Shipping products internationally is complex. Ecommerce businesses often leave don’t understand everything they need to set up before they officially launch into a new market.
While many brands start shipping internationally through direct-to-consumer sales, there are many other sales channels to pursue. Retail, B2B and online marketplace selling requires a significantly more complex returns process.
One of the hardest parts of international returns is reclaiming the duties, taxes, and customs fees that were paid upon import. This is especially true for retail, B2B, and online marketplace shipments—reclaiming customs fees for these types of returns is known as duty drawback, or drawback.
If you are an ecommerce brand shipping your products internationally through B2B and retail outlets, here’s what you need to know about duty drawback.
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What are Duties?
Anytime a product is imported into a country it incurs a duty fee, which is one of many types of customs fees. Duties differ based on the country of origin and the country of import. They are often determined by international trade negotiations, and they are based on product characteristics.
It’s difficult to understand the difference between duties, taxes, and tariffs. They are all types of customs fees. One differentiator is that while duty fees change, they don’t ever go away.
Duty rates are applied to certain categories of materials and products, and they largely depend on how much that country needs them. For most consumer goods duty fees are usually 5-7% of the import value, because these products may not have as big of an impact on the economy.
Duties are calculated by each product’s 10-digit HTS code. This is a fixed code that is dependent on the characteristics of your product. Every type of product is classified with a specific HTS code.
What is Duty Drawback?
Duty drawback, also called drawbacks, is when a refund is collected for the customs fees and duties paid imported products that have then been exported back out of the country. Drawback refunds are only collected upon export.
The process to reclaim customs fees from international returns is complex. Duty drawback is specifically only used for retailers importing finished goods, then warehousing them, then exporting them to a third country. Duty drawback only applies to B2B shipments, online marketplaces and retail goods.
Duty drawback does not apply to the following scenarios:
- The importer will export products one time only, unless the product is high value
- The importer is shipping a duty-free product
- The importer is shipping a Free Trade Agreement product
Read our readiness checklist for ecommerce brands looking to start shipping internationally.
How Does Duty Drawback Work?
To make your duty drawback a success, it comes down to the data collection you have as a merchant. It’s important for both your freight forwarder and your fulfillment provider to track the inventory and SKUs (or barcodes in some cases) so that you can properly match everything up to get the maximum refund.
The US duty drawback program allows merchants to reclaim 99% of the duties and taxes that were paid. A freight shipment will have duties and taxes on it so the big benefit for merchants is if you can match up what was imported with the inventory that has left the country, then you can submit a claim and recover 99% of what you paid in taxes.
Historically the program was built for manufacturers bringing in parts and assembling them and then re-exporting them. But it now also works with the ecommerce industry, specifically retailers and marketplaces reselling items.
For example, many merchants might want to start shipping to online marketplaces soon after launching a new country. If your product is listed on a popular marketplace, you’ll be more likely to grow your customer base quickly. While marketplaces often act like retailers in the eyes of customs rules, there are some nuances that need to be understood. Many online marketplaces will also need to ship your products out of the country when international orders come in. This brings up the question of duties and taxes paid on the imported products that don’t end up staying in the country.
How to Apply for Duty Drawback
There are many rules around how and when you can apply for duty drawback. Here are the main points to keep in mind:
- Keep an accurate record of all invoices, shipment receipts, exportation documents, and transfers of merchandise.
- Your records should be kept for 3-5 years because you must apply for duty drawback within 5 years of import.
- File and apply on time and with all accurate paperwork needed.
Documentation you’ll need to submit to apply for duty drawback include:
- Proof of duties paid (this is usually found on a specific customs form called 7552)
- Entry summary form (this is a specific document that includes an entry number for your import)
- Proof of import (this is often your shipping invoice acquired at Customs and Border Protection)
- Proof of export (this can be your customs documentation like commercial invoice and shipping declaration)
Who Gets Paid Back with Drawbacks?
The party who receives the refund from duty drawbacks depends on the customs documentation and agreements made for import. It can be the importer, exporter, or intermediate party within the drawback transaction.
Because duty drawbacks require significant administrative work (and usually the help of a firm or broker which means extra fees) it’s important to weigh the amount of costs returned with the amount of costs it takes to administer a duty drawback program.
Most merchants will work with a specific type of international shipping agency to manage their duty drawback. If you’re a smaller brand it may be hard to get a contract with these agencies because many of them have very high minimums and work with big companies who have large shipments. There are some third-party providers who will do the same thing for other smaller brands.
If you are looking for international shipping support, reach out to DCL Logistics for a quote. We have excellent international partners who integrate seamlessly into our systems. You can get flawless fulfillment from DCL and also freight forwarding from Flexport, or international shipping support from Passport Shipping.
Tags: International
