Drawback is the refund of certain taxes, duties and fees paid to Customs on imports for certain exports from the U.S. Long considered “the most complex commercial program” of U.S. Customs, recent simplifications of the drawback law should make drawback claims somewhat easier to prepare. Unfortunately, drawback is a forgotten opportunity for many United States exporters.
While understanding drawback law can be challenging, if you have the right assistance, you can prepare the necessary documents and information to support a claim to obtain a refund. You can stop missing this opportunity to claim refunds for duties, taxes and fees paid to Customs on imported merchandise after that merchandise has been exported.
In order to obtain a drawback refund for exported merchandise, you must identify qualifying imports and the type of drawback that is appropriate to your circumstances. Each type has its own conditions, requirements and special rules. You must determine the conditions for the export (or destruction) of merchandise that allow for a drawback claim, maintain the appropriate records, and file the appropriate documents to support the claim, adhering to the governing time frames.
Types of Drawback
- Rejected Merchandise Drawback applies to merchandise that does not conform to requirements, was not properly shipped, or was defective. Rejected merchandise drawback requires the imported merchandise to be exported (or destroyed) in order to obtain the duty refund.
- Manufacturing Drawback covers merchandise made into a new and different article with a distinctive name, character or use, or is made fit for a particular use. The new law will eliminate the requirement for the general rulings that had been a prerequisite for such claims by allowing the submission of a bill of materials to satisfy the different article requirement.
- Unused Merchandise Drawback is for merchandise not used in manufacturing, but some minor operations can be performed on the merchandise.
Both manufacturing and unused merchandise drawback allow for the exportation of either “directly identified” merchandise or appropriately “substituted” merchandise to claim the duty refund, and allow for destruction of the merchandise in appropriate circumstances.
Directly Identified Merchandise
Documentation of the merchandise's use in the manufacturing process is required. Calculating the drawback can be shown by demonstrating the quantity of the merchandise used in the exported article through “abstracts” or “schedules” of production.
For purposes of unused merchandise drawback, documentation that the imported merchandise was not used in any operations that constitute manufacture or production must be maintained. Direct identification can be achieved by multiple inventory identification methods, including through identifying and segregating specific lots or batches, or through alternative methods for fungible merchandise.
Because imported and domestically produced merchandise is often interchangeable in products exported from the U.S., in some circumstances, U.S. drawback law allows for the “substitution” of other merchandise for the imported merchandise that is the subject of the claim for a refund.
This has been substantially simplified. Previously, substitution drawback was allowed for “commercially interchangeable” merchandise which is of the “same kind and quality.” The new law reduces this uncertainty by allowing substitution of merchandise that is classified under the same 8-digit HTSUS classification.
There are a large number of special rules for various drawback claims which may apply.
Substitution of “Finished Petroleum Derivatives”
The previous law already allowed the use of the 8-digit HTS classification for substitution of finished petroleum derivatives to satisfy the “same kind and quality” drawback requirements. The new law has simplified the documentation and record-keeping requirements for these claims.
Generally, substitution for unused merchandise drawback claims are not allowed for exports to NAFTA countries but are limited to direct identification for unused merchandise drawback. In those cases, the drawback refund is limited to the lesser of the duties paid on the goods imported into the U.S. or the duties paid on the finished goods imported into the other NAFTA country.
Other Special Rules
Other special rules apply to a variety of other products, including some construction and repair materials, packaging materials, recovered materials, and salt that is used to cure fish and meat.
Timing and Form
Under the simplified law, drawback claims must be filed within 5 years of the date of importation of the goods for which drawback is claimed (previously, it was 6 years from the date of import, but 3 years from the date of export). Drawback claims are made through submission of the Customs Form 7551, along with the required documentation and after exportation or destruction of the merchandise to one of the four Customs Drawback Centers. A customs broker with a national permit may file a claim at any Center.
Under previous law, 99% of duties and other taxes and fees paid (including Merchandise Processing Fees [MPF], Harbor Maintenance Fees [HMF], and for spill taxes on petroleum products) were refundable, except for MPF and HMF for manufacturing drawback. The new law allows for refunds of MPF and HMF paid and claimed for manufacturing drawback, but the refund amount is limited to 99% of the lesser of amount of duties, taxes and fees paid at import or that would be applied to the exported merchandise if it were imported.
Drawback claims are paid to the exporter of record, which is not required to be the importer which paid the duties, taxes and fees. For exporters which were not the importer (or in a principal-agency drawback operation), a Certificate of Delivery is required to demonstrate the transfer of drawback products in the claim. While drawback claims can take a long time to process, accelerated payment is authorized under certain conditions but requires the posting of a Customs bond to cover the anticipated refund amount.
False Drawback Claims
Customs may assess penalties for false drawback claims, and that all parties to the claim may be subject to joint and several liabilities under the new law.
As the often forgotten opportunity, the newly simplified U.S. drawback program allows for a number of entities to obtain refunds of duties paid on imported merchandise that is exported from the U.S. Contact us today so we can assist you in evaluating your trade activity to determine whether it is eligible for drawback and help you prepare your claims.
Information provided by: U.S. Customs Dept. - Cole International