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Duty Refund Newsletter - February 2010

Elimination of Excise Taxes Under Unused Substitution Drawback

On October 15, 2009 the Bureau of Customs and Border Protection (CBP) issued a Notice of Proposed Rulemaking (NPRM) in the Federal Register to amend Title 19 CFR Parts 113 and 191. Concurrently, the Alcohol and Tobacco Tax and Trade Bureau (TTB) also issued an NPRM to amend Title 27 Parts 28 and 44.

The purpose of both these NPRMs was to eliminate the refund of excise taxes under 1313(j)(2) Unused Substitution Drawback. Both CBP and TTB put forth arguments to support their proposal to preclude the filing of a substitution drawback claim for internal revenue excise that was paid on imported merchandise in situations where no excise was paid upon the substituted merchandise.

The reaction to the NPRMs from the drawback trade was swift and immediate. Comstock & Theakston, Inc. and C. J. Holt & Co., Inc., through several trade associations, requested extensions of the comment period from 30 days to 90 days in order to have ample time to assess the arguments proposed by CBP and TTB and to prepare counter arguments. Both CBP and TTB granted extensions to January 15, 2010.

Over 28 Senators and Congressmen responded to the NPRMs by writing to Mr. Geithner at the Department of the Treasury and Ms Napolitano at the Department of Homeland Security requesting both agencies to immediately withdraw the NPRMs.

Elimination of the refund of excise taxes on exports would be felt immediately by exporting businesses involved in the production of petroleum, tobacco and wine. Each of these industries competes in the global market and relies heavily on exports. The elimination of the refund of excise taxes would severely impact the gains they have made in recent years in the international marketplace.

Of great concern to the drawback community in general was the underlying implication that if CBP and TTB were successful in the elimination of excise taxes under unused substitution drawback, they could ultimately seek elimination of substitution on a broader basis. To that end, many trade associations and individual companies commented on the NPRMs.

For over 200 years Congress has supported the drawback program as a means to increase jobs and promote exports. A review of Congressional intent over those years shows that Congress intended the drawback law to be interpreted liberally. Beginning with the Trade Act of 1930, Congress has regularly expanded the availability of drawback and expressly stated its intent to increase jobs and expand exports in its legislative history.

In 1980 Congress introduced Same Condition Drawback which was later expanded to Unused Merchandise Drawback. In 1984 Congress expanded Same Condition Drawback to include substitution (1313(j)(2)). In 2004 Congress amended the language of 1313(j)(2) to reverse the Texport Oil case to insure that drawback is available for all federal duties, taxes and fees. Contrary to Congressional intent, the proposed rules are a blatant attempt by CBP and TTB to change existing law via rulemaking, pre-empting and negating the role of Congress.

In these difficult economic times, the duty drawback program is even more essential in keeping and creating jobs as well as increasing exports. Any restrictions on drawback will hurt U.S. businesses and the economy.

As a result of our concerted effort to oppose these NPRMs, CBP has indicated that the NPRMs will be withdrawn and appropriate notice will be published.