Substitution Drawback of Tobacco Products Is in Ways and Means Crosshairs

The ability to eliminate excise taxes on tobacco products through substitution drawback would end if the tax legislation the House Ways and Means Committee is considering becomes law. The U.S. considers this sort of drawback "double drawback," because the substitute exported product was never subject to excise taxes, and that is how the committee characterized it. "This provision stops the practice of double drawbacks for tobacco products by making exports that are not subject to excise tax ineligible for a drawback claim," the summary says.

The Treasury Department and CBP previously promulgated a regulation on "double drawback," but the Court of International Trade, and a federal appeals court, ruled that the regulation conflicted with congressional intent on drawback (see 2108230021). That regulation, however, prohibited exporters' use of substitution drawback on alcoholic beverages, not just tobacco.

At the same time, the committee recommends increasing excise taxes on tobacco, and applying excise taxes to the nicotine content of vaping cartridges. It would double the excise tax on cigarettes, small cigars and roll-your-own tobacco, and apply the cigarette rate to nicotine, which would make the tax rate for a Juul pod or the equivalent similar to the federal excise tax on a pack of cigarettes. After the doubling, the rates would rise with inflation starting in 2023.