Petition — M. G. R. S., Inc. v. California State Board of Equalization

FF Supreme Court, U.$.

FILED

JUL 29 1980

MICHAEL Ru ih, oo. «= ER

IN THE

Supreme Court of the United States

October Term, 1980

M.G.R.S., INC.,

Petitioner,

VS.

CALIFORNIA STATE BOARD OF EQUALIZATION,

Respondent.

On Writ of Certiorari to the

Supreme Court of the State of California.

PETITION FOR CERTIORARI.

JAMES H. LYONS,

J. TERENCE LYONS,

523 West Sixth Street, Suite 1216,

Los Angeles, Calif. 90014,

(213) 626-6451,

Attorneys for

Petitioner M.G.R.S., Inc.

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

PACK oes

IN THE

Supreme Court of the United States

October Term, 1980

M.G.R.S., INC.,

' Petitioner,

VS.

CALIFORNIA STATE BOARD OF EQUALIZATION,

Respondent.

On Writ of Certiorari to the

Supreme Court of the State of California.

PETITION FOR CERTIORARI.

Questions Presented for Review.

Petitioner M.G.R.S., Inc. operated a passenger vessel

between the Port of Los Angeles and Santa Catalina Island

over 20 miles of high seas beyond the three-mile limit from

either shore.

Sections 6368 and 6368.1 of the California Revenue and

Taxation Code exempt from the state sales and use tax

‘‘watercraft for use in interstate or foreign commerce,’” and

the state statutes nowhere define that term.

On Petitioner’s civil action for refund of taxes paid under

protest, the trial court found that this vessel was therefore

exempt from tax, but the California appellate courts re-

versed.

li

This petition presents the following questions:

1. Can California deny that this transportation be-

tween two points in California but traversing 20 miles

of high seas outside California is *‘interstate or foreign

commerce,’’ in the face of this Court’s holding to the

contrary in Lord v. Steamship Company' and subse-

quent cases?

2. Can California extend its boundaries beyond both

the federal and state boundaries established by this

Court in United States v. California,’ so as to define

this transportation as not being ‘‘interstate or foreign

commerce?’’

3: Can California deny that this vessel, which carries

pre-paid passengers from other states and foreign coun-

tries, is engaged in ‘‘interstate or foreign commerce”’

as defined by this Court in The Daniel Ball,’ merely

because these passengers constitute a minority of pas-

sengers on a minority of voyages?

Parties to the Proceeding Below.

All parties to the proceeding in the California Supreme

Court are included in the caption of the case in this Court.

'102 U.S. 541 (1880).

*381 U.S. 139 (1965).

‘10 Wall. 557 (1881).

ill

TABLE OF CONTENTS

Page

Questions Presented for Review ...............05:. i

Parties to the Proceeding Below ................4.. ii

See OE I ee ais Si oi eet ere Owetiees iii

Bee FI 6 5 os ae 8 eo we Se Ee ee Vv

SODOEED OE CSINIOR TEBOW -i0 505. seine cree ee Sabo v's l

Grounds on Which Jurisdiction Is Invoked......... |

Constitutional Provisions, Statutes, and Regulations In-

WE PS eee Ch 6 CUR CAVERN Rad OR eae ee 2

ET OF GU ks vnc as ca bviedbudaedee anes 4

OT SIE, 5 64sy a cb Owe ta tate eke ag 4

Proceedings Below ...........--.eue0 Peres 6

Federal Questions Raised .....6 sc decccsccudece 7

Pk. o's AEM ob Cannes Kees cee NOedeNeOk ee 8

I.

The California Courts Have Here Held That Transpor-

tation Between Two Points in the Same State but

Traversing High Seas Outside That State Is Not

‘Interstate or Foreign Commerce,’’ Contrary to

Consistent Decisions of This Court ............ 8

II.

The California Courts Have Here and Elsewhere Ex-

tended the State’s Boundaries Beyond Both the Fed-

eral and State Boundaries Established by This Court

in United States v. California ......:........ 14

Ill.

The California Courts Have Here Held That Transpor-

tation of Interstate Passengers Is Not Itself Interstate

Commerce, Because There Are Not Enough Such

SENG oss kc ap ee A ey 28 o RROS LAE Ceri 17

2” RES Pea ie ne Ripa ae eae TER) Reo enon LL Sto 19

iv

APPENDIX

Page

Order of California Supreme Court Denying

| RN SRN, CEPR SPE > Eran aie fo A-1

BE. cides FaAOMs coh ob) F CRE MRK ADn sds ees pete A-2

Minute Order and Judgment of Trial Court for Petitioner

Rte o Oe SOE eN rr ee Ee Pe EL ee A-14

Stipulation Deeming Parties’ Stipulation of Facts and

Court Minute Order to the Findings of Fact

and Conclusions of Law, and Said Stipulation of

its 6 one o Niarw das ewan k Seda a Cee A-17

Notice of Redetermination of California State Board of

MINED 3 3 i've os bh wr'e's WA eC edna Oho ea enn de A-24

Raising and Preserving the Federal Question ...... A-25

Vv

TABLE OF AUTHORITIES

Cases Page

Central Greyhound Lines v. Mealy, 334 U.S. 653

CO. 6.0 FE un VS 186.59 Lees ches ka eee f,

Civil Aeronautics Board v. Island Air Lines, Inc., 235

Y.ompp. S90 CD. Maw. 1936)... obvi cskee ves

Cornell Steamboat Company v. United States, 321 U.S.

Op REP ee er 1s eRe RUF perioral oe OM: 2,

Garnett, Ex parte, 141 U.S. 1 (1891) ........... 10,

Lehigh Valley Railroad Co. v. Commonwealth of

Pennsylvania, 145 U.S. 192 (1891) .......... 10,

Lord v. Goodall Steamship Company, 102 U.S. 541

{Pores sry wa eye ae ii, 2, 8, 9, 10, 11,

New York, New Haven & Hartford R.R. Co. v.

Nothnagle, 346 U.S. 128 (1953) ................

People v. Weeren, 26 Cal.3d 654 (1980) ... 1, 2, 15,

Skiriotes v. Florida, 313 U.S. 69 (1941) ...........

Southerland v. St. Croix Taxicab Association, 315 F.2d

ee Le Ce HSE. sc onk ben eee es ay oe

The Daniel Ball, 10 Wall. 557 (1881) ..... ie Ey 3

United Air Lines v. Public Utilities Commission of

California, 109 F.Supp. 13 (S.D. Cal. 1952), reversed

on procedural grounds, 346 U.S. 402......... ll,

United States v. California, 332 U.S. 804 (1947) ....

United States v. California, 381 U.S. 139 (1965) ....

(5s sae Ukr v valet caeoneun ae aan ek Gel ee ee.

United States v. Colorado & N.W.R. Co., 157 F. 321

Ce ae SED wc ao.eh oe We Cee eee

Wilmington T. Co. v. Railroad Commission (1913) 166

MA PD chs oid GS. 6 200 kk oes ede ee

Wilmington Transportation Company v. Railroad Com-

mission of California (1915) 236 U.S. 151 ....10,

13

vi

Page

Constitution

United States Constitution, Art. I, Sec. 8........... 8

United States Constitution, Art. I, Sec. 8, cl. 3...... 2

United States Constitution, Art. VI, cl. 2........... 2

| Rules

pues of Court, Fimte 17.108) 2. on ccc cece cccces l

mee OF Comet, Mate 17. Ie)... cc cece caveeetien l

Se Oe CE, ND BE ks eco ecb ckweceres et |

Statutes

California Administrative Code, Title 18, Sec. 1594.. 4

California Revenue and Taxation Code, Sec.

EGR AE ae PO AS ga ak a NR 2.2 ¥

IES a's Wink G's ce aa By dvs 0 EI We AE Se i

United States Code, Title 28, Sec. 1257(3) ......... |

United States Code, Title 28, Sec. 2101(c) ......... ]

United States Code, Title 49, Sec. 1301(24) ........ 3

Reports of Opinions Below.

The opinions of the courts and of the administrative

agency below are not published in any official or unofficial

reports. (The extended opinion of the California court of

appeal was not certified for publication despite requests by

both respondent California State Board of Equalization and

petitioner M.G.R.S., Inc. that it be so published, because

this case will set precedent for a number of pending actions

as well as future cases.)

All opinions below are set forth in the Appendix hereto.

Also relevant to a determination of this Petition is the

officially reported opinion in People v. Weeren, 26 Cal.3d

654 (1980), in which the California Supreme Court officially

published certain of the rulings sought to be reviewed here.

Weeren is the subject of a separate petition for certiorari

now pending before this Court as Docket No. 79-1978.

Grounds on Which Jurisdiction Is Invoked.

The California Supreme Court filed and entered its decree

denying hearing to petitioner M.G.R.S., Inc. on April 30,

1980. Jurisdiction is conferred upon this Court by Title 28,

United States Code, sections 1257(3) and 2101(c), as in-

terpreted and carried forward by this Court in its Rule

17.1(b) and (c) and its Rule 20.2, respectively.

The California Supreme Court decree denies hearing on

petition to review the California court of appeal decision

reversing the trial court, which court of appeal decision

defines the term ‘‘interstate or foreign commerce’’—a term

which is federal by any definition, and a term of federal

Constitutional significance (see, e.g., Frankfurter for the

Court in Central Greyhound Lines v. Mealy, 334 U.S. 653

(1948), quoted infra at 13-14)—in a way in conflict with

the decisions of this Court and the consistent decisions of

federal courts of appeals, including: |

ra Bed

— Lord v. Steamship Company, 102 U.S. 541 (1880):

Transportation between two points in the same state

but traversing any territory outside that state is

‘*interstate or foreign commerce.’’ Accord: Cornell

Steamboat Company v. United States, 321 U.S. 634

(1944).

— United States v. California, 381 U.S. 139 (1965):

The seaward boundary of California for all purposes

is a three-mile belt off the coast and a separate three-

mile belt around each offshore island, and Califor-

nia cannot extend that boundary for any purpose.

But see: People v. Weeren, 26 Cal.3d 654 (1980),

which so extends that boundary.

— The Daniel Ball, 10 Wall. 557 (1871): Where pas-

sengers moving in interstate commerce are trans-

ported as part of that interstate journey by a carrier,

even though wholly within one state, that carrier

engages in interstate commerce. Accord: Souther-

land v. St. Croix Taxicab Association, 315 F.2d

264 (3d Cir. 1953).

Constitutional Provisions, Statutes, and Regulations In-

volved.

The principal constitutional provisions, statutes, and reg-

ulations involved in this case are set forth verbatim at this

point. All other provisions referred to by Petitioner are cited

in the Table of Authorities above.

United States Constitution, Article 1, Section 8, clause

.

‘*The Congress shall have Power . . . To regulate

Commerce with foreign Nations, and among the sev-

eral States, and with the Indian Tribes; .. .”

United States Constitution, Article V1, clause 2:

eae

‘*This Constitution, and the laws of the United States

which shall be made in pursuance thereof; and all Trea-

ties made, or which shall be made, under the Authority

of the United States, shall be the supreme Law of the

Land; and the Judges in every State shall be bound

thereby, any Thing in the Constitution or Laws of any

State to the contrary notwithstanding.’’

Many federal statutes defining ‘‘interstate or foreign com-

merce’’; for example, Title 49, United States Code, section

1301(24):

‘*The carriage by aircraft of persons or property as

a common carrier for compensation or hire . . . be-

tween places in the same State of the United States

through the airspace over any place outside thereof.

’*,

California Revenue and Taxation Code, sections 6368

and 6368.1:

‘*$6368. Watercraft for interstate or foreign com-

merce.

‘*(a) There are exempted from the taxes imposed by

this part the gross receipts from the sale of and the

storage, use, or other consumption in this state of

watercraft for use in interstate or foreign commerce

involving the transportation of property or persons for

hire or for use in commercial deep sea fishing opera-

tions outside the territorial waters of this state by per-

sons who are regularly engaged in commercial deep

sea fishing, and any sales of tangible personal property

becoming a component part of such watercraft in the

course of constructing, repairing, cleaning, altering,

or improving the same, and charges made for labor

and services rendered in respect to such constructing,

repairing, cleaning, altering, or improving. . . .”’

‘*$6368.1 Watercraft used in commercial deep sea

fishing; receipt from sale or lease

‘‘(a) There are exempted from the taxes imposed

by this part, the gross receipts from the sale of and the

ntiillbiaiss

storage, use, or other consumption in this state of

watercraft which are leased, or are sold to persons for

the purpose of leasing, to lessees using such watercraft

in interstate and foreign commerce involving the tran-

sportation of property of persons for hire or for use in

commercial deep sea fishing operations outside the ter-

ritorial water of this state by persons who are regularly

engaged in commercial deep sea fishing, and any sales

of tangible personal property becoming a component

part of such watercraft in the court of constructing,

repairing, cleaning, altering, or improving the same,

and charges made for labor and services rendered in

respect to such constructing, repairing, cleaning. al-

tering, or improving... .”’

California Administrative Code, Title 18 (Board of Equal-

ization regulations), section 1594:

**1594. Watercraft.

‘*(a) General Exemptions. Tax does not apply to the

sale of nor to the storage, use, or other consumption

of watercraft which are used, leased to a lessee for use.

or sold to persons for leasing to lessees for use for any

of the following purposes:

**(1) Use in interstate or foreign commerce involv-

ing the transportation of persons or property for hire,

even though the watercraft operates between termini

within the state, such as ferry boats operating entirely

within the state but transporting interstate passengers

or cargo and barges or tugs that operate entirely within

the state convoying or aiding the departure or arrival

of vessels to or from points outside the state.*’

STATEMENT OF THE CASE.

Factual Background.

Petitioner M.G.R.S., Inc., (“*MGRS"*) leased and op-

erated the S.S. Catalina at all material times exclusively in

we aie

the transportation of passengers and their baggage for hire

between the Port of the City of Los Angeles on the California

mainland and the harbor of the City of Avalon on Santa

Catalina Island, a distance of 26 miles over the ocean.

(Stipulation of Facts, CT 9-15, Pars. 5 and 6.‘

A number of the S.S. Catalina passengers (identified in

the Stipulation only as a minority of total passengers on a

minority of voyages) were part of out-of-state pre-paid group

package tours which originated from locations as diverse

as New York City; Vancouver, British Columbia; Houston,

Texas; and Sonora, Mexico. (Stipulation, Par. 6.) No in-

formation was presented as to the various in-state or out-of-

state points of origin of persons and families travelling in-

dependent of group package tours.

Respondent California State Board of Equalization

(‘‘Board’’) and the California appellate courts placed great

weight upon the additional fact—deemed irrelevant by

MGRS (see pp. infra)—that the operation of the S.S.

Catalina was regulated by the California Public Utilities

Commission. (Stipulation, Par. 5.)

At all material times, California Revenue and Taxation

Code sections 6368 and 6368.1 provided, and do now pro-

vide, an exemption from the state sales and use tax for

‘‘watercraft for use in interstate or foreign commerce in-

volving the the transportation of property or persons for

hire’’ and for “‘watercraft which are leased, or are sold to

persons for the purpose of leasing, to lessees using such

watercraft in interstate and foreign commerce involving the

transportation of property or persons for hire.’’

“This case was presented to the trial court on a written Stipulation

of Facts. References to **CT’’ are to the Clerk’s Transcript in the

California appellate courts.

pa Oe

During the entire audit period (1963 through 1970),

MGRS did not have a permit from nor an account number

with the Board and made no payments under the provisions

of the California Sales and Use Tax Law with respect to

bareboat charter lease payments on the S.S. Catalina, or for

the purchase of parts and materials in the repair and main-

tenance of the vessel, or for charges for labor or services

rendered in respect thereto. MGRS purchased the tangible

property ex-tax by furnishing its vendors with a watercraft

exemption certificate at the time of sale. (Stipulation, Pars.

4, 7, and 8.)

In January 1971—eight years after the audit period be-

gan—the Board first asserted claims against MGRS for sales

and use tax liability for lease payments, purchase of parts

and materials, and charges for labor and services, all in

connection with the operation of the $.S. Catalina between

Los Angeles and Catalina Island from 1963 through 1970.

(Stipulation, Par. 9.)

Proceedings Below.

The Board conducted an audit of MGRS and, after MGRS

timely filed all claims and protests required by law, assessed

tax base upon its conclusion ‘‘that the movement of pas-

sengers and property by vessel from the California mainland

to Santa Catalina Island and vice versa is not interstate or

foreign commerce. . . ."’ MGRS timely paid the tax under

protest; filed claim for refund; and, upon denial of such

claim, filed this suit. (CT 12.)

The case was tried on written Stipulation of Facts (CT

9-15) and on written briefs (CT 16-71) and oral argument.

On November 14, 1978, the trial court entered judgment

in favor of MGRS. (CT 97.) Findings of Fact and Conclu-

sions of Law were duly waived by the parties in writing.

Du Biics

deeming the Stipulation of Facts and the court’s minute

order to be used as findings and conclusions. (CT 92.)

The Board appealed from the judgment, challenging the

trial court’s determination that the operation of the S.S.

Catalina by MGRS ‘“‘is’a use of the vessel in interstate and/

or foreign commerce as used in Revenue and Taxation Code

Sections 6368 and 6368.1.’’ (CT 98.)

The court of Appeal reversed, and the California Supreme

Court denied MGRS’s petition for hearing.

Federal Question Raised.

The federal question here presented for review was first

raised in the trial court in MGRS’s Complaint, in which

MGRS alleged:

‘*At all times mentioned herein, plaintiff was and

presently is engaged in interstate or foreign commerce

in the transportation of passengers and their baggage

for hire by vessel between the Port of Los Angeles and

the City of Avalon on Catalina Island. . . .”’ (Par. 4;

CT 2.)

and:

‘*Defendant’s [Board’s] interpretation [of ‘interstate

or foreign commerce’ is in direct derogation of the

statutes of the United States Government and the State

of California and cases of competent jurisdiction in-

terpreting the same.”’ (Par. 14; CT 4.)

The preservation and articulation of this federal question

throughout the state court proceedings are detailea «n the

Appendix.

pe Meee

ARGUMENT.

Petitioner MGRS seeks hearing before this Court because

the California Supreme Court continues to treat international

waters as its own territory in the face of explicit direction

from this Court to the contrary. (United States v. California,

381 U.S. 139 (1965).)

[t is necessary now for this Court to direct the California

courts to recognize the established seaward boundary of the

State of California (and therefore of the United States) for

all purposes, and to put a stop to the California courts’

practice of redefining terms of federal Constitutional sig-

nificance whenever it suits the state’s peculiar interests.

The California Courts Have Here Held That Transpor-

tation Between Two Points in the Same State but

Traversing High Seas Outside That State Is Not

‘Interstate or Foreign Commerce,’’ Contrary to

Consistent Decisions of This Court.

As early as 1880 the United States Supreme Court de-

termined that transportation between points in California but

over points on the high seas constituted foreign comerce.

In Lord v. Steamship Company (also cited as Lord v. Good-

all, etc.), 102 U.S. 541 (1880), this Court considered the

case of the steamship *‘ Ventura’ which was engaged solely

in the transportation of goods and passengers between San

Francisco and San Diego. She neither took on nor put off

goods outside of the State of California, but in making her

voyages she ran a distance of 480 miles on the Pacific

Ocean.

This Court held that Congress has the power to regulate

commerce with foreign nations and among the several States

(U.S. Const., Art. I, sec. 8), but that it has nothing to do

ae SY:

with the purely internal commerce of the states. In applying

that principle, this Court concluded that contracts to carry

goods from San Francisco to San Diego by sea could not

be performed except by going not only out of California,

but out of the United States as well. The Court recognized

that the Pacific Ocean belonged to no one nation, and that

when the ‘‘Ventura’’ went out from San Francisco to San

Diego on her voyages she entered on a navigation which

was necessarily connected with other nations. Although the

‘*Ventura’’ was not trading with those nations, she was

navigating with them.

‘*In every just sense, therefore, she was, while on

the ocean, engaged in commerce with foreign nations,

and as such she and the business in which she was

engaged were subject to the regulating power of Con-

gress.’’ 102 U.S. at 544.

The holding of the United States Supreme Court in the

Lord case—that a voyage between San Francisco and San

Diego is interstate or foreign commerce so as to subject the

vessel to federal regulation—is alone sufficient to control

the issue presented in this case. If that coastal voyage is

interstate or foreign commerce, then the voyage of the S.S.

Catalina between the mainland and Santa Catalina Island

which necessitates travel beyond California waters is a for-

tiori interstate or foreign commerce.

But the California appellate courts held just the opposite.

The state courts here committed dangerous error in find-

ing that the Lord case *‘was expressly rejected and repu-

diated and the case expressly disapproved . . . in both the

state Supreme Court and the United States Supreme Court

opinions in the later case of Wilmington T. Co. v. Railroad

Commission (1913) 166 Cal. 741, and in Wilmington Trans-

portation Company v. Railroad Commission of California

(1915) 236 U.S. 151 ...’’ (Court of appeal opinion

sialic

(‘‘Opinion’’) at page 6; Appendix page 7.) MGRS submits

that the supreme court of the State of California could not

expressly (or otherwise) reject, repudiate, or disapprove a

decision of the United States Supreme Court.*

Moreover, contrary to the appellate court's statement, the

Supreme Court of the United States did not in fact reject,

repudiate, or disapprove the Lord case. The only reference

to the Lord case in Wilmington Transportation Company

v. Railroad Commission of California, supra, 236 U.S.

151, appears at page 153, where this Court said:

‘Relying upon Lord v. Goodall, N.&P.S.S. Co.,

102 U.S. 541, 26 L.Ed. 224, the plaintiff in error

contends that transportation over the high seas is ‘com-

merce with foreign nations’ in the constitutional sense.

(Citing cases.) But if it be assumed for the present

purpose that the power of Congress extends to the

subject of this controversy |that is, the subject is in-

terstate or foreign commerce], the fact remains that the

power has not been exeicised.”’

This is the only reference by the United States Supreme

Court to the Lord case in Wilmington. The United States

Supreme Court did not reject or repudiate or disapprove the

Lord case, ‘‘expressly’’ or otherwise.

Nor was Lord *‘renounced”’ by the United States Supreme

Court in Lehigh Valley Railroad Co. v. Commonwealth of

Pennsylvania, 145 U.S. 192 (1891), or in Ex parte Garnett,

141 U.S. 1 (1891), as stated in the Opinion at page 6.

In fact, the Supreme Court in the Lehigh Valley case

again stated of the vessel involved in Lord, *‘In every just

sense, therefore, she was, while on the ocean, engaged in

commerce with foreign nations, and, as such, she and the

“But it is precisely that attitude that causes MGRS to now present

this petition.

oDh ton.

business in which she was engaged were subject to the

regulating power of Congress.’’ The Lehigh Valley Court

did not criticize, reject, or denounce the findings in the Lord

case. Lehigh Valley simply said that it was unnecessary to

invoke the power to regulate commerce in order to find that

the maritime law would apply to this particular operation.

(145 U.S. at 203.) Ex parte Garnett, supra, 141 U.S. 1,

is to the same effect.

Indeed, the principle of the Lord case is corroborated by

consistent federal authority.

In Cornell Steamboat Company v. United States, 321

U.S. 634 (1944), the United States Supreme Court applied

the principle of the Lord case, involving foreign commerce,

to circumstances involving interstate commerce. This Court

there held that where a carrier by water hauls from one point

in New York to another point in New York through New

Jersey waters, the carrier was engaged in transportation by

water from a place in a state to a place in another state

within the meaning and coverage of the Interstate Commerce

Act. This, notwithstanding the fact that the vessels never

touched the New Jersey shore.

In flights by air, where the origin and destination are in

the same state, federal trial courts have consistently held

the flights to be interstate or foreign commerce. In Civil

Aeronautics Board v. Island Air Lines, Inc., 235 F.Supp.

990 (D. Haw. 1954), it was held that flights between the

islands of the state of Hawaii were over points on the high

seas and therefore constituted interstate or foreign com-

merce. Finally. and closest to home is the case of United

Air Lines, Inc. v. Public Utilities Commission of California,

109 F.Supp. 13 (S.D. Cal. 1952), reversed on procedural

grounds, 346 U.S. 402. There, the federal court held that

since flights between Los Angeles International Airport and

Santa Catalina Island were over waters (high seas) outside

es | ae

the State of California, the flights were under the jurisdiction

of the federal Civil Aeronautics Board. Although the case

was reversed in the United States Supreme Court on pro-

cedural grounds, the finding that the flights were properly

regulated by the federal government as interstate or foreign

commerce was not overruled.

In each of these cases, the fact that the vessels or airplanes

in transportation made no stops while outside the state was

irrelevant in the determination of interstate or foreign com-

merce. Equally irrelevant was the fact (argued by the court

of appeal without authority, Opinion at 6, 7, 12) that the

vessels or airplanes did not enter the waters or air space of

any other state or nation.

It is this long-standing and consistent body of federal law

that California now challenges in the bald statement (Opin-

ion at page 9) that ‘‘The cases do not hold that all else

beyond the territorial waters of California is necessarily

interstate or foreign commerce. . . .”’

This is plain, dangerous, and defiant error. Nor does the

California court’s rationale in any way explain or excuse

its challenges to the federal rule of law in this regard. The

State courts “‘explain’’:

‘*The state here has simply legitimately imposed a use

tax not upon an interstate commercial activity but on

the property or use thereof by a local corporation doing

an entirely local business out of one local point in

California where it has its principal place of business,

San Pedro, and where that business involves no more

than going to another point within the same county and

state.’’ (Opinion at 10.)

This proffered rationale seems to be based upon two

equally unsound theories: That the tax is “‘legitimate,’* in

the sense of constitutionally permissible; and, That the

a ae

transportation is ‘‘local,’’ as though that meant it could not

be *‘interstate or foreign.’’

MGRS has never challenged the ability of California to

enact a hypothetical statute taxing its operations. But the

fact is that the California legislature has chosen to exempt

vessels in g interstate or foreign commerce,’’ and having

made that choice it must abide by the meaning of that federal

phrase.

On page 4 of the Opinion, the court of appeal erroneously

states: *“The issue before us does not involve any question

of the authority of the state or of Congress to regulate or

otherwise legislate concerning respondent’s activity.’’ The

authority of Congress to regulate the Catalina voyage is

precisely the issue, because Congressional authority to reg-

ulate is the meaning of ‘‘interstate or foreign commerce.”’

Whether Congress has chosen to exercise that power is not

relevant, because the fact of regulation does not make com-

merce interstate but rather the interstate character permits

such regulation. See Wilmington Transportation Co. v.

California Railroad Commission, supra, 236 U.S. 151,

seriously misinterpreted by the state court (Opinion at 7-9),

holding transportation from Los Angeles to Catalina is in-

terstate or foreign but could be regulated by the state if

Congress and the Interstate Commerce Commission chose

not to regulate it.

Equally .in conflict with this Court’s ruling, but perhaps

even more dangerous, is the state courts’ confusion of local

vs. national commerce with intrastate vs. interstate com-

merce.

The fact that this transportation may be local rather than

national in scope does not affect its ‘‘interstate or foreign’’

character. To attempt to call transportation that is clearly

interstate or foreign commerce by some other name is to

ais bis

commit the same error that was so severely criticized by

Justice Frankfurter, speaking for the Court, in Central Grev-

hound Lines v. Mealey, 334 U.S. 653 (1948):

‘*But to label transportation across an interstate stream

‘local commerce’ for some purposes when it is ‘inter-

state commerce’ in other relations, see, e.g., Covington

& Cincinnati Bridge Co. v. Kentucky, 154 U.S. 204,

is to use loosely terms having conotations of consti-

tutional significance. To cal! commerce in fact inter-

State ‘local commerce’ because under a given set of

circumstances, as in the Lehigh Valley case, a partic-

ular exertion of State power is not rendered invalid by

the Commerce Clause is to indulge in a fiction, Es-

pecially in the disposition of constitutional issues are

legal fictions hazardous, because of the risk of con-

founding users and not merely readers. The kind of

confusion to which the Lehigh Valley opinion has given

rise results from employing a needless fiction—calling

commerce local which in fact is interstate—as a manner

of stating that a particular exercise of State power is

not invalid even though it affects interstate commerce.

The difficult task of determining whether a phase of

commerce, concededly interstate, is subject to a par-

ticular incidence of State regulation, through taxation

or otherwise, is not lessened by calling interstate com-

merce local commerce in order to sustain its local con-

trol. To state this persistent and protean problem of our

federalism in the form of a question-begging fiction,

is not to answer it.”’ (334 U.S. at 659-660.)

Transportation between the mainland and Santa Catalina

Island is in interstate or foreign commerce—for all purposes,

The California Courts Have Here and Elsewhere Ex-

tended the State’s Boundaries Beyond Both the Fed-

eral and State Boundaries Established by This

Court in United States v. California.

The transportation in this case traverses 20 miles of in-

ternational high seas beyond the three-mile limit from either

shore. This conclusion should be clear from the holding in

Lord v. Steamship Company, supra, 102 U.S. 541, and

United Air Lines, Inc. v. Public Utilities Commission, su-

pra, 109 F.Supp. 13.

Any possible doubt was finally resolved by the United

States Supreme Court in United States v. California, 381

U.S. 139 (1965). The California boundaries defined in that

case are boundaries that control the state legislature as well

as the federal government. This Court made its meaning

abundantly clear in its rejection of California’s position in

that case:

‘*.. , California may not use such base lines to

extend our international boundaries beyond their tra-

ditional international limits against the expressed op-

position of the United States. . . . But an extension of

state sovereignty to an international area by claiming

it as inland water would necessarily also extend na-

tional sovereignty, and unless the Federal Govern-

ment’s responsibility for questions of external sover-

eignty is hollow it must have the power to prevent

states from so enlarging themselves.’’ (381 U.S. at

168; emphasis supplied. )

But California purports now to so enlarge itself by its

decisions in this case and in People v. Weeren, 26 Cal.3d

654 (1980), also now before this Court on petition for cer-

tiorari.”

In both cases, the California courts pay mere lip service

to this Court’s clear rule in U.S. v. California and proceed

to decisions in direct conflict with that rule.

Here, the court of appeal Opinion states that *‘we do not

dispute that in its travel the §.S. Catalina travelled upon the

“Docket No, 79-1978,

hes YY ae

high seas’’ (at page 9), but then goes on to ‘‘distinguish’’:

‘In both of the United States v. California cases. there

existed the conflict in the operation or claims uder the

interpretation of what Congress intended to grant to

the states by the Submerged Tidelands Act and the

interpretation of the state's statutes defining the bound-

aries of the State of California. Additionally, the state

in those cases was a party claiming broader statutory

territory than the existing statutes clearly described.

No such conflict is present here.’’ (Opinion at 9-10.)

The California courts thus hold that they may extend the

California boundary described in U.S. v. California under

any circumstances where the effect does not produce a spe-

cific ‘‘conflict’’ with an ‘‘existing statute.”

This is arrogance!

The California Supreme Court reached the same defiant

result in People v. Weeren, supra, 26 Cal.3d 654, decided

at a time between the state court of appeal Opinion and the

supreme court denial of hearing in this case. There, the

court affirmed the conviction (which had been reversed by

the court of appeal) of fishermen for violations of the state

Fish and Game Code occurring on the high seas between

the mainland and offshore islands. The court concluded that

the state constitution and statutes defining the, seaward

boundaries of California were void under U.S. v. California

and that U.S. v. California ‘‘necessarily defined the state's

inland waters for all national purposes’’ (emphasis sup-

plied), but held that the state could constitutionally regulate

the extraterritorial conduct of its citizens under the circum-

stances presented under the rule of Skiriotes v. Florida, 313

U.S. 69 (1941). In reply to the fisherman's argument that

"381 U.S. 139 (1965), and 332 U.S. 804 (1947),

a

California law itself limited the application of such penal

statutes to acts within California territory, the court ‘‘rea-

soned”’;

‘*The completed violations in the case before us oc-

curred well within the state boundaries as defined by

our state Constitution and statutes. |Citations to sec-

tions admitted void under U.S. v. California.| These

are the limits to which the Legislature implicitly in-

tended to extend California’s criminal laws. . . . As

we have observed, California’s territorial boundaries

and, therefore, the extent of its criminal jurisdiction

are restricted when they conflict with federal and in-

ternational law. The factual record before us presents

no such conflict.’’

Apparently, the California Supreme Court does not be-

lieve this Court’s decisions to have the force of federal law.

It is time to set things straight.

III.

The California Courts Have Here Held That Transpor-

tation of Interstate Passengers Is Not Itself Inter-

state Commerce Because There Are Not Enough

Such Passengers.

Even if the transportation in this case were wholly within

the state of California (which it is not), it would nevertheless

be ‘‘interstate or foreign commerce’’ here because of the

character of the passengers carried.

The rule first stated in The Daniel Ball, 10 Wall. 557

(1871), remains law:

‘*.. , where passengers or goods travelling from

one state to another are transported as part of that

interstate journey by an agency which carries them

solely within one state, the intrastate portion of the

journey becomes interstate.’’

ai} §-—

This principle was stated in terms of the shipment of

goods in United States v. Colorado & N.W.R. Co., 157 F.

321 (8th Cir. 1907):

‘*Every part of every transportation of articles of

commerce in a continuous passage from an inception

in one state to a prescribed destination in another is a

transaction of interstate commerce . . . and every one

who participates in it, who carries the goods through

any part of their continuous passage, unavoidably en-

gages in interstate commerce.”’ (157 F. at 323; em-

phasis supplied. )

The same principle applies to the movement of passengers.

New York, New Haven & Hartford R.R. Co. v. Nothnagle,

346 U.S. 128 (1953).

At all times in issue in this action, MGRS was engaged

in rendering service to Santa Catalina Island for groups

originating outside the State of California. These included

pre-paid tours originating in Vancouver, British Columbia;

New York City; Flagstaff, Arizona; Sonora, Mexico; Provo,

Utah; Boston, Massachusetts; Las Vegas, Nevada; Albu-

querque, New Mexico; Salt Lake City, Utah; Little Rock,

Arkansas; Oceanside, New York; Houston, Texas, and so

forth. (Stipulation, Par. 6; CT 10.)

In a case where the complete tour is prepaid and the tour

originates out-of-state, the entire tour, including the local

portion thereof, is included in interstate commerce. In

Southerland v. St. Croix Taxicab Association, 315 F.2d 264

(3d Cir. 1963), the court held that ‘‘taxis’’ which transported

passengers from the airport to their hotels, were engaged

in interstate commerce where the taxi fare was pre-paid

from out-of-state:

‘*(T]he transportation of these individuals had been

arranged for them and paid for in advance as an integral

part of their all-expense interstate journey. Hence, it

=e |: oe

cannot, under these facts, be said that the service ren-

dered by the plaintiff under his contract was distinct

and separate from the interstate journey or that it was

just another local fare.’’ 315 F.2d at 269.

The present case comes within the rule of Southerland

in that interstate passengers have planned their transporta-

tion to Catalina and have pre-paid for it as part of a con-

tinuous interstate journey, arranged in advance from their

home states or countries. Even though these interstate pas-

sengers make up a small proportion of the company’s busi-

ness, under the rule of The Daniel Ball, their presence is

sufficient to make the vessel one engaging in interstate com-

merce.

The court of appeal did not even mention, much less

discuss, any of these authorities. Instead, the Opinion (at

page 11) merely ‘‘dismissed as de minimis’’ these clear

federal standards of interstate commerce.

Conclusion.

For each of the separate reasons set forth above, petitioner

M.G.R.S. prays this Honorable Court issue its Writ of Cer-

tiorari herein.

Respectfully submitted,

JAMES H. LYONS,

J. TERENCE LYONS,

Attorneys for Petitioner

M.G.R.S., Inc.

APPENDIX.

Clerk’s Office, Supreme Court

4250 State Building

San Francisco, California 94102

I have this day filed Order Apr. 30, 1980. HEARING

DENIED.

In re: 2 Civ. No. 56238. M.G.R.S., Inc. vs. State Board

of Equalization.

Respectfully,

Clerk

nei, om

Decision of California Court of

Appeal Reversing Trial Court.

In the Court of Appeal of the State of California, Second

Appellate District, Division Two.

M.G.R.S., Inc., a California corporation, Plaintiff and

Respondent, vs. California State Board of Equalization.

Defendant and Appellant. 2 Civ. No. 56238. (Super.Ct No.

C96419).

Filed: March 12, 1980.

APPEAL from a judgment of the Superior Court of Los

Angeles County. William P. Hogoboom, Judge. Reversed

with directions.

George Deukemejian, Attorney General, and Arthur C.

DeGoede, Edmond B. Mamer, Philip C. Griffin, Lawrence

K. Keethe, and Jeffrey M. Vesely, Deputy Attorneys Gen-

eral, for Defendant and Appellant.

James H. Lyons and J. Terence Lyons, for Plaintiff and

Respondent.

NATURE OF APPEAL:

Appellant, State of California, through its State Board

of Equalization (Board) appeals from the judgment of the

Superior Court exempting respondent M.G.R.S.. Inc.

(MGRS) from payment of sales or use tax.

ISSUE:

The appeal presents the simple question: ‘‘Is the trans-

portation of passengers upon the vessel ‘S. S. Catalina’

between the port of Los Angeles and the harbor of the City

of Avalon on Catalina Island, both being points within the

County of Los Angeles, interstate commerce within the

meaning of Revenue and Taxation Code sections 6368 and

6368.1?""

OUR DECISION:

ett Biinse

We hold that it is not and we reverse.

FACTS:

The parties submitted the case to the trial court upon a

written stipulation of facts. MGRS is a California corpo-

ration whose business was limited to transportation of pas-

sengers between the Port of Los Angeles and Avalon on

Catalina Island. The distance between the two points is

approximately 26 miles. Both points are located within the

County of Los Angeles and the State of California. The trip

takes approximately two hours one way. MGRS was reg-

ulated solely by the California State Public Utilities Com-

mission. No United States mail, interstate freight nor in-

terline passengers were carried on the trip between the two

points. On a few occasions, a minority of the passengers

transported were part of group package tours paid for and

operated by out-of-state travel agents. The Board imposed

certain taxes under the Use and Sales Tax Law. MGRS paid

under protest and thereafter sought recovery on the basis

that its activity was excluded because it was engaged in

interstate commerce and the law which otherwise imposed

the tax on such business excluded those which were in

interstate commerce.

THE STATUTORY PROVISIONS:

California imposes a Sales and Use Tax on the type of

activity in which MGRS is engaged. (*‘California Use Tax

Law’’, Rev. & Tax. Code, div. 2, part 1, §§6001, et seq.)

Revenue and Taxation Code sections 6368 and 6368.1.,'

'References hereafter to sections 6368 and 6368.1 are to the Revenue

and Taxation Code.

oS See

specifically exempt receipts from the use or sales and lease

for such use of water craft for use in Interstate or foreign

commerce.

DISCUSSION: ©

The issue before us does not involve any question of the

authority of the state or of Congress to regulate or otherwise

legislate concerning respondent’s activity. No federal law

is being disputed. The California statute impinges on no

federal legislation or regulation. The respondent does not

dispute the power or authority of California to legislate in

this field. Respondent instead asserts that it seeks to have

enforced the law as written and to be excluded from the tax

by reason of its claim that it, respondent, is engaged in

interstate commerce. However, we conclude that under the

facts at bench, respondent’s contentions are reduced to the

argument that respondent’s activity could possibly be de-

fined as being interstate commerce and therefore exempting

respondent from the tax. The exemption, however, applies

only to vessels which actually are engaged in or used in

interstate commerce, not upon activity which could be so

defined. The specific activity of respondent at the place

where it occurred has not been declared interstate commerce

by any s.ate or federal statute. Nor has it been so defined

by any California Supreme Court or appellate case or any

United States Supreme Court decision.

Some cases relied upon by respondent at first blush seem

to hold that similar conduct has been described as interstate

commerce. Examination of such cases discloses totally dis-

similar facts upon which they can be distinguished. More

importantly, other California and United States Supreme

Ac Bose

Court cases have demonstrated that this type of activity

present at bench is not interstate commerce.

Relying upon language used in Lord v. Goodall etc. S.Co.

(1880) 102 U.S. 541, respondent asserts that it is engaged

in interstate or foreign commerce because its vessel the S.S.

Catalina, like the vessel Ventura in Lord, traveled upon the

‘high seas’’, i.e. beyond the territorial or three-mile sea-

ward limit of the State of California’s shoreline. But Lord

is of littke comfort to respondent. In Lord the steamship

Ventura transported passengers and cargo between San

Francisco and San Diego. On one such voyage the vessel

was lost. In affirming the applicability of the federal statute

which limited liability, the United States Supreme Court

stated that in its voyage the vessel traveled 480 miles and

that the vessel went out of California and out of the United

States as well, far out onto the Pacific Ocean. The court

declared that the vessel entered on navigation which was

‘connected with other nations.’ It said, ‘‘In every just

sense, therefore, she was, while on the ocean, engaged in

commerce with foreign nations, and as such she and the

business in which she was engaged were subject to the

regulating power of Congress.”’ (/d. at p. 544.)

However, the statement in Lord that the federal statute

was applicable because the ship was engaged in interstate

commerce and that this was because of its travel on the

Pacific Ocean, was expressly rejected and repudiated and

the case expressly disapproved on this ground in both the

state Supreme Court and the United States Supreme Court

opinions in the later case of Wilmington T. Co. v. Railroad

Commission (1913) 166 Cal. 741, and in Wilmington Trans-

portation Company v. Railroad Commission of California

(1915) 236 U.S. 151, affirming the Supreme Court of Cal-

ifornia’s decision in 166 Cal. 741. As explained in both

decisions, Lord was not a case of determining the existence

stelle

of interstate commerce but instead involved the initial au-

thority of Congress to enact legislation relative to and ap-

plicable to all ships in navigation, i.e. the right to limit

liability under the maritime jurisdiction. There was present

in Lord an act of Congress which applied to the activity

involved. That activity was the loss at sea which caused the

operation of the statute. Both the state and the United States

Supreme Court decisions in Wilmington recognize that that

part of the discussion in Lord concerning the existence of

interstate commerce had earlier been renounced by the

United States Supreme Court in Lehigh Valley R. Co. v.

Commonwealth of Pennsylvania (1891) 145 U.S. 192, and

in Ex Parte Garnett (1891) 141 U.S. 1, 12. As explained

in Garnett, the maritime limited liability statute was appli-

cable to vessels and ships in navigation whether engaged

in interstate commerce or not. Such maritime laws apply

to all vessels on all navigable waters whether the vessel is

operating within or beyond the territorial waters of the state

(Butler v. Boston & Savannah Steamship Co. (1888) 130

U.S. 527) and may be applicable or operate irrespective of

the commerce clause or of the presence or absence of in-

terstate commierce in the particular case. (Moragne v. State

Marine Lines (1970) 398 U.S. 175.)

Respondent also relies on Cornell Steamboat Co. v.

United States (1943) 321 U.S. 634. In defining interstate

commerce for the purpose of commerce by water and the

regulation thereof, the court in Cornell held that part of the

Interstate Commerce Act regulating certain common carriers

by water apply to vessels traveling between two points in

the same state but which pass through the waters of another

state. But present in Cornell were two features absent at

bench. They are: (1) while en route between two points in

New York, the voyage of the ship passed through the waters

within the boundary of New Jersey, another state, and (2)

Pini

Congress had enacted legislation covering that very type of

activity which the federal government sought ‘to regulate.

Moreover, the court expressly noted that such definition did

not include certain types of cases involving transportation

where the terminal points are located within the same state

for the purpose of removing the activity from state taxation

expressly citing Wilmington Transportation Company v.

Railroad Commission of California, supra, 236 U.S. 151.

The facts at bench are different than in Cornell. As stip-

ulated, in ferrying its passengers back and forth in this

narrow channel, MGRS in no way contacted any activity

of any other state or foreign country. By crossing the chan-

nel, respondent MGRS entered the territory of no other

state, passed no other state or foreign country, nor entered

the waters thereof. It carried no United States mail, interstate

freight or interline passengers. It did nothing that required

regulation by the federal government. It was not regulated

by any federal, foreign or non-California governmental

body. Comparing these facts to the facts in Wilmington is

instructive. In Wilmington the state sought to control the

rates charged for carrying passengers and cargo from San

Pedro to Avalon, the same route and activity as present at

bench. Holding that the activity was not exempt from state

control on the claimed basis that it was interstate commerce

and subject only to congressional control, the California

Supreme Court said: ‘*Vessels plying between San Pedro

and Avalon cross the high seas for the sole purpose of

getting from one point in Los Angeles County to another

point in the same county. They do not touch at any other

port, either of the United States or of any foreign country.

They do not transfer their passengers or freight to any other

vessel or receive the same from any other vessel in their

course. They do not on the voyage take on or put off any

article of commerce. While a portion of the voyage is on

ee oe

the high seas, the navigation thereof is merely incidental

to the real purpose of the voyage, which is to ply between

two ports, both of which are located in the same county in

this state.’’ (Wilmington T. Co. v. Railroad Commission,

supra, 166 Cal. 741, 743.)

In affirming and approving this decision, the Supreme

Court of the United States agreed adding its language as

follows:

‘*We are not here dealing with the case of property

which is in course of continuous transportation to an-

other State or to a foreign country. [Citations.] It must

be assumed upon this record that the State claims the

right to exercise its authority only as to transportation

between the mainland and the island and solely with

respect to such shipments over this route as are local

to the State, both as to the beginning and the end of

the transportation. There is no passage through the

territory of another State; the transportation, in its entire

course, is subject to a single authority—either that of

Congress or that of the State—and the latter would

yield to the exercise of the former. The sovereignty of

no other jurisdiction is encountered. It is plainly of

importance to the people of the State that this local

traffic should be carried upon reasonable terms; and

if, in the case of a ferry, a State may protect its people

from extortion although the ferriage is to the shore of

another State, there is in our judgment no ground for

saying that where the transportation is between two

places in the same State it is less a subject for local

action, in the absence of Federal interposition, because

the voyage is over a stretch of open sea. Congress has

not attempted to intervene, and we find no basis for

the conclusion that the subject is one which must be

deemed to be wholly free from regulation unless Con-

gress deals with it. On the contrary, it is precisely of

that local character which permits it to be left appro-

sO

priately to the care of the State.’’ (Emphasis added.)

(Id. at p. 156.)

Both appellant and respondent devote much discussion

to the issue of the territorial boundaries of California and

whether or not the state has the power or authority to ‘‘reg-

ulate beyond its territorial jurisdiction.’’ Respondent claims

that the two related cases of United States v. California in

(1947) U332 U.S. 19 and the subsequent decision in United

States v. California (1965) 381 U.S. 139, are authority for

the proposition that California cannot claim no exercise

authority beyond the historic three-mile limit, parallel and

seaward of its coastline because such area constitutes the

high seas rather than the inland waters of the state. The

holdings of these cases are irrelevant for our purposes here.

The existence of the official territorial limits of California

is relevant only to determine the fact that the vessel here

does in fact travel upon high seas and beyond the inland

waters of the state.

But as indicated before, there is no dispute and we do

not dispute that in its travel the S.S. Catalina traveled upon

the high seas. However, the activity in issue here was not

subject to congressional regulation. The result is that respon-

dent would claim that it is by definition presently under no

authority or regulation by any jurisdiction. But nothing in

the companion cases of United States v. California, supra,

holds that the State of California may not impose a use tax

on the activity simply because of the definition and deter-

mination of the territorial limits in those cases, which con-

cerned the application of the Submerged Tidelands Act. The

cases do not hold that all else beyond the territorial waters

of California is necessarily interstate or foreign commerce.

In both of the United States v. California cases, there existed

the conflict in the operation or claims under the interpre-

tation of what Congress intended to grant to the states by

‘he Submerged Tidelands Act and the interpretation of the

State’s statutes defining the boundaries of the State of Cal-

ifornia. Additionally, the state in those cases was a party

claiming broader statutory territory than the existing statutes

clearly described. No such conflict is present here. The state

claims no territory or jurisdiction to control what occurs in

or over the high seas per se. The state here has simply

legitimately imposed a use tax not upon an interstate com-

mercial activity but on the property or use thereof by a local

corporation doing an entirely local business out of one local

point in California where it has its principal place of busi-

ness, San Pedro, and where that business involves no more

than going to another point within the same county and

State.

The authority and right to impose a tax free from the

claim that by definition the activity is interstate commerce,

is amply supported by Wi/mington Transportation Company

v. Railroad Commission of California, supra, 236 U.S.

151, and other Cases rejecting the defense of interstate com-

merce. (Alaska v. Arctic Maid (1961) 366 U.S. 199)

Respondent also relies upon United Air Lines v. Public

Utilities Commission of Cal, (1952) 109 F. Supp. 13 (S.D.

Cal.). The federal trial court held that flights between Los

Angeles International Airport and Santa Catalina Island

were within the jurisdiction of the Federal Civil Aeronautics

Board because the flights were over the high seas. The state

claimed the right to regulate flights by requiring compliance

with its local regulations. Respondent asserts that the case

was reversed by the Supreme Court on ‘‘procedural grounds.’

Irrespective of respondent's characterization, the entire case

was reversed in 346 U.S. 402, in its entirety. Thus there

is no authority that transporting passengers by air from San

Pedro to Catalina Island is interstate commerce which

thereby insulates that activity from control by the State of

California.

In addition to the ‘‘high seas’’ argument, respondent

claims that some of its passengers are passengers in interstate

or foreign commerce. This is based on the stipulation that

a minority of the total passengers on a minority of voyages

were parts of group package tours paid for and operated by

out-of-state travel agents. This argument may be dismissed

as de minimis. In a suit for tax refund, the burden of proof

rests upon the party seeking the refund. He must show not

only that the tax assessment was in error but also prove

sufficient facts upon which a correct assessment can be

made. (People v. Schwartz (1947) 31 Cal.2d 59, 64-66;

Sunshine Art Studios of California, Inc. v. State Bd. of

Equalization (1974) 39 Cal. App.3d 223, 230-231.) In order

to qualify for the claimed exemption of section 3638, it was

respondent’s burden to prove that the principal use of the

watercraft was transportation for hire in interstate or foreign

commerce. A minority of the passengers on the minority

of the trips (whatever that may mean), does not prove that

the principal use of the vessel was in interstate commerce

or that a principal use was in transporting such types of

passengers. (Union Oil Co. v. State Bd. of Equal. (1963)

60 Cal.2d 441, 456-457.) To the contrary, it infers that on

infrequent occasions some few passengers were sightseers

or tourists from out of state. There is no proof of any in-

terstate tourist business or negotiations therefor conducted

by respondent. Neither is there any proof that respondent

served as some sort of connecting passenger carrier between

two interstate carriers. Admittedly, ‘‘there is no single con-

cept of interstate commerce. . . ."’ (McLeod v. Threlkeld,

supra, 319 U.S. 491, 495.) Also, we recognize that almost

any local activity which may have only a remote and tenuous

relationship with travel or other interstate commerce can be

ro.

said to affect interstate commerce, thus enabling Congress

to regulate it in order to promote some publicly accepted

and judicially recognized interest (e.g. see Wickard v. Fil-

burn (1942) 317 U.S. 111.) But neither Congress nor the

state have so classified respondent’s activity. Until and un-

less Congress or the state so declare, the out-of-state tourist

status of some few of its passengers does not truly change

the local intrastate character of respondent’s activity.

In summary, ‘«e respondent was not doing a business in

interstate commerce among the several states or between

one state and another or passing through waters of another

state or foreign nation. It was not carrying on any substantial

part of any interstate travel. Apart from making a claim that

it was plying its trade upon the high seas, respondent cannot

demonstrate that its activity was genuinely and substantially

engaged in interstate or foreign commerce. Admittedly, the

absence of congressional control does not necessarily prove

the activity is not interstate commerce. On the other hand,

as in the case at bench, the lack of any evidence of any

federal regulation or control, and the lack of any evidence

that the imposition of the sales and use tax in any way

conflicts with any federal rule or regulation governing the

activity of respondent, and the lack of any evidence that the

activity in fact interferes with or substantially affects directly

or indirectly the commerce of some sister state or foreign

state or foreign nation, all strengthen the conclusion that

respondent is not engaged in interstate or foreign commerce.

The judgment is reversed and the cause remanded to the

superior court with instructions to enter judgment for

appellant.

NOT FOR PUBLICATION.

/s/ Beach, J.

BEACH

nei ie

We concur:

/s/ Fleming, Acting P. J.

FLEMING

/s/ Compton, J.

COMPTON

aie...

Minute Order.

Superior Court of California. County of Los Angeles.

Dept. |.

Date: Sept. 28, 1978.

Honorable: Wm. P. Hogoboom, Judge.

G. Hicks Deputy Sheriff.

B. Buckle, Deputy Clerk.

M.G.R.S., Inc., etc. vs. California State Board of Equal-

ization. C 96 419.

Counsel for Plaintiff: Jarnes H. Lyons.

Counsel for Defendant: Evelle J. Younger, By: Lawrence

K. Keethe.

NATURE OF PROCEEDINGS:

RULING ON SUBMITTED MATTER

In the above-entitled matter, heretofore submitted by this

Court on June 28, 1978, the Court now rules as follows:

The Court finds that during the audit period, the operations

of the S.S. Catalina by the plaintiff, M.G.R.S., Inc., a

California Corporation, as described and set forth in the

stipulation of facts, is a use of the vessel in interstate com-

merce as used in the Revenue and Taxation Code of the

State of California, Sections 6368 and 6368.1 and that plain-

tiff, M.G.R.S., INC., ACALIFORNIA CORPORATION.

is entitled to a refund of taxes as prayed against defendant,

CALIFORNIA STATE BOARD OF EQUALIZATION.

Counsel for plaintiff to prepare findings of fact, conclusions

of law and judgment.

Counsel of record mailed a copy of this minute order sent

U.S. Mail this date.

oa)

Judgment.

Superior Court of the State of California, for the County

of Los Angeles.

M.G.R.S., Inc., a California corporation, Plaintiff. v.

California State Board of Equalization, Defendant. No. C

96419.

Filed: Nov. 14, 1978.

This case was submitted for decision on a Stipulation of

Facts and written briefs on June 28, 1978 in Department

1 of the above-entitled Court, the Honorable William P.

Hogoboom, Judge presiding, sitting without a jury, a jury

having been duly waived. Plaintiff appeared by its attorney,

James H. Lyons; defendant appeared by its attorney Evelle

J. Younger, Attorney General, by Lawrence K. Keethe,

Deputy Attorney General. Evidence, in the form of a Stip-

ulation of Facts, having been presented by the parties, the

cause having been argued in written briefs, oral argument,

and subsequent letters directed to the Court by both plaintiff

and defendant, and the case having been submitted for de-

cision, and Findings of Fact and Conclusions of Law having

been waived by stipulation of the parties,

IT IS ORDERED, ADJUDGED AND DECREED that:

1. During the audit period, the operations of the S.S.

Catalina by plaintiff M.G.R.S., Inc., as described and set

forth in the Stipulation of Facts, is a use of the vessel in

interstate and/or foreign commerce as used in Revenue and

Taxation Code Sections 6368 and 6368.1, and plaintiff

M.G.R.S., Inc. is therefore entitled to a refund of taxes

from defendant California State Board of Equalization.

2. Plaintiff M.G.R.S., Inc. recover from defendant

California State Board of Equalization the sum of $28,812.04,

interest on said sum to the date hereof in the sum of

at

$9,4687.66, with plaintiff's costs and disbursements

amounting to the sum of $......... , together with interest on

said judgment as provided by law.

The Clerk is ordered to enter the judgment.

Dated: November 14, 1978.

/s/ Hogoboom

Judge of the Superior Court

APPROVED AS TO FORM AND CONTENT:

EVELLE J. YOUNGER

Attorney General

PHILIP C. GRIFFIN

LAWRENCE K. KEETHE

Deputy Attorneys General

/s/ Lawrence K. Keethe

LAWRENCE K. KEETHE

Attorneys for Defendant

California State Board of Equalization

a, we

Stipulation Deeming Parties’ Stipulation of Facts and

Court Minute Order to the Findings of Fact and

Conclusions of Law, and Said Stipulation of Facts.

In the Superior Court of the State of California for the

County of Los Angeles.

M.G.R.S., Inc., a California corporation, Plaintiff, v.

California State Board of Equalization, Defendant. No. C

96419.

Filed: Oct. 18, 1978.

IT IS HEREBY STIPULATED by and between plaintiff

M.G.R.S., Inc. and defendant California State Board of

Equalization, through their respective counsel of record

herein, that the Findings of Fact and Conclusions of Law

referred to in the Court’s Minute Order of September 28,

1978 are waived, and that the Stipulation of Facts heretofore

agreed to by the parties, filed with the Court and used by

the Court in deciding this case, together with said Minute

Order of September 28, 1978, may be used as the Findings

of Fact and Conclusions of Law in this action.

Dated: October 13, 1978.

/s/ James H. Lyons

JAMES H. LYONS

Attorney for Plaintiff

M.G.R.S., Inc.

Dated: October 17, 1978.

EVELLE J. YOUNGER

Attorney General

PHILIP C. GRIFFIN

LAWRENCE K. KEETHE

Deputy Attorneys General

wot | ae

by /s/ Lawrence K. Keethe

LAWRENCE K. KEETHE

Attorneys for Defendant

Caiifornia State Board

of Equalization

JUDGE OF THE SUPERIOR COURT

— a

Stipulation of Facts.

Superior Court of the State of California, for the County

of Los Angeles.

M.G.R.S., Inc. a California corporation, Plaintiff, vs.

California State Board of Equalization, Defendant. No. C

96419.

Filed: Feb. 9, 1978.

IT IS HEREBY STIPULATED by and between plaintiff

M.G.R.S., Inc., a California corporation (hereinafter called

**MGRS’’) and defendant California State Board of Equal-

ization (hereinafter called ‘‘Board’’), through their respec-

tive counsel, that for the purposes of the herein action the

following statements are true and undisputed, although not

necessarily relevant, and may be treated by the Court as

facts proven in open court.

1. At all times herein mentioned, MGRS was and is

now a corporation duly organized and existing under and

by virtue of the laws of the State of California, with its

principal place of business in the County of Los Angeles.

2. The Board is a duly constituted agency of the State

of California charged with the administration of the Sales

and Use Tax Law.

3. The California Attorney General has an office in the

City of Los Angeles, County of Los Angeles, State of Cal-

ifornia.

4. The amount in controversy between MGRS and the

Board concerns the period January |, 1963 through Decem-

ber 31, 1970 (hereinafter called ‘‘audit period’’) to which

all unspecified time references relate.

5. Atall times mentioned herein, plaintiff was engaged

in the transportation of passengers and their baggage for

hire by vessel between the Port of the City of Los Angeles

and the harbor of the City of Avalon on Santa Catalina

Island pursuant solely to authority granted by the California

Public Utilities Commission in Decision 59710 in Appli-

—20— ‘

cation 41589, dated February 23, 1960, as subsequently

amended.

6. The duration of the one-way voyage between the two

points was approximately two hours and covered a distance

of 26 miles. No United States mail, interstate freight on

through arrangements between MGRS and other carriers)

passengers were carried on the S.S. Catalina by MGRS.

Some of the passengers transported were part of group pack-

age tours arranged, paid for and operated by out-of-state

travel agents. These tours originated in the following lo-

cations, among others: Vancouver, British Columbia; New

York City; Flagstaff, Arizona; Sonora, Mexico; Provo,

Utah; Boston, Massachusetts; Las Vegas, Nevada; Albu-

querque, New Mexico; Salt Lake City, Utah; Little Rock,

Arkansas; Oceanside, New York; Houston, Texas. The pas-

sengers on such out-of-state package tours represent a mi-

nority of total passengers on a minority of voyages.

7. Atall times mentioned herein, MGRS leased the S.S.

Catalina, a watercraft, from the Catalina Transportation

Co., a California corporation, under a bareboat charter

agreement whereby MGRS was responsible for the purchase

of parts and materials and for the repair and maintenance

of the vessel. During the audit period MGRS made regular

lease payments to Catalina Transportation Co. and pur-

chased tangible personal property which became a com-

ponent part of such watercraft in the course of further con-

struction, repairing, cleaning, altering or improving the

vessel, and paid charges for labor and services rendered in

respect thereto. Such tangible personal property included,

among other things, paint, valves, springs, ropes and bulk-

heads.

8. During the audit period MGRS did not have a permit

from nor an account number with the Board and made no

atk, )

payments under the provisions of the Sales and Use Tax

Law with respect to either the bareboat charter lease pay-

ments or for the purchase of parts and materials in the repair

and maintenance of the vessel, or for charges for labor or

services rendered in respect thereto. MGRS purchased the

tangible personal property ex-tax by furnishing its vendors

with a watercraft exemption certificate at the time of sale.

9. On January 14, 1971, the Board issued to MGRS a

report of a field audit covering the audit period. The report

was based upon a review of the books and records of MGRS,

including the general ledger, books of original entry, cash

receipts and disbursements journal, purchase invoices and

the lease agreements between MGRS and Catalina Trans-

portation Co. The Board administratively determined that

the operation of the S.S. Catalina by MGRS did not come

within the exemption qualifying provisions of Revenue and

Taxation Code Sections 6368 and 6368.1, and thus a tax

was assessed measured by the bareboat charter lease pay-

ments in the amount of $274,847 and the cost of tangible

personal property which became a component part of the

S.S. Catalina in the course of repairing, cleaning, altering,

and improving the same, and charges made for labor and

services rendered in respect to such repairing, cleaning,

altering, or improving, in the amount of $191,804.

10. On March 4, 1971, the Board issued to MGRS a

notice of determination covering the audit period, a copy

of which is attached hereto as Exhibit A and incorporated

herein by reference.

11. On March 10, 1971, MGRS filed with the Board

a petition for redetermination on the ground that the oper-

ation of the S.S. Catalina came within the exemption pro-

visions of Revenue and Taxation Code Sections 6368 and

6368.1.

eS. . ae

12. On March 9, 1972, a preliminary hearing on the

petition was held before Board Hearing Officer Robert H.

Anderson. On September 25, 1973, a formal hearing on the

petition was held before the Board en banc.

13. On December 28, 1973, the Board issued to MGRS

a notice of redetermination, a copy of which is attached

hereto as Exhibit B and incorporated herein by reference.

14. On January 25, 1974, MGRS timely paid under

protest to the Board the amount of $30,916.73 set forth in

the notice of redetermination.

15. On March 15, 1974, MGRS timely filed with the

Board under the provisions of Revenue and Taxation Code

Section 6902 a claim for refund of the amount paid. It

requested that the penalty portion of the assessment

($2,104.69) for failure to file tax returns be waived under

Section 6592 and refunded on the ground that it was advised

by its counsel and believed that it was exempt from the tax

under Sections 6368 and 6368.1.

16. On May |, 1974, the Board denied the claim for

refund of MGRS in the amount of $28,812.04 and waived

the penalty in the amount of $2,104.69. On June 21, 1974,

the Board refunded the penalty to MGRS.

17. On August 8, 1974, MGRS timely filed this action

pursuant to Revenue and Taxation Code Section 6933.

18. If the Court determines that the use of the S.S.

Catalina by MGRS is ‘‘in interstate or foreign commerce”’

as those words are used in Revenue and Taxation Code

Sections 6368 and 6368.1. MGRS is entitled to a refund

in the amount of $28,812.04 plus interest thereon from

January 25, 1974, as provided by Revenue and Taxation

Code Section 6936. If the Court determines that the use of

the S.S. Catalina by MGRS is not *‘in interstate or foreign

Re.

commerce’’ as those words are used in Sections 6368 and

6368.1, MGRS is entitled to no amount of refund.

DATED: February 9, 1978.

EVELLE J. YOUNGER,

Attorney General

PHILIP C. GRIFFIN,

RODNEY LILYQUIST, JR.,

LAWRENCE KETHE,

Deputy Attorneys General

By /s/ Lawrence Kethe

LAWRENCE KETHE

Attorneys for Defendant,

California State Board of

Equalization

DATED: February 8, 1978.

/s/ James H. Lyons

JAMES H. LYONS

Attorney for Plaint‘ff

M.G.R.S., Inc.

idle

State Board of Equalization

Department of Business Taxes

P.O. Box 1799

Sacramento, California 95808

M.G.R.S. Inc. P.O. Box 511, San Pedro, CA 90733.

DATE: December 28, 1973.

NOTICE OF REDETERMINATION

You are hereby notified that the action indicated below

was taken on your petition for redetermination of Sales and

Use Tax.

AMOUNT

TAX INTEREST PENALTY TOTAL

As Determined

1-1-63 to 12-31-70 21,046.95 4,187.27 2,104.69 27,338.91

Adjustment 3,577.82 3,577.82

As Redetermined 21,046.95 7,765.09 2,104.69 30,916.73

Monthly interest of 105.23 will accrue if not paid before

2-1-74.

Addtional penalty of 2,104.70 if not paid by 1-27-74.

The Board concluded that the movement of passengers

and property by vessel from the California mainland to Santa

Catalina Island and vice versa is not interstate or foreign

commerce within the meaning of the term as used in Sections

6368 and 6368.1 of the Revenue and Taxation Code.

cc: James H. Lyons

611 West 6th Street

Suite 3450

Los Angeles, CA 90017

|

The Federal Question.

The federal question. was first raised in this case in Pe-

titioner’s complaint in the state trial court, as set forth in

the Statement of Facts above.

This question was expressly considered by the trial court:

‘*THE COURT: I will give them [Sales Tax Counsel

Rulings] as much weight as I possibly can but you

know when it is a choice between the United States

Supreme Court and the Sales Tax Council [sic, Coun-

sel], | may feel under some compulsion to take rather

lightly the Sales Tax Council [sic, Counsel].

‘*MR. KEETHE [Counsel for the Board]: I think

United States v. California would be one of the cases

Your Honor should look to.’’ (Reporter's Transcript

at 16.)

and ruled upon:

‘* . . , the operations of the S.S. Catalina by planitiff

M.G.R.S., Inc., as described and set forth in the stip-

ulation of facts, is a use of the vessel in interstate and

for foreign commerce . . . ’’ (Judgment, CT 98; Ap-

pendix page A-20.)

The same issue was raised by MGRS in its brief before

the court of appeal (e.g., Statement of Issues Presented,

Respondent’s Brief at page 6; Petition for Rehearing at pages

6 ff.), and in its Petition for Hearing to the California Su-

preme Court at, for example, pages 2-3:

‘The sole issue presented to the superior court, and

to the Court of Appeal, is:

Whether the operation of the vessel ‘S.S. Catalina’

by MGRS between the California mainland and Santa

Catalina Island, and involving the transportation of

otherwise interstate passengers, is or is not ‘interstate

or foreign commerce’ and therefore exempt from the

California sales and use tax by virtue of the provisions

of sections 6368 and 6368.1 of the Revenue and Tax-

= 26 ——

ation Code.

‘The position of MGRS, and the judgment of the

superior court, is based upon the syllogism (1) that

transportation between two points in the same state

through waters outside that state constitutes ‘interstate

or foreign commerce’ as a matter of federal law binding

upon the states, (2) that transportation between the Port

of Los Angeles and Santa Catalina Island involves leav-

ing the State of California and travelling 20 miles of

high seas before re-entering California, and therefore

(3) that such transportation is within the exemption for

‘interstate or foreign commerce’ which the Legislature

has chosen to create in sections 6368 and 6368.1 of

the Revenue and Taxation Code.

‘‘Further, as an independent basis for its claim and

for the superior court’s judgment, MGRS argues that

persons transported by MGRS are themselves in 1n-

terstate or foreign commerce, aad the transportation

conducted by MGRS therefore assumes this character

as a matter of controlling federal law.

‘*The Opinion of the Court of Appeal recognizes

that the subject voyage leaves California and travels

upon the high seas before re-entering the state (Opinion

at pages 9, 11, and 12), but refuses to recognize that

such transportation is ‘interstate or foreign commerce’

as a matter of law.

‘With respect to the interstate character of some of

MGRS’s passengers, the Opinion ignores established

rules of federal constitutional interpretation and merely

asserts—without authority—that the ‘argument may be

dismissed as de minimus.’ (Opinion at 13.)”’

Throughout the entire life of this litigation, both parties

and all courts have relied upon their respective interpreta

Ha, 4, eee

tions of this Court’s decisions in claiming support for their

respective arguments and decisions.

Petitioner now prays that this court stop California from

redefining ‘‘interstate or foreign commerce’’ contrary to

federal law, and from extending not only its own boundaries

but those of the United States into the international sea.