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.  

BREAKING DOWN 'Drawback'

A drawback is a type of rebate that is designated for importers and exporters that use the U.S. as a type of temporary storage space for their goods. These companies have them imported into the country where they remain for a period before they are exported to their next destination outside of the country.

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 into 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 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.   

An Example of a Drawback

For an example of a drawback, consider L&B Manufacturing. L&B Manufacturing is a company that manufactures children’s furniture. They are based out of the United States, but the wood they use to build their table and chair sets is imported from Norway and most of their customers are in Ireland. When L&B receives a furniture order they contact their suppliers in Norway who ship them the materials they need. These materials enter the country as raw timber. When the timber arrives, it is taxed as an import. The woodworkers at L&B then cut it down to the dimensions they need for the particular order they are working on. Once it’s the correct size they begin the intricate woodworking process that makes their furniture so popular. By the time they are done with it, the original raw timber has become a beautiful table with two matching chairs.

When they are ready to ship the order to Ireland, L&B will be charged an export tax. Although the timber looks nothing like how it did when it entered the country, the taxes have already been paid on the materials. L&B is eligible to file for a drawback and receive a rebate on the tax they paid when the finish product was shipped overseas.

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.

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