The V.I. Government filed new rules and regulations for paying excise tax this week, hoping to persuade a judge to lift an injunction on collecting the tax that is costing the territory millions of dollars in revenue each month.
Filing the new rules is the latest of several actions taken in hopes of mollifying the court.
The issues with the case date back decades and were partly adjudicated back in 1984, but the territory never followed through on legislation resolving constitutional problems with the territory’s excise tax.
In September 2018, 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, the ruling called 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 in September, “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. This prompted Gomez in November to direct the territory to stop collecting the tax at all.
The territory quickly filed an emergency motion to lift the injunction on collecting the tax.
To bolster their case, the government included two items also aimed directly at Gomez’ concerns. It included a Nov. 21 letter to all V.I. manufacturers saying excise taxes will be collected on goods manufactured in the Virgin Islands starting Dec. 1. And it has a screen capture of the Bureau of Internal Revenue’s online portal showing how businesses can pay the tax online.
The Feb. 19 filing of rules and regulations are an effort to meet Gomez’ objection that there are no regulations.
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. To include locally manufactured goods would increase those totals. Being unable to collect the tax increases the territory’s structural budget deficit, worsening an already difficult budget situation.