Upcoming CBP Regulations To Clarify Overhaul of Drawback Process in Recent Customs Law

ARLINGTON, Va. -- Upcoming CBP regulations are needed to address several areas left unclear by major changes to drawback in recently enacted customs reauthorization legislation, a government official and industry executives said during a June 7 panel discussion at the American Association of Exporters and Importers annual conference. CBP still needs to decide how to handle changes in classification that occur between entry and the filing of the drawback claim and changes to “lesser of” limitations on drawback. The overhaul, the biggest for drawback since 1930, presents opportunities but also poses challenges for both industry and the government, and more changes are on the way as drawback is automated in ACE, they said.

The Trade Facilitation and Trade Enforcement Act of 2015, enacted Feb. 24, created a new simplified framework whereby substitution drawback will be allowed for most goods with the same eight-digit HTS subheading, and the deadline for most drawback claims will run five years from the date of importation (see 1603010043). Over a decade in the making, the drawback provisions take effect two years after enactment, on Feb. 24, 2018, and allow for an additional grace period of one year, until Feb. 24, 2019, during which drawback claims may be made under either the old or the new statute.

CBP now needs to issue regulations to “iron out” how the new drawback process will work, said Michael Cerny of Cerny & Associates. One consideration the law does not address is how to handle changes in classification that take place after the HTS number is originally declared on an entry. While making drawback claims based on a straightforward HTS classification will simplify the process in most situations, there will also be situations in which a ruling or court decision has been issued, or a protest or disclosure filed, that will change the HTS number before the drawback claim is filed, resulting in a drawback claim based on HTS provisions not reflected in the claimant’s records. CBP is “going to have to find a way to deal with that in the regulations,” Cerny said.

Another issue that needs to be addressed by CBP regulations is the “lesser of” concept and its extension in the new law to manufacturing substitution drawback, Cerny said. Already familiar to users of unused merchandise drawback, the new law says claims for unused substitution drawback may only be for 99 percent of the lesser of (i) the duties, taxes and fees paid on the imported merchandise or (ii) the amount of duties, taxes and fees that would apply to the exported or destroyed article if the exported or destroyed article were imported. The language focusing on the duties, taxes and fees paid on a hypothetical import is problematic, said Cerny, who hopes CBP will issue regulations that focus on the product’s value instead.

The new law’s extension of the “lesser of” rule to manufacturing substitution drawback, limiting claims to the lesser of the designated import or the substitute component, is a big change for manufacturers, which will now have to keep track of the value of their component parts for drawback purposes, Cerny said. CBP was against the extension of the rule, not seeing any risks in the manufacturing drawback process that would justify it, said Maryanne Carney, national drawback field specialist at CBP. CBP legal staff know “they need to tackle this in the regulations with good explanations,” Carney said. Though some may have thought manufacturing rulings issued by CBP were going away, the agency now thinks it will need them in some form, though it still isn’t sure what form that will be, she said. “That’s why we’re going to have two years to work on these regulations,” Carney said. “Stay tuned, there’s a lot more that’s going to come out on this particular issue.”

One change that some had seen as major -- the extension of liability for drawback claims to the importer record -- will have less of an impact than some feared, Cerny said. Though importers are now jointly and severally liable, CBP will go after them last, first attempting to recover excessive drawback from the surety and then the claimant. Also, the importer is only liable for their portion of the claim, and not any additional penalties, Cerny said. “Savvy importers” will protect themselves by requiring claimants of drawback on their imported merchandise to get a surety bond covering the claims and a written agreement with the potential claimant, he said. Importers with potential third-party drawback claims may also want to work with customs brokers, who can see sensitive information from both the claimant and the importer and keep it confidential, Cerny said.

Beyond the drawback provisions of the new customs reauthorization law, major changes also are coming to drawback as a result of its automation in ACE, the panelists said. Chief among these is electronic proof of export, Cerny said. The law required CBP to allow use of electronic export information (EEI) in ACE as proof of export, but what could streamline the process even more is the potential to use the outbound manifest, which would prove the date of importation as well as fact, he said. CBP is currently “building the framework” to validate electronic drawback claims with information filed in the ACE Automated Export System and export manifest systems, Carney said, though it is not “hooking up” the systems yet.

Electronic drawback will also allow CBP to act more quickly on claims, Carney said. There’s a “lot more validation right up front,” so rejected claims will be sent right back to the claimant, without having to wait for a CBP drawback specialist to it, she said. The quick turnaround is going to be a challenge for CBP, which currently has a backlog of more than 12,000 claims in New York alone, Carney said. Complicating matters, CBP is for several years going to have claims filed in ACE that are based on consumption entries filed in the legacy Automated Commercial System. All in all, it will “take a while to smooth out,” but “in the end I think that’s a win for us,” Carney said.

Another coming change is CBP’s simplification of the entry types applicable to drawback, Carney said. Today, drawback entries are filed under six different entry types, 41 through 46, depending on the type of drawback being claimed. CBP will debut a new entry type, 47, which will cover all drawback, and include a box to check the provision of law under which the claim is being filed.