000; and a declared price below the $38 charged to unrelated buyers invites Customs to question whether the relationship influenced it. Both sides are exposed.

Option three: price at $55 FOB, customs value $550,000, duty $137,500, and B shows a $27,500 loss. A distributor that loses money year after year invites a §482 adjustment back to a reasonable profit, and the high price also paid more duty.

The actual price should come from B's functions, risks and comparable data; the example only shows how the three sides pull against each other.

What documents to prepare

A purchase agreement stating the price or pricing formula, trade terms (FOB or other), payment terms, and who bears freight, insurance, duty and return risk.

Pricing support: the factory's prices and invoices to unrelated customers, distributor margins in the industry, or a cost plus calculation. Review it every year and document why prices changed.

Matching customs and books: commercial invoices and entry values should match the purchase cost in the books. If a year-end transfer pricing adjustment changes the price, consider the effect on customs value and handle it through your broker where needed.

Reporting: a U.S. corporation 25% or more foreign-owned reports purchases, loans and service fees with the factory on Form 5472, filed with Form 1120, with a $25,000 penalty per missed form. A foreign investor forming a new U.S. company files BEA Form BE-13 within 45 days. On the Chinese side, the factory's sales to its U.S. subsidiary are subject to China's own transfer pricing rules, so both sides should use the same story.

How home goods sellers compare Wayfair, Walmart and Amazon and choose a U.S. entity is covered in our Houzz sellers guide; what a foreign-owned subsidiary files each year is in our U.S. subsidiary guide. To have us set up a purchase agreement and pricing calculation, book a free 15-minute consultation or reach us on WeChat at YCLUSA.