In a major victory for drawback claimants, and particularly the wine, petroleum and tobacco industries, the United States Court of International Trade recently struck down Treasury Department regulations which sought to limit drawback of excise taxes on exported substituted merchandise. In National Association of Manufacturers v. United States, Slip. Op. 20-9 (January 24, 2020), the Court held that Treasury’s regulations — which limit drawback of excise taxes to the lesser of the amount of taxes paid on the designated import or the amount of taxes paid on the substituted export – were contrary to the language of the drawback law, as amended by the Trade Facilitation and Trade Enforcement Act of 2015.

The NAM decision is the latest development in a long-standing controversy that dates to 2004, when Customs’ drawback office in San Francisco began paying drawback of excise taxes charged on imported wines based on the exportation of substituted wines which had been withdrawn from bonded warehouses, and which had never themselves been assessed with tax. Treasury sought, unsuccessfully, to have Congress overturn the practice.

The drawback law, as amended by TFTEA, provides that excise tax drawbacks are to be based on the excise taxes that would have been assessed on the exported merchandise, had it been imported.  But Treasury issued Modernized Drawback regulations which limited the drawback to the amount of tax actually paid on the exported goods – in effect, precluding drawback where the exported goods had been withdrawn from a bonded warehouse. NAM, on behalf of its drawback-claiming members, sued to overturn the regulations.

While the CIT suggested that Treasury had identified a potentially valid policy concern, Senior Judge Jane A. Restani held that Treasury needed to look to Congress, not the courts, to address that concern. The Court also noted that, in enacting drawback reforms as part of the Trade Facilitation and Trade Enforcement Act of 2016, Congress acted “with presumed knowledge of the problem the agencies attempt to address in their regulations. In other words, Congress has acted. If the agencies wish a different result, they must seek it from Congress, not a court.”

Analysis of the Decision

Courts analyze government regulations, using a two-step test articulated by the Supreme Court in Chevron USA Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984).

“Chevron Step One” asks whether Congress has expressly spoken to the matter at hand. If it has, that is the end of the inquiry, and Congressional intent must be honored and enforced.

“Chevron Step Two” applies only where the court determines that Congress has left a “gap” to be filled by regulations. In that case, a reviewing court will uphold the regulations so long as they are “reasonable”.

The CIT decided the NAM case under Chevron Step One, finding that Congress had spoken expressly to the question at hand, and had mandated that excise tax drawback be calculated with reference to the taxes that would have been paid on the exported article had it been imported. This left the Court no option to try to interpret the statutory language in a way which would be compatible with Treasury’s regulations.

Much of the decision revolved around the interpretation of the terms “drawback” and “drawback claim”. Treasury, in its regulations, defined “drawback” to include not only a claim for refund of duties or taxes paid in respect of an imported article, but also any remission or exemption from tax under any other statute. Thus, the government asserted, paying excise tax drawback when the exported substituted article had not itself been assessed with tax would constitute a violation of the proscription against “double drawback” contained in 19 U.S.C. §1313(v).

Noting that the Tariff Act did not specifically contain a definition of “drawback”, the CIT resorted to common meaning to define the term. The court held that the Tariff Act, almost exclusively “uses the term drawback in relation to duties and fees imposed upon importation and then recovered”. The sole exception is found in 19 U.S.C. §1313(d), which provides for a drawback of excise taxes on certain flavoring extracts, medicinal or toilet preparations  and bottled distilled spirits and wines.  The Court further noted that, under the Internal Revenue laws, the term “drawback” is used only with reference to taxes paid or determined, and does not have the broad meaning set out in the challenged Customs drawback regulation.

The Court also found the substitution unused merchandise drawback statute, 19 U.S.C. §1313(j)(2), to be categorical in stating that with respect to “imported merchandise on which was paid any duty, tax or fee imposed under Federal law upon entry or importation”, that “notwithstanding any other provision of law, upon the exportation or destruction of such other merchandise an amount calculated pursuant to regulations published by the Secretary of the Treasury under subsection (l) shall be refunded as drawback.” The use of the phrase “notwithstanding any other provision of law” precluded denial of drawback based on any reading of the Internal Revenue Code or any other law. “Drawback is simply not conditioned on the tax status of the substituted merchandise”, the Court held.

The Court also noted that TFTEA had amended Section 313(l) of the Tariff Act to provide specific guidance concerning the method in which unused merchandise drawback would be calculated. The regulations were inconsistent with this direction. 

The Court has asked NAM to submit a proposed Judgment Order by February 7, and has given the Government until February 18 to respond. The Court should issue its final judgment shortly thereafter.

The Government has 60 days from the date of final judgment to determine whether it will appeal this decision to the Federal Circuit. At this time, it is unclear whether Treasury will appeal, but since the CIT disposed of the case under “Chevron Step One”, it left very little room for the government to maneuver on an appeal.