A panel of federal appellate judges said the V.I. government may have taken adequate steps that would allow it to collect excise taxes in the future. The ruling came on Wednesday in the case of Reefco Services, Inc. vs. Government of the Virgin Islands.
The three-judge panel upheld a District Court decision to award Reefco $5,287.74 in payments demanded by the government for custom refrigerator parts sold locally. But Chief Circuit Judge D. Brooks Smith, along with Judges Patty Shwartz and Theodore McKee vacated a part of the lower court ruling directing the V.I. government to seek permission from District Court to impose and collect excise taxes.
In another portion of Wednesday’s ruling, 3rd Circuit judges ordered the lower court to hold further proceedings to determine if an injunction preventing the local government from imposing excise taxes can be lifted.
Local officials claim the inability to collect excise taxes as a result of ongoing litigation had produced a loss of $47.44 million in revenue as of January 2020.
The injunction came along with a ruling in a case first filed in 2010 in which lawyers representing Reefco said local tax laws charged importers of goods but not the merchants who sold the goods locally. That, they said, violated the Commerce Clause in Article 1 of the U.S. Constitution.
The Commerce Clause sets the rules for both interstate and international trade. In the case decided by the 3rd Circuit, Reefco made and sold custom refrigerator parts for marine vessels. The items that became subject to the excise tax were described by the government as imported goods. Reefco declared they were boat parts and were exempt from excise taxes.
In oral arguments made before the panel in December 2019, lawyers representing the Internal Revenue Bureau said Reefco did not suffer any financial injury from paying the tax because they passed the expense along to their customers.
But McKee, who wrote the Oct. 7 opinion, saw things differently. “… we will affirm the District Court’s award of declaratory, injunctive and monetary relief, in part, and vacate and remand for further proceedings regarding the necessity of the injunction,” he wrote. “GVI is still obligated to refund to Reefco $5,287.74 in assessed taxes.”
But McKee said the lower court went too far when it told local officials they must seek permission from the court before imposing an excise tax. The court had the right to adjudicate the law, he said, but not to make law.
New rules and regulations promulgated in the V.I. in February 2019 were viewed by the appellate as an attempt to show excise taxes would apply to both importers and merchants. If Internal Revenue can prove that’s true, the District Court injunction could be lifted, allowing the V.I. government to resume excise tax collection.