Understanding the Basics of Customs Duty Drawback

Duty drawback is probably the most under used duty recovery program available by U.S. Customs. Most companies tend to look for duty savings on the front end when they import goods into the U.S.  With duty drawback, you get a full refunded duties back on the back end.

It’s kind of like when you file your personal taxes. Throughout the year you are paying with each paycheck you receive.  Then, when it’s time to file your return, you look for all the deductions to help drop your tax liability. If you are fortunate enough, you’ll get a pretty penny back from Uncle Sam.  Duty drawback process is similar in this way.

What is a duty drawback?

According to U.S. Customs, “Drawback is the refund of certain duties, internal revenue taxes and certain fees collected upon the importation of goods and refunded when the merchandise is exported or destroyed.”

Duty drawback isn’t anything new. It is one of the oldest programs in the United States and was established in 1789. The purpose of duty drawback is to encourage manufacturing in the United States and then have those goods subsequently exported.

How duty drawbacks impact your business.

Your business can qualify for duty drawback if you are an exporter, importer, or manufacturer. An exporter would benefit if they purchased imported duty-paid merchandise and then sold it (in the original condition) to a foreign buyer or by purchasing a product made from imported merchandise.

An importer can benefit from import duty- drawback if they export imported goods or if they manufacture exported goods with imported products.

A manufacturer can benefit from this program if they use imported merchandise in the manufacturing process and export or destroy the final product. Some other major types of industries that would benefit from drawback are ones that import raw materials or components and then manufacture the items into something else.  For example:  chemical, textile, automotive, aerospace, electronics, food and beverage companies.

Types and examples of duty drawback

There are several types of duty drawback drawbacks that are authorized under Section 1313, title 19, United States Code (U.S.C.). The most used drawbacks include manufacturing, substitution and unused merchandise direct identification. The duty drawback program promotes international trade by incentivizing domestic manufacturing, production and exportation of the goods.

Let’s take a closer look at some examples:

Manufacturing Drawback

The manufacturing drawback provides a refund on the duties paid on import merchandise that is used in the manufacture or production of other goods upon exportation or destruction under CBP supervision.

One caveat – the articles cannot be used in the United States prior to import date or the exportation or destruction. Under this drawback, a manufacturer can recover 99% of the duties and taxes paid back on the imported merchandise.

Here’s one example of this type of duty drawback claims:  Let’s say a pharmaceutical company imports a raw chemical to use in the manufacture of a drug. Once the drug is manufactured, the company then exports this drug to another country.

The pharmaceutical company can then file for a duty drawback on the import duties they paid for the raw chemical that was used in making the drug.  (As long as the drug was not used in the United States before being manufactured article exported.)

Manufacturing Substitution Drawback

The manufacturing substitution drawback helps to encourage the use of domestic raw materials over imported ones. It supports the domestic producers of raw materials and encourages import substitution.

The substitution drawback program aims to reduce the reliance on imported goods and helps to promote domestic sourcing. A substitution and drawback claim claimant must demonstrate that the substitution did not increase the drawback amount.

The drawback claim is granted when a company exports or destroys the goods made from the imported merchandise, the substituted goods or some combination of the two. Under this drawback a company can recover 99% of the duties paid on the imported merchandise.

For this example, let’s say a company imports a motor for a weed trimmer. The motors are stored in the factory (where they also have domestically produced motors of the same kind and quality as those that were previously imported).

When the weed trimmers are assembled, the trimmers could contain either the imported motor or the domestic one.

The company then exports the assembled weed trimmers to another country. Since the weed trimmers could contain either one of the motors, the company is able to file for the manufacturing substitution duty drawback refunds on the duties paid for the imported motors.

USMCA Manufacturing Drawback

The USMCA Manufacturing Drawback program replaced the NAFTA duty drawback provisions. It promotes duty-free trade facilitation among the United States, Canada, and Mexico. This type of duty drawback program streamlines the various duty refunds and drawback procedures and documentation under USMCA. It provides duty refund for goods re-exported to Mexico or Canada.

USMCA manufacturing drawback eliminates duties on qualifying goods imported from and exported to member countries.

Even though the USMCA retains the drawback restrictions that existed under NAFTA, there were some changes that were noted in the interim implementation instructions when USMCA was rolled out. U.S. Customs has also put out a wonderful USMCA Fact Sheet on Drawbacks. This fact sheet compares what could be done under NAFTA and what can be done under USMCA drawback.

Unused Merchandise Drawback

The Unused Merchandise Drawback is for imported goods that are exported without being used in the United States. There are two methods to match exports with duty paid imports when filing this claim process this type of drawback.

The first one is the Unused Direct Identification drawback method. This specifically traces imported merchandise to exported goods using serial or lot number tracing or an accounting methodology.  It also requires the additional documentation because of the merchandise’s unused status.  Companies can claim this type of drawback on imported goods that are exported in essentially the same condition as they were imported.

The second method is the Unused Substitution Drawback. Under this method the exported merchandise, regardless of origin, is matched to duty paid on imported goods at the 8th or 10th digit of the HTSUS number.

To qualify for the unused merchandise substitution the export destination cannot be to a USMCA Country or U.S. Territory and the HTS number classification cannot be “other” at the 8th or 10th digit. If either of these are true, then the Unused Merchandise Direct Identification must be used.

An example of the Unused Merchandise Drawback using the Direct Identification method would be that a company imports a car from Germany.

The company then sells the car to a company in Argentina.  Since the car was not modified or changed in any way, and since it can be tracked by the vehicle’s VIN number, this would qualify under the Unused Merchandise Drawback.

Rejected Merchandise Drawback

Rejected merchandise drawback refers to goods imported, but found to be either defective, not conforming to the sample or specifications, or shipped without consent from the consignee. If the goods are exported or destroyed under CBP supervision within the three-year statutory period, then the importer can file for this substitution unused merchandise drawback.

Before the importer can file the rejected merchandise drawback, they must file a CBP Form 7553, Notice of Intent to Export, Destroy, or Return Merchandise for Purposes of Drawback with the intended port of export prior to the date of redelivery. Procedures for this type of Drawback can be found in Subpart D of 19 CFR 191.

An example of this type of Drawback would be that a company ordered a shipment of blue playground balls from a company in China.  When the shipment was imported and delivered, they discover that half of the order contains red playground balls (not the blue ones originally ordered).

So, the company returns half of the shipment back to the manufacturer in China.  The company filed for drawback on half of the shipment that was returned under the rejected merchandise and drawback law since the goods did not conform to the sample or specifications originally requested.

Conclusion

If you aren’t already taking advantage of duty- drawback refunds, maybe you should take a closer look and see if there is a way that you can benefit from this old program. With the prices of everything going up, getting a refund could be very beneficial and a nice cost-saving measure to produce your goods.

Navigating duty drawback can be quite confusing but might just be worth seeing how it works and how it can benefit you.

Are you looking to work with expert trade compliance specialists? If so, be sure to send us a message to schedule a time to talk with our team today!

Customs Duty Drawback FAQs

What does duty drawback mean?

A duty drawback is a refund on duties, taxes and fees paid on imported goods that are later exported as unused or as a finished product. It can also be destroyed under CBP supervision.

What qualifies for duty drawback?

Merchandise that is imported and used in the manufacture or production of another item that is exported. Merchandise that is imported but is unused. Merchandise that is imported or substituted merchandise in a product that is of the same quality and kind as the one that was imported and used in the final product. Merchandise that is rejected by the consignee because of quality, not the same as the sample or specification or shipped to the consignee without their consent.

Who qualifies for duty drawback?

To qualify for duty- drawback claims, you must be the original importer of exported product of record, have paid the applicable duties and taxes, still have possession of the exported merchandise or be able to have sufficient evidence to show that the merchandise was exported.

How much is the duty drawback refund?

You can get up to 99 percent of the duties, taxes and/or fees paid on the imported merchandise if it was unused, exported, manufactured into another product and then exported or destroyed under CBP or customs supervision.

Can Section 301 duties qualify for duty drawback?

Currently, duty drawback is allowed on Section 301 duties if the goods come directly from China to the U.S. and vice versa. If the goods enter a third country at any point, then they will be subject to a non-refundable 10% duty rate.