When “Unused” Merchandise Was Actually Used: Drawback Fraud and the False Claims Act
Unused merchandise drawback allows importers to recover nearly all of the customs duties they paid when imported goods are re-exported or destroyed without being used in the United States. The statute defines “use” narrowly enough that testing, cleaning, repacking, and similar operations do not disqualify the goods. But when merchandise is deployed for its intended commercial purpose — installed at a customer site, sold to a consumer, put into production — it has been used, and a drawback claim that says otherwise is a false claim for payment from the United States.
Drawback fraud is the mirror image of the customs duty evasion that drives most False Claims Act enforcement in the trade space. Instead of avoiding an obligation to pay duties, the claimant seeks an affirmative payment from the Treasury to which it is not entitled. That makes drawback fraud a direct false claim under 31 U.S.C. § 3729(a)(1)(A) — a simpler and cleaner legal theory than the reverse false claims theory that underlies duty evasion cases. And among the various ways a drawback claim can be false, the misrepresentation that merchandise was “unused” when it was actually put into service may be the most common and the most visible to employees inside the company.
Unused Merchandise Drawback: A Brief Primer
Under 19 U.S.C. § 1313(j), when imported duty-paid merchandise is exported or destroyed under CBP supervision without having been used in the United States, the importer may claim a refund of up to 99 percent of the duties paid. The provision has two variants: direct identification drawback under § 1313(j)(1), where the actual imported goods are exported, and substitution drawback under § 1313(j)(2), where the claimant exports merchandise classifiable under the same 8-digit HTS subheading as the imported goods. In either case, the merchandise must not have been “used” before export.
The statute provides an extensive safe harbor. Operations including testing, cleaning, repacking, inspecting, sorting, refurbishing, blending, repairing, reworking, cutting, slitting, adjusting, replacing components, relabeling, disassembling, and unpacking do not constitute “use” for drawback purposes, provided they do not amount to manufacture or production. This list is intentionally broad: Congress recognized that merchandise often requires handling, quality checks, or minor preparation before re-export, and none of that should disqualify the goods from drawback recovery.
But the safe harbor has a boundary. When merchandise is deployed for its intended commercial purpose — when it does the thing it was designed to do, in the hands of the person it was designed to serve — it has been used. A drawback claim filed on used merchandise contains a false certification, and every payment CBP makes on that claim is a payment the government should not have made.
Where the Line Falls
The distinction between permitted operations and disqualifying use is fact-specific, but the principle is not complicated. An imported industrial pump that is bench-tested at a warehouse before re-export has been tested — a safe-harbor operation. The same pump, installed in a customer’s facility and run for three months as part of a process line, has been used. An imported garment that is inspected, refolded, and repacked for export has undergone safe-harbor operations. The same garment, sold to a consumer and worn before being returned, has been used.
CBP has addressed the returned-merchandise question directly. The agency has evaluated whether customer-returned retail goods can qualify for unused merchandise drawback, distinguishing between goods returned in pristine condition with tags attached and goods that show signs of having been worn or consumed. The analysis turns on whether the goods were deployed for their commercial purpose. Merchandise tried on briefly in a fitting room occupies a gray area; merchandise worn, washed, or visibly used does not.
The fraud arises when a company knows its merchandise was used and files a drawback claim anyway. The CBP Form 7553 — the Notice of Intent to Export, Destroy, or Return Merchandise for Purposes of Drawback — requires a certification that the merchandise has not been used in the United States before exportation or destruction. That certification is a statement to the United States government. When it is false, it supports a false claim for payment.
Hypothetical Fact Patterns
The following scenarios illustrate how the “used” question can generate FCA liability. Each involves merchandise that was deployed for its intended purpose before being exported, and a drawback claim that represents otherwise.
Diagnostic equipment deployed at a hospital and then exported. A medical device distributor imports high-value imaging equipment from a Section 301 country, paying 25% duties. The unit is shipped to a hospital for a 90-day clinical evaluation. During the evaluation, the equipment is installed, calibrated, and used to process patient samples. The hospital declines to purchase the unit. The distributor retrieves it, exports it to a buyer in Europe, and files an unused merchandise drawback claim certifying that the equipment was not used in the United States. But the equipment was installed and operated for its intended clinical purpose. This is not testing or inspecting — it is use. An employee in field service, clinical operations, or logistics who knows the unit was deployed at a hospital site has identified a false certification.
Returned consumer electronics resold abroad. A retailer imports smartphones, sells them to U.S. customers, and accepts returns under its warranty program. Some returned units are cosmetically imperfect, show signs of use, or have been activated and registered. The retailer aggregates these returns, exports them in bulk to a secondary-market buyer overseas, and files unused merchandise drawback claims on the full lot. But merchandise that was sold to and used by a consumer is not “unused.” The activation records, warranty registration data, and physical condition of the units all demonstrate that the goods were put to their intended commercial purpose. An employee in the returns processing center or trade compliance department who handles these units and sees the drawback filings has the factual basis for a qui tam claim.
Industrial tooling rotated through domestic production before export. A manufacturer imports specialized cutting tools from a country subject to antidumping duties. The tools are used in domestic production runs until they approach the end of their useful life, then pulled from the line, lightly refurbished, and exported to the manufacturer’s overseas subsidiary. The manufacturer files unused merchandise drawback claims, characterizing the refurbishment as a safe-harbor operation. But the tools were used in production — the refurbishment does not undo the prior use. The safe harbor applies to operations performed on merchandise that has not yet been used, not to merchandise that is reconditioned after use. An employee in production, tool management, or trade compliance who knows the tools ran in domestic production before being exported has identified the core of the fraud.
What Employees Should Watch For
The employees most likely to detect this pattern are those who handle the merchandise physically: warehouse workers, field service technicians, returns processors, quality inspectors, and logistics coordinators. They see the equipment come back from a customer site with installation marks. They process returns that have been opened, activated, or worn. They pull tools off the production line and prepare them for export. They know the merchandise was used.
Specific red flags include: merchandise bearing signs of deployment — wear, installation marks, field service tags, customer configuration changes — being certified as “unused” for drawback purposes; returned consumer goods with activation records, missing tags, or cosmetic damage being included in drawback claim filings; internal instructions to characterize used merchandise as having undergone only safe-harbor operations; and any gap between what the drawback claim file says about the merchandise’s history and what the employee knows actually happened to it. If you have observed a pattern consistent with these scenarios, contact us for a confidential consultation. The False Claims Act’s qui tam provisions allow individuals with original knowledge of drawback fraud to file suit on behalf of the United States and share in 15 to 30 percent of whatever the government recovers.
