Businesses that export goods can be eligible for duty drawback, the refund of certain duties, taxes and fees that are collected when goods are imported. Duty drawback refunds are available when merchandise is exported or destroyed. While the exporter has the first right to claim duty drawbacks, in some cases importers retain this right.
How Does a Duty Drawback Work?
If you import goods into the U.S. that are later exported unused or as finished products, you can claim a duty drawback. Duty drawback is also available on merchandise destroyed under U.S. Customs supervision. Duty drawbacks aim to incentivize exports and enhance the economy. Companies can claim duty drawback up to five years after export, as long as the exported goods were not used in the U.S. or took a new form, function or branding.
Here’s a simple example: A U.S. bicycle manufacturer imports tires from France, gears from Italy and ultra-light aluminum frames from China. The manufacturer will have to pay import duties and taxes on all these items. When the manufacturer exports the completed bicycles to Europe and Asia, it can claim duty drawback and recover the taxes paid at import.
Types of Duty Drawbacks
There are three main types of duty drawbacks, with different criteria and duty drawback meanings.
- Unused merchandise drawback: Unused merchandise drawbacks allow companies to claim refunds on import duty of merchandise that is in the same condition as it was at import. This type of duty drawback allows for value-added improvements like cleaning, painting or testing. The only caveat is that this merchandise cannot be used in the U.S. for its intended purpose before export.
- Manufacturing drawback: Manufacturing drawbacks are offered for raw materials or components that are used to make something new or different before export. For this type of duty drawback, the new product must have either a new name, character or use. An example of this type of drawback would be silicon chips used in manufacturing computers or cell phones.
- Rejected merchandise drawback: A rejected merchandise drawback is related to imported materials that do not meet the requirements or specifications of the importer. This merchandise can either be exported or destroyed with Customs supervision and will qualify for duty drawback. An example of rejected merchandise would be shoes with manufacturing defects that the importer decides to return to the supplier.
What Is Eligible for Duty Drawback?
The legal owner of the merchandise at the time of export is eligible for duty drawback. If the importer is not the exporter, it has the option to retain rights for duty drawback in the contract of sale. In all other cases, the exporter is eligible for duty drawback.
How Much Is the Duty Drawback Refund?
The duty drawback refund is 99% of the original import duties, fees and tariffs paid to U.S. Customs and Border Protection at the time of import. Duty drawback is only available when the goods or merchandise is imported or destroyed.
How Long Does It Take to Receive a Duty Drawback Refund?
According to the U.S. Customs and Border Protection, duty drawback refunds can take three to six months or longer to process. While you could receive the duty drawback sooner, it’s wise not to count on it in your cash-flow projections until after six months or more.
How Far Back Can You Go for Duty Drawback?
You may be able to file for duty drawbacks for goods that were imported up to five years ago. Your company is eligible for duty drawback on any imports or exports that happened within the last five years.
Example of a Duty Drawback
Duty drawback varies by the country of origin of the goods. Suppose an American bicycle manufacturer is importing Chinese-made bicycle tires. If they import bicycle tires worth $50,000, the import duty will be 0.3464%, or $173.20.
When the bicycle manufacturer exports the finished bicycles, it can file for duty drawback and receive 99% of the $173.20 paid, or $171.46.
How to Calculate Duty Drawback
Duty drawback depends on the original import taxes, duties and fees. These fees vary by the origin country, the type of goods and the total value. Import taxes and fees range from 0 to 37.5% of the value of the goods. The average charge is 5.63%. Importers of e-commerce purchases that exceed the import tax threshold limit are charged a 3% flat rate.
Duty drawback is usually 99% of the import taxes and fees, although that can vary by the goods being exported and their condition.
Drawback vs. Refund
Duty drawback is a refund from U.S. Customs and Border Protection for import taxes, fees and duties paid. It works much like returning an item to a store. If you return a sweater you haven’t worn for a refund, you’ll also be refunded the sales tax. In the same way, when you export merchandise you previously imported without using it in the U.S., you’ll get a refund, or duty drawback, on import taxes paid.
The customs duty drawback is a refund of taxes and fees. This customs drawback is a type of refund any U.S. exporter can claim if they imported goods or merchandise in their business process.
Final Thoughts on Customs Drawbacks
By understanding your eligibility for duty drawbacks, you can collect cash from these drawbacks, even if you did not originally import the goods or merchandise. Customs drawbacks or duty drawbacks can help businesses recoup sometimes costly import duties and fees. Even if the duty drawback is small, every little bit helps build a sustainable business and improve the bottom line to create a cash-flow-positive trucking business.