Appellate Judges Seek New Briefs in Reefco Case

Cargo ship unloads containers. (Photo from Crowley Maritime website)
Cargo ship unloads containers. (Photo from Crowley Maritime website)

Lawyers representing the Internal Revenue Bureau and a private firm opposing the bureau’s tax policies have until Monday, to tell a federal appeals panel if it can move forward on consideration of a case now before it.

Since 2010 the company, Reefco Services Inc., has said the tax bureau improperly assessed it for excise taxes it did not owe.

The directive to file supplemental briefs in the case, Reefco Services Inc. vs. Government of the Virgin Islands, et. al., came after oral arguments on the appeal were heard on St. Croix in early December. Chief Judge D. Brooks Smith of the U.S. Appeals Court for the Third Circuit ordered the legal teams to submit briefs on whether new considerations in the case have surfaced since a lower court denied an emergency motion from the tax bureau on Dec. 6.

In oral arguments heard Dec. 10 in U.S. District Court on St. Croix, Smith asked Assistant U.S. Attorney Dionne Sinclair if he, along with Judges Patty Shwartz and Theodore McKee, should expand the subjects they will include in a pending opinion.

The emergency motion asked the court to lift the order against further assessment of taxes on goods brought into the territory by manufacturers for the purpose of production. It also asked the court’s permission for the tax bureau to enact new rules submitted in early 2019.

In the Dec. 6 ruling, District Court Judge Curtis Gomez said the government had not changed the way it taxed goods sold to local manufacturers and the new rules were unconstitutional.

Sinclair, an attorney working with the office of the Virgin Islands Solicitor General, is asking the Third Circuit to reverse the judgment that cut off a government revenue stream. As she presented her arguments on Dec. 10, the government lawyer said more than $47 million was a stake.

The government lawyer told the court the $47 million represented the amount of outstanding excise taxes overall. Within the scope of the Reefco case, the figure was much smaller – about $100,000.

On Oct. 12, 2018, Gomez issued a split ruling on five counts filed in a civil lawsuit. Among the two counts favoring Reefco was one that said the Government of the Virgin Islands and its tax bureau violated the Commerce Clause when it imposed excise taxes on exempt items brought into the territory by Reefco.

The Commerce Clause is part of Article 1 in the Constitution. It gives Congress the power to regulate trade between the U.S. and foreign nations, and as part of interstate commerce.

According to court documents, Reefco provides refrigeration and air conditioning equipment to the local marine industry. When materials used in the manufacture of those parts made their way through cargo transport, Reefco claimed they were boat parts, exempt from excise tax.

Tax officials disagreed and refused to release the goods until the company paid up. Reefco sued, claiming discrimination.

Over the course of hearings held in court since the suit was filed in 2014, an Internal Revenue Bureau official admitted tax officials did not realize there was a provision in the excise tax code that applied to local manufacturers. Therefore, the official said, there was no enforcement.

Fixing the code to comply with the law was hard, Sinclair said. The tax bureau promulgated new rules and regulations in February and is still waiting for the court’s approval. Sinclair said the emergency motion was intended to spur the decision along.

The three-judge panel hearing the case on St. Croix Dec. 10 said they did not understand why proper enforcement of tax codes had become such a sticking point.

“Apparently this decision not to act had this consequence, of significant value to the islands,” Shwartz said.

It would take an act of Congress to allow the Virgin Islands tax bureau to make an exception in the application of excise taxes that allowed a difference between the way manufacturers based inside and outside the territory are treated, the court has said in prior rulings. And since that has not happened the current system continues to violate the Commerce Clause.

Attorney Taylor Stickling, representing Reefco in oral arguments, said although there is a large amount of money currently outside the reach of the government, the government must make the needed changes.

At the end of the Dec. 10 hearing, the chief appellate judge asked the parties to submit memorandum explaining whether the ruling against the government’s emergency motion raised issued the panel must address other than those currently before the court.

“Are you asking us to rule any differently from your initial request as a result of the recent ruling by the court?” Smith said.