By Dave Ress
Richmond Times-Dispatch, Va.
(TNS)
A loophole in U.S. trade law is turning into what could be a multibillion-dollar windfall for international cigarette firms with Mexican-made packs of longtime U.S. brands already flooding into the United States.
An obscure 2015 tweak to an old law allows international tobacco firms to get a refund, called a drawback, of the $1.01 a pack federal excise tax, when they import cigarettes into the U.S. as long as they export the same amount—even though there’s no federal excise tax charged on exported cigarettes.
That turns drawbacks, which the United States has allowed since 1789 as long as imported goods are immediately re-exported or destroyed, into a sort of double drawback.
It’s a big issue for Henrico County-based Altria, because the tobacco giant does not import cigarettes and does not sell cigarettes outside the United States.
Its big competitors—R.J. Reynolds Tobacco, Japan Tobacco and Imperial Brands—do. So do a number of smaller, discount brand firms.
The stakes are high. Altria pays the $1.01 excise tax on the more than three billion packs it ships from its Philip Morris USA Manufacturing Center by Interstate 95 in South Richmond. The bill last year was $3.5 billion.
Meanwhile, cigarette imports from its competitors are on the rise.
U.S. International Trade Commission data show cigarette imports last year jumped more than 23% to 8.4 billion sticks—basically 450 million packs—as exports rose to nearly match that total, as they have to in order to trigger the drawback.
Mexican-made cigarettes here
Altria’s field staff—the people who go store to store to see how sales are going, make sure retailers are complying with restrictions on sales to minors and to offer new marketing material—saw Mexican-made packs of Pall Mall ultra-lights begin arriving last year.
They spotted Mexican-made Camel filters and Pall Mall light and full flavor cigarettes this winter.
Lucky Strikes, Camel Blue and still more Pall Mall varieties arrived this spring.
Based on trade commission monthly data so far this year, Altria thinks imports are on track to jump by more than 70%.
It’s an odd pattern, given that U.S. consumption of cigarettes is declining, and could signal some big changes in terms of where cigarettes are made and what goes in them.
“U.S. consumer demand for cigarettes has declined. Foreign manufacturers have responded in part to market changes over the past few decades by reducing their purchases of U.S.-grown tobacco leaf in favor of cheaper foreign leaf,” Altria spokesman David Sutton said.
“In fact, double drawback makes it even easier to rely on cheap foreign leaf,” he said.
Altria sees little impact from tariff increases
Altria told investors June 10 that while it is monitoring the impact of President Donald Trump’s tariffs, it’s still expecting profits this year will rise.
The tobacco in cigarettes exported from the United States is not subject to the higher duties on tobacco used in U.S.-made cigarettes sold in the United States if the manufacturer’s imported leaf exceeds a government-set cap.
That means cigarettes made here for export can use more lower-cost foreign leaf, so it’s not clear that any rise in cigarette exports means a boost for U.S. growers’ sales, he said.
Meanwhile, the double drawback eventually could cost the U.S. government as much $2.2 billion a year as more firms seek to tap it, the Treasury estimated in 2018 when it tried to close the loophole.
This year, the Joint Committee on Taxation estimated that the double drawback on cigarettes could cost the federal government more than $12 billion over the next decade, prompting the House of Representatives to propose ending the program,
Altria supports the move.
R.J Reynolds is taking the opposite stance.
“We believe the duty drawback provision poses a serious threat to North Carolina’s economy, with potentially devastating consequences for farmers,” a spokesman said.
The National Association of Manufacturers, which successfully argued to overturn the Treasury’s repeal of double drawback, called it an expansion of the longstanding drawback provision that “encourages more U.S. exports, boosting employment, raw materials, and manufacturing.”
The U.S. Circuit Court of Appeals for the Federal Circuit ruled in 2021 that Congress wanted the double drawback to work the way it does when it enacted its 2015 paperwork-easing revision.
That means it will be up to Congress to decide, said the American Consumer Institute Center for Citizen Research, a Washington nonprofit.
“There’s no rational argument for paying tax refunds when no tax was collected,” it said. “One criticism is that the change would curb the use of drawbacks. In fact, the change proposed would curb only the corporate welfare of double drawbacks while simultaneously retaining drawbacks when an excise tax was actually paid.”
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© 2025 Richmond Times-Dispatch, Va. Visit www.timesdispatch.com. Distributed by Tribune Content Agency LLC.
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Tags: cigarettes, excise taxes, tariffs, Taxes, trump tariffs
