If you’re importing or exporting anything to or from the United States, it’s likely that you’re paying customs duties and fees and may be eligible for customs duty drawback. But that raises more questions — what is duty drawback, how do you file for it and what qualifies for it?
A customs duty drawback is a refund of duties, taxes and fees that are initially charged when importing goods. Generally, drawbacks can only be claimed when imported goods are later destroyed under the supervision of the CBP or exported out of the U.S. Individuals and companies must follow specific steps, including filling out and submitting CBP Form 7553, in order to be eligible for duty drawback.
Our comprehensive guide below explains exactly what a duty drawback is and the most common types of drawbacks available to businesses.
Drawbacks have been around in America since 1789 in one form or another as a way to encourage manufacturing and then exporting inside the U.S. market.
As noted above, a duty drawback is a reimbursement of particular fees, duties and taxes that were originally collected upon the importation of goods into the U.S. These refunds only happen under certain circumstances:
The claimant for a drawback can be the exporter, the importer or another party in the chain of the transaction.
Ironically, drawbacks are highly underutilized in the United States. There is roughly $3 billion annually available in drawbacks for companies but only 20 percent — about $600 million — is actually claimed.
It’s thought that it is not solely ignorance that leads companies to not utilize drawbacks but that it is simply not factored into the equation when they are purchasing. But a bigger factor is simply being unaware it exists at all.
There are many different types of U.S. drawback and aspects under which you can make a claim to recover fees, duties or taxes paid on merchandise. It is also important to know the different codes to file under when it’s time to apply for your drawback.
Valid claims include the following:
So now that you know what a customs duty drawback is and when you are allowed to claim them, let’s look into the most common types.
The myriad of drawback laws allowing you to recover taxes, fees and duties is extensive. Listed below are the different types of duty drawbacks in the U.S.
Direct Identification Manufacturing Drawback (19 U.S.C. 1313(a)): Under this kind of drawback, an importer can get 99 percent of the taxes, duty and fees refunded once proof is submitted to the CBP that the product or materials were exported or destroyed. The only provision is the merchandise in question can’t have previously sold prior to it being exported or destroyed.
Substitution Manufacturing Drawback (19 U.S.C. 1313(b)): If imported merchandise is used in the production of goods in the United States, upon exportation or destruction of the manufactured articles, it is eligible for drawback.
Furthermore, absolutely none of the imported products could have been used in the manufacture of the exported or destroyed articles. Only then can a drawback of 99 percent may be claimed.
Rejected Merchandise Drawback (19 U.S.C. 1313(c)): Merchandise in this category must have been rejected because it doesn’t measure up to previous samples received or agreed-upon specs. Other items that fall into this category are products that were shipped without the agreement of the consignee, any defective products or items sold at the retail level and were then returned for whatever reason. If the goods in question meet any of that criteria, 99 percent of all the fees can be pursued as a drawback.
However, the claimants must fill out and file CBP Form 7553 and notify the CBP before exportation or destruction in order to qualify — unless the importer has been exempted from having to do so.
Unused Direct Identification Drawback (19 U.S.C. 1313(j)(1)): This kind of drawback pertains to imported merchandise that has gone unsold and/or unused. If these products are exported or destroyed under CBP supervision, the party is eligible to recover 99 percent of the associated taxes, fees and duties.
Just like with rejected merchandise, CBP Form 7553 must be filled out and filed. The CBP then has to be alerted before the items are exported or trashed, unless there is an exemption
Substitution Unused Merchandise Drawback (19 U.S.C. 1313(j)(2)): If merchandise that is classifiable under the same 8-digit HTS subheading number as the imported merchandise, provided the HTS description of the imported merchandise is not "other," is exported or destroyed without being used in the United States, drawback of 99 percent of the duty, taxes and fees on the value of the imported or substituted merchandise, whichever is less, may be claimed.
Drawback is different when shipping to Canada and Mexico. Before the export or elimination of the products, claimants are required to notify CBP of their intent by filing CBP Form 7553 with CBP Officers at the port of examination. However, there are certain criteria that can be met to exempt an exporter from this. If you need help understanding this criteria, our experts are ready to help you. We help our clients receive duty drawback refunds on Mexican and Canadian imports on a consistent basis.
First and foremost, you need to know how to file for your drawbacks. There are various U.S. codes pertaining to drawbacks and refunds, some of which were explored in the previous section.
19 U.S. Code 1313 is the main code regarding drawback and refunds and has a list of subcategories under it for each specific example. Here is that list:
19 U.S. Code 1313(a): Articles made from imported merchandise
19 U.S. Code 1313(b): Substitution for drawback purposes
19 U.S. Code 1313(c): Merchandise not conforming to sample or specifications
19 U.S. Code 1313(d): Flavoring extracts; medicinal or toilet preparations; bottled distilled spirits and wines
19 U.S. Code 1313(e): Imported salt for curing fish
19 U.S. Code 1313(f): Exportation of meats cured with imported salt
19 U.S. Code 1313(g): Materials for construction and equipment of vessels built for foreigners
19 U.S. Code 1313(h): Jet aircraft engines
19 U.S. Code 1313(i): Proof of exportation
19 U.S. Code 1313(j): Unused merchandise drawback
While this might be subject to change in the future, drawbacks are also allowed on Chinese goods. Listed under Section 301 Trade Remedies on the CBP website, this allows exporters to get refunded on duties, tariffs, tariff exclusion refunds and taxes that have been increasing recently. The goods will have to come directly from China to the U.S. or vice versa for the full refund. If the goods enter a third country at any point, they will be subject to a non-refundable 10 percent duty rate — just one more thing for businesses to consider.
Another detail to consider is whether or not you imported the item. In some cases, only the exporter can claim drawback. This would come into play under a scenario similar to the following:
Your company imports ball bearings to the U.S. and you sell them to a wholesaler. If the wholesaler then exports or destroys the items without sending them back to the manufacturer, they would recover the duties at that point. Regardless of if the wholesaler was the one to originally pay the duties, fees or taxes, the cost of those were included in the wholesaler’s purchase price, so they are entitled to drawbacks at that point.
To claim drawback, there are three things an exporter must have:
Certain documents can help establish this connection. For instance, a Certificate of Delivery — a document which chronicles the transfer of imported goods and their corresponding paid duties — is a big step in the direction of proving that you are eligible to receive drawbacks. This document can also show the transfer of drawback products to an exporter.
Keeping up-to-date paperwork is essential; this is meant to be over a period of several years. A business can claim drawback up to 5 years from the original importation, so you might have goods or a piece of equipment that you have for, let’s say, 3 years and decide to destroy it or export it. Your paperwork has to be available from the original transaction date so you can show customs that you are in compliance to claim the drawback.
Drawing up proper paperwork between the seller and the buyer could be helpful as well. If it is legally agreed upon, the seller can reserve the right to claim drawback. But for the buyer to consider this, it is assumed they may receive a lower upfront price when purchasing goods since they’d hypothetically be leaving thousands of dollars on drawbacks if agreeing to let the buyer keep that right.
Another important aspect of finalizing the drawback process is having a record of repeatedly submitting claims which are error-free. If this applies to you, it’s possible to request that Customs approve an accelerated payment of drawback. The drawback will dispensed shortly after the claim is submitted, if the claimant provides a bond to protect against Customs overpaying. If Customs does accidentally overpay, the claimant will be able to keep the appropriate amount and is required to return the excess.
The list of items you claim drawback on is vast, but it’s also helpful to know the instances where it is not able to be claimed. For example, imported aluminum or steel that has had Section 232 duties on it is not eligible for drawback. Furthermore, duties on flour or flour by-products made from imported wheat will not have duties refunded. Another common example is produce or agricultural products that are over-quota.
A general formula for figuring out how much drawback you’re entitled to is the 99 percent rule. Unless there is a special reason, an exporter gets up to 99 percent of its duties, taxes and fees as a drawback.
So let’s say your duty over the course of one year from exports alone was $1 million. In this scenario, you would be eligible to receive $990,000 back, since that is 99 percent of $1 million. With that kind of money on the table for major exportation, it could be a healthy bump to a company’s bottom line to do its due diligence and file for drawbacks.
This is the rule of thumb for estimating drawbacks but the CBP will actually make the final determination on what you’re entitled to receive back based on what is submitted. A Customs Broker or service provider could help with these estimates if they are hired to file on your behalf.
Alluded to earlier in the article briefly, in order to file for your drawback, you will need to fill out CBP Form 7553. This form signals your intent to export or destroy the merchandise in question and also allows the CBP to determine how much of a drawback you’ll receive.
Once you have all your documentation on hand, filling out the actual form should take about 30 minutes. But for the potential of recouping thousands of dollars in taxes, the investment of time is undoubtedly worth it.
There are four drawback offices in the United States where refunds are submitted to: Chicago, Houston, Newark/New York and San Francisco. The party filing the claim can make it at any of these four offices regardless of where in the country the initial import arrived.
Claims must be filed electronically through the CBP’s Automated Broker Interface, as all filings are done paperlessly now. The claimant can use a service provider, a licensed Customs Broker or self-file.
If for some reason, the process seems daunting or you really don’t have the time to jump through hoops, a Customs Broker might be the best option to help prepare everything for you and can even provide additional services you might need during customs clearance as well.
If you decide to self-file, just remember that accuracy is king. Obviously, 100 percent accuracy will put your claim through quickly, but certain inaccuracies or multiple mistakes can either delay your drawback or see it be rejected.
Although it has been mentioned elsewhere in the article, you can fill out the form to claim exports for up to 5 years prior. So long as you have the documentation, that money is not lost and should be recoverable.
When you’re ready to finally claim what’s yours and file for customs duty drawback, let USA Customs Clearance take care of the heavy lifting and help you with a import license. We can save you time and recover your duties by helping you get the appropriate forms located and filled out. We also offer fast and efficient customer service to quickly help solve any questions that might arise during drawback filing.
With your record-keeping and our expertise, we can guide you in the process to recover up to 99 percent of your duties, taxes and fees for up to 5 years of exports. We offer additional services regarding your business like help with clearing customs, helping you prepare documents, importing intensive care beds and even offering Customs Bonds.. A customs bond is a requirement for any importation of goods valued at over $2,500. Additionally, our full-service approach allows us to even take care of warehousing and transportation of your imported goods.
USA Customs Clearance can monitor your services and make sure the bond is up to date to avoid delays in shipping. Connect with us by scheduling a consulting session. We’ll make getting your drawback a priority so you have more time to focus on your business. If you still have questions about your drawback or what an import/export consultant can do for you, call 855.912.0406 or visit our customs consulting services page today!