CIT Rejection of Excise 'Double Drawback' Regs Likely to Result in New Final Rule, Hold on Processing Claims

Recent CBP regulations limiting the amount of drawback that can be claimed on excise taxes look set to be invalidated, after the Court of International Trade issued a decision Jan. 24 that found those limits contradict the legal framework created by Congress for drawback and legislative intent to expand the duty savings program.

CBP’s final rule “runs afoul of the ordinary meaning of drawback and results in irreconcilable statutory conflicts,” CIT said. It is “contrary to the clear intent of Congress as expressed in the language and structure of the statute. Accordingly, the court must hold the Final Rule unlawful,” the trade court said. CBP issued the final rule in December 2018 as part of a broader overhaul of drawback regulations following passage of the Trade Facilitation and Trade Enforcement Act of 2015 (see 1812170013).

CIT declined to immediately issue an order vacating the regulations, setting deadlines in February for more briefs due on what form of judgment it should issue. But that is the likely outcome. “Really, the only thing that the plaintiffs can seek is to have the challenged regulations vacated, and new regulations, which conform to the statute, enacted,” said John Peterson of Neville Peterson, who filed an amicus brief in the case on behalf of Customs Advisory Services.

The National Association of Manufacturers and the Beer Institute filed the lawsuit. They challenged portions of the regulations that deem exportation without payment of excise taxes to be a form of drawback, and limit the amount of drawback to the amount of taxes paid (and not previously refunded) on the export that forms the basis for the drawback claim. Taken together, the provisions clarified that CBP considers drawback claims that rely on excise-unpaid exports (such as domestic wine never sold for domestic consumption) a form of prohibited “double drawback.”

NAM also cautioned that the final rule’s effects would spread beyond just drawback on wine excise taxes. The limits “would prevent the use of untaxed exports as the basis for drawback of any taxes, duties, or fees at all,” NAM said.

CIT applied the Supreme Court’s “Chevron” test to determine whether CBP’s regulations should stand. First, a regulation must not violate the clear intent of laws passed by Congress. If those laws are ambiguous, then step two is determining whether the regulation is reasonable and doesn’t go against congressional intent.

The “double drawback” ban didn’t make it over the first bar. The drawback laws only reference drawback on taxes and duties “paid or determined,” not taxes that are never assessed. The expanded definition also “makes no logical sense. Excise tax is often never paid on exported alcohol,” CIT said. The requirement that taxes be paid on the exported good also run afoul of the drawback laws. “Drawback is simply not conditioned on the tax status of the substituted merchandise. That consideration finds no basis in the statute,” CIT said.

Congress also knew about CBP’s concerns about “double drawback” for at least a decade, and declined to change the drawback laws to address the issue, even as it made several other drawback changes, CIT said.

“Even if Treasury has a legitimate policy concern about what it views as excessive drawback refunds, the place to seek correction is Congress, not the courts,” Peterson said about the decision. “The court noted that Congress had been asked to enact legislation in line with Treasury's position, and had declined to do so. There is a tension between the revenue-raising purpose of excise taxes and the granting of drawback, the Court noted, and Congress consistently has resolved the tension in favor of drawback,” he said.

Despite the clear rejection by the court of the “double drawback” provisions, the immediate outcome is likely a hold on drawback claims affected by the decision. “With the challenged regulations struck down, I suppose Customs could start processing and granting claims based on the language of the statute itself,” Peterson said. “But 19 USC 1313(l) contemplates that Treasury will issue regulations for calculation of drawback, so CBP will probably not process claims until new regulations, compliant with the statutory requirements, are adopted.”

The court could issue a deadline for those new regulations, as it did in a separate, October 2018 decision involving other parts of CBP’s final rule (see 1810120055). “What will be interesting to see is whether the Court's final judgment will set a time limit for CBP to enact the required regulations and then review the regulations issued to ensure that they are consistent with the statute,” Peterson said. “This is the approach the Court took in the 2018 Tabacos de Wilson case, which forced Customs to adopt the overdue Modernized Drawback regulations in the first place.”

Given CIT’s clear rejection, an appeal seems an uphill battle, Peterson said. “Whether the government appeals remains to be seen. But they lost on a ‘Chevron Step One’ analysis, which doesn't leave them much room for further arguments in the Court of Appeals,” he said.

“We are pleased that the U.S. Court of International Trade recognized that federal law clearly provides for the refund of certain taxes when manufacturers export similar products,” said Peter Tolsdorf, NAM deputy general counsel, in an emailed statement. “The ‘drawback’ of these taxes has a proven record of supporting manufacturing growth in the United States. The significant increase in wine exports since drawback was first implemented for wine in 2004 illustrates the pro-manufacturing effects of this program. The NAM and its members look forward to the Treasury Department’s implementation of duty drawback to empower manufacturers in America.” CBP and the Justice Department did not comment.