FLORIDA-BRAZIL CITRUS CASE

Florida growers pay a state tax on each box of citrus fruit they harvest. The proceeds finance the Florida Department of Citrus, which promotes the state’s citrus fruits, juices, and related products. Since 1970, the State of Florida has imposed, pursuant to Section 601.155 of the Florida Statutes, an “equalizing excise tax” on processed orange and processed grapefruit products that are imported into the state to be blended with Florida juices. The “equalizing excise tax” was imposed to make juice importers share in the cost of the state’s marketing programs.

However, the statute by its terms (Section 601.155(5), Florida Statutes) exempts from the tax products “produced in whole or in part from citrus fruit grown within the United States”. Foreign juice producers (Costa Rica, Mexico and Brazil) are required to pay the tax. Imported frozen orange juice concentrate, principally from Brazil, is mixed with Florida juice to improve its color and make up for seasonal supply shortfalls. Foreign producers shipped about 32 million gallons of juice concentrate to Florida during the 1999 – 2000 season. The levy is valued at roughly 3 cents per gallon, making the tax collection worth almost US$ 1 million per year. In contrast, more than 6,000 domestic producers in California, Arizona and Texas, whose juice is also blended with Florida orange juice, have been exempt from the tax.

Brazilian exporters pay the Florida excise tax on frozen orange juice concentrate in addition to the US import duty. Furthermore, since 1987 there has been an antidumping duty order in effect on the import of Brazilian frozen concentrated orange juice (FCOJ). The combined tax and duty accounts for nearly 50 percent of the cost of a ton of Brazilian concentrate. The Brazilian Association of Citrus Exporters estimate that US duties on Brazilian orange juice imports add US$418 to every ton shipped.The apparent discrimination between imported and domestic like products lead directly to the initiation by Brazil of a dispute settlement process to resolve the matter with the US.

On 20 March 2002 the Government of Brazil requested bilateral consultations under WTO auspices with the United States regarding the "equalizing excise tax". Brazil argued that the incidence of the tax on imported processed citrus products and not on domestic products constitutes a de facto violation of GATT Most Favoured Nation and National Treatment provisions (Articles II: 1(a), III.1 and III:2, GATT 1994).

Moreover, the proceeds of the tax are directed by statute to the advertising and promotion of Florida grown citrus and citrus products, with no promotion of imported citrus or citrus products. Brazil considers this a violation of Articles III:4 and III.1 of GATT 1994. Florida officials seem to think that this issue can be finessed by an increase in generic advertising tied to out-of-state tax collections. However, it may not be an adequate solution for either California or Brazilian producers.

The impact of the Florida equalizing excise tax has been to provide protection and support to domestic processed citrus products and to restrain the importation of processed citrus products into Florida. Processed citrus products, principally in the form of frozen concentrated orange juice are among Brazil's most significant exports to the United States, and the restraint on their importation by the State of Florida constitutes a nullification and impairment of benefits accruing to Brazil under GATT 1994.

The Brazilian request for consultations generated a meeting in late March between Florida State Governor Jeb Bush and US Trade Representative Robert Zoellick. Reportedly, USTR Zoellick explained the lack of a credible defence against the pending Brazilian WTO challenge.

The State Legislature was tasked with developing and passing an amendment to the law. Days later, at the urging of Florida's Department of Citrus, the State Legislature passed an amendment removing the tax exemption for citrus products from the United States. The Florida view is that the amendment addresses Brazil's main concern - that the State was not taxing domestic citrus. Passage of the bill, and signing it into law by Governor Bush are considered sufficient to see Brazil withdraw its complaint. Governor Bush signed the amendment April 16. Out-of-state domestic producers that send their juice to Florida will have to pay the tax beginning July 1.

In the meantime, the state legal system is also engaged. Earlier this year, five international companies that import foreign bulk juice concentrate from Brazil, Costa Rica, and Mexico filed a lawsuit against the Florida Department of Citrus seeking to abolish the equalization tax.

They argued that the tax is in fact a tariff on foreign goods and unconstitutional because it gave preferential treatment to products from non-Florida US states. On March 15, Polk County Circuit Court Judge Dennis P. Maloney noted that there are no known market factors that justify special protection for citrus juice made from non-Florida United States fruit. He found one part of the statute unconstitutional because of its "discriminatory effect" on citrus products imported from abroad. He deferred a ruling on the constitutionality of dealing separately with one part of a two-part statute.

On April 15, he ruled that it was not unconstitutional to invalidate part of the equalization tax statute while leaving the rest of the law standing.In effect, Judge Maloney said that citrus products not subject to Florida's “box tax” must pay an equalization tax. The judge ruled that the Department of Citrus could not tax exempt citrus products from other US states.

It is yet to be determined whether the five companies will get refunds for the taxes paid in the previous three years. This will not be determined definitively until the larger issue is completely resolved. Specifically, the companies now contend the judge cannot sever the exemption from the tax, which if repealed is expected to save the firms up to $1 million annually. Department of Citrus solicitors argue that the judge acted with authority to so rule. In other words, legal appeals are likely to be filed in the months to come in pursuit of a total refund that could be worth up to $5 million for the plaintiffs.The refund question is expected to be determined in July.

Further action may not be restricted to the US domestic legal process. In the WTO context, the US effort thus far has focused on addressing the violation of Article III:2 of GATT 1994, namely gross discrimination in tax treatment – its differential application to fruit grown inside the United States outside Florida. However, there are aspects to the Brazilian complaint that have not yet been satisfied, and are sufficiently troubling to suggest the case in Geneva is far from settled. Brazil noted that with respect to the tax on Florida-grown citrus fruit, GATT Article III:2 is violated because "citrus fruit" from Florida and imported "processed citrus products" are not "like products".

In addition, Brazil alleges that the equalizing excise tax also taxes imported citrus products at a higher ad valorem rate than it taxes Florida fruit, in violation of the second sentence of Article III:2 and, by reference, in violation of Article III:1 of GATT 1994.The rates that apply to imported juice are also, in effect, higher than those that apply to Florida fruit.

In other words, there are several significant aspects to the complaint that have not been broached, and could still be sufficient to cause Brazil to proceed with a request for a panel. The wider FTAA perspective is also a factor as the Florida industry has made numerous representations in Washington to ensure that the tariff remains in place as a shield against competitive Brazilian product. In an increasingly common tariff-jumping tactic, the Brazilian producers in the early 1990s began to invest directly in the Florida industry. It is estimated that foreign – mainly Brazilian - companies own as much as 40% of the Florida processing industry.