Import Taxes and Duty Drawback: An Introductory Guide to Savings

Hardly a day goes by recently without another headline about plans for new tariffs on certain—or all—goods imported from a particular country. While news like this can cause a fair amount of uncertainty for businesses, it’s also raised awareness of duty drawback—a tariff mitigation strategy that allows businesses to recoup duties on items that are subsequently exported or destroyed.   

And it’s not the first time it’s happened.  

For example, when U.S. import tariffs on over 12,000 products jumped from 2.6% to 17% in 2018, many of our clients responded by adjusting their international trade strategies. While these increased duties—also known as the Section 301 tariffs—hit certain industries rather hard, hundreds of our forward-thinking clients have been able to offset these impacts by establishing duty drawback programs.  

As a licensed customs broker focused exclusively on duty drawback, I’m always surprised at how many businesses don't realize they're leaving money on the table. And I suppose that’s good news if you’re reading this blog; whether you’re the importer-of-record, the exporter-of-record, or an intermediate consignee, taking advantage of a duty drawback program gives you a significant competitive edge.  

In this short guide, I’ll break down everything you need to know about how import taxes work and how you can recover those costs through drawback.  

What is Duty Drawback?  

Duty drawback is a refund of tariff-imposed import duties, taxes, and fees paid on imported goods that are subsequently exported or destroyed.  

The concept is similar to other tax refunds you may have experienced in the past. You pay money to the government and, if certain criteria are met, you can get the money refunded to you. However, instead of the tax being on income it is on the items that you import. And instead of tax brackets and deductions determining your refund amount, it is duty rates and proof exportation or destruction. In fact, in some situations it could be better than income tax refunds as you can recover up to 99% of the duties that you paid.  

Understanding Import Taxes and Your Recovery Opportunities  

While many businesses view import duties as a fixed “cost of doing business,” relatively few logistics and trade compliance professionals know about the full potential a drawback program can have on their organization’s bottom line. Some, I’ve been surprised to learn, know next to nothing about drawback.  

The Basics of Import Taxes & Drawback  

When goods come into the United States, the U.S. Customs and Border Protection (CBP) agency collects import taxes—also known as customs duties. If they ultimately leave the U.S. in the same condition, are manufactured into something else, or are rejected (i.e., returned or destroyed), then Uncle Sam allows you to recoup those duties, regardless of whether you were the importer-of-record.  

Here's the part that keeps drawback professionals busy: to get drawback refunds, it’s necessary to jump through a lot of hoops. And as with many government processes, this requires proof, paperwork, and persistence. 

Working through a duty drawback claim is kind of like putting together a jigsaw puzzle. We take your imports, compare them to your exports and find as many matches as we can. And when that happens, it feels even better than that satisfying “click” when two puzzle pieces snap together. For us, it’s a “cha-ching!” as we see money moving back to our clients’ bottom lines.  

Oh, and did I mention that we only get paid when you do?  

We leave it to other brokers and logistics firms to handle things like customs clearance, tariff classifications, bonds, and such. Our sole focus is applying for drawback privileges and filing claims on behalf of our clients. I know it’s nerdy, but it’s what we do best.   

Why Duty Drawback Matters Now More Than Ever  

Recent tariff increases have made duty drawback an increasingly important strategy to maintaining our clients’ competitive advantage. While many of the newest tariffs are not drawback eligible—at least not as of this writing—drawback can be claimed on many of the older tariffs. And collecting even a partial amount of your paid duties can help mitigate costs, potentially keeping your prices down and helping you maintain or increase your piece of the proverbial pie.  

Consider this scenario: A manufacturing company faces a 25% increase in import duties on their raw materials. By implementing a comprehensive drawback program, they could potentially recover 99% of eligible duties—transforming what might have been a significant financial burden into a stronger bottom line.  

Or maybe consider the case of setting up a bonded warehouse. That’s a good strategy and it may work for some businesses. But that takes time and money, especially if you’re starting from scratch by buying the land, pouring the foundation, etc. In today’s dynamic tariff environment, we’re finding that a lot of businesses are gravitating toward duty drawback due to the lower overhead of setting up a program, especially if your drawback provider is 100% commission based, as we are. 

Types of Import Taxes and Their Drawback Potential  

It’s important to know that the privilege of claiming drawback isn’t limited to importers or exporters. Even third-party logistics firms (i.e., intermediate consignees) can qualify. Here’s a short introduction to help you know whether your organization is eligible.  

It’s also important to understand the different types of duties and how they relate to drawback. I’ll discuss two here that can help you maximize your returns.  

Ad Valorem Duties: Your Primary Drawback Opportunity  

Ad valorem duties are the most common recoverable import tax. Derived from the Latin for "according to value," these duties are comparable to the property taxes your county may assess on your home. 

Here’s how it works in international trade. If you or your supplier imports something valued at $100 and the import duty is 25%, you pay $25. If it leaves the U.S., or you choose to destroy it, you can get that $25 back (well, 99% of it) so that’s $24.75. But we are guessing you probably import way more than $100. So, if you are curious how much you can potentially receive back, use this calculator to see how drawback might benefit your organization.   

Specific and Compound Duties: Hidden Recovery Potential  

Some products face specific duties (fixed amounts per unit) or compound duties (combining percentage and unit rates). At first glance, these complex duty structures might seem like a barrier to applying for drawback privileges and ultimately filing claims. Yes, specific duties mean that you must proportionally allocate duties for exports that involve partial shipments, repackaging, or processing. And compound duties require tracking both quantity-based and value-based components.  

For these reasons and many more, companies dealing with specific and compound duties rely heavily on detailed record-keeping and accurate inventory tracking systems to ensure compliance and maximize refunds. But that becomes significantly easier when you have a trusted partner to guide you through the process. 

Qualifying for Duty Drawback: Beyond Basic Eligibility  

Remember, drawback is a privilege, not a right—one that is it is contingent upon strict compliance with specific rules and regulations set by CBP. That is, drawback applicants must actively meet certain criteria to claim the benefit, rather than having an inherent entitlement to it; essentially, it's a benefit that can be granted or revoked depending on adherence to the program's guidelines.   

This is where having a solid privileges application comes in. It’s the first and most important step we take at CITTA Brokerage on behalf of our clients. Without it, you simply don’t have a program.   

Complex Eligibility: Our Specialty  

Just as you might rely on a tax accountant to help with your annual income tax returns, using a drawback provider to file claims on your behalf helps ensure that you maximize the amount you can recover. Your drawback specialist can also help you overcome common challenges like:  

• Documenting the direct identification between imported and exported goods  

• Proving manufacturing substitution eligibility  

• Meeting specific timeframe requirements for claims and information requests 

• Understanding qualifying activities beyond traditional import/export scenarios  

• Keeping your program in compliance with hundreds of CBP rules and regulations 

  
  

Beyond Traditional Import/Export Operations  

One common misconception is that drawback only applies to straightforward import/export operations. However, I've helped manufacturers, retailers, and distributors—many of whom didn't consider themselves importers or exporters—implement successful drawback programs.  

Take Action: Transform Your Duty Payments into Opportunities  

Throughout my years of helping businesses navigate duty drawbacks, one truth has remained constant: waiting to start a drawback program means leaving money on the table. While import duties might seem like unavoidable costs, we’ve helped hundreds of organizations transform these expenses into opportunities for growth and competitive advantages.  

Today's complex trade environment, marked by increased tariffs and shifting regulations, makes duty drawback more valuable. Smart companies aren't just accepting these heightened costs—they're partnering with specialists who understand the intricate privilege application process and can maximize their recovery potential while ensuring full compliance.  

Ready to discover your duty drawback potential? Let's have a conversation about your specific situation. Set up a discovery call today.