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Trade Compliance

How Fashion E-Tailers Can Take Advantage of Duty Drawback

A number of factors have recently converged to “accidentally” turn U.S.-based fashion companies into exporters. This phenomenon has created duty drawback opportunities that didn’t exist 3 years ago.

Dan Gardner

Solutions Consultant at 3rdwave

This blog was written to accompany our upcoming webinar: Duty Drawback for E-Commerce - How to Reclaim 25% of Your Product Cost. LEARN MORE HERE.

The U.S. Fashion industry has never been known for pursuing export markets. Be it wearing apparel, footwear or accessories, the focus has always been on serving American consumers. There are lots of reasons for this, but a number of factors have recently converged to “accidentally” turn U.S.-based fashion companies into exporters. In turn, that phenomenon has created duty drawback opportunities that didn’t exist as recently as three years ago.

In general terms, “duty drawback” is defined by U.S. Customs & Border Protection as a program that refunds duties paid on imported merchandise when those goods are subsequently exported. There’s a lot more to the mechanics of duty drawback, but that’s basically the story. First implemented during the Great Depression to foster domestic job creation, U.S. companies have enjoyed the financial benefits of drawback for decades.

Even though the vast majority of fashion items sold in the U.S. are imported, traditional retailers (i.e. before e-commerce) never took advantage of duty drawback. The most obvious explanation for this is that fashion retailers were too busy serving the U.S. market to go after exports. Also, for larger retailers that had stores in other countries, they simply exported directly from the country of manufacture to the destination country, never bringing those goods into the U.S.

E-commerce has changed the above model because on-line shoppers around the world can buy whatever they like, from wherever they are. With strong brand recognition overseas, U.S. fashion companies now find themselves selling an ever-growing array of multi-item orders to individual shoppers as far off as Australia, Brazil and Germany. Whether you call it Business-to-Consumer or Direct-to-Consumer, the emergence of these accidental (or at least, unintentional) exports have created a unique opportunity for E-tailers to cash in on duty drawback.

Bearing in mind that imported wearing apparel, footwear and accessories carry heavy duty rates in the U.S., and that the Section 301 Tariffs increased duty exposure by another 25% for Chinese origin products, we’re talking about real money that importers pay to Uncle Sam. Now that they’re exporting, these same companies can recover 99% of the duties paid by executing a duty drawback. Of course, the trick is being able to a) prove that an item was imported and b) substantiate that a subsequent export took place.

Before we get into how a fashion importer/exporter can pull off a duty drawback, let’s address an important observation. Specifically, why wouldn’t a fashion importer fulfill non-U.S. orders directly from the country of manufacture, thus eliminating the need to bring goods into the United States and pay duties? There are a number of reasons why fashion companies don’t fulfill international D2C orders from the country of origin, two of which warrant an explanation.

The first has to do with the fact that the logistics infrastructures of countries that manufacture and export fashion goods are not set up for a Direct-to-Consumer order fulfillment model. Basically, countries like China, Vietnam, Cambodia and Bangladesh were set up for bulk exports, not thousands of individual on-line orders. In other words, while domestic D2C is flourishing in China, one would be hard-pressed to find a 500,000 sq. ft. fulfillment center in Shenzhen to service international D2C.

The other factor is related to the mix of items an international on-line shopper might purchase. For example, if a shopper in Israel goes on-line and buys two pairs of jeans, a shirt, a pair of shoes and a couple of scarfs, it’s very likely that those items were manufactured by at least three different vendors, each of whom could be in different countries. As such, the challenge is where (and how) to consolidate the order so that it arrives to Tel Aviv as one shipment. For the foreseeable future at least, the answer is, that can’t be done.

So, the above story takes us right back to where we started; a U.S. importer brings stuff into the U.S. from abroad, pays duty on it and fulfills both domestic and international orders from the U.S. Because a duty drawback claim is only triggered when goods are exported, the key for U.S. fashion companies is to have the ability to capture item-level detail on the hundreds (if not thousands) of small parcel shipments they are exporting every month. That’s different from how traditional exports are structured and as such, present some unique challenges.  

One of the big differences between a “traditional” duty drawback and a fashion drawback is that the latter is dealing with a high volume of individual export shipments, all of which are being exported via FedEx, UPS or DHL. Of course, that makes proving that an export took place more cumbersome, especially since low value shipments do not require an AES filing. Add to this the fact that the drawback claimant must be able to link an original import to an export via their internal inventory management system, and the process becomes even more complex.

Duty Drawback isn’t easy and can appear daunting to companies that are unfamiliar with how it works. With that said, there is a real opportunity for fashion companies to recover the (high) duties paid on imported goods. In the case of Chinese origin denim jeans, for example, the duty rate is 17%, plus the 25% Section 301 Tariffs. That’s $.42 in duty on every dollar of dutiable value, 99% of which can be recovered if those jeans are exported, and the fashion company can prove it. As one can see, the stakes in this game are high and should be taken seriously.

For those fashion companies interested in pursuing duty drawback, the hack lies in using software that automates the compilation and reconciliation of import, export and inventory management data. Unfortunately, that’s historically been a lot easier said than done, and even the savviest of drawback claimants have been forced to manage this process through a hodge-podge of disparate systems and unwieldy spreadsheets.

The good news for fashion companies is that because they’re new to the drawback game, they can begin with a “clean slate”. That means that they don’t have to depend on spreadsheets to manage a drawback program; they can avail themselves of web-native solutions that not only automate the data compilation process, but that create the item-level links between the original import, their own inventory management system and the export.  

In recognition of the drawback opportunity that now exists for the fashion industry, 3rdwave has developed a turn-key, web native solution that drives the entire process. Enabled by a unique Product Master Database and powered by algorithms that automate both data compilation and that matching of exports to imports, 3rdwave allows claimants to capture every penny of drawback that they’re eligible for.

With a particular emphasis on how to manage high volumes of D2C exports, the 3rdwave solution is unparalleled in its ability to serve the fashion industry. That capability makes the recovery of hundreds of thousands of dollars of duties anything but an accident.

This blog was written to accompany our upcoming webinar: Duty Drawback for E-Commerce - How to Reclaim 25% of Your Product Cost. LEARN MORE HERE.