STATEMENT OF WILLIAM J. SCHIEFFELIN III, CHAIRMAN, SCHIEFFELIN & C.O

NEW YORK, N.Y.

This Statement is submitted by Schieffelin and Company, New York, New York, in support of the basic purposes of the Trade Reform Act of 1973, H. R. 10710 and specifically to endorse authority contained in Section 102, "Nontariff barriers to and other distortions of trade."

Schieffelin and Company has for almost 200 years engaged in the business of importing and selling wines and spirits throughout the United States. Accordingly, we have been seriously affected by the so-called Wine Gallon/Proof Gallon method of assessing duty and Internal Revenue taxes on imported bottled distilled spirits since 1868.

Domestic and imported distilled beverages are subject to the U.S. internal revenue tax of $10.50 on each proof gallon, or wine gallon, when below proof.1 Both the internal revenue tax and the duty are calculated on a proof-gallon basis if the product imported for consumption is 100 proof or above. A proportionate amount of the base tax and duty is added when the product is above proof-100 proof. Each gallon (wine gallon) imported below 100 proof is subject to the internal revenue tax of $10.50 and is also dutiable at the rate specified "per gallon" in the TSUSA.2

The dual basis of taxation recognized in Section 5001 (1), i.e.: wine gallonproof gallon, opreates inequitably as between bottled domestic and bottled imported distilled spirits. The burden imposed upon imported bottled spirits is readily apparent when one considers the practice of the domestic industry and the times at which the tax attaches to domestic and imported spirits..

The tax on domestically produced spirits is levied at the time of their withdrawal from bond; on the other hand the tax and duty on imported spirits are

126 USCA 5001 (A) (1)—“There is hereby imposed on all distilled spirits in bond or produced in or imported into the United States an internal revenue tax at the rate of $10.50 on each proof gallon or wine gallon when below proof and a proportionate tax at a like rate on all fractional parts of such proof r wine galln."

The term "proof" refers to the ethyl alcohol content of a liquid at 60 degrees Fahrenheit stated as twice the percent of ethyl alcohol by volume, e.g., a gallon of pure ethyl alcohol is 200 proof and is equivalent to 2 proof gallons. A "proof gallon" is the equivalent of a U.S. gallon containing 50% of ethyl alcohol by volume, i.e., 100 proof. A "wine gallon" is a standard U.S. gallon of liquid measure equivalent to a volume of 231 cubic inches. The term is normally applied to spirits that are less than 100 proof, i.e., less than 50% alcohol by volume.

levied at the time of importation. Since it is a universal practice in the U.S. distilling industry to withdraw spirits from bond in proof or over proof condition and thereafter to dilute the spirits to below proof for bottling and sale, the domestic distiller always pays the tax on a proof gallon basis. Thus, the tax of $10.50 per proof gallon paid by the domestic distiller is reflected in the cost of the domestic spirits thereafter diluted and bottled at, for example, 86 proof to the extent of only 86% of $10.50, or $9.03 per wine gallon. Imported bottled spirits are necessarily below proof at time of importation and, therefore, the tax and duty are assessed on a wine gallon basis. The resulting tax amounts to $10.50 per bottled gallon, or $1.47 more per gallon than the actual tax paid by the domestic distiller, plus, of course, customs duties.

The wine gallon/proof gallon basis of taxation no longer serves a valid purpose with regard to domestic spirits, and it has never served a valid purpose with regard to imported spirits.

This method of tax collection was initiated in 1868 with respect to domestically produced spirits only and was designed to combat a then existing and prevalent fraud which was possible only because a widespread corruption among the tax inspection officials operating at domestic distilleries and warehouses. Later, this method of tax collection was apparently extended to Customs duties on imported spirits, without any consideration being given to the purpose behind its original adoption. In 1917, when imported spirits became subject to internal revenue taxes, the method of collection which had been inaugurated almost 50 years earlier, to combat a domestic fraud, which by that time had been long ceased to exist, became applicable to imported spirits.

WINE GALLON/PROOF GALLON ASSESSMENTS ON IMPORTED SPIRITS SHOULD BE

ABOLISHED

I. A major objetive c^ proponents of H.R. 10710 is to authorize negotiation of the reduction or elimination of non-tariff barriers and other distortions of international trade. This objective is clearly set forth in the pending Section 102. The Administration's position with respect to the reduction or elimination of nontariff barriers finds its counterpart in the views of many of the United States' major trading partners, including the European Community (EC), which have long urged action of this type as part of multilateral trade agreements.

II. The present method of Internal Revenue taxation and assessment of Customs duty on the wine gallon/proof gallon basis has been recognized by the U.S. Government as a non-tariff barrier. In fact, the United States has long been criticized in GATT for wine gallon method of tax assessment. See GATT Committee on Trade in Industrial Products, "Inventory of Non-Tariff Barriers" ("Protection" by means other than tariffs), GATT Document COM. IND/6/Add. 5 (1968). Although this document was classified by GATT, the EC authorized the United Kingdom to inform the U.S. Customs Court in Schieffelin & Co., Beitzell & Co., Inc. v. U.S., 61 C.C.R. 397, C.D. 3640, (1968) that the report notes EC protest against the United States' excise tax system for spirits imported in bottles, as contrary to Article III of GATT. The Government of Canada, in the same case on appeal to the Court of Customs and Patent Appeals, likewise authorized counsel to advise the Court that the Canadian Government raised the same issue in GATT.

III. The unfairness of the wine gallon/proof gallon method of assessing taxes and duties on imported spirits has, as previously stated, been conceded to be undesirable by the Executive Branch of the United States Government.

The Department of State is on record as to the discriminatory nature of the wine gallon basis for tax assessment. A letter of October 12, 1954 from the Assistant Secretary for Economic Affairs, Department of State, to the Commercial Minister, British Embassy, on the subject of the wine gallon tax stated: "The Department shares your views that the effect of this tax is to discriminate against imported distilled spirits."

This position was affirmed during a GATT Working Party meeting in April 1970, when foreign representations were made that the United States' wine gallon tax was discriminatory. The United States, representative at this meeting acknowledged that the tax had a "non-tariff barrier" effect that discriminated against imports of bottled distilled spirits. See GATT Working Party on Border Tax Adjustments-Draft Report Spec (70) 31/Rev. 1, 28 April 1970, at 80.

Similarly, the Treasury Department in an analysis of the 1951 Customs Simplification Act, in commenting on the section of the hill which would have abolished the wine gallon/proof gallon method of assessment, said that the section of the Internal Revenue law which provides this method of assessment ". . . operates

inequitably as between domestic and imported distilled spirits, since the domestic spirits are always or nearly always above proof at the time of tax payment while imported beverage distilled spirits are generally under proof at the time of importation."

Abolition of the wine gallon/proof gallon method of taxation and duty assessment on imported spirits cannot be expected to affect the domestic spirits industry in any significant way.

(a) Consumer demands for different kinds of spirits tend to be taste related, rather than cost related. The simple example of the private party, including the cocktail party, at which drinks are served without cost to the guest, demonstrates dramatically that the guest chooses his drink on the basis of his or her taste preferences. It is also apparent that vodka, gin, and whisky blend with neutral grain spirits, which are available in good quality and which are relatively inexpensive, have not destroyed the market for straight domestic whiskys, including quality bourbons. Similarly, the availability of good bourbon and other straight whiskys at reasonable prices has not destroyed the marked for higher priced domestic blends. Indeed, the market for domestic bonded, straight, and blended straight whisky actually increased during the decade 1963 to 1972, despite enormous growth in consumption of other spirits including gin, vodka, rum, brandy, cordials, and other specialties. (During this decade the consumption of non-whisky spirits rose from less than 79 million wine gallon in 1963 to more than 158 million wine gallon in 1972).

(b) Any spectre of imported Scotch becoming a new factor to undercut the market for American whiskys by reason of the abolition of the wine gallon/ proof gallon method of duty assessment can be laid to rest by reason of the fact that Scotch of good quality is already entering the United States free of this discriminatory method of assessment. The Scotch in question is, of course, that which is brought to the United States at or over-proof in bulk, and bottled in this country. It is evident that if the American demand for Scotch whisky continues to grow, as it has been growing in recent years, it will continue to be met, even if the wine gallon/proof gallon method of assessment is not eliminated. Continuation of this non-tariff barrier cannot lead to an increase in consumption of domestic whisky, nor can it prevent consumers from purchasing Scotch which comes in free of discriminatory duties and taxes.

(c) Given the fact that taste preferences dictate the type of spirits which a particular individual will consume, it is apparent that the principal effect of abolishing the wine gallon/proof gallon method of assessment will be to make Bottled in Scotland Scotch Whisky, which is now relatively high priced in the United States market, more competitive with those brands of Scotch whisky which avoid assessment of the wine gallon/proof gallon basis by being imported in bulk.

CONCLUSION

Continuation of existing discriminatory assessment of tax and duty on imported bottled spirits serves to penalize producers and the U.S. consumers, of high quality Scotch whisky imported from the United Kingdom in bottles.

Abolition of the wine gallon/proof gallon method of taxation and duty assessment in the context of expected international trade negotiations, will have no adverse effect on U.S. producers of distilled spirits and can be expected to bring about foreign concessions of importance to United States industries. Respectfully submitted.

STATEMENT OF GULF RESOURCES & CHEMICAL CORP.

Gulf Resources & Chemical Corporation appreciates this opportunity to present this statement and supporting legal memorandum in connection with the Finance Committee's consideration of H.R. 10710, the Trade Reform Act of 1973.

Through its divisions and subsidiaries, Gulf Resources is a diversified producer of metals, minerals and chemicals. Its major products are coal; nonferrous metals, including lead, zinc, silver, gold, antimony and cadmium; lithium chemicals and metals; and chemical fertilizers. In addition, the Company has a major interest in Great Salt Lake Minerals & Chemicals Corporation, which extracts and markets potassium sulfate, sodium sulfate and sodium chloride from Great Salt Lake.

Although Gulf Resources' operations are primarily in the United States, its products are sold worldwide, and it thus sympathizes with the need for open and free trade. It is for this reason that the Company supports the principal international trade objectives of the Trade Reform Act of 1973.

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