Bottle Shock: Treasury Challenges Tax Break for Wine Importers


New rules proposed by the Treasury Department could affect big U.S. wine producers that also import wines.

New rules proposed by the Treasury Department could affect big U.S. wine producers that also import wines.


Photo:

Rick Bowmer/Associated Press

The Trump administration is challenging a tax benefit that gives the wine industry more than $50 million annually and blocking beer and spirits makers from using the same break.

The government’s fight against the alcohol industry stems from what officials describe as an error by a Customs and Border Protection office in San Francisco in 2004. Since then, wine importers have been able to offset taxes owed on imports by getting credit for their exports—even when excise taxes on those exports were never paid.

The Treasury Department attempted to end the benefit for wine companies in late 2009 but senators from wine-producing states, including current Senate Minority Leader Chuck Schumer (D., N.Y.), objected and Treasury withdrew the proposal.

Now, Treasury officials say it is time to remedy the mistake before it balloons. They contend that imported wine gets an unfair advantage over domestically produced competition and that allowing the break to spread to other alcohol companies could cost the government billions of dollars annually.

“This proposal would correct an improper practice that has allowed firms to import foreign wine excise tax-free, even though all U.S.-made wine sold here is subject to excise tax,” said

Tony Sayegh,

a Treasury spokesman. “The proposed rule would end a transfer of U.S. taxpayer dollars to foreign producers.”

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Taxing Wine

The Treasury Department is challenging a tax benefit enjoyed by wine companies for more than a decade. The government says imports are getting an unfair advantage, but the industry is resisting the change.

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When it exports, the company claims a refund of the taxes it paid on imports. That’s called a drawback.

How excise taxes work for wine:

U.S. government

Imported French wine

4

Exported U.S. wine

This step—the drawback when excise taxes haven’t been paid on exports—is what Treasury wants to stop and what alcohol companies want to expand beyond wine

1

4

U.S. wine company pays taxes on imported wines

U.S. wine company

2

3

Wine company produces U.S. wine, keeps it in a

specified warehouse and doesn’t pay excise taxes before exporting it.

Wine company imports wines

#wsj-ai2html-1533243884400 position: relative; overflow: hidden; width: px; display: none; .wsj-ai2html-1533243884400aiAbs position: absolute; .wsj-ai2html-1533243884400aiImg display: block; width: 100% !important; #wsj-ai2html-1533243884400 p font-family: Arial,Helvetica,sans-serif; font-size: 13px; line-height: 18px; margin: 0; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-3-0 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 300; text-align: right; color: #323232; margin-top: 1px; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-3-1 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 20px; font-weight: 500; color: #323232; margin-top: 1px; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-3-2 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 400; color: #323232; margin-top: 1px; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-3-3 font-family: Arial,Helvetica,sans-serif; font-size: 12px; line-height: 12px; color: #ffffff; margin-top: 1px;

When it exports, the company claims a refund of the taxes it paid on imports. That’s called a drawback.

How excise taxes work for wine:

Imported French wine

U.S. government

4

This step—the drawback when excise taxes haven’t been paid on exports—is what Treasury wants to stop and what alcohol companies want to

expand beyond wine

1

4

U.S. wine company pays taxes on imported wines

Exported

U.S. wine

U.S. wine company

2

3

Wine company produces U.S. wine,

keeps it in a specified warehouse and doesn’t pay excise taxes before exporting it.

Wine company imports wines

#wsj-ai2html-1533243884400 position: relative; overflow: hidden; width: px; display: none; .wsj-ai2html-1533243884400aiAbs position: absolute; .wsj-ai2html-1533243884400aiImg display: block; width: 100% !important; #wsj-ai2html-1533243884400 p font-family: Arial,Helvetica,sans-serif; font-size: 13px; line-height: 18px; margin: 0; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-2-0 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 300; text-align: right; color: #323232; margin-top: 1px; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-2-1 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 20px; font-weight: 500; color: #323232; margin-top: 1px; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-2-2 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 400; color: #323232; margin-top: 1px; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-2-3 font-family: Arial,Helvetica,sans-serif; font-size: 12px; line-height: 12px; color: #ffffff; margin-top: 1px;

When it exports, the company claims a refund of the taxes it paid on imports. That’s called a drawback.

How excise taxes work for wine:

U.S. government

Exported

U.S.

wine

4

Imported French wine

This step—the drawback when excise taxes haven’t been paid on exports—is what Treasury wants to stop and what alcohol companies want to

expand beyond wine

1

4

U.S. wine company pays taxes on imported wines

U.S. wine company

2

3

Wine company produces U.S. wine,

keeps it in a specified warehouse and doesn’t pay excise taxes before exporting it.

Wine company imports wines

#wsj-ai2html-1533243884400 position: relative; overflow: hidden; width: px; display: none; .wsj-ai2html-1533243884400aiAbs position: absolute; .wsj-ai2html-1533243884400aiImg display: block; width: 100% !important; #wsj-ai2html-1533243884400 p font-family: Arial,Helvetica,sans-serif; font-size: 13px; line-height: 18px; margin: 0; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-1-0 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 20px; font-weight: 500; color: #323232; margin-top: 1px; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-1-1 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 300; color: #323232; margin-top: 1px; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-1-2 font-family: Arial,Helvetica,sans-serif; font-size: 12px; line-height: 12px; color: #ffffff; margin-top: 1px; #wsj-ai2html-1533243884400 .wsj-ai2html-1533243884400-aiPstyle-1-3 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 400; color: #323232; margin-top: 1px;

How excise taxes work for wine:

Wine company imports wines

1

Imported French wine

U.S. wine company pays taxes on imported wines

2

U.S. government

U.S. wine company

4

3

Exported

U.S.

wine

When it exports, the company claims a refund of the taxes

it paid on imports. That’s called

a drawback.

This step—the drawback when excise taxes haven’t been paid on exports—is what Treasury

wants to stop and what alcohol

companies want to

expand beyond wine

Wine company produces U.S. wine,

keeps it in a specified warehouse and doesn’t pay excise taxes before exporting it.

Source: Treasury Department

Industry representatives, bracing for a legal and lobbying battle, say the government’s argument is flawed and that the tax benefit helps U.S. wine producers compete in foreign markets by encouraging exports. Companies can only reduce import taxes if they have exports to pair them with. Since 2004, U.S. wine exports have nearly doubled to $1.53 billion in 2017, according to the Wine Institute, an industry trade group.

The new rules could affect big U.S. wine producers that also import wines, such as E & J Gallo Winery, the Wine Group and

Constellation Brands
.

E & J Gallo referred questions to the Wine Institute. Constellation and the Wine Group declined to comment.

The tax-rule change isn’t likely to affect the price or availability of wines imported to the U.S. but it could disincentivize U.S. wine producers from investing in foreign markets, industry experts said.

“The program has functioned just as Congress intended, to incentivize and increase exports of wine made in the U.S.,” the Wine Institute, which represents the California wine industry, said in an email.

If all products that face excise taxes got the same treatment as wine, the U.S. could lose $674 million to $3.3 billion in revenue annually, according to Treasury. Those include beer, spirits, tobacco and certain fuels.

Spirits and beer makers argue Congress specifically intended to expand the benefit beyond wine to them.

Pernod Ricard
SA

is “disappointed by the Treasury Department’s misinterpretation of congressional intent,” said Taylor Foxman, a spokeswoman for the French spirits maker. Other companies reporting lobbying on this or related issues include spirits maker

Diageo

PLC and brewer

Anheuser Busch InBev
.

“For an administration that is focused on narrowing trade imbalances, one would think they would want to be doing everything they can to increase exports,” said

Linda Dempsey,

vice president for international economic affairs policy at the National Association of Manufacturers.

According to a Treasury analysis, the benefit mostly encourages bulk imports of wine that generate a larger tax break as a percentage of the price.

“You are providing a subsidy to the major bulk importers and exporters of wine,” said

Adam Looney,

a former Treasury official and a senior fellow at the Brookings Institution.

The dispute comes from an old corner of U.S. law known as drawback. The idea is that if a company pays an import tax and exports the same item, the company should get the tax back.

Congress has expanded drawbacks to cover substitutions, so companies can get import taxes back if they export similar products. In 2016, Congress made substitutions more generous and easier to use—something other makers of alcohol say means they should also benefit.

“They specifically did not exclude any sector from utilizing the program,” said

Mark Gorman,

senior vice president at the Distilled Spirits Council.

Treasury officials say the official estimates generated in connection with the 2016 law show nothing like the revenue losses Treasury now projects if it doesn’t act. That, they say, is evidence that Congress wasn’t opening the door to broader claims.

The regulation addresses drawback claims related to excise taxes on alcohol and other products. The government collected about $25 billion in taxes on alcohol and tobacco in 2017, mostly on domestic production.

U.S.-made alcohol is subject to excise taxes of up to $1.07 per wine gallon for typical wine, $13.50 per proof gallon for distilled spirits and $18 per barrel for beer.

The same taxes are imposed on alcohol imports, so theoretically all alcohol bought in the U.S. should bear the same taxes, Treasury officials say. If domestically produced alcohol has been taxed and then exported, the tax is refunded.

But there is a twist. Companies can produce alcohol in the U.S., keep it in specified facilities and never pay excise tax before it is exported, even though there is technically a tax liability. Eliminating that tax liability should be the only permitted drawback and companies shouldn’t also get their import taxes back, Treasury officials say.

This is where the 2004 Customs decision comes in. Customs allowed wine companies to use untaxed exports to justify a claim for offsetting the taxes on imports. That is a “double drawback” that shouldn’t be allowed, Treasury officials said.

Industry officials dispute that interpretation, saying companies should be able to pay import taxes and then get those back when they export a similar product, whether or not they have already paid an excise tax.

Write to Richard Rubin at richard.rubin@wsj.com and Jennifer Maloney at jennifer.maloney@wsj.com

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