Trump Administration Blocks Tax Break for Alcohol Companies

By Richard Rubin

WASHINGTON—The Trump administration on Monday finalized a regulation limiting the ability of U.S. wineries and global alcohol companies to reduce import taxes.

In the government’s view, the new rules stop wine and spirits companies from double-dipping on tax breaks. The government contends that the companies are getting or seeking a tax advantage for imports over domestic production.

The change will yield more than $600 million for the government over the next decade by reversing the tax treatment the wine industry now gets and will potentially prevent billions of dollars more in refund claims from spirits companies and others seeking similar rulings, according to the rule from the Treasury Department and U.S. Customs and Border Protection.

The companies and the National Association of Manufacturers paint a very different picture, arguing instead that the tax provision in question promotes U.S. exports and follows longstanding precedents.

“Treasury needs to follow congressional intent and stop impeding a program that levels the playing field for U.S. manufacturers in the global market,” Chris Swonger, president of the Distilled Spirits Council of the U.S., said in a written statement.

Companies that filed comments opposing the regulation include Diageo PLC, maker of Smirnoff vodka, and Sazerac Co., the maker of Fireball Cinnamon Whisky. The government turned them down, and one possible recourse now could be a lawsuit.

The dispute stems from what is known as “drawback.” Under U.S. law, companies can get their import taxes refunded if they have a matching or similar exported product.

For alcohol, the U.S. imposes excise taxes on domestic products and removes those taxes from exports regardless of whether there are imports.

In the maneuver in question, companies have bottles on which they have never paid excise taxes because they were produced for export. Then, as they import bottles, the companies seek refunds of the import taxes.

In Treasury’s view, that is a “double drawback” because the companies effectively get to avoid excise taxes on the exports anyway and then get refunds for taxes attributable to those same exports. Under this line of thinking, the result is that imported bottles effectively don’t have excise taxes on them but wine that is domestically produced and sold does.

The companies note that the U.S. Constitution forbids taxes on exports. Having their exports free of excise taxes isn’t really a drawback or refund of any taxes, because those taxes could never be imposed anyway, they say. Thus, according to the companies, the refund of their import taxes isn’t a second drawback and encourages exports because they can only get the taxes back if they export.

Treasury and Customs rejected that argument. The Treasury Department proposed a similar regulation in 2009, but backed off after objections from companies and members of Congress.

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