“These proposed regulations establish a new process for drawback pursuant to TFTEA which liberalizes the merchandise substitution standard, simplifies recordkeeping requirements, extends and standardizes timelines for filing drawback claims and requires the electronic filing of drawback claims,” the proposed rule states.
The CIT in a June 29 ruling said it would consider imposing its own deadline for issuance of TFTEA drawback regulations if CBP couldn’t issue a proposed regulation for notice and comment “on or about” July 5, as that marked the end of the 90-day statutory review period for the draft regulatory package, which Treasury sent to the Office of Management and Budget (OMB) on April 6.
Among other changes, TFTEA drawback is to allow for simplified procedures, including the ability to use eight-digit Harmonized Tariff Schedule subheadings or Export Schedule B numbers to claim substitution drawback, instead of using part numbers, the basis of the pre-TFTEA substitution method.
However, the proposed rule establishes that provisional requirements for electronically filed TFTEA drawback claims described in a Feb. 24 CBP interim guidance document for TFTEA drawback procedures are “placeholders only and will not be used to process the claims beyond their initial acceptance in [the Automated Commercial Environment].”
“Actual” final requirements for TFTEA claims will be established after the drawback rulemaking process is complete and new regulations go into effect, CBP said.
The CIT case, Tabacos de Wilson v. United States, involved several customs brokers and importers challenging CBP’s refusal to grant accelerated payment privileges for drawback claims until the regulatory package containing the new drawback calculation method is final.
The CIT denied Tabacos de Wilson’s motion for a preliminary injunction to prevent CBP from suspending or limiting the operation of the statute covering accelerated payment of drawback claims as well as individual drawback claimants’ approval to receive accelerated payment pursuant to the regulation.
The court noted that claimants with drawback claims that qualify under the pre-TFTEA version of drawback are free to file claims under those regulations, and CBP will continue to provide accelerated payment of those claims.
TFTEA provided for a year for CBP to transition from the old to new drawback mechanism established through TFTEA, with final regulations for the new mechanism set to be released and take effect by the end of Feb. 24, 2019.
CBP expects to collect comments on the TFTEA drawback proposed rule through Sept. 16.
The 444-page proposed rule seeks to prohibit the filing of substitution drawback claims for excise tax paid on imports in situations in which no excise tax was paid on substituted merchandise, namely exports, or limit the amount of drawback allowable to the amount of taxes paid on the substituted merchandise and thus eliminate “double drawback.”
CBP identified alcoholic beverages, tobacco and taxable fuels as products most likely to take advantage of this type of drawback, thereby causing large potential revenue losses.
Allowing substitution drawback claims in circumstances in which internal revenue taxes haven’t been paid on the substituted — or exported — product results in the imported product being introduced into commerce with no net payment of excise tax — a “double drawback” at odds with the broader statutory schemes of customs drawback and excise taxation, the proposed rule says.
CBP outlined as an example of a claim for “double drawback” of wine, an instance in which a domestic winery imports 100 liters of wine, pays federal excise tax on that wine and sells the imported wine in the United States, but is never responsible for paying excise taxes upon its exports and therefore doesn’t generate a symmetrical tax credit.
Such a scenario would involve the domestic winery exporting 100 liters of domestically produced wine from Alcohol Tobacco Tax and Trade Bureau (TTB)-bonded premises without payment of federal excise tax and filing for substitution drawback with CBP on the basis that the 100 liters of domestically produced wine are commercially interchangeable with the 100 liters of imported wine, after which the domestic winery receives a refund of 99 percent of federal excise taxes it paid on the 100 liters of imported wine.
CBP currently allows such claims only with respect to wine. But the distilled spirits industry recently has lobbied for substitution drawback benefits for its products as well.
If distilled spirits were permitted to obtain substitution drawback benefits analogous to those currently provided for wine, distilled spirits producers could be permitted to manufacture inexpensive liquor and destroy it, without having paid the excise tax imposed on the domestically produced liquor, CBP said.
This would give the importer the ability to use the destruction of the domestically produced liquor to seek substitution drawback on the excise tax of the liquor they import.
The excise tax per gallon may far exceed the marginal cost of production of some types of liquor, so these manufacturers would receive a “significant economic benefit,” despite having never paid excise taxes on the domestically produced liquor, CBP said, citing Agriculture Department statistics from 2006 that estimated the cost of production of neutral grain spirits at about $0.53 per proof gallon.
CBP projected annual revenue loss from allowing drawback on distilled spirits would range from $312 million to $937 million over 10 years.
The agency invites comments on its proposed treatment on alcohol imports and exports under TFTEA drawback.