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Treasury and CBP Must Allow Drawback Refunds of Excise Taxes Pending Government Appeal

By John Brew, Teresa Abney & John Arszulowicz on May 20, 2020
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The government has lost another battle in its fight to prevent refunds of certain excise taxes paid by importers. Earlier this year, the U.S. Court of International Trade (CIT) struck down a regulation issued by the Department of the Treasury and U.S. Customs and Border Protection (Treasury and CBP, collectively the agencies) designed to limit the scope of those refunds. Nat’l Ass’n of Mfrs. v. United States Dep’t of Treasury, No. 19-00053, slip op. at 20-09 (CIT Jan. 24, 2020). Although the CIT ruled the regulation invalid, the government sought permission to continue to apply the regulation while it appealed the court’s decision. This would have allowed the government to deny refunds for the excise taxes at issue. Last week, the CIT denied the government’s request. Nat’l Ass’n of Mfrs. v. United States Dep’t of Treasury, No. 19-00053, slip op. at 20-67 (CIT May 15, 2020)

Regulations at Issue

The United States imposes federal excise taxes on certain domestically consumed goods (e.g., wine, beer, spirits, tobacco, petroleum products). However, U.S. companies may be eligible for a “drawback.” A drawback is a refund of certain duties, fees, or taxes collected on imports. A common drawback is the “substitution drawback,” which allows for a refund of taxes, fees, and duties collected on imports when the importer exports similar goods classified under the same Harmonized System (HS) tariff classification code. The excise tax is meant to raise revenue, whereas the drawback encourages exports by allowing a refund of taxes paid on imports.

Treasury and CBP said that under the current legal framework, the drawback rules led to a double drawback from some importers. That is, some U.S. companies could receive a refund of excise taxes paid on imported products even though the substitute exported product was never subject to any excise tax. To address this concern, Treasury and CBP promulgated a regulation to stop the “double drawback.” The regulation limited the drawback to the amount of taxes paid and not previously refunded.

Court of International Trade Strikes Down the Regulation

In January 2020, the CIT struck down the “double drawback” regulation. The court held that the regulation conflicted with the governing drawback statute (Trade Facilitation and Trade Enforcement Act of 2015). The court said that there are two competing regimes: the federal excise tax, which raises revenue, and the drawback statute, which encourages exports by refunding excise taxes. When choosing between these regimes, the court said Congress has repeatedly chosen to encourage exports at the expense of lost excise tax revenue.

Accordingly, the CIT invalidated the regulation and U.S. companies can continue to seek refunds of excise tax they paid on imported goods when they have exported similar goods, even if they did not pay excise tax on the exported goods.

The Agencies Attempt To Apply Invalidated Regulation

After it lost, Treasury and CBP appealed the case and requested that the CIT stay the case pending appeal. If granted, the stay would have allowed Treasury and CBP to operate as if the struck-down regulation was valid (and not have to issue excise tax refunds for “double drawbacks”). The court denied Treasury and CBP’s request. The CIT said a stay was not appropriate because the government was likely to lose on appeal, the government would not suffer irreparable injury absent a stay, and the stay would injure the complainants because drawback payments do not include interest.

Photo of John Brew John Brew

John Brew is the former chair of Crowell & Moring’s International Trade Group and a partner in the firm’s Washington, D.C. office.

John has extensive experience in import and export trade regulation, collaborating with corporations, trade associations, foreign governments, and nongovernmental organizations on…

John Brew is the former chair of Crowell & Moring’s International Trade Group and a partner in the firm’s Washington, D.C. office.

John has extensive experience in import and export trade regulation, collaborating with corporations, trade associations, foreign governments, and nongovernmental organizations on customs administration, enforcement, compliance litigation, legislation, and policy matters. He represents clients in proceedings at the administrative and judicial levels as well as before Congress and the international bureaucracies that handle customs and trade matters. John advises clients on all substantive import regulatory issues handled by U.S. Customs and Border Protection and Immigration and Customs Enforcement, such as classification, valuation, origin, marking, tariff preference programs, other agency regulations, admissibility, customs brokerage, Section 321, drawback, foreign trade zones, duty recovery programs, import restrictions, quotas, audits, prior disclosures, penalties, investigations, Customs Trade Partnership Against Terrorism and trade compliance programs, importations under bond, the Jones Act, and vessel repairs.

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Photo of Teresa Abney Teresa Abney
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Photo of John Arszulowicz John Arszulowicz

John Arszulowicz is an associate in Crowell & Moring’s Washington, D.C. office and a member of the Tax and International Trade groups. John’s practice focuses on advising clients on tax controversy, tax planning, trade remedies, and import regulatory compliance matters. John also supports…

John Arszulowicz is an associate in Crowell & Moring’s Washington, D.C. office and a member of the Tax and International Trade groups. John’s practice focuses on advising clients on tax controversy, tax planning, trade remedies, and import regulatory compliance matters. John also supports the firm’s Corporate Group on asset-based and real estate loans and loan restructures. In addition, John supports the firm’s U.S. Food and Drug Administration (FDA) matters. John’s experience includes researching and summarizing numerous compliance and liability concerns for the distribution and labeling of FDA-regulated products granted an Emergency Use Authorization or enforcement discretion exception during the nation’s COVID-19 response. Prior to joining Crowell & Moring, John was a credentialed agency official at the FDA, where he completed the FDA’s basic food and drug law course. John was also a summer intern at the U.S. Department of Labor, Office of the Solicitor. During this summer internship, John was involved in a variety of Employee Retirement Income Security Act of 1974 (ERISA) matters. John was selected as a Gary S. Tell ERISA Litigation Scholar.

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  • Posted in:
    International
  • Blog:
    International Trade Law
  • Organization:
    Crowell & Moring LLP
  • Article: View Original Source

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