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Canada and Mexico have to be done on a direct ID basis. Substitution to Canada went away with NAFTA. But there are different methodologies behind direct ID.
Most of us have heard of the accounting terms FIFO and LIFO, but may not understand exactly how they work in a drawback situation or when they should be used.
When utilizing First-In, First-Out (FIFO) all receipts (imports and domestic receipts) and all sales (exports and domestic sales) are accounted for. Next, the first sale (export sale or domestic sale) and the oldest legal receipt (within three years of the sale), are married for the drawback claim reports. Finally we draw down the inventory of the receipts and the sales by like amounts. Last-In, First-Out (LIFO), works almost the same except the sales are married to the newest receipts first.
After all sales in your claim are processed there should be a receipt to match each. If any export or domestic sales are not matched to an import or domestic receipt, the inventory is out of balance and the discrepancy must be located. The work in finding a 'home' for all of the sales makes the accounting methods FIFO and LIFO less attractive. Before choosing one of the accounting methods, consider how your own general inventory moves and use the same methodology. It seems most companies move merchandise on a FIFO basis as most drawback accounting is based on the FIFO method.
The explicit ID tracks an export back to an import by a unique reference number such as serial number, order number or maybe even the 7501 number. Usually only very costly items will carry a serial number. Other commodities such as food and drugs can carry lot numbers that could be used to track an export back to an import on an explicit ID basis. In some cases even an order number is carried throughout, from import purchase to export sale and that could be used as the unique, traceable reference for direct ID.
Customs allows use of the old "blanket ID" method. The blanket ID method (LOHI, for Low to High) specifies a match of exports to imports based on the imports with the lowest duty per unit first. If two or more imports have the same (lowest) duty per unit then you claim drawback on the oldest of the lowest.
To use the blanket ID, all receipts must be imports. The same part number(s) CANNOT be bought or made in the US. If you make parts1 thru 10 in China (and not at all in the US) and 11-15 in China and the US you can still claim LOHI on parts 1-10 because all receipts are imports. You cannot claim blanket ID (LOHI) at all on parts 11-15 because they are not always of foreign origin.
Many people fit the blanket ID category as it seems everything is now made overseas. Word has gotten out that blanket ID is allowed. More folks are claiming exports to Canada and Mexico now as they familiarize themselves with the correct methods.
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