Rejected Merchandise Drawback Explained

Rejected merchandise drawback under 19 U.S.C. § 1313(c) applies to certain duty-paid imported merchandise that is later exported or destroyed because it meets one of the qualifying statutory circumstances.

Potential qualifying situations include merchandise that does not conform to specifications, was shipped without the consignee's consent, was defective at the time of importation, or was sold at retail and subsequently returned under the applicable rules. Eligibility depends on the reason for rejection or return, timing, disposition, and supporting documentation.

What Is Rejected Merchandise Drawback?

Rejected merchandise drawback is authorized under 19 U.S.C. § 1313(c).

It applies to certain imported, duty-paid merchandise that is later exported or destroyed under U.S. Customs and Border Protection (CBP) supervision.

Unlike manufacturing drawback, rejected merchandise drawback does not require the imported goods to be used in a U.S. manufacturing process. Instead, eligibility is based on the condition or circumstances of the imported merchandise, or, under a separate statutory provision, its return following a retail sale.

What Types of Merchandise May Qualify?

Under 19 U.S.C. § 1313(c), rejected merchandise drawback can apply when duty-paid merchandise entered or withdrawn for consumption falls into one of the following categories:

• The merchandise does not conform to a sample or specifications
• The merchandise was shipped without the consent of the consignee
• The merchandise was defective as of the time of importation
• The merchandise was ultimately sold at retail and, for any reason, returned to and accepted by the importer or qualifying recipient of the merchandise

CBP's current regulations recognize each of these as a basis for rejected merchandise drawback.

What Does “Not Conforming to Specifications” Mean?

Merchandise may potentially qualify when the imported goods do not meet the specifications, sample, or requirements under which they were purchased.

Depending on the facts, examples could include merchandise with:

• Incorrect dimensions
• Incorrect materials or composition
• Improper product specifications
• Quality characteristics outside the agreed requirements
• Other differences from the applicable sample or specification

The claimant must be able to provide documentation satisfactory to CBP establishing the basis for the rejected merchandise claim. Simply deciding that merchandise is undesirable or difficult to sell is not enough to establish that it failed to conform to a sample or specification.

Do Defective Imported Goods Qualify?

They may.

For rejected merchandise drawback based on a defect, the merchandise must be shown to have been defective as of the time of importation.

This distinction is important. Merchandise that becomes damaged after importation because of subsequent handling, storage, use, or another domestic event does not automatically qualify as defective merchandise under § 1313(c)(1)(C)(i).

The claimant must maintain evidence sufficient to demonstrate that the defect existed at the relevant time. CBP has previously denied rejected merchandise claims when the claimant could not adequately establish the asserted defect.

Supporting evidence may vary by product and circumstances and could include:

• Supplier correspondence
• Inspection reports
• Quality-control records
• Product specifications
• Photographs
• Testing results
• Return authorizations
• Credit documentation
• Records identifying the affected merchandise

What If Merchandise Was Shipped Without the Consignee’s Consent?

Merchandise shipped without the consent of the consignee is another statutory basis for rejected merchandise drawback.

As with defective or nonconforming merchandise, the claimant must be able to substantiate the circumstances supporting that basis and comply with the applicable export or destruction procedures.

Can Retail Returns Qualify for Rejected Merchandise Drawback?

Yes. Rejected merchandise drawback is not limited to merchandise that was defective when imported.

Under 19 U.S.C. § 1313(c)(1)(C)(ii), qualifying imported merchandise that is ultimately sold at retail can potentially qualify when it is returned for any reason and accepted by the importer or the person who received the merchandise from the importer.

CBP has specifically interpreted this provision as covering qualifying retail merchandise returned for any reason, without requiring the merchandise to have been defective or nonconforming.

This can make rejected merchandise drawback relevant to businesses with significant volumes of imported retail returns.

Is There a Special Substitution Rule for Returned Retail Merchandise?

Yes.

Current CBP regulations provide a special rule for returned retail merchandise. Under this rule, the claimant can designate an import that occurred within one year before the exportation or destruction of the returned merchandise if both the designated imported merchandise and the returned merchandise share:

• The same 8-digit HTSUS subheading
• The same specific product identifier, such as a part number, SKU, or product code

The claimant must maintain documentation supporting that relationship.

This rule can be particularly useful for retailers managing large quantities of identical products where tracing a particular returned unit to its original import entry may be difficult.

Does Rejected Merchandise Have to Be Returned to the Foreign Supplier?

No. The statute requires qualifying merchandise to be exported or destroyed under the applicable CBP procedures. It does not require the export to be made specifically back to the original foreign supplier.

The claimant must still maintain the required evidence of exportation and satisfy all other applicable rejected merchandise requirements.

Can Rejected Merchandise Be Destroyed Instead of Exported?

Yes.

Qualifying rejected merchandise may be destroyed rather than exported, provided the destruction follows CBP's required procedures.

For destruction-based drawback, CBP generally requires the claimant to submit CBP Form 7553, Notice of Intent to Export, Destroy, or Return Merchandise for Purposes of Drawback, at least seven working days before the intended destruction.

CBP then determines whether it will witness the destruction. If CBP does not attend, the claimant must provide evidence from a disinterested third party establishing that the destruction occurred as described.

The value of materials recovered through the destruction process may also affect the drawback calculation.

For additional information, see Can You Claim Duty Drawback on Destroyed Merchandise?

Does CBP Need an Opportunity to Examine Rejected Merchandise?

Generally, yes.

Rejected merchandise drawback has specific notice requirements designed to give CBP an opportunity to examine the merchandise before exportation or destruction.

For rejected merchandise claims, the claimant or exporter generally must file CBP Form 7553 at least five working days before the merchandise is intended to be returned to CBP custody, unless an applicable waiver procedure has been approved or satisfied.

CBP can decide to examine the merchandise or waive examination. If CBP timely states that it intends to examine the merchandise and the goods are exported or destroyed without being presented for examination, the affected drawback claim must be denied.

Because destruction has its own timing requirements, companies considering either exportation or destruction should evaluate the applicable notice procedure before disposing of the merchandise.

How Long Do You Have to Export or Destroy Rejected Merchandise?

Qualifying rejected merchandise generally must be exported or destroyed within five years after the date of importation or withdrawal, as applicable.

This is an important distinction from simply saying a claimant has “five years from the export date.” The applicable timing requirements begin with the underlying import or withdrawal, while the drawback claim itself must also satisfy the broader statutory filing requirements.

Returned retail merchandise using the special rule discussed above also has an additional requirement tying the designated import to the exportation or destruction within a one-year period.

For additional information, see How Far Back Can You Claim Duty Drawback?

How Much Can Be Recovered Through Rejected Merchandise Drawback?

CBP regulations provide for rejected merchandise drawback of up to 99% of the duties paid on qualifying imported, duty-paid merchandise, subject to the applicable statutory and regulatory calculation rules.

The actual refund depends on factors such as:

• Duties associated with the qualifying import
• The merchandise included in the claim
• The applicable drawback calculation
• Any duty-specific restrictions
• Documentation supporting the claim
• Whether recovered materials have value following destruction

A company should therefore evaluate the individual duty components rather than assume that every amount paid at import is automatically recoverable.

What Documentation Is Required?

Rejected merchandise claims require documentation supporting both the original import and the specific basis for claiming rejected merchandise drawback.

Depending on the situation, records may include:

• Import entry data
• Duty-payment information
• Commercial invoices
• Product specifications
• Purchase orders
• Supplier correspondence
• Inspection and quality-control records
• Evidence of defects or nonconformity
• Return merchandise authorizations
• Retail sales and return records
• Product identifiers such as SKUs or part numbers
• CBP Form 7553
• Export documentation
• Destruction documentation
• Records supporting merchandise ownership or transfers

Current regulations specifically require the claimant to provide documentation establishing that the merchandise was nonconforming, shipped without consent, or defective as of importation when one of those bases is used. If the claimant was not the importer, additional statements and supporting records regarding prior ownership and other drawback claims are required.

The electronic drawback claim must also identify which statutory basis applies to the rejected merchandise.

For additional information, see What Documentation Is Required for a Duty Drawback Claim?

Can Someone Other Than the Importer Claim Rejected Merchandise Drawback?

Potentially, yes, but additional documentation requirements apply.

Current CBP regulations specifically address situations in which the rejected merchandise claimant is not the importer. In that case, the claimant must obtain a signed statement from the importer and each other qualifying prior owner confirming that no other person has made a drawback claim on the merchandise, and the claimant must certify that records supporting that statement are available.

The specific transaction structure should therefore be reviewed before assuming that only the importer of record can pursue the claim.

Is Rejected Merchandise Drawback the Same as Unused Merchandise Drawback?

No. They are separate drawback provisions with different eligibility requirements.

Rejected merchandise drawback under § 1313(c) focuses on qualifying defective, nonconforming, unauthorized, or returned retail merchandise.

Unused merchandise drawback under § 1313(j) generally applies when qualifying merchandise has not been used in the United States before exportation or destruction.

There can be situations where merchandise potentially satisfies more than one provision. CBP regulations specifically state that rejected merchandise may be claimed under direct identification unused merchandise drawback under § 1313(j)(1) when the applicable unused-merchandise requirements are met.

Selecting the appropriate provision requires evaluating the merchandise, its condition and use, the available documentation, and the transaction history.

How Can J.M. Rodgers Help With Rejected Merchandise Drawback?

J.M. Rodgers can evaluate rejected merchandise activity as part of a broader duty drawback program.

Our team can review factors such as:

• Import and duty data
• Reason merchandise was rejected or returned
• Product and SKU information
• Supplier documentation
• Retail return activity
• Export plans
• Destruction plans
• Transaction ownership
• Available supporting records
• Potential alternative drawback methodologies

When rejected merchandise appears to qualify, J.M. Rodgers can help structure the applicable documentation and CBP procedures, prepare and file the drawback claim, and maintain support for the transactions included in the program.

Next Steps

If your company regularly exports, returns, or destroys imported merchandise because of defects, specification issues, unauthorized shipments, or retail returns, those transactions may create a rejected merchandise drawback opportunity.

The best time to evaluate eligibility is before the merchandise is exported or destroyed, because rejected merchandise drawback can involve advance notice and CBP examination requirements.

J.M. Rodgers can review the merchandise, import activity, reason for rejection or return, planned disposition, and available records to determine whether rejected merchandise drawback or another drawback methodology may apply.

Disclaimer

This information is general in nature and does not constitute legal advice. Rejected merchandise drawback eligibility depends on the specific merchandise, import transaction, reason for rejection or return, documentation, export or destruction procedures, timing, and applicable CBP requirements.