On August 23 the Federal Circuit issued its opinion in National Association of Manufacturers v. Department of the Treasury, a case we have been following because it attracted an amicus brief. The case was argued before Judges Lourie, Prost, and Reyna. These judges considered whether regulations promulgated by the Department of Treasury to curtail “double drawback” (two tax refunds for the same exported merchandise) are invalid. Judge Reyna authored the majority opinion in the case, affirming the U.S. Court of International Trade’s judgment finding the regulations to be invalid. This is our opinion summary.
Judge Reyna summarized the relevant background:
This appeal concerns a set of regulations, promulgated in 2018 by the Department of the Treasury (“Treasury”) and the United States Customs and Border Protection (“CBP” or “Customs”), described herein as the Rule. The Rule is an interpretation of 19 U.S.C. § 1313(v), which states in relevant part: “Merchandise that is exported or destroyed to satisfy any claim for drawback shall not be the basis of any other claim for drawback. . . .” 19 U.S.C. § 1313(v). Generally, imported goods are subject to a variety of payments, such as tariffs, duties, fees, and certain taxes, such as an excise tax. A “drawback” is a customs transaction involving the refund of any payments that were made upon the importation of a good. . . . Another common form of drawback, known as a “substitution drawback,” involves the refund of duties, taxes, or fees that were paid upon importation and refunded when similar goods . . . are exported. . . . Since 2008, substitution drawback has been allowed for wine where the imported wine and exported wine are of the same color and the price variation between the imported wine and the exported wine does not exceed fifty percent. . . . The substitution in the example can also result in a near total refund of both tariffs and excise taxes paid on the imported wine. This can occur in situations where the substituted exported wine was either not subject to any excise tax by virtue of being exported from a bonded facility, or had received a complete refund of any previously paid excise taxes. This results in a “double drawback.” As a response to this practice, the Government promulgated the Rule to prevent “double recovery” of excise tax.
The Rule makes two fundamental changes to the drawback regime. First, it includes within the definition of “drawback” and “drawback claim” a “refund or remission of other excise taxes pursuant to other provisions of law.” . . . Second, the Rule limits drawbacks to the amount of taxes paid and not previously refunded. . . . The National Association of Manufacturers (“NAM”) along with Intervenor, The Beer Institute, brought suit against the Treasury and CBP arguing that the Rule is contrary to law, arbitrary and capricious, and impermissibly retroactive. . . . The United States Court of International Trade (“CIT”) applied the two-part Chevron test to find that the Rule is unlawful as to the challenged provisions. . . . Applying those principles, the CIT determined that the inquiry ends at step one because the Rule conflicts with the unambiguous text of the statute.
Judge Reyna began his analysis of the regulations in question by highlighting that the court “review[s] the CIT’s interpretation of statutes and regulations de novo” using the two-step Chevron framework.
Proceeding to the merits, Judge Reyna indicated that the government’s argument in this case “defies logic.” This is so, he explained, because a “tax that has never been paid or determined cannot be said to have been ‘drawn back,’ and goods that have been exported without payment of tax cannot give rise to a ‘claim’ for drawback.” Moreover, in response to the “Government’s argument that taxes on bonded wine products have been ‘determined’ at the point of production,” Judge Reyna highlighted that the definition of “‘Determined’ within the [Internal Revenue Code] refers to situations where tax is both determined and paid at the time the goods are withdrawn from bond, or where ‘the amount of the tax to be paid is computed and fixed.’” As a result, the court concluded that “the expansive definition in the Rule, which extends drawback to situations in which tax is never paid or determined, conflicts with the unambiguous text of the statute.”
The government made a number of additional arguments contending “that the CIT erred in invalidating the Rule by erroneously reading the Rule to create irreconcilable statutory conflicts and irrational results.” The government argued, for example, that the CIT incorrectly found “that the Rule produces irrational results by preventing ‘an untaxed export from serving as substituted merchandise in a drawback claim on a corresponding import in any capacity.’” According to the government, “the Rule does not prohibit this result but merely prohibits double recovery of the same tax.” The government also argued “that the legislative history of the drawback regime does not support invalidating the Rule.”
In response, Judge Reyna noted how the statutory language requires “drawback of ‘any’ tax imposed on importation, ‘notwithstanding any other provision of law.’” He indicated the government’s position would “render the ‘notwithstanding’ clause meaningless.” As a result, he stated, “the CIT was correct in its finding that [the government’s approach] produces an absurd result that fails at Chevron step one.” Judge Reyna also noted that the “legislative history of the drawback regime demonstrates that Congress chose to expand access to drawbacks at the expense of excise taxes.”
The court ultimately “affirm[ed] the judgment of the CIT that the Rule is unlawful as to the challenged provisions.”