Drawback

What Is a Drawback?

A drawback is a rebate on taxes or tariffs paid by businesses on goods that were imported into the United States and then exported out again, such as on raw materials being imported for use in production, and the final goods then being exported. This lessens the tax burden on companies helping to improve their profitability.

Understanding a Drawback

A drawback is a refund on specific duties, fees, and taxes, collected from U.S. companies for importing goods according to the U.S. Customs and Border Protection Agency. Typically, imports and exports are taxed. Drawbacks help to alleviate the tax burden for U.S. exporters.

Drawbacks apply to companies that have materials imported into the U.S. where they remain for a period before they're exported to their next destination outside of the country. Although the laws have been modified over the years, drawbacks were originally instituted by the Continental Congress in 1789 in an effort to create jobs, boost manufacturing, and encourage exports.

The taxable goods that are eligible for the drawback once they have been exported do not need to be in the same condition as when they arrived in the country. The rebate is applicable to materials that are used in the manufacturing of other products as well. Once the manufactured product has been exported, the rebate would apply. However, a drawback does not apply to goods that have been damaged or spoiled prior to being exported.

The types of imports, according to cbp.gov, that might be eligible for drawbacks include:

The objective of the drawback is to allow U.S. manufacturers to have a competitive edge with other countries where labor or goods may be less expensive and to offset some of these costs. 

Example of a Drawback

Let's say, as an example, L&B Manufacturing manufactures children’s furniture in the United States. However, the wood they use to build their table and chair sets is imported from Norway. Also, most of their customers that buy their products are located in Ireland.

When L&B receives a new furniture order, they contact their supplier in Norway who ships them the materials they need. The materials enter the U.S. as raw timber, and it is taxed as an import. The woodworkers at L&B take the raw materials and produce the finished product, which is a table with two matching chairs.

L&B ships the order to Ireland and the U.S. manufacturer is charged an export tax. However, L&B is eligible to file for a drawback and receive a rebate on the taxes paid on the exported products.

Although the exported timber, or the finished product, looks nothing like the raw materials that were originally imported, L&B still gets the tax rebate. The drawback or rebate is granted because the company had already paid taxes on the imported raw materials.

Had that timber been damaged in a fire, or had the woodworkers made a mistake and cut the pieces too small to be used in the creation of the table, L&B would have been unable to receive the drawback on the taxes paid.

The process of the drawback allows L&B to avoid paying taxes twice on the different parts of their business, which for some manufactures, could be a significant financial burden; the difference between a profitable company and one incurring losses.