Elimination of 'Double Drawback' for Excise Only Ends 'Anomaly' Created by CBP Field Office, DOJ Brief Says

A recent change to the customs regulations that limits the use of substitution drawback on excise taxes is supported by the plain language of the law, and merely closes a “double drawback” loophole that CBP San Francisco erroneously opened in 2004 when it misinterpreted that legal language as it was first enacted, Justice Department lawyers said in a brief filed Aug. 28 with the Court of International Trade.

The National Association of Manufacturers challenges the December 2018 final regulations on drawback under the Trade Facilitation and Trade Enforcement Act of 2015 (see 1904180046). A provision in those regulations limits drawback to “the amount of taxes paid (and not returned by refund, credit or drawback) on the substituted merchandise” (see 1812170013). NAM and other industry groups argue that provision limits drawback contrary to congressional intent, and also impermissibly applies retroactively to claims filed prior to the final rule’s February 2019 effective date (see 1906280030).

The government says “double drawback” was never the intent of Congress. Before 2004, excise tax drawback was the exclusive domain of the Internal Revenue Code, as administered by the Alcohol and Tobacco Tax and Trade Bureau. The 2004 law that expanded CBP drawback to also cover excise taxes opened up the risk that companies would claim drawback on excise taxes from both TTB and CBP, the government said.

For example, a case of California wine on which excise taxes were refunded via TTB drawback could also form the basis of a substitution drawback claim on a case of imported French wine. “The result would be a case of French wine available for consumption in the United States virtually free of excise taxes, which would subvert the intent of the excise-tax regime to uniformly impose excise tax on all domestically consumed products subject to the tax,” the government’s brief said.

According to the brief, the Tariff Act at 19 USC 1313(v) prevents that from occurring by providing that: “Merchandise that is exported or destroyed to satisfy any claim for drawback shall not be the basis of any other claim for drawback; except that appropriate credit and deductions for claims covering components or ingredients of such merchandise shall be made in computing drawback payments.” Contrary to what NAM and other industry groups claim in their challenge, the mentions of “drawback” in that statute apply to drawback under both the Tariff Act and the Internal Revenue code, the government said.

But despite that prohibition, after the legal change in 2004, “CBP’s San Francisco Drawback Center inadvertently began processing drawback claims on imported wine that resulted in the double drawback of excise taxes,” the government said. “No statute, regulation, ruling, or other guidance had ever explicitly permitted the double drawback of excise taxes before 2004, and to date, no such law allows it, or specifically provides for it.” Indeed, CBP has only granted “double drawback” for wine, and not any other commodities including beer, spirits or tobacco.

“The double-drawback payments on wine are, in short, an anomaly,” the government said. But because “Customs law requires notice-and-comment proceedings to modify treatment previously accorded by CBP to substantially identical transaction … the anomaly persisted for years despite no express authorization for it in law.”

CBP’s TFTEA drawback regulations changed that. Its interpretation of 19 USC 1313(v) “not only reasonably follows from the text, but is consistent with the overall statutory drawback and excise-tax schemes,” the government said. It’s also consistent with history, given that double drawback claims weren’t granted before 2004, and “even the special treatment of wine resulted from a processing error in the San Francisco field office,” it said. “And nothing in Congress’s decision to make excise taxes eligible for substitution drawback in 2004 meant that all such drawback claims were to be paid regardless of other applicable provisions of Title 19.”

The regulations are not impermissibly retroactive either, the government said in its brief. “The rule does not have retroactive effect” given that the prohibition in 19 USC 1313(v) “has been the law for more than 25 years,” it said. “The Rule corrects this error and takes effect for substitution claims for the drawback of excise taxes on wine made 60 days after the publication of the Rule. Because the Rule was finalized and published on December 18, 2018, the prohibition on the double drawback of excise taxes on wine took effect for claims filed on or after February 19, 2019.”

Email ITTNews@warren-news.com for a copy of the brief.