CAFC Affirms, No Double Drawback Problem on Wine

Back in 2020, we covered National Association of Manufacturers v. Department of Treasury in which the Court of International Trade invalidated a CBP regulatory amendment that prohibited drawback of certain excise taxes based on the export of domestically-produced wine that was exempt from the export tax. The Federal Circuit has now affirmed that decision, along much the same lines of reasoning as applied by the CIT, so go read that post for more details.

In brief, Customs and Border Protection (but apparently not Congress) perceived there to be a problem in the way drawback law has been applied to wines with respect to excise taxes. Prior to CBP amending the regulations, drawback could be claimed for the recovery of excise taxes paid on imported wine where the corresponding exported wine was a domestic product that was exempt from the excise tax. The exemption might apply because the wine was exported from a bonded warehouse without being offered for sale in the U.S. The apparent concern is that domestic manufacturers who do not also import wine, are subject to the excise tax for production and sale in the U.S. and cannot offset it by claiming drawback on imports that were subject to the tax. 

CBP branded the allowed substitution drawback based on excise tax exempt wine "double drawback." In the regulatory amendments, CBP tried to eliminate this practice by broadening the definition of drawback to include the remission of the excise tax (i.e., the avoidance of collection). Once avoidance becomes drawback and because drawback can only be claimed once, the "problem" goes away.

Except that the Court of Appeals disagreed. 

First, the Court rejected the idea that a remission is the same as drawback. The relevant statutes, which were not amended, appear to authorize this very practice. The tariff law, 19 USC 1313(d), allows for drawback of excise taxes on imported wine. Moreover, the tax law, 26 USC  5362(c), allows for the withdrawal of wine for export from a bonded warehouse without the payment of excise taxes. Together, this seems to indicate that Congress understands and approves of this process. The United States argued that its expanded definition of drawback was proper under the law because § 5362 creates the same benefit as a refund of the tax by exempting the wine from excise tax to begin with. According to the Court, this makes no sense because, one cannot "drawback" a tax that was never paid.

The Government proffered other arguments trying to parse the statute to support its broader definition of "drawback." The Court of Appeals would have none of it. According to the Court, the amendments conflict with the statute. For example, the amendment makes a hash of the statutory method for calculating the amount of the drawback. That method states that the drawback will be 99% of the lesser of the duties, taxes, and fees paid on the imported goods or on the exported goods had they been imported. Under the CBP approach, that will always be zero because the exemption for wine exported from a bonded warehouse results in a zero tax. 

This all seems to be the worst sort of lawyerly semantics. There is no double drawback here. There is exactly one drawback covering the taxes actually paid on imported wine. The perceived problem is not that twice the amount paid in is refunded. On the contrary, no more than 99% of what was paid in can be the subject of drawback. 

Nevertheless, allowing tax-exempt wine to serve as the basis for a substitution drawback claim does disadvantage companies that do not have tax-exempt wine on which to claim drawback. If that is a bug in the system, it can be corrected by Congress. On the other hand, it may be a feature. Drawback law is intended to encourage exports. Domestic wine producers can use bonded warehouses to avoid excise taxes for exports. Maybe that is exactly what Congress wants and why it has not addressed this.

Cheers.

Also, worst title ever, but I am too tired to be any more creative.

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