With the rollout of the new automated processing functionality in CBP’s Automated Commercial Environment (ACE) earlier this year and implementation of legislative requirements in the Trade Facilitation and Trade Enforcement Act (TFTEA) of 2015, drawback is expected to become a more widely used program by the country’s international traders.
“It will be better than the paper process that we had before,” said Michael V. Cerny, an attorney with international trade and customs law practice Sandler, Travis & Rosenberg; outside drawback counsel to drawback broker STTAS, a UPS company; and the drawback committee chair of the National Customs Brokers and Forwarders Association of America and part of the first significant industry discussions via the CBP-led Trade Support Network to modernize and simplify drawback that began in 2002.
Cerny said he believes more small and midsized exporters now will take advantage of drawback, which is “always good for the economy.”
Until the final TFTEA regulations and new filing processes for drawback are firmly in place by the start of next year, claimants and their filers anticipate working closer than ever before to facilitate their claims with CBP.
“I like to say it’s drawback’s not-so-simple simplification, as we are all living in a whole new drawback world,” said David Corn, vice president of drawback specialist Comstock & Theakston and the co-chair of the American Association of Exporters and Importers drawback committee that met routinely with CBP during the process of automating drawback.
“Much of this process is fluid as discussions on specific policies are still being finalized,” Corn added. “As anyone might guess, with a transition to a system like ACE, it takes time to work out the kinks.”
229 Years Old. Congress first enacted duty drawback legislation in 1789, making it one of the oldest trade laws on the books. The laws and procedures for claiming drawback have been occasionally amended during the past 85 years.
Basically, a drawback is a refund of customs duties paid on imported materials that are then exported or used in the manufacture of exports. With documented proof, exporters can receive refunds from CBP of up to 99 percent on duties paid.
Almost any commodity is eligible for drawback refunds, such as chemicals, steel, tobacco, petrochemicals, pharmaceuticals, auto and electronic components, textiles, sugars and citrus products. Drawback is also an accepted practice for international business in the World Trade Organization.
While some large companies handle their own drawback claims through CBP, most rely on third-party drawback specialists to manage the complexity associated with processing these claims, which can result in hundreds of thousands of dollars in returns for some companies.
It’s estimated that close to $1 billion in drawback was returned to American companies during fiscal year 2016. That may sound like a lot, but drawback specialists believe another $3 billion to $4 billion might actually go unclaimed each year.
Drawback may apply to a variety of import/export transactions, but the two most popular uses in the U.S. involve substitution manufacturing and unused merchandise. Substitution manufacturing drawback includes both imported merchandise and any merchandise of the same kind and quality, which are then exported or destroyed. Unused merchandise drawback covers imported materials that are unused and exported or destroyed.
However, drawback specialists believe the traditionally onerous paperwork requirements for claims deterred many potential participants in the program.
The past difficulties with claiming drawback also has left the CBP program open to criticism from congressional and federal government watchdog agencies like the Government Accountability Office and Inspector General.
With the implementation of the 1993 Customs Modernization Act, CBP took some steps to reform its drawback regulations and procedures. In 1998, the agency introduced its first penalties for noncompliance with drawback.
None of these changes ended the inherent frustration with the program, which was caught between deeply entrenched paper processes and emerging automation. In 2001, Customs considered calling for an end to drawback if it and the industry could not find a way to modernize the program. This resulted in a 16-year-long dialogue between CBP and the drawback industry to include the program in ACE.
Since August 2015, the TSN Drawback Working Group has worked closely with CBP to outline policies, regulatory concepts and business requirements for automating drawback in ACE. The changeover from paper to automated drawback filing processes was further cemented by congressional passage of TFTEA.
“Drawback is a small piece in ACE overall, but CBP Commissioner [Kevin] McAleenan clearly took an interest in it,” Cerny said. “He listened to us and helped move the ball forward.”
ACS To ACE. Filing drawback claims under CBP’s former umbrella system, the Automated Commercial System (ACS), required a transmission of data filtered through the Automated Broker Interface (ABI) for claim acceptance. Once the claim was approved via ABI, the party filing the claim — often a drawback specialist — would complete a Customs Form 7551 that included specific information about the claimant, type of drawback claim, bond information and claim details.
Included with the claim would be attachments for the drawback claim providing additional claim details; calculations for imports, exports and bills of material (for manufacturing, where necessary); and certifications with signatures.
The claim would be considered accepted in ACS after the supplemental information was received at the drawback center and reviewed. There are currently four CBP drawback centers, which are located in Newark, N.J.; San Francisco, Houston and Chicago.
Drawback claimants also could file a manual claim without an ABI transmission, but this required the commercial drawback specialist to input the information into ACS before sending it to CBP, extending the claim processing and payment duration. The ability to file paper-based claims, however, will be permitted through Feb. 23, 2019, when the final TFTEA rules pertaining to drawback being electronically filed in ACE take effect.
“If the manual claims are sent, they are limited to a specific set of data elements, as the drawback specialist will have to manually enter the data, transmit the claim in ACE and then send the results of that transmission back to the claimant,” Corn said. “If the submission is rejected in ACE, then that is sent back to the claimant to correct the problem and send new data to CBP for the process to start again.”
Because of this, Corn recommends against directly filing manual claims with CBP.
“In ACE, once a claimant sends the claim through ABI you know immediately if it’s been accepted or rejected as all of the claim details are submitted at one time,” he said.
Devil’s In Details. Since Feb. 24, claimants can file drawback claims in ACE in accordance with the TFTEA law. However, while the drawback regulations based on TFTEA have yet to be finalized, CBP has issued interim guidance to the industry for filing these types of drawback claims.
In this guidance, Corn said claimants and filers should be aware of the new concepts and validations that are required with ACE transmissions and how to avoid processing errors. These details are spelled out in CBP-issued documents covering ACE business rules and processes and an error dictionary.
The ACE business rules and process document outlines what’s required for current drawback claims processing, known as “core,” and the new methods under TFTEA.
The Drawback Working Group worked extensively with CBP on developing the error dictionary. “We walked through each error one by one to ensure the troubleshooting statements were correct based on the statute and regulations and that the validations worked correctly for the specific drawback provisions within the [information technology] certification and production environments,” said Corn, who participates in the Drawback Working Group.
As of March 23, the error dictionary covered 263 possible error messages for claims, which can be either informational or fatal. Informational messages will not cause a claim to be rejected, while fatal messages will force a claim rejection.
What will make it easier to submit drawback claims in ACE is the use of eight-digit Harmonized Tariff Schedule numbers as the product reference points, instead of referencing item and part numbers on commercial invoices, Cerny said. The drawback industry has been calling for the use of HTS numbers to drive drawback claim filings since the early 2000s.
Corn used the following example to explain the benefits of using HTS numbers in ACE: “If a claimant imported blue knit cotton shirts as well as red knit polyester shirts and they were classified with the same eight-digit HTS number, it wouldn’t matter if the claimant exported the blue shirt or the red shirt and claimed drawback, as both shirts would be considered the same merchandise under the new law.”
For unused merchandise substitution, however, if the eight-digit HTS number starts with the term “other,” the claimant will need to complete the drawback match at the 10-digit HTS number. Further, if the 10-digit HTS number also begins with the term “other,” then the claimant will be unable to use CBP’s new substitution drawback concept, but will be able to claim direct identification for unused merchandise, Corn explained.
A downside for filers under this new method is the requirement to split up large drawback claims into many smaller ones because of the line/size limitations in ACE. “It’s necessary to watch how import line items are used for specific types of drawback (as one calculation on a line will determine how it’s used for the future), and additional work is required for entries that have reconciled information,” Corn said.
Until the final implementation of the TFTEA-based drawback rules, drawback filers and claimants must decide on whether to currently stick with the core or embrace the unfinished TFTEA for processes for filing their claims.
“Filers for now have to juggle TFTEA vs. core drawback law, interim guidance for new TFTEA drawback, changes for layouts in ACE and the updates to the business rules,” Corn said “For filers, this process is currently not so simple. With the help of the drawback team at CBP, we will adjust to our new world and carry forward together as we always have.”
Drawback filer sources:
Drawback Customs and Trade Automated Interface Requirements (CATAIR): https://www.cbp.gov/document/guidance/ace-drawback-catair-guidelines
ACE Business Rules and Process Document: https://www.cbp.gov/document/guides/ace-entry-summary-business-process
Interim Guidance Document for Drawback: https://www.cbp.gov/document/guidance/ace-drawback-guidance
Error Dictionary: https://www.cbp.gov/document/technical-documentation/ace-drawback-error-dictionary