Duty Drawback – The Devil is in the Details

Duty Drawback, granted under section 313(a) of the Tariff Act of 1930, as amended in 19 U.S.C. Section 1313(a), costs North American business up to 2.4 Billion a year [Source: Neville Peterson LLP] because the process is so convoluted that most business would rather lose the money owed to them then try to navigate through a process which seemingly requires truckloads of paperwork and which can take 6 months or more to resolve. Why is it so difficult? The US has had 224 years to make it so (as it was the second law passed by the first Congress way back in 1789).

Even though the goal of duty drawback is to promote U.S. business development by allowing a company to secure refunds for products that were exported, the government considers this drawback a privilege, and one that has to be earned (through a rigorous filing process).
Duty drawback is further complicated by the fact that claims are not just limited to importers, manufacturers who purchase imported products for use in their manufactured goods that are to be exported and exporters who purchase products made from imported merchandise are also eligible to make drawback claims, because drawback is paid to the exporter (under the assumption that the importer they bought the goods from charged the buyer enough to make a profit, and thus recovered the duty in this way), who has to have proof that the product is eligible for duty drawback. For a product to be eligible, it has to be an imported product on which duty was paid and which was subsequently substantially transformed and then either exported within five years of import, rejected upon import, or unused and exported or destroyed within three years of import.

What is a substantial transformation? It is one that is complicated, requires money and labour, and results in a new and different product, which has a new name, character and usage. Detailed documentation of the process may be required in filing the claim.

To file a claim on the product that was substantially transformed, the filer needs to prove that the resultant product contains an imported product on which duty was paid. This requires an exact paper trail that documents the product, either by batch, lot, or serial number that was consumed and the product that was produced. If the merchandise that was imported is then exported or destroyed within three years in an unused state, the organization is also eligible for drawback. In this situation, the organization will need to keep a paper trail that proves the unused merchandise that was exported or destroyed was the same merchandise that was subject to an import duty. Finally, an organization also has the option of rejecting import merchandise that does not conform to specifications, that was shipped without its consent, or that was determined to be defective, and file a drawback claim on this merchandise, but to do so the merchandise must be returned to customs. Unless the merchandise has no resale value, this is generally not a good option.

Unless the claim is for goods imported from Canada or Mexico under NAFTA, which has its own drawback filing process, the steps involve:

  • applying for a ruling
    this provides an organization with permission to submit a claim, and will generally require that the organization provide a detailed description of the process that demonstrates it substantially transforms the product on which the organization is intending to file a drawback
  • file the claim
    including all of the paperwork required, which, at a minimum will require the following for proof of import

    • Customs Form 7501
    • Commercial Invoice
    • Documentation necessary to support use of products in a substantial transformation manufacturing process
    • Waste summary documentation for any products discarded
    • Certificate of Delivery
  • and, at a minimum, the following for proof of export

    • export declaration
    • invoice
    • bill of lading
    • purchase orders and receipts from the customer

And it will take time. As the CBP site says be aware the process of filing for drawback can be involved and the time it takes to receive refunds can be lengthy. But if you do a lot of exporting, the cashflow could make even a six month wait worth it.