Recent changes to Customs’ Drawback Program have earned the participation of formerly skeptical customs compliance managers and individual importers, leading to millions of dollars in refunds for the drawback of import duties, fees, and for some products, taxes. Drawback is the refund, under certain circumstances, of 99 percent of the duties and specified fees imposed on imported articles if they are not sold in the United States, but are instead exported or destroyed. Thus, the drawback eligible goods that gain the duty-free status do not compete with domestically made competing products. Historically, the U.S. drawback program was probably the most complex and paperwork-heavy duty abatement programs administered by US Customs. I always took the position that unless your imported products were subject to a 3 percent duty or more, the administrative, paperwork and recordkeeping costs combined with the risks of errors outweighed the monetary gains you could expect from drawback.
That view changed with the adoption of the Drawback Modernization Act (called “TFTEA”) in 2016 and the issuance of Drawback program regulations that became final in early 2019. The new requirements provided the following beneficial changes:
1 -There is a new set of drawback regulations, contained at 19 CFR 190, which govern “modernized drawback” and take the place of the longstanding drawback regulations at 19 CFR 191;
2 – Many of the paper forms are eliminated and there is now a mandate for virtually all required drawback documents to be filed electronically through ACE, saving time, money and headaches;
3 – The “old” system set forth a series of variant time frames for the different types of drawback (manufacturing, unused, rejected), pertaining when the goods had to be manufactured into other products, substituted for interchangeable domestic components, exported or destroyed and when a drawback claim must be filed. Modernized drawback gives the claimant a unitary, consistent time frame of five years from the date of entry of the drawback products in which to manufacture or simply store them, export or destroy them, and file a drawback claim for the goods;
4 – Drawback is extended to the Merchandise Processing Fee and the Harbor Maintenance Fee for drawback products in all circumstances, see 19 CFR § 190.3(a)(4),(5). Drawback was previously payable only for HMF or MPF cited in a claim for unused merchandise drawback, see 19 CFR § 191.3(a)(4),(5);
5 – Substitution drawback empowers you to use both foreign and domestic merchandise in manufacturing goods for export or as “unused” merchandise subject to drawback. Under the old drawback regulations, the substitutability of merchandise for purposes of claiming Substitution Manufacturing Drawback or Unused Substitution Merchandise Drawback was dependent on whether the two types of merchandise were “interchangeable”, a tougher and subjective test. Now, for Substitution Manufacturing Drawback, the test is whether the foreign and domestic components are classifiable under the same eight-digit subheadings of the U.S. Harmonized Tariff Schedules, see 19 CFR § 190.22(a). The same eight-digit comparative test applies for the purpose of determining the compatibility of foreign and domestic merchandise for the purposes of Unused Substitution Merchandise Drawback, unless the eight-digit HTS categorization begins with an “Other” in which case you must establish that the foreign and domestic merchandise are classifiable under the same ten-digit HTS number. If that 10-digit HTS number begins with “Other”, you cannot use Unused Substitution Merchandise Drawback and must use Direct Identification Unused Merchandise Drawback if that is available. See 19 U.S.C. §1313(j)(2); 19 CFR § 190.2
There are also provisions for Rejected Retail Merchandise Drawback that are new to the Modernized Customs regulations which we will address in a future article.
In the meantime, please contact us if you have any questions about setting up a new Drawback program, getting it approved, or any aspects of its operation and administration.
Robin W. Grover
