TAX ALERT  |  August 27, 2021

The United States Court of Appeals for the Federal Circuit ruled against the Treasury Department and the Bureau of Customs & Border Protection’s appeal, invalidating a regulation promulgated by the agencies against substitution drawback claims. The court held the regulation conflicted with the unambiguous text of 19 U.S.C section 1313(v). The decision affirms the U.S. Court of International Trade’s (CIT) decision that found for the National Association of Manufacturers (NAM) and The Beer Institute that brought the suit.

The crux of the case involved a law enacted in 2008 that provided a way to utilize what the industry refers to as a “double drawback” of excise taxes and customs duties. A substitution drawback allows refund of the taxes, fees and duties paid on imports when similar products are exported. Companies involved in both import and export of wine have been applying this law to claim drawback of excise tax on imported wine, even if they have not paid excise tax on the exported wine. In essence, this allows imported wine to be entered into the U.S. without any excise tax and without a corresponding payment on the exported wine – i.e., a double drawback.  

Treasury promulgated a rule to prevent such double drawbacks. NAM challenged the regulations as contrary to the statute. The government agencies defended the regulation as reasonable and necessary to reconcile the purpose of the excise tax with the drawback regime.

The CIT held in favor of the wine industry, finding the regulations were invalid. It noted that this issue had previously been expressed to Congress on multiple occasions, yet Congress took no steps to curtail the practice. The court reasoned that the government could not now “attempt to alter this policy choice by way of a regulation that does not comport with the animating statute.”