What is Duty Drawback?

Originally enacted in 1789 as part of the Original Tariff Act, the drawback law allows for the refund of duties, taxes, and fees on imported merchandise that is subsequently exported.

For example: A company imports sunglasses from its factories in China into its US North America distribution facility and pays a 2.1% duty on the imported value. 70% of the frames are sold at its domestic retail stores, while 30% of the sunglass frames are exported to stores in Canada and the Caribbean. The Company is eligible for a refund of the 2.1% it paid in duty when the imported frames are exported to Canada and the Caribbean.

There are four primary drawback legal
provisions found in United States Code Section 1313:
  • Manufacturing Drawback: Drawback on raw materials and component parts used to make a new and different article of commerce. The production process must result in a product with either a new name, character, or use.
  • Unused Merchandise Drawback: Drawback on imported materials or finished products exported in essentially the same condition. This provision allows for an extensive list of incidental operations, such as testing, cleaning, and painting. Essentially any value-added process short of a manufacturer, as defined above, is allowable under unused merchandise drawback. However, the merchandise cannot be used in the United States for its intended purpose prior to exportation.
  • Rejected Merchandise Drawback: Drawback on imported materials that do not meet specifications at the time of importation or are shipped without the consent of the consignee. The imported merchandise can be either returned to the vendor or destroyed under Customs supervision and qualify for drawback. This provision does allow for the use of the merchandise in the US. For example, imported shoes are sold at the retail and returned by the consumer due to a defect. The shoes can be exported with the benefit of drawback.
Methods of matching imports and exports (applies to both manufacturing and unused merchandise drawback):
  • Direct Identification: Using lot number and serial number tracking to match an export with its exact importation. In the absence of lot numbers and serial number tracing, a drawback claimant can instead utilize one of the acceptable drawback accounting methods as a way of complying with the requirements.
  • Substitution: Instead of requiring direct tracing from import to export, the substitution method allows drawback claimants to match “similar” merchandise within very broad time frames. The definition of “similar” products has evolved over the years with the amendment of the drawback law. The most recent change to the law via the Trade Facilitation and Enforcement Act (TFTEA) defines like merchandise as products that fall within the same 8 digit Harmonized Tariff Schedule Number. Note: The ability to use the substitution methods applies to both manufacturing drawback as well as unused, but the rules vary for each.

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