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.