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Manufacturing Substitution Drawback

The Basics of Manufacturing Substitution Drawback

JM Rodgers specializes in many types of duty drawback, one of which is manufacturing substitution drawback.

When imported duty-paid, duty-free or domestic material of the same kind and quality (SKAQ) as the imported duty-paid designated material is used to produce the exported product, U.S. import duty may be recovered. This is true even when none of the designated merchandise may have been used to produce the exported articles.

Drawback is granted when a company exports or destroys the goods made from the imported merchandise, the substituted goods or articles, or some combination of the two.

Claimants under manufacturing drawback may, if approved, file retroactively, provided that the drawback claims are filed within three years of the date of export. For many companies, this initial recovery of duty can be quite substantial.

An Example of Manufacturing Substitution Drawback

Umbrella Widget Corporation imports 1000 motors and pays US customs duties of $1000 (in this case, $1 per motor imported). It then ships the motors to an assembly factory in Greenville, SC where it also maintains an inventory of domestically produced motors of “same kind and quality” as the imported motors. At the same factory, there are also duty-free motors that were manufactured in the Caribbean. Umbrella then manufactures and assembles 1000 dishwashers with a single motor in each one and exports 500 of them to customers in foreign markets.

It is possible that the dishwashers contain all domestically produced motors of the same “kind and quality as the imported motors, or Umbrella cannot tell which motors were installed into dishwashers due to their manufacturing and inventory process. Regardless, Umbrella is still entitled to 99% of the duties pain on the imported motors just the same as if the motors had been used to manufacture the 500 dishwashers that were exported to foreign markets. As such, Umbrella can claim drawback equal to 99% of the original duties paid to US customs on the imported motors, calculated as 0.99 x $500 = $495.00. Additionally, the total drawback may not be greater than the 99% paid on the original imported motors, even if they produced more than 500 dishwashers.

The Law Behind Manufacturing Substitution Drawback

This type of drawback is outlined in section Subsection 1313(b) of the Tariff Act [19 U.S.C. Section 1313(b)]. Here is the exact language of the law:

(b)Substitution for drawback purposes
(1)In general
If imported duty-paid merchandise or merchandise classifiable under the same 8-digit HTS subheading number as such imported merchandise is used in the manufacture or production of articles within a period not to exceed 5 years from the date of importation of such imported merchandise, there shall be allowed upon the exportation, or destruction under customs supervision, of any such articles, notwithstanding the fact that none of the imported merchandise may actually have been used in the manufacture or production of the exported or destroyed articles, an amount calculated pursuant to regulations prescribed by the Secretary of the Treasury under subsection (l), but only if those articles have not been used prior to such exportation or destruction.

Upcoming Change To The Manufacturing Substitution Drawback Law

Subject Current Future
Time Frame 3 years from date of export 5 years from date of import
Claim Designation Products used in Manufacture at the part number level Products used in Manufacture at the 8-digit HTS level. Bills of Material must contain the HTS numbers for ALL components used in manufacture
Calculation of Drawback 99% of each duty paid 99% of the lesser of the amount of duties, taxes and fees paid with respect to the imported components and the amount of duties, taxes and fees paid that would apply to the components if the components were imported
Bills of Material Claim attachments identify part number and quantity used in manufacture Claim attachments identify merchandise used in manufacture by 8 digit HTS number

Other Types of Drawback We Handle

  • Unused Merchandise Direct Identification
  • Unused Merchandise Substitution
  • Manufacturing Direct Identification
  • Manufacturing Substitution
  • Domestic Tax Paid on Alcohol
  • Rejected Merchandise
  • Petroleum Derivatives
  • Packaged Goods
  • Destruction
  • Merchandise Processing Fees
  • Harbor Maintenance Fees

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