Early in my career I took a position as Import Manager at Hughes Aircraft Company, an aerospace company in California. Hughes had imported a small natural diamond window (the size of a penny), from the Netherlands for use in a spacecraft.  U.S. Customs classified it as an optical element because it was used to filter light, as well as rays, and Hughes therefore had to pay a considerable duty on it.  The window was incorporated into the Pioneer spacecraft and launched from Florida to the planet Venus.  Taking advantage of a ruling that said launching a spacecraft was considered an “export” for drawback purposes, we prepared a drawback entry, and received a refund of the duty paid.

Drawback goes back more than 200 years, and is probably the first U.S. export promotion program. Drawback applies when an article is imported and duty paid on it.  Later the article is exported, either in original condition or as part of a manufactured product.  Providing all requirements are satisfied, the exporter may receive a refund of the duty paid.

Under the current laws and regulations there are several different forms of drawback; however there are two types that are most commonly used. The first is Unused Merchandise Drawback.  It applies when an imported duty-paid article is exported after not being used or enhanced while in the U.S.  Examples of Unused Merchandise Drawback would include articles imported and placed in inventory or storage, or articles imported for testing or calibration and exported in an unchanged condition.  Only small physical changes are allowed under Unused Merchandise Drawback.  Changes that result in a new or different product would disqualify the imported article for this type of drawback.  Using an imported article for its intended purpose would also disqualify it.

The other major type of drawback is Manufacturing Drawback. It applies when imported duty paid components and materials are used to manufacture an article that is subsequently exported.  “Manufacture” in this instance means a substantial transformation of the imported components or materials into a new and different article.  In fact the Customs definition of “substantial transformation” comes from a case involving drawback.

The drawback refund is generally 99% of the duty originally paid. U.S. Customs & Border Protection (CBP) keeps 1% as a processing fee.  We say “generally” because there are some forms of drawback where the refund is 100%.  Under some conditions the importer can also receive a refund of the Merchandise Processing Fee.

Drawback applies to articles exported from the U.S. “Export” means a permanent export from the U.S. (temporary exports do not qualify).  Drawback will also apply to destruction in the U.S.  The destruction must be complete where no valuable materials can be recovered.  Articles may also be “exported” if placed in a Foreign Trade Zone in the U.S.  To qualify the articles must enter under Zone Restricted status, meaning they can only be destroyed or exported from the Zone.

Normally the original importer that paid duty on the articles will claim drawback. The right to claim drawback may be transferred to another party in the U.S.  This is done via a Certificate of Delivery transferring the articles and drawback rights from one party to another.  As an example, Company A can import steel and pay duty on it, then sell the steel to Company B that uses it to manufacture automobiles that are subsequently exported.  Providing there is an appropriate Certificate of Delivery, Company B can claim a drawback refund of the duty paid by Company A.  (In real life Company A and Company B will probably enter into a drawback sharing agreement).

A commonly used drawback provision is “substitution.” This allows a drawback claimant to substitute domestic components or materials of the same kind and quality for the imported duty paid components and materials and claim drawback as though all the components and materials were imported.

Using the previous example, Company B could manufacture automobiles in the U.S. using imported duty paid steel obtained from Company A and commercially interchangeable steel made in the U.S. and claim drawback on the imported steel until the quantity was exhausted, even though the exported automobiles may have actually been made with the domestic steel or a combination of domestic and imported steel.

There have been many rulings on what may be considered “substituted.” Primarily the substituted components and materials must be commercially interchangeable, which is something that a user would accept in lieu of the imported articles.

Drawback is not automatic. A company must apply in advance and obtain approval in the form of a ruling to use manufacturing drawback.  Unused Merchandise Drawback does not require an advance ruling, but the drawback entry must be filed prior to export.  If there will be multiple exports of the same types of products on which drawback will be claimed, the claimant may apply to CBP for approval to use a summary method to claim drawback on multiple exports.

The drawback regulations are found in Part 191 of the Customs Regulations, and they are detailed and complex. Drawback sounds like a good deal because it results in getting refunds from the Government; however potential claimants need to be aware of all the responsibilities associated with drawback.  There are detailed recordkeeping requirements that may oblige the claimant to keep records for 10 years or more.  Those records are not just of the imports and exports but also include receiving, inventory and manufacturing records, as well as any Certificates of Delivery and substitution information.  The claimant may also need to obtain a special Customs bond and enter into a drawback compliance program to obtain accelerated refunds of duty.

Also be aware that CBP may audit drawback claims. This can be a desk audit asking for all the records associated with a claim.  In some instances, CBP auditors may visit the claimant and perform the audit on-site.

Due to the complex regulations and procedures, most drawback claimants use a drawback broker to prepare and file claims. Some of the major customs brokers have drawback specialists.  There are also customs brokers that specialize in filing drawback entries.  The brokers normally charge a percentage of the duty recovered, which is subject to negotiation between the parties.

A word to the wise is to carefully examine use of drawback before using it. The refunds received must be of a volume to justify the cost and risks associated with claiming drawback.  Using drawback and getting refunds sounds good, but make sure it is not more trouble than it is worth.