Legal Challenges Over End of 'Double Drawback' Appear Likely

Further litigation over the final drawback rules under the Trade Facilitation and Trade Enforcement Act is widely expected, with the most likely target being the provisions on drawback for excise taxes, according to multiple lawyers watching the issue closely. One lawyer mentioned ongoing discussions with tobacco firms to file a lawsuit over the excise tax issue, while the wine industry, which could see an end to more than $50 million in annual refunds, would be another likely litigant. The so-called "double drawback" for excise taxes is the most obvious piece to be challenged, but there are some other issues that could face legal scrutiny.

While most challenges to federal regulations are argued in the U.S. Court of Appeals for the D.C. Circuit, a lawsuit over the drawback regulations may be more likely to fall under the Court of International Trade's jurisdiction, said John Peterson, of Neville Peterson. "After all, the CIT just decided the Tabacos de Wilson case, has clear jurisdiction over administration and enforcement matters relating to things arising under the Tariff Act and has some judges with drawback experience," said Peterson, who represented Tabacos de Wilson in the case that forced CBP to move forward with the final regulations (see 1810120055). "The CIT has in the past struck down drawback regulations."

There may still be an argument for having the D.C. Circuit consider the case, but "I think they're probably spoiling for a jurisdiction fight if they do that," Peterson said. One notable case in the late 1980s that involved customs regulations over trademarks eventually reached the Supreme Court, which found both courts could "exercise jurisdiction," Peterson said. Sandler Travis lawyer Michael Cerny said he too expects a legal fight over the excise tax provisions, "perhaps before those provisions become effective." The excise tax changes, unlike the rest of the final rule that took effect on Dec. 18, 2018, will become effective on Feb. 19. "That makes sense given the significant opposition reflected in the comments," Cerny said. Both Cerny and Peterson have previously filed comments in opposition to limiting drawback of excise taxes.

Trade groups, including the National Association of Manufacturers and the Distilled Spirits Council, have already expressed disappointment over the final rule. “We are exploring all options to resolve this issue so that manufacturers’ competitiveness is not impacted negatively,” Patrick Hedren, NAM vice president of labor, legal and regulatory policy. “At a time when retaliatory tariffs are impacting American business, small and large, this program could provide some relief, simplification, and add to our competitiveness,” DSC CEO Chris Swonger said. “Treasury needs to follow Congressional intent and stop impeding a program that levels the playing field for U.S. manufacturers in the global market.”

The wine industry, which has largely been the sole recipient of the drawback of excise taxes since 2004, seems to be taking the biggest hit due to the final rule. CBP said in its economic analysis for the final rule that "in 2015, substitution drawback claims for wine totaled approximately $54.9 million, or 15 percent of gross excise tax collections on imported wine." Robert Koch, CEO of Wine Institute, a wine trade association, said in a news release the group is "deeply troubled" over the final rule. "Congress has repeatedly stepped up to support wine’s participation in the program," he said. "It’s unfortunate that the administration chose to ignore that history.” John Buckley, a litigator with Williams & Connolly who filed one of the two sets of comments from E. & J. Gallo Winery and Constellation Brands and other major wine companies (see 1809190005), declined to comment beyond that filing.

Beyond excise taxes, the issue of mixed claims may also still be unresolved, Cerny said. Even though the final rule didn't prohibit the use of claims that seek substitution-based drawback under the TFTEA regulations for imports associated with entries designated as a claim under the previous drawback law, Cerny said claimants "still cannot file a TFTEA substitution claim against a line item previously claimed under core drawback." The result seems to be "the elimination of drawback that seems to be provided for in the statute" and could result in a lawsuit if seen as necessary and worthwhile, Cerny said.

Some yet-to-be identified issues also seem likely to emerge, Cerny said. Given the newness of the final rule, "I expect CBP will make decisions and issue interpretations that will result in some folks not getting the drawback they may expect," he said. "I expect also that over the next few years we will see protests and possibly litigation over how the regulations were meant to operate in particular situations and whether certain interpretations of CBP’s regulations are in line with what is provided for in the statute." That inevitable process will help "flesh out specifics about the regulations and statute," he said.