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Duty Drawback

Drawback programs may obtain significant revenue savings, which would otherwise go untapped as business expenses.

However, drawback is a complex area with the risk of large penalties due to improper filings, record management, or transaction structure. We help minimize such legal risks by structuring and implementing drawback programs to the maximize benefits to our clients.

What is drawback?

Historically the word drawback has denoted a situation in which a duty or tax that has been lawfully collected is refunded or remitted, wholly or partially, because of a particular use made of the commodity on which the duty or tax was collected.   

Drawback was initially authorized by the first tariff act of the United States in 1789. Since then it has been part of the law, although from time to time the conditions under which it is payable have changed.

The rationale for drawback has always been to encourage American commerce or manufacturing, or both. It permits American businesses to compete in foreign markets without the handicap of including in its costs, and consequently in its sales price, the duty paid on imported merchandise.

Drawback Resources

Information on duty drawback can be found by clicking on any of the following topics:

  • Customs statute for duty drawback:

                       19 U.S.C. Section 1313
                       19 U.S.C. Section 1313a

  • Customs regulations for duty drawback:

                       19 C.F.R. Section 191

Types of Drawback

Several types of drawback are authorized under Title 19 United States Code Section 1313 (19 U.S.C. 1313):

 If articles are exported or destroyed, which were manufactured in the United States with the use of imported merchandise, then the duties paid on the imported merchandise used may be refunded as drawback, less one percent, which is retained by Customs to defray costs. (19 U.S.C. 1313(a) the direct identification manufacturing drawback provision) 

 If both imported merchandise and any other merchandise of the same kind and quality are used to manufacture articles, some of which are exported or destroyed before use, then drawback not exceeding 99 percent of the duty which was paid on the imported merchandise is payable on the exports.  It is immaterial whether the actual imported merchandise or the domestic merchandise of the same kind and quality was used in the exported articles.  This provision in the Code makes it possible for firms to obtain drawback without the expense of maintaining separate inventories for imported and domestic merchandise.  (19 U.S.C. 13131(b), the substitution manufacturing drawback provision)

Some of the more common transactions to which drawback is applied include:

1.      Merchandise is exported or destroyed because it does not conform with samples or specifications, or was shipped without the consent of the consignee, then 99 percent of the duties which were paid on the merchandise may be recovered as drawback.  (19 U.S.C. 1313(c))

2.     Certain products manufactured with the use of domestic alcohol are exported or shipped to various island possessions, a drawback of the internal revenue taxes paid on the domestic alcohol may be refunded.  (19 U.S.C. 1313(d))

3.    Finished Petroleum derivatives (19 U.S.C. 1313(p))

4.    Packaging material used to package merchandise exported or destroyed under section 1313(a), (b), (c), or (j), may receive 99 percent of the duties paid on the packaging material as drawback.  (19 U.S.C. 1313(q))

How To Obtain Drawback

As most manufacturers are interested in sections 131 3(a) and (b), only the procedures for obtaining drawback under these provisions are discussed.  The purpose of drawback is to enable a manufacturer to compete in foreign markets.  To do so, however, the manufacturer must know, prior to making contractual commitments, that he will be entitled to drawback on his exports.  The drawback procedure has been designed to give the manufacturer this assurance and protection.

MANUFACTURING DRAWBACK RULINGS

To obtain drawback, a manufacturer or producer of articles intended to be claimed for drawback must first apply for a manufacturing drawback ruling.  There are two types of manufacturing drawback rulings: (1) General and (2) Specific. 

General Manufacturing Drawback Ruling

General manufacturing drawback rulings are provided for in Section 191.7, of the Customs Regulations (19 C.F.R. 191.7) and are designed to simplify drawback for certain common manufacturing operations.  These rulings are contained in Appendix A to Part 191, Customs Regulations 19 C.F.R. Part 191) and include the following:

1.        General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(a) (T.D. 81-234; T.D. 83-123)

2.        General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(a) or 1313(b) for Agents (T.D. 81-181)

3.        General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(a) for Burlap or Other Textile Material (T.D. 83-53)

4.        General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(b) for Component Parts (T.D. 81-300)

5.        General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(a) for Flaxseed (T.D. 83-80)

6.        General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(a) for Fur Skins or Fur Skin Articles (T.D. 83-77)

7.        General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(b) for Orange Juice (T.D. 85-110)

8.        General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(b) for Petroleum or Petroleum Derivatives (T.D. 84-49)

9.        General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(b) for Piece Goods (T.D. 83-73)

10.   General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(b) for Raw Sugar (T.D. 83-59)

11.   General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(b) for Steel (T.D. 81-74)

12.   General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(b) for Sugar (T.D. 81-92)

13.   General Manufacturing Drawback Ruling Under 19 U.S.C. 1313(a) for Woven Piece Goods (T.D. 83-84)

A manufacturer or producer engaged in an operation that falls within a published general manufacturing drawback ruling may submit a letter of notification of intent to operate under that general ruling.  Letters of notification of intent to operate under a general manufacturing drawback ruling must be submitted to any drawback office where drawback entries will be filed and liquidated, provided that the general manufacturing drawback ruling will be followed without variation.  If there is any variation in the general manufacturing drawback ruling, the manufacturer or producer shall apply for a specific manufacturing drawback ruling under Section 191.8.

Specific Manufacturing Drawback Ruling

Where a manufacturer or producer cannot follow any one of the prescribed general manufacturing rulings without variation, the manufacturer or producer must apply for a specific manufacturing drawback ruling under Section 191.8.  Sample formats for specific manufacturing drawback rulings are contained in Appendix B to Part 191, Customs Regulations (19 C.F.R. Part 191).

An application for a specific manufacturing drawback ruling must be submitted, in triplicate, to:

               U.S. Customs Service Headquarters

               Duty and Refund Determination Branch

               Office of Regulations and Rulings

               Washington, DC 20229

Unused Drawback

For unused drawback, no drawback ruling is required but applicant should see a local Customs Drawback Branch (addresses listed below) prior to exportation of the unused articles to be claimed for drawback.

Completion of Drawback Claims

Claims must be filed within 3 years after exportation of the articles. To avoid being time-barred by the statute of limitations, a claim may be filed before a drawback contract (rate) is effective, although no payments will be made until the contract is approved. For completion of unused drawback claims, see your local Customs Drawback Branch prior to exportation.

Export Procedure

It is necessary for a drawback claimant to establish that the articles on which manufacturing drawback is being claimed were exported within 5 years after importation of the imported merchandise which is the basis for the drawback.  In the case of unused drawback, the time period for exportation is 3 years after importation. 

Exportation of articles for drawback purposes must be established by complying with one of the procedures provided for in Section 191.72 (in addition to providing prior notice of intent to export if applicable ( 191.35, 191.36, 191.42, and 191.91).  Supporting documentary evidence must establish fully the date and fact of exportation and the identity of the exporter.  The procedures for establishing exportation outlined by this section include, but are not limited to:

1.      Actual evidence of exportation consisting of documentary evidence, such as an originally signed bill of lading, air waybill, freight waybill, Canadian Customs manifest, and/or cargo manifest, or certified copies thereof, issued by the exporting carrier; 

2.      Export summary ( 191.73);

3.      Certified export invoice for mail shipments ( 191.74);

4.      Notice of lading for supplies on certain vessels or aircraft ( 191.112); or

5.   Notice of transfer for articles manufactured or produced in the U.S. which are transferred to a foreign trade zone ( 191.183).

Export of qualified U.S.-made petroleum products may be shown by matching production at a specific refinery with exports of qualified petroleum products of the same kind and quality that occur within 180 days after the refinery produced the designated petroleum product.

Export of qualified imported petroleum products may be shown by matching the amount imported with exports of qualified petroleum products of the same kind and quality that occur within 180 days after the import. (Section 1313(p) drawback)

Payment of Claims

When a claim has been completed by filing all required documents, the entry will be liquidated by the port director to determine the amount of drawback due.  Drawback is payable to the exporter unless the manufacturer reserves to himself the right to claim the drawback.

Accelerated Payment

The privilege to obtain accelerated payment of drawback, under certain conditions, is authorized by Section 192.72.  Accelerated payment generally will insure that a claimant will receive his drawback no later than 2 months after he files a claim.  Accelerated drawback also applies to unused drawback.

Effect of the North American Free Trade Agreement (NAFTA)

The NAFTA provisions on drawback will apply to goods imported into the United States and subsequently exported to Canada on or after January 1, 1996. The NAFTA provisions on drawback will apply to goods imported into the United States and subsequently exported to Mexico, on or after January 1, 2001.

Under the NAFTA, the amount of Customs duties that will be refunded, reduced or waived is the lesser of the total amount of Customs duties paid or owed on the goods or materials when imported into the United States and the total amount of Customs duties paid or owed on the finished good in the NAFTA country to which it is exported, for purposes of 19 U.S.C. 1313(a), (b), (f), (h), and (g).

No NAFTA country, on condition of export, will refund, reduce or waive the following: antidumping or countervailing duties, premiums offered or collected pursuant to any tendering system with respect to the administration of quantitative import restrictions, tariff rate quotas or trade preference levels, or a fee pursuant to Section 22 of the U.S. Agricultural Adjustment Act. Moreover, unused substitution drawback (19 U.S.C. 1313(j)(2)) was eliminated as of January 1, 1994.

Drawback Centers

 

Port of Baltimore

200 St. Paul Place

Baltimore, MD 21202

 

Port of Miami

6601 W. 25th Street

Miami, FL 33102­5280

 

Port of Boston

10 Causeway Street

Boston, MA 02222­1059

 

Port of New Orleans

423 Canal Street

New Orleans, LS 70130

Port of Chicago

610 S. Canal Street

Chicago, IL 60607­4523

 

Port of New York

6 World Trade Center

New York, NY 10048

Port of Houston

1717 East Loop

Houston, TX 77029

 

Port of San Francisco

555 Battery Street

San Francisco, CA 94111

 

Port of Los Angeles

Long Beach Seaport Area

300 S. Ferry Street

Terminal Island, CA 90731

 

Further Reading:

  • "Unused Drawback Requirements Under NAFTA and the Customs Moderation Act" (July 26, 2000) TEXT | PDF
  • "Customs Publishes New Drawback Regulations" (May 29, 2000) TEXT | PDF
  • "Customs Issues Rules On Penalties for False Drawback Claims" (November 1998) TEXT | PDF
  • "Summary of Drawback Regulations" (June 2, 1998) TEXT | PDF
  • "Unused Drawback Requirements Under NAFTA and the Customs Modernization ACT" TEXT | PDF

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