Distilled Spirits Industry Hopes to Benefit From TFTEA Substitution Drawback Changes

Customs brokerages, law firms, and other members of the trade community are angling to secure eligibility of distilled spirits for substitution drawback under new regulations set to take effect Feb. 24, industry sources said in recent interviews. On that date, simplified substitution drawback enacted through the Trade Facilitation and Trade Enforcement Act will take effect, generally enabling substitution drawback to cover imports and exports with the same eight-digit HTS or Schedule B number. But questions surround whether CBP will deem distilled spirit exports eligible for substitution, due to the agency’s historical drawback treatment regarding alcohol-related excise taxes and technical classifications of U.S. production facilities.

The issue recently caught the attention of Congress, as House Appropriations Committee fiscal year 2018 DHS funding legislation asks why drawback claims for certain import tariffs are not accepted and why claims are not treated consistently across all categories of imported goods (see 1707190034). One reason for CBP’s denial of distilled spirits claims could have to do with the fact that all U.S.-made liquor exclusively destined for export from the start of production is made in customs bond, a trade lobbyist said. This means the liquor is never entered for U.S. consumption, a necessary criterion for both imports and exports, to qualify for drawback. Further, the bonded exports are exempted from excise tax. “So you’re never technically generating a credit that can be used against the import of that same commercially interchangeable eight-digit HTS code," the lobbyist said.

Asked about the mention of drawback in the funding legislation, a CBP spokeswoman said the agency is “actively considering” a protest filed by a U.S.-based distiller over four claims liquidated without payment of claimed excise tax refunds, and CBP has made “prior determinations” that the substitution method isn’t available for distilled spirits. Several more protests to CBP are “in queue,” according to an industry source. Excise taxes hadn’t been paid on the protesting distiller’s exports, and CBP couldn’t verify whether excise taxes were paid on the claimed imports “for purposes of processing the drawback claim as The Alcohol and Tobacco Tax and Trade Bureau (TTB) actually assessed and collected the excise,” the spokeswoman said in an email. TTB didn’t comment.

Although not entirely clear what distiller filed the claims referenced by the spokeswoman, there have been several recent lobbying filings that mention drawback. Brown-Forman, owner of Jack Daniels, listed “Customs and Border Protection's denial of drawback of taxes paid to Alcohol Tobacco Tax and Trade Bureau,” in a July lobbying report. Becker Law Firm is working on behalf of Brown-Forman on drawback, the firm said in a July 2 filing. Another recent filing shows that United Kingdom-based multinational Diageo hired Sidley Austin to lobby on alcohol excise taxes and drawback

CBP previously sought to address a related issue. The agency said in a 2009 proposed rule (see 09101520) that wine shouldn’t qualify for substitution drawback because that provides superfluous excise tax benefits for the product. CBP's proposal explained that avoiding "payment of internal revenue taxes on both imported and domestically-produced merchandise by relying on the provisions of two discrete statutory programs administered by different agencies for different purposes is contrary to Congressional intent.” That proposal was eventually withdrawn (see 10030215). CBP tried to change statutory precedent in that 2009 proposal, Tom Ferramosca, a customs broker with Thomas Ferramosca Associates, said in an interview. “They couldn’t make the change,” he said. “The hullabaloo was outrageous.”

However, U.S. wine produced in customs bond enjoys substitution drawback benefits, at least in part because the drawback statute “only talk[s] in terms of imports” and omits any language that directs an accounting of duties, taxes, and fees for exports if the products had been imported, for purposes of drawback calculation, Ferramosca said. The law carves out exports from calculation considerations of substitution claims for wine, and says that the refunds will equal 99 percent of duties, fees, and taxes paid on imports themselves.

One requirement for administering drawback is that taxes must actually be paid on involved imports and exports. "The test here is whether or not the excise tax was ever paid on the spirits before they were exported,” the trade lobbyist said. “Now if you had some spirits that were made for consumption in the U.S….and if you export those spirits, you would be entitled to the drawback.” An industry source who supports substitution drawback for distilled spirits said the lack of excise taxes upon export shouldn’t factor into qualification decisions because the Constitution prohibits taxes or duties on exports from any state. The source also noted that spirits produced in TTB bonded facilities -- not in customs bond -- are regularly entered into U.S. commerce, and, therefore, those products should qualify.

Another issue involved in the applicability of substitution drawback to spirits is the effects to U.S. tax revenue, others said. While wine incurs an excise tax of $1.07 a gallon, spirits incur an excise tax of $13.50 a proof gallon, a term for one liquid gallon at 100 proof. “The potential loss to the Treasury, if they should ever replicate in spirits what they’re doing in wine, is huge,” the trade lobbyist said.

TTB will likely be very cautious about the extension of substitution drawback to spirits when the TFTEA system enters into force in February, due to revenue concerns and because spirits are an item of “new impression,” the trade lobbyist said. The distilled spirits industry “would like customs to just approve a couple of these claims, and set a precedent, and then once they set the precedent, the floodgates would open,” the lobbyist said. “There would be a significant increase in people taking advantage of this utility. I think customs is aware of it. They’re trying to push back.”

But Ferramosca said TFTEA is sufficiently broad to allow distilled spirits to qualify for substitution drawback, and the industry source agreed. It remains to be seen whether or not CBP will address distilled spirits in its proposed rulemaking for TFTEA drawback, expected in September to allow enough time for public comments to meet the statutory deadline (see 1707200003). A CBP spokeswoman said the agency couldn't discuss the specific language in the proposal because "this rulemaking is still under active review." If CBP omits distilled spirits or doesn’t provide a desirable avenue for their substitution drawback treatment in the rulemaking, stakeholders will continue litigating the issue and make Congress “well aware” of the issue, similar to the 2009 proposed rule on excise taxes and wine drawback, the industry source said.