Amicus Brief — Sears, Roebuck & Co. v. County of Los Angeles

IN THE

Supreme Court of the United States

October Term, 1979

No. 78-1577

SEARS, ROEBUCK AND Co.,

Petitioner,

vs.

CouNTY OF Los ANGELES and City OF COMPTON,

Respondents.

On Petition for a Writ of Certiorari to the Court of Appeal

of the State of California, Second Appellate District.

Motion for Leave to File Brief Amicus Curiae in Sup-

port of Petitioner and Brief of Charles R. Ajalat as

Amicus Curiae in Support of Petitioner.

CHARLES R. AJALAT,

AJALAT & POLLEY,

523 West Sixth Street, Suite 552,

Los Angeles, Calif. 90014,

Amicus Curiae.

Parker & Son, Inc., Law Printers, Los Angeles. Phone 724-6622

SUBJECT INDEX

Page

Motion for Leave to File Brief Amicus Curiae in

I ME NII: on sicnccictsenncrnsdsemabinnscnttiedendadeins l

Brief of Amicus Curiae on the Merits in Support of

BS A ES, en I, il ees AOR ee ARR SS OE 3

I.

Soeerest Gf Amows Crise .............:...................... 3

Il.

SD 0 ca ola acc ancicgeheinesles eg Ancasenonnans 3

A. Michelin, Complete Auto, Japan Lines

and the Case at Bar Should Establish a

Coherent Interstate-Foreign Commerce

ESSERE R Ee Ae RIC ERE AE OIE 1 rR 3

B. Japan Line’s Special Treatment of Foreign

Commerce Applies to the Case at Bar ...... 7

C. The Statute Permissibly Discriminates in

Favor of Foreign Transactions and Is

Consistent With the Free Flow of Goods

Between Sovereign Nations ...................... 10

1. Boston Stock Exchange .................. 10

EG. BERRI CURSE Repro ne Aaa ome 12

3. . Peek. Tee ............. SD cedeenisieatieediwannas 12

4. Responsibility to Their Electorates.. 13

5. Free Flow of Commerce to Inland

BE ditink a deigin niscieeipnebeamrkas bbedecasnscontnas 14

Il.

CRE TNE A Fe ok PP PR Ee re RO A 14

TABLE OF AUTHORITIES CITED

Cases Page

Asarco Inc. v. Idaho State Tax Comm. (No. 78-

SEREREIR ney races ere ICA OR ON MRR OT 5

Boston Stock Exchange v. State Tax Comm’n

(1977) 429 U.S. 318, 50 L.Ed.2d 514, 97 S.Ct.

ME lL oaciceciabtanciccncanadetassttshdggshougtnscotaisielcte 4, 10, 12, 3S

Complete Auto Transit, Inc. v. Brady (1977) 430

U.S. 274, 51 L.Ed.2d 326, 97 S.Ct. 1976 ...... - ee

Flint v. Stone Tracy Co. (1911) 220 U.S. 107, 55

eG Ea: SE ae IE ésaianccs vidio cdtnbdigseadcdedoesdcreney 5

Japan Line, Ltd. v. County of Los Angeles (1979)

cae U.S. ........, 60 L.6.26 336, 99 S.C. ........

Mi SSeS Sor weed Nar om APA egal TRAE 1&7, 0S 120

Michelin Tire Corp. v. Wages (1976) 423 USS.

276, 46 L.Ed.2d 495, 96 S.Ct. 535 ...... 2 3, 4,%4, 8

Mobil Oil Corp. v. Vermont Com’r of Taxes (No.

PIII Te lac cas ilsrechasccsledhicenntsionqeudal oxbbcanslowusseaasaes 5

Moorman Manufacturing Co. v. Bair (1978) 437

US. 267, 57 L.Ed.2d 197; 98 S.Ct. 2340 .......... 4

National Geographic Society v. California Board

of Equalization (1977) 430 U.S. 551, 51 L.Ed.

ee 4

Pacific Co. Ltd. v. Johnson (1932) 285 U.S. 480,

we A go a. See mae 5

Statute

California Revenue and Taxation Code, Sec. 225 __.

Rent cry Dee Seance Renee Benne sidghsibhintons ne ae Se ae

IN THE

Supreme Court of the United States

October Term, 1979

No. 78-1577

SEARS, ROEBUCK AND Co.,

Petitioner,

vs.

CounTY OF Los ANGELES and CiTy OF COMPTON,

Respondents.

On Petition for a Writ of Certiorari to the Court of Appeal

of the State of California, Second Appellate District.

Motion for Leave to File Brief Amicus Curiae

in Support of Petitioner.

Charles R. Ajalat, Ajalat & Polley, hereby respectful-

ly moves for leave to file the attached brief amicus

curiae in this case. The consent of the Attorney for

the County of Los Angeles has been obtained. The

consent of the Attorney for the Petitioner was requested

and refused.

Charles R. Ajalat, Ajalat & Polley represents, in

pending litigation, clients who have been denied the

benefits of the statute whose constitutionality has been

questioned. In addition to being an active practitioner

in the state and local tax area, he teaches state and

local taxation in the Masters of Taxation program

—

at the University of Southern California. He was in-

volved in the passage of the statute here involved

as well as all of the other California developments

related to and leading up to Michelin Tire Corp. v.

Wages (1976) 423 U.S. 276, 46 L.Ed.2d 495, 96

S.Ct. 535. For each of these reasons, he has an interest

in the case at bar and the development of the law

in this area.

Based on relatively extensive oral discussions with

both parties, it is believed that the parties will not

or have not sufficiently recognized the extent to which

this case is an integral part of the important line of

State tax cases decided by this Court since 1976 and

its interrelationship with that line of cases. This case,

too, involves the problem of the effect on interstate

or foreign commerce of a state or local government

decision to tax, or (as in this case) not to tax. Further,

based on those discussions, it is believed that the parties

will not or have not sufficiently set forth the purpose

and effect of the statute whose constitutionality is ques-

tioned. Both of these considerations are relevant to

a proper disposition of the case and to the development

of federal constitutional law as it impacts on state

and local taxation.

Charles R. Ajalat, Ajalat & Polley, therefore, urges

that leave be granted to file a brief as amicus curiae

and respectfully so moves the Court.

Respectfully submitted,

CHARLES R. AJALAT,

AJALAT & POLLEY,

Amicus Curiae.

= ae

BRIEF OF AMICUS CURIAE ON THE MERITS

IN SUPPORT OF PETITIONER.

I.

INTEREST OF AMICUS CURIAE.

Amicus Curiae represents, in pending litigation,

clients who have been denied the benefits of the statute

whose constitutionality has been questioned. In addition

to being an active practitioner in the state and local

tax area, Amicus Curiae teaches state and local taxa-

tion in the Masters of Taxation program at the Univer-

sity of Southern California. Amicus Curiae was involved

in the passage of the statute here involved as well

as all of the other California developments related

to and leading up to Michelin Tire Corp. v. Wages

(1976) 423 U.S. 276, 46 L.Ed.2d 495, 96 S.Ct.

535. For each of these reasons, Amicus Curiae has

an interest in the case at bar and the development

of the law in this area.

II.

ARGUMENT.

This case is an integral part of the important line

of state tax cases decided by this Court since 1976.

It, too, involves the problem of the effect on interstate

or foreign commerce of a state or local government

decision to tax, or (as in this case) not to tax.

A. Michelin, Complete Auto, Japan Lines and the

Case at Bar Should Establish a Coherent Inter-

state-Foreign Commerce Dichotomy.

In the last three years, this Court in an excit-

ing and direct. way has come to grips with the

age old problems presented by state taxation which

are at the same time some of the most difficult and

some of the most important ones of our constitutional

said

framework. The Court is recognizing that the constitu-

tional concepts cut across all the state tax lines and

it is making a coherent, workable conceptual framework

out of what has otherwise been chaos.

Nexus and apportionment in relation to benefit—

the two key due process considerations—have long

ago been set forth by this Court with recent affirma-

tion: Nexus, having been broadly defined, is often no

longer an issue (but see National Geographic Society

v. California Board of Equalization (1977) 430 U.S.

551, 51 L.Ed.2d 631, 97 S.Ct. 1386); apportionment,

although it still presents extremely difficult issues, ¢s-

pecially in the income tax area (see Moorman Manu-

facturing Co. v. Bair (1978) 437 U.S. 267, 57 L.Ed.

2d 197, 98 S.Ct. 2340), has been deemed by the

courts often to be best handled by the legislature.

Commerce Clause problems, on the other hand, have

evolved somewhat more slowly in terms of solutions

based on consistent, practical theories. Not until recently

has the Court been able to come to grips with the

application of state taxes to interstate commerce and

foreign commerce other than to recognize that states

could not discriminate against such commerce (recently

reaffirmed in Boston Stock Exchange v. State Tax

Comm'n (1977) 429 U.S. 318, 50 L.Ed.2d 514, 97

S.Ct. 599, and Michelin Tire Corp. v. Wages, supra).

The Court’s first step toward making sense out of

nondiscriminatory apportioned state taxation as it relates

to interstate commerce and foreign commerce was the

dramatic elimination of the Import-Export Clause as

a separate consideration. (Michelin Tire Corp. v.

Wages, supra.)

The Court then dealt with interstate commerce in

terms of the modern realities and our strong federal

_ os

system and made the income tax rules conform, as

they should, to the theory behind the property tax

rules: Nondiscriminatory, properly apportioned taxes

can be applied to all commerce between the states, in-

cluding transactions exclusively in interstate commerce.

(Complete Auto Transit, Inc. v. Brady (1977) 430

U.S. 274, 51 L.Ed.2d 326, 97 S.Ct. 1976.)

Finally, the Court turned its attention to the key

problem of state taxation today—the effect of state

and local taxes upon the relations of the sovereign

federal government with other sovereign governments.

Refusing to use the outdated and inconsistent “home

port doctrine,” the Court dealt with the key issue

itselfi—the effect of state taxation upon foreign com-

merce and held that “When construing Congress’ power

to ‘regulate Commerce with foreign Nations,’ a more

extensive constitutional inquiry is required.” (Japan

Line, Ltd. v. County of Los Angeles (1979) ........

2: See , 60 L.Ed.2d 336, at 346, 99 S.Ct. -........ )

The Court is now faced with clarifying the coherent

structure it has erected in Complete Auto (interstate

commerce) and Japan Line (foreign commerce). The

vehicles before the Court are the case at bar and

the pending cases of Mobil Oil Corp. v. Vermont

Com’r of Taxes (No. 78-1201) and Asarco Inc. v.

Idaho State Tax Comm. (No. 78-1839).' Unless the

1The issues presented in this brief may not affect the pending

Mobil Oil and Asarco cases, supra, unless the Court applies

the “forbidden effect” test of Complete Auto Transit, Inc.

v. Brady, supra, 51 L.Ed.2d at 337, or unless it overturns

(as many have argued it should) the doctrine of Flint v.

Stone Tracy Co. (1911) 220 U.S. 107, 55 L.Ed. 389, 31 S.Ct.

342. (See Pacific Co. Ltd. v. Johnson (1932) 285 U.S. 480,

76 L.Ed. 893, 52 S.Ct. 424), suggested by some to be the key

remaining outdated anachronism in the state tax area after the

elimination of the “original package” and “home port” doctrines.

a ee

Court. is to go back to additional legal fictions and

artificial distinctions, it must use the current term’s

cases to make clear that foreign commerce itself must

have absolute immunity from state taxation under the

foreign commerce clause,” and that state statutes fur-

thering that goal, as in the present case, are valid and

desirable.

Legal fictions and artificial distinctions, if they are

adopted, will not only cause years of litigation and

burdens on the courts, but will ultimately have to

be swept away as were the original package doctrine

in Michelin, the franchise tax-income tax distinction

in Complete Auto, and the home port doctrine in

Japan Line. The alternative is workable and consistent

with the federal constitution prohibition of discrimina-

tion against foreign commerce. The alternative is to

allow nondiscriminatory, properly apportioned state tax-

ation of interstate commerce; to prohibit any state

taxation of foreign commerce; and to allow states, con-

sistent with the policies behind such prohibition, to

favor foreign transactions over local and interstate ones,

subject to the ultimate responsibility they owe in this

regard to their electorates and the Congress.

“For example, the Japan Line rule should not be limited

solely to foreign based instrumentalities exclusively engaged in

foreign commerce but should be applied to domestic based

instrumentalities to the extent they are engaged in foreign com-

merce. Any reference to prohibiting taxation of foreign com-

merce, of course, would mean no expansion of the rules applica-

ble where such foreign commerce has terminated. Tor example,

foreign goods which are not in transit have no constitutional

immunity. Michelin Tire Corp. v. Wages, supra.

oP a

B. Japan Line’s Special Treatment of Foreign Com-

merce Applies to the Case at Bar.

Japan Line, Ltd. v. County of Los Angeles, supra,

prohibited the taxing authority from taxing foreign

based instrumentalities of commerce engaged exclusively

in foreign commerce. This Court, noting that the argu-

ment was “not without weight,” recognized appellee’s

concern that “by exempting appellant’s containers from

tax, the state in effect will be forced to discriminate

against domestic, in favor of foreign commerce.”

The case at bar is not one wherein the constitution

requires a similar discrimination against domestic in

favor of foreign commerce. Rather, the issue is whether

the state legislative action must be upheld as properly

consonant with the special place and protection from

State taxation given foreign commerce by the federal

government. Although Japan Line does not constitu-

tionally require the result, the policies behind Japan

Line require a holding that the statute is valid.

The proper analysis starts by recognizing that the

Japan Line rationale must apply to foreign commerce

generally and not to a particular aspect of such com-

merce. To avoid inconsistency and artificiality, the spe-

cial treatment of foreign commerce granted in Japan

Line cannot and must not be limited to instrumental-

ities of foreign commerce. Further, it must not be

limited to foreign based domiciliaries, nor limited to

exclusively foreign commerce (as opposed to the portion

of a business which is in foreign commerce}

a

To limit Japan Line to instrumentalities of foreign

commerce would be to say the vehicle that carries

the commerce is more important than the commerce

itself.* To limit the constitutional protection of foreign

commerce to foreign based companies would be to

create a non-intended constitutional discrimination

against American based companies doing business in

foreign commerce.

To hold that foreign commerce is special if it is

engaged in exclusively, but when interstate commerce

is also engaged in the constitutional immunity is lost,

would be irrational.

The enhanced risk of multiple taxation test set forth

in Japan Line applies whenever any aspect of foreign

commerce is involved, especially in today’s narrowing

and interdependent world. “|NJeither this Court nor

this Nation can ensure full apportionment when one

of the taxing entities is a foreign sovereign.” (Japan

Line, Ltd. v. County of Los Angeles, supra, 60 L.Ed.

2d at 247.) If foreign commerce is involved and Cali-

fornia can tax any aspect of it, it follows that foreign

sovereigns would also have a theoretical basis to tax

and its apportionment formula is not under the control

of this Court or this Nation.

Japan Line also teaches that it must be inquired

whether the tax prevents the Federal Government from

“speaking with one voice when regulating commercial

relations with foreign governments.” (Japan Line, Ltd.

v. County of Los Angeles, supra, 60 L.Ed.2d at 349.)

%Compare Japan Line, Ltd. v. County of Los Angeles,

supra, 60 L.Ed.2d at 349, fn. 14, “In Washington Revenue

Dept., the Court, holding that the state tax at issue did not

prevent ‘speaking with one voice,’ noted: ‘No foreign business

or vessel is taxed.’”’ (emphasis added).

a

The rationale for the inquiry is to prevent international

disputes over reconciling apportionment formula and

retaliation against the taxing state and other states

of the United States.

As the Solicitor General in this case has said:

“In sum, the decisions of this Court involving imports,

exports, and foreign commerce uniformly emphasize

that one of the principal purposes of the Constitution

was to assure that the States did not impede or obstruct

importation, exportation, or foreign commerce.” (Brief

of the United States as Amicus Curiae, p. 9.)

These policies apply to all aspects of foreign com-

merce and cannot be limited to instrumentalities that

are foreign-owned and exclusively in foreign commerce.

To not accept this principle will cause litigation, incon-

sistencies and impossible lines to draw for years to

come.

If Japan Line, then, prohibits state taxation of

forcign commerce because of the inability to control

foreign taxation and the fact that state taxation can

Cause international disputes and retaliation, what does

this teach us about state exemption of goods being

transshipped through California which have a foreign

source or foreign destination? Such state exemption

does not involve the difficult problem of this Court

or this Nation telling foreign sovereigns what to do.

Such state exemption lessens rather than heightens the

likelihood of international disputes and retaliation. Al-

though an exemption of foreign commerce from certain

countries would be prohibited, exemption of all foreign

source or foreign destination transshipments is not only

a valid state legislative power but one consonant with

the foreign commerce policies behind the Commerce

=

Clause. Such a statute should be encouraged and not

prohibited. California Revenue and Taxation Code Sec-

tion 225 which lessens burdens on foreign source or

foreign destination transshipments must be upheld as

proper legislative action consonant with the special

place and protection from state taxation given foreign

commerce by the federal government.

C. The Statute Permissibly Discriminates in Favor of

Foreign Transactions and Is Consistent With the

Free Flow of Goods Between Sovereign Nations.

1. Boston Stock Exchange.

The California Court of Appeal held, based on

Boston Stock Exchange v. State Tax Comm'n, supra,

that Revenue and Taxation Code Section 225 unconsti-

tutionally discriminated in favor of foreign commerce

and against domestic commerce. We must recall again

that the result of Japan Line appears to require “the

state in effect . . . to discriminate against domestic

in favor of foreign commerce.” (See page 7 above.)

Although there is no constitutional requirement of dis-

crimination in the case at bar, as set forth above,

the policies of Japan Line make clear that such a

discrimination is not unconstitutional.

The Boston Stock Exchange case is not relevant

to the case at bar because it was in the interstate

context. It prohibited “a direct commercial advantage

to local business” by reason of taxing “laws that favor

local enterprises at the expense of out-of-state business-

es.” (429 U.S. at 329.) The discrimination “between

two types of interstate transactions in order to favor lo-

cal commercial interests over out-of-state businesses”

(Id. at 335( was prohibited because it went against the

fant, | Wome

policy of creating “an area of free trade among the

several States.” (/d. at 328.)

Where foreign transactions are involved, different

considerations are at issue. As the Solicitor General

made clear, there is no constitutional prohibition against

favoring imports and exports over domestic goods. In

fact, the Import-Export Clause makes such a differentia-

tion, and does so as a matter of absolute prohibition

against certain state taxes on imports or exports. The

purpose of the Import-Export Clause—to assure a free

flow of goods between sovereign nations and the inland

states of this country—is precisely furthered by Revenue

and Taxation Code Section 225.

This Court has never held that there could not

be discriminations in favor of foreign commerce, but

rather only prohibited discriminations against foreign

commerce.

“{T|he decisions of this Court involving imports,

exports and foreign commerce uniformly emphasize

that one of the principal purposes of the Constitu-

tion was to assure that the states did not impede

or obstruct importation, exportation or foreign

commerce. . . . |The statute| facilitates importa-

tion and exportation and assures that imports and

exports passing through the state will not be im-

peded even to the extent of the impact of a

generally applicable property tax. While such ac-

tion may not be constitutionally required, it is

not, as the decision below erroneously held, consti-

tutionally prohibited. Nothing in the Commerce

Clause prevents a state from favoring imports

and exports beyond the extent required by the

Import-Export Clause.” (Brief for the United

States as Amicus Curiae, pp. 9-10.)

—,

2. Tariffs.

The Court of Appeal in the case at bar also held

that the federal tariff power was undermined by the

statute. As noted by the Solicitor General, the reasoning

of Michelin Tire Corp. v. Wages, supra, holds this

irrelevant. (423 U.S. at 287.) More importantly, it

should be clear that state and local taxes do not

impact tariff decisions inasmuch as it would be impos-

sible administratively for the federal government to

take into account all state and local taxation or non-

taxation in determining tariff policy. To look at the

thousands of cities, counties, states and _ special

districts and the impact on foreign goods of nondis-

criminatory, apportioned taxes where there was nexus

in relationship to benefit; and then to determine the

impact of nondiscriminatory decisions by other such

entities not to tax; and then to keep track of all

changes in the taxing policies of these thousands of

entities, would be undesirable even if possible. Further,

the statute in question clearly applies to imports and

exports in the transportation stream from all countries

and does not discriminate in favor of or against any

nation.

3. Free Trade.

Of greater importance than the inapplicability of

Boston Stock Exchange or relationship to tariffs is

the effect of the statute in relationship to the key

federal policy as to foreign commerce: free trade among

sovereign nations absent specific Congressional deci-

sions to the contrary.

With the modern interdependence of nations, the

problems of balance of payments and the need of

nations to encourage foreign purchases of their own

goods, there is a strong impetus to make the flow

_

of goods between sovereign nations and the United

States as unencumbered as possible vis-a-vis the states.

The statute clearly supports the flow of foreign trade

with the United States. To prohibit the state legislature

from advancing that trade would hurt the federal

policy rather than help it. To not allow the states

to take a position consonant with that of the federal

government would be detrimental to the federal position.

If Congress wished to encourage state furtherance of

its policies, it would be required to pass statutes in

every conceivable area asking for such aid, and a

decision invalidating Revenue and Taxation Code Sec-

tion 225 would make states wary of whether, notwith-

standing general federal approval, this Court might

change their statutes.

4. Responsibility to Their Electorates.

It must be noted that the major discrimination under

Revenue and Taxation Code Section 225 is that Cali-

fornia based manufacturers who export goods to foreign

countries and import goods to California are not ex-

empt, whereas their counterpart exporters or importers

in Arizona are exempt.

In fact, California could not favor both foreign trans-

shipments and local origination or destination transac-

tions at the expense of interstate transactions, for the

discrimination between the latter two would violate

Boston Stock Exchange.

Thus, a strong, built-in check on the system exists

in that the California legislature is responsible to the

California electorate as to any favoring of foreign trans-

shipments over other commerce. This factor would

probably not be enough by itself to validate an interstate

discrimination. When combined with the special status

entiiies

of foreign commerce, with which the statute is con-

sonant, however, it makes clearer that not only is

free trade between sovereign nations furthered by the

statute; but, there are built-in protections to prevent

serious discrimination against interstate commerce.

5. Free Flow of Commerce to Inland States.

Rather than impede interstate commerce, it must

be emphasized that the purpose of Revenue and Taxa-

tion Code Section 225, in consonance with the Import-

Export Clause and the regulation of foreign commerce,

was precisely to help the free flow of goods from

foreign countries to the other states of the United

States. Thus, not only is there encouragement of a

free flow of goods between nations but between the

states themselves.

III.

CONCLUSION.

For all of the foregoing reasons, Amicus Curiae

urges this Court to reverse the California Court of

Appeal and uphold the constitutionality of Revenue

and Taxation Code Section 225.

Respectfully submitted,

CHARLES R. AJALAT,

AJALAT & POLLEY,

Amicus Curiae.