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Manufacturing Drawback

19 USC 1313

Imported merchandise that has been transformed into a new and different product that is subsequently exported (or destroyed in the U.S.) is eligible for Manufacturing Drawback if the exportation occurs within 5 years from the date of the merchandise's importation. Customs further stipulates that the article manufactured from imported materials cannot be used for its intended purpose in the US prior to its exportation.

In addition to claiming drawback on the actual imported merchandise that is exported, Customs also allows the claimant to collect drawback on any waste or yield loss of imported merchandise that is incurred in the production of the exported articles. Records that identify the quantity and value of the waste must be maintained by the claimant.

"Direct Identification"

19 USC 1313(a)

Although Customs generally requires the drawback claimant to directly track its merchandise from the point of importation, through production, and then exportation, it will allow the use of certain accounting methods such as LIFO, FIFO, or Low to High if the claimant can demonstrate its ability to comply with the accounting requirements.

"Substitution"

19 USC 1313(b)

A drawback claimant may file for Manufacturing Substitution Drawback if it exports a finished article that is made in whole or in part with the use of raw material or components (domestic or foreign) that are of the "same kind and quality" as the imported merchandise subject to the drawback claim.

Although Customs does not require the claimant to actually export the imported merchandise that is the subject of the drawback claim, it does require that the claimant use the imported merchandise in its production process. The resulting article may or may not then be exported.

Before a claimant can file under the substitution allowance, it must obtain a manufacturing substitution drawback ruling. This ruling will, among other things, establish the fact that both the imported and substituted merchandise are truly "same kind and quality" material. The primary criteria that Customs uses to establish whether two materials are "same kind and quality" or "substitutable" is whether they can be used interchangeably in the manufacturing process that produces the same exported article.

The original intent of Manufacturing Substitution when it was introduced by Customs in the 1950's was to relieve the claimant of having to maintain two separate inventories, one for domestically-sourced raw material and another for imported, duty-paid raw material. Today, most companies that take advantage of the Substitution allowance do so because it relieves them of the administrative burden of having to track its materials from import to export. Another advantage of using Substitution is the claimant's ability to match older, higher duty value imports with newer exports, thereby maximizing its drawback rate of return.