Argument Recap

As we have been reporting, the Federal Circuit this month is hearing oral arguments in three cases that attracted amicus briefs. In a tax case, National Association of Manufacturers v. Department of the Treasury, the Federal Circuit heard argument Monday related to a decision by the U.S. Court of International Trade that regulations promulgated by the Department of Treasury to curtail “double drawback” (two tax refunds for the same exported merchandise) are invalid. This is our argument recap.

August Flentje argued for the government. He began by asserting that Congress wanted to protect against importers who abused the system by counting drawback twice. As a result, he argued, it drafted 19 U.S.C. § 1313(v) to read: “Merchandise that is exported or destroyed to satisfy any claim for drawback shall not be the basis of any other claim for drawback . . . .”

Judge Reyna asked a few questions regarding the Trade Facilitation and Trade Enforcement Act (TFTEA). In particular, he pointed out that the TFTEA made clear that the amount of drawback was equal to the amount of duties or taxes that would apply to the exported article. Judge Reyna asserted the plain language of this approach ran contrary to the Treasury’s rule to the extent it required taking the lesser amount of competing drawbacks. Flentje responded that two subsections of the relevant rule indicated how to calculate the drawback, and he argued that this did not contradict the plain language of the TFTEA.

Judge Lourie interjected to ask Flentje to address the “notwithstanding” provision of 19 U.S.C. §1313(j). Flentje argued that the “notwithstanding” term was added to the statute so that, irrespective of whether the internal revenue code defined a tax as “imposed upon” entry or “imposed because of entry,” it would result in drawback. He asserted that this leads to the next question of what to do with the drawback. Flentje argued that this is the step where the anti-abuse provision applies.

Judge Prost asked if the rule expands the definition of “drawback” from the former understanding of the term that refers to drawbacks as “payed or determined.” Flentje answered that the Court of International Trade incorrectly found that the statute only included these as drawbacks. First, he artued, the statute does not define “drawback,” but leaves it to the agency. Second, he continued, since 1789 “drawback” has referred to excise tax that doesn’t need to be paid. Third, he argued, the Supreme Court recognized this same definition of drawback over 100 years ago. Thus, Flentje asserted, it was reasonable for the agency to interpret the term “drawback” to include the removal of excise tax when a product is exported. According to Flentje, what is being “drawn back” is the tax that would have been paid had it been sold in the United States.

Peter D. Keisler argued for National Association of Manufacturers. He maintained that the rule at issue cannot be reconciled with either the text of the governing statutes or Congress’s repeated refusal to pass legislation adopting the policies the agency imposed. Keisler asserted that TFTEA established a mandatory calculation methodology that the rule directly flouts. He further argued that the “notwithstanding” clause was passed precisely to overrule customs headquarters’ decisions attempting to deny excise tax drawback to alcoholic beverages.

Addressing Judge Prost’s earlier point regarding the definition, Keisler asserted that the government sought to make every untaxed export itself a “drawback,” which is prohibited a second “drawback.” Keisler, however, asserted when there is merely an export without a payment of tax, the text does not permit it to be considered a “drawback.” Further, he argued, the early history of drawback that the government referenced isn’t relevant because substitution drawback was added in 1984 specifically for the purpose of encouraging exports by giving a tax benefit.

Judge Prost asked, if the “notwithstanding” provision doesn’t literally override every provision of law, where the court should draw the line with respect to what is and is not overridden. Keisler agreed that “notwithstanding” clauses should not be taken to illogical extremes, but he contended that they must be given some meaning. He argued that the government has not presented a single instance under its interpretation where the “notwithstanding” clause would be effective. He asserted that the court here does not need to find what the outer limit is because the case at issue lies at the core of the very reason the clause was enacted: overruling customs decisions denying drawback to alcoholic beverages.

In rebuttal, Flentje maintained that substitution drawback was not simply meant to encourage exports, but also to level the playing field and promote fair competition. He asserted, however, that the other side’s interpretation will create an excise tax free zone for imports of alcohol, cigarettes, gasoline, etc., which cannot be what Congress intended.

We will keep track of this case and report on its disposition.