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‘Rum War’ Set to Resume Between Territory and Puerto Rico

Just when it seemed the issue had settled down, Puerto Rico’s Resident Commissioner Pedro Pierluisi on Thursday rekindled the "rum war" between that territory and the U.S. Virgin Islands by introducing a new measure in Congress to limit how their rum cover-over funds can be used.
The bill, called "Investing in U.S. Territories, Not Corporations Act of 2011," was introduced in the House by Pierluisi; a companion bill mirroring the House legislation was introduced in the Senate by New Jersey Democrat Robert Menendez.

Even though the bills were introduced Thursday, V.I. Delegate to Congress Donna Christensen said she’s seen it coming for weeks. Pierluisi had warned her he would be launching the legislation just before Congress took a break three weeks ago.

She said the just-introduced bill was similar to the measure the two lawmakers had unsuccessfully attempted a year ago. However, this version contains several new twists she called even more objectionable.

The so-called rum war began after the Diageo Corporation decided to build its own distillery on St. Croix, terminating a contract it had with a Puerto Rico distiller to produce the rum marketed worldwide as Captain Morgan’s Spiced Rum.

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Puerto Rico officials charged that the international liquor company had been lured to the U.S. Virgin Islands through an improper promise of the cover-over funds.

The cover-over funds are the tax paid on rum from the territories sold in the United States, which is returned—or "covered over"—to the territory from which that rum came.

The Diageo distillery on St. Croix was financed by bonds, which will be repaid with the increased cover-over the territory will receive from the sale of Captain Morgan’s Rum made on the island. Cruzan Rum, another company, subsequently entered into a similar agreement with the V.I. government to finance an expansion of its facilities.

Pierluisi’s bill a year ago had attempted to cap at 15 percent the amount of cover-over money that can be used by the territory to directly support the rum industry. The bill died when the Congressional session ended last fall.

Christensen said she had only received a copy of the new bill Thursday and hadn’t gone over it in detail, but the V.I. government’s main objection hadn’t changed.

“While we are still evaluating the ramifications of this new proposal, I can say on first review that it still is an attempt of one territory to dictate how the other achieves economic development and utilizes its own funding,” Christensen said.

The new bills would:
• Limit the amount of cover-over that could be used by each territory for direct or indirect support of the industry to 15 percent, as the previous bill had attempted. That would include everything from grants and subsidies to market promotion and debt service. It would place limits on each rum producer as well as on the rum producers in aggregate in each territory as well.

• Prohibit the use of cover-over funds for cane neutral spirits (redistilled rum used to produce other liquors, such as whiskey). This provision seems to reflect fears voiced by Puerto Rico industry officials based on the fact that both Diageo and Cruzan’s parent company make a range of distilled spirits. Puerto Rico officials tried to build support for their bill last year by raising the specter of the companies stealing other spirits companies from the states in a bid financed by rum sales.

• Place limits on the amount of market share that each territory could claim: 65 to 70 percent for Puerto Rico and 30 to 35 percent for the U.S. Virgin Islands.

This is the most striking of the new provisions, Christensen said. Rum cover-over revenues are distributed based on the amount of rum sold from each territory. Puerto Rico has always had the lion’s share of the market. But with V.I.-distilled rum entering the marketplace under the very popular Captain Morgan’s label, that percentage could shift.

The bill, if passed into law, would dictate the percentage of rum-cover over at those fixed ranges, regardless of how much rum actually was sold.

The Diageo and Cruzan Rum deals were the centerpiece of Gov. John deJongh’s effort to bolster the territory’s economy by creating a new industry.

“These bills go against the right of the government of the Virgin Islands to utilize the tools given to it by the Congress to expand its economy and to provide for its citizens,” said Christensen. “Just as important, it takes dollars hard earned in the Virgin Islands and it gives them away to Puerto Rico. We will not give up these rights or Virgin Islands’ money,” she said.

A year ago Pierluisi’s bill was sent to the Ways and Means Committee, the tax-writing panel of the House, where it never received a hearing. The committee at the time was chaired by Rep. Charles Rangel (D-N.Y.), an associate of Christensen’s and a friend of the U.S. Virgin Islands.

With Republicans wresting control of the House in the 2010 elections, the chairmanship passed to GOP Rep. Dave Camp of Michigan. It is not clear how the change in leadership would affect the measure, if at all, but Christensen pointed out that both Pierluisi and Menendez are Democrats.

In a statement issued late Thursday evening, Gov. John deJongh stated, "Our 30-year production agreements with Diageo and Fortune Brands [i.e., Cruzan] are creating and protecting American jobs, allowing the V.I. government to invest in schools, infrastructure and public needs, and improving the environment. This revenue comes at a time when the Virgin Islands needs it most and already is generating economic growth.

"There is no ‘rum war’ between the territories," deJongh continued. "Congress has not acted on Puerto Rico’s two-year effort to overturn our agreements because it would be an assault on free enterprise. Puerto Rico has secured its own agreement with Bacardi and is pursuing one with Destileria Serralles.

"There is no reason for federal legislation altering a program that provides economic development tools to advance the interests of both communities, that works as Congress intended to support a vibrant rum industry in the United States, and that encourages the fiscal stability of the territories.”

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Just when it seemed the issue had settled down, Puerto Rico’s Resident Commissioner Pedro Pierluisi on Thursday rekindled the "rum war" between that territory and the U.S. Virgin Islands by introducing a new measure in Congress to limit how their rum cover-over funds can be used.
The bill, called "Investing in U.S. Territories, Not Corporations Act of 2011," was introduced in the House by Pierluisi; a companion bill mirroring the House legislation was introduced in the Senate by New Jersey Democrat Robert Menendez.

Even though the bills were introduced Thursday, V.I. Delegate to Congress Donna Christensen said she's seen it coming for weeks. Pierluisi had warned her he would be launching the legislation just before Congress took a break three weeks ago.

She said the just-introduced bill was similar to the measure the two lawmakers had unsuccessfully attempted a year ago. However, this version contains several new twists she called even more objectionable.

The so-called rum war began after the Diageo Corporation decided to build its own distillery on St. Croix, terminating a contract it had with a Puerto Rico distiller to produce the rum marketed worldwide as Captain Morgan's Spiced Rum.

Puerto Rico officials charged that the international liquor company had been lured to the U.S. Virgin Islands through an improper promise of the cover-over funds.

The cover-over funds are the tax paid on rum from the territories sold in the United States, which is returned—or "covered over"—to the territory from which that rum came.

The Diageo distillery on St. Croix was financed by bonds, which will be repaid with the increased cover-over the territory will receive from the sale of Captain Morgan's Rum made on the island. Cruzan Rum, another company, subsequently entered into a similar agreement with the V.I. government to finance an expansion of its facilities.

Pierluisi's bill a year ago had attempted to cap at 15 percent the amount of cover-over money that can be used by the territory to directly support the rum industry. The bill died when the Congressional session ended last fall.

Christensen said she had only received a copy of the new bill Thursday and hadn't gone over it in detail, but the V.I. government’s main objection hadn't changed.

“While we are still evaluating the ramifications of this new proposal, I can say on first review that it still is an attempt of one territory to dictate how the other achieves economic development and utilizes its own funding,” Christensen said.

The new bills would:
• Limit the amount of cover-over that could be used by each territory for direct or indirect support of the industry to 15 percent, as the previous bill had attempted. That would include everything from grants and subsidies to market promotion and debt service. It would place limits on each rum producer as well as on the rum producers in aggregate in each territory as well.

• Prohibit the use of cover-over funds for cane neutral spirits (redistilled rum used to produce other liquors, such as whiskey). This provision seems to reflect fears voiced by Puerto Rico industry officials based on the fact that both Diageo and Cruzan's parent company make a range of distilled spirits. Puerto Rico officials tried to build support for their bill last year by raising the specter of the companies stealing other spirits companies from the states in a bid financed by rum sales.

• Place limits on the amount of market share that each territory could claim: 65 to 70 percent for Puerto Rico and 30 to 35 percent for the U.S. Virgin Islands.

This is the most striking of the new provisions, Christensen said. Rum cover-over revenues are distributed based on the amount of rum sold from each territory. Puerto Rico has always had the lion's share of the market. But with V.I.-distilled rum entering the marketplace under the very popular Captain Morgan's label, that percentage could shift.

The bill, if passed into law, would dictate the percentage of rum-cover over at those fixed ranges, regardless of how much rum actually was sold.

The Diageo and Cruzan Rum deals were the centerpiece of Gov. John deJongh's effort to bolster the territory's economy by creating a new industry.

“These bills go against the right of the government of the Virgin Islands to utilize the tools given to it by the Congress to expand its economy and to provide for its citizens,” said Christensen. “Just as important, it takes dollars hard earned in the Virgin Islands and it gives them away to Puerto Rico. We will not give up these rights or Virgin Islands’ money,” she said.

A year ago Pierluisi's bill was sent to the Ways and Means Committee, the tax-writing panel of the House, where it never received a hearing. The committee at the time was chaired by Rep. Charles Rangel (D-N.Y.), an associate of Christensen's and a friend of the U.S. Virgin Islands.

With Republicans wresting control of the House in the 2010 elections, the chairmanship passed to GOP Rep. Dave Camp of Michigan. It is not clear how the change in leadership would affect the measure, if at all, but Christensen pointed out that both Pierluisi and Menendez are Democrats.

In a statement issued late Thursday evening, Gov. John deJongh stated, "Our 30-year production agreements with Diageo and Fortune Brands [i.e., Cruzan] are creating and protecting American jobs, allowing the V.I. government to invest in schools, infrastructure and public needs, and improving the environment. This revenue comes at a time when the Virgin Islands needs it most and already is generating economic growth.

"There is no 'rum war' between the territories," deJongh continued. "Congress has not acted on Puerto Rico’s two-year effort to overturn our agreements because it would be an assault on free enterprise. Puerto Rico has secured its own agreement with Bacardi and is pursuing one with Destileria Serralles.

"There is no reason for federal legislation altering a program that provides economic development tools to advance the interests of both communities, that works as Congress intended to support a vibrant rum industry in the United States, and that encourages the fiscal stability of the territories.”