Background

The Court of International Trade ruled recently that it cannot uphold a federal regulation that produces irrational results simply because they are not intended by the issuing agency. The court also said it will not read limiting language into a law to save an agency’s interpretation of that law in regulation even when it appears to address valid administrative and economic concerns. As a result, the court ruled that certain provisions in a U.S. Customs and Border Protection regulation on drawback are unlawful.

The case at issue involves the interaction of federal excise taxes, which are imposed on certain domestically consumed goods, and duty drawback, which is a refund of duties, taxes, and fees paid on imported goods. One form of drawback, substitution drawback, allows such refunds when goods other than those imported are exported under the same HTSUS number in a one-to-one fashion. Here, companies that both export and import wine had been claiming drawback of excise tax paid on imported wine on the basis of their substituted exports even though the latter was either not subjected to any excise tax or had received a complete refund of those paid.

Although CBP expressed concern about this practice to Congress on multiple occasions, no law was passed to curtail it. In response, CBP promulgated regulations to both prevent the wine industry from continuing to benefit from what it saw as a “double drawback” scheme and to ensure that other industries would not attempt to employ this scheme following the liberalization of substitution drawback requirements by the Trade Facilitation and Trade Enforcement Act.

According to the CIT, these regulations made two fundamental changes to the drawback regime. First, they substantially expanded the definition of drawback to include the refund or remission of excise taxes that occurs when goods are exported. Not only does this functionally prevent a company from filing a claim for drawback of charges assessed on a substitutable export, the court states, it also extends drawback to situations in which tax is never paid or determined.

However, the court states that drawback is generally understood to mean the refund or cancellation of duties on imports and that the law almost exclusively uses the term in relation to duties and fees imposed on importation. The court also points out that a statute on which CBP relies, Title 26 of the U.S. Code, does not use drawback to refer to instances in which excise tax is never paid or determined.

Second, CBP’s regulations limit drawback claims on exported or destroyed substituted merchandise to the amount of taxes paid on the substituted merchandise and not previously returned by refund, credit, or drawback. However, the CIT states that this interpretation directly conflicts with other statutory provisions. For example, under 19 USC 1313(j)(2) drawback is “simply not conditioned on the tax status of the substituted merchandise.” In addition, CBP’s interpretation of 19 USC 1313(v) to disallow exports on which excise tax was not paid from serving as substituted merchandise imposes a restriction on drawback that did not previously exist and is therefore not a rational reading of 19 USC 1313(l)(2), in which Congress intended to liberalize drawback.

More broadly, the CIT states that a policy decision must be made as to whether to privilege the federal excise tax regime, which seeks to raise revenue, or the drawback regime, which essentially lessens revenue, when they collide. The court concludes that Congress “has repeatedly chosen to expand access to drawback at the expense of lost excise tax revenue” and that CBP cannot attempt to alter this choice by way of a regulation that does not comport with the law. As a result, the CIT holds the challenged provisions of CBP’s regulations unlawful.

For more information, please contact trade attorney Robert Grasing at (212) 549-0163.

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