Petition for Writ of Certiorari — Loudoun County, Virginia, Petitioner v. Dulles Duty Free, LLC

APPENDIX

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APPENDIX A

OPINION OF THE SUPREME COURT OF

VIRGINIA, DATED AUGUST 24, 2017

PRESENT: All the Justices

DULLES DUTY FREE, LLC

v.

COUNTY OF LOUDOUN

Record No. 160939

FROM THE CIRCUIT COURT OF LOUDOUN

COUNTY

Burke F. McCahill, Judge

OPINION BY JUSTICE STEPHEN R.

McCULLOUGH

August 24, 2017

Dulles Duty Free, LLC, challenges Loudoun

County’s imposition of a Business, Professional, and

Occupational License (“BPOL”) tax on a substantial

portion of its sales. It argues that the Import-Export

Clause of the Constitution of the United States, U.S.

Const. art. I, § 10, cl. 2, bars the County from imposing

the tax. The circuit court ruled in favor of the County.

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For the reasons noted below, we reverse the judgment

of the circuit court and remand this action for a

computation of the refunds for the relevant tax years

that are due to the taxpayer.

BACKGROUND

Duty Free is a retailer of duty free merchandise at

Dulles Airport in Loudoun County, where it operates

several stores.1 Every aspect of the duty free business

is highly regulated. As required by federal law, Duty

Free holds the alcohol, tobacco, fragrances, luxury

goods, bags, watches, and other products it sells in

bonded warehouses in Florida and Texas. Bonded

carriers transport the goods to a secure warehouse at

Dulles Airport which, in turn, distributes the

merchandise to retail stores inside the airport.

The merchandise is sold in a restricted area of the

airport. Only passengers with boarding passes may

enter and these passengers must first go through

security. Duty Free can sell items to both domestic and

international passengers. For domestic travelers, Duty

Free charges a Virginia sales tax and the purchaser

takes immediate possession of the item. When the sale

involves a bonded imported item, the domestic

passenger pays an import duty. Duty Free does not

challenge the imposition of the BPOL tax to such

domestic sales.

19 U.S.C. § 1555 authorizes bonded duty free sales of

merchandise for export.

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International travelers, on the other hand, must

present a passport and boarding pass to the cashier in

the Duty Free shop. The cashier will swipe the

boarding pass on the register to record the information

that is on the boarding pass. Duty Free does not charge

a Virginia sales tax for international export sales and

does not collect any import duty, i.e. the sales are “duty

free.” Instead of receiving the item immediately, the

traveler is given a receipt or ticket. A duty free runner

delivers the item to the buyer at the jetway

immediately prior to boarding and the customer hands

the ticket to the runner. See 19 U.S.C.

§ 1555(b)(3)(F)(i)(II). If a passenger does not appear to

collect the item, Duty Free voids the sale and returns

the merchandise to the store.

Duty Free is able to track which sales are domestic

and which sales are international. International sales

represent over ninety percent of Duty Free’s sales.

Duty Free established that the following gross receipts

were attributable to international travelers: for tax

year 2009, $18,827,494; for tax year 2010, $13,747,954;

for tax year 2011, $15,162,747; for tax year 2012,

$18,203,469; and for tax year 2013, $20,151,691.

Duty Free does not dispute that it owns inventory

and other personal property in Loudoun County. There

is also no question that it employs a large number of

personnel in the County to run its retail operations.

Duty Free uses County roads, and benefits from the

protection of County fire and rescue, law enforcement,

the court system, and other County services.

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Loudoun County requires every person “engag[ed]

in a business” in Loudoun County to obtain a business

license. Loudoun County Ordinance § 840.03(a).

Accordingly, Duty Free has obtained a business license

to operate in Loudoun County. Code § 58.1-3702

permits “the governing body of every county, city and

town” to impose a “tax on the gross receipts or the

Virginia taxable income of the business.” Code § 58.13703.1(A)(3)(a) provides that “[w]henever the tax

imposed by this ordinance is measured by gross

receipts, the gross receipts included in the taxable

measure shall be only those gross receipts attributed to

the exercise of a privilege subject to licensure.” The tax

does not target imports or exports; it applies across the

board to all sales.

Loudoun County has chosen to collect the tax based

on the measure of gross receipts. See Loudoun County

Ordinance § 840.14(o). Loudoun County defines “gross

receipts” as “the whole, entire, total receipts

attributable to the licensed privilege, without

deduction.” Id.; Loudoun County Ordinance

§ 840.01(k). The tax is calculated based on the prior

year’s gross receipts. Id.; see also Loudoun County

Ordinance §§ 840.01(m); 840.03(d); 840.04(a);

840.14(o). For businesses with sales not more than

$200,000 per year, the County levies a flat $30 fee.

Loudoun County Ordinance § 840.13(c). For businesses

with sales above the $200,000 threshold, the County

collects 17 cents for every $100 in retail sales for all

sales, not just those above $200,000. Loudoun County

Ordinance § 840.14(o).

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In 2014, Duty Free filed an application for

correction of its BPOL taxes for the years 2009, 2010,

2011, 2012, and 2013. Duty Free does not challenge the

imposition of the BPOL tax on its domestic sales. It

argues, however, that applying the BPOL tax on the

gross receipts of its international sales violates the

Import-Export Clause of the Constitution of the United

States.

Following a hearing, the circuit court issued a

detailed memorandum opinion. The court canvassed

the cases from the United States Supreme Court and

concluded that “[t]he BPOL tax of Loudoun County

does not violate the Import Export Clause of the U.S.

Constitution.” Consequently, the court held that Duty

Free “is not entitled to relief from the assessments

complained of in its Application.” Duty Free appeals

from this ruling.

ANALYSIS

“Arguments challenging the constitutionality of a

statute or regulation are questions of law that this

Court reviews de novo on appeal.” DiGiacinto v. Rector

& Visitors of George Mason Univ., 281 Va. 127, 133,

704 S.E.2d 365, 368 (2011).

This case presents an “as applied” challenge rather

than a challenge to the facial constitutionality of the

BPOL tax. Volkswagen of Am., Inc. v. Smit, 279 Va.

327, 336, 689 S.E.2d 679, 684 (2010) (“Because our

jurisprudence favors upholding the constitutionality of

properly enacted laws, we have recognized that it is

possible for a statute or ordinance to be facially valid,

and yet unconstitutional as applied in a particular

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case.”). We accord every legislative act a presumption

of constitutionality, including laws subject to an as

applied challenge. Id. A party which alleges a statute is

being unconstitutionally applied bears the burden of

proving that the statute is unconstitutional under a

particular set of facts. See FFW Enters. v. Fairfax

County, 280 Va. 583, 590, 701 S.E.2d 795, 800 (2010).

The Import-Export Clause provides, in relevant

part, that “[n]o State shall, without the Consent of the

Congress, lay any Imposts or Duties on Imports or

Exports, except what may be absolutely necessary for

executing its inspection Laws.” U.S. Const. art. I, § 10,

cl. 2.

The problems that led to the inclusion of this

Clause in the Constitution are well known. “One of the

major defects of the Articles of Confederation, and a

compelling reason for the calling of the Constitutional

Convention of 1787, was the fact that the Articles

essentially left the individual States free to burden

commerce both among themselves and with foreign

countries very much as they pleased.” Michelin Tire

Corp. v. Wages, 423 U.S. 276, 283 (1976). In an

introduction to the Debates of the Constitutional

Convention, James Madison noted that New Jersey

was likened to a “cask tapped at both ends” by New

York and Philadelphia; and North Carolina as the

“patient bleeding at both arms” – with Virginia and

South Carolina happily serving as phlebotomists.

2 The Papers of James Madison 691-92 (Henry D.

Gilpin, ed., Washington, D.C.: Langtree & O’Sullivan,

1840). These taxes on imported and exported goods

“nourish[ed] unceasing animosities” and, if left

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unchecked, Madison thought, would likely end “in

serious interruptions of the public tranquility.” The

Federalist No. 42, at 264 (J. Madison) (Clinton Rossiter

ed., 2003). The Import-Export Clause, along with the

Commerce Clause and the Export Clause, was

designed to suppress fratricidal trade policies and thus

“provide for the harmony and proper intercourse

among the States.” Id. at 263.

I.

OVERVIEW OF THE UNITED STATES SUPREME

COURT’S

IMPORT-EXPORT

CLAUSE

JURISPRUDENCE.

Resolution of the constitutional propriety of the

BPOL tax to Duty Free’s in-transit export sales hinges

on the applicability, and ongoing validity, of the

decision in Richfield Oil Corp. v. State Bd. of

Equalization, 329 U.S. 69 (1946). Duty Free argues

that Richfield Oil controls. The County asserts that the

case is distinguishable or superseded by later

decisions.

A. The decision in Richfield Oil.

Richfield Oil entered into a contract with the

government of New Zealand for the sale of oil. Id. at

71. None of the oil was to be used or consumed in the

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United States; all of it was for export.2 Id. California

assessed a retail sales tax against Richfield Oil that

was “measured by the gross receipts from the

transaction.” Id. at 71-72. Richfield Oil argued that the

tax violated the Import-Export Clause and the

Supreme Court agreed.

The Court examined whether the oil was an

“export.” Id. at 78. Surveying its precedent, the Court

noted that goods intended for export were not exempt

from the “ordinary burdens of taxation.” Id. at 78-80.

But once goods have been placed with a common

carrier for export, “or have been started upon such

transportation in a continuous route or journey” (i.e.

the goods are in transit), they are exports for purposes

of the Import-Export Clause and may not be taxed. Id.

at 79. The Court concluded that the oil was an export

because it had been delivered “into the hold of the

vessel,” and this delivery “marked the commencement

of the movement of the oil abroad.” Id. at 82-83.

The Court found unpersuasive California’s

argument that the tax in question was “not an impost

2 Richfield Oil carried the oil by pipeline from its refinery in

California to storage tanks at the Los Angeles harbor, where a

New Zealand naval vessel appeared to receive it. The price was

free on board (“F.O.B.”) Los Angeles, with payment made in

London, England, and delivery was “to the order of the Naval

Secretary” of New Zealand. When the vessel had docked, Richfield

Oil pumped the oil from the storage tanks into the vessel.

Customary shipping documents were given to the master,

including a bill of lading which designated Richfield Oil as the

shipper and consigned the oil to a designated Naval-Officer-In

Charge in Auckland, New Zealand. 329 U.S. at 71.

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within the meaning of the Import-Export Clause.” Id.

at 83. The Court accepted the California Supreme

Court’s characterization of the tax as “an excise tax for

the privilege of conducting a retail business measured

by the gross receipts from sales; that it is not laid upon

the consumer and does not become a tax on the sale or

because of the sale.” Id. at 83-84. California pointed out

that the tax did not directly target exports, that it

instead was “measured by the gross receipts of retail

sales” and was “levied on retailers ‘For the privilege of

selling tangible personal property at retail.’” Id. at 83.

“[W]hether the tax deprives the taxpayer of a federal

right,” the Court reasoned, turns not on the

characterization of the tax under state law but, rather,

on “its operation and effect.” Id. at 84. The Court

explained that the Import-Export Clause prohibits

more than “taxes laid specifically upon the exported

goods themselves.” Id. at 85. Were it otherwise, the

Court observed, states would easily impose taxes

“nominally conforming to the constitutional restriction

but in effect overriding it.” Id. The Court noted,

quoting Chief Justice John Marshall, that a tax

measured by the gross receipts of sales is effectively a

tax on the article itself. Id. at 84 (“[A] tax on the sale of

an article . . . is a tax on the article itself.”) (quoting

Brown v. Maryland, 25 U.S. (12 Wheat) 419, 444

(1827)). A tax that effectively “add[s] to the price of the

article, and [is] paid by the consumer, or by the

importer himself,” such as a tax “on the occupation of

an importer” is in practical effect no different from “a

direct duty on the article itself.” Id. at 85. The Court

concluded that California’s tax was “an impost upon an

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export within the meaning of Article I, Section 10,

Clause 2, and is therefore unconstitutional.” Id. at 86.

B. Developments since Richfield Oil.

In Low v. Austin, 80 U.S. 29 (1872), the Supreme

Court interpreted the Import-Export Clause to prohibit

a State “from imposing a nondiscriminatory ad valorem

property tax on imported goods until they lose their

character as imports and become incorporated into the

mass of property in the State.” Michelin, 423 U.S. at

282 (describing the test in Low v. Austin). This test

was known as the “original package doctrine.” Boris I.

Bittker & Brannon P. Denning, The Import-Export

Clause, 68 Miss. L.J. 521, 531 (1998). Following

extensive scholarly criticism of Low v. Austin, the

Court revisited its approach in 1976 in Michelin, where

the tax at issue was an ad valorem inventory tax

Georgia imposed on automobile and truck tires and

tubes that were imported from France and Nova

Scotia. 423 U.S. at 279. The tax was

“nondiscriminatory” – it did not single out imports for

taxation. Id. at 281.

The Court surveyed the history that led to the

adoption of the Import-Export Clause and identified

“three main concerns” the Clause sought to alleviate:

[1] the Federal Government must speak with

one voice when regulating commercial relations

with foreign governments, and tariffs, which

might affect foreign relations, could not be

implemented by the States consistently with

that exclusive power;

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[2] import revenues were to be the major source

of revenue of the Federal Government and

should not be diverted to the States; and

[3] harmony among the States might be

disturbed unless seaboard States, with their

crucial ports of entry, were prohibited from

levying taxes on citizens of other States by

taxing goods merely flowing through their ports

to the other States not situated as favorably

geographically.

Id. at 285-86.

The Court observed that “[n]othing in the history of

the Import-Export Clause even remotely suggests that

a nondiscriminatory ad valorem property tax which is

also imposed on imported goods that are no longer in

import transit was the type of exaction that was

regarded as objectionable by the Framers of the

Constitution.” Id. at 286 (emphasis added). The Court

overruled Low v. Austin and fashioned a new threepart test based on the three goals that led to the

adoption of the Import-Export Clause. Id. at 301, 28689.

Applying the three-part test, the Court held that

the Georgia ad valorem tax at issue did not violate the

Import-Export Clause. Id. at 286-89. The Court found

that the tax had no impact on the Federal

Government’s exclusive regulation of foreign commerce

because, “[b]y definition, such a tax does not fall on

imports as such because of their place of origin.” Id. at

286. In addition, a non-discriminatory ad valorem tax

does not “deprive the Federal Government of the

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exclusive right to all revenues from imposts and duties

on imports and exports.” Id. Finally, such a tax does

“not interfere with the free flow of imported goods

among the States.” Id. at 288. On this point, the Court

explained that “the Clause was fashioned to prevent

the imposition of exactions which were no more than

transit fees on the privilege of moving through a

State.” Id. at 290. The Court suggested that “to the

extent there is any conflict whatsoever with this

purpose of the Clause, it may be secured merely by

prohibiting the assessment of even nondiscriminatory

property taxes on goods which are merely in transit

through the State when the tax is assessed.” Id.

In holding that Georgia’s ad valorem tax was not an

“impost” or “duty” under the Import-Export Clause, the

Court stressed its “nondiscriminatory” nature. Id. at

279, 281, 282, 283, 286, 287, 288. The Court observed

that

[u]nlike imposts and duties, which are

essentially taxes on the commercial privilege of

bringing

goods

into

a

country,

[nondiscriminatory ad valorem taxes] are taxes

by which a State apportions the cost of such

services as police and fire protection among the

beneficiaries according to their respective

wealth; there is no reason why an importer

should not bear his share of these costs along

with his competitors handling only domestic

goods.

Id. at 287.

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The Court summarized the new approach in

Department of Revenue of Wash. v. Association of

Wash. Stevedoring Cos., 435 U.S. 734 (1978). It

explained that “[p]revious cases had assumed that all

taxes on imports and exports and on the importing and

exporting processes were banned by the Clause.” Id. at

752. “Before Michelin, the primary consideration was

whether the tax under review reached imports or

exports.” Id. For imports, “the analysis applied the

original-package doctrine.” Id. “So long as the goods

retained their status as imports by remaining in their

import packages, they enjoyed immunity from state

taxation.” Id. “With respect to exports, the dispositive

question was whether the goods had entered the

‘export stream,’ the final, continuous journey out of the

country.” Id. “As soon as the journey began, tax

immunity attached.” Id. “Michelin initiated a different

approach to Import-Export Clause cases.” Id. at 752.

Rather than focus on whether the goods were imports,

the Court “analyzed the nature of the tax to determine

whether it was an ‘Impost or Duty,’” and it did so by

applying the three-part test mentioned above. Id.

Michelin dealt with imports. Washington

Stevedoring Cos., decided two years after Michelin,

examined whether Michelin’s three-part test for

assessing the constitutionality of non-discriminatory

taxes on imports should also apply to exports.

Washington State imposed a business and occupation

tax upon stevedoring, “the business of loading and

unloading cargo from ships.” Id. at 737. After its

overview of the change wrought by the Michelin

decision, the Court adopted what it described as a

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“similar” approach to exports. Id. at 754. With respect

to the second policy identified in Michelin, protecting

the Federal Government’s revenue from taxes on

imports, the Court noted that, in contrast to imports,

the Constitution forbids the Federal Government from

taxing exports. Id. at 758. See U.S. Const., Art. I § 9,

cl. 5. Despite this difference, a “tax relating to exports

can be tested for its conformance with the first and

third policies” identified in Michelin. Id.

Applying this test, the Court concluded, first, that

the tax did not “restrain the ability of the Federal

Government to conduct foreign policy.” Id. at 754. The

tax applies “to virtually all businesses in the State,”

and it is not a “special protective tariff. . . . No foreign

business or vessel is taxed.” Id. As in Michelin, “[t]he

tax merely compensates the State for services and

protection” it provides to businesses. Id. Second, the

tax “falls upon a taxpayer with [a] reasonable nexus to

the State, is properly apportioned, does not

discriminate, and relates reasonably to services

provided by the State.” Id. at 754-55.

The Court added a caveat: “Because the goods [in

Michelin] were no longer in transit, however, the Court

did not have to face the question whether a tax relating

to goods in transit would be an ‘Impost or Duty’ even if

it offended none of the policies behind the Clause.” Id.

at 755. In Washington Stevedoring, “the tax [did] not

fall on the goods themselves.” Id. Instead, the tax fell

on the activity of moving the goods. Id. Thus, although

the tax related to goods in transit, the fact that it did

not fall upon the goods themselves “leads to the

conclusion that the Washington tax is not a prohibited

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‘Impost or Duty’ when it violates none of the policies”

animating the Clause. Id. The Court expressly declined

to reach the question of whether the Michelin approach

should be employed “when a State directly taxes

imports or exports in transit.” Id. at 757 n.23.

The Court also repudiated what it characterized as

dicta in Richfield Oil, the proposition “that the ImportExport Clause effects an absolute prohibition on all

taxation of imports and exports.” Id. at 759. The Court

reaffirmed “the central holding of Michelin that the

absolute ban is only of ‘Imposts or Duties’ and not of all

taxes.” Id.

The Court concluded as follows:

The Washington business and occupation tax, as

applied to stevedoring, reaches services provided

wholly within the State of Washington to

imports, exports, and other goods. The

application violates none of the constitutional

policies identified in Michelin. It is, therefore,

not among the “Imposts or Duties” within the

prohibition of the Import-Export Clause.

Id. at 761.

Later, in United States v. International Bus. Mach.

Corp., 517 U.S. 843, 862 (1996), the Court indicated in

dicta that it has not overruled the core holding in

Richfield Oil with respect to a state tax that is

assessed directly on goods in import or export transit.

Although that case addressed the Export Clause rather

than the Import-Export Clause, the Court stated that

it had “never upheld a state tax assessed directly on

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goods in import or export transit.” Id. The Court

further indicated that compliance with the ImportExport Clause may be secured “‘by prohibiting the

assessment of even nondiscriminatory property taxes

on [import or export] goods which are merely in transit

through the State when the tax is assessed.’” Id.

(alteration in original) (quoting Michelin, 423 U.S. at

290).

Finally, in Itel Containers Int’l Corp. v. Huddleston,

507 U.S. 60, 78 (1993), the Court upheld a sales tax on

leases of containers used in international shipping. The

Court rejected the argument that Richfield Oil was

controlling, noting with regard to the prohibition on

direct taxation of imports and exports “in transit” that

“[e]ven assuming that rule has not been altered by the

approach we adopted in Michelin, it is inapplicable

here.” Id. at 77. As in Washington Stevedoring, the tax

at issue in Itel fell “upon a service distinct from

[import] goods and their value.” Id. at 78 (alteration in

original) (quoting Washington Stevedoring, 435 U.S. at

757).

C. The bright line Richfield Oil test, rather than

the policy based Michelin test, supplies the rule

of decision on the present facts.

It is fair to say that courts have struggled to

determine which test to apply when it comes to

assessing the constitutionality of taxes that fall on

export goods in transit. In Louisiana Land &

Exploration Co. v. Pilot Petroleum Corp., 900 F.2d 816

(5th Cir. 1990), the United States Court of Appeals for

the Fifth Circuit invalidated a state tax on jet fuel sold

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for export to a foreign country. Id. at 821. While noting

that Richfield Oil has “never been overruled by the

United States Supreme Court,” id. at 819, that court

relied on both Richfield Oil and Michelin to conclude

that the Alabama tax at issue violated the ImportExport Clause. Id. at 820-21.

In Virginia Indonesia Co. v. Harris Cnty. Appraisal

Dist., 910 S.W.2d 905 (Tex. 1995), the majority of a

divided Texas Supreme Court observed that “[t]he

United States Supreme Court has yet to announce

whether the new approach set forth in Michelin should

be applied to a direct tax on imports or exports in

transit.” Id. at 910. The Court noted that “[a]lthough

the Michelin court rejected the original package

doctrine, it did not overrule . . . any of the stream of

export cases, and the two doctrines are different

enough that the rejection of one does not, of itself,

signify the demise of the other.” Id. at 910-11. The

Court concluded that a county’s ad valorem tax on

goods in “the export stream” violated the ImportExport Clause. Id. at 915. Two justices dissented,

arguing that the Michelin test was the right one to

apply and that the tax was valid under that test. Id. at

915-16, 925.

Similarly, in U.S. Steel Mining Co. v. Helton, 631

S.E.2d 559 (W. Va. 2005), a divided Supreme Court of

Appeals of West Virginia accepted Richfield Oil as

binding, but held that the goods were not placed in

export at the time a coal severance tax applied (when

the coal was extracted from the natural resources of

the state) and, therefore, there was no violation of the

Import-Export Clause. Id. at 567. See also Ammex, Inc.

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v. Dep’t of Treasury, 603 N.W.2d 308, 313 (Mich. Ct.

App. 1999) (concluding that Richfield Oil retains

“precedential value,” but that the tax in question did

not fall upon oil that was an “export” within the

intendment of the Import-Export Clause, since it was

sold at retail on the United States side of a bridge

connecting to Canada, and would have been at least

partly used in the United States, even by customers

who drove directly over the bridge.3

In contrast, a United States District Court in Guam

applied the Michelin test to a direct tax on goods in

export. See Duty Free Shoppers, Ltd. v. Tax

Commissioner, 464 F. Supp. 730, 735-36 (D. Guam

1979) (finding that duty free goods as sold only to

passengers leaving the Territory for foreign countries

have clearly embarked on their final, continuous

3 The court in Ammex, Inc. summarized the exportation

concept, 603 N.W.2d at 463-64, as follows:

The word “export” means the transportation of goods from

the United States to a foreign country. Swan & Finch Co.

v. United States, 190 U.S. 143, 145 (1903). “Exportation is

a severance of goods from the mass of things belonging to

this country with an intention of uniting them to the mass

of things belonging to some foreign country.” Id. Thus, an

article does not constitute an “export” if there exists a

practical possibility of diversion to domestic markets. See

Joy Oil Co. v. State Tax Comm’n of Michigan, 337 U.S.

286, 288 (1949) (citing Richfield Oil, [329 U.S.] at 82).

Similarly, an article cannot be considered an “export”

within the meaning of the Import-Export Clause if “it will

be used in this country for its designed purpose, before

being shipped abroad.” See Itel Containers, 507 U.S. at 82

(Scalia, J., concurring).

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journey out of the country, since their movement to

foreign shores has “started (or) been committed,” and

commenting that “[a]pplying either phraseology, we

are satisfied that when liquor and tobacco products are

delivered to a departing passenger en route to foreign

shores in the ‘sterile area’ of the airport, such goods,

having entered the export stream, constitute exports;”

concluding, however, that no policy of the ImportExport Clause is thereby violated).

Our review of this mass of precedent yields two

conclusions that guide our resolution of this case. First,

the Supreme Court has not overruled Richfield Oil

and, while it has significantly revised its ImportExport Clause jurisprudence, the Court has carefully

carved out for future disposition the issue whether the

Michelin test would apply to a non-discriminatory tax

that falls on export goods in transit. See Itel

Containers, 507 U.S. at 77; Washington Stevedoring,

435 U.S. at 757 n.23; Michelin, 423 U.S. at 290. We

cannot ignore the Court’s repeated signals to that

effect. Consequently, we conclude that Richfield Oil

supplies the rule of decision. As the Supreme Court has

noted

If a precedent of this Court has direct

application in a case, yet appears to rest on

reasons rejected in some other line of decisions,

the [lower courts] should follow the case which

directly controls, leaving to this Court the

prerogative of overruling its own decisions.

Rodriguez de Quijas v. Shearson/American Express,

Inc., 490 U.S. 477, 484 (1989).

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Second, the Court has not retreated from its method

of assessing the constitutionality of a state tax based

on its operation and effect. Richfield Oil, 329 U.S. at

84. A State’s characterization of the tax does not

control. Id.

II.

THE BPOL TAX IS INDISTINGUISHABLE FROM

THE PROHIBITED GROSS RECEIPTS TAX IN

RICHFIELD OIL.

The County attempts to distinguish the BPOL tax

from the tax the Court invalidated in Richfield Oil. We

find the County’s arguments unpersuasive. As a

threshold matter, we need not confront the often

vexatious problem of whether the goods are in export

transit. There is no dispute that the merchandise Duty

Free sells to international travelers constitutes export

goods in transit: these travelers, who are leaving the

country, have passed through security checks and they

must present their passports and an airline boarding

pass to complete the purchase.

The County argues that the BPOL tax is not a

“direct tax” and does not resemble the tax the Court

invalidated in Richfield Oil. The County takes the view

that the tax is placed on “the privilege to engage in a

business activity, and that is not the same as a tax on

goods.” We disagree. The characterization of the tax for

purposes of state law does not control whether the tax

violates the Import-Export Clause. Richfield Oil, 329

U.S. at 84 (state’s characterization of a tax “is not

determinative of the question whether the tax deprives

the taxpayer of a federal right.”). Under Richfield Oil,

a tax that falls directly on export goods in transit

21a

Appendix A

violates the Clause. Id. (constitutionality of a tax on

export goods in transit hinges on “its operation and

effect.”). The BPOL tax is imposed on a percentage of

gross sales, just like California’s tax in Richfield Oil.

For every $100 worth of sales, Duty Free must pay 17

cents in tax. Although the tax is imposed on the gross

receipts of a business, it is in its “operation and effect”

a direct tax on the export goods in transit. Richfield

Oil, 329 U.S. at 84; see also Crew Levick Co. v.

Pennsylvania, 245 U.S. 292, 295-96 (1917)

(“[I]mposition of a percentage upon each dollar of the

gross transactions in foreign commerce … [is] in effect

an impost or duty upon exports.”).

The BPOL tax is imposed on “the gross receipts . . .

of the business.” Code § 58.1-3702. The California tax

invalidated in Richfield Oil was based on “the gross

receipts of retail sales and is levied on retailers ‘[f]or

the privilege of selling tangible personal property at

retail.’” Richfield Oil, 329 U.S. at 83. We are hard

pressed to see a difference of constitutional magnitude

between the BPOL tax and the tax at issue in Richfield

Oil. Indeed, the parallels between the BPOL tax and

the tax under review in Richfield Oil are striking.

We also perceive no constitutional significance in

the fact that retailers in California were authorized to

collect the tax from the consumers, as opposed to the

BPOL tax, for which liability lies with the business.

The California tax at issue in Richfield Oil was

ultimately the responsibility of retailers. See Richfield

Oil, 329 U.S. at 84 (“[The tax] is not laid upon the

consumer.”); see also Western Lithograph Co. v. State

Bd. of Equalization, 78 P.2d 731, 734-35 (Cal. 1938)

22a

Appendix A

(“The provisions of the [retail sales tax] act itself

specifically are that the tax is laid upon and is a direct

obligation of the retailer” and the tax should not be

“considered as a tax on the consumer.”).

It may be that the Supreme Court will provide

additional guidance concerning the applicability of the

Import-Export Clause to nondiscriminatory taxes like

the BPOL tax that would be imposed upon on export

goods in transit. Until then, Richfield Oil compels the

conclusion that the BPOL tax is unconstitutionally

applied to Duty Free’s international export sales.

CONCLUSION

The BPOL tax as applied to Duty Free’s export

goods in transit constitutes an impermissible impost

upon an export in violation of the Import-Export

Clause of the Constitution of the United States.

Consequently, we will reverse the judgment of the

circuit court and remand this matter for a

determination of the refund due to Duty Free.

Reversed and remanded.

23a

APPENDIX B

OPINION OF THE CIRCUIT COURT OF

LOUDOUN COUNTY, DATED APRIL 26, 2016

TWENTIETH JUDICIAL CIRCUIT OF VIRGINIA

Loudoun, Fauquier and Rappahannock Counties

April 26, 2016

Craig D. Bell, Esquire

J. Christian Tennant, Esquire

McGuire Woods, LLP

Gateway Plaza

800 East Canal Street

Richmond, VA 23219-3916

Steven F. Jackson, Esquire

Courtney R. Sydnor, Esquire

Office of the County Attorney

One Harrison Street, SE (MSC #06)

P.O. Box 7000

Leesburg, VA 20177-7000

Re: Dulles Duty Free, LLC v. County of Loudoun

Civil No. 90613

Dear Counsel:

This matter was heard on April 6 and 7, 2016 on

the application for correction of erroneous assessment

of business professional and occupational license tax

24a

Appendix B

(BPOL tax) for the years 2009 through 2013. The

applicant is Dulles Duty Free, LLC and the defendant

is the County of Loudoun. Most of the facts were not in

dispute. Each side submitted written briefs. Duty Free

maintains that the tax attributable to gross receipts

derived from retail sales of goods in foreign commerce

violates Article 1, Section 10, Clause 2 of the United

States Constitution, commonly referred to as the

Import Export Clause1. The County denies this.

Background

Duty Free is a duty free retailer that operates in

many locations throughout the United States. Duty

Free conducted retail operations in five locations

within Dulles International Airport in Loudoun County

for the years 2009 through 2011. A sixth location

opened in 2012 and was operated for the years 2012

and 2013. Duty Free paid to the County BPOL taxes

for the years 2009 through 2013 and seeks a refund.

The duty free shops sell millions of dollars of

merchandise to travelers at the airport. 19 U.S.C. §

1555 authorizes bonded duty free sales of merchandise

for export from the country. Duty Free is highly

regulated with significant federal oversight primarily

through United States Customs and Border Protection.

Duty Free sells alcohol, tobacco, luxury gifts,

fragrances and other goods in their stores. Duty Free

assembles imported and domestic goods in bonded

Duty Free originally included a challenge under the

Commerce Clause but has abandoned that claim.

1

25a

Appendix B

warehouses in Florida and Texas. Bonded carriers

transport the goods to a bonded warehouse at Dulles

Airport where they are eventually delivered to the

retail stores within the airport. This process is highly

regulated, scrutinized and controlled. For example, a

bonded carrier arriving at the airport warehouse is

unable to unload his sealed container until a customs

official is present to verify the delivery, and to break

the customs seal and cut the bolts sealing the

container. Once in the warehouse, items are first

delivered to a staging area where they must again be

inspected before they can be warehoused. The process

of delivery to the retail stores is also highly controlled.

Once in the retail stores the goods are available for

sale in the “sterile” area of the airport. This is the area

where only passengers who have boarding passes and

have gone through security may enter. Both domestic

and international passengers may make purchases at

Duty Free’s stores. The evidence showed that Duty

Free is able to identify whether a sale is for import or

export. If a domestic passenger purchases an item, a

Virginia sales tax is charged and the customer is able

to take possession of the item. If the sale involves a

bonded imported item, an import duty is paid by the

domestic passenger.

International sales are handled differently. An

international traveler must show his or her passport

and boarding pass, which is verified by Duty Free’s

cashier. The international traveler purchases the goods

for export. No Virginia sales tax is collected nor is any

duty collected. The merchandise is not delivered to the

traveler at the point of sale. The traveler obtains a

26a

Appendix B

receipt and a duty free cartman meets the traveler at

the jet way just prior to boarding the plane, where the

traveler surrenders his receipt to the cartman in

exchange for the goods. In this way, Duty Free ensures

that items are in fact for export.2 These procedures are

to ensure actual export. Duty Free receives favorable

federal tax treatment under the law. Duty Free is able

to demonstrate through record keeping the percentage

of sales attributable to domestic travelers and

international travelers. Duty Free has a business

license to operate in Loudoun County. As a result,

Duty Free is obligated to pay the BPOL tax measured

by gross receipts. Duty Free does not challenge the

BPOL taxes attributable to its domestic sales.

However, Duty Free maintains that the BPOL tax

arising from gross receipts attributable to

international sales (which is over ninety percent of its

sales) violates the United States Constitution.

Under the existing law, if a retail location has gross

receipts less than $200,000, a flat BPOL rate of $30 is

paid. Duty Free paid several $30 fees to Loudoun

County during the years in question. While Duty Free

states that the $30 BPOL flat rate charged does not

distinguish between domestic and export sales, it has

chosen not to challenge this particular taxing

structure. Accordingly, at issue are the retail stores

that had gross sales in excess of $200,000. These

claims are set forth below:

2 Duty Free also explained the procedure for the return of

goods and voiding of sales if, for example, a passenger fails to

show up at the gate for boarding.

27a

Appendix B

Gross Receipts from Export 2009: $18,827,494

Gross Receipts from Export 2010: $13,747,954

Gross Receipts from Export 2011: $15,162,747

Gross Receipts from Export 2012: $18,203,469

Gross Receipts from Export 2013: $20,151,691

Duty Free admits that it owns inventory and

tangible personal property in Loudoun County.

Further, it admits that it employs a large number of

individuals (in excess of 100) in Loudoun County to

staff its operation. The stores are open from 7:00 a.m.

to 10:00 p.m. each day. These employees, as well as

customers, use Loudoun County roads to get to the

airport. Duty Free’s operation benefits from the

protection of the Sheriff’s Department, Fire and

Rescue, the court system and other County laws and

ordinances. All of the merchandise is delivered to a

warehouse in Loudoun County, and eventually is sold

in retail in Loudoun County.

Discussion

The Code of Virginia authorizes an administrative

appeal of a determination of a Commissioner of

Revenue, and a judicial review of that determination

under § 58.1-3703.1. Duty Free did pursue an

administrative appeal on different grounds, but did not

seek judicial review when it did not prevail. This

application is filed pursuant to Va. Code § 58.13984(A). This authorizes application to the court to

correct erroneous assessment of local levies. In such a

proceeding “...the burden of proof shall be upon the

taxpayer to show ... that the assessment is otherwise

28a

Appendix B

invalid or illegal”. Here, Duty Free contends that the

BPOL tax based on gross receipts for exports for the

years 2009 through 2013 should not be imposed

because it violates the Import Export Clause of the

United States Constitution (Article 1, Section 10,

Clause 2).

The Import Export Clause bars states and localities

from exacting “...any Imposts or Duties on Imports or

Exports...” Duty Free argues that under the law, the

BPOL tax based on gross receipts is imposed on sales

of exports, and therefore qualifies as a “direct” tax on

the goods sold. Further, Duty Free maintains that the

export goods being sold and delivered to those

preparing imminently to go abroad are “in export

transit” and cannot be taxed.

The County argues that its BPOL tax is not a sales,

property or income tax. It is not a tax on a particular

transaction. Rather, it is an “indirect” tax for the

privilege to engage in a business in Loudoun County.

Tax liability is triggered by the decision to operate a

business in Loudoun County. It is a means to collect

revenue from a business using the roads and variety of

protections and services that are afforded by the

County. While gross receipts above $200,000 are

utilized in determining the tax, this is only a measure

of the overall business activity.

Section 58.1-3702 creates the authority for the

County to levy this license tax. It authorizes the

County to levy such license tax either on gross receipts

or the Virginia taxable income of the business.

Loudoun County has elected to use gross receipts.

29a

Appendix B

Section 58.1-3703 provides: “Such governing body

may levy and provide for the assessment and collection

of county, city or town license taxes on businesses,

trades, professions, occupations and callings and upon

the persons, firms, and corporations engaged therein

within the county ...”

Section 58.1-3703.1A.3 provides:

(a) General rule. Whenever the tax imposed by

this ordinance is measured by gross

receipts, the gross receipts included in the

taxable measure shall be only those gross

receipts attributable to the exercise of a

privilege subject to licensure at a definite

place of business within this jurisdiction.

The Loudoun County Ordinance defines gross

receipts as the “... whole, entire, total receipts

attributable to the licensed privilege ... Section

840.01(K). Section 840.05 adopts the same general rule

as found in Va. Code § 58.1-3703.1, quoted above.

Under Section 840.14 (o) the rate is fixed at seventeen

cents ($0.17) per one hundred dollars ($100) of gross

receipts.

In determining whether Duty Free has met its

burden of proof to show that the assessment is invalid

or illegal based on a constitutional challenge the Court

must start with the presumption:

There is a strong presumption in favor of the

constitutionality of statutes. Town of Ashland v.

Board of Supervisors, 202 Va. 409, 416, 117

S.E.2d

679,

684

(1961);

Hunton

v.

30a

Appendix B

Commonwealth, 166 Va. 229, 236, 183 S.E.2d

873, 876 (1936). Indeed “[t]here is no stronger

presumption known to the law than that which

is made by the courts with respect to the

constitutionality of an act of Legislature.”

Whitlock v. Hawkins, 105 Va. 242, 248, 53 S.E.

401, 403 (1906). Any reasonable doubt as to the

constitutionality of a statute must be resolved in

favor of its constitutionality, and “[o]nly where it

is plainly in violation of the Constitution may

the court so decide.” Almond v. Gilmer, 188 Va.

822, 834, 51 S.E.2d 272, 276 (1949). The General

Assembly may enact any law or take any action

“unless it is prohibited by the state or federal

constitution in express terms or by necessary

implication.” Dean v. Paolicelli, 194 Va. 219,

227, 72 S.E.2d 506, 511 (1952); see also

Kirkpatrick v. Board of Supervisors, 146 Va.

113, 126, 136 S.E. 186, 190 (1926).

“We will not invalidate a statute unless that

statute clearly violates a provision of the United

States or Virginia Constitutions.” Marshall v.

Northern Virginia Transportation Authority, 275

Va. 419, 427, 657 S.E.2d 71, 75 (2008) (citing In

re Phillips, 265 Va. 81, 85-86, 574 S.E.2d 270,

272 (2003); City Council of Emporia v. Newsome,

226 Va. 518, 523, 311 S.E.2d 761, 764 (1984)).

The Court assumes the “legislature chose, with care,

the words it used” when it enacted Va. Code § 58.13703.1. Simon v. Forrer, 265 Va. 483, 490 (2003). The

statute uses gross receipts as a measure but attributes

the tax to the exercise of a privilege. This demonstrates

31a

Appendix B

the legislative intent that these taxes are not a direct

tax on the sales (whether for domestic consumption or

export) but rather a tax on the privilege of operating

within the County. However, Duty Free maintains that

the BPOL tax in fact operates as a direct tax and

therefore is unconstitutional.

It is reasonable to assume that the legislature

recognized that a business engaged in an activity

within a county will utilize the services and privileges

afforded them, and that the level of use requires a

means of measurement. While there are two options,

the gross receipts selected by Loudoun County is a

legitimate means authorized by the General Assembly

to measure the level of business activity.

It is also reasonable to assume that the legislature

was aware that there are businesses such as this

particular business that engage in the sale of goods

including the sale of goods for export.

Established case law in Virginia addresses the

distinction between a direct tax on property and a

license tax. In Town of Ashland v. Board of

Supervisors, 202 Va. 409, 117 S.E. 2d 679 (1961), the

Court heard a constitutional challenge to a license tax

on motor vehicles. The town argued the distinction

between a direct tax on property and a license tax. The

Court cited with approval language from Hunton v.

Commonwealth:

“We think the fundamental weakness in

petitioner’s case is his theory that any tax which

affects property in any way, directly or

indirectly, is a tax on that property. This

32a

Appendix B

argument is not sound and has been expressly

repudiated by this court.

“The owner of an automobile in Virginia pays

a tax for the privilege of operating his car. In a

sense this tax affects the car, but it is

universally conceded that this is a license or

privilege tax and not a tax on the property

concerned, to-wit, the automobile.”

Certainly it cannot be successfully contended

that an owner is required to obtain a license for

his vehicle if it is stored in a garage and not

operated upon the streets and highways. Such a

vehicle is subject to a personal property tax, but

not a license tax, unless he exercises the

privilege of operating it upon the streets and

highways. Since the tax in question is a license

or privilege tax and not a tax on the property

itself, it is not violative of Section 168 of the

Virginia Constitution.

Town of Ashland, 202 Va. at 413, 117 S.E. 2d 639

(citing Hunton v. Commonwealth, 166 Va. 229, 244,

183 S.E. 873, 879 (1936)).

Duty Free relies on precedent from the Supreme

Court of the United States to conclude that because

these goods enter the stream of transport for export,

the tax based on gross receipts directly burdens the

goods and therefore is a direct tax that violates the

United States Constitution. Duty Free relies heavily on

Richfield Oil Corp. v. State Board of Equalization, 329

U.S. 69 (1946).

33a

Appendix B

It is challenging to try to reconcile the Import

Export Clause jurisprudence. Many of the cases that

discuss this area of the law also involve challenges

under the Commerce Clause or the Export Clause,

Article 1, Section 9, Clause 5 (“No tax or duty shall be

laid on articles exported from any state”). It appears

that different criteria are involved for these challenges.

The Richfield case does involve a challenge under

Article 1, Section 10, Clause 2 (the Import Export

Clause). A retail sales tax was assessed measured by

gross receipts of oil shipped from a California refinery

to storage tanks, and eventually to a ship destined for

New Zealand. The oil was clearly for export. The

California court allowed the tax “... because the

delivery of the oil which resulted in the passage of title

occurred prior to the commencement of the

exportation” Richfield, 329 U.S. at 74.

The oil was for shipment abroad but the question

remained as to whether at the time the tax accrued,

the oil was an export. The Court discussed the

Commerce Clause and the Article 1, Section 9, Clause

5 cases as a part of its analysis. Although the Court

discussed a number of cases involving, for example,

shipment by a common carrier for export, it appears

that the actual holding is based upon the conclusion

that the delivery into the hold of the vessel marked the

commencement of the movement of the oil abroad. Id.

at 83. At that point, it passed into the control of a

foreign purchaser and there was nothing that created

the probability the oil would be diverted to domestic

use. There was a certainty of the foreign destination at

that point.

34a

Appendix B

The California court found the tax measured by

gross receipts of retail sales was an excise tax for the

privilege of conducting a business measured by gross

receipts. The Supreme Court noted that the case could

not be decided on the characterization of the tax, but

had to turn on its operation and effect. “The incident

which gave rise to the accrual of the tax was a step in

the export process” Richfield, 329 U.S. at 84. The

Supreme Court concluded this was an impost upon an

export and was unconstitutional. Id at 86. This is the

point advanced by Duty Free.

Duty Free notes the emphasis in this case on two

points: being “in export transit”, and the operation and

effect on the goods themselves. In other words, once the

good has been shipped or started upon a continuous

route, it has entered the stream of exportation. There

was no chance that the foreign exports would be

thwarted. In addition, because it is a tax on gross

receipts, it acts as a tax on the goods themselves.

Obviously there are significant distinctions between

the facts of this case and the facts in Richfield.

Richfield involved a sales tax, which is by all

definitions a direct tax on goods. Like the BPOL tax

here, it was measured by gross receipts. In the case at

bar, the BPOL tax obligation accrues not at a point of

sale, but rather when the entity begins any business

activity. If the business has gross receipts under

$200,000, a flat fee is paid. If gross receipts are greater

than $200,000, the tax amount is measured by the

gross receipts. Although not dispositive, the BPOL tax

is denominated a tax on the privilege of operating, with

the level of activity measured by the gross receipts. But

35a

Appendix B

the issue remains whether a tax on gross receipts acts

as a tax on the goods themselves. The current

jurisprudence on the Import Export Clause must be

considered. Both sides have argued the holdings in

Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976) and

Dept. of Revenue v. Assoc. of Washington Stevedoring,

Cos., 435 U.S. 734 (1978) are instructive.

In Michelin, Georgia imposed an ad valorem

property tax on tires and tubes that had been imported

and warehoused at a distribution center. The Georgia

court found that the tires lost their status as imports

once they were removed from the original shipping

cartons and mingled with other tires. The Supreme

Court affirmed the tax without deciding the issue of

whether the goods had lost their status as imports. The

Georgia court relied upon Low v. Austin, 80 U.S. 29

(1872), which held states are prohibited from imposing

a non-discriminatory ad valorem tax on imported goods

until they lose their character as imports and became

incorporated into the mass of property in the state. The

Supreme Court acknowledged its incorrect analysis of

the case of Brown v. Maryland, 12 Wheat. 419 (1827)

in adopting its rationale in Low. The Court specifically

pointed out that the Brown Court did not include nondiscriminatory ad valorem property taxes among the

prohibited imposts and duties. In other words, the

Court used this opportunity to question its holding in

Low that as long as the items retained their character

as an import, a tax upon them in any form is

constitutionally prohibited. Michelin, 423 U.S. at 282.

The Court stated:

36a

Appendix B

Our independent study persuades us that a

nondiscriminatory ad valorem property tax is

not the type of state exaction which the Framers

of the Constitution or the Court in Brown had in

mind as being an “impost” or “duty” and that

Low v. Austin’s reliance upon the Brown dictum

to reach the contrary conclusion was misplaced.

Michelin, 423 U.S. at 283.

In reaching this conclusion, the Supreme Court

reviewed the rationale for the Import Export Clause,

and concluded that there are three main concerns that

the Framers of the Constitution sought to alleviate: (i)

ensuring that the federal government speaks with one

voice when regulating foreign commerce; (ii) preserving

import revenues as a major source of federal revenue;

and (iii) preventing disharmony likely to be caused if

seaboard states taxed goods coming through their

ports. Id. at 285-86. In export cases, only the first and

third concerns apply. Washington Stevedoring, 435

U.S. at 758. These three concerns are not addressed

here as there is no suggestion by Duty Free that they

are in any way implicated in this case. I also find that

the County has correctly argued that the concerns that

are addressed in Michelin are not applicable to the

facts in this case.

The Supreme Court pointed out that a nondiscriminatory ad valorem property tax that also is

imposed on imported goods that are no longer in

import transit is not the type of exaction that was

objectionable to the Framers of the Constitution. Id. at

37a

Appendix B

286. The Michelin Court took the opportunity to

discuss the distinction between imposts and duties:

Unlike imposts and duties, which are essentially

taxes on the commercial privilege of bringing

goods into a country, such property taxes are

taxes by which a state apportions the cost of

such services as police and fire protection among

the beneficiaries according to their respective

wealth; there is no reason why an importer

should not bear his share of these costs along

with his competitors handling only domestic

goods. The Import-Export Clause clearly

prohibits state taxation based on the foreign

origin of the imported goods, but it cannot be

read to accord imported goods preferential

treatment that permits escape from uniform

taxes imposed without regard to foreign origin

for services which the State supplies.

Id. at 287.

In this case, the County is attempting to apportion

the cost of its services to the intended beneficiaries

without regard to the origin or ultimate destination of

the good: “...[s]uch taxation is the quid pro quo for

benefits actually conferred by the taxing state”

Michelin, 423 U.S. at 289.

The Michelin case is important because the

Supreme Court concluded that the Import Export

Clause is not a broad prohibition of every “tax” that

falls in some measure on imported goods. The Clause

prohibits imposts or duties that had well understood

38a

Appendix B

meanings. Id. at 290. ‘Imposts’ were like custom duties,

that is, charges levied on imports at the time and place

of importation. ‘Duties’ was a broader term embracing

excises as well as custom duties ... and general

property exactions were known by the term ‘tax’ rather

than the term ‘duty’.” Id. at 292 (quotation omitted).

The Court acknowledged that a tax could have an

incidental effect on federal revenues by creating an

economic burden on importation of foreign goods, but

preventing or avoiding this incidental effect was not an

objective of the Framers of the Constitution. Michelin,

423 U.S. at 287. The Court carefully drew a distinction

between imposts, duties and taxes that had not been

drawn in Richfield:

The terminology employed in the Clause –

“Imposts or Duties” – is sufficiently ambiguous

that we decline to presume it was intended to

embrace taxation that does not create the evils

the Clause was specifically intended to

eliminate.

Michelin, 423 U.S. at 293-94.

In addition, the Court overturned the use of the

“original package” test in Low to determine if imported

goods are still in transport. That test created an

opportunity for a state or locality to levy a tax if it

could show that the importer had so acted upon the

thing imported such as taking it out of its original

package, for example, that it had lost its character. If it

was in its original package, however, it could not be

taxed. Michelin 423 U.S. at 297-98. The Court also

observed that even with the original package test that

39a

Appendix B

allowed taxation if the item lost its character and was

co-mingled, it was never intended that in the absence

of such action (co-mingling), no tax could be imposed.

Id.

In Michelin, the Court concluded that the tires were

no longer in transit. They were stored in a distribution

warehouse from which a wholesale operation was

conducted. The non-discriminatory property tax did not

violate the Import Export Clause. Id. at 302.

It would have been preferable had the Court

directly addressed its holding in Richfield. The impact

of Michelin is the subject of considerable disagreement

between the parties in this case. Duty Free asserts that

Richfield has not been overruled and the case does not

address the concept of goods in transit. Duty Free also

argues that a tax on gross receipts still acts as a tax on

the goods themselves. In fact, the Michelin Court did

conclude the tires were no longer in transit when they

were stored in the warehouse. Of course, the real

distinction here is that in Michelin the goods had been

imported and had reached a destination (a warehouse)

where they would be fully distributed. In this case, the

goods also reached a warehouse awaiting further

distribution for a retail operation, and the ultimate

export of the majority of the goods. Duty Free

maintains their goods are in continuous transit, and

the nature of their business is such a continuous

journey and stream of commerce that it ensures an

export for the majority of their goods. Michelin does

clarify that not all taxes are violative of the Clause.

Without determining if Richfield was explicitly or

implicitly overruled, it is safe to conclude that the legal

40a

Appendix B

landscape as it relates to the Import Export Clause

changed significantly with Michelin. In Michelin, the

Court reached the conclusion that the imported tires

stored in the warehouse from which a wholesale

operation was run were no longer in transit. The Court

found that the warehouse was operated no differently

than a distribution warehouse utilized by wholesalers

who are dealing in domestic goods. Beyond this, the

Court did not establish any criteria for a trial court to

make a determination of when goods are in transit.

Nor did the Michelin Court create a test for

determining when a tax is “direct”, or acts as a direct

tax.

The parties also have argued the impact of Dept. of

Revenue of Washington v. Assoc. of Washington

Stevedoring Companies, et al., 435 U.S. 734 (1978).

Washington State imposed a business and occupation

tax based on stevedoring activities in loading and

unloading ships. The Court held that this tax was not

an “impost or duty” and thus did not violate the Import

Export Clause.

The Washington Stevedoring Court discussed

Michelin and noted the Michelin Court determined for

the first time which taxes fell within the absolute ban

on imposts and duties. Washington Stevedoring, 435

U.S. at 751. I believe it is also significant that the

Court noted that: “Previous cases had assumed that all

taxes on imports and exports and on the importing and

exporting processes were banned by the Clause”. Id. at

752. Specifically, the Court cited the Richfield case.

The Supreme Court then discussed the status of the

law before Michelin:

41a

Appendix B

“Before Michelin, the primary consideration was

whether the tax under review reached imports

or exports.

***

With respect to exports, the dispositive question

was whether the goods had entered the “export

stream” the final continuous journey out of the

country.

***

Michelin initiated a different approach to

Import-Export Clause cases. It ignored the

simple question whether the tires and tubes

were imports. Instead, it analyzed the nature of

the tax to determine whether it was an “Impost

or Duty”. Specifically, the analysis examined

whether the exaction offended any of the three

policy considerations leading tothe presence of

the Clause ...

Washington Stevedoring, 435 U.S. at 752 (citations

omitted).

This case clarifies the impact of Michelin. While not

expressly overruling Richfield, there is a new calculus

that is to be applied to import-export cases. The Court

also addressed the fact that the Michelin Court, by

finding the goods were no longer “in transit”, did not

face the question of whether a tax relating to a good in

transit would be an impost or duty.

In Washington Stevedoring, the Court held that the

activity taxed occurred while imports and exports were

in transit, but the tax does not fall upon the goods

42a

Appendix B

because the tax reaches the business of loading and

unloading ships in the State of Washington. Therefore,

despite the existence of the first distinction (the

activity occurred while imports and exports were in

transit), the presence of the second (the tax reaches

only activity in the State of Washington) leads to the

conclusion that the tax is not an impost or duty when it

violates none of the import-export policy concerns.

Because the case involved exports only, the first and

third policy concerns announced in Michelin have to be

examined. Washington Stevedoring, 435 U.S. at 755.

In Limbock v. Hoven & Allison Co., 466 U.S. 353

(1984), a case involving imports, the Court discussed

the Import Export Clause cases:

It is apparent, and indeed clear, that Michelin

with its overruling of Low v. Austin, adopted a

fundamentally different approach to cases

claiming the protection of the Import-Export

Clause. We said precisely as much in

Washington Revenue Dept. v. Association of

Washington Stevedoring Cos., 435 U.S. 734.

***

To repeat: we think it clear that this Court in

Michelin specifically abandoned the concept that

the Import-Export Clause constituted a broad

prohibition against all forms of state taxation

that fell on imports. Michelin changed the focus

of the Import-Export Clause cases from the

nature of the goods as imports to the nature of

the tax at issue. The new focus is not on whether

the goods have lost their status as imports but

43a

Appendix B

is, instead, on whether the tax sought to be

imposed is an “Impost or Duty”.

Limbock, 466 U.S. at 359-360.

Washington Stevedoring relied on Canton R. Co. v.

Rogan, 340 U.S. 511 (1951), which involved a gross

receipts tax on railroad operating in the Port of

Baltimore. The company argued that since just under

half of its gross receipts were derived from the

transport of imports or exports, they were therefore

immune from state tax. In Canton, the Court rejected

this claim, finding that the immunity of services

incidental to importing and exporting was not as broad

as the immunity of the goods themselves. Canton R.

Co., 340 U.S. at 514-15.

In United States v. International Business Machines

Corp., 517 U.S. 843 (1996), the Court dealt with a

challenge under Article 1, Section 9, Clause 5 (Export

Clause) of the Constitution and discussed the Import

Export Clause cases. Specifically, the Court noted that

following Michelin, Washington Stevedoring did involve

goods that were deemed to be in transit. This fact was

not dispositive because the tax did not “fall on the

goods themselves” and therefore was not an Impost or

Duty:

“In both Michelin and Washington Stevedoring,

we left open the possibility that a particular

state assessment might not be properly be called

an impost or duty, and this would be beyond the

reach of the Import-Export Clause ... Though we

found in Michelin that a non discriminatory

state property tax does not transgress the policy

44a

Appendix B

dictates of the Import-Export Clause, we also

recognized that the Import-Export Clause is “not

written in terms of a broad prohibition of every

‘tax’, and that impost and duty are narrower

terms then tax. In Washington Stevedoring, we

likewise rejected the assertion that the ImportExport Clause absolutely prohibits all taxation

of imports and exports. We said that the term

‘Impost or Duty’ is not self-defining and does not

necessarily encompass all taxes” and that the

respondent’s argument to the contrary ignored

“the central holding of Michelin that the

absolute ban is only of Imposts or Duties and

not of all taxes”.

IBM, 517 U.S. at 857 (citations omitted).

Conclusion

At trial, Duty Free established it deals in goods that

are sold for domestic consumption but that over ninety

percent of its sales were goods destined for export. As

the goods move from warehouses in Florida and Texas

to the Loudoun County warehouse and ultimately, to

Duty Free’s retail stores at Dulles International

Airport, and are sold, Duty Free asserts the goods for

export are “in transit”. Although Duty Free is able to

show, through its record keeping, the percentage of

goods sold for export on any given day, the ultimate

disposition of each good in Duty Free’s retail stores is

unknown until the moment of sale. Because of its

ability to track sales and the fact that historically most

items are sold for export, Duty Free can legitimately

claim that a majority of the goods they sell are in the

45a

Appendix B

stream of commerce for export. But this determination

is not dispositive, as there is no longer a broad

prohibition against all forms of state taxation that may

affect an export. The absolute ban is on imposts and

duties, and not all taxes. The fact that a tax may

indirectly affect an import or export is not dispositive

because every tax could be said to affect the value of

goods sold as a cost of business.

There is no suggestion that this tax would be

prohibited by any of the Michelin policy considerations

(first and third) relating to exports. The BPOL tax

itself is determined by the State and County as a tax

on the privilege of operating within the County. It is

clear that under Virginia case law, it is deemed an

indirect tax. This tax is not a property tax on inventory

nor is it a sales tax exacted at the point of sale. It is not

identified with any particular good. It is triggered by

the decision to engage in business activity in Loudoun.

The level of activity is measured by gross receipts. The

business activity that it reaches is significant, and it

impacts the County. The activity extends throughout

the process of the transport in Loudoun County to the

warehouse and distribution to the retailer for the

ultimate sale. The BPOL tax cannot be viewed as a tax

on the commercial privilege of exporting, but rather a

tax designed to allow the County to apportion the cost

among the businesses for the services provided. It is

not an impost or duty. It is an indirect tax that does

not “fall” upon the export.

To the extent that Duty Free maintains that

Richfield still controls because a tax on gross receipts

acts as a tax on the goods themselves, I find that this

46a

Appendix B

broad proposition is no longer applicable. Under

Michelin and Washington Stevedoring, this BPOL tax

is not an impost or duty, and does not transgress any of

the policy dictates behind the Import Export Clause.

The BPOL tax does not fall upon the goods themselves.

The fact that it can have some impact on exports

because the business activity is measured in gross

receipts does not alter this conclusion. The BPOL tax of

Loudoun County does not violate the Import Export

Clause of the U.S. Constitution. Mr. Jackson should

draft an order that may incorporate by reference this

opinion and each side may note their respective

objections. I will place the matter on the docket for

May 6, 2016 at 2:00 p.m. for entry. Neither side is

required to appear provided an endorsed order has

been submitted prior to that date.

Very truly yours,

/s/

Burke F. McCahill

Judge

BFM/gpt

47a

APPENDIX C

CONSTITUTIONAL &

STATUTORY PROVISIONS

Article I, Section 10 of the United States

Constitution provides, in relevant part:

No State shall, without the Consent of the

Congress, lay any Imposts or Duties on Imports

or Exports, except what may be absolutely

necessary for executing its inspection Laws: and

the net Produce of all Duties and Imposts, laid

by any State on Imports or Exports, shall be for

the Use of the Treasury of the United States;

and all such Laws shall be subject to the

Revision and Controul of the Congress.

U.S. Const. art. I, § 10, cl. 2.

***

Virginia Code § 58.1-3702 provides, in relevant

part, that “the governing body of every county, city and

town that levies [a] license tax may impose the tax on

the gross receipts or the Virginia taxable income of the

business.” Va. Code Ann. § 58.1-3702.

***

Virginia Code § 58.1-3703.1(A)(3)(a) provides, in

relevant part, that “[w]henever the tax imposed by this

ordinance is measured by gross receipts, the gross

receipts included in the taxable measure shall be only

those gross receipts attributed to the exercise of a

privilege subject to licensure at a definite place of

business within this jurisdiction.” Va. Code Ann.

§ 58.1-3703.1(A)(3)(a).

48a

Appendix C

***

Loudoun County Ordinance § 840.01(k) provides:

“‘Gross receipts’ means the whole, entire, total receipts

attributable to the licensed privilege, without

deduction, except as may be limited by the provisions

of Chapter 37, Title 58.1, of the Code of Virginia, as

amended.” Loudoun County Ordinance § 840.01(k).

***

Loudoun County Ordinance § 840.03 provides, in

relevant part:

(a) License Required. Every person shall apply

for a license for each business or profession

when engaging in a business in this jurisdiction

if:

(1) The person has a definite place of

business in this jurisdiction . . . .

...

(f) Licensing Basis.

As to businesses,

professions, trades or occupations for which a

gross receipts license tax is levied on persons

having a definite place of business in the

County, all gross receipts derived from the

business, profession, trade or occupation shall be

included in their licensing basis . . . .

Loudoun County Ordinance § 840.03(a), (f).

49a

Appendix C

***

Loudoun County Ordinance § 840.14 provides, in

relevant part:

In addition to the fee specified in

Section 840.13(c), any person engaged in a

business, profession, trade or occupation with

gross receipts of more than two hundred

thousand dollars ($200,000.00) shall be assessed

and required to pay annually a license tax on

gross receipts or a flat tax at the rate

established for the particular enterprise as set

forth below:

...

(o) Retail Merchants. Every person engaged

in the business, profession, trade or occupation

of selling goods, wares or merchandise, for use

or consumption by the purchaser, at retail only

and not for resale, shall pay for the privilege an

annual license tax of seventeen cents

($0.17) per one hundred dollars ($100.00) of

gross receipts.

Loudoun County Ordinance § 840.14(o).