In the everchanging world of international trade and increasing tariffs, U.S. businesses are looking for ways to reduce costs and maximize profit. One often overlooked opportunity is the duty drawback program, administered by U.S. Customs and Border Protection (CBP). This program allows companies to recover duties, taxes and certain fees paid on imported goods that are later exported or destroyed.
What Is Duty Drawback?
Duty drawback, originally established by the Continental Congress in 1789, refers to the refund (up to 99%) of certain duties, taxes and fees paid on imported merchandise when that merchandise is either:
• Exported,
• Used in the manufacturing of exported products, or
• Destroyed before use or before entering the commerce of the U.S.
The idea is simple: if goods are not ultimately consumed in the U.S. market, then the government should not retain the duties paid on them.
Types of Duty Drawback in the U.S
The CBP allows for 14 types of specific drawback claims as authorized under Section 1313, Title 19, United States Code (U.S.C.), each with specific criteria. Three of the most common types of duty drawback are as follows:
1. Unused Merchandise Drawback
Applies when goods are imported and then exported without being used in the U.S.
Allowable incidental operations, such as testing, cleaning, inspection are allowed by the U.S. business. The goods must be specifically identified and exported within three years from the date of importation.
2. Manufacturing Drawback
Applies when imported materials are used to manufacture a product that is then exported. Manufacturing drawback requires that the imported merchandise and the export of a new and different article occur within five years of the importation of the imported article. Manufacturing operations must take place within three years after receipt by the manufacturer of the designated imported merchandise. This three-year period must be within the five-year import-to-export period.
A U.S. manufacturer is required to apply for and receive a manufacturing drawback ruling in order to initiate a drawback claim. There are currently several general manufacturing drawback rulings available that eliminate the need for submission of an application for a specific manufacturing drawback ruling.
General manufacturing drawback rulings are contained in Appendix A to Part 191 of the Customs Regulations. Any drawback claimant that can comply with the conditions of any published ruling may notify the CBP drawback center where it intends to file its drawback claims of its intent to operate under the ruling. The drawback center will provide an acknowledgement letter authorizing the manufacturer to operate under the identified general manufacturing ruling.
3. Rejected Merchandise Drawback
Applies when imported goods are found to be defective, do not meet specifications, or are shipped without consent, and are then returned to the supplier or destroyed under CBP supervision within the three-year statutory period.
How the U.S. Duty Drawback Process Works
The following is a general outline of how a U.S. business can claim duty drawback.
1. Import Goods and Pay Duties
Keep all customs documentation, including CBP Form 7501 (Entry Summary).
2. Maintain Records
Businesses must maintain detailed import and export records, including bills of lading, invoices and proof of export. The majority of rejected claims are due to incomplete or inaccurate documentation. For rejected merchandise claims, observation of destruction by CBP personnel or proof of destruction will be required.
3. File a Drawback Claim
Submit CBP Form 7551 (Drawback Entry) along with all supporting documents. Claims must be filed within five years from the date of importation. After February 2019, paper drawback claims are no longer accepted. All drawback claims must be filed electronically using the CBP system.
4. CBP Review and Refund
After verification, CBP will issue a refund for up to 99% of the duties, taxes, and fees paid.
Conclusion
Duty drawback is one of the most underutilized tools in U.S. trade policy. Like any government program, navigating the process can be complex, but with the right systems in place, companies that import and export regularly can unlock substantial refunds.
For more information, please contact your Miller Cooper advisor.
It is important to note that the CBP is actively updating guidance on the applicability of duty draw back to universal baseline tariffs and reciprocal tariffs. As of the date of this article, CBP has confirmed all reciprocal tariffs are eligible for drawback. The reader is encouraged to consult CBP’s Cargo Systems Messaging Service for the latest developments.
