Duty Drawback News & Events

Drawback Community Court Case

The Trade Facilitation and Simplification Act of 2016 (known by its acronym TFTEA) significantly liberalized, and sought to simplify the export incentive program referred to as duty drawback.

The statute mandated a two-year implementation period to allow Customs sufficient time for rulemaking and the programming changes (drawback filing was stilled mired in Customs’ legacy system ACS) needed to fully automate the submission of drawback claims.

Any proposed rulemaking requires a public comment period following formal publication in the Federal Register. Customs then considers any public comments submitted and eventually publishes the final version of the new regulatory structure.

The Trade Community was rightly alarmed that CBP had not even published proposed regulations in the Federal Register as the deadline date of Feb. 24, 2018, approached. Mere weeks before the deadline, CBP issued “Interim Guidance for Filing” pending final rulemaking. The interim guidelines stated CBP would suspend both the payment and liquidation (final review and disposition of a Customs transaction) of drawback claims filed using the more liberal Harmonized Tariff Schedule substitution rules (the new drawback regime allows for the matching of import and exports that fall within the same 8 digit HTS) until that time when drawback regulations were finalized.

Drawback claimants could continue to receive payment for claims filed under the more restrictive rules and time frames under the legacy “Core” drawback program during a one-year transition period mandated by the new law until Feb. 24, 2019. The trade community feared that left to its own devices, CBP would reach the end of the transition period without new rulemaking in place at which point the processing and payment of drawback claims would cease entirely, a likely scenario based on CBP historical performance of 3-5 years lag time for the finalization of new regulations.

The various industry association drawback committees that consist of drawback filers and Customs brokers specializing in drawback matters decided that CBP’s actions were not only in bad faith but a violation of the TFTEA drawback statute that required Customs to implement new rulemaking by Feb. 24, 2018. The drawback trade community decided to let the Court of International Trade decide the matter and initiated legal action in March 2018.

Ruling

In the matter of Tabocos de Wilson, Judge Restani of the Court of International Trade held that the CBP violated the intent of the TFTEA statute by failing to implement the rulemaking necessary to process TFTEA drawback claims. The Court then needed to decide on a remedy for the CBP’s misguided actions. Judge Restani asked the Trade and CBP to offer possible solutions that would allow for the processing and payment of TFTEA drawback claims submitted on or after Feb. 24, 2018, the law’s official start date.

CBP, under the pressure of the detrimental ruling by the Court, decided on its own volition to publish approximately 450 pages of entirely new drawback regulations, proposed as Section 190 of the Customs Regulations. This tome was published for public comment on August 1st in part to convince Judge Restani that the government had complied with the TFTEA requirements. Given that proposed regulations have no legal effect and are not enforceable, the Court was unconvinced.

The attorney representing the various industry plaintiffs proposed the immediate issuance of a limited number of rules needed specifically to implement HTS level substitution. CBP argued that it needed more time to consider all public comments, adjust provisions accordingly, and allow for review by the governing federal agencies, before finalizing rulemaking. Despite losing its case on the merits, Customs, instead of seeking middle ground, asked the Court to allow them complete latitude in finalizing the proposed regulations.

Predictably, Judge Restani was unmoved by the government’s argument and its clear intent to avoid any consequence for failing to meet the statutory requirements of the TFTEA. The judge issued his final decision Slip Opinion 18-138 on October 12.

Decision Summary

The decision favorable to the Trade included the following elements:

Government to publish entire NPRM by Dec. 17, 2018, and make it effective on that date:
Excise tax provisions to have delayed effective date; BUT —
Government, in its discretion, may elect to delay publishing any regulations other than the ones plaintiff identified as essential to carry out Section 906(g) of TFTEA.

The last element essentially severely restricted the government’s ability to appeal the decision on the basis that it was unreasonable to require a compressed time period to issue the final version — 450 pages of proposed rulemaking. CBP was required only to implement the rules needed to implement TFTEA substitution as proposed by the plaintiffs’ attorney. The government could delay or implement other parts of the proposed regulations at its own discretion.

When Can you Expect Payment?

CBP most recently advised the courts that it had submitted the final version of the proposed rulemaking to the various government agencies for final review and that it anticipated meeting the court’s imposed deadline of Dec. 17, 2018, a clear indication that it chose not to appeal the decision. The drawback community expects the payment of TFTEA drawback claims to commence on or about that date.

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The “Other Other” Problem

The primary liberalization of the duty drawback law passed as part of the Trade Facilitation and Enforcement Act of 2015 (TFTEA) involved redefining the substitution provision of the drawback law.

While this “game-changer” will increase drawback recovery dramatically, the devil, as the saying goes, is in the details.

Some background

The substitution method allows a drawback claimant to match “commercially interchangeable” or like merchandise within broad time parameters instead of directly tracing an export back to its exact import. The current law and regulatory structure primarily relies upon the part number and quality specifications to determine if an import and export meet the standard of commercial interchangeability.

For example, an export Grade A Orange Juice made from domestic oranges could be substituted or matched with imported Brazilian duty-paid Grade A Orange Juice because they both meet the same basic quality standards and industry specifications. In the case of merchandise identified by a part number or model number (electronics and retail merchandise, for example), generally the imported item and exported item must share the same part-number identifier to be considered substitutable for drawback purposes.

As an example, a company imports sunglasses from China into its U.S. distribution facility. The majority of these glasses are sold domestically, but a portion are exported to retail stores in the Caribbean. Under the existing substitution provision, sunglasses with a model number of RB123 could be matched with any import of an RB123 that occurred within three years previous to the export date.

The new drawback law eliminates entirely the concept of commercial interchangeability and instead relies upon the Harmonized Tariff Schedule Number or HTS number. The imported and exported merchandise simply need to fall within the same HTS number at the 8th digit level of the classification number.

Continuing with the sunglasses example, a pair of exported Ray Bans could be matched with a pair of imported Oakley’s, assuming they are both classified under the same HTS for sunglasses (HTS Number 9004.10.00). The one huge exception to the HTS substitution rule – if the classification begins with “other” at the 8th digit, then the drawback claimant must match at the 10th digit. If the HTS also begins with “other” at the 10th digit then substitution drawback is not available, and the claimant must match imports and exports at the part-number level under the provisions of direct identification drawback.

These “other” classifications are catch-all baskets for merchandise without a specific classification. For example, heading 9004 is for “spectacles, goggles and the like, corrective, protective, or other”. 9004.10.00 under this heading is for “Sunglasses”. 9004.90.00 encompasses all spectacles, goggles, and the like corrective protective, OTHER than sunglasses; consequently, a drawback claimant submitting drawback on protective goggles would need to match imports and exports according to part-number level and file drawback under the provisions of direct identification drawback, at least for the products that fall into the “other” baskets. This rule will require the vast majority of existing drawback claimants to file under both the provisions of substitution drawback and direct identification where many currently file only under substitution. Warning: The regulatory compliance requirements are substantially higher for direct identification drawback claims vs. substitution claims.

Exactly how a company will decrement the same import designated under two different legal provisions remains to be seen, but at least one of the methods currently being floated by Customs would be detrimental to the Trade Community. We will learn more of the specifics once the proposed regulations are published for public comment in the Federal Register, hopefully by late summer.

The “other” problem also partially thwarts the legislation’s stated intention to simplify drawback by elevating claims from the more detailed part-number level to the broader classification level. CBP favored this move because Customs Automated Commercial Environment (ACE) for processing import and exports (ACE) captures data at the tariff-number level and note commercial invoice line item detail. However, an initial review of Alliance’s drawback clients found that on average about 40 percent of a company’s classifications fall into the “other” category so much of the drawback world will still operate at the part-number level even after the new regime is fully implemented.

Members of the Drawback Trade Community involved in the negotiation of TFTEA reluctantly agreed to the “other” provision to avoid controversy with members of Congress that insisted on this limitation. Such a controversy could have resulted in the removal of the drawback section from the final version of the bill so the decision was made to proceed because the vast majority of the legislation was favorable to the Trade, and the law could be amended at a later date to alter or eliminate the “other” rule.

The legislation also included a provision that allows a claimant to file under the existing law during a one year transitionary period until Feb. 23, 2019, so claimants not benefiting from the new law’s HTS level substitution can at least delay some of the pain of the “other” problem. We suggest that companies conduct a detailed analysis to determine the impact of the legislation on one’s existing drawback program in order to proceed in the most advantageous manner.

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My Customs Broker Handles That

It’s common for importers to rely heavily on the services of their Customs brokers.

Customs brokers are knowledgeable professionals licensed by U.S. Customs and Border Protection (“CBP”). They are “plugged in” to CBP’s computer systems, and get real-time updates on changes to regulations and practices. Brokers do a complicated job with precision and speed. But there’s a limit to how much importers should rely on them.

IMPORTER OF RECORD

Under U.S. Customs laws and regulations, the importer of record (the actual owner or purchaser of the imported goods) is responsible for all aspects of compliance, including the correctness of entry information and the payment of duties. See 19 U.S.C. 1484(a)(1). In fact, your customs broker is merely your representative before the agency. It works much the same way as your tax return. Your accountant may prepare the return, but if extra taxes are owed, it’s not your accountant who will be paying them.

Under Customs law, the penalty statute (19 U.S.C. 1592) is generally used against importers for false statements, acts, or omissions that affect compliance. (There are separate statutes generally covering brokers’ conduct.) The importer also has specific recordkeeping responsibilities. Importers are required to keep customs records (entries, invoices, purchase orders, etc.) generally for five years. The penalties for not being able to produce these records are often greater than the penalties for negligence in making the entry.

As the importer of record, your company is the principal on the surety bond that is used to secure the entry of goods and payment of duties. If the duties are not paid, or if CBP finds that additional duties are owed, the importer of record, not the broker, is the responsible party. The insurance company that underwrites the bond will go to great lengths to make sure that the responsible party pays its debt.

SUPERVISION OF BROKERS

Because the importer is responsible for all aspects of compliance, it is incumbent on the importer to provide accurate information and answer any questions the broker has in service of preparing the entry. Given sparse or incomplete information, and given the time pressures facing all brokers, there is a natural tendency for brokers to do the best they can with the information available. This can result in imported goods being misclassified, merchandise value not being correctly declared, and customs violations occurring.

Customs brokerage is a competitive business, with a big emphasis on keeping the importer / customer happy. Pressures like these, along with insufficient supervision and communication from the importer, can lead the broker to err on the side of duty savings. For example, we’ve seen situations where brokers appear to automatically claim NAFTA preference on goods from Canada or Mexico, even if the importer didn’t tell them to. NAFTA preference is not automatic; there are specific and complicated rules in play. Similarly, some brokers tend to use the duty free “U.S. Goods Returned” provision for merchandise returning from the U.S., even if the required documentation is not present.

These “favors” some brokers do for their importers are anything but favors! Duty free claims such as these increase the likelihood of Customs scrutiny of an importer, and if they were made incorrectly, they will subject the importer to bills for increased duties, as well as civil penalties under the fraud statute. Moreover, it’s important to keep in mind that while most import transactions are paperless and are not subject to an in-depth review by CBP officials, during a Customs audit (or even a routine post-entry inquiry), the same transactions will be reviewed with a heightened level of scrutiny, and reviewed for complete adherence to regulatory requirements. Simply put, it’s easy for the broker to err on the side of duty savings. But it’s equally easy for CBP to question such activities, and even easier for them to issue bills for additional duties and to assess penalties.

Even if the broker is only trying to help you, they’re human and can make mistakes. It’s your responsibility as the importer to check their work. You can do this yourself, or hire someone to do it for you. Many brokerages have consulting operations that offer such services. It’s best, however, to have the work checked by someone other than the person who initially performed the work. (And as you might expect a law firm to point out, only when such consulting and internal audit work is performed by a law firm is it protected under attorney-client privilege.)

Your customs broker is a valuable part of the team. But YOU must also be a part.

My Customs Broker Handles That”
Torres Law PLLC

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Wine Drawback Parameters

Customs Headquarters in a long-awaited ruling issued its interpretation related to a provision of the Food, Conservation, and Energy Act of 2008 that addressed the commercial interchangeability of wine for drawback purposes.

Section 15421 of the law states—for drawback purposes imported and exported wine will be matched on a color for color basis (e.g. red for red and white for white) within a 50 percent wholesale price variance. The new law, while clear in its general intent, left the door open for Customs to limit its scope through a more restrictive interpretation.

The Customs ruling addressed a variety of specific issues raised by the San Francisco Drawback Office in a request for internal advice.

San Francisco Customs sought clarification on the following points

Whether wines produced from fermented rice or fruit other than grapes, such as cider, perry, plum wine, prune wine, sake, and mead, are within the scope of section 15421 of the Act;
Whether fortified wines that contain in excess of 14 percent alcohol by volume (including fortified dessert wine, sherry, port, and vermouth) are within the scope of section 15421 of the Act;
Whether carbonated wines, such as crackling wine, sparkling wine, or effervescent including champagne, are within the scope of section 15421 of the Act;
Whether imported and substituted wines in different size containers are within the scope of section 15421 of the Act; and,
Whether imported or substituted rose table wine is commercially interchangeable with either red or white table wine.

Customs narrowed the scope of commercial interchangeability as it relates to wine by holding that the law only applied to still table wines under 14 percent alcohol by volume. This excluded consideration of any other wines made from fruit other than grapes as well as sparkling wines or still table wine over 14 percent. Rose wine was held to be its own separate color category.

The one positive holding for the industry involved wines shipped in different size containers (bulk shipping vs. bottled case goods). Wines shipped in various size packaging was considered to be commercially interchangeable regardless of the packaging configuration. This portion of the ruling was a significant win for the trade community as bulk wine and case goods fall into different internal revenue department tax categories as well as HTS classifications.

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TFTEA Drawback Update

This week we enter the transition period from historical drawback regime to the new era promulgated by the TFTEA (Trade Facilitation and Enforcement Act of 2015 also referred to as the New Drawback Law) which officially becomes operational Saturday, 2/24/18.

Alliance staff will begin submitting claims via the new drawback module in ACE on this date. We are hoping for the best, but the more cynical among us fears a complete initial failure of the ACE drawback module once live filing commences on Saturday.

The latest on the challenging transition

Interim Rule Making – In the absence of regulations finalized in time for the new law’s implementation date on 2/24/18, CBP decided to issue temporary interim rulemaking for drawback filers and brokers. We have provided you a copy of the Interim Guide on your right.

The impact on all these monumental changes will vary for each filer based on the applicable legal provision. Alliance’s team can assess a claimant’s program and develop a filing strategy that compliantly maximizes recovery.

The following summarizes the various options available under TFTEA as well as the existing drawback law (also referred to as “Core” drawback in the Interim Guide on your right):

TFTEA Filers

This category includes new claimants that will file under TFTEA to take advantage of HTS level Substitution. The bad news. CBP has taken the position that drawback claims will be paid under the new law until final rule making is in place. The trade community is taking CBP to court seeking a temporary injunction as we believe CBP is on tenuous legal ground. If we lose the motion for a temporary injunction, then we will most likely not continue with a protracted legal battle because the regulations will be published before we can fully litigate. Our industry attorneys seek additional plaintiffs to participate in the litigation. They asked us to refer smaller companies that rely on timely drawback payments to stay competitive in the global marketplace. The various trade associations are covering the legal expenses. If you believe that your company could assist with the effort and want to explore this option, please contact Alliance directly.

NAFTA Drawback Filers

TFTEA left the NAFTA drawback restrictions untouched. If you export primarily to Canada and/or Mexico, then no change to your program other than the new drawback law expanded retroactive drawback to 5 years from date of importation to file a claim. This extends the export time frame beyond three-year maximum of the current law. The change only impacts new drawback claimants attempting to maximize the retroactive time frame. Problems related to the migration of Customs electronic filing platform from ACS to ACE also scheduled for February 24th could delay payment of both NAFTA related and other “Core” drawback claims.

Core Drawback Filers

Claimants may file under the existing law for any of the drawback legal provisions until February 24th of 2019. Core claims are eligible for payment under accelerated payment privileges. Why file under the existing law…mainly because HTS level substitution drawback is not available for tariff classifications that begin with “other” at the 8th and 10th digit so some will either not benefit from the new law or worse yet, will see less drawback recovery due to the “other” rule. We will file under the current law for clients in this predicament until the existing lawfully expires next year.

One possible strategy to eliminate the “other” problem with the new law is to compliantly reclassify merchandise to more specific HTS number, or if that option is not viable, petition the ITC for an HTS break out at the 10th digit. Alliance can refer you to specialists that assist you with a petition process to secure a statistical breakout at the 10th digit. Please contact us for additional details.

Maximize Your Duty Drawback Refunds Compliantly

No cost or obligation and easy to get started with Alliance. Identify new drawback program opportunity or evaluate the performance of your current program and maximize drawback refunds compliantly.

GET STARTED