Q. What is drawback?

Drawback is the refund of import duties on imported merchandise that is subsequently re-exported. The drawback law is found in the Tariff Act of 1930 while the regulations can be found in Part 191 of the US Customs Regulations. There are 2 primary kinds of drawback claims:

Unused Merchandise Drawback - Drawback on imported merchandise exported in essentially the same condition.

Manufacturer's Drawback - Drawback on imported merchandise subjected to an assembly or production process prior to export. The imported item is exported as a component of a finished article.

Note: A valid export triggers the drawback opportunity, i.e. the severance of goods from the United States with the purpose of transferring them to the commerce of another country. Shipments to all U.S. territories except for Puerto Rico qualify as a valid export destination for drawback purposes.

Q. What percent of the duties does Customs refund and how long does it take to receive payment?

Customs refunds 99% of the duties paid. Claimants can request Accelerated Payment Privileges, which expedites the payment of the claim. Claimants filing under accelerated payment can typically expect a refund within 45 days from the date of filing. Without accelerated payment, a claimant could wait a year or longer. Alliance International will draft and submit the accelerated payment application on behalf of our clients.

Q. Can we file against historical export shipments?

The regulations allow a period of three years from the date of export to submit a drawback claim; consequently, a company can file drawback against the past three years of export history. The first year a company implements a program they can expect a "windfall" of recoveries from the past three years of export shipments. Alliance works in conjunction with each client to ensure that the claims filed encompass the maximum amount of export history allowed.

Q. What if my company is not the importer or exporter of record for the drawback merchandise?

These types of "third-party" import and export transactions still qualify for drawback, but the various parties must cooperate in order to complete a claim. The regulations grant the exporter the first right to file a claim, but the exporter can waive the rights back to the importer. Additionally, an importer can issue a certificate of delivery to the exporter that will allow the exporter to file a claim against the importer's duty-paid transactions.

Q. How does a company trace an export back through the inventory and manufacture process and match it against
its original importation if the merchandise loses its identity?

The regulations allow a company to match exports and imports at a part number level within certain regulatory time frames. This method of matching imports to exports is called substitution. Any time a company makes a duty-paid import, think of it as making a deposit into a drawback "bank account". To make a withdrawal, the company must export merchandise that is essentially the same as the merchandise in the "bank". The designated import must fall within the three-year period prior to the export date. Additionally, the exported and imported merchandise must be commercially interchangeable in the case of unused substitution drawback and of the same kind and quality in the case of manufacturing drawback. Customs will only allow a company to match export to imports of like product.

The alternative to the substitution methodology of matching imports to exports is called direct identification. The direct ID provision of the regulations requires a company to match an export to its exact import through the use of a serial number or lot number or by using an acceptable accounting methodology. Direct ID is the only methodology that the NAFTA regulations allow for unused (same condition) exports to Canada and Mexico.

Q. What are some of the advantages of substitution?

To use an example, assume that a company imports garlic from China and that they also purchase the same garlic from a farm in Gilroy, CA. The garlic meets the exact same industry specifications, and it is co-mingled in inventory. When the company exports the garlic to a customer they cannot determine whether the garlic came from the domestic source or from China. Substitution allows a claimant to match an export from a domestic lot against an import of commercially interchangeable merchandise. The export does not need to be traced to a specific import.

To add another element to the example, assume that the company only imports from China; however, beginning in January of 1999 the imported garlic from China is now free of duty. Any exports after January '99 will strictly contain duty free lots of imported material. The substitution provision allows us to continue to file drawback by matching the export containing duty free imports against the older dutiable imports, once again, as long as the export and import are within three years of each other and the two lots of merchandise are commercially interchangeable. Under this scenario, eventually the import bank balance will fall to zero because the company will be making withdrawals from the bank while it no longer makes any additional deposits from duty paid imports. Once all the imports are exhausted, the company's import bank will be drawn to zero, and its program will cease to exist since it will no longer have imports on which to drawback the duties.

Q. How does Customs determine whether imported and exported merchandise is commercially interchangeable
for the purpose of filing under unused substitution?

The Customs Regulations, 19 CFR 191, list four primary criteria in determining whether merchandise is commercially interchangeable. Alliance ascertains which of the below categories applies to your organization as part of the full range of services provided. The criteria are as follows:

Industry Specifications - Many commodities are covered by published industry standards utilized by buyers and sellers of the commodity to determine the quality or grade of a particular material. There are a variety of national and global organizations that have established industry wide specifications for numerous products including agricultural products, steel, and titanium, to name a few. Standards and specifications are published by the USDA, ASTM (American Society for Testing Materials), and ANSI.
Classification from the Tariff Schedule of the United States - Both the imported and the exported merchandise must fall within the same HTS classification.
Part Numbers - If both the import and the export carry the same part number, Customs will most likely consider them commercially interchangeable.
Relative Value - The import and the export must sell for approximately the same price allowing of course for reasonable mark-up and other cost that are factored into the export sales price.

Q. How does Customs determine if merchandise is substitutable under the provisions of manufacturers substitution
(USC 1313B), i.e. the imported and the substituted raw materials meet the "same kind and quality standard"?

The drawback regulations require a claimant to obtain a drawback ruling prior to receiving payment on a manufacturing drawback claim. The drawback ruling establishes the parameters for substitution. There are two types of rulings: general and specific. The Office of Regulations and Rulings located in Washington, D.C. (Customs Headquarters) issues both types of rulings. The general rulings are available for an industry or a general manufacturing scenario. Any company that can comply with the general ruling's terms and conditions, may declare its intention to operate under the ruling by submitting an application to one of Customs regional drawback offices. Generally, Customs sends an approval letter to a qualifying company within 60 days.

If a company's manufacturing scenario is not covered by one of the general rulings, it must apply to Customs Headquarters for a specific ruling. This process will take at least 120 days from the date of submission. Alliance will formulate the specific rulings and follow-up until approved.

Q. Do I have to submit one drawback claim for each export?

No, exports can be combined into monthly, quarterly or even annual submissions.

Q. What impact did the NAFTA have on drawback?

The implementation of NAFTA imposed a variety of restrictions on the drawback programs of all three countries. In the United States, the substitution provision of same condition drawback was no longer available on exports to Canada and Mexico. Under substitution, a claimant could export domestically sourced merchandise and still file a drawback claim if they also imported the same commercially interchangeable merchandise. Substitution also made the drawback filing process much less burdensome in that an export could be matched with any commercially interchangeable import of the same style number imported within three years prior or the export date. NAFTA does still allow same condition drawback on exports on Canada and Mexico under the filing method of direct identification. Under direct ID, the claimant must match exports to imports either specifically using a lot number of serial number or using one of the acceptable direct identification accounting methodologies.

Q. What records must a company maintain to support its claims?

Generally, unused drawback claims require import, export, and inventory records along with any other records needed to verify commercial interchangeability, if applicable. Manufacturing drawback requires a more extensive list of records. In addition to the previously mentioned records, a manufacturing drawback claimant must also maintain receiving records, bills of material, and production records.

Q. How long will it take to implement a program and file a claim?

This depends on a variety of factors including: the number and complexity of the import and export transactions; the availability of electronic records; the number of parties involved in the import and export transactions; and the motivation level of the company. Generally, the process takes between 4 and 8 months from start-up to receiving the first check.

Q. What do we have to do to support the process?

Generally, the client's responsibilities fall into two primary categories - record keeping, and providing access to the needed records and data. To prepare a drawback claim, Alliance will minimally require a copy of the import entry summary and related commercial invoice. For exports, we need a copy of the export bill of lading and commercial invoice. If filing manufacturing drawback, we will also need a bill of material to match the export item with the various imported component parts or raw materials. Alliance requests that a client assign a designated program coordinator to assist us in gathering the required records and data elements.

Q. Can we automate the process?

Yes, clients typically can provide us with both export and bill of material data directly from their system that we then load into our drawback processing software. In certain cases we can automate the transfer of electronic import data to avoid the need to key from import documents. The file can either be in an ASCII, Excel, or Access format. The availability of electronic export and bill of material data can significantly expedite the claim filing process.

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