Court Allows Winery To Proceed On Refund Claim Against the U.S. For Excise Taxes Paid By Bonded Warehouse
What entity has the right to pursue a refund for overpayment when a bonded warehouse overpays taxes on a winery’s inventory? This question about the Small Producers Tax Credit on Wine (26 USC §5041) is at the center of a recent case from the Eastern District of Washington.
K Vintners brought this complaint against the federal government looking to collect a refund for a $433,238.37 overpayment after the taxes were paid by K Vintners bonded warehouseman – Tiger Mountain.
The government moved to dismiss on the grounds that because the taxes were paid by the warehouseman, even though K Vintners had reimbursed the warehouseman for the payment, K Vintners didn’t have the right to make the claim to recover the federal excise taxes on wine that Tiger paid on K Vintners wine.
In this opinion, the Court rejected the argument with some explanation that is a helpful explanation of the bonded warehouse/winery relationship. In denying the U.S.’ request to dismiss, the court found that Tiger Mountain served only as a “bonded transporter and warehouse for the wine as it travels from producer to retailer and then to the consumer.” The court noted that Tiger Mountain, was a convenient collection point for the IRS in the stream of commerce, but K Vintners owned the wine and directed its destination for sale.
On these facts, the court compared the case to an older cotton tax case where the middle-man incurred tax assessment on goods owned by the producer – as a convenient collection point.
The court went so far as to cite to the legislative history of the statute that allows for refunds – 26 USC §6423, which makes specific reference to these types of situations:
This subsection [§6423] also makes provision for cases where the taxpayer is not the owner of the taxed commodity. For example, in the case of distilled spirits withdrawn from internal revenue bond, the tax is paid by the warehouseman holding the spirits, and the warehouseman is therefore the only person entitled to file claim for refund of such tax. However, in many instances he is not the owner of the spirits. In such cases the owner is likely to supply the warehouseman with the amount of the tax to secure the release of the spirits from bond. This subsection recognizes the equities of the owner under these circumstances even though he was not the taxpayer. It permits the warehousemen in these cases to claim the refund or credit where the owner has given his written consent to allowance of the refund to the claimant warehouseman if the owner bore the ultimate burden of the tax or has unconditionally repaid the amount claimed by the person who bore the ultimate burden of the tax.
The agreement (a portion of it was included with the pleadings and can be found here) between the warehouse and the winery even specifically mandated reimbursement because it was a contract from a bonded warehouse and they always mandate reimbursement for taxes paid by the warehouse. The specific language in this agreement states “Bonded customers will be billed for Federal Taxes on taxable distribution twice monthly.”
It seems pretty clear from the legislative history and the language in §6423 that there shouldn’t have been an issue, but we’ll want to keep monitoring this case as it may provide some insight as to how the government understands the credit.