What Is Duty Drawback and How Does It Work?

Understanding Duty Drawback

Duty drawback is a program administered by U.S. Customs and Border Protection (CBP) that allows for the refund of customs duties, taxes, and certain fees paid on imported merchandise. This refund becomes available when that merchandise is subsequently exported from the United States or destroyed under CBP supervision. The program’s primary objective is to encourage domestic manufacturing and exports, fostering a more equitable competitive environment for businesses in the global marketplace. By enabling companies to recover duties on goods not ultimately consumed within the country, duty drawback helps reduce the cost of U.S. exports, making American products more competitive internationally.

Types of Duty Drawback

Duty drawback encompasses several distinct categories, each designed to address different scenarios where imported goods are not ultimately consumed domestically. The most common types include manufacturing drawback, unused merchandise drawback, and rejected merchandise drawback.

Manufacturing drawback applies when imported merchandise is used as a material or component in the production of another article, which is then exported. For instance, a company importing raw materials to produce finished goods for international sale could seek a refund of duties paid on those imported materials. This category can involve either direct identification, where the imported materials are specifically traced to the exported product, or substitution, where commercially interchangeable materials are used interchangeably in production.

Unused merchandise drawback covers imported goods that are exported in the same condition as when they were imported, without being used or altered in the United States. An example would be a retailer importing a bulk order of products, then re-exporting a portion due to overstock or a change in market demand. Unused merchandise claims can involve direct identification or substitution. Rejected merchandise drawback applies to imported goods that are defective, do not conform to specifications or samples, or were shipped without the consent of the consignee. If these goods are subsequently exported or destroyed under CBP supervision, duties paid on them can be refunded.

Eligibility for Duty Drawback

Qualifying for duty drawback involves meeting specific conditions related to the imported merchandise, the party filing the claim, and the timing of the export or destruction. The merchandise must have been subject to a duty, tax, or fee upon its importation into the United States. Common eligible duties include ordinary customs duties, merchandise processing fees, and harbor maintenance fees.

The ability to file a drawback claim extends to various parties in the supply chain, including the original importer, the exporter, or an intermediate party who acquires the goods and subsequently exports them. If the importer and exporter are different entities, the right to claim drawback can be formally transferred from the importer to the exporter. This transfer of drawback rights is a common practice that facilitates claims across complex supply chains.

A crucial aspect of eligibility is the timeframe within which the imported goods must be exported or destroyed and the claim filed. For most types of drawback, the imported merchandise must be exported or destroyed, and the drawback claim filed, within five years from the date of its importation into the United States. This five-year window allows businesses to manage inventory and export operations while preserving eligibility for refunds.

The Duty Drawback Claim Process

Filing a duty drawback claim requires adherence to specific procedural steps outlined by U.S. Customs and Border Protection. The process begins with preparing the necessary documentation, including evidence of importation, proof of duties paid, and documentation of the subsequent export or destruction. For certain drawback types, particularly unused or rejected merchandise, claimants may need to file a CBP Form 7553, Notice of Intent to Export, Destroy or Return Merchandise for Purposes of Drawback, prior to the actual export or destruction, to allow CBP the opportunity to examine the goods.

All drawback claims must be submitted electronically through the Automated Commercial Environment (ACE), CBP’s centralized online platform. The primary form used for filing a drawback claim is CBP Form 7551, the Drawback Entry, which details the imported and exported merchandise and the duties being claimed. While self-filing is an option, many businesses work with a licensed customs broker or a drawback service provider who can prepare and transmit the claim on their behalf. To receive refunds more quickly, claimants can apply for Accelerated Payment privilege, which typically requires a valid customs bond to guarantee repayment to the government if the claim is later denied or overpaid.

Once a claim is submitted, CBP reviews the documentation and may request additional information or clarification. If approved, CBP processes the refund, which can be up to 99% of the duties, taxes, and fees originally paid.

Maintaining Records

Accurate record-keeping is crucial for navigating the duty drawback program and ensuring compliance with CBP regulations. Claimants are legally required to retain specific documentation to support their drawback claims. This includes import entries, such as CBP Form 7501, which serves as proof that duties were paid on the imported goods.

Proof of export is also essential, typically demonstrated through documents like bills of lading, air waybills, or other carrier-signed proofs of shipment. For manufacturing drawback claims, detailed manufacturing records, production logs, and inventory records are necessary to establish the link between the imported materials and the exported finished articles. Purchase and sale invoices for both imported and exported goods further substantiate the transactions. All records related to a drawback claim must be retained for three years from the date of the claim’s liquidation or payment.