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U.S. trade court: “Substitution drawbacks” of wine companies

Trade court: “Substitution drawbacks” of wine companies

The U.S. Court of International Trade issued an opinion in a case concerning “substitution drawbacks” of companies importing and exporting wine.


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The case is: The National Association of Manufacturers v. United States, Slip Op. 20-09 (CIT January 24, 2020). Read the trade court’s opinion [PDF 559 KB]


In a “substitution drawback,” a party is entitled to refund of the taxes, fees, and duties paid on imports when other merchandise is exported under the same Harmonized Tariff Schedule of the United States (HTSUS) subheading in a one-to-one fashion. This may occur whether or not certain taxes were paid on the corresponding exported merchandise. For several years, companies that both export and import wine claimed drawback on charges paid on the imported wine on the basis of their substituted exports, due in part to a relaxed substitution standard.

The wine substitution drawback resulted in a near total refund of the excise taxes paid on the imported wine. This occurred even though the substituted exported wine was either not subjected to any excise tax or received a complete refund of any previously paid excise taxes.

After repeatedly expressing concern to Congress without any congressional action, the Customs and Border Protection (CBP) and Treasury issued final regulations in 2019 expanding the definition of “drawback” to stop what the agencies refer to as “double drawback” in the wine industry and to ensure that other industries would not attempt to claim the same benefit following the liberalization of the substitution drawback requirements by the Trade Facilitation & Enforcement Act of 2015.

The National Association of Manufacturers (NAM) challenged the regulations and the government agencies defended them as reasonable and necessary to reconcile the purpose of the excise tax with the drawback regime.

Trade court opinion

Applying the Chevron analysis, the court held that the expanded definition of drawback in the final regulations conflicts with the unambiguous text of the statute, which makes “clear that Congress intended excise taxes on certain alcohol to be recovered as long as the product was not for sale or consumption in the domestic market.” Further, the court held that the definition is also unsupported by the legislative history.

Accordingly, the court held the challenged provisions of the final regulations to be unlawful.


For more information, contact a tax professional with KPMG’s Excise Tax Practice group:

Taylor Cortright | +1 (202) 533 6188 |

For more information on this topic or to learn more about KPMG’s Trade & Customs Services, contact:

Doug Zuvich
Partner and Global Practice Leader
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Steve Brotherton
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Luis (Lou) Abad
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Irina Vaysfeld
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Amie Ahanchian
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Robert Waldrop
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George Zaharatos
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Jessica Libby
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T: 612-305-5533


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