Benefits of Duty Drawbacks

Understanding what duty drawbacks are, their benefits, and how to claim them is key to maximizing your import/export savings.
Benefits Of Duty Drawbacks

Imagine an American company importing raw minerals and paying the United States’ standard 2% tariff. The company then refines those minerals into metal and exports their product to the European Union, which typically tariffs cross-Atlantic trade up to 3%.


That company would be taxed twice for the same items and take a significant financial hit. That cost could have them rethinking the entire arrangement and stifle their import/export business.


Duty drawbacks are the solution to prevent a company from being taxed twice.


Duty drawbacks are refunds on tariffs designed to prevent a company from being double-taxed and, more importantly, encourage ongoing trade between nations.


However, the duty drawback system is rarely taken advantage of to the fullest. The US Customs and Border Protection Agency (CBP) estimates that 78%-85% of potential duty drawback refunds go unclaimed every year. 


Companies may be unaware of drawbacks, or the process could seem too complicated, but the potential for savings is massive. So your company should not overlook duty drawbacks.


Understanding what duty drawbacks are, their benefits, and how to claim them is key to maximizing your import/export savings.


What Are Duty Drawbacks?


The CBP defines drawbacks as “the refund, reduction or waiver in whole or in part of customs duties assessed or collected upon importation of an article or materials which are subsequently exported.”


Typically 99% of the original import duty is reimbursed. Meanwhile, the CBP keeps the remaining 1% for administration costs. Only the exporting company can qualify to receive duty drawbacks, and they are not a right–there is no guarantee the application will be successful.


Duty drawbacks are utilized chiefly by manufacturing industries. These industries often import materials or components, then refine or manufacture them into a new product for export. 


The following industries often make use of drawbacks:

  • Pharmaceuticals
  • Alcoholic beverages
  • Agricultural products
  • Metal alloys
  • Automotive, aviation, and heavy equipment
  • Textiles
  • Petroleum
  • Industrial chemicals
  • Packaging materials

Everything You Need To Know About Uk/eu Export Controls And Sanctions


What is the History of Duty Drawbacks?


Duty drawbacks were first utilized in the United States in 1789 to ease the burden of shipbuilders who imported lumber for the country’s growing naval and merchant fleets. In addition, it benefitted meat preservers who required tremendous amounts of imported salt.


Drawbacks then and now strive to:

  • Create jobs
  • Encourage manufacturing
  • Encourage exports

Since then, the duty drawback system has only grown. Expansions to the drawback system came in the 1930s, 1980s, and 1990s. The latest large-scale update to drawback law was added in 2018. Each expansion introduced new types of drawbacks and increased the number of eligibility. 


Today more than $600 million is recovered annually through the drawback system, but an estimated $2.4 billion worth of reimbursement goes unclaimed every year. Therefore, any business that spends thousands of dollars on import duties should consider going through the drawback process.



What Kind of Duty Drawbacks Exist?


The most common duty drawback scenarios are:

  • Direct Identification Manufacturing drawback, or just manufacturing drawback, is available when an imported good isn’t intended for end-use in the country. Most commonly, this applies to manufacturing scenarios. For example, importing material to create microchips but then exporting those microchips abroad. 
  • Substitution Manufacturing. This drawback applies when a manufacturer uses identical imported and domestic materials. When the manufactured product is exported, they can receive reimbursement regardless of the material’s source. This helps prevent complicated inventory issues where identical domestic and imported materials must be kept track of separately.
  • Unused Merchandise. In the event a company imports goods but subsequently exports them back to the country of origin in the same condition, their original import fees can be reimbursed.
  • Rejected Merchandise. If imported goods are incorrect or unusable somehow and are thus destroyed, the importer can recoup their original duty fees with a drawback.

Less common duty drawback scenarios are:

  • Internal Revenue Tax. This type of drawback applies to products manufactured and exported using domestic alcohol. 
  • Salt (Fish and Meat). If imported salt is used to cure fish or meat products, the duty fees may be remitted.
  • Construction Materials. If imported material is used in the construction of foreign ownership, the import fees can be reimbursed through drawback even though the vessels aren’t technically exported.
  • Repair Materials. Imported materials used to repair jet planes originally manufactured abroad can also apply for a drawback.
  • Packaging Material. Any imported packaging material that is later used to pack exports also qualifies to have the original import fee reimbursed.
  • US Produced Packaging Material. Likewise, if US-made packing material is created with imported materials, the original import fee qualifies for drawback.


Benefits Of Duty Drawbacks


How to Apply for Duty Drawbacks?


If your company can benefit from any of the above drawback types, you’ll be eager to understand the application process. In 2018 the procedures for drawback applications were updated


All duty drawback applications must:

  • Be submitted electronically.
  • Be submitted within five years of the import date.
  • Be accompanied by detailed records.
    • Invoices
    • Shipment receipts
    • Cash receipts
    • Exportation documents
    • Transfers of merchandise

In addition, the United States maintains four duty drawback centers throughout the US to offer assistance and answer questions about the process.


Duty drawback centers are located in:

  • Chicago, Illinois: 5600 Pearl Street, Rosemont, IL 60018 — (847) 928-8070
  • Houston, Texas: 2350 N. Sam Houston Parkway East, Suite 1000, Houston, TX 77032 — (281) 985-6890
  • Newark, New Jersey: 1100 Raymond Boulevard, Room 310, Newark, NJ 07102 — (973) 368-6950
  • San Francisco, California: 555 Battery Street, Room 109, San Francisco, CA 94111 — (415) 782-9245


Understanding Drawbacks Maximizes Profits


The entire process of applying and getting approval for a duty drawback can take several years but can be sped up by seeking pre approval with the CBP. After pre approval, you can see your money in less than a month after applying. 


Still, the process is time-consuming no matter which route is taken, which is why a Software solution provider is often employed to handle the paperwork.


If any of the $2.4 billion worth of unclaimed refunds could be going to your company, it is well worth taking advantage of the duty drawback program.


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