[Federal Register Volume 74, Number 198 (Thursday, October 15, 2009)]
[Proposed Rules]
[Pages 52937-52941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-24791]


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DEPARTMENT OF THE TREASURY

Alcohol and Tobacco Tax and Trade Bureau

27 CFR Parts 28 and 44

[Docket No. TTB-2009-0005; Notice No. 100]
RIN 1513-AB77


Drawback of Internal Revenue Taxes

AGENCY: Alcohol and Tobacco Tax and Trade Bureau, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Alcohol and Tobacco Tax and Trade Bureau proposes to amend 
its regulations to clarify the relationship between tax payment under 
the Internal Revenue Code of 1986 and drawback of tax under the Tariff 
Act of 1930. The proposal provides conforming amendments to reflect 
proposed Customs and Border Protection regulations stating that 
domestic merchandise on which no tax is paid under the Internal Revenue 
Code may not be substituted for imported merchandise for purposes of 
claims for drawback of tax under the customs laws and regulations.


DATES: We must receive your written comments on or before December 14, 
2009.

ADDRESSES: You may send comments on this notice to one of the following 
addresses:
     http://www.regulations.gov: Use the comment form for this 
notice on the Federal e-rulemaking portal, Regulations.gov, to submit 
comments via the Internet;
     Mail: Director, Regulations and Rulings Division, Alcohol 
and Tobacco Tax and Trade Bureau, P.O. Box 14412, Washington, DC 20044-
4412.
     Hand Delivery/Courier in Lieu of Mail: Alcohol and Tobacco 
Tax and Trade Bureau, 1310 G Street, NW., Suite 200-E, Washington, DC 
20005.
    See the Public Participation section of this notice for specific 
instructions and requirements for submitting comments, and for 
information on how to request a public hearing.
    You may view copies of this notice, selected supporting materials, 
and the comments we receive about this proposal within Docket No. TTB-
2009-0005 at http://www.regulations.gov. A direct link to this docket 
is posted on the TTB Web site at http://www.ttb.gov/regulations_laws/all_rulemaking.shtml under Notice No. 100. You also may view copies of 
this notice, all supporting materials, and the comments we receive 
about this proposal by

[[Page 52938]]

appointment at the TTB Information Resource Center, 1310 G Street, NW., 
Washington, DC 20220. Please call 202-453-2270 to make an appointment.

FOR FURTHER INFORMATION CONTACT: Gerry Isenberg, Regulations and 
Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, 1310 G 
Street, NW., Suite 200-E, Washington, DC 20220; telephone 202-453-2097.

SUPPLEMENTARY INFORMATION: 

Background

Taxation of Distilled Spirits, Wines, Beer, and Tobacco Products Under 
the Internal Revenue Code of 1986

    Chapter 51 of the Internal Revenue Code of 1986 (IRC) sets forth 
excise tax collection and related provisions applicable to distilled 
spirits, wines, and beer. Chapter 52 of the IRC contains similar 
provisions applicable to tobacco products and cigarette papers and 
tubes.
    Under Chapter 51, a Federal excise tax is imposed on all wines and 
distilled spirits produced in or imported into the United States. 26 
U.S.C. 5001, 5041. A Federal excise tax also is imposed on beer brewed 
or produced, and removed for consumption or sale within the United 
States, or imported into the United States. 26 U.S.C. 5051. For 
domestically-produced wine, the tax is imposed at the conclusion of 
fermentation or removal from the fermenter (see 27 CFR 24.176). For 
domestically-produced distilled spirits, the tax is imposed at the time 
that the product comes into existence. 26 U.S.C. 5001(b). For 
domestically-produced beer, the tax is imposed when the product is 
removed for consumption or sale. 26 U.S.C. 5051. For imported wine, 
distilled spirits, and beer, the tax is imposed when the product is 
imported into the United States.
    However, Federal excise taxes on imported and domestically-produced 
wine, distilled spirits, and beer are generally not paid or determined 
until the products are removed from bonded premises or from customs 
custody for consumption or sale. 26 U.S.C. 5041, 5061, 5006, 5007, 
5054. Domestically-produced wine, distilled spirits, and beer may be 
exported without payment of the Federal excise tax. 26 U.S.C. 5362(c), 
5214(a), 5053. In addition, on the exportation of domestically-produced 
wine, distilled spirits, or beer that was 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.
    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.
    Regulations implementing the provisions of Chapters 51 and 52 of 
the IRC are contained in 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 Chapters 51 and 52 and the 
regulations promulgated thereunder.

Drawback Under the Tariff Act of 1930

    Section 313 of the Tariff Act of 1930, as amended (19 U.S.C. 1313), 
provides for the drawback or refund of duties, taxes, and fees paid on 
imported merchandise if that merchandise is subsequently exported or 
destroyed under customs supervision. Paragraph (2) of subsection (j), 
hereafter referred to as ``(j)(2) drawback,'' permits the substitution 
of other merchandise for the imported merchandise for purposes of the 
exportation or destruction requirement.
    Specifically, the (j)(2) drawback provision allows 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: (1) Is 
commercially interchangeable with the imported merchandise on which 
duties, taxes, and fees were paid, (2) is exported or destroyed within 
3 years of the date of importation of the imported merchandise, and (3) 
before such exportation or destruction, is not used within the United 
States and is in the possession of the party claiming drawback, that 
is, either the importer of the imported merchandise or a person who 
receives from the importer a certificate of delivery transferring to 
that person the imported merchandise or commercially interchangeable 
merchandise or any combination of the two (and with the transferred 
merchandise being treated as the imported merchandise). The (j)(2) 
drawback provision also includes a standard for commercial 
interchangeability for wine, that is, ``wine of the same color having a 
price variation not to exceed 50 percent between the imported wine and 
the exported wine.''
    Regulations implementing section 313 are set forth in 19 CFR part 
191. Subpart C of part 191 concerns unused merchandise drawback and 
includes, in Sec.  191.32, standards applicable to (j)(2) drawback 
claims. The Bureau of Customs and Border Protection (CBP) is 
responsible for the administration of section 313 and the regulations 
promulgated thereunder.

Proposed CBP and TTB Regulatory Changes

    In recent years CBP has received and approved a number of (j)(2) 
drawback claims involving imported bottled and bulk wine and 
domestically-produced wine. A hypothetical example of how such a 
transaction could work is as 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 then 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; and, 
finally, 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 scenario described above, only 1 percent of the Federal 
excise tax on the imported wine is ultimately received into the U.S. 
Treasury. Thus, (j)(2) drawback in effect allows imported wine to be 
introduced into the U.S. market 99 percent free of Federal excise tax. 
Although the (j)(2) drawback claims involving the drawback or refund of 
IRC tax that CBP has processed have been limited to wine, under the 
present statutory and regulatory framework, other products that are 
subject to excise tax under IRC Chapters 51 and 52 could be the subject 
of claims for (j)(2) drawback.
    Based on a review of the applicable statutory provisions, the 
Department of the Treasury has concluded that the practice of allowing 
(j)(2) drawback claims in circumstances in which internal revenue taxes 
have not been paid on the substituted domestic product is incompatible 
with the intent of Congress in levying excise taxes under the IRC and 
extends beyond the intent of Congress for administering

[[Page 52939]]

drawback under the comprehensive framework of section 313. In order to 
address these concerns, CBP in a document published in this issue of 
the Federal Register is proposing to amend its regulations to preclude 
the filing of a claim covering drawback of tax under subsection (j)(2) 
if no tax was paid on the substituted domestically-produced 
merchandise.
    In view of the relationship between (j)(2) drawback claims and 
excise tax liability under Chapters 51 and 52 of the IRC as discussed 
above and as reflected in the proposed new CBP regulatory texts, TTB 
believes that it would be appropriate to add to the TTB regulations 
conforming amendments that alert the reader to the effect of the new 
CBP regulatory provision as regards alcohol and tobacco products 
exported without payment of tax or with drawback of tax. TTB notes in 
this regard that the IRC vests broad authority in the Secretary of the 
Treasury to promulgate regulations governing the removal of alcohol and 
tobacco products for export without payment of tax in order to ensure 
protection of the revenue. See 26 U.S.C. 5053 for beer, 5214(a) for 
distilled spirits, 5362(c) for wine, and 5704 for tobacco products. 
Furthermore, the IRC vests broad authority in the Secretary of the 
Treasury to promulgate regulations needed for the enforcement of the 
IRC. See 26 U.S.C. 7805(a). TTB believes that the proposed conforming 
amendments are needed to contribute to the enforcement and integrity of 
the excise tax system.
    Accordingly, this document proposes six amendments to part 28 of 
the TTB regulations (27 CFR part 28), which contains rules regarding 
the exportation of distilled spirits, wine, and beer without payment of 
tax and with drawback of tax. Similarly, this document proposes two 
amendments to part 44 of the TTB regulations (27 CFR part 44), which 
contains rules regarding the exportation of tobacco products and 
cigarette papers and tubes without payment of tax and with drawback of 
tax. Although the only substantive text change in each affected section 
involves the addition of a reference to the new CBP rule, in several 
cases the entire section is revised in order to eliminate the use of 
undesignated introductory and concluding text and thus facilitate 
addition of the new provision.

Public Participation

Comments Invited

    We invite comments from interested members of the public on this 
proposed rulemaking. Please submit your comments by the closing date 
shown above in this notice. Your comments must reference Notice No. 100 
and include your name and mailing address. Your comments also must be 
made in English, be legible, and be written in language acceptable for 
public disclosure. We do not acknowledge receipt of comments, and we 
consider all comments as originals.

Submitting Comments

    You may submit comments on this notice by using one of the 
following three methods:
     Federal e-Rulemaking Portal: You may send comments via the 
online comment form associated with this notice in Docket No. TTB-2009-
0005 on ``Regulations.gov,'' the Federal e-rulemaking portal, at http://www.regulations.gov. A link to that docket is available under Notice 
No. 100 on the TTB Web site at http://www.ttb.gov/regulations_laws/all_rulemaking.shtml. Supplemental files may be attached to comments 
submitted via Regulations.gov. For information on how to use 
Regulations.gov, click on the site's Help or FAQ tabs.
     U.S. Mail: You may send comments via postal mail to the 
Director, Regulations and Rulings Division, Alcohol and Tobacco Tax and 
Trade Bureau, P.O. Box 14412, Washington, DC 20044-4412.
     Hand Delivery/Courier: You may hand-carry your comments or 
have them hand-carried to the Alcohol and Tobacco Tax and Trade Bureau, 
1310 G Street, NW., Suite 200-E, Washington, DC 20005.
    If you are commenting on behalf of an association, business, or 
other entity, your comment must include the entity's name as well as 
your name and position title. If you comment via Regulations.gov, 
please include the entity's name in the ``Organization'' blank of the 
comment form. If you comment via postal mail, please submit your 
entity's comment on letterhead.
    You may also write to the Administrator before the comment closing 
date to ask for a public hearing. The Administrator reserves the right 
to determine whether to hold a public hearing.

Confidentiality

    All submitted comments and attachments are part of the public 
record and subject to disclosure. Do not enclose any material in your 
comments that you consider to be confidential or that is inappropriate 
for public disclosure.

Public Disclosure

    On the Federal e-rulemaking portal, Regulations.gov, we will post, 
and the public may view, copies of this notice, selected supporting 
materials, and any electronic or mailed comments we receive about this 
proposal. A direct link to the Regulations.gov docket containing this 
notice and the posted comments received on it is available on the TTB 
Web site at http://www.ttb.gov/regulations_laws/all_rulemaking.shtml 
under Notice No. 100. You may also reach the docket containing this 
notice and the posted comments received on it through the 
Regulations.gov search page at http://www.regulations.gov.
    All posted comments will display the commenter's name, organization 
(if any), city, and State, and, in the case of mailed comments, all 
address information, including e-mail addresses. We may omit voluminous 
attachments or material that we consider unsuitable for posting.
    You and other members of the public may view copies of this notice, 
any supporting materials, and any electronic or mailed comments we 
receive about this proposal by appointment at the TTB Information 
Resource Center, 1310 G Street, NW., Washington, DC 20220. You may also 
obtain copies at 20 cents per 8.5 x 11-inch page. Contact our 
information specialist at the above address or by telephone at 202-453-
2270 to schedule an appointment or to request copies of comments or 
other materials.

Regulatory Analysis and Notices

Executive Order 12866

    This proposed rule is not a significant regulatory action as 
defined in Executive Order 12866. Therefore, a regulatory assessment is 
not required.

Regulatory Flexibility Act

    Pursuant to the requirements of the Regulatory Flexibility Act (5 
U.S.C. chapter 6), we certify that this notice of proposed rulemaking 
will not have a significant economic impact on a substantial number of 
small entities. The proposed rule imposes no substantive requirements 
and therefore will not impose, or otherwise cause, a significant 
increase in reporting, recordkeeping, or other compliance burdens on a 
substantial number of small entities. Accordingly, a regulatory 
flexibility analysis is not required.

Drafting Information

    Francis W. Foote of the Regulations and Rulings Division drafted 
this document.

[[Page 52940]]

List of Subjects

27 CFR Part 28

    Aircraft, Alcohol and alcoholic beverages, Armed forces, Beer, 
Claims, Excise taxes, Exports, Foreign trade zones, Labeling, Liquors, 
Packaging and containers, Reporting and recordkeeping requirements, 
Surety bonds, Vessels, Warehouses, Wine.

27 CFR Part 44

    Aircraft, Armed forces, Cigars and cigarettes, Claims, Customs 
duties and inspection, Excise taxes, Exports, Foreign trade zones, 
Labeling, Packaging and containers, Reporting and recordkeeping 
requirements, Surety bonds, Tobacco, Vessels, Warehouses.

Authority and Issuance

    For the reasons explained in the preamble, TTB proposes to amend 
chapter I of title 27 of the Code of Federal Regulations as follows:

PART 28--EXPORTATION OF ALCOHOL

    1. The authority citation for part 28 is revised to read as 
follows:

    Authority:  5 U.S.C. 552(a); 19 U.S.C. 81c, 1202; 26 U.S.C. 
5001, 5007, 5008, 5041, 5051, 5053, 5054, 5061, 5111, 5112, 5114, 
5121, 5122, 5124, 5201, 5205, 5207, 5214, 5232, 5273, 5301, 5313, 
5362, 5555, 6302, 7805; 27 U.S.C. 203, 205; 44 U.S.C. 3504(h).

    2. Section 28.91 is amended by adding a new paragraph (c) to read 
as follows:


Sec.  28.91  General.

* * * * *
    (c) Distilled spirits withdrawn without payment of tax under this 
subpart may not be substituted for imported merchandise for purposes of 
drawback of tax under section 313(j)(2) of the Tariff Act of 1930, as 
amended (19 U.S.C. 1313(j)(2)). See 19 CFR 191.32(b)(4).
    3. Section 28.121 is revised to read as follows:


Sec.  28.121  General.

    (a) Wine may, subject to this part, be withdrawn from a bonded wine 
cellar, without payment of tax, for:
    (1) Exportation;
    (2) Use on the vessels and aircraft described in Sec.  28.21;
    (3) Transfer to and deposit in a foreign-trade zone for exportation 
or for storage pending exportation;
    (4) Transfer to and deposit in a customs bonded warehouse as 
provided in Sec.  28.27; or
    (5) Transportation to and deposit in a manufacturing bonded 
warehouse.
    (b) All such withdrawals shall be made under the applicable bond 
prescribed in subpart D.
    (c) Wine withdrawn without payment of tax under this subpart may 
not be substituted for imported merchandise for purposes of drawback of 
tax under section 313(j)(2) of the Tariff Act of 1930, as amended (19 
U.S.C. 1313(j)(2)). See 19 CFR 191.32(b)(4).
    4. Section 28.141 is amended by adding a new paragraph (d) to read 
as follows:


Sec.  28.141  General.

* * * * *
    (d) Customs drawback claims. Beer removed without payment of tax 
under this subpart may not be substituted for imported merchandise for 
purposes of drawback of tax under section 313(j)(2) of the Tariff Act 
of 1930, as amended (19 U.S.C. 1313(j)(2)). See 19 CFR 191.32(b)(4).
    5. Section 28.171 is revised to read as follows:


Sec.  28.171  General.

    (a) Distilled spirits manufactured, produced, bottled in bottles, 
packed in containers, or packaged in casks or other bulk containers in 
the United States on which an internal revenue tax has been paid or 
determined, and which have been marked under the provisions of 27 CFR 
part 19 and of this part, as applicable, especially for export with 
benefit of drawback may be:
    (1) Exported;
    (2) Laden for use on the vessels or aircraft described in Sec.  
28.21;
    (3) Transferred to and deposited in a foreign-trade zone for 
exportation or for storage pending exportation; or
    (4) Transferred to and deposited in a customs bonded warehouse as 
provided for in Sec.  28.26(b).
    (b) On receipt by the appropriate TTB officer of required evidence 
of exportation, lading for use, or transfer, there shall be allowed to 
the bottler (or packager) of the spirits, drawback equal in amount to 
the tax found to have been paid or determined on the spirits.
    (c) Distilled spirits on which drawback is paid under this subpart 
may not be substituted for imported merchandise for purposes of 
drawback of tax under section 313(j)(2) of the Tariff Act of 1930, as 
amended (19 U.S.C. 1313(j)(2)). See 19 CFR 191.32(b)(4).
    6. Section 28.211 is revised to read as follows:


Sec.  28.211  General.

    (a) Wines manufactured, produced, bottled in bottles packed in 
containers, or packaged in casks or other bulk containers in the United 
States on which an internal revenue tax has been paid or determined, 
and which are filled on premises qualified under this chapter to 
package or bottle wines, may, subject to this part, be:
    (1) Exported;
    (2) Laden for use on the vessels or aircraft described in Sec.  
28.21; or
    (3) Transferred to and deposited in a foreign-trade zone for 
exportation or for storage pending exportation.
    (b) On receipt by the appropriate TTB officer of required evidence 
of exportation, lading for use, or transfer, there shall be allowed a 
drawback equal in amount to the tax found to have been paid or 
determined on the wines.
    (c) Wines on which drawback is paid under this subpart may not be 
substituted for imported merchandise for purposes of drawback of tax 
under section 313(j)(2) of the Tariff Act of 1930, as amended (19 
U.S.C. 1313(j)(2)). See 19 CFR 191.32(b)(4).
    7. Section 28.221 is revised to read as follows:


Sec.  28.221  General.

    (a) Beer brewed or produced in the United States and on which the 
internal revenue tax has been paid may, subject to this part, be:
    (1) Exported;
    (2) Delivered for use as supplies on the vessels and aircraft 
described in Sec.  28.21; or
    (3) Transferred to and deposited in a foreign-trade zone for 
exportation or for storage pending exportation.
    (b) A claim for drawback of taxes found to have been paid may be 
filed only by the producing brewer or his duly authorized agent. On 
receipt by the appropriate TTB officer of required evidence of such 
exportation, delivery for use, or transfer, there shall be allowed a 
drawback equal in amount to the tax found to have been paid on such 
beer.
    (c) Beer on which drawback is paid under this subpart may not be 
substituted for imported merchandise for purposes of drawback of tax 
under section 313(j)(2) of the Tariff Act of 1930, as amended (19 
U.S.C. 1313(j)(2)). See 19 CFR 191.32(b)(4).

PART 44--EXPORTATION OF TOBACCO PRODUCTS AND CIGARETTE PAPERS AND 
TUBES, WITHOUT PAYMENT OF TAX, OR WITH DRAWBACK OF TAX

    8. The authority citation for part 44 continues to read as follows:

    Authority:  26 U.S.C. 5142, 5143, 5146, 5701, 5703-5705, 5711-
5713, 5721-5723, 5731, 5741, 5751, 5754, 6061, 6065, 6151,

[[Page 52941]]

6402, 6404, 6806, 7011, 7212, 7342, 7606, 7805; 31 U.S.C. 9301, 
9303, 9304, 9306.
    9. Section 44.61 is amended by adding a new paragraph (c) to read 
as follows:


Sec.  44.61  Removals, withdrawals, and shipments authorized.

* * * * *
    (c) Tobacco products and cigarette papers and tubes removed from a 
factory or an export warehouse, and cigars withdrawn from a customs 
bonded warehouse, without payment of tax under this subpart may not be 
substituted for imported merchandise for purposes of drawback of tax 
under section 313(j)(2) of the Tariff Act of 1930, as amended (19 
U.S.C. 1313(j)(2)). See 19 CFR 191.32(b)(4).
    10. Section 44.221 is amended by designating the existing text as 
paragraph (a) and adding a new paragraph (b) to read as follows:


Sec.  44.221  Application of drawback of tax.

* * * * *
    (b) Tobacco products and cigarette papers and tubes on which 
drawback is allowed under this subpart may not be substituted for 
imported merchandise for purposes of drawback of tax under section 
313(j)(2) of the Tariff Act of 1930, as amended (19 U.S.C. 1313(j)(2)). 
See 19 CFR 191.32(b)(4).
* * * * *

    Signed: September 3, 2009.
John J. Manfreda,
Administrator.
    Approved: September 17, 2009.
Timothy E. Skud,
Deputy Assistant Secretary (Tax, Trade, and Tariff Policy).
[FR Doc. E9-24791 Filed 10-14-09; 8:45 am]
BILLING CODE 4810-31-P