Court Rules on Treasury Limiting Excise Tax Drawbacks on Wine Exports

The National Association of Manufacturers and the Beer Institute filed suit against the Department of the Treasury and U.S. Customs and Border Protection, challenging a 2018 regulatory rule ("the Rule") regarding substitution drawbacks for wine exports. The case centered on how excise taxes are treated under 19 U.S.C. § 1313, a statute permitting refunds of duties, fees, and taxes paid on imported merchandise when similar goods are exported.

Historically, wine exporters have claimed substitution drawbacks even when exported wine was untaxed, provided it met statutory similarity criteria (e.g., same color and within 50% price range). The 2018 Rule redefined "drawback" to include excise tax benefits not yet paid or determined, which would preclude refunds on imports where the exported goods had been untaxed. The government argued the Rule prevented "double recovery" by disallowing excise tax refunds on exported goods that had no associated tax liability.

The plaintiffs challenged the Rule under the Administrative Procedure Act, claiming it conflicted with the unambiguous text of the statute, improperly reinterpreted existing provisions, and introduced irrational limitations. They argued that 19 U.S.C. § 1313(j)(2), which allows substitution drawbacks "notwithstanding any other provision of law," precluded the new restrictions.

Court of International Trade and Federal Circuit rulings

The Court of International Trade applied Chevron deference and concluded at step one that Congress had directly spoken to the issue. It held that the Rule contradicted the plain language of the statute and invalidated the provisions that expanded the definition of "drawback" to include excise tax benefits not paid or determined. The court emphasized that neither the Tariff Act nor the Internal Revenue Code used the term "drawback" for untaxed exports, and that the agencies’ attempt to redefine it produced an irrational result.

On appeal, the Federal Circuit affirmed. It held that the Rule’s broader definition of "drawback"—including cancellations of excise tax liabilities never paid or determined—was contrary to statutory language. The court explained that goods exported without payment of tax do not meet the statutory condition of having been taxed, and therefore cannot be the basis of a valid drawback claim.

The Federal Circuit also rejected the argument that tax liabilities attached at production and were merely canceled at export. It found this inconsistent with the Internal Revenue Code’s distinction between taxes that are paid or determined and those that are not. The court concluded that Congress did not authorize the agencies to limit substitution drawbacks in the way attempted by the Rule.

Statutory interpretation and legislative history

The court found that the Rule conflicted with both the calculation formula in § 1313(l)(2) and the legislative history of § 1313(j)(2), which emphasized broad availability of drawbacks. The opinion cited multiple instances where Congress expanded substitution drawback eligibility, including specific language allowing excise tax drawbacks even when the exported product had not been taxed. The court also highlighted that the Treasury and CBP had previously attempted similar regulatory changes in 2009, but withdrew them following congressional objections.

The court concluded that the 2018 Rule introduced a restriction that Congress had expressly rejected and failed at Chevron step one due to a conflict with the plain statutory language. It affirmed the Court of International Trade’s ruling invalidating the Rule.

Help with international trade and excise tax disputes

If your business faces regulatory conflicts or compliance challenges involving U.S. Customs, excise taxes, or international trade law, Whitcomb, Selinsky PC handles matters including tariff disputes, international tax compliance, and cross-border transactions. Reach out to schedule a consultation and learn how our team can assist with your claim.