U.S. District Court Judge Robert Molloy issued a revised order Thursday that prohibits the V.I. government from collecting excise tax on importers until officials first prove they’re prepared to collect it on local manufacturers.
The order means that the Internal Revenue Bureau will not be able to collect more than $3 million in anticipated excise tax revenue during a court-ordered trial period during the month of January. IRB Director Joel Lee has said the excise tax brings in approximately $40 million annually, and a 2018 injunction on excise tax collection by Molloy’s predecessor, former Judge Curtis Gomez, has cost the territory more than $84 million to date.
Lee and Government House Communications Director Richard Motta Jr. did not respond Thursday to questions from The Daily News about Molloy’s revised order. It’s unclear how much revenue officials anticipate collecting from local manufacturers.
For 30 years, the V.I. government has not assessed excise tax on local manufacturers, essentially penalizing importers of goods with an additional tax in violation of the Commerce Clause.
In 2014, attorney Alex Golubitsky brought a lawsuit against the territory on behalf of refrigeration company Reefco Services Inc., which successfully sought a refund of the excise tax assessed on various items the company imported over the years.
Attorney Taylor Strickling has continued to argue that the company is subject to a discriminatory tax, and Gomez not only issued Reefco a $5,287.74 refund, but also a Nov. 2018 order enjoining the government from collecting excise taxes until officials prove they intend to do so equitably.
The government appealed to the 3rd Circuit, and the appellate judges said they couldn’t determine whether the government had started equitably taxing local manufacturers. The judges remanded the case “on that issue alone with an instruction to the District Court to lift the November 26th injunction upon receiving evidence that the GVI is in fact assessing an excise tax on local manufacturers,” according to the appellate court’s opinion. “Upon obtaining proof that the GVI is assessing the excise tax on local manufacturers, we direct the District Court to lift the injunction.”
Molloy heard argument from Strickling and Assistant V.I. Attorney General Carol Thomas-Jacobs during a court hearing Wednesday, and issued an oral order that the government could resume all excise tax collection on Jan. 1, before a follow-up hearing on Feb. 3 to reassess the taxation plan.
But on Thursday, Molloy — who took over the bench in April — walked back a portion of that order, after reconsidering the facts of the complex, long-running case.
“Reading the Third Circuit’s opinion in the context of this court’s previous orders, Reefco’s position is correct,” Molloy wrote. “The Third Circuit directed this court to lift this injunction ‘upon receiving evidence that the GVI is in fact assessing an excise tax on local manufacturers,’” and “‘moreover, the injunction was affirmed ‘in part, as to its enjoining of the GVI from continuing to collect excise tax from importers, but not local manufacturers.’”
The V.I. government “therefore must remain enjoined from assessing and collecting the excise tax from importers until it has provided evidence demonstrating that it is assessing and collecting the tax from local manufacturers,” Molloy wrote.
Prior to Thursday’s revision, Government House issued a news release Wednesday evening celebrating the court’s decision as a win that would bring in additional tax revenue at a time when the territory is struggling to fund the Government Employees’ Retirement System and other critical needs.
“This is certainly welcome news at a time when revenue for the GVI is in a precarious place because of the economic crash brought on by the COVID-19 pandemic,” Gov. Albert Bryan Jr. said in a statement.
“This is quite a victory for the territory. It was a long and challenging legal battle from the District Court to the Third Circuit and back,” Attorney General Denise George added.
But the possibility remains for other companies to file claims for refunds on excise taxes, as Reefco’s $5,000 refund has withstood appellate court review.
And even before Molloy’s new order Thursday, the proposed excise tax plan still faced challenges, as Strickling argued Wednesday that the IRB will still unconstitutionally tax imported goods at a higher rate than those manufactured in the territory.
While a local cabinet maker, for example, is taxed on the $500 cost of supplies, an importer would be taxed on the $1,000 purchase cost for identical cabinets, so “the government’s plan now is to come back and discriminate slightly less,” Strickling told Molloy.