Duty Drawback of Federal Excise Taxes and its’ Effect on SSJV

Winegrape GrowersWhy are SSJV Winegrape prices so low and what can we do about it?

John DuarteWinegrower

President, Duarte Nursery, Inc.CAWG Board Member – Past Federal Issues Chair.

Friends Day, May 1st, 2015

Duty Drawback of Federal Excise Taxes and its’ Effect on SSJV Winegrape Growers

Why are SSJV Winegrape prices so low and what can

we do about it?

John DuarteWinegrower

President, Duarte Nursery, Inc.CAWG Board Member – Past Federal Issues Chair.

Friends Day, May 1st, 2015

Spot prices on SSJV grapes:

• Low.• Not sustainable.• Motivating removals.• Not connected to winery trends.• Few vineyards planted w/o contracts.

Is it because of DDB of Excise Taxes?

Friends Day, May 1st, 2015

What is Duty Drawback?

Duty Drawback n. def. –

Tax paid on imported goods or products that is paid back when goods or products made with those products or highly similar products are exported again.

Example:

An auto manufacturer imports wheels from a country that actually still pays tariffs when exporting into the U.S. The imported wheels are assembled onto a vehicle that is exported. The Auto manufacturer can drawback 99% of the tariffs or duty that it paid.

Friends Day, May 1st, 2015

What is Excise tax?

Excise taxes n. def. – An excise or excise tax (sometimes called a duty of excise special tax) is an inland tax on the sale, or production for sale, of specific goods or a tax on a good produced for sale, or sold, within a country or licenses for specific activities. Excises are distinguished from customs duties, which are taxes on importation.

Excises are inland taxes, whereas customs duties are border taxes.

Example:In the U.S. we pay excise taxes on alcohol, tobacco, firearms, archery and fishing products, gasoline, tanning booths and wagering.

Friends Day, May 1st, 2015

DDB and Excise taxes should be separate issues.

DDB is about imports and trade – border taxes.

Excise taxes are about specific goods – inland taxes.

Friends Day, May 1st, 2015

The Issue: DDB with Excise Tax

• Tariffs are very low.• Excise taxes are high.• When a company's exports are greater than

its imports (2000-2006) DDB of tariffs and excise taxes can motivate wineries to import wine into the U.S. – The incentive to buy abroad amounted to over $1

per gallon or $175 per ton of winegrapes. Excise taxes make up at least 6/7 of the incentives.

Friends Day, May 1st, 2015

Impact of DDB of Excise taxes:

• $.28 per liter• $1.06 per gallon• $2.54 per case• $185 per ton (?????)• Has always been a benefit on packaged wine.• Was bad for growers 2003-2009.• Should be good for growers since 2010 and until

exports exceed imports.

Friends Day, May 1st, 2015

Why are we here?There is a 2003 IRS letter ruling that allows wine excise taxes that are paid upon import to be treated as a common duty.

This was clarified in a subsequent Farm Bill.

TTB questioned the policy by opening a public review process in 2009.

Ten U.S. Senators including Feinstein and Boxer and eighteen US Congressmen have backed the IRS position in stern letters to the TTB.

TTB withdrew the review.

A CAWG delegation first learned of the issue from TTB in 2010.

Friends Day, May 1st, 2015

Economic Implications of Drawback of Wine Economic Implications of Drawback of Wine Import Duties and Excise TaxesImport Duties and Excise Taxes

California Association of Winegrape GrowersCalifornia Association of Winegrape Growers

November 12, 2014November 12, 2014

Daniel A. Sumner and Georgi T. Gabrielyan

University of California Agricultural Issues Center andAgricultural and Resource Economics, UC, Davis

Traded Bottled Table Wine Quantity and Prices

Traded Bulk Table Wine Quantity and Prices

Accumulation of Potential Excess Bulk Table Wine Imports Eligible for Drawback

Traded Bulk Table Wine Quantity and Prices

Sumner slide edited by John Duarte

Is it DDB in 2014?

• Imports are greater than Exports.– DDB subsidizes exports

• In the most basic analysis DDB should be good for growers.

Friends Day, May 1st, 2015

2nd Order concerns of DDB of ET

• Can cause further buyer consolidation.• Has probably exacerbated cyclicality.• May create winners and losers among

growers.• Bulk wine imports are a significant supply

source and may be opaque as to varietal.

Friends Day, May 1st, 2015

Why the low winegrape prices?• Foreign competition:– Global Production– Global Recession– US market size &

strength

• Market Changes– Trading up– Varietal– JIT supply chain

• Industry Structure:– Few buyers.– More Public Companies– Retailer pressures– Winery Capacity

• Crush• Storage

Friends Day, May 1st, 2015

What can growers do?• Plant other crops.– Almonds– Walnuts– Pistachios– Raisin– Citrus

• Sell high.

• Demand longer term contracts– 20-25 years to match life

of vyd.– Allows longer term

financing.– Need a partial inflation

adjustment.• Capital investment

remains constant• Operating costs increase.

Friends Day, May 1st, 2015

Thank you.Thank you.

Friends Day, May 1st, 2015