The Trade Facilitation and Enforcement Act of 2016 (known by its acronym TFTEA) profoundly liberalized the unique tariff mitigation strategy commonly referred to as duty drawback refunds. This represented the culmination of a nearly 12-year collaboration effort between the Drawback Trade Community and Customs and Border Protection in an effort to modernize the drawback refund program to make this valuable export incentive program more accessible to U.S. Business.
The duty drawback law originally enacted in 1789 by the first U.S. Congress allows for the refund of Customs duties on imported merchandise subsequently exported from the U.S. either in the same form or following a manufacturing process.
As an example, a producer of eyewear in China imports sunglasses into its distribution facility located in the U.S. at a duty rate of 2.5%. Eighty percent of the glasses are sold in its stores in the U.S. but twenty percent are exported to its stores in Canada and Latin America. Upon reexport to Canada and Latin America, the eyewear company is eligible for a refund of the 2.5% regular duty and if applicable, the 25% China tariff.
The implementation of the new drawback program in 2018 could not have been timelier as it coincided with the Trump Administration’s decision to levy 25% punitive tariffs on nearly $400 billion in value on imports from China. The purpose of the tariff was an effort to balance a massive trade deficit, address a variety of alleged unfair trade practices by Beijing, and benefit American manufactures, and by extension, U.S. factory workers.
One major electronics company we represent went from paying under a few million a year in duty to nearly $50 million following the impositions of the China Tariffs. The duty drawback program will allow them to recapture nearly $20 million in duties thus substantially reducing the cost impact of the tariff. Another alcohol company we work with withstands to recover nearly $15 million in federal excise tax (also eligible for a refund via the drawback program in addition to duties and tariffs). They are taking advantage of the drawback program that allows not only for the refund of future imports and exports but provides refunds on duties associated with 5 years of historical activity!
The imposition of these massive tariff increases disrupted supply chains as it sent U.S. importers scrambling for compliant strategies to mitigate the additional 25% cost on much of the import activity from China. Selecting the correct strategy for U.S. importers among a number of options was further complicated by one primary unknown variable – how long would the tariffs last? In addition to duty drawback refunds, U.S. businesses evaluated many strategies that included petitioning the Trump Administration for product exclusions, shifting supply chains to source products from outside of China, adjustments to classification/valuation, foreign trade zones, and bonded warehouses.
The duty drawback program with its minimal start-up costs and with no disruption to existing product flows and supply chains offers significant advantages to other tariff mitigation strategies but is limited to those companies with significant export volumes from the United States. Companies that only import into the U.S. with no offsetting export volume, are better served by other compliant tariff minimization methods.
Understanding the Drawback Substitution Methodology
The new drawback law substantially liberalized the substitution rules to allow more flexibility when matching import and export activity for drawback purposes. Understanding how substitution works is key to determining a company’s recovery potential. The substitution method allows a drawback claimant to match “like” merchandise instead of directly linking an export back to the original importation using lot number or serial number tracing. Under the previous substitution drawback rules prior to the 2018 amendment of the law, the imported and exported merchandise needed to share the same material code and/or product specifications. With the new rules implemented in 2018, the import and the export need only share the same tariff classification number at either the 8th or the 10th digit of the HTS number.
As an example, under the previous drawback regime, a U.S. importer and exporter of orange juice would need to match on the basis of grade and specification. Since many Florida orange juice distributors source juices from multiple countries including Mexico and Brazil (two of the world’s largest producers of OJ) in addition to procuring domestic juice, the exported juice and the imported juice needed to be commercially interchangeable in the marketplace, a very narrowly defined standard. Today, the same company can match export Florida grade A juice and reclaim the duty assessed on imported Brazilian Grade B juice because both fall under the same general tariff classification – grade, specification, or material code are no longer relevant.
The liberalization of this substitution standard places additional recovery on the table for a number of industries while simplifying the process of preparing drawback claims. Returning to the example of sunglasses, the eyewear company could now export a pair of U.S.-made sunglasses and offset the duty paid on imported glasses from China. In the case of beer, there is only one harmonized tariff classification for beer, so an exported Coors light would be interchangeable with Molson beer imported from Canada.
The first step in the drawback process is to conduct a thorough evaluation of a company’s drawback potential both for the past five years as well as moving forward. As the saying goes, a company must first determine if the “juice is worth the squeeze.” For many large importers/exporters, the answer is a resounding “yes”, and given the opportunity for retroactive recovery, the first-year refunds can provide a significant boost to the bottom-line while assisting many importers in reducing the impact of the Trump tariffs.
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Anthony Nogueras, the founder and current CEO of Alliance Drawback Services, brings nearly 30 years of drawback specific experience to Alliance’s extensive list of clients that includes many Fortune 500 firms. In 2020, Alliance cumulative drawback filings exceeded $100 million in drawback refunds.
During his extensive career as a drawback specialist, he has spoken on drawback matters before a host of organizations including National Associations of Purchase Managers, The Juice Products Association and the International Titanium Association in addition to many international trade organizations. He has also been published in the Journal of Commerce, and numerous other trade industry publications.
Mr. Nogueras drawback experience includes the management of drawback accounts in a variety of industries including retail, petrochemicals, metals, and agricultural products. In 1989 he graduated with high honors from San Francisco State University with a bachelor’s degree in International Relations and Economics. He is also a Licensed Customs Broker.
