Tax alert

Federal Circuit denies excise tax claim for refund for tobacco importer

May 16, 2022
Business tax Excise tax consulting International tax Consumer goods

The United States Court of Appeals for the Federal Circuit (“Federal Circuit”) recently rejected an importer’s appeal for a claim for refund of $500,000 it paid in excise taxes on imported tobacco products. (see Federal Circuit Ruling)

The Federal Circuit upheld the decision by the U.S. Court of International Trade (“lower court”) ruling in favor of the U.S. government and against New Image Global, Inc. (“New Image”). (see lower court’s decision) At issue is how to determine the weight of imported “tobacco products” for purposes of calculating the federal excise tax imposed on roll-your-own tobacco. 

In 2009, as a part of its Children’s Health Insurance Program Reauthorization Act, Congress expanded the federal excise tax on tobacco to include “roll-your-own-tobacco”. The excise imposed on “roll-your-own-tobacco” is assessed at $27.78 per pound.  Roll-your-own-tobacco is defined as: “any tobacco which, because of its appearance, type, packaging, or labeling, is suitable for use and likely to be offered to, or purchased by, consumers as tobacco for making cigarettes or cigars, or for use as wrappers thereof.”

At the lower level and on appeal, New Image, an importer of tobacco, argued that the tobacco should be dry before it is weighed for excise tax purposes. In its brief, New Image explained to the court that the tobacco, when initially purchased from the manufacturer, is wet because of an ethanol-based flavoring it contains. As such, New Image before weighing the wraps of tobacco for tax purposes, would remove them from their packages and let them dry for 24 hours. This method resulted in the tobacco weighing in an average of 0.71 grams per wrap.

The U.S. Customs Department did not agree with New Image’s method of determining the tax. Instead, it argued that for purposes of calculating the tax, the correct method should be to subtract the weight of the package and packing material from the imported tobacco, weighing as is, not allowing the wraps to dry. This method resulted in an average weight of 0.915 grams per wrap, creating an increase in excise tax liability. 

At the lower level, the government filed a motion for summary judgement with the U.S. Court of International Trade stating there is no genuine dispute of material fact as to the method used to weigh the tobacco. Alternatively, New Image argued the method used to weigh the tobacco product does present a dispute of material fact and as such, the government’s motion for summary judgement should be denied.

The lower court ruled in favor of the government and held that there is no dispute of material fact with regard to the method used to weigh the tobacco and as such, rendered judgment as a matter of law in favor of the government. 

The Federal Circuit Court summarily affirmed the lower court’s decision without an opinion, resulting in the denial New Image’s claim for refund.

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