U.S. drawback regulations have been in place since their implementation in 1789. 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 drawback has been occasionally amended over the past 85 years, it took the passage of the 2015 Trade Facilitation and Trade Enforcement Act (TFTEA) to drive the biggest changes with the program, including liberalizing standards for substituting merchandise, easing documentation requirements, extending and standardizing time frames for filing drawback claims and requiring electronic filing in the Automated Commercial Environment (ACE), CBP’s umbrella computer system.
It’s estimated that close to $1 billion in drawback is returned to American companies each fiscal year, but third-party drawback specialists believe another $3 billion to $4 billion might go unclaimed each year due to the arduous process of filing drawback claims. The filing efficiencies within the new regulations are expected to increase the number of companies taking advantage of the program’s benefits.
However, not all shippers are applauding the new drawback regulations, particularly distilled spirits producers, which note that they’ve been excluded from filing substitution drawback claims.
The final rule maintains a provision against filing of substitution drawback claims for excise tax paid on imports in situations in which no excise tax was paid on substituted merchandise, namely exports, or limit the amount of drawback allowable to the amount of taxes paid on the substituted merchandise and thus eliminate “double drawback.”
CBP identified alcoholic beverages, tobacco and taxable fuels as products most likely to take advantage of this type of drawback, thereby causing large potential revenue losses.
Allowing substitution drawback claims in circumstances in which internal revenue taxes haven’t been paid on the substituted — or exported — product results in the imported product being introduced into commerce with no net payment of excise tax — a “double drawback” at odds with the broader statutory schemes of customs drawback and excise taxation, CBP said in its rulemaking.
“Congress intended drawback for taxes paid on distilled spirits, beer, wine and other products because of their importance to driving U.S. exports, so it should come as no surprise that manufacturers have serious concerns with Treasury’s rule,” Patrick Hedren, vice president of labor, legal and regulatory policy for the National Association of Manufacturers, said in a statement. “We are exploring all options to resolve this issue so that manufacturers’ competitiveness is not impacted negatively.”
The wine industry was able to claim drawback on these taxes for a number of years, and other industries were looking forward to that action as well. It’s expected that the next step for the wines and spirits industry is to take court action to gain the inclusion in drawback, said someone familiar with drawback industry matters.
The House Homeland Security fiscal year 2018 funding bill noted with concern that CBP has adopted a policy that denies drawback when taxes are collected by a federal agency other than CBP, such as the Alcohol and Tobacco, Tax and Trade Bureau.
Brown-Forman Corp., which owns Jack Daniels, lobbied lawmakers of both the House and Senate this summer to legislatively overturn this CBP denial. A second-quarter 2017 lobbying filing indicated that Brown-Forman’s advocacy issues during the quarter included “Customs and Border Protection's denial of drawback taxes paid to Alcohol Tobacco Tax and Trade Bureau.”
“While the excise tax decision in the final rule was expected, the decision to withhold drawback for substitution for excise taxes is unfortunate,” said Dave Corn, vice president of one of the nation’s oldest drawback specialists, Comstock and Holt, co-chairman of the Association of American Exporters and Importers’ Drawback and Duty Deferral Committee, and vice chairman of the National Customs Brokers and Forwarders Association of America’s Drawback Committee.
“Regarding the other changes to the regulations, there were some items that the trade successfully challenged for additional clarity so that Part 190 better reflects the language that was in Part 191 of the regulations and makes the process a little less complex,” he said. “Overall there will be efficiencies and we look forward to seeing the positive impacts on our clients.”