Definition
The lesser-of rule caps substitution drawback at 99% of the smaller of two amounts: the duties, taxes and fees paid on the designated import, or those the exported or destroyed article would owe if it were imported (19 U.S.C. 1313(l)(2)(B)). For manufacturing substitution, the comparison uses the substituted merchandise instead (1313(l)(2)(C)). It applies to substitution claims under 1313(j)(2) and 1313(b), not to direct identification or rejected merchandise claims.
Also known as: lesser of rule, lesser-of calculation
Which drawback claims does the lesser-of rule apply to?
Substitution claims: unused merchandise substitution under 19 U.S.C. 1313(j)(2) and manufacturing substitution under 1313(b). It does not apply to direct identification claims (1313(a) and (j)(1)) or to rejected merchandise claims under 1313(c). Two narrow categories are exempt: wine under (j)(2) and petroleum under 1313(p) (1313(l)(2)(D)). The rule came in with TFTEA for claims filed on or after February 24, 2018.
How does CBP calculate the lesser-of amount?
CBP compares values per unit. The import side is the per-unit value of the designated entry line, averaged in the line's HTSUS unit (19 CFR 190.2 and 190.51(b)(1)(ii)). The other side depends on the claim (190.11): the selling price in the export filing (EEI) for an export, the value at the time of destruction for a destruction, and for manufacturing substitution the acquisition or production cost of the substituted input. In CBP's examples, the import line's duty rates are applied to the lower value, 99% is taken, and the result is rounded per unit. ACE checks the reported per-unit values on substitution claims.
What does the lesser-of rule look like in practice?
Illustrative numbers for an unused merchandise substitution claim:
- Import line: 1,000 units entered at $50,000 ($50 per unit), dutiable at 3.4% plus 25% Section 301, so 28.4%, or $14.20 of duty per unit.
- Export: 600 domestic units in the same 8-digit HTS subheading, sold at $40 per unit on the EEI.
- With the lesser-of rule: 28.4% x $40 = $11.36 per unit; 99% of that is $11.25; times 600 units is $6,750.
- If the export price were $50 or more: 99% x $14.20 = $14.06 per unit; times 600 units is $8,436.
The lower export value cut the refund by $1,686. A direct identification claim, exporting the imported units themselves, would not be capped this way.
How does the lesser-of rule affect Section 301 refunds?
Section 301 duties are drawback eligible (CSMS 18-000419), and claims report both the Chapter 99 number and the regular HTS number (CSMS 19-000050). CBP says eligible Chapter 99 duties are refundable on substitution claims even when the lesser-of rule applies; the cap bites only when the substituted goods are worth less than the imported goods, as in the example above. Chapter 99 duties that are not drawback eligible are excluded, and ACE checks for them. See Section 301 duty drawback.
Where does Stable Software fit?
DrawbackAI by Stable Software computes substitution claims per unit, including the lesser-of comparison, as part of optimized import-to-export matching: pairing high-value exports with high-duty imports keeps more of the refund. Customs brokers file the claims for their importer clients under their own filer code and POA. Flat software license. No contingency, no percentage of the refund. See DrawbackAI.
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Frequently asked questions
Does the lesser-of rule apply to direct identification drawback?
No. It applies only to substitution claims under 19 U.S.C. 1313(j)(2) and 1313(b). Direct identification and rejected merchandise claims are not capped by it.
Which values does CBP compare under the lesser-of rule?
The per-unit value of the designated import line against the export's selling price in the EEI, the value at destruction, or, for manufacturing substitution, the substituted input's cost (19 CFR 190.11).
Does the lesser-of rule reduce Section 301 drawback?
Only when the substituted goods are worth less than the imported goods. CBP says eligible Section 301 duties are refundable on substitution claims, limited by the lower value when the lesser-of rule applies (CSMS 19-000050).
Are any claims exempt from the lesser-of rule?
Yes: wine under 1313(j)(2) and petroleum claims under 1313(p) (19 U.S.C. 1313(l)(2)(D)).