House Passes Legislation Targeting Excise Tax Drawbacks for Tobacco Products

No sooner did the Court of Appeals for the Federal Circuit hand exporters a major victory in obtaining excise tax drawbacks than the Treasury department has turned to Congress in an effort to reverse that decision, at least with respect to tobacco products.

Recently, in National Association of Manufacturers v. United States, the Federal Circuit struck down Treasury regulations which attempted to limit recovery of excise taxes in drawback by prohibiting the exportation of untaxpaid goods as the basis for substitution drawback claims.

Wine producers had enjoyed some $60 million per year in drawback refunds on excise taxes in recent years, and exporters of tobacco products were preparing to claim such drawbacks for the first time. However, a provision tax increase legislation, passed by the House of Representatives to help fund the Biden Administration’s proposed $3.5 million budget would eliminate certain drawbacks for tobacco products, and to do so on a retroactive basis.

Section 138505 of the funding legislation amends the Internal Revenue Code, 26 U.S.C. § 5704, to define any remission of excise tax as a “drawback.” It would prohibit the exportation of untaxpaid products as the basis for substitution drawback in claims filed by with the Alcohol and Tobacco Tax and Trade Bureau (TTB). While the legislation does not mention Section 313 of the Tariff Act specifically, its enactment would lead Customs to deny drawback claims for tobacco products, asserting that those claims would represent an impermissible “double drawback” in violation of 19 U.S.C. § 1313(v).

To add insult to injury, the amendment would be effective retroactive to December 8, 2018, the date Treasury, under court order, implemented its Modernized Drawback Regulation. Once those regulations were issued, tobacco exporters filed claims for drawback in respect of goods imported as far back as 2013. The new law, if enacted, would effectively extinguish those drawback claims – a possible violation of the “Takings Clause” of the U.S. Constitution.

Interestingly, the proposed amendment goes after tobacco exporters, but not after wine exporters. This is probably in recognition of the fact that earlier attempts to legislatively terminate excise tax drawback for the wine industry met with strong opposition from the Congressional California delegation.

Drawback proponents are mobilizing before Congress to have the controversial measure killed. At this time, it is too soon to tell what the chances of success will be, but this is another indication of Treasury’s hostility to the drawback program.