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Did you know that the United States Customs and Border Protection (CBP) offers a duty drawback program?
This program allows businesses to claim a refund on customs duties paid on imported goods. In order to qualify for the duty drawback program, your company must meet specific eligibility requirements.
With the availability of different types of customs duty drawbacks, companies that import and export products can benefit from significant cost savings by taking advantage of these benefits. Whether you are a manufacturer looking to reduce your manufacturing costs or an importer looking to recover unused materials, understanding the customs duty drawback process is critical.
In this guide, we will cover everything you need to know about the customs duty drawback process. We will examine the different types of duty drawbacks available, how to file a claim, and how to claim your refunds.
What is Customs Duty Drawback?
A customs duty drawback is a refund of up to 99% of duties paid on imported goods that are later exported. The refund may be claimed for either the total amount of duties paid or for a portion of the duties paid, depending on the circumstances.
Drawbacks were created by Congress to encourage exports by reimbursing companies for specific import duties, taxes, and fees they have already paid. The primary purpose of customs duty drawback is to provide relief from double taxation (taxing the same good twice). However, customs duty drawback also helps to encourage exports by making imported goods used in manufacturing processes more competitive in international markets.
Types of Duty Drawback
Depending on the reason for your imports, different types of customs duty drawbacks are available.
Manufacturing Direct Identification Drawback
It allows manufacturers to recover duties paid on imported materials that are used in the manufacturing of goods that are exported. To qualify, the manufacturer must be able to identify the specific imported materials that were used in the exported goods.
Example of Manufacturing Direct Identification Drawback
Your company imported 10,000 meters of fabric and incurred $10,000 ($1 per fabric) in customs duties. After shipping the fabric to a factory in the US, you manufacture 5,000 jackets that are later exported. Since the fabric was directly identified in the finished product, you can claim a duty drawback of 99% on your export shipments. In other words, you can claim a refund of $9,900, or 99% of your original customs duty payment.
Manufacturing Substitution Drawback
It allows manufacturers to recover duties paid on imported materials that are replaced by identical or similar domestic materials in the manufacturing of goods that are exported. To qualify, the manufacturer must be able to identify the imported materials that were replaced by domestic materials.
Example of Manufacturing Substitution Drawback
Your company incurred $10,000 in customs duties for the 10,000 meters of fabric imported (at a rate of $1 per meter). After shipping the fabric to a factory in the US, you combine it with domestic materials to manufacture 5,000 jackets that are later exported. Since the fabric was replaced by identical or similar domestic materials in the end product, you can claim a duty drawback of 99% on your export shipments.
Unused Merchandise Direct Identification Drawback
It allows importers to recover duties paid on imported merchandise that is exported unused. To qualify, the importer must be able to identify the specific imported merchandise that was exported unused.
Example of Unused Merchandise Direct Identification Drawback
Using the same example as above, your company imported 10,000 meters of fabric for $10,000 ($1 per meter). After shipping the fabric to a factory in the US, you manufacture 2,500 jackets. Two years later, you find that you still have 5,000 meters of fabric that has not been used in any products. Since you can identify the unused imported materials, you can claim a duty drawback of 99% on your export shipments.
Unused Merchandise Substitution Drawback
It allows importers to recover duties paid on imported merchandise that is replaced by identical or similar domestic merchandise before being exported. To qualify, the importer must be able to identify the imported merchandise that was replaced by domestic merchandise.
Example of Unused Merchandise Substitution Drawback
After acquiring the fabric and shipping it to a factory in the US, you find that 2,500 meters can be replaced by domestic material before being exported. Since you can identify both the imported and domestic materials used in manufacturing your products, you can claim a duty drawback of 99% on your export shipments.
The Customs Duty Drawback Process
How to Apply for Customs Duty Drawback?
To apply for customs duty drawback, you must first file a claim with the U.S. Customs and Border Protection (CBP). This claim must include documentation that proves the imported merchandise was previously used in the manufacturing of exported goods, as well as information on how to identify this merchandise.
To qualify for a customs duty drawback, you must:
- Be the original importer of record
- Have paid the applicable duties, taxes, and fees
- Still have possession of the exported merchandise or sufficient evidence to show that you exported the merchandise
In order to successfully apply for customs duty drawback, you must provide the following:
- Proof of duties paid — to prove you've paid all necessary duties and taxes, you must submit a Certificate of Delivery (customs form 7552)
- The CBP Form 7501 Entry Summary — to identify relevant information about the imported commodity, the CBP requires you to fill out this form
- Proof of import — provide the CBP with customs clearance documentation with the 7551 form that shows all relevant information about your imported merchandise, including the HS tariff classification and import value
- Proof of export — to prove you've exported the goods, include documents like the bill of lading, commercial or sales invoices, or other export-related documents
How to Claim Duty Drawbacks?
Once your claim is approved by the CBP, you can then file for a refund of the customs duties paid. This process typically takes between 3-6 months, depending on the type and complexity of your claim.
Tips for Claiming Duty Drawbacks
To ensure a smooth and successful application for customs duty drawback, it's essential to:
- Carefully review all applicable rules and regulations before applying
- Keep meticulously detailed records of your shipments and duties paid
- Be prepared to provide supporting documentation
- By using the Accelerated Payment privilege, you can get your duty drawback refund in as little as 4-6 weeks after the CBP approves your claim (the privilege is available for eligible importers that meet the appropriate criteria, so be sure to check with your customs broker for more details)
Claim Drawbacks More Efficiently
The customs duty drawback process can be confusing, but it's worth taking the time to learn how it works.
The most essential component of the duty drawback process is having the necessary documentation to support your filing.
If you're looking for a way to make the customs duty drawback process more straightforward, consider using Cargoflip's software. Our document management system makes it simple to keep track of all the paperwork you'll need for a successful claim.
So instead of spending hours on paperwork, you can focus on other aspects of your business — and maximize your profits by claiming customs duty drawbacks more efficiently than ever before.