OT:RR:CTF:EPDR H277463 ND

Center Director
Agriculture & Prepared Products
Center of Excellence and Expertise
U.S. Customs & Border Protection
555 Battery Street, Room 319
San Francisco, CA 94111

Attn: Pauline Guan, Drawback Specialist

Re: Application for Further Review of Protest Number 2809-16-100293; Unused Merchandise Drawback; Substitution Drawback; 19 U.S.C. § 1313(j)(2); Distilled Spirits; Excise Tax; 19 C.F.R. § 191.38; 19 C.F.R. § 191.2(t); 19 C.F.R. § 191.72

Dear Center Director:

The purpose of this decision is to address the application for further review (“AFR”) of protest number 2809-16-100293, filed by Brown-Forman Corporation (“Brown-Forman”) on May 20, 2016, regarding the denial of its four drawback claims. This protest is designated as the lead protest and addresses the identical facts and issues presented in protest numbers 2809-16-100339, 2809-16-100340, 2809-16-100341, 2809-16-100342, 2809-19-101145, 2809-19-101146, 2809-20-102088, 2809-20-102089, 2809-20-102113, and 2809-20-102114.

FACTS:

Brown-Forman entered two entries, numbers XXX-XXXX102-4 and XXX-XXXX103-2, of grain neutral spirits (“GNS”) from Canada on May 15, 2014, and May 20, 2014, respectively. The imported GNS was classified under subheading 2207.10.3000, Harmonized Tariff Schedule of the United States (Annotated) (“HTSUSA”).

GNS imports under subheading 2207.10.3000, HTSUSA, from Canada in May of 2014 could enter free of duty pursuant to the North American Free Trade Agreement (“NAFTA”). Although the imported GNS was not subject to duties at the time of entry, it was subject to the federal excise tax assessed on all imported and domestically produced distilled spirits pursuant to the Internal Revenue Code (“IRC”) as enumerated in 26 U.S.C. § 5001 (“excise tax”). Rather than paying the excise tax to U.S. Customs and Border Protection (“CBP”) at the time of entry, Brown-Forman elected to defer the tax payments and transferred the imported GNS directly to the company’s Alcohol and Tobacco Tax and Trade Bureau (“TTB”) bonded distilled spirits plant (“DSP”). Upon admission to the TTB-bonded DSP, the imported GNS was used in the production of finished goods.

On August 27, 2015, Brown-Forman filed four drawback claims, numbers XXX-XXXX024-8, XXX-XXXX025-5, XXX-XXXX026-3, and XXX-XXXX023-0. On December 4, 2015, the drawback office liquidated all four claims without drawback. According to the drawback office, CBP could not refund drawback of excise tax for distilled spirits paid to TTB. The drawback office relied on Headquarters Ruling Letters (“HQ”) 227916 (Jan. 6, 1999) and HQ 229320 (July 29, 2002) as the basis for the denial of Brown-Forman’s drawback claims.

Brown-Forman filed protest number 2809-16-100293 on May 20, 2016, challenging the liquidations without drawback and CBP’s determination that excise taxes paid to TTB owed on imported distilled spirits that are deferred upon importation are not eligible for drawback under 19 U.S.C. § 1313(j)(2). Brown-Forman makes two primary arguments. First, statutory amendments enacted in 2004 changed the plain language of 19 U.S.C. § 1313(j)(2) to demonstrate Congress’ intent that no other law may abridge Brown-Forman’s right to drawback of excise tax under § 1313(j)(2). Accordingly, Brown-Forman argued that as a result of the 2004 legislative change, § 1313(j)(2) allows for drawback of any tax imposed on imports under Federal law notwithstanding any other provision of law. Second, Brown-Forman argued that the 2004 legislative amendments made Congress’ intent clear that § 1313(j)(2) drawback is not precluded by the excise tax drawback provision under the IRC Title 26 drawback provision as was held by certain HQ Ruling Letters issued prior to 2004, upon which the drawback office relied.

To substantiate its drawback claims, Brown-Forman provided two Excise Tax Returns (TTB Form 5000.24) to demonstrate the amount of tax on distilled spirits owed to TTB during the designated periods, a portion of which is attributed to entry numbers XXX-XXXX102-4 and XXX-XXXX103-2. The first Excise Tax Return is identified by serial number 2014-12 (Amended), covers the period between June 16, 2014, and June 30, 2014 (“Excise Tax Return 2014-12”), and concerns drawback claims XXX-XXXX025-5, XXX-XXXX024-8, and XXX-XXXX026-3. The second Excise Tax Return, identified by serial number 2014-13 (Amended), covers the period between July 1, 2014, and July 15, 2014 (“Excise Tax Return 2014-13”), and concerns drawback claim XXX-XXXX023-0. The tax returns identify the total amount of excise tax calculated for distilled spirits withdrawn from Brown-Forman’s DSP during the enumerated period, namely June 16, 2014, through July 15, 2014. Furthermore, the tax returns note that a designated portion of the total excise tax owed is attributable to imported proof gallons of GNS transferred to its DSP and there used in the production of a finished product that was withdrawn during the enumerated period.

To further substantiate its drawback claims, Brown-Forman provided documentation including import commercial invoices, Notice of Intent to Export, Destroy or Return Merchandise for Purposes of Drawback (CBP Form 7553), Drawback Entry (CBP Form 7551), export commercial invoices, export packing lists, export bills of lading, Transportation Entry and Manifest of Goods Subject to Customs Inspection and Permit (CBP Form 7512), and Withdrawal of Spirits, Specially Denatured Spirits, or Wines for Exportation (TTB Form 5100.11).

Brown-Forman asserted that, collectively, the documentation shows the withdrawal of GNS from its DSP in Kentucky, transportation of the spirits by rail to Norfolk, VA, for exportation to Finland. The documentation identifies the quantity exported, unique identifiers for the tankers containing the exported spirits, associated entry numbers for the drawback claims, and export vessel information. Brown-Forman has also certified that it has not and will not claim a refund from TTB with respect to the protested drawback claims.

In reviewing the documentation, CBP flagged several discrepancies. For example, the export date identified on CBP Form 7551, with respect to drawback claim XXX-XXXX026-3, predates the purported withdrawal of the exported spirits from Brown-Forman’s DSP. Additionally, both TTB Form 5100.11 and the packing lists associated with the exported tankers were dated in advance of the entry dates of entry numbers XXX-XXXX102-4 and XXX-XXXX103-2. According to Brown-Forman, these discrepancies were clerical errors as demonstrated by the other accompanying documents that identify consistent dates and data. Subsequently, the drawback office denied Brown-Forman’s protest, reiterating that it could not grant drawback of excise taxes paid to TTB, and determining that the documentation provided by Brown-Forman did not substantiate its drawback claims.

For purposes of the AFR and at the request of CBP Headquarters, Brown-Forman provided additional documentation with respect to drawback claim XXX-XXXX026-3, including SAP Data Services (“SAP”) documentation evidencing the admission of imported proof gallons of GNS into Brown-Forman’s DSP, and the association of these imports to entry number XXX-XXXX102-4. For purposes of maintaining controls relevant to the production of a consumer product, Brown-Forman is able to tie back any product containing imported GNS to one or more import batches. In Brown-Forman’s internal accounting systems, imported proof gallons are assigned a batch number, allowing Brown-Forman to track the usage of each proof gallon from the point of admission into the DSP through the bottling of the spirits into finished goods.

Brown-Forman also provided SAP documentation evidencing the amount of excise tax owed to TTB, as identified on Excise Tax Return 2014-12 for the period of June 16, 2014, through June 30, 2014. One such SAP documentation shows the portion of GNS that was segregated from the total quantity withdrawn from the DSP during this two-week period that is attributed to entry number XXX-XXXX102-4. Another such SAP documentation shows the total tax liability for the period covered in Tax Return 2014-12, which includes the excise taxes owed on the segregated GNS. Brown-Forman also provided the wire transfer to the IRS in the amount identified on Excise Tax Return 2014-12, that is dated July 31, 2014. Finally, Brown-Forman provided the following documents with specific reference to drawback claim XXX-XXXX026-3: “Shipping Instructions,” “Bulk Liquor Intent to Export,” straight bill of lading, certificate of analysis, “Serial Report Number,” and “Order Acknowledgement.” These transactional forms are consistent in providing the amount of GNS exported, the unique identifier of the export tanker, the associated entry number, and the export vessel.

ISSUE: Whether Brown-Forman’s entries of tax-deferred GNS admitted into a TTB-bonded DSPs are eligible for drawback under 19 U.S.C. § 1313(j)(2) upon the exportation of substituted commercially interchangeable tax-deferred alcohol for which no tax was paid, and no consumption entry was filed. LAW AND ANALYSIS:

It is the opinion of your office that this protest meets the criteria for further review. We agree and are of the opinion that this protest involves questions of law and fact, upon which we have not previously ruled, namely whether entries of distilled spirits are eligible for drawback under 19 U.S.C. § 1313(j)(2). See 19 C.F.R. § 174.24(b).

The refusal to pay a claim for drawback is protestable pursuant to 19 U.S.C. § 1514(a)(6). The instant protest was timely filed, within 180 days from the date of liquidation of the drawback entries. See 19 U.S.C. § 1514(c)(3)(A). CBP denied Brown-Forman’s drawback claims on December 4, 2015, when it liquidated the subject drawback entries without drawback. This protest was filed on May 20, 2016, within 180 days of that liquidation.

Generally, federal excise taxes are imposed on the manufacture and distribution of certain consumer goods, including upon the importation of distilled spirits, wines, beer, tobacco products, and certain imported taxable fuel and petroleum products. Title 26 of the Internal Revenue Code of 1986, as amended, is the main body of domestic statutory tax law of the United States and includes laws covering federal excise taxes. A system of bonded warehouses under the supervision of TTB ensures compliance with these excise tax obligations to the extent that they are unpaid upon importation. See 27 C.F.R. Part 27.

To understand what is at issue in this case, it is necessary to understand the statutory regime under which the dispute arises. The IRC includes its own drawback provision for distilled spirits, which provides for the refund and drawback of excise taxes paid on domestic and imported merchandise when that merchandise is exported. See 26 U.S.C. § 5062(b)-(c). For example, under 26 U.S.C. § 5062(b), TTB allows drawback on excise taxes paid for domestic merchandise that is exported. Under 26 U.S.C. § 5062(c), TTB allows drawback on excise taxes paid for imported merchandise that is exported (provided that the imported merchandise was determined to be unmerchantable or not conforming to sample or specification). CBP drawback provisions include a refund of federal duties, taxes, or fees paid upon entry or importation of goods into the United States. Specifically, 19 U.S.C. § 1313(d), closely parallels 26 U.S.C. § 5062(b), and authorizes drawback of excise taxes levied on domestically produced spirits, which are subsequently exported.

Historically, many drawback claimants sought drawback of excise taxes paid on merchandise pursuant to the unused merchandise drawback provisions of 19 U.S.C. §§ 1313(j)(1) and 1313(j)(2). In particular, § 1313(j) was seen to hold the potential of providing drawback on imports without requiring that the imports be “unmerchantable or not conforming to sample or specification,” and 19 U.S.C. § 1313(j)(2) provided for potentially more drawback opportunities because the provision allows for the refund of duties, taxes, or fees paid upon entry or importation of merchandise, when substituted merchandise is unused and exported or destroyed.

Prior to 2004, CBP consistently denied § 1313(j) drawback claims regarding excise taxes for two reasons. First, because the drawback of excise taxes was specifically provided for within the IRC provisions and 19 U.S.C. § 1313(d), CBP determined that drawback under the § 1313(j) was not appropriate because more specific statutory language provided for drawback of excise taxes. See, e.g., HQ 227916 (Jan. 6, 1999); HQ 227347 (Apr. 18, 1997). Second, CBP also reasoned that the language of § 1313(j) in effect at the time stated that drawback was allowed (under certain conditions) for merchandise “on which was paid any duty, tax, or fee imposed under federal law because of its importation.” Because the excise tax was imposed on products manufactured in the United States as well as products imported into the United States, CBP determined that “[i]t cannot be said that the tax is imposed because of the importation,” and accordingly, drawback under § 1313(j) was not appropriate. See, e.g., HQ 229276 (Dec. 10, 2001); HQ 227916 (Jan. 6, 1999).

The phrase, “because of its importation” in 19 U.S.C. § 1313(j)(2) became the subject of several disputes. For example, in a dispute regarding Harbor Maintenance Taxes (“HMT”), the Court of Appeals for the Federal Circuit (“Federal Circuit”) determined that HMT was ineligible for drawback because the fee applied to all shipments using ports regardless if the shipment was an importation. See Texport Oil Co. v. United States, 185 F.3d 1291, 1297 (Fed. Cir. 1999). Thus, because the HMT covered both imports and domestic activities, the court held that the HMT did not meet the statutory requirement “because of its importation” or fit with congressional intent for eligible fees under § 1313(j)(2). Id. at 1296-97. In a parallel dispute, the Federal Circuit reached a similar conclusion that drawback eligibility of excise taxes levied on petroleum products under 26 U.S.C. § 4611(a)(2), known as “Spill Taxes,” could not be the subject of CBP’s drawback because the Spill Tax did not discriminate between imports and exports. See George E. Warren Corp. v. United States, 341 F.3d 1348, 1356 (Fed. Cir. 2003).

In direct response to these cases, in 2004, Congress amended the language of § 1313(j)(2) to require drawback of “any” tax imposed on importation (as opposed to a tax imposed “because of its importation”), “notwithstanding any other provision of law.” The Miscellaneous Trade and Technical Corrections Act of 2004, Pub. L. 108-429, 118 Stat. 2434 (“Trade Act of 2004”). In 2021, the Federal Circuit determined that “Congress added this ‘notwithstanding’ clause in 2004 specifically to overrule a series of CBP rulings holding excise taxes ineligible for substitution drawback and to make excise taxes eligible for substitution drawback like other federal charges imposed ‘upon entry or importation.’” Nat’l Ass’n of Mfrs. v. United States Dep’t of Treasury, 10 F.4th 1279, 1287 (Fed. Cir. 2021) (hereinafter “NAM”). The Federal Circuit further held that “a refund [must] be paid on imported goods upon the timely exportation of other goods with the same USHTS code regardless of whether taxes were paid on those other goods.” Id. Accordingly, we evaluate the underlying issues in Brown-Forman’s application for further review under the current § 1313(j)(2) legal framework as set forth by the Federal Circuit.

As discussed above, Brown-Forman requests drawback of excise taxes on imported GNS paid to TTB under CBP’s drawback provisions. Brown-Forman makes two primary arguments. First, the statutory amendment enacted in 2004 changed the plain language of 19 U.S.C. § 1313(j)(2) to demonstrate Congress’ intent that “no other law may abridge Brown-Forman’s right to drawback of [excise tax] under § 1313(j)(2),” such that § 1313(j)(2) requires drawback of any tax imposed under Federal law upon importation notwithstanding any other provision of law. Second, that § 1313(j)(2) drawback is not precluded by the excise tax drawback provision under Title 26 as was held, inter alia, in the HQ Ruling Letters issued prior to 2004 and that were relied upon by the drawback office.

Pursuant to the Trade Act 2004 and the Federal Circuit’s decision in NAM, we find that excise taxes Brown-Forman paid on the two entries of GNS are eligible for drawback under 19 U.S.C. § 1313(j)(2), including instances where excise taxes were paid to TTB rather than CBP. Whether CBP must pay a substitution drawback claim pursuant to 19 U.S.C. § 1313(j)(2), however, is also dependent on whether the drawback claim criteria are met. Section 1313(j)(2) provides the criteria for substitution drawback. In this case, at issue is whether there was imported merchandise on which excise taxes were paid and whether there were relevant exports.

As part of the drawback criteria, CBP is required to verify the accuracy of all drawback claims, which includes “examination of all records relating to the transaction(s)” as needed. 19 C.F.R. § 191.61(b); see also 19 U.S.C. § 1508(a); 19 C.F.R. § 191.38. Thus, a drawback claimant must be able to substantiate the accuracy of the refund amount claimed for excise taxes paid, whether that is to CBP upon importation or to TTB upon withdrawal from a TTB-bonded DSP, through records kept in the ordinary course of business. See 19 C.F.R. § 191.2(t). Moreover, a drawback claimant must provide supporting documentary evidence to establish fully the date and fact of exportation and the identity of the exporter in accordance with 19 C.F.R. § 191.72.

To substantiate its drawback claim, Brown-Forman provided Tax Returns 2014-12 and 2014-13, import commercial invoices, SAP documentation, and proof of payment of excise taxes associated with entry numbers XXX-XXXX102-4 and XXX-XXXX103-2. Tax Returns 2014-12 and 2014-13 showed Brown-Forman’s tax liability for GNS withdrawn from its DSP between June 16, 2014, and June 30, 2014, as well as from July 1, 2014, through July 15, 2014, respectively. The tax returns further evidence the tax liability with respect to GNS withdrawn from the DSP within the enumerated time periods. Brown-Forman also provided SAP documentation that recorded the tax liability as it appears on Tax Return 2014-12. For example, the SAP documentation records the tax liability attributed to segregated imported GNS by line item, which indicates the admission date into the DSP and the associated entry number, XXX-XXXX102-4. Each line item in the SAP system is assigned a specific batch number that allows Brown-Forman to trace what product the batch is ultimately used in. The SAP system is able to track, by entry number, the totality of the withdrawn GNS during the relevant period. Both the total tax liability and the tax liability attributed to imported GNS evidenced in the SAP documentation align with the tax liability as it appears in Tax Return 2014-12. Additionally, Brown-Forman provided proof of payment to the IRS in the form of a wire transfer in the amount identified on Tax Return 2014-12, which is owed for the totality of GNS withdrawn from Brown-Forman’s DSP during the period at issue. Accordingly, Brown-Forman has substantiated proof of payment of excise taxes to TTB, through accounting kept in the ordinary course of business, that serves as the basis for the drawback claims at issue.

To substantiate proof of exportation, Brown-Forman initially provided CBP Form 7553 (Notice of Intent to Export, Destroy, or Return Merchandise for Purposes of Drawback), CBP Form 7551 (Drawback Entry Form), export commercial invoices, export bills of lading, export packing lists, CBP Form 7512 (Transportation Entry and Manifest of Goods Subject to CBP Inspection and Permit), and TTB Form 5100.11 (Withdrawal of Spirits, Specially Denatured Spirits, or Wines for Exportation). According to the export bill of lading, four tankers containing GNS were withdrawn from Brown-Forman’s TTB-bonded DSP in Kentucky, transported by rail to the Port of Norfolk, and exported to Finland. Each tanker was given a unique identifier that consistently appears on each invoice, packing list, and bill of lading. Moreover, the export documents including CBP Form 7553, the export commercial invoices, packing lists, bills of lading, and TTB Form 5100.11 are consistent in the exported quantities, tanker identification numbers, exporting vessel information, and sales order numbers with respect to each drawback claim. Thus, based on the export documents, the fact that a relevant exportation occurred is not in question.

Despite the evidence to support exportation, there are a few discrepancies with the documentation that Brown-Forman provided. Specifically, the export date identified on CBP Form 7551, with respect to drawback claim XXX-XXXX026-3, predates the purported withdrawal of the exported GNS from Brown-Forman’s DSP. Additionally, both TTB Form 5100.11, and the packing lists associated with the exported tankers are dated in advance of the entry date for entry numbers XXX-XXXX102-4 and XXX-XXXX103-2. According to Brown-Forman, these discrepancies are mere clerical errors that are overcome by the other accompanying documentations that identify consistent dates and data.

To overcome the discrepancies that appear in the export documentation, Brown-Forman provided a straight bill of lading, purchase order, certificate of analysis, shipping instructions, intent to export form, and number reporting form. These documents further evidence the exportation of tankers from Kentucky to Finland, and consistently identify each exported tanker, bill of lading number, sales order number, and booking number, as they appear on the previous documents provided by Brown-Forman. The evidence in these documents, particularly the merchandise description, sales information, and shipping date, cross-reference CBP Form 7551, CBP Form 7553, CBP Form 7512, export commercial invoice, packing list, and the export bill of lading that Brown-Forman previously provided. Despite the clerical errors that appear on certain documents, the disputed information is consistent among the other export documents indicating these were in fact clerical errors. Accordingly, based on the totality of the documentation provided by Brown-Forman, we find that Brown-Forman has satisfied the requirements of 19 C.F.R. § 191.72 and substantiated its exportation of articles for drawback purposes.

In conclusion, pursuant to 19 U.S.C. § 1313(j)(2) and the Federal Circuit’s decision in NAM, we find that excise taxes Brown-Forman paid on the two entries of GNS are eligible for drawback, including instances where excise taxes were paid to TTB rather than CBP. Further, based on the documentation provided by Brown-Forman, we find that the two drawback claims met the drawback criteria at issue pursuant to § 1313(j)(2), in that Brown-Forman established the fact that excise taxes were paid on the imported merchandise and there were relevant exports. HOLDING:

Based on the foregoing, Brown-Forman’s drawback claims at issue under protest number 2809-16-100293 are eligible for drawback. The protest should be GRANTED.

You are instructed to notify the Protestant of this decision no later than 60 days from the date of this decision. Any reliquidation of the entry or entries in accordance with the decision must be accomplished prior to this notification. Sixty days from the date of the decision, the Office of Trade, Regulations and Rulings will make the decision available to CBP personnel and the public on the Customs Rulings Online Search System (“CROSS”) at https://rulings.cbp.gov/, or other methods of public distribution.

Sincerely,

Yuliya A. Gulis, Director
Commercial and Trade Facilitation Division