5th Circuit Rejects Broad Reading of 'Importer' Under IRS Rules

The U.S. Court of Appeals for the 5th Circuit last week held that tire retailer Texas Truck Parts & Tire was the "beneficial owner" of tires imported by Chinese manufacturers and, as such, is liable for excise taxes on the imports (Texas Truck Parts & Tire v. United States, 5th Cir. # 23-20588).

5th Circuit Judges Cory Wilson and Dana Douglas, along with Judge Wendy Vitter of the U.S. District Court for the Eastern District of Louisiana, rejected the government's broad construction of what parties may constitute an importer, though they said Texas Truck is still liable for the duties since it's the beneficial owner of the imports.

Texas Truck bought tires from the Chinese manufacturers during the period 2012-17. The Chinese companies, all of which had local U.S. affiliates, shipped and imported the goods then sent them to Texas Truck in Houston. The IRS sought payment of around $1.9 million in excise taxes, prompting a dispute on whether the Chinese companies or Texas Truck were the importer of the goods.

Though there is no congressional nor IRS regulatory definition of "importer," the Treasury Department defined the term as "any person who brings such an article into the United States from a source outside the United States, or who withdraws such an article from a customs bonded warehouse for sale or use in the United States." The district court sided with Texas Truck, finding the Chinese manufacturers to have been the ones to import the goods (see 2310130033).

The 5th Circuit reversed this decision, only after first rejecting the government's broad interpretation of the IRS' regulations. The court noted two instances for which an entity can be considered an importer under the IRS code. The first is when a party brings a taxable article into the U.S. or withdraws it from a customs bonded warehouse. The court said this construction leaves a gap regarding foreign entities that distribute taxable goods to a domestic party under a purchase order. The regulations fill the gap by imposing the tax on the goods' beneficial owner if the foreign entity is the nominal importer.

The U.S. argued that the term "brings" in the Treasury definition of importer should be read broadly. The government would say Texas Truck brought about the importation by placing an order. The 5th Circuit said this reading is "exceptionally broad, and an unnecessary expansion of the plain language." The court backed its decision with two IRS rulings that seemingly confer a more narrow construction of when a company is considered to be an importer.

Though it agreed with the district court's ultimate interpretation of the term "brings," the 5th Circuit disagreed with the way in which the district court used two authorities. The first is the Supreme Court decision in Cunard S.S. Co. v. Mellon, which held that importation consists of bringing an article in the country "from the outside," and that "an actual bringing in" is "importation regardless of the mode in which it is effect." The court said it's "not persuaded that this definition of importation" should influence the definition here since it came from a "since-repealed amendment."

The second authority was CBP's definition of "importer of record," which the court disregarded since "interpretation of a statute or regulation from one agency does not bind another's interpretation of that material." At issue was the Treasury's definition only.

However, the 5th Circuit kept Texas Truck on the hook for the excise taxes, since it found the company to be the beneficial owner of the goods, making the company the importer of the goods under the IRS' regulatory scheme. The court said the plain language of the regulations suggests that a "nominal importer is an entity that handles the transportation or logistics of importation on behalf of another entity that induced the importation and will derive almost all of the future benefits thereof."

There's "no doubt" here that the Chinese companies didn't act "as any more than nominal importers," the decision said. "The Chinese manufacturers were importers in name only." The goods were imported then shipped to an American company, "which then sold the tires," the court said.