FEDERAL CIRCUIT AFFIRMS CIT DECISION INVALIDATING LIMITATIONS ON EXCISE TAX DRAWBACKS

The United States Court of Appeals for the Federal Circuit, in National Association of Manufacturers v. Department of the Treasury, No. 2020-1734 (August 23, 2021), affirmed a decision of the United States Court of International Trade (CIT) which invalidated certain Treasury Department regulations which sought to limit drawback of Federal Excise Taxes (FET). The Federal Circuit found that Congress had spoken plainly to the issue at hand, favoring duty drawback over excise tax collections, and that Treasury’s regulations were inconsistent with Congressional intent.

Section 313 of the Tariff Act of 1930, as amended by the Trade Facilitation and Trade Enforcement Act of 2015, provides that excise tax drawbacks are to be paid in respect of eligible exports as though they had been imported. But the Treasury Department, in crafting its Modernized Drawback Regulations, 19 C.F.R. Part 190, sought to limit excise tax drawback in two ways: first, the regulations limited excise tax drawback to the amount of excise tax that had been paid on the exported good, a clear deviation from the statutory directive. Second, Treasury expanded the regulatory definition of “drawback claim”  to include any exemption or forgiveness of tax, rather than a claim for a refund of a duty or tax already paid.

The Court of International Trade struck down the regulations, holding that they did not pass Step 1 of the two-part test for evaluation of regulations set out in Chevron USA Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984).  Step 1 of the test asks whether Congress has spoken directly to the question at hand; if so, then the language of the statute governs.  If Congress has not spoken directly to the question, and has left “gaps” to be filled in by regulations, Step 2 of the test asks whether the agency’s regulatory interpretation is “reasonable”.

The Federal Circuit, per Judge Jimmie Reyna, held that:

To prevail, the Government must succeed in both its redefinition of “drawback,” particularly for the purposes of the “double drawback” prohibition of 19 U.S.C. § 1313(v), and in its interpretation of numerous subsections of 19 U.S.C. § 1313.

The Government fell short on both counts.

First, the Court struck down as unreasonable Treasury’s attempt to expand the regulatory definition of “drawback claim” for purpose of interpreting 19 U.S.C. §1313(v) prohibition against “double drawbacks”. Rejecting the government’s argument that excise taxes are “determined” on bonded goods upon removal from warehouse, and then “canceled” upon exportation, noting this was inconsistent with provisions of the Internal Revenue Code. The Court then sustained the traditional definition of “drawback” as being a claim for refund of a duty or tax actually paid:

The Rule’s broadened definition of “drawback” includes a drawback of excise tax that was never “paid or determined” on exported merchandise. See 26 U.S.C. §§ 5704(b), 5214(a), 5362(c). This defies logic. A tax that has never been paid or determined cannot be said to have been “drawn back,” and goods that have been exported without payment of tax cannot give rise to a “claim” for drawback, because there would be no refund to be paid out or cancellation of liability to be made.

The appellate court next rejected the Government’s arguments that its proposed limitations on excise tax drawback were consistent with legislative intent and sound policy considerations, noting that Congress directed that substitution drawback be paid under 19 U.S.C. §1313(j)(2) requiring substitution unused merchandise drawback to be paid when conditions are satisfied “notwithstanding any other provision of law”. The CAFC also noted that the Treasury regulations would effectively cancel the refund calculation provisions set out in the statute at 19 U.S.C. §1313(l), specifically that excise tax drawback was to be paid based on the tax “that would apply to the [substituted] exported article if the exported article were imported.”.

The Court rejected Treasury’s claim that the legislative history of the drawback statute supported its interpretation, stating that “Here, the legislative history of the drawback regime demonstrates that Congress chose to expand access to drawbacks at the expense of excise taxes”.

The decision protects an excise drawback scheme which the wine industry has enjoyed for years, and opens up new duty drawback opportunities in the tobacco and petroleum industries.