Tax Appeal of Reel Hooker Sportfishing, Inc. v. State, Department of Taxation

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FOR PUBLICATION IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

IN THE INTERMEDIATE COURT OF APPEALS

oF THE sTATE oF HAwAr1

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IN THE MATTER OF THE TAX APPEAL OF

REEL HOOKER SPORTFISHING, INC., Plaintiff-Appellant v.

STATE OF HAWAFI, DEPARTMENT OF TAXATION, Defendant-Appellee,

and EXACT GAME FISHING, INC., Plaintiff-Appellant v.

STATE OF HAWAfI, DEPARTMENT OF TAXATlON, Defendant-Appellee,

and FINEST KIND, INC., Plaintiff-Appellant v.

STATE OF HAWAIYI, DEPARTMENT OF TAXATlON, Defendant-Appellee

No. 29593

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APPEAL FRoM THE TAx APPEAL coURT §

(cAsE Nos. 07-0072, 07-0073 and 07-0074) § §§

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MAY 28, 2010 F”

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FoLEY, PREsIDING JUDGE, FUJIsE AND LEoNARD, Jq§ ho

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OPINION OF THE COURT BY LEONARD, J.

This is a tax appeal case in which the taxpayers, who

challenge the

are in the charter boat fishing business,

(GET) on their

assessment of HawaFi General Excise Tax

businesses on the ground that a federal statute limiting non-

33

federal taxes upon vessels operating in U.S. navigable waters,

§ 5(b) (2006), preempts the

United States Code (U.S.C.)

application of the Hawafi GET statute, Hawaii Revised Statutes

(HRS) § 237-l3(6)(A) (200l & Supp. 2008), to their charter

fishing revenue. Plaintiffs-Appellants Reel Hooker Sportfishing,

Inc.

Exact Game Fishing, and Finest Kind,

Inc.,

appeal from the Consolidated Judgment

(Judgment), by the Hawafi Tax

Inc.,

(collectively Taxpayers)

entered on December 22, 2008

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Appeal Court (Tax Appeal Court),F which entered Judgment against

Taxpayers and in favor of Defendants-Appellees Director of

Taxation, State of Hawafi, and Department of Taxation, State of

HawaiU.(State).W We hold that 33 U.S.C. § 5(b) does not preempt

the assessment of Hawafi GET on the charter fishing revenue of

these Hawafi businesses because GET is a tax assessed on gross

business receipts for the privilege of doing business in HawaiUq

and is not a tax on their vessels or passengers.

I. BA£HKGRCHHHD

Taxpayers are Hawafi corporations, incorporated under

and in accordance with the laws of the State of HawaiUH

Taxpayers own and operate three passenger vessels that are

licensed by the federal government to carry up to six passengers

in the "coastwise" trade. The coastwise endorsement entitles the

vessels to unrestricted access to the navigable waters

surrounding the islands of Maui, Lanai and Molokai. Taxpayers

are in the charter fishing business, providing customers with the

opportunity to fish for various species of pelagic game fish,

including marlin, tuna, ono (wahoo), and mahimahi. The fishing

excursions originate at Maui's Lahaina Harbor.

The principal source of Taxpayers' earnings is the

fares paid by their charter passengers. Since beginning

operations decades ago, Taxpayers have added GET to the charter

fares collected from their passengers, which is consistent with

the practice in the charter fishing industry.

y The Honorable Gary W.B. Chang presided.

W Taxpayers also seek relief from the following orders, also entered

on December 22, 2008: (l) Order Granting Director of Taxation, State of

Hawafi and Department of Taxation, State of Hawafi's Motion for Summary

Judgment Filed October lO, 2008; (2) Order Denying Reel Hooker Sportfishing,

Inc.'s Motion for Summary Judgment on First Amended Complaint to Recover

Monies Paid Under Protest Pursuant to HRS § 40-35 Filed August 26, 2008; (3)

Order Denying Exact Game Fishing, Inc.'s Motion for Summary Judgment on First

Amended Complaint to Recover Monies Paid Under Protest Pursuant to HRS § 40-35

Filed August 2l, 2008; and (4) Order Denying Finest Kind, Inc.'s Motion for

Summary Judgment on First Amended Complaint to Recover Monies Paid Under

Protest Pursuant to HRS § 40-35 Filed August 26, 2008.

2

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On or about June 22, 2007, Taxpayers each filed a

complaint against the State in the Tax Appeal Court, seeking

relief from GET assessments for tax years 2004 and 2005. In

their complaints, Taxpayers requested refunds for amounts paid

under protest pursuant to HRS § 40-35 (l993), claiming that the

State improperly imposed GET under HRS § 237-l3(6)(A)W because

it is preempted by 33 U.s.c. § 5(1>) .i/

On October 22, 2007, the Tax Appeal Court entered a

stipulation and order consolidating Taxpayers' three cases under

Tax Appeal Case No. O7~OO72. Taxpayers subsequently filed a

first amended complaint on December 24, 2007. In response, the

State filed a consolidated answer on January 3, 2008.

The Tax Appeal Court heard the parties' cross-motions

for summary judgment on November 3, 2008, On December 22, 2008,

9 HRs § 237-13(6)(A) (2001> prevides=

Upon every person engaging or continuing within the State in

any service business or calling including professional

services not otherwise specifically taxed under this

chapter, there is likewise hereby levied and shall be

assessed and collected a tax equal to four percent of the

gross income of the business, and in the case of a

wholesaler under section 237~4(a)(lO), the tax shall be

equal to one~half of one percent of the gross income of the

business, Notwithstanding the foregoing, a wholesaler under

section 237-4(a)(lO) shall be subject to section 237-13 3.

y 33 U.S.C. § 5(b) previdee=

No taxes, tolls, operating charges, fees, or any other

impositions whatever shall be levied upon or collected from

any vessel or other water craft, or from its passengers or

crew, by any non~Federal interest, if the vessel or water

craft is operating on any navigable waters subject to the

authority of the United States, or under the right to

freedom of navigation on those waters, except for (l) fees

charged under section 2236 of this title; (2) reasonable

fees charged on a fair and equitable basis that (A) are used

solely to pay the cost of a service to the vessel or water

craft; (B) enhance the safety and efficiency of interstate

and foreign commerce; and (C) do not impose more than a

small burden on interstate or foreign commerce; or (3)

property taxes on vessels or watercraft, other than vessels

or watercraft that are primarily engaged in foreign commerce

if those taxes are permissible under the United States

Constitution.

FOR PUBLICATION IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

the Tax Appeal Court entered orders granting summary judgment to

the State and denying the Taxpayers' motions. Final judgment

also was entered. On January 2l, 2009, Taxpayers timely filed a

notice of appeal.

II. POINTS OF ERROR

On appeal, Taxpayers contend that the Tax Appeal Court

erred because it: (l) looked beyond 33 U.S.C. § 5(b)'s plain,

unambiguous and explicit prohibition of state taxation of the

earnings on Taxpayers' vessels; (2) construed 33 U.S.C. § 5(b) to

allow assessment of GET on the charter revenue of Taxpayers'

vessels notwithstanding a resulting direct conflict with the

federal law; and (3) construed 33 U.S.C. § 5(b) to allow a

privilege tax on Taxpayers' business of transporting passengers

to and from a state boat harbor.

MIII. APPLICABLE STANDARD OF RE'\/'IEW

"We review the circuit court's grant or denial of

summary judgment de novo." Querubin v. Thronas, 107 Hawafi 48,

56, 109 P.3d 689, 697 (2005) (quoting Durette v. Aloha Plastic

ReCyCling, InC., lO5 Hawafi 490, 50l, lOO P.3d 60, 7l (2004)).

Likewise, the meaning of a statute is a question of law that is

reviewed de novo. See, e.q., Sierra Club v. Dep't of Transp. of

state of Hewei‘i, 120 Hewai‘i 181, 197, 202 P.3d 1226, 1242

(2009) .

IV. DISCUSSION

The dispositive issue in this tax appeal is whether HRS

§ 237-l3(6)(A) is preempted by the Marine Transportation Security

Act of 2002, codified at 33 U.S.C. § 5(b). A state law is

preempted by federal law when there is (l) express preemption or

(2) implied preemption.

Express preemption exists when Congress makes its

intent known through explicit statutory language preempting state

action in a given area. See, e.g., English v. Gen. Elec. Co.,

496 U.S. 72, 79 (l990); Wardair Canada, Inc. v. Florida Dep't of

FOR PUBLICATION IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

Revenue, 477 U.S. 1, 6 (1986). when the text of an express

preemption clause is susceptible to multiple interpretations,

courts generally accept the reading that disfavors preemption.

Bates v. Dow Agrosciences LLC, 544 U.S. 43l, 449 (2005).

Implied preemption occurs when there is either (1)

conflict preemption or (2) field preemption. A state law is

preempted under the conflict preemption doctrine when it is

impossible to comply with both the state and federal laws, or

when the state law impedes the objectives of the federal law.

Gade v. Nat'l Solid Wastes Mgmt. Ass'n, 505 U.S. 88, 98 (l992);

Field preemption occurs when the federal legislative scheme is so

pervasive that it occupies the field, leaving no room for states

to supplement federal law. ld; at 98, 115.

The United States Supreme Court has held that the

burden of establishing preemption rests with the party who is

seeking the benefit of it. De Buono v. NYSA-ILA Med. and

Clinical Serv. Fund, 520‘U.S. 806, 814 (1997). That party must

therefore "bear the considerable burden of overcoming the

starting presumption that Congress does not intend to supplant

state law." ;d¢ Thus, preemption is disfavored unless the

"nature of the regulated subject matter permits no other

conclusion" or "Congress has unmistakably so ordained." Florida

Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142 (1963).

In analyzing whether a state law is preempted, the

"purpose of Congress is the ultimate touchstone." Retail Clerks

Intern. Ass'n., local 1625, AFL-CIO v. Schermerhorn, 375 U.S. 96,

103 (1963). The purpose of Congress can be "explicitly stated in

the statute's language, or implicitly contained in its structure

and purpose." Jones v. Rath Packinq Co., 430 U.S. 519, 525

(1977) .

A. Hawai‘i GET

Pursuant to HRS § 237-13(6)(A), GET is levied,

assessed, and collected upon "every person engaging or continuing

FOR PUBLICATION IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

within the State in any service business or calling including

professional services not otherwise specifically taxed," which

indisputably includes Taxpayers' gross income from their charter

fishing business. GET is a tax on gross income or gross

receipts. §e§ HRS § 237-3 (2001). The Hawafi Supreme Court has

described GET as a tax on the privilege of doing business in the

St1it€.

Hawai‘i's general excise tax is a gross receipts tax on the

privilege of doing business in HawaFi, thus Hawafi's

general excise tax is a privilege tax. . . . A privilege tax

is assessed a party based on the fact that the party chose

to engage in business activity within the state. Such a tax

is justified on the ground that companies conducting

business enjoy the protections and benefits given by the

state.

In re Tax Appeal of Baker & Taylor, Inc. v. Kawafuchi, 103

Hawafi 359, 365, 82 P.3d 804, 810 (2004) (citations and footnote

omitted; format altered). "

B. Express Preemption

Taxpayers argue that 33 U.S.C. § 5(b) expressly.

preempts the imposition of GET on the earnings of their vessels,

emphasizing the statutory language as follows: "No taxes

shall be levied upon or collected from any vessel . . . or from

its passengers . . . by any non-federal interest," if the vessel

is operating on any navigable waters of the United States.

The Supreme Court has emphasized that the plain

language of federal laws must be narrowly construed because of

the presumption against preemption. Cipollone v. Liqgett Group,

lng;, 505 U.S. 504, 505 (1992). In this case, the plain language

of 33 U.S.C. § 5(b) prevents anyone except the federal government

from imposing a tax on a vessel or on its passengers or crew,

while that vessel is operating on navigable waters, In contrast,'

HRS § 237-13(6)(A) requires Hawafi businesses to pay a privilege

tax for engaging and conducting business in the State of HawaiUH

Contrary to Taxpayers' assertion, the express language of 33

U.S.C. § 5(b) does not explicitly prohibit a state from taxing a

FOR PUBLICATION IN WEST'S HAWAI‘I REPORTS AND PACIFIC REPORTER

corporation's gross income for engaging in business in that

state. The federal statute refers only to vessels and their

passengers and crews, and simply does not address the business

revenue or gross income generated by a business that operates the

vessel.

Indeed, the case cited by Taxpayers as "illustrative"

of their express preemption argument in fact undercuts it. In

A1oha Airlines, Inc. v. Director of Taxation of HawaiH, 464 U.S.

7 (1983), the Supreme Court found that the explicit language of

49 U.S C. § 1513(a) preempted taxes levied and assessed upon the

gross income of an airline pursuant to HRS § 239-6 (1970).W As

noted in Aloha Airlines, 49 U.S.C. § 1513(a) expressly states

that "no state . . . shall levy a tax . . . on persons traveling

in air commerce or on the sale of air transportation or on the

gross receipts derived therefrom." 464 U.S. at 11 (emphasis

added). The Court found that HRS § 239-6 was expressly preempted

because it imposes a state tax on the gross receipts of airlines

selling air transportation and carrying persons traveling in air

commerce. ;d; The statute at issue in Aloha Airlines plainly

differs from the statute at issue in this case because the

explicit language of 33 U.S.C. § 5(b) does not prohibit a state

from imposing a tax on the gross income of businesses within that

state. Since Congress has not explicitly and unambiguously

prohibited states from imposing taxes on the gross income of

businesses in 33 U.S.C. § 5(b), there is no express preemption

through its statutory language. As argued by the State, if

y During the relevant period, HRS § 239-6 provided, in part:

Airlines, certain carriers. There shall be levied and

assessed upon each airline a tax of four per cent of its

gross income each year from the airline business; provided

that if an airline adopts a rate schedule for students in

grade twelve or below traveling in school groups providing

such students at reasonable hours a rate less than one-half

of the regular adult fare, the tax shall be three per cent

of its gross income each year from the airline business.

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Congress had intended in 33 U.S.C. § 5(b) to preempt states from

imposing taxes on the gross income or gross receipts derived from

commerce over navigable waters, it could have so stated, as was

done in 49 U.S.C. § 1513(a).

Inherent in Taxpayers' express preemption argument is

the contention that any tax on the gross receipts received by

Taxpayers for carrying passengers aboard their vessels is in fact

a tax on the vessel and passenger alike. This proposition is

simply not supported by the authorities relied on by the

Taxpayers nor any others that have been considered by this court.

See, e.q,, Gloucester Ferry Co. v. Penn., 114 U.S. 196 (1885)

(cited by Taxpayers) (rejecting, as an interference with

interstate commerce, Pennsylvania's attempt to tax dividends of a-

New Jersey ferry company that merely loaded and unloaded

passengers and freight at a Philadelphia dock). Particularly in

light of strong presumption against preemption, we decline to

broadly construe the term "vessel" to include the gross income

generated by a taxpayer's use of its vessel.

Thus, we reject Taxpayers' argument that 33 U.S.C.

§ 5(b) expressly preempts the assessment of GET.

C. Implied Preemption

l. Conflict Preemption

Taxpayers contend that HRS § 237-13(6)(A) is impliedly

preempted because it is in direct conflict with 33 U.S.C. § 5(b).

Specifically, Taxpayers argue that "state law is violated if

Taxpayers do not pay the [GET] tax, yet if they do so, they

violate federal law by collecting it on behalf of the state."

First, this is a faulty premise. For better or worse,

HRS § 237-16(A)(6) requires only that businesses pay GET to the

State, it does not require that businesses collect this tax from

their customers. While collection of the GET from customers and

clients is a common, arguably uniform, practice that is not

prohibited by Hawafi law, the GET is a privilege tax on the

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business, not its customer. The fact that Taxpayers fund their

payment of the GET through a pass-through charge to their

customers/passengers does not change the nature of the GET from a

tax on their businesses to a tax on their passengers.

Taxpayers also argue that the imposition of GET on

their charter fishing business impedes the objectives of the

federal law and, therefore, is barred by the conflict preemption

doctrine. Taxpayers contend that the purpose of 33 U.S.C. § 5(b)

was to decrease the financial burden on vessel operators and

their passengers by exempting them from state and local taxes

that interfere with interstate commerce by mandating a broad

prohibition against state and local taxation.` The legislative

history suggests a more targeted concern and more narrow

legislative solution. The U.S. House Conference Report states

that the purpose of 33 U.S.C. § 5(b) was "to clarify existing law

with respect to Constitutionally permitted fees and taxes on a

vessel," and "to prohibit fees and taxes on a vessel simply

because that vessel sails through a given jurisdiction." H.R.

Rep. No. 108-334, at 180 (2002) (Conf. Rep.) (emphasis added).

The Report also notes that the amendment did "not affect whether

sales or income taxes are applicable with respect to vessels."

;d; Indeed, a sponsor of the bill that was codified as 33 U.S.C.

§ 5(b) explained the purpose of the legislation as follows:

[The proposed legislation] addresses the current problem,

and the potential for greater future problems, of local

jurisdictions seeking to impose taxes and fees on vessels

merely transiting or making innocent passage through

navigable waters subject to the authority of the United

States that are adjacent to the taxing community. We are

seeing instances in which local communities are seeking to

impose taxes or fees on vessels even where the vessel is not

calling on, or landing, in the local community. These are

cases where no passengers are disembarking, in the case of

passenger vessels, or no cargo is being unloaded in the case

of cargo vessels and where the vessels are not stopping for

the purpose of receiving any other service offered by the

port. In most instances, these types of taxes would not be

allowed under the Commerce Clause of the United States

Constitution. Unfortunately, without a statutory

clarification, the only means to determine whether the

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burden is an impermissible burden under the Constitution is

to pursue years of litigation.

148 Cong. Rec. E2143-04 (2002).

Taxpayers and Amicus Curiae Paradise Cruise, Limited,

dba Star of Honolulu Cruises & Events (Amicus Curiae) also ask

this court to consider an unpublished Tennessee decision

concluding that 33 U.S C. § 5(b) preempted a Tennessee privilege

tax law. Upon review, however, the statute at issue in §igh

Countv Adventures, Inc. v. Polk County, No. E2007-02678-COA-R3-

CV, 2008 WL 4853105 (Tenn. Ct. App., November 10, 2008), levied a

privilege tax upon consumers participating in commercial

whitewater rafting excursions, not upon the rafting businesses,

although the businesses were tasked with collecting the tax from

their customers/passengers. The Tennessee court, noting the lack

of any explicit preemption language in 33 U.S.C. § 5(b), held

that there was a manifest and irreconcilable conflict between

Polk County's privilege tax on consumers participating in rafting

excursions on navigable waters and the federal law. ld; at *12-

13.W As Taxpayers, in their role as Hawafi businesses, and not

their boating customers/passengers, are taxed pursuant to HRS

§ 237-14(6)(A), the Tennessee court's rationale is inapplicable

to this case. 4

2. Field Preemption

Taxpayers argue that taxation of the earnings from

their vessels pursuant to HRS § 237-13(6)(A) creates an obstacle

to uniform federal regulation of maritime commerce and Amicus

Curiae argues that federal law so fully occupies the legislative

y We are also unpersuaded by the August 30, 2005 order issued by a

trial court in Pennsylvania, i.e., the Court of Common Pleas of Fayette

County, Pennsylvania (No. 220 of 2005, G.D.), that was provided by Amicus

Curiae. In contrast to our analysis here, the Pennsylvania court summarily

construed its statute as levying a tax on the use of the river. As discussed

above, Hawai‘i courts have long held GET to be a privilege tax on businesses,

for the privilege of doing business in Hawafi, without regard to the nature

of the business. Thus, we reject the notion that Taxpayers are being taxed

simply for their use of Hawafi's navigable waters.

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field that the GET is impliedly preempted, While we recognize

the broad scope of federal maritime legislation, we fail to see

how the imposition of GET on the gross receipts of Taxpayers'

charter fishing businesses interferes in any way with the uniform

federal regulation of maritime commerce, Accordingly, we reject

the argument that the doctrine of field preemption is applicable

to this case.

V. CONCLUSION

For the foregoing reasons, the Circuit Court's December

22, 2008 Judgment is affirmed.

DATED: Honolulu, Hawafi, May 28, 20l0.

¢;//e. '"

Dennis Niles Presiding Judge

(Shannon S. Imlay and

Ronald N.W. Kim with § § ~

him on the briefs)

(Paul Johnson Park & Niles) Associate Jud

for Plaintiffs-Appellants

Damien A. Elefante, Deputy

Attorney General (Hugh R. Jones,

Deputy Attorney General, with

him on the brief

for Appeliee sTATE 0F HAWAI‘I,

DEPARTMENT OF TAXATION

U