In August, N.C.-based cigarette importer, King Maker Marketing Inc., challenged a decision by U.S. Customs and Border Protection (Customs) that rejected its claims for more than $11 million in drawback duties as untimely.
Under U.S. Customs laws, importers who pay duties, including federal excise taxes on cigarettes and other tobacco products, can seek a refund or “drawback” of those duties when the products are subsequently exported or destroyed. These drawback provisions are intended, in part, to promote exports to allow companies to compete in foreign markets.
One common type of drawback—at issue in King Maker’s legal challenge—is the “unused merchandise” drawback. This drawback claim allows an importer to obtain refunds of duties paid on certain imported cigarettes where the cigarettes are not used in the U.S. before being exported or destroyed, or through “substitution” provisions, where the importer exports or destroys other unused cigarettes with the same classification under the Harmonized Tariff Schedule.
Notably, the unused merchandise drawback claims must be submitted “before the close of the 5-year period beginning on the date of importation of the imported merchandise,” 19 U.S.C. § 1313(j)(2)(B) (emphasis added), where the phrase “date of importation” means either “in the case of merchandise imported otherwise than by vessel, the date on which the merchandise arrives within the Customs territory of the United States,” or “[i]n the case of merchandise imported by vessel, … the date on which the vessel arrives within the limits of a port in the United States within intent then and there to unlade such merchandise,” 19 C.F.R. § 101.1.
In its complaint filed with the U.S. Court of International Trade, King Maker argued that Customs incorrectly concluded that the claims were untimely based on an improper interpretation of the phrase “date of importation.” Because King Maker admitted the imported cigarettes into a Foreign Trade Zone (FTZ) outside of Customs territory, the company argues that the “date of importation” was the date the cigarettes were withdrawn from the FTZ for consumption in the U.S. By contrast, CBP reportedly asserts that King Maker had five years to file the drawback claims from the date the imported cigarettes were admitted to the FTZ.
In support of its complaint, King Maker points to language from the FTZ Act that provides that merchandise may generally be admitted to an FTZ “without being subject to the customs laws of the United States,” 19 U.S.C. § 81c—including the 5-year limitation period for drawback claims. The company also cites precedent for the proposition that “a foreign trade zone is considered to be outside the Customs territory of the United States.” Nissan Motor Mfg. Corp. v. United States, 884 F.2d 1375 (Fed. Cir. 1989).
Customs has not yet responded to the Complaint, so it remains to be seen how the agency will respond. The agency might argue, however, that the “Customs territory of the United States” for purposes of determining the drawback claims encompasses FTZ zones.
Takeaway
Importers who take advantage of FTZs will want to closely monitor this case, King Maker Marketing Inc. v. United States, No. 1:24cv134 (Ct. Int’l Trade Aug. 2, 2024).
On the one hand, a Customs’ victory would mean that importers’ drawback claims for imported merchandise could be strictly limited to the limitations period even if the goods are admitted to FTZs.
On the other hand, a King Maker victory could give importers that use FTZs greater flexibility with respect to drawback claims because the limitations period may not run until the merchandise is removed from the FTZ for consumption.
If you have questions regarding Customs drawback duties or federal excise taxes for tobacco products generally, our team is happy to assist.