If your business imports goods into the United States, you’ve likely have heard of duty drawback, but may not be aware of the right type of drawback for your business, and how it can help you cut costs.
Duty drawback is a program administered by the US Customs and Border Protection (CBP) agency that allows importers to recover some duties paid on certain goods. Some refunds can be a significant percentage of the import duties your company paid, so it’s worth investigating duty drawbacks. The place to start is learning about the different duty drawback types and which one is right for your business. The two primary types are manufacturing drawback and unused merchandise drawback.
Below, you will find a complete guide to both types of duty drawbacks, including the factors to consider and tips for maximizing your potential drawback benefits.
Understanding Duty Drawback Types
Each type of duty drawback caters to different business scenarios. Here’s a look at manufacturing and unused merchandise drawbacks and how your business might take advantage of one or the other.
Manufacturing Drawback
The manufacturing drawback allows businesses to recover some duties and fees paid on imported goods that are subsequently used to manufacture products meant for export. The federal government designed the manufacturing drawback to promote domestic manufacturing and drive US exports. To be eligible for the manufacturing drawback, the imported goods must be significantly transformed into something new during the manufacturing process.
This type of drawback has many benefits for manufacturing organizations:
- Cost reductions: Recovering duty fees lowers manufacturers’ production costs and costs of goods sold.
- Competitive advantages: Lowered costs mean manufacturers can invest more in their business, making them more competitive in the marketplace.
- Increased exports: Duty savings encourage manufacturers to create more products for export, stimulating international trade.
Some business scenarios where manufacturing drawbacks might apply include:
- Component manufacturing, where a company imports raw materials or other components to manufacture a finished product meant for export.
- Product assembly, when businesses import parts intended to assemble a product that’s subsequently exported.
Unused Merchandise Drawback
With unused merchandise drawbacks, claimants can recover duties, taxes, and fees on imported merchandise that is subsequently exported or destroyed. As the name implies, the merchandise cannot be used in the US before export or destruction. This type of drawback benefits businesses that may overestimate their needs for an imported good or experience a change in demand.
There are two ways to identify unused goods that might qualify for unused merchandise drawback:
- Direct identification requires the importing business to track specific merchandise from when it’s imported until it’s exported or destroyed, using a unique identifier such as a serial number.
- Substitution allows businesses to substitute imported merchandise with others that fall under the same 8-digit HTS numbers.
Either way, imported goods must remain in their original condition and must not have been altered or used in any way. Unused merchandise drawbacks might apply in these business scenarios:
- Overstocked inventory: A business imports more merchandise than needed and decides to export its excess inventory.
- Product returns: Customers return unused merchandise, which the business then exports.
Factors to Consider in Selecting the Right Duty Drawback Type
While the high-level guidelines for each drawback type are relatively straightforward, it’s not always clear when you should file a claim for one or the other. Given the time, effort, and personnel required, it’s best to ensure your business can actually realize cost savings before submitting drawback claims to the CBP.
For example, the complexity of your manufacturing process—or a lack of complexity—might indicate whether the goods you import will be eligible for a manufacturing drawback. If the goods aren’t significantly transformed in the manufacturing process, there’s a chance they won’t be eligible.
Excess inventory that you don’t plan to use isn’t always eligible for an unused merchandise drawback. If your inventory management system doesn’t meet the requirements for direct identification, your claim could be ineligible.
Another factor to consider is the proportion of duties in the overall production costs. If duties constitute a significant portion of the costs, there’s a good chance pursuing a manufacturing drawback claim could pay off. On the other hand, if the duties represent a small percentage of your overall costs, the time and effort required for a claim can eat away at any potential savings. Keep in mind that filing claims with the CBP requires an investment in hardware and software to ensure proper processing, and these expenses alter the cost-benefit analysis.
Calculating the amount of duties that can realistically be recovered by exporting or destroying unused merchandise is recommended before pursuing an unused merchandise claim. Timely filing is important too, because in some cases, it may take months or years to receive your drawback refund.
Professional Duty Drawback Services
Complex regulations, technology investments, cost-benefit analyses—it’s easy to see why some businesses don’t pursue duty drawback claims. Sometimes, it’s unclear which type of duty drawback is right for your business. Fortunately, you can leave it to the professionals. J.M. Rodgers has over 60 years of experience with freight import, export, customs brokerage, and professional duty drawback services.
Our database of drawback matches ensures we file the right claim for the maximum potential refund on behalf of your business. We have the technology, staff, and expertise to file claims efficiently, leading to millions of dollars in potential refunds across all industries. To learn more about our professional duty drawback services, contact us today.
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