A judge has ruled that the Virgin Islands government may begin collecting excise tax again starting Jan. 1, and will have one month to show that a proposed collection plan is constitutional and equitably taxes both local manufacturers and importers of goods made outside the territory. U.S. District Court Judge Robert Molloy ordered officials to appear at another hearing on Feb. 3 to reassess the collection plan, and left open the potential for future challenges to the territory’s excise tax system — which are likely to come.

Attorney Taylor Strickling, who is challenging the tax’s legality on behalf of refrigeration company Reefco Services Inc., said Wednesday that the proposed collection scheme is still unconstitutional, and “the government’s plan now is to come back and discriminate slightly less.”

Molloy’s order temporarily lifts an injunction put in place by his predecessor, Judge Curtis Gomez, in November 2018, which enjoined the government from collecting excise taxes entirely.

That order has cost the Virgin Islands government more than $84 million to date, according to a statement issued Wednesday by V.I. Bureau of Internal Revenue Director Joel Lee. The case began in 2014, when attorney Alex Golubitsky brought a lawsuit against the territory on behalf of Reefco, seeking a refund of the excise tax assessed on items the company imported over the years.

Golubitsky and Strickling, who represented the company during Wednesday’s evidentiary hearing, argued that the tax violated the Commerce Clause because it was levied against importers of manufactured goods into the territory only.

Gomez agreed and ordered that Reefco receive a refund and that the government could not collect any excise tax on any businesses until officials proved they could do so equitably.

Local officials acknowledged that for more than three decades, the Virgin Islands government did not follow a previous court order requiring promulgation of excise tax regulations on local manufacturers. The V.I. Internal Revenue Bureau drafted the necessary regulations in February 2019, after the government had lost about $3 million due to Gomez’s order.

But Gomez denied requests to lift the injunction, and wrote that “the new proposed scheme continues to discriminate against interstate commerce in its effect.”

The local government appealed to the 3rd Circuit, which agreed in an opinion in October that “local manufacturers were afforded a tax break not available to foreign and domestic importers,” and “the District Court correctly held that Reefco is entitled to a refund.”

The judges affirmed Gomez’s award of $5,287.74 that the government had assessed in taxes against Reefco, but disagreed that the District Court has the authority to approve or disapprove new tax regulations, and “remanded this matter for further proceedings as to whether the excise tax has been assessed against local manufacturers.”

At Wednesday’s hearing, Assistant V.I. Attorney General Carol Thomas-Jacobs called Excise Tax Supervisor Glenford Hodge to testify about the government’s plan for assessing excise tax on companies. Businesses will be required to register through a website and submit a worksheet that calculates the cost to manufacture items based on invoices for supplies — or the cost to purchase items for import, which is then marked up 5%. That figure is what the Internal Revenue Bureau then uses to apply the V.I. Code’s assessment of between 2 and 35% excise tax on various types of goods, Hodge said.

For example, a local manufacturer might spend $500 on materials to build cabinets that were then sold for $1,000, which is marked up 5% to $1,050, and then taxed at a rate of 4%, for a total tax of $42, Hodge said.

Strickling argued that excise tax is a “standard, vanilla” type of tax that a jurisdiction could choose to implement, similar to how many states assess sales tax, rather than taxing manufacturers and importers.

If the territory collects excise tax, it must do so in accordance with the Commerce Clause, Strickling said, and he argued that the proposed taxation plan still results in a lower effective rate on local manufacturers.

While a local cabinet maker is taxed on the $500 cost of supplies, an importer would be taxed on the $1,000 purchase cost for identical cabinets, Strickling said.

“That would be the primary fault with this proposed plan,” Strickling said, noting that it is the same one that Gomez rejected in December 2019.

But Molloy said the local government “was caught between a rock and a hard place” because of Gomez’s injunction, so they must be given an opportunity to at least begin assessing tax on local manufacturers before the system can be further scrutinized.

“I don’t see how it can be accomplished in any other way,” Molloy said. “The court needs to allow the government to proceed with its plan,” and then “we’re going to revisit that.”

— Contact Suzanne Carlson at 340-714-9122 or email scarlson@dailynews.vi.