Duty Drawback Regulations & Law

The concept of “drawback” allows for a refund of duty paid on imported merchandise that is subsequently exported from the United States. Originally established by the Continental Congress in 1789, the United States drawback statute has existed in some form for over 200 years. The purpose of allowing drawback refunds is to expand United States export activity, that in turns fuels economic expansion and domestic job growth. This is accomplished by allowing the importer or exporter to recover 99% of the customs duties paid on the imported article, once the imported article or a “commercially interchangeable” domestic article (the concept of drawback substitution) is exported from the United States.

The drawback statute has been the subject of numerous amendments since 1789, the most recent of which occurred as part of the Trade Facilitation and Enforcement Act of 2015 (know by its acronym of TFTEA). The TFTEA amendments took effect Feb. 24, 2018 and allowed a one-year transition period where claimants could file either under the old or the new rules. This transition period ended on February 24, 2019. Currently, drawback claimants can only file under the new regime.

New Drawback Rules under TFTEA: The primary liberalization of the duty drawback law passed as part of the Trade Facilitation and Enforcement Act of 2015 (TFTEA) and involved redefining the substitution provision of the drawback law. The new drawback regulations can be found in Section 191 of the Code of Federal Regulations for Customs Duties contained within Title 19.

While this “game-changing” legislation will inevitably increase drawback recovery dramatically for certain claimants, 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 standards 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 instance) the imported item and exported item must generally 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 before the export date.

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

Continuing with the sunglasses example, a pair of exported Ray Ban sunglasses could be matched with a pair of imported Oakley sunglasses, 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.