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How to use Duty Drawback Programs to Recover Duties, Taxes, and Fees?

A Statista research indicates the value of imports of services in the United States was 59.22 billion USD in October 2022.

Do you operate in an industry that is driven by import and export? If yes, you must have, at some point, heard of the duty drawback program in the United States. While importing and exporting offer multiple benefits, the duty drawback program serves as a powerful tool for companies to recover up to 99% of the amount spent in paying duties, taxes, and fees on your imports in certain cases. Isn’t it great?

Well, the process underpinning the duty drawback programs involves several complex and time-consuming aspects. However, if you are eligible for the drawback, you can reap good benefits.

This article delves into what duty drawbacks are, who can avail of its benefits, types of duty drawbacks, limitations, and more.

So, let’s get started!

What is duty drawback?

Essentially, duty drawback is an initiative by the U.S. Customs and Border Protection (CBP) program that allows refund of nearly 99% of customs, fees, taxes, and duties incurred during import on goods that were later exported or destroyed without usage or manufactured into another item. The CBP is a highly competent and responsible authority that oversees the aspects of the duty drawback program. It’s worth mentioning that the CBP had taken precautionary measures during the Covid – 19 pandemic by granting the exclusion of certain items.

Ever since its inception in 1789 through the endeavors of the Continental Congress, the duty drawback program has always focused on providing benefits and evolved to make lives better. Initially, the program aimed at job creation and fostered the manufacturing and export of goods. Spanning a period of over two centuries, the duty drawback program underwent various modifications and amendments with the objective of including more commodities and options that more companies could benefit from.

Who should avail of the benefits of the duty drawback program?

Drawbacks help earn refunds on the duties and taxes paid on imported items that, for some reason, were later exported or destroyed. As stated earlier, the core driver of the drawback program is the goods being exported or destroyed without usage. That said, this program would work well for companies and industries that regularly import goods and export them to other countries.

Some of the examples under this category include-

  • Metals and alloys
  • Alcohols, beverages, and tobacco products
  • Textiles and fabric
  • Petroleum and derivatives
  • Packaging materials
  • Agricultural products
  • Consumer goods

What are the types of duty drawbacks?

In essence, there are three kinds of duty drawback returns under the Customs and Borders Patrol.

Unused Merchandise Drawback – It refers to the drawback provided for export and destruction of the imported goods under the supervision of CBP for which the duties, taxes, or fees had been paid. However, the goods have never been used in the United States before destruction or export.

Rejected Merchandise Drawback- This type of drawback refers to cases where the imported goods were either defective, non-conforming to the specifications, or were shipped without consent during import. Importers can recover the duties, taxes, or fees paid if the merchandise was exported or destroyed under CBP supervision.

Manufacturing Drawback – In the event of the imported goods being manufactured into a new product that is subsequently exported, the claimant can apply for a drawback with the CBP by intimating to them the complete manufacturing process from the time of import through manufacturing and export.

In case of both unused and manufacturing drawbacks, companies can use one of the two methods:

  • Direct Identification: Under this technique, an imported item is identifiable through a serial number, SKU number, lot number, or some method of accounting.
  • Substitution: Under this, the merchandise is categorized using the eight-digit HTSUS number as designated imported goods.

Are all duties, taxes, and fees eligible for drawback?

In most cases, 99% of the duties, taxes, and fees on the imported goods that were later exported or destroyed can be recovered if the claimant is eligible for duty drawback. Some of the primary duties that are eligible for drawback include the following –

  • All ordinary custom duties, including the Section – 301 duties on the Chinese origin goods
  • Marking duties
  • Merchandise Processing Fees (MPF)
  • Harbor Maintenance Fees (HMF)

On the flip side, duties not eligible for drawback include but are not limited to –

  • Anti-dumping duties
  • Over-quota agricultural items
  • Section -232 duties imposed on aluminum and steel products

Does drawback have any disadvantages to companies?

While drawbacks offer a means for companies to save money by refunding the taxes, duties, and fees spent on imports, they also call for a high degree of accuracy and systematic record-keeping, and thorough compliance. Though this might seem a part of the company’s day-to-day activities, in reality, the process is extremely complex and time-consuming. Practically, it might take several years for companies to systematize their ways of working and maintain appropriate and timely records.

In addition, companies will have to maintain all the records relating to the import of goods, including detailed invoices, proof of duties paid, manufacturing and inventory records, and more. Besides, companies must conform to the stringent timeframes when filing claims to avail drawbacks.

The regulatory bodies have enacted strict procedures to scrutinize the authenticity of the claims filed. In the event of any fraudulent or false claims, companies are liable to civil and criminal penalties. CBP conducts thorough audits on the drawback to verify the accuracy of the claims filed.

How can you be a part of the drawback?

To participate in a drawback, companies need to apply with the CBP for the required privileges, depending on the type of drawback they will be using. It makes sense to seek professional advice and guidance from experts such as trade attorneys or trade partners while going through the drawback procedures. Furthermore, it must be kept in mind that drawback is only a privilege and not a guaranteed right, which is always applicable.

In some cases, companies request an expedited payment of the drawback amount at the time of applying for the privileges. This would, in turn, ensure that companies receive the payments before getting liquidated, letting them receive funds, if approved, by CBP. Generally, companies also opt for a drawback bond that offers an estimation of the number of duties, taxes, and such to be claimed during that period.

Wrapping up

The good news is that U.S. economic growth would improve by focusing on reducing imports. Nevertheless, drawback programs are highly useful as they help companies increase their revenues by allowing them to save the amount spent on paying duties, taxes, and fees on imports, subject to conditions. However, despite this benefit, it cannot be denied that these programs are complex and are strictly regulated by CBP. That said, companies can surely reap the benefits if they are eligible for the drawback.

In case of any queries or concerns about duty drawbacks, feel free to reach us here.

NOTE: All details pertaining to CARM R2 processes are based on the current information available at the time of writing. As this is subject to change, it’s recommended you periodically check in with the CBSA or your customs broker.