February 24, 2018 was supposed to be a red letter day for importers and exporters. Two years earlier, Congress, in enacting the Trade Facilitation and Trade Enforcement Act (TFTEA), announced a historic expansion of the duty drawback statute, Section 313 of the Tariff Act. Substitution for drawback purposes, long governed by amorphous tests of “commercial interchangeability” or “same kind and quality”, was to be replaced by a straightforward test based on eight-digit tariff classifications. The time period for claiming drawback was to be expanded, in many cases, from three to five years.  International traders looked forward to reaping what promised to be hundreds of millions of dollars in additional duty refunds.

All the Treasury Department had to do – and it was given two years to do it – was to enact a regulation setting out the method for calculating drawback refunds. And Congress gave Treasury a very detailed blueprint of what it expected that calculation rule to look like. Customs and Border Protection repeatedly told the trade community it would be ready to go with the new drawback rules by February 24, 2018: “Trust us!”

Needless to say, Treasury did not publish its regulation by the appointed date. Instead, it recently released a bizarre “Guidance Document” called Drawback: Interim Guidance for Filing TFTEA Drawback Claims, which, in effect, mothballs large parts of the drawback program for an indefinite period – possibly years.

CBP’s excuse was that it didn’t have time to issue the required refund calculation rule. In fact, the Guidance Document contains a whole bunch of rules – Customs just couldn’t be bothered to follow the requirements of the Administrative Procedure Act (APA) to issue them.


Good News, Bad News, Worse News

The “good news” – Customs will begin accepting drawback claims filed under the new TFTEA rules beginning February 24, using its new Automated Commercial Environment (ACE) portal. The “bad news” – Customs won’t be processing any of those claims for a long time – not until it has issued proposed new drawback regulations, received and analyzed public comment on them, and issued them in final form – a process that typically takes years to complete.

Wait, there’s “worse news” – Customs will not be issuing accelerated payments of drawback refunds, as the Customs Regulations require [19 C.F.R. §191.92], until its regulations are finished and it starts reviewing TFTEA drawback claims. That’s true even if your company has qualified for accelerated drawback and has posted a bond to secure the government for repayment.

“No Time to Make Rules – So Here are Some Rules”

While Treasury claims it hasn’t had time to issue a drawback refund calculation rule, the Guidance Document in effect contains such a rule – the one Congress hinted at under TFTEA. In filing claims under the new law, claimants are to calculate their refund as the lesser of (1) the weighted average value per unit of goods on the entry line item, and (2) the drawback that would have been paid if the designated exported merchandise had been imported.  So, if the average drawback per imported unit would be $3.20, and the drawback on the exported unit would have been $3.00, the claimant gets the lesser number -- $3.00.

Only not for a long, long time, apparently.

And the Guidance Document contains other rules – none of them issued using legal process, none of them vetted for public comment – but apparently immediately effective and binding. Two of the more notable:

  • The “First Filed” Rule – if you previously designated any merchandise on an entry line item for direct identification drawback [19 U.S.C. §1313(j)(1)], the remaining drawback-eligible merchandise cannot be designated on a claim filed using the TFTEA rules – ever.  If you try to designate such merchandise, your claim will be rejected.
  • The “Mixed Use” Rule – if you designated an import entry for substitution unused merchandise under the pre-TFTEA standard, you need to advise Customs what line item the goods came from. And then that line item’s ineligible for a claim under TFTEA rules. If you don’t provide CBP with the copious additional information the agency asks for, your claim will be denied. This rule is in effect only for the February 24, 2018-February 2019 “transition year”, during which claimants can select to have their claims processed under old rules or TFTEA rules.

And there are other goodies. If you hold a manufacturing drawback ruling, you’ll need to modify it during the “transition year”, or Customs will revoke it as “void” at the end of the year.

Funny, for an agency that claims not to have had time to make a rule, CBP surely seems to have made quite a number of rules. It just didn’t bother following the legal requirements for making them.


Why Have One Set of Regulations When You Can Have Two?

How did this state of affairs come to pass?  Well, even though Congress told CBP to make a single regulation about calculating refunds, the agency seems to have gotten it into its bureaucratic head that it needs an entire second set of drawback regulations, and has drawn up a proposed 19 C.F.R. Part 190, which presumably will deal with “TFTEA” drawback claims.  Never mind that the current regulations, 19 C.F.R. Part 191, expressly deal with “all” claims for drawback. It sounds like Customs intends to have two largely duplicate sets of regulations, one of which will slowly ride into the sunset over the next decade as pre-TFTEA claims (which Customs has taken to calling “core” drawback claims) run their course, and a second title governing TFTEA claims. [CBP must not have gotten the Administration’s memo about curtailing unnecessary regulations].


Rulemaking Takes Time – Lots of It

This has all the makings of tragedy for drawback claimants and those who service them, particularly if CBP takes years to finalize its new regulations. By way of comparison, the last comparable change to the drawback law was enacted in 1993. Customs didn’t stop processing claims, and only conformed its drawback regulations, instead of proposing a whole new set – but its final regulations weren’t issued for 5 years, until 1998. [And CBP didn’t update most of its drawback forms to reflect the 1993 changes until 2001].

Unlike other types of duty refunds, drawback is not paid with interest. So if a refund is delayed several years, the drawback claimant loses the use of money for that period – a situation the accelerated payment regulation [which remains in effect and a perfectly good device for processing TFTEA claims] – was designed to address.  Plus, companies that count on drawback could suffer reduced cash flow, and diminished profitability in the interim.

And once the final regulations are set, CBP’s four regional Drawback Processing Centers will presumably take a while to dig through years’ worth of unprocessed claims.

It’s a bizarre situation. And one which, as executed by CBP, is patently unlawful.