Thursday, August 04, 2016

Ruling of the Week 2016.17: A Burning Question About Drawback

What happens when an importer pays duties, taxes and fees on imported merchandise which is subsequently destroyed in a fire? Unfortunately, nothing good.

Duty drawback is a statutory mechanism by which 99% of the duties, taxes, and fees paid on entry may be refunded if, within three years of importation, the merchandise is exported or destroyed under Customs' supervision. The merchandise must not have been "used" in the U.S. and the claimant must satisfy the regulatory requirements. See generally 19 USC § 1313(j)(i). As an aside, there are other kinds of drawback for special circumstances including petroleum products, substituted goods, and rejected merchandise.

In HQ H219828 (Aug. 27, 2014), a company called Sarmento Import and Export, Inc., sought drawback on bottles of wine lost in a warehouse fire. To give CBP the opportunity to observe destruction, the regulations require that the claimant submit a Form 7553 at least seven working days prior to the intended destruction date. This gives CBP the opportunity to verify what merchandise was destroyed. CBP need not always do so, but it must be given the opportunity. Of course, there was no prior knowledge that the fire would occur and no intended date of destruction.

The fire occurred on June 6, 2009. In an effort to recoup the duties, taxes, and fees paid on the lost inventory, Sarmento filed a CBP Form 7553 on September 2, 2010, more than a year after the wine was destroyed. As further backup, Sarmento submitted inventory receipts, post-fire photographs, a spreadsheet, and prior customs entries. Most of the company's records were destroyed in the fire.

Sarmento asked CBP to verify the destruction after the fire occurred. Unfortunately, CBP was unable to verify what merchandise had been destroyed. Consequently, CBP could not certify on the 7553 that it had verified the destruction of previously entered merchandise. Sarmento, therefore, was not entitled to drawback.

This is a sad story, but there are a few lessons to be learned.

First, drawback is technical and has detailed requirements. Be careful when making claims to satisfy the statutory and regulatory requirements. There is always the possibility that CBP has over stepped its regulatory authority by mandating some detailed information or other procedural requirement not intended by Congress. But, no one should want to be the claimant who has to fight that fight.

Second, detailed inventory records showing customs entries and the corresponding receipts of merchandise and warehouse location should be maintained and backed up separate from the inventory itself. While there is no way for Sarmento to have filed a timely 7553, Notice of Intent to Destroy, having better records might have given CBP more confidence in the claim. That would not have guaranteed a successful claim, but it would have helped.

Third, think about whether your insurance covers duties, taxes, and fees as well as part of the insured value of your inventory.

I'll look for better news to pass on.

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