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Duty Drawback Newsletter - October 2009

Principals and Agents

If you are a company that claims drawback under the manufacturing drawback provisions, you need to be aware of a requirement in the regulations that is often overlooked. As businesses become more specialized and look to outsource functions that are not part of their core business, there may be instances where a manufacturing function gets shifted to the facilities of an outside converter or contractor. Unless you have properly advised Customs of this, you are not in compliance with the drawback regulations.

Each manufacturer or producer of articles intended to be claimed for drawback must be covered by a drawback ruling. This requirement holds true even for those outside contractors that may be doing only a single aspect of your manufacturing process. The ruling can be one of the published general manufacturing drawback rulings which were designed to cover common manufacturing operations, or can be a specific manufacturing drawback ruling covering a single company's own unique situation.

§191.9 of the drawback regulations addresses those situations where a company that owns merchandise may contract with another corporate entity for certain manufacturing functions and yet still retain ownership of the merchandise. The owner of the merchandise is considered the principal in such instances, and the other party is considered to be the agent.

The advantage to this type of arrangement is that operations performed by a properly identified agent are considered as having been performed by the principal. This removes the burden of having to document transfers of merchandise from the principal to the agent on Certificates of Delivery, or to document transfers of processed merchandise back to the principal from the agent on Certificates of Manufacture and Delivery.

In order to qualify to use the principal-agent concept, certain requirements must be met. The owner must establish that it is the principal in a contract between it and its agent who actually does the work for the principal on either the designated or substituted merchandise, or both. The contract must include:

1. terms of compensation to show that the relationship is an agency rather than a sale
2. how transfers of merchandise and articles will be recorded by the principal and its agent
3. the work to be performed on the merchandise by the agent for the principal
4. the degree of control that is to be exercised by the principal over the agent's performance of work
5. the party who is to bear the risk of loss on the merchandise while it is in the agent's custody
6. the period that the contract is in effect.

The records of the principal and/or the agent must establish that the principal has legal and equitable title to the merchandise before receipt by the agent. It must also be clearly established that the commercial relationship between the two parties is not a buy/sell arrangement. The principal must retain ownership of the merchandise at all times, and the agent can only charge for the work it performs on behalf of the principal.

The owner/principal must have a drawback ruling that describes the complete manufacturing process, including those processes done by the agent, and must state that it intends to operate under the principal-agent procedures. The agent must either have its own specific manufacturing drawback ruling, or must file to operate under the general manufacturing drawback ruling published for agents.

If your company is claiming manufacturing drawback, make sure that any agents are properly identified and qualified. You also need to identify any separately-incorporated subsidiaries or affiliates that may be involved in the manufacturing process, since these related companies cannot be covered by an approval issued to a parent company. These are considered separate legal entities and must have their own drawback rulings.

As you research your company's manufacturing operations to determine if agents are involved, please contact us for assistance. We will work with you to identify those situations that qualify for principal/agent consideration, and will file for the requisite drawback rulings. We can also address situations that do not qualify under this provision to bring your drawback program into full compliance with the drawback statute and regulations.