Richard Rubin reported on a new wine tax case in The Wall Street Journal yesterday. The National Association of Manufacturers filed the lawsuit (link here, and embedded below) over substitution drawbacks

Briefly, substitution drawbacks (19 U.S.C. 1313(j)) allow companies that import wine to obtain a tax refund for the taxes paid on the imported wine when similar merchandise is exported or destroyed. Bring in a case of wine that you pay taxes on – get those taxes back if you export a case of similar wine. (What’s similar? – wine “of the same color” and within 50 percent of the same price.) Those in favor of the substitution argue that it benefits U.S. manufacturers and boosts employment because in order to get the substitution, you need to make domestic products which requires hiring workers to create items you export.

But a problem arose when Customs and Border Protection and the Treasury Dept. promulgated rules that would impose a new limit on the amount of the refund of your imported items’ taxes to what you paid in tax on the substituted merchandise. Since exported domestic wine, spirits and beer are exempt from excise, taxes, the new rule would effectively halt the substitution drawback.

The lawsuit notes that the defendants tried to implement this same rule in 2009 and met with substantial opposition and notes that there are several problems with it this time around as well:

  • For starters, they argue it isn’t in line with the intent and purpose of the Trade Enforcement Act of 2015;
  • Second they claim its arbitrary in its exercise of administrative rulemaking authority in that there’s an insufficient record for the implementation of this rule;
  • Third, the manufacturers argue Congress intended for the drawback to apply an not be limited by the taxes paid on exported merchandise;
  • Fourth, they argue that the rule looks for a retroactive/pre-implementation application, which is improper.

In the lawsuit, the plaintiffs request that the rule be vacated and that the defendants be enjoined from enforcing it.