Drawback of Internal Revenue Excise Tax, 52928-52931 [E9-24789]

Agencies

• DEPARTMENT OF HOMELAND SECURITY
• DEPARTMENT OF THE TREASURY
• Bureau of Customs and Border Protection
• Department of Treasury

[Federal Register Volume 74, Number 198 (Thursday, October 15, 2009)]
[Proposed Rules]
[Pages 52928-52931]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-24789]



[[Page 52928]]

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DEPARTMENT OF HOMELAND SECURITY

DEPARTMENT OF THE TREASURY

Bureau of Customs and Border Protection

19 CFR Parts 113 and 191

[USCBP-2009-0021]
RIN 1505-AC18


Drawback of Internal Revenue Excise Tax

AGENCY: Customs and Border Protection, Department of Homeland Security; 
Department of the Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document proposes to amend title 19 of the Code of 
Federal Regulations to preclude situations where imported merchandise 
subject to Federal excise tax is allowed into the United States, in 
effect, 99 percent free of that tax through application of a drawback 
claim. Specifically, the proposed amendments would preclude the filing 
of a substitution drawback claim for internal revenue excise tax paid 
on imported merchandise in situations where no excise tax was paid upon 
the substituted merchandise or where the substituted merchandise is the 
subject of a different claim for refund or drawback of tax under any 
provision of the Internal Revenue Code. This document also proposes to 
amend title 19 by adding a basic importation and entry bond condition 
to foster compliance with the amended drawback provision. These 
proposed amendments are necessary to protect the revenue by clarifying 
the relationship between drawback claims and Federal excise tax 
liability.

DATES: Comments must be received on or before November 16, 2009.

ADDRESSES: You may submit comments, identified by USCBP docket number, 
by one of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments via docket number 
USCBP-2009-0021.
     Mail: Trade and Commercial Regulations Branch, Regulations 
and Rulings, Office of International Trade, U.S. Customs and Border 
Protection, 799 9th Street, NW. (Mint Annex), Washington, DC 20229-
1179.
    Instructions: All submissions received must include the agency name 
and USCBP docket number for this proposed rulemaking. All comments 
received will be posted without change to https://www.regulations.gov, 
including any personal information provided. For detailed instructions 
on submitting comments and additional information on the rulemaking 
process, see the ``Public Participation'' heading of the SUPPLEMENTARY 
INFORMATION section of this document.
    Docket: For access to the docket to read background documents or 
comments received, go to https://www.regulations.gov. Submitted comments 
may also be inspected during regular business days between the hours of 
9 a.m. and 4:30 p.m. at the Trade and Commercial Regulations Branch, 
Regulations and Rulings, Office of International Trade, U.S. Customs 
and Border Protection, 799 9th Street, NW., 5th Floor, Washington, DC 
Arrangements to inspect submitted comments should be made in advance by 
calling Joseph Clark at (202) 325-0118.

FOR FURTHER INFORMATION CONTACT: William Rosoff, Entry Process and Duty 
Refunds, Regulations and Rulings, Office of International Trade, (202) 
325-0047.

SUPPLEMENTARY INFORMATION:

Public Participation

    Interested persons are invited to participate in this rulemaking by 
submitting written data, views, or arguments on all aspects of the 
proposed rule. Customs and Border Protection (CBP) also invites 
comments that relate to the economic, environmental, or federalism 
effects that might result from this proposed rule. If appropriate to a 
specific comment, the commenter should reference the specific portion 
of the proposed rule, explain the reason for any recommended change, 
and include data, information, or authority that support such 
recommended change.

Background

    This document proposes amendments to title 19 of the Code of 
Federal Regulations (19 CFR) that would preclude the filing of a 
substitution drawback claim for internal revenue excise tax paid on 
imported merchandise in situations where no excise tax was paid upon 
the substituted merchandise or where the substituted merchandise is the 
subject of a different claim for refund or drawback of excise tax under 
any provision of the Internal Revenue Code.
    The statutory and regulatory framework giving rise to this 
situation is explained below.

I. Excise Taxation Under the Internal Revenue Code of 1986

    The Internal Revenue Code (IRC) of 1986, as amended (IRC), codified 
as title 26 of the United States Code (26 U.S.C.), is the main body of 
domestic statutory tax law of the United States and includes, inter 
alia, laws covering Federal excise taxes. Federal excise taxes are 
imposed on the manufacture and distribution of certain non-essential 
consumer goods, such as distilled spirits, wines, beer, tobacco 
products, imported taxable fuel and petroleum products.

Distilled Spirits, Wines, and Beer: Imposition of Federal Excise Tax 
and Exemptions

    Chapter 51 of the IRC sets forth excise tax collection and related 
provisions applicable to distilled spirits, wines, and beer. In 
general, this chapter provides that a Federal excise tax is imposed on 
all wines, distilled spirits, and beer produced in or imported into the 
United States. 26 U.S.C. 5041, 5001, and 5051.
    Statutory exceptions to the imposition of Federal excise tax exist; 
for example, domestically produced wine, distilled spirits, and beer 
are exempt from the tax if removed from bonded premises for export. 26 
U.S.C. 5362(c), 5214(a), 5053. In addition, upon the exportation of 
domestically-produced wine, distilled spirits, or beer removed from 
bonded premises with payment of tax, drawback is allowed in an amount 
equal to the tax paid. 26 U.S.C. 5062, 5055.

Tobacco: Imposition of Federal Excise Tax and Exemptions

    Under Chapter 52, a Federal excise tax is imposed on all tobacco 
products and cigarette papers and tubes manufactured in or imported 
into the United States. 26 U.S.C. 5701. The tax on domestically-
produced tobacco products and cigarette papers and tubes is imposed at 
the time that the product comes into existence, that is, when a product 
meets one of the definitions under the IRC. The Federal excise tax on 
imported and domestically-produced tobacco products and cigarette 
papers and tubes is generally not paid or determined until the products 
are released from customs custody or removed from bonded premises. 26 
U.S.C. 5702, 5703. Tobacco products and cigarette papers and tubes may 
be removed from bonded premises, without the payment of Federal excise 
tax, for export. 26 U.S.C. 5704. In addition, upon exportation of 
tobacco products and cigarette papers and tubes upon which the tax has 
been paid,

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drawback of the tax paid is allowed. 26 U.S.C. 5706.

Other Excise Taxes

    Chapter 32 of the IRC imposes various manufacturers excise taxes, 
including taxes on gasoline, diesel fuel, and kerosene (taxable fuel). 
The tax on imported taxable fuel is imposed on entry into the United 
States for consumption, use, or warehousing. If taxable fuel is 
exported, the IRC provides that the tax paid on the fuel may be 
refunded to the taxpayer or an amount equal to the tax paid on the fuel 
may be paid to the person exporting the fuel. Chapter 38 of the IRC 
also imposes various environmental taxes, including a tax on petroleum 
products entered into the United States for consumption, use, or 
warehousing.

Implementing Excise Tax Regulations

    Regulations implementing the provisions of chapters 51 and 52 of 
the IRC are contained in chapter 1 of title 27 of the CFR (27 CFR 
chapter 1). The Alcohol and Tobacco Tax and Trade Bureau (TTB) within 
the Department of the Treasury is responsible for the administration of 
chapter 51 and the regulations promulgated thereunder. Regulations 
implementing the provisions of chapters 32 and 38 are contained in 
title 26 of the CFR and are administered by the Internal Revenue 
Service.

II. Drawback Under the Tariff Act of 1930

    Section 313 of the Tariff Act of 1930, as amended, (19 U.S.C. 
1313), concerns drawback and refunds. Drawback is a refund of certain 
duties, taxes and fees paid by the importer of record and granted to a 
drawback claimant upon the exportation, or destruction under CBP 
supervision, of eligible articles under specified conditions. The 
purpose of drawback is to place U.S. exporters on equal footing with 
foreign competitors by refunding most of the duties paid on imports 
used in domestic manufactures intended for export.
    There are several types of drawback. Within section 313, paragraph 
(j) provides for ``unused merchandise drawback,'' which is intended to 
permit drawback to be claimed on imported merchandise on which was paid 
any duty, tax, or fee imposed under Federal law upon entry or 
importation if such merchandise was exported or was destroyed under CBP 
supervision, and was not used within the United States before such 
exportation or destruction, within the 3-years from the date of 
importation.

Substitution Drawback (19 U.S.C. 1313(j)(2))

    Section 313(j)(2) (19 U.S.C. 1313(j)(2)), hereafter referred to in 
this document as ``(j)(2) substitution drawback,'' is a type of 
drawback that permits other merchandise to be substituted for the 
imported merchandise for purposes of satisfying the exportation or 
destruction requirement. Specifically, 19 U.S.C. 1313(j)(2) provides 
for the payment of drawback, not to exceed 99 percent of the duties, 
taxes, and fees paid on the imported merchandise, based on the 
exportation or destruction of ``any other merchandise (whether imported 
or domestic)'' that is: (1) Commercially interchangeable with the 
imported merchandise on which duties, taxes, and fees were paid; (2) 
exported or destroyed within 3 years of the date of importation of the 
imported merchandise; and (3) not used within the United States before 
such exportation or destruction and is in the possession of the party 
claiming drawback.

Implementing CBP Drawback Regulations

    Regulations implementing 19 U.S.C. 1313 are set forth in part 191 
of title 19 of the Code of Federal Regulations (19 CFR part 191). 
Within part 191, subpart C sets forth the regulations pertaining to 
unused merchandise drawback and includes, in Sec.  191.32, standards 
applicable to (j)(2) drawback claims.

III. Reasons for Regulatory Change

Integrity of Federal Excise Tax System at Risk

    In recent years, CBP has received and approved a number of (j)(2) 
substitution drawback claims involving imported bottled and bulk wine 
and domestically-produced wine. A hypothetical example of this type of 
transaction follows:

    A domestic winery imports 100 cases of bottled wine, pays 
Federal excise tax on the wine, and sells the imported wine in the 
United States. The domestic winery then exports 100 cases of its 
domestic wine without payment of Federal excise tax. The domestic 
winery files a (j)(2) drawback claim with CBP on the basis that the 
100 cases of domestically-produced wine are commercially 
interchangeable with the 100 cases of imported wine. The domestic 
winery receives a refund of 99 percent of the Federal excise taxes 
that it paid on the 100 cases of imported wine.

In the above hypothetical, imported wine is introduced into the U.S. 
market, in effect, free of 99 percent of Federal excise tax. As a 
result, the U.S. Treasury ultimately receives only 1 percent of the 
Federal excise tax on the imported wine.

Diverse Commodities Potentially Impacted

    In addition to the claims processed by CBP involving (j)(2) 
substitution drawback on wine, given the present statutory and 
regulatory structure within which these claims are administered, other 
products that are subject to excise tax under the IRC may also be the 
subject of such drawback claims where the excise taxes on the good have 
been refunded, remitted, or not paid (e.g., distilled spirits and beer 
(IRC chapters 51 and 52; 26 U.S.C. 5001; 5051); tobacco products and 
cigarette papers and tubes (IRC chapter 52; 26 U.S.C. 5701); imported 
taxable fuel (IRC chapter 32; 26 U.S.C. 4081); petroleum products (IRC 
chapter 38; 26 U.S.C. 4611)).

Congressional Intent

    The allowance of (j)(2) substitution drawback claims in 
circumstances in which internal revenue taxes have not been paid on the 
substituted domestic product is incompatible with Congress' intent to 
levy excise taxes under the IRC and circumvents the intended 
administration of drawback under the comprehensive framework of section 
313.
    As part of Congress' extensive review of the drawback statute, 
effected by the Customs Modernization and Informed Compliance Act (Mod 
Act), Public Law No. 103-182, 632, 107 Stat. 2057 (1993) (enacted as 
Title VI of the North American Free Trade Agreement Implementation 
Act), a provision was added to section 313(v) that provides that, 
``[m]erchandise that is exported or destroyed to satisfy any claim for 
drawback shall not be the basis of any other claim for drawback; except 
that appropriate credit and deductions for claims covering components 
or ingredients of such merchandise shall be made in computing drawback 
payments.'' Based on the foregoing statutory prohibition against 
multiple drawback claims, 19 U.S.C. 1313(v) precludes the use of 
merchandise on which there has been a remission of duties, taxes, and 
fees from being used to claim drawback of duties, taxes, and fees paid 
on other merchandise upon its exportation or destruction.
    The legislative history of this provision indicates that Congress 
did not intend to allow multiple drawback claims on the exportation or 
destruction of goods. As noted in the House Report accompanying the 
legislation, section 632(a)(7) provides that under the amended statute, 
``only one drawback

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claim per exportation or destruction of goods would be allowed.'' H.R. 
Rep. No. 103-361(l), at 130, reprinted in 1993 United States Code 
Congressional and Administrative News (U.S.C.C.A.N.) 2552, 2680.
    In the context of amending 19 U.S.C. 1313 as part of the Mod Act, 
Congress also added language to subsection (u) of section 313 which 
restricted eligibility for drawback to imported merchandise that had 
been regularly entered or withdrawn for consumption. This limiting 
language was added, as described in the legislative history, because it 
codified ``current Customs practice against piggybacking other duty 
exemption benefits (foreign-trade zones, bonded warehouses and duty-
free temporary importation) onto the drawback benefits.'' H.R. Rep. No. 
103-361(I) at 130, reprinted in 1993 U.S.C.C.A.N. at 2680. The addition 
of this limiting language ensured that companies could not claim 
drawback on the ``importation'' of goods which had never actually been 
entered for consumption in the United States, but rather had been 
physically located in a foreign trade zone and then exported without 
the payment of duties. The ability to obtain substitution drawback 
under 19 U.S.C. 1313(j)(2), thus introducing imported wine into the 
U.S. market nearly free of Federal excise tax, is an example of 
``piggybacking'' a previously existing Federal excise tax exemption 
benefit (exporting domestically-produced wine without payment of excise 
tax) onto the drawback benefits.
    The IRC is quite specific regarding the circumstances in which 
internal revenue taxes are, and are not, required to be paid on 
domestic and imported merchandise. See chapters 32, 38, 51, and 52 of 
the IRC. The fact that a party would be able to avoid the payment of 
internal revenue taxes on both imported and domestically-produced 
merchandise by relying on the provisions of two discrete statutory 
programs administered by different agencies for different purposes is 
contrary to Congressional intent, as discussed above.
    Congress is cognizant of the possibility that the interplay of 
tariff provisions could lead to a situation where collection of 
internal revenue tax might be at risk in an import transaction. For 
example, Congress structured U.S. note 1(b) to subchapter I of Chapter 
98 of the Harmonized Tariff Schedule of the United States (HTSUS) to 
avoid this outcome. The subchapter I provisions allow duty-free or 
reduced-duty treatment for articles exported and returned that were not 
advanced in value or improved in condition by any process of 
manufacture or other means while abroad. U.S. note 1(b) was structured 
to ensure collection of the tax by stating that the provisions of the 
subchapter (with certain exceptions not relevant here) do not apply to 
any article ``[o]f a kind with respect to the importation of which an 
internal-revenue tax is imposed at the time such article is entered, 
unless such article was subject to an internal-revenue tax imposed upon 
production or importation at the time of its exportation from the 
United States and it shall be proved that such tax was paid before 
exportation and was not refunded.'' The net effect of U.S. note 1(b) to 
subchapter I of chapter 98, HTSUS, is to ensure that internal revenue 
tax is imposed on merchandise that is entered for consumption in the 
United States. Section 10.3 of title 19 of the CFR (19 CFR 10.3) 
implements the provisions of U.S. note 1(b) to subchapter I of chapter 
98, HTSUS. The amendments proposed in this document would similarly 
ensure that internal revenue taxes will be paid in cases involving 
(j)(2) substitution drawback.

Explanation of Proposed Amendments

    For the reasons outlined above, this document proposes to amend 
Sec.  191.32 of title 19 of the CFR (19 CFR 191.32) by adding a new 
paragraph (b)(4) to preclude drawback of internal revenue tax imposed 
under the IRC in connection with a (j)(2) substitution drawback claim 
if no excise tax was paid on the substituted exported merchandise or if 
that merchandise was subject to a claim for refund or drawback of tax 
under any provision of the IRC. In addition, this document proposes to 
amend Sec.  113.62 of title 19 of the CFR (19 CFR 113.62), which sets 
forth basic importation and entry bond conditions, to add a new 
condition under which the principal agrees not to file, or transfer the 
right to file, a substitution drawback claim that would be inconsistent 
with the terms of new Sec.  191.32(b)(4). The consequences of default 
specified in newly re-designated paragraph (n) of Sec.  113.62 would 
apply in the case of a breach of this bond condition.
    Conforming regulatory texts are also being published by TTB in this 
edition of the Federal Register.

Executive Order 12866 and the Regulatory Flexibility Act

    This proposed rule is not considered to be a significant regulatory 
action under Executive Order 12866 because it will not have an annual 
effect on the economy of $100 million and does not raise novel policy 
concerns. The Office of Management and Budget has not reviewed this 
regulatory evaluation under that Order.
    Regarding the impact of the proposed rule on small entities as 
required by the Regulatory Flexibility Act (5 U.S.C. 604), as amended 
by the Small Business Regulatory Enforcement and Fairness Act of 1996, 
a small entity may be a small business (defined as any independently 
owned and operated business not dominant in its field that qualifies as 
a small business per the Small Business Act); a small not-for-profit 
organization; or a small governmental jurisdiction (locality with fewer 
than 50,000 people).
    As stated above, these changes are intended to preclude the filing 
of (j)(2) substitution drawback claims in circumstances in which 
internal revenue taxes have not been paid on the substituted domestic 
product, or where that merchandise is subject to a different claim for 
refund or drawback of IRC taxes. The proposed amendments still allow 
for the return of 99 percent of the duties, taxes, and fees paid on the 
imported merchandise upon export, or when IRC taxes have been paid on 
substituted domestic product and the substituted merchandise is not the 
subject of a separate claim for refund or drawback of such taxes.
    To the extent that small entities have filed (j)(2) substitution 
drawback claims that would no longer be permitted, this regulation, if 
finalized as proposed, could have an economic impact on a substantial 
number of small entities. However, this proposed rule does not restrict 
import and export activities for any entities, regardless of size; 
these proposed amendments merely reflect Congress' intent regarding 
statutory prohibitions against multiple drawback claims and serve to 
clarify the application of existing statutory provisions. Thus, the 
impacts of this rule would not rise to the level that would be 
considered economically significant.
    CBP welcomes comments on this assumption. The most helpful comments 
are those that can give us specific information or examples of a direct 
impact on small entities. If we do not receive comments that 
demonstrate that the rule causes small entities to incur significant 
direct costs, we may, during the process of drafting the final rule, 
certify that this action does not have a significant economic impact on 
a substantial number of small entities.

Paperwork Reduction Act

    As there are no new collections of information proposed in this 
document,

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the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) 
are inapplicable.

Signing Authority

    The amendments contained in this document are being issued by CBP 
in accordance with Sec.  0.1(a)(1) of title 19 of the CFR (19 CFR 
0.1(a)(1)), pertaining to the authority of the Secretary of the 
Treasury (or his/her delegate) to approve regulations related to 
certain CBP revenue functions.

List of Subjects

19 CFR Part 113

    Bonds, Customs duties and inspection, Exports, Imports, Reporting 
and recordkeeping requirements.

19 CFR Part 191

    Administrative practice and procedure, Bonds, Claims, Commerce, 
Customs duties and inspection, Drawback, Exports, Reporting and 
recordkeeping requirements.

Proposed Amendments to the Regulations

    For the reasons set forth in the preamble, CBP and the Treasury 
Department propose to amend 19 CFR parts 113 and 191 as set forth 
below:

PART 113--CUSTOMS BONDS

    1. The general authority citation for part 113 continues to read as 
follows:

    Authority:  19 U.S.C. 66, 1623, 1624.

    2. Section 113.62 is amended by redesignating paragraph (m) as 
paragraph (n) and adding a new paragraph (m) to read as follows:


Sec.  113.62  Basic importation and entry bond conditions.

* * * * *
    (m) Agreement to comply with CBP regulations applicable to 
substitution drawback claims. In the case of imported merchandise that 
is subject to internal revenue tax imposed under the Internal Revenue 
Code of 1986, as amended (IRC), the principal agrees not to file, or to 
transfer to a successor the right to file, a substitution drawback 
claim involving such tax if the substituted merchandise has been, or 
will be, the subject of a removal from bonded premises without payment 
of tax, or the subject of a claim for refund or drawback of tax, under 
any provision of the IRC.
* * * * *

PART 191--DRAWBACK

    3. The general authority citation for part 191 continues to read as 
follows:

    Authority:  5 U.S.C. 301; 19 U.S.C. 66, 1202 (General Note 3(i), 
Harmonized Tariff Schedule of the United States), 1313, 1624;
* * * * *
    4. Section 191.32 is amended:
    a. At the end of paragraph (b)(2), by removing the word ``and'';
    b. At the end of paragraph (b)(3), by removing the period and 
adding, in its place, ``; and''; and
    c. By adding a new paragraph (b)(4) to read as follows:


Sec.  191.32  Substitution drawback.

* * * * *
    (b) * * *
    (4) For purposes of drawback of internal revenue tax imposed under 
Chapters 32, 38, 51, and 52 of the Internal Revenue Code of 1986, as 
amended (IRC), drawback granted on the export or destruction of 
substituted merchandise will be limited to the amount of taxes paid 
(and not returned by refund, credit, or drawback) on the substitute 
merchandise.
* * * * *

    Approved: October 8, 2009.
Jayson P. Ahern,
Acting Commissioner, U.S. Customs and Border Protection.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. E9-24789 Filed 10-14-09; 8:45 am]
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