Court Chastises V.I. for Violating Excise Tax Order – Millions in Revenue at Risk

The Ron deLLugo Federal Courthouse. (File photo)
The Ron deLLugo Federal Courthouse. (File photo)

After learning the V.I. government had continued collecting excise taxes in violation of his September court order, U.S. District Court Judge Curtis Gomez on Thursday denied Gov. Kenneth Mapp’s administration’s request to stay his earlier ruling pending appeal.

Potentially at risk are tens of millions of dollars in tax revenue collected each year.

The point of contention has to do with the territory’s longstanding but apparently unconstitutional and illegal practice of imposing different tax status on goods from the states than it does locally produced goods.

“During the course of hearings held on November 8, 2018, and November 15, 2018, which addressed the motion of the GVI to stay, the parties disclosed to the court that the GVI continues to collect excise taxes in the same manner that the court had found in its September 28, 2018, judgment to be violative of the United States Constitution,” Gomez wrote in his order denying the government’s motion to stay the judgment pending appeal.

His Nov. 15 order enjoins the territory from collecting excise taxes in a manner inconsistent with the court’s holding in its Sept. 28 judgment.

“The GVI is enjoined from collecting excise taxes in a manner that violates Commerce Clause principles … ,” Gomez ruled.”If and when” the administration “is prepared to collect excise taxes in a manner consistent with (his earlier ruling) the court may reconsider the injunctive relief.”

In September, Gomez invalidated the territory’s excise tax, saying it violates the U.S. Constitution’s Commerce Clause. While the judgment in the particular case is small, it calls into question many tens of millions of dollars in excise taxes collected in recent years.

Reefco, a refrigeration company, paid excise tax on parts and materials it shipped in for refrigeration systems installed in boats. Reefco filed suit in 2014, arguing it should not have to pay because “boat parts” are exempt from excise tax under V.I. law. And it argued the tax is a violation of both the Commerce Clause and the Import Export Clause of the U.S. Constitution.

The court dismissed most of the counts, including the constitutional questions, in 2015. But in September Gomez vacated its dismissal of the Commerce Clause argument and ruled the territory’s excise tax violated the Commerce Clause. That clause gives Congress authority to regulate interstate commerce.

In that September ruling, Gomez cited a Third Circuit appellate case that found that just because Congress may have authorized an excise tax on goods when they are imported does not mean Congress automatically consented to the “unilateral imposition of unreasonable burdens on commerce.” He cited several cases that say Congress can authorize discriminatory burdens on commerce but only if Congress is clear and unambiguous in its intent.

Another Third Circuit case found a U.S. Virgin Islands excise tax that discriminated against the businesses of other states was prohibited, but a tax impacting both locally produced goods and imported goods alike was permissible.

In 1984, the territory amended V.I. law, applying excise taxes equally to local and imported goods. But, Gomez wrote, “No statutory provision exists outlining the procedures for the collection of excise taxes on locally manufactured goods: and no regulations to collect those taxes were ever put in place. And Bureau of Internal Revenue officials testified to the court that they do not collect any excise taxes on locally produced goods.”

“We have no basis to charge a tax on something that’s not imported into the territory,” BIR Supervisor of Excise Tax Glenford Hodge testified during a deposition in the case. “Excise tax is collected on items imported into the territory.”

Gomez ruled that because no tax is collected on locally produced goods, the tax violates the Commerce Clause. He awarded Reefco a refund of $5,287.74 for excises taxes going back to 2011.

The government filed a motion to stay the order and appealed to the Third Circuit. Meanwhile, according to the court, the government continued to collect the tax in the discriminatory fashion prohibited by Gomez’ order.

While the award is small, that Gomez invalidated the excise tax altogether and awarded Reefco a refund of taxes paid several years ago could be burdensome to the government if all or many others who paid excise taxes would also be due refunds.

According to data at the Bureau of Internal Revenue website, the government collected between $23 million and $33 million in excise taxes per year from 2012 through 2017, averaging $25.7 million per year.