Time is Ripe to End the Double Duty Drawback Tax Loophole

As senators consider H.R 1, the One Big Beautiful Bill Act (OBBA), they have an opportunity to agree with the House to close a loophole that harms American companies and jobs.  This loophole, known as a duty drawback, allows companies to avoid paying an excise tax and then claim a refund for the amount they were supposed to pay.  According to a May 13, 2025, Joint Committee on Taxation report, repeal would raise $12.1 billion over the next 10 years.   It would also protect American farmers and manufacturers.

Since America’s founding in 1789, the government has allowed companies to claim a drawback on duties and taxes that they have paid on goods that are stored in the U.S. but then either exported or destroyed.  The original intent was to provide an incentive for companies to use U.S. ports as part of their trade routes.  The use of drawbacks was expanded in the 2004 Miscellaneous Trade and Technical Corrections Act.  However, this legislation created a loophole that allowed companies that stored their products in a bonded warehouse and then never paid an excise tax on these products to export them from the U.S. and claim an excise tax drawback refund.

This loophole was mainly used by alcohol companies until 2015, when the Trade Facilitation and Trade Enforcement Act of 2015 was signed into law and expanded the number of industries, including cigarette manufacturers, that could claim the double drawback refund.  Since 2015, cigarette manufacturers have been moving production out of the U.S. and then importing their products and storing them in a bonded warehouse.  In addition to claiming a refund of these excise taxes and harming taxpayers, the double drawback also threatens domestic farming and manufacturing jobs, since tobacco companies are moving their manufacturing overseas to avoid paying the initial excise tax on cigarettes.

The OBBA as passed by the House of Representatives on May 22, 2025, contains a provision that would close the double drawback loophole.  The Senate should agree to end this policy, which costs the government billions of dollars and puts tobacco companies that have continued to manufacture their products domestically at a competitive disadvantage.  That would be a win for American business, consumers, and taxpayers.