COMMENTARY: The substitution revolution

Drawback regulations on substitution changed with Trade Facilitation Act last year    In February 2016, President Barack Obama signed the Trade Facilitation and Trade Enforcement Act (TFTEA), which contains a section on drawback and refunds that represents the most significant changes to the duty drawback program in nearly a century.
   Drawback literally dates back to the inception of the United States itself, but the most recent substantive change to the program came when the “substitution concept” was introduced with the Tariff Act of 1930.
   While there are many changes to the law under TFTEA, substitution will be impacted the most. Substitution is carried out for merchandise that is considered the same kind and quality as the imported merchandise (Title 19 U.S.C. 1313(b) or 1313(p)) or is considered commercially interchangeable with the imported merchandise (Title 19 U.S.C. 1313(j)(2)). In Section 906, a major change was made for unused merchandise under TFTEA:

   “1313(j)(2) Subject to paragraphs (4), (5), and (6), if there is, with respect to imported merchandise on which was paid any duty, tax, or fee imposed under Federal law upon entry or importation, any other merchandise (whether imported or domestic) that – (A) is classifiable under the same 8-digit HTS subheading number as such imported merchandise;”

   With this change, effective Feb. 24, 2018, claimants will be able to claim drawback on merchandise classified under any eight-digit Harmonized Tariff Schedule number that they’ve exported that matches to merchandise of the same eight-digit import HTS. 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.
   As with anything that seems like a great change on the surface, there’s always the question of “what’s the catch?” In this case, Customs and Border Protection (CBP) built in protection for their revenue. If the article description for the eight-digit HTS number begins with the term “other,” then the claimant needs to complete the drawback match at the 10-digit HTS number. If the article description for the 10-digit HTS number begins with the term “other,” then the claimant would not be able to utilize the new substitution concept.
   When the regulations are released, there will be more clarification for how the new concept is defined.
   The calculation will change for substitution claims with a “lesser of” concept. If an eight- or 10-digit match is made for unused merchandise substitution drawback, claimants will be entitled to the amount of duties, taxes and fees paid on the imported merchandise or the amount of duties, taxes and fees that would apply to the export/destroyed article if the exported/destroyed article were imported.

As with anything that seems like a great change on the surface, there’s always the question of “what’s the catch?”

   For manufacturing substitution drawback, the same concept applies, but the refund would be the lesser of the amount of duties, taxes and fees paid on the imported merchandise or the amount of duties, taxes and fees that would apply to the substituted merchandise if the substituted merchandise were imported. The method that CBP decides to use to determine these values will play a significant role in the amounts of drawback that will be claimed.
   The duty drawback program has been in existence since 1789 and was established during the First Session of the First Congress of the newly minted United States of America. Enforcing collection of duties on wares and merchandise would support the debts that the government had taken on through the Revolutionary War years. Duties were placed on everything from distilled spirits to molasses, nails and spikes, tobacco, coal, tea, buttons, saddles, and clothing, among many others. Immediately after laying out of the duties, this language was written in Chapter 2, Section 3:

   “And be it [further] enacted by the authority aforesaid, That all the duties paid, or secured to be paid upon any of the goods, wares and merchandise as aforesaid…shall be returned or discharged upon such of the said goods, wares or merchandise, as shall within twelve months after payment made, or security given, be exported to any country without the limits of the United States, as settled by the late treaty of peace; except one per centum of the amount of the said duties, in consideration of the expense which shall have accrued by the entry and safe-keeping thereof.”

   The program remained relatively unchanged until the Tariff Act of 1930, which expanded manufacturing drawback with the introduction of the concept of substitution of merchandise which was of the same kind and quality (particularly for sugar, non-ferrous metal and ore containing non-ferrous metal). Substitution was later broadened for other commodities for manufacturing and in the 1980s, for merchandise that was considered unused and fungible.
   For unused merchandise, the substitution concept allowed domestic merchandise to be used in a drawback situation, instead of the need to directly trace the imported merchandise through from import to export. If an American company had imported duty-paid merchandise from overseas and also purchased the same fungible merchandise from a supplier here in the U.S., that company could claim drawback on the exported merchandise regardless of the fact that the exported merchandise may not have been imported.
   In plain English, if the imported merchandise from overseas and the merchandise from the domestic supplier were thrown into one bucket, it wouldn’t matter which piece was selected from the bucket for exportation and used on a drawback claim so long as the import balance was never exceeded. This concept greatly increased the amount of drawback that companies could receive.
   Since the concept of substitution was introduced to the drawback world in 1930, it has seen all kinds of change. From the allowance of substitution in manufactured articles, to the inclusion for unused merchandise, no change has been as significant as what will be available in the new law for drawback claimants. In 2018, the doors will open to a whole new world for substitution. The question is, will you be ready?