Whining About Drawback

UPDATE: In a judgment dated February 18, 2020, the CIT ordered Customs to process claims that would have been denied as a result of CBP's redefinition of "drawback." Expect the government to seek a stay of the order pending its inevitable appeal.

Duty drawback is complicated enough without Customs and Border Protection  trying to bend it to its own will. National Association of Manufacturers v. United States involves an effort by Customs to redefine “drawback” in a way that prevents wine exporters from claiming substitution drawback on exports of domestic wine to recover excise taxes paid on imported wines. Got that?

The starting point for this is understanding that the government collects excise taxes on domestic wines consumed in the U.S. Excise taxes are not collected on wines exported from a bonded facility or, if paid, may be refunded on export. 26 U.S.C 5214(a)(4) and 5062(b). Drawback is defined as the refund of 99% of customs duties, fees, and internal revenue taxes imposed on imported merchandise under federal law including the refund of internal revenue taxes on domestic alcohol as defined in 19 USC 1313(d). Relevant here, substitution drawback occurs when the imported item is subject to tax and the drawback claim is made on the export of some other product that is classifiable in the same tariff item. In the case of wine, Congress has specifically limited substitution drawback to circumstances where the wine is of the same color and the value is within 50%. 19 USC 1313(j)(2). The fact that the exported item was not subject to the duty or tax does not prevent it from being used as the basis for the drawback claim.

Customs has long been unhappy about that practice. The way it has been explained to me is that CBP believes this creates an unfair advantage for companies that both import and export wine as compared to purely domestic producers. The domestics pay the excise tax. Importers that also export, on the other hand, can use their exports as the basis for drawback claims to recover excise taxes. To the extent that the excise tax may never be paid for goods exported from a bonded facility, Customs has called this “double drawback.” It has raised the issue with Congress and advocated for a change to the drawback law to bar claims in these circumstances. Customs has also claims that a 2004 ruling from the Port of San Francisco that authorized this practice was a mistake.

Not having secured a legislative change, Customs made a change as part of the Modernized Drawback regulatory package Congress required under the Trade Facilitation and Trade Enforcement Act (“TFTEA”), see 83 FR 37,886, 37,896 (Aug. 2, 2018). The clever change is to broaden the definition of drawback to include the refund or remission of excise taxes pursuant to other non-drawback laws. 19 CFR 190.2. Under this definition, the wine exporters that never pay excise taxes or secure a refund under the tax laws have already received the drawback and are not entitled to additional drawback under the customs laws. In other words, the new definition of drawback is an effort to formalize the “double drawback” conclusion CBP had previously reached.

The plaintiffs in this case are the National Association of Manufacturers and the Beer Institute, both of whom would presumably like to secure the same treatment that wine exporters have enjoyed. They argued that CBP’s regulatory change is inconsistent with the drawback statutes and, therefore, cannot be enforced.

From WineCoolerDirect.Com

The Court of International trade categorized the big picture question as “how far should it go in interpreting statutory provisions so that they are not inconsistent with regulations that appear to address valid administrative and economic concerns of the agencies responsible for the implementation and operation of the statute.” Answering its own question, the Court held, “not very far from the actual words of the statute, particularly where Congress acts with presumed knowledge of the problem the agencies attempt to address in the regulation.” That should tell you how this is going to come out.

Although this is a custom case, it does not involve an individual denied drawback claim. That would normally proceed on the basis of a denied protest and de novo review under 28 USC 1581(a). Instead, this is a general challenge to the regulation itself under the Administrative Procedure Act, 5 USC 702, et seq. That means the Court’s review is based on the agency record and the agency decision will be reversed if it is arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.

The way the Court reviews whether a regulation is consistent with law is, for now, based on the Supreme Court decision in Chevron, U.S.A. v. Natural Resources Defense Council, 467 U.S. 837 (1984). This involves a two-step analysis. First, if the relevant statute clearly addresses the question, the Court will require that the regulation be consistent with the intent of Congress expressed in the law. If the law does not address the question, the regulation will be upheld so long as it is based on a permissible interpretation of the statute by the relevant agency.

The Court identified lots of problems with Customs’ interpretation of the drawback law. Not the least of which was that Congress expressed a clear intent that excise taxes on alcohol be subject to drawback. This is explicit in 19 USC 1313(d), which states, in part:

Upon the exportation of bottled distilled spirits and wines manufactured or produced in the United States on which an internal revenue tax has been paid or determined, there shall be allowed, under regulations to be prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, a drawback equal in amount to the tax found to have been paid or determined on such bottled distilled spirits and wines. 

Nothing in this section nor in Title 26 defines drawback as the avoidance of excise taxes. Thus, a regulation that prohibits drawback for an excise tax that was paid on imports by adding an inconsistent definition of drawback is not in accordance with law.

The Court goes on to find that CBP’s interpretation of the drawback and excise tax statutes is internally inconsistent. The statutes simply do not make drawback depend on the tax status of the exported product. The fact that drawback can only be claimed once for any tax paid does not give Customs the authority to redefine drawback to create a duplicative claim. Under the prior regulation, one drawback claim was permitted to recover the excise tax paid on imports. Calling that duplicative does not make it so.

One by one, the Court knocked down the government’s various rationales for its interpretation of the drawback law. In the end, the government argued that its interpretation is necessary and appropriate to reconcile the revenue-raising purpose of the excise tax with the drawback law. As is, according to the government, permitting drawback on domestic products that were not subject to the excise tax undermines the “animating principles” of the laws.

It seems (to me) that CBP is trying to solve a problem that does not really exist. It is true that importers who subsequently export wine can claim drawback for excise taxes paid on the imports but not paid on the exported domestic goods substituted for the imports. True enough; but the claimant  can only seek drawback to the amount of the excise tax paid, less one percent. According to the Court, this is the balance that Congress reached. The policy behind drawback is to promote exports from the U.S. Congress appears to have expressly decided that the U.S. will forgo the collection of revenue to support the export trade. Customs’ effort to ensure the collection of excise taxes runs afoul of that and cannot stand.

Thus, the Court declared the regulation to be invalid and ordered the parties to propose an appropriate judgment.