This article gives an overview of a case in which an importer of a tobacco product was wrongfully assessed additional taxes not due as a result of improper classification of product. Specifically, the company was importing a product called “gutkha” that the U.S. Customs and Border Protection classified incorrectly as snuff instead of chewing tobacco. The classification is important because snuff has a higher federal excise tax than chewing tobacco. In response, the company successfully challenged the tobacco product type misclassification and was awarded attorney’s fees as a result.
There are several government agencies that oversee the import and export of tobacco products in the United States, including U.S. Customs and Border Protection (“Customs”) and the Alcohol and Tobacco Tax and Trade Bureau (“TTB”). The Court that hears the majority of the challenges regarding action taken by these agencies is called the United States Court of International Trade (“CIT”). Further, a party prevailing in a civil action brought by or against the United States is entitled to an award of the attorneys’ fees and other expenses incurred by that party in such action, “unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.” 28 U.S.C. § 2412(d).
Shah Brothers, an importer of a smokeless tobacco product from India called “gutkha” challenged the tariff classification made by U.S. Customs and Border Protection (“Customs”) as “snuff”, arguing that the product instead should have been classified as “chewing tobacco”. Shah Brothers., Inc v. United States, 2014 CIT 109.
The classification is important because classification as “chewing tobacco” rather than “snuff” lowers the applicable excise tax (although it does not alter the applicable tariff rate). See HTSUS 2403.99.20; 26 U.S.C. § 5701(e)(1)-(2). The “gutkha” imported by Shah Bros. is a grayish/beige substance consisting of dry rough chunks of betel nut pieces and bits of tobacco leaf, coated with a powdered blend of the spices. “Snuff” is defined as “any finely cut, ground, or powdered tobacco that is not intended to be smoked,” 26 U.S.C. § 5702(m)(2), whereas “chewing tobacco” is “any leaf tobacco that is not intended to be smoked.” Shah Brothers explained in their challenge that the “gutkha” is not finely cut, ground or powdered,” and as a result, was improperly classified.
Shah Brothers attempted to initiate a complaint with TTB directly as opposed to the CIT. However, the CIT is the entity with full “authority” over Customs revenue functions, Customs “assesses” excise taxes on imports and “classifies and values merchandise for purposes of assessment. Further, in proceedings under § 1581(a) makes relief manifestly inadequate and, accordingly, the court has jurisdiction in this case under § 1581(i).”); Am. Ass’n of Exps. & Imps. v. United States, 751 F.2d 1239, 1245 (Fed. Cir. 1985) (“The objective of the addition of § 1581(i) was to make it clear that . . . prospective importers challenging Customs Service regulations imposing import restrictions need not attempt to import merchandise, file a protest and then contest the administrative denial of the protest in the CIT under § 1581(a).”) In response to Shah Brother’s Complaint, the agency confessed judgment to their classification claim, agreeing to refund, with interest, the contested duties and excise taxes. See
As a result, the Shah Brothers then successfully pursued an award of its attorney’s fees, expenses, and costs in connection with this action, pursuant to the Equal Access to Justice Act, 28 U.S.C. § 2412(d) (2012) (“EAJA”). Under the EAJA, a party prevailing in a civil action brought by or against the United States is entitled to an award of the attorneys’ fees and other expenses incurred by that party in such action, “unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.” 28 U.S.C. § 2412(d).
According to Plaintiff, “[t]he tobacco leaf is not finely cut, ground or powdered” and “[w]hen the gutkhais rinsed in a fine mesh strainer, the spice coating is washed off and the remaining components, i.e. crushed betel nut and tobacco leaf, are plainly visible and identifiable as such.”
This case is an important reminder of the complexity of operating in the tobacco industry. It is important to be informed and aware of the laws as well as the processes in place to appeal unlawful over taxation. Having a knowledgeable tobacco tax attorney on your side is invaluable in operating successfully and ensuring you are not overpaying taxes.