Duty drawbacks are almost as old as the American Republic itself and can be traced back to the Tariff Act of 1789 — the very first major piece of legislation passed by the inaugural United States Congress. From the outset, newly elected lawmakers in the Congress had been petitioned by domestic manufacturers to impose tariffs on imported goods ranging from shipbuilding materials to candlesticks, stationery, and chocolate.
The 5% or higher tax which the legislation placed on most imported goods not only helped to protect fledgling U.S. manufacturers, but afforded the federal government with a revenue source to fund its operations and pay down the millions worth of foreign debt accumulated during the Revolutionary War.
Included in the landmark bill was a new “drawback” provision that allowed for recovery of up to 99% of import duties paid on goods (except distilled spirits) that were were subsequently exported within one year. The drawback was first conceived by lawmakers as a way to give relief to fishermen who were struggling from the duties imposed on imported salt used in curing and shipbuilders that required a wide range of imported products for the nation’s growing merchant marine and navy.
Since those early days, the drawback legislation has undergone many changes that when combined have made drawback an extremely comprehensive duty recovery mechanism, but also one that can be fairly complicated to navigate at times, which may help explain why it is still relatively underutilized. Key revisions to the legislation over the years, include:
The Tariff Act of 1930
Better known as Smoot-Hawley, the infamous protectionist trade bill slapped punitive tariffs on more than 900 products and is generally viewed by most experts as having exacerbated the length and depth of the Great Depression. Aside from that, however, the legislation also introduced of the concept of “substitution manufacturing drawback.”
Prior to the advent of this change, drawback could only be claimed if a documentary trail could be produced to demonstrate that the same product was being imported and exported. With “substitution” drawback is allowed on products that are the “same kind and quality.” This allows for drawback to be made in the case of nearly identical or fungible goods that often become commingled in supply chains and virtually impossible to differentiate in practice.
1980 – Direct Identification Same Condition/Unused Merchandise Drawback
A change made by Congress in 1980 amended the drawback law to provide for “same condition” drawback, a refund of 99% of duties, fees and taxes paid on imported goods which are subsequently exported (or destroyed under Customs supervision) within three years after their date of importation, without having been altered in condition or used in the United States prior to such exportation or destruction.
More recently, Congress updated the drawback law to replace the “same condition” drawback provisions with new ones for “unused merchandise” drawback. In direct identification cases, these changes eliminate the requirement that a product be exported in the “same condition” as when imported, and expand the list of incidental operations which may be performed without disqualifying a product for drawback.
1984 – Substitution Same Condition/Unused Merchandise Drawback
A further modification by Congress in 1984, allowed “substitution” same condition drawback. Under this procedure, a company may recover a 99% drawback of duties paid on imported merchandise, if, within three years, it exports “fungible” domestic or foreign merchandise.
The exported “fungible” merchandise must be in the same condition as the merchandise which was imported, and may not have been used within the U.S. prior to its exportation. “Fungible” merchandise is defined as merchandise which is for all purposes commercially interchangeable with the imported merchandise.
Chemicals are a good example of a products where this situation is not uncommon. Another example would be an importer of fasteners that are combined with other such parts of general use into the construction of a machine that is subsequently exported. In this case, the manufacturer could claim drawback on all the components parts as long as they were of the same kind and quality.
1990 – Petroleum Derivatives
A change made in 1990 by Congress simplified duty drawback for the petroleum industry by creating a new category for “petroleum derivatives” that were deemed to be eligible for drawback by virtue of being “same kind and quality” and “commercially interchangeable.”
1993 – Incidental Operations
Changes made to the drawback law in 1993 expanded the list of “incidental” operations that may be performed on an import without jeopardizing its drawback eligibility. Incidental operations in this regard include repackaging, testing, cleaning, and sorting among others.
1994 – North American Free Trade Agreement
The 1994 NAFTA placed limitations on drawback accessibility for goods moving between the U.S., Canada, and Mexico. As a result, duty drawback has not been payable (except direct identification same condition/unused merchandise drawback) for decades. However, a provision in the trade pact, effectively created a new “NAFTA drawback” that allowed exporters to continue claiming drawback on a limited basis in order to avoid double taxation.
Need More Information?
GHY International has extensive experience handling drawbacks of all kinds for companies looking to maximize all available duty recovery programs, so don’t hesitate to contact us – our trade experts are here to help save you money.