Appellants Brief — Bacchus Imports, Ltd. v. Dias

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Me re, aoe,

“ “2 Le hd a s .

No, 82-1565

W. Reece Baper Auuay §. Hatey

Rosert E. Frerras x ‘

James A. Hucues 410 Spring Street

Or Oxnick, Hernincton & Nevada City, California

SuTcuirre 95850

A Baslintendd Coperetion Telephone: (916) 265-5524

600 Montgomery Street Moy

San Francisco, California Attorney for Appellants”

94111 ; ,

a % DOMES OF enn omnmEEe. me. + wo mar ay. 28.7. CAS

EET: STEVAS,

In the Supreme Cotrt——“

OF THE

United States

Octoser Term, 1983

Baccuvs Imports, Lrp., and Eacie Distaisvrors, Ivc.,

Appellants,

vs.

Georce Frerras,

Director or Taxation or THE State or Hawan,

Appellee.

On Appeal from the Supreme Court of the

State of Hawaii

OPENING BRIEF FOR APPELLANTS

BACCHUS IMPORTS, LTD. AND EAGLE

DISTRIBUTORS, INC.

Telephone: (415) 392-1122

Of Counsel

a ,

QUESTIONS PRESENTED

1. Does a state tax of 20% ad valorem on the sale at

wholesale of all liquor sold in Hawaii, which singles out

(by exemptions for locally produced liquors) imported

liquor for discriminatory taxation, constitute a duty or

impost on imports prohibited by the Import-Export Clause

(U.S. Const. art. I, § 10, el. 2)?

2. Does such a discriminatory state tax, imposed for

the express purpose of fostering and protecting certain

local liquor industries, and of promoting the consumption

of their products, infringe unconstitutionally on the power

of Congress under the Coiumerce Clause (U.S. Const. art.

I, $8, cl. 3)?

3. Does such a discriminatory state tax, by exempting

from the tax certain locally made liquors while taxing

similar liquors imported into Hawaii by appellant whole-

salers, deny to them the equal protection of the laws (U.S.

Const. amend. XIV, § 1) ?*

* List of all parties to the proceedings below. The parties to the

proceedings in the Hawaii Tax Appeal Court and in the Hawaii

Supreme Court were Bacchus Imports, Ltd. (plaintiff in Case No.

1852 in the tax appeal court), Eagle Distributors, Inc. (plaintiff

in Case No. 1866), Paradise Beverages, Inc. (plaintiff in Case

No. 1862), and Foremost-McKesson, Inc., dba McKesson Wine &

Spirits Co. ( plaintiff in Case No. 1867), and George Freitas, Direc-

tor of Taxation of the State of Hawaii (defendant in all cases). In

the Hawaii Supreme Court all of these cases were consolidated as

No. 7802, October Term 1979.

Rule 28.1 statement. Appellants provided the list of parent

companies, subsidiaries other than wholly-owned subsidiaries, and

affiliates required by Rule 28.1 at page iii of their Jurisdictional

Statement filed on March 15, 1983.

TABLE OF CONTENTS

Questions Presented

Opinions Below ........

Jurisdiction ............6000.

Constitutional and Statutory Provisions ..

Statement of the Case .....

Summary of Argument

BIEN eitestovececesolacescoveses

I. The Discriminatory Hawaii Liquor Tax Violates

Se INININI CEIMUNIND csccccsccscscscscecesascvcesecccesecsseseeece

A. The Basic Purpose of the Commerce Clause

Is to Prevent Isolationist and Protectionist

Measures like the Hawaii Liquor Tax ..........

Protectionist Laws and Laws that Discrimi-

nate on Their Face Are Unconstitutional

a scensmnnnnenscnonacconee

The Hawaii Liquor Tax Is Unconstitutional

IIIT oli cd adnateasanenencegnteccseccssececsoces

1. The Per Se Rule Applies Because of

Hawaii's Impermissible Protectionist

2. The Hawaii Liquor Tax Is Invalid Be-

cause Its Facial Discrimination Against

Interstate Commerce Is Unjustifiable....

The State’s Arguments That the Hawaii

Liquor Tax Does Not Discriminate Against

Interstate Commerce Are both Irrelevant

ER SR I OCR

"ey

iii

Tasie or Contents

Given Hawaii's Protectionist Purpose

and the Liquor Tax's Facial Discrimina-

tion, Appellants Were Not Required to

Show Discrimination in the Tax’s Prac-

tical Operation ......... petssipaveshiseautnns siaenereenees

A Tax That Discriminates Against

Products in Interstate Commerce Is

Unconstitutional Even if In-State and

Out-of-State Taxpayers Are Treated

Equally .... covaisapsivionauhinsebdanaabte sdaeiaacapaie

II. The Imposition of the Hawaii Liquor Tax on

Imports Violates the Foreign Commerce Clause

and the Iinport-Fxport Clause occ

A. By Discriminating Against Imports the

Hawaii Liquor Tax Violates the Foreign

Origin the Hawaii Liquor Tax Violates the

IMpoOrt-Export Clause ......ccccccscccceceserereessesees

Taxes Imposed on Imports Because of

Their Foreign Origin Fall Within the

Absolute Ban of the Import-Export

CIRO casesecsscsesassccqpenoqtiabenskabeenensntanngenatnaidios

The Court's Michelin Decision Provides

Recent Authority for the Continuing

Validity of Beam and Cook and for the

Conclusion That the Hawaii Liquor Tax

Is Unconstitutional ..........ccccssscsssssseseeees

The Hawaii Liquor Tax Is an Unconsti-

tutional Tax on Imports Under Beam,

Cook, ate BGROTI ecciccnincssssssnsniccsenssiinssnees

Page

Tasie or Contents

Page

III. Section 2 of the Twenty-first Amendment Does

Not Save the Discriminatory Tax oo... 29

A. The Purpose of Section 2 of the Twenty-first

Amendment Was to Provide a Constitutional

Basis for Dry States to Remain Dry ............ 30

B, This Court's Opinions Establish That State

Interests Must Be Subordinated to Federal

Law and Policy in Appropriate Circum-

ORION | dicacestedncnrczise sclaciccciedeeniidbasiiidisantistigies 35

C, In the Context of the “Issues and Interest

at Stake” in This Case, the Twenty-first

Amendment Provides No Basis for Uphold-

ing Hawaii's Discriminatory Tax ......00.... 39

Conclusion .......... Fee cae Pe NERD bet ee hale iiss. <deabiaadiieiaties 41

TABLE OF AUTHORITIES

Cases

Page

Allied Stores of Ohio, Ine, v. Bowers, 358 U.S, 522

II: ncccccccistocomiesestocienisosessssteccenaittaenteneserniamalaaals 9, 20, 29

Baldwin vy, G.A.F, Seclig, aay 294 U.S, 511 (1935)......15, 19

Boston Stock Exchange vy. State Tax Comm'n, 429 U.S.

I CIT) seccsnicckicsnsctcetsusshqrebenadunssnscssinlabiadiy a aa

Bowman v. C) ‘cago & Nocthansaleiih Ry. Co., 125 U.S.

465 (1888)... snnangenooseenasesbeunnensenienytaabelsantespiaiaineaniinisanl 30

Brown v. Maryland, 25 U.S. (12 Wheat.) 419 (1827).

sicaeeeeapnailiad “23, 25

California Retail hie De re Ts kak nv, Mideal Alu-

minum, Inc., 445 U.S. 97 (1960) ........ssecssccsssssesessessesses

sashiiesiasaliisieiiaaiesienteieneaiit sesesssssessseeseesDp B21) BO BOp BO OF y OO, BB, 40

Clark Distilling Co. vy, Western Maryland Ry. Co,, 242

CUB GEE CEBIG ) ccseceedcocecensnctstinsaisnecetsninsisenenntonmnecntaniaa 31, 32, 33

Connolly v. Union Sewer Pipe Co., 184 U.S, 540 (1902) 29

Cook v. Pennsylvania, 97 U.S, 566 (1878)... 9, 22, 25, 27

Craig v. Boren, 429 U.S, 190 (1976) concen 9, 32, 33, 39

Dean Milk Co, v, Madison, 340 U.S, 349 (1951) .......... l4

Dept. of Revenue vy. Ass'n of Washington Stevedoring

Cain CEB Title TOE (AGTR) cccresnccesseresestsnensstecninns aad 24, 28

Dept. of Revenue v. James B. Beam Distilling Co., 377

Melis SR CRI concesnncesastncnnssansenninasinsenicsenebntonetsnusiicanl 9, 24, 27

Freeman v. Hewit, 329 U.S. 249 (1946) o..ccccccccenee 10, 11

Guy v. Baltimore, 100 U.S, 434 (1880) wo ccccccccecssseneneens 17

Halliburton Oil Well Cemeuting Co. v. Reily, 373 U.S.

EID cadebncenictcesenctesssesenccvensncntsnictbetinsishtivepnatabaieneaia 19, 21

Hayes v. Missouri, 120 U.S. 68 (1887) woes 29

Hegeman Farms Corp. v. Baldwin, 293 U.S, 163 (19384) 15

Henneford vy. Silas Mason Co., 300 U.S, 577 (1987)......15, 20

TaBLe oF AUTHORITIES

Cases

Page

H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525

II akaandorsisutda’stolankssientapionica Ses cilasainesits<nssndieescbcasaet vada iosaa 11

Hostetter v. Idlewild Bon Voyage Liquor Corp., 377

Ne Ee ERR OT SR Ry ret POS 9, 35, 36, 37, 38

Hughes v. Oklahoma, 441 U.S. 322 (1979) .......... 10, 12, 16, 17

I. M. Darnell & Son Co. v. Memphis, 208 U.S. 113

ITY acdc Giccsivedin eh ones a sericndeeasalibps lade thaicstcoie sbgsahoibaeass 16, 21

Indianapolis Brewing Co. v. Liquor Control Comm'n,

I I ae 36, 37

Japan Line, Ltd. v. County of Los Angeles, 441 U.S.

ISAS ree DE Poet Las a ae eR PR ER 22

Joseph S. Finch & Co. v. McKittrick, 305 U.S. 395

SI lata LtcnlorGistnopetcitinicossopicesa Shc deeubapmeasdiucseoniamanbeaehad 36, 37

Joseph E. Seagram & Sons, Inc. v. Hostetter, 384 U.S.

II aescclich nce es aratotsin lh uemepddeinitiakadeesiiniassaacnins 38

Kassel v. Consolidated Freightways Corp., 450 U.S.

| Rp eC a ees Nie sey= sedan eke Re 12, 15

Leisy v. Hardin, 135 U.S. 100 (1890) .0.....ccccccesesesecseseseee 30

Lewis v. BT Investment Managers, Inc., 447 U.S. 27

IR alate ains ob dbase sinc dhiastacnieadocga ecsonilctamakic wih aigins tte ate 12

License Cases, 46 U.S. (5 How.) 504 (1847) occccccccsseoee 30

Low v. Austin, 80 U.S. (13 Wall.) 29 (1872) 0.0... 26, 27

Mahoney v. Joseph Triner Corp. 304 U.S. 401

SITE piitenloh Atinsinccdiichidincitbncilncsonatenscenbledadkbeaiiaes atti ee me 36, 38

Maryland v. Louisie na, 451 U.S. 725 (1981) ou... 8, 16, 21

McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944) .......... 11

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

Sea Sranotiieelthan’ scinntdcdncescsibeaotpnaicne ccgieacueilaaae 9, 10, 25, 26, 27, 28

vii

TABLE oF AUTHORITIES

Cases

Page

Minnesota v. Clover Leaf Creamery Corp., 449 U.S.

SCRIIIED . tacenssthsinnnisoniassssigcaccsbeeeetinassetaniuaistadiedunsbiooah 12, 13

Mugler v. Kansas, 123 U.S. 623 (1887) .0.......ccecseseseseeees 30, 32

People v. Maring, 3 Keyes 374 (N.Y. Ct. App. 1867)........ 25

Philadelphia v. New Jersey, 437 U.S. 617 (1978) ............

sparen icctsasiclercstebendbcacabbasadiaigipiionscaliploiaecalieon ais 11, 12, 18, 20, 21

Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) «0.000000... 20

Rhodes v. Iowa, 170 U.S. 412 (1898) .o...ccccccceseeseeeeeeeees 31

Scott v. Donald, 165 U.S. 58 (1897) ... ae Lo ee

Southern Ry. Corp. v. Greene, 216 U. s. “400 (1910) .. seco 9, 29

State v. Bengsch, 170 Mo. 81, 70 S.W. 710 (1902) 0.0.0.0... 29

State Bd. of Equalization v. Young’s Market, 299 U.S.

IED ncchcstaicserededcdinccnconsamiebachshanhcasmsiniaccdlpaad 35, 36, 38

Walling v. Michigan, 116 U.S. 446 (1886) oe 18

Welton v. Missouri, 91 U.S. 275 (1876) ............ 17, 23, 25, 27

Wheeling Steel Corp. v. Glander, 337 U.S. 562 (1949)......9, 29

Wisconsin v. Constantineau, 400 U.S. 433 (1971).......... 38, 39

Constitution

United States Constitution

Commerce Clause (art. I, § 8, cl. 3) .........cecceeceeeeeeeee passim

Import-Export Clause (art. I, § 10, el. 2)...

sases teeta diialiahiabibihestoriaidiecinleoiennonnncastoainaions 1, 2, 24, 25, 26, 27, 28, 33

Fourteenth Amendment ‘siiallediciidisinsdutestaeleemlaainces 1, 2, 38, 39

NLA LEAT ONES 32

Twenty-first Amendment .....................0.00:00000 2, 29, 30, 32-40

viii

TABLE oF AUTHORITIES

Statutes

Page

Sherman Act

CUB DB. 44:2 OB OG.) cecepisccdncieressncnintpsccsmaieptnnmennanin 40

Webb-Kenyon Act

ORE TI 6 BADD i ciiciccipeccsstincasphlecerniion 31, 32, 33, 34, 35

Wilson Act

GE RA: © URED: thei cticctnicesnccnnscncnstieecinmaoemian 30, 31, 32, 35

Hawaii Revised Statutes

III cirncastinscecisniescchspatelssnscaniig iceasalannileaspikdaadecaiod alas eae 7

§ 244-4 (Hawaii Liquor Tax) 00... eccceesseeteeseeeeee passim

I UTI aicsccientisole dest native sieapaemciecbaeaaiaseetaciaastada deena 3,4

BOGS Tiare. Bowe, Tere, ©. OG, 6 Yaa caccscecciecescttctesncctmctoncecorns +

BOTS Toe. Bate. Bae, @ GA SS cicvccectcenicceteattiatas 4

OCG ee: WO, RNG, GBs GE ascites eee 4

BOGE Bia. Bons, Ean, ©. BOB, 6B: wicsesenccstescicracsrnnenenadi 4

Congressional Record

Vol. 21 (Senate Debate on Wilson Act) ......c.c.cceccceecseeeoes 30

Vol. 49 (Senate Debate on Webb-Kenyon Act) ................ 34

Vol. 76 (Senate Debate on Twenty-first Amendment)....33,34

Legislative Reports

1960 Haw. Sen. Journal, Standing Comm. Rep. No. 87... 5

1960 Haw. Sen. Journal, Standing Comm. Rep. No. 222... 5

1976 Haw. Sen. Journal, Standing Comm. Rep. No.

TG ccsctniiinicncensersitnthiscnsctncielabedataiaeaa 5

Law Reviews

J. Eule, Laying the Dormant Commerce Clause to Rest,

io: eit Mw Bei | Rae Be ee oh 13

No. 82-1565

In the Supreme Court

OF THE

United States

Octoser Term, 1983

Baccuvus Imports, Lrp., and Eacie Distaisvtors, Inc.,

Appellants,

vs.

Georce FReiras,

Drrector or TAXATION oF THE StaTeE or Hawau,

Appellee.

On Appeai from the Supreme Court of the

State of Hawaii

OPENING BRIEF FOR APPELLANTS

BACCHUS IMPORTS, LTD. AND EAGLE

DISTRIBUTORS, INC.

OPINIONS BELOW

The opinion of the Hawaii Supreme Court in this case is

reported at 65 Haw. , 656 P.2d 724 (1982), and is

reproduced in the Appendix to the Jurisdictional State-

ment (“AJS”) beginning at A-1. The opinion of the Hawaii

Tax Appeal Court has not been reported, and is reproduced

at AJS A-4l.

JURISDICTION

The judgment of the Hawaii Supreme Court (AJS

A-56), which sustained the validity of the Hawaii liquor

tax (H.R.S. § 244-4, set out at pp. 2-3 infra) against a chal-

lenge based on the United States Constitution (art. I, 48,

cel. 3; art. I, § 10, cl. 2; and amend. XIV, § 1), was entered

on January 5, 1983. The notice of appeal (AJS A-59) was

filed with the Hawaii Supreme Court on March 3, 1983

and the appeal was docketed on March 15, 1983. Probable

jurisdiction was noted by this Court on June 20, 1983. The

jurisdiction of this Court is invoked under 28 U.S.C.

§ 1257(2).

CONSTITUTIONAL AND STATUTORY PROVISIONS

Article I, section 8, clause 3 of the United States Consti-

tution provides in part: “The Congress shall have power

... [t]o regulate Commerce with foreign Nations, and

among the several States... .”

Section 10, clause 2 of the same article provides in part:

“No State shall, without the Consent of Congress, lay any

Imposts or Duties on Imports or Exports....”

Section 1 of the Fourteenth Amendment provides in

part: “... No State shall... deny to any person within

its jurisdiction the equal protection of the laws.”

Section 2 of the Twenty-first Amendment provides: “The

transportation or importation into any State, Territory, or

possession of the United States for delivery or use therein

of intoxicating liquors, in violation of the laws thereof, is

hereby prohibited.”

Section 244-4 of the Hawaii Revised Statutes, as

amended to date, provides:

Every person who sells or uses any liquor not tax-

able under this chapter in respect of the transaction

by which such person or his vendor acquired such

liquor, shall pay an excise tax which is hereby imposed,

equal to twenty percent of the wholesale price of the

liquor so sold or used, provided, that the tax shall be

paid only once upon the same liquor; provided, further,

that the tax shall not apply to:

(1) Liquor held for sale by a permittee but not yet

sold;

(2) Liquor sold by one permittee to another per-

mittee;

(3) Liquor which is neither delivered in the State

nor to be used in the State, or which under the

Constitution and laws of the United States cannot

be legally subjected to the tax imposed by this chap-

ter so long as and to the extent to which the State

is without power to impose the tax;

(4) Liquor sold for sacramental purposes or the

use of liquor for sacramental! purposes, or any liquor

imported pursuant to section 281-33;

(5) Alcohol sold pursuant to section 281-37 to a

person holding a purchase permit or prescription

therefor, or any sale or use of alcohol, so purchased,

for other than beverage purposes;

(6) Okolehao manufactured in the State for the

period May 17, 1971 to June 30, 1981;

(7) Any fruit wine manufactured in the State

from products grown in the State for the period

May 17, 1976 to June 30, 1981; or

(8) Rum manufactured in the State for the period

May 17, 1981 to June 30, 1986.

STATEMENT OF THE CASE

This appeal presents a simple, but fundamental, question

for review. May a state employ a tax which on its face

discriminates against interstate and foreign commerce in

order to foster and protect local industry? The surprising

answer of the Hawaii Supreme Court was affirmative.

Appellants Bacchus Imports, Ltd. (“Bacchus”) and

Eagle Distributors, Inc. (“Eagle”) are companies licensed

to import alcoholic beverages into Hawaii and to sell them

at wholesale to other licensees. Joint Appendix (“JA’’) 7,

12. Hawaii imposes a tax at a rate of 20% of the wholesale

price on the first sale at wholesale of liquor.’ Because the

“Liquor” is defined by section 281-1 of the Hawaii Revised

Statutes as follows:

“Liquor” or “intoxicating liquor” includes alcohol, brandy,

whiskey, rum, gin, okolehao, sake, beer, ale, porter, and wine;

tax is based on the actual wholesale price, it includes a

tax on all freight charges, customs duties, and federal

taxes, as well as the wholesaler’s markup. JA 9-10, 16, 22-

23. The tax is payable by the wholesaler whether or not it

is collected from the purchaser, and is assessed on monthly

gross sales reported to the state. JA 8-9, 15-16.

Over the years Hawaii's legislature has enacted several

exemptions from the tax expressly designed to foster vari-

vus local liquor industries. From 1960 to 1965, when the

rate of tax was 16%, okolehao (a brandy distilled from

the roots of the ti plant) produced in Hawaii was exempted

from the tax.’ This exemption expired in 1965, was reenacted

in 1971,’ was extended again in 1976,‘ and expired in 1981.

The same 1976 enactment granted a five-year exemption

to wine made in Hawaii from fruit grown in the State.°

This exemption was allowed to lapse in 1981. While the

present case was pending before the Hawaii Supreme

Court, however, the legislature enacted and the governor

approved a new exemption for “rum manufactured in the

State for the period May 17, 1981 to June 30, 1986.’"*

The express intent of these exemptions is to promote

the development and growth of local industry through dis-

criminatory protection from the tax imposed on alcoholic

beverages imported from foreign countries or the other 49

states. The stated purpose of the original 1960 exemption

and also includes, in addition to the foregoing, any spirituous,

vinous, malt or fermented liquor, liquids, and compounds,

whether medicated, proprietary, patented, or not, in whatever

form and of whatever consistency and by whatever name

called, containing one-half of one per cent or more of alcohol

by volume, which are fit for use or may be used or readily

converted for use for beverage purposes.

#1960 Haw. Sess. Laws, c. 26, § 1.

*1971 Haw. Sess. Laws, c. 62, § 1.

*1976 Haw. Sess. Laws, c. 39, § 1 (H.R.S. § 2444(6)).

°1976 Haw. Sess. Laws, c. 39, §1 (H.R.S. § 244-4(7)).

198) Haw. Sess. Laws, c. 182, § 1 (H.R.S. § 244-4(8)).

for okolehao was “to encourage and promote the establish-

ment of a new industry.”” The 1976 exemptions were justi-

fied by the Senate Ways and Means Committee as follows :*

The purpose of this bill is to extend the exemption

of okolehao manufactured in the State from the liquor

tax for an additional five years, to June 30, 1981. It

is hoped that this five-year extension will aid the

local okolehao industry to get on a firm financial

foundation.

Your Committee has amended this bill to provide a

similar five-year exemption to the local fruit wine

industry. Testimony received indicated that there may

be an economic potential to the State in this area

which, hopefully, this bill can help stimulate.

The Conference Committee Report on the latest exemp-

tion, for Hawaii-made rum, shows that the legislative pur-

pose of favoring local industry continues :*

"1960 Haw. Sen. Journal, Standing Comm. Rep. No. 87. In its

original form, the legislation exempted the sole manufacturer by

name. Ibid.; see Standing Comm. Report No. 222.

*1976 Haw. Sen. Journal, Standing Comm. Rep. No. 408-76.

*1981 Haw. Sen. Journal, Conf. Comm. Rep. No. 29. The debate

on the Report was as follows:

Senator Abercrombie moved that Conf. Comm. Rep. No. 29

be adopted and H.B. No. 247, S.D. 2, C.D. 1, having been read

throughout, pass Final Reading, seconded by Senator Hen-

derson.

Senator Kawasaki rose to speak against the measure as

follows:

“Mr. President, generally, : ee Oe ee

to new industries, particularly regarding the manufacture of

Hawaiian Liquor, but I have some doubts about an arbitrary

five-year exemption that we are providing this particular

industry. I'd like to allow them the exemption as long as they

need it but a blanket five years without showing cause for it

might not be the wisest thing. For that reason, I'd like to

vote against this bill.”

The purpose of this bill is to exempt rum manu-

factured in the State from the liquor tax for five years.

... Your Committee is aware of the consolidated cases

in the State Tax Appeal court, Civil Nos. 1852, 1862,

1966 and 1867, under the name Bacchus Imports, Ltd.,

et al. v. Freitas, currently pending in the State Su-

preme Court, regarding the validity of certain liquor

tax exemptions, and has had extensive discussions

with the Attorney General’s Office and the State Tax

Department regarding the cases. Your Committee also

notes that opinions conflict as to whether or not the

national tax structure provides an advantage to rum

produced in Puerto Rico and therefore makes no

findings on that issue. Your Committee does feel, how-

ever, that providing a tax incentive in the form of a

liquor tax exemption for a period of years is an ap-

propriate method of encouraging the development of a

new industry in the State and is therefore in agree-

ment with the intent of the bill.

The discrimination created by the exemption is signifi-

cant, reflecting both the rate of the tax and its incidence.

An alcoholic beverage bottled at a cost of $10.00 will sell in

Hawaii for $32.20 if it has been imported from France, but

will sell for just $19.10 if bottled in Hawaii. Nearly half

of this difference, or $6.50, is accounted for by the 20%

tax. JA 11.

Senator Henderson remarked:

“Mr. President, we have consistently given five-year ex-

emptions, in the initial periods, to these alcohol industries.”

Senator Cayetano added his remarks as follows:

“Mr. President, voting with reservations for the bill, my

concern is that with respect to new industries, it seems that

we have taken a very selective approach. There’s really no

rationale for us to give one new industry tax exemption

status over another. I suggest that when we come into session

next year we consider a more comprehensive approach.”

Id., 598th Day, at p. 751.

—

‘

The rate of the tax can cause a similarly exaggerated

price differential between two products originating out-

side of Hawaii. The size of the price differential, which

ordinarily would be attributable solely to the freight

charges involved, is exacerbated by the 20% surcharge.

Thus the same bottle costing $10.00 to manufacture which

sells for $32.20 if imported from France will sell for $23.80

if shipped from California. In this case, $2.20 (or more

than 25%) of the differential represents the increase added

by the Hawaii tax on the freight, shipping, and related

markups attributable to the imported bottle. A substantial

share of the revenues derived from the tax thus repre-

sents a surcharge on the transportation and importation

costs for products imported from sister states and foreign

countries. JA 11.

Appellant Bacchus made its May 1979 payment of liquor

tax under protest,’ and cited as grounds therefor that the

Hawaii Liquor Tax violated the Import-Export and Com-

merce Clauses of the United States Constitution. JA 13.

In June 1979 it filed suit on the same grounds in the

Hawaii Tax Appeal Court, and appellant Eagle followed

with its payment under protest in August 1979 and its

complaint in September 1979. JA 13; 7. By subsequent

stipulation, there was later added by amendment to each

complaint a claim that the tax violated the Equal Protec-

tion Clauses of both the United States and Hawaii Con-

stitutions. The cases were consolidated and heard on stipu-

lated facts in the Hawaii Tax Appeal Court. The decision

of that court, written by the Hawaii Attorney General’s

office on the ex parte request of the tax appeal court (see

AJS at A-41), ruled on plaintiff's Import-Export Clause

and Commerce Clause contentions, holding in favor of the

tax, but did not deal with the Equal Protection arguments.

Payment of taxes under protest, and subsequent suit for their

refund, are provided for in H.R.S. § 40-35, as amended.

The appeals to the Hawaii Supreme Court were consoli-

dated, and briefed and argued on the facts stipulated in

the tax appeal court. Again appellants raised the con-

stitutional issues argued below. In an opinion that rejected

each of appellants’ contentions with respect to those issues,

the Hawaii Supreme Court ruled that the tax was consti-

tutional.

The highest state court based its conclusion on a mis-

reading of this Court’s consistent rulings prohibiting dis-

criminatory state taxes. The Hawaii court’s answer to

appellants’ claim of discrimination between Hawaiian and

non-Hawaiian products was that the Hawaii tax treated

Hawaiians and non-Hawaiians alike. Thus, the court’s re-

sponse to the patent discrimination of the statute was to

deny discrimination because every wholesaler was subject

to the same tax in the same manner. This analysis over-

looked the clear command of more than a century of Com-

merce Clause jurisprudence. State laws that discriminate

against out-of-state products are invalid, as are those that

discriminate against out-of-state individuals.

SUMMARY OF ARGUMENT

The Hawaii Liquor Tax at issue in this case discrim-

inates on its face against alcoholic beverages imported from

sister states and foreign countries. That discrimination

renders the tax unconstitutional per se.

Protectionist statutes and statutes that discriminate on

their face against interstate commerce are invalid per se

under the Commerce Clause. Maryland v. Louisiana, 451

U.S. 725 (1981) ; Boston Stock Exchange v. State Tax Com-

mission, 429 U.S. 318 (1977). The record in this case shows

that the Hawaii Liquor Tax was designed for the express

purpose of fostering local industry at the expense of inter-

state and foreign commerce. Hawaii’s protectionist pur-

pose, and the discriminatory language of the statute itself,

make further inquiry into the operation or effect of the

tax unnecessary.

The Hawaii tax, by discriminating against alcoholic bev-

erages imported from abroad as well as against those

shipped from other states, violates the foreign Commerce

Clause. Cook v. Pennsylvania, 97 U.S. 566 (1878). The dis-

criminatory tax on imported products is, in addition, a

state-imposed duty on imported liquor which violates the

Import-Export Clause. Michelin Tire Corp. v. Wages, 423

U.S. 276, 288 n.7 (1976); Department of Revenue v. James

B. Beam Distilling Co., 377 U.S. 341 (1964). The protec-

tionist discrimination between Hawaiian and non-Hawaiian

aleoholic beverages also violates the Equal Protection

Clause because it creates a classification which is not sus-

tained by any legitimately rational basis. Compare Wheel-

ing Steel Corp. v. Glander, 337 U.S. 562 (1949) with Allied

Stores of Ohio, Inc. v. Bowers, 358 U.S. 522 (1959). Cf.

Southern Ry. Corp. v. Greene, 216 U.S. 400 (1910).

Section 2 of the Twenty-first Amendment does not justify

the liquor tax. Neither the history nor the language of the

amendment provides any support for a discriminatory tax

of the type involved in this case. See California Retail

Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S.

97 (1980) ; Craig v. Boren, 429 U.S. 190 (1976) ; Hostetter v.

Idlewild Bon Voyage Liquor Corp., 377 U.S. 324 (1964).

The protectionist purpose of the Hawaii Liquor Tax can-

not prevail over the dominant federal interest in free trade.

ARGUMENT

THE DISCRIMINATORY HAWAII LIQUOR TAX

VIOLATES THE COMMERCE CLAUSE

The Hawaii Liquor Tax is, by design, a protectionist

measure. It seeks to foster local industry at the expense

of foreign and interstate commerce. On its face it dis-

criminates against products solely because of their out-of-

atate origin. It thus violates what this Court has held, in

Boston Stock Exchange v. State Tax Commission, 429 U.S.

318 (1977), to be a “fundamental principle” of Commerce

Clause jurisprudence:

No State, consistent with the Commerce Clause, may

“impose a tax which discriminates against interstate

commerce ... by providing a direct commercial ad-

vantage to local business.”

429 U.S. at 329 (citation omitted).

A. The Basic Purpose of the Commerce Clause Is to Pre-

vent Isolationist and Protectionist Measures like the

Hawaii Liquor Tax

The failure of the Articles of Confederation to prohibit

the individual states from advancing their own commercial

interests by discriminating against goods from other states

was “a compelling reason for the calling of the Constitu-

tional Convention of 1787. .. .” Michelin Tire Corp. v.

Wages, 423 U.S. 276, 283 (1976). Economie warfare among

the states convinced the Framers that “in order to succeed,

the new Union would have to avoid the tendencies toward

economic Balkanization that had plagued relations among

the colonies and later among the States under the Articles

of Confederation.” Hughes v. Oklahoma, 441 U.S. 322, 325-

26 (1979).

The Commerce Clause was the solution. It grants to

Congress the power “[t]o regulate Commerce with foreign

Nations, and among the several States... .” U.S. Const.

art. I, §8, cl. 3. As this Court has long recognized, the

Commerce Clause does more than enable Congress to

enact legislation. It also prohibits a state from erecting

barriers against the free flow of interstate and foreign

trade even in the absence of congressional action. Freeman

v. Hewit, 329 U.S, 249, 252 (1946). That prohibition is basic

to the federal system established by the Constitution:

This princip!e that our economic unit is the Nation,

which alone has the gamut of powers necessary to con-

trol the economy, including the vital power of erecting

customs barriers against foreign competition, has as

its corollary that the states are not separable economic

units. As the Court said in Baldwin v. Seelig, 294 U.S.

511, 527, “What is ultimate is the principle that one

state in its dealings with another may not place itself

in a position of economic isolation. ...”

Our system, fostered by the Commerce Clause, is

that every farmer and every craftsman shall be encour-

aged to produce by the certainty that he will have free

access to every market in the Nation, that no home

embargoes will withhold his export, and no foreign

state will by customs duties or regulations exclude

them. Likewise, every consumer may look to the free

competition from every producing area in the Nation

to protect him from exploitation by any. Such was the

vision of the Founders; such has been the doctrine of

this Court which has given it reality.

H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 537-39

(1949). In consistently striking down laws by which states

have attempted to isolate their economies and protect their

local businesses from interstate competition, this Court has

focused on the incompatibility of such protectionist mea-

sures with the basic purpose of the Commerce Clause “to

create an area of free trade among the several States’

which would remain “free from interference by the States.’™

B. Protectionist Laws and Laws that Discriminate on

Their Face Are Unconstitutional Per Se

Although the Court has recognized that an incidental

burden on interstate commerce may be permitted when a

state acts to further a legitimate local public interest,

“where simple economic protectionism is effected by state

legislation, a virtually per se rule of invalidity has been

erected.” Philadelphia v. New Jersey, 437 U.S. 617, 624

“McLeod v. ].E. Dilworth Co., 322 U.S. 327, 330 (1944).

“Freeman vo. Hewit, 329 U.S. 249, 252 (1946).

(1978). Despite the Court’s description of the rule as one

of “virtually” per se invalidity, it is clear that economic

protectionism “is impermissible under the Commerce

Clause.” Kassel v. Consolidated Freightways Corp., 450

U.S. 662, 685 (1981) (Brennan, J., concurring). The cases

demonstrate that a finding of protectionism is fatal to a

statute discriminating against interstate commerce.

In addition, any statute that discriminates on its face

against interstate commerce is, even in the absence of evi-

dence of the state’s purpose, so suspect under the Commerce

Clause that the burden is cast upon the state to prove its

constitutionality. Hughes v. Oklahoma, 441 U.S. 322, 336

(1979). As this Court held in Hughes:

[FJacial discrimination [against interstate com-

merce] by itself may be a fatal defect, regardless of the

state’s purpose, because “the evil of protectionism can

reside in legislative means as well as legislative ends.”

At a minimum such facial discrin nation involves the

strictest scrutiny of any purported legitimate local

purpose and the absence of nondiscriminatory alter-

natives.

441 U.S. at 337 (citation omitted).** Thus, a discriminatory

statute is invalid unless the state shows that there is no

"See also Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 36

(1980) (citation omitted):

Over the years, the Court has used a variety of formulations

for the Commerce Clause limitation upon the States, but it

consistently has distinguished between outright protectionism

and more indirect burdens on the free flow of trade. The Court

has observed that “where simple economic protectionism is

effected by state legislation, a virtually per se rule of iuvalidity

has been erected.”

“See also Minnesota v. Clover Leaf Creamery Corp., 449 U.S.

456, 471 n.15 (1981) (discriminatory effect can invoke per se rule);

Philadelphia v. New Jersey, 437 U.S. 617, 626-27 (1978):

[w]hatever (the state’s] ultimate purpose, it may not be accom-

plished by discriminating against articles of commerce coming

from outside the State unless there is some reason, apart from

their origin, to treat them differently.

nondiscriminatory method of achieving any legitimate pur-

pose it is alleged to serve.

C. The Hawaii Liquor Tax Is Unconstitutional Per Se

This case presents the Court with an avowedly protee-

tionist statute that discriminates on its face against inter-

state commerce for no legitimate reason. It is unconsti-

tutional both for its protectionist purpose and for its

unjustifiable discrimination.

1. The Per Se Rule Applies Because of Hawaii's Im-

permissible Protectionist Objective

The protectionist purpose of Hawaii’s Liquor Tax is

beyond question. According to the Hawaii Legislature, the

exemptions from tax for locally produced okolehao, wine,

and rum were meant “to encourage and promote the estab-

lishment of a new industry,” to “aid the local okolehao in-

dustry,” and to stimulate “economic potential to the state

in this area [of local wine production].’"* The state has

never disavowed these protectionist purposes. To the con-

trary, protectionism is the only purpose Hawaii advances

to justify the discrimination. The state argues that the tax

savings realized by Hawaii okolehao producers “could be

channelled into a national promotion campaign and com-

petitive pricing,” that jobs would be generated by favoring

Hawaii producers, that the “benefit to the industry and

ultimately the State of Hawaii” justified the discrimination,

and that the tax scheme “would give [the wine industry] a

stimulus to become a solid, financially sound industry.”

See Statement of the Case, supra. The legislature has con-

sistently expressed a protectionist purpose in enacting the various

exemptions.

*Record (“R.”) 268. With such a clear articulation of protection-

ism as the sole purpose of the Hawaii Liquor Tax, no hypothetical

legislative objectives should be considered. Minnesota o. Clover

Leaf Creamery Corp., 449 U.S. at 471 n.15; J. Eule, Laying the

Dormant Commerce Clause To Rest, 91 Yale L. J. 425, 457 (1982).

Thus, the Hawaii Liquor Tax is, by its nature and pur-

pose, a protectionist assault on the basic free trade purpose

of the Commerce Clause. If it were allowed to stand it

“ ‘would invite a multiplication of preferential trade areas

destructive’ of the free trade which the Clause protects.”

Boston Stock Exchange v. State Tax Commission, 429

U.S. 318, 329 (1977) (quoting Dean Milk Co. v. Madison,

340 U.S. 349, 356 (1951)). A statute enacted for such

plainly protectionist reasons cannot survive Commerce

Clause scrutiny.

Boston Stock Exchange provides an exaimple of the

Court’s application of the per se rule to a tax designed to

foster local industry. Concerned by the growth of securi-

ties exchanges in other states, New York enacted a trans-

fer tax on sales of securities that discriminated on its face

against sales in other states.’ The transfer tax’s express

purpose was to provide a commercial advantage to the

New York Stock Exchange and other in-state exchanges.

The legislature, the governor, and the New York Stock

Exchange (as the law’s primary intended beneficiary), all

acknowledged that the state’s objective was to promote

New York’s exchanges at the expense of those in other

states. 429 U.S. at 323-28. The statute’s protectionist na-

ture thus was unquestioned, and no further showing as to

its discriminatory effect was necessary. The Court unani-

mously held that the statute violated the “fundamental

In any event, the state has not attempted to justify the tax as fur-

thering any other objectives, and the Hawaii Supreme Court

accepted the legislative history as an accurate statement of the tax’s

purpose. AJS A-12 to A-13.

"For nonresidents of New York the tax on in-state securities sales

was only one-half of the tax on out-of-state sales. In addition, in-

state sales by either nonresidents or residents were subject to a

maximum tax of $350, while out-of-state sales were taxed without

limitation, based solely on the size of the transaction.

principle” that no state could, through its tax scheme,

favor local business over interstate commerce. 429 U.S. at

329."

An earlier New York statute, also enacted for pro-

tectionist purposes, was held unconstitutional in Baldwin

v. G.A.F. Seelig, Inc., 294 U.S. 511 (1935). A provision of

the New York Milk Control Act setting minimum prices to

be paid by dealers to New York milk producers had previ-

ously been upheld by the Court in Hegeman Farms Corp.

v. Baldwin, 293 U.S. 163 (1934). In Seelig, however, the

Court was faced with a challenge to another provision

of the Act that discriminated against interstate commerce.

The provision challenged in Seelig, in order “(t]o keep the

system unimpaired by competitors from afar,” 294 U.S. at

519, barred the sale of milk from other states if the out-

of-state producer was paid less than the New York

minimum price. New York acknowledged that its purpose

was to protect New York milk producers by eliminating

the competitive advantage of other producers. Id. at 522,

523, 527. The Court struck the law down, holding that when

“the avowed purpose of the obstruction, as well as its

necessary tendency, is to suppress or mitigate the con-

sequences of competition between the states ... [then] by

the very terms of the hypothesis” the statute imposes an

unconstitutional burden on interstate commerce. Id. at 522.

See also Kassel v. Consolidated Freightways Corp., 450

U.S. 662, 682 n.3, 685-87 (1981) (Brennan, J., concurring)

(Court should not reach question of law’s practical burden

on interstate commerce because state’s protectionist pur-

pose requires Court to hold law invalid per se).

The Hawaii Liquor Tax, like the laws struck down in

Boston Stock Exchange and Seelig, is protectionist. It, too,

is unconstitutional.

“The Court rejected, without going beyond the statute’s face, the

state’s arguments that the statute was (1) nondiscriminatory in its

practical effect and (2) a valid “compensatory” tax under Henne-

ford v. Silas Mason Co., 300 U.S. 577 (1937).

2. The Hawaii Liquor Tax Is Invalid Because Its

Facial Discrimination Against Interstate Com-

merce Is Unjustifiable

Even if no protectionist purpose is found, a discrimina-

tory state tax is invalid unless the state comes forward

with a legitimate local objective and a showing that it had

no less discriminatory means to attain that objective.

Hughes v. Oklahoma, 441 U.S. at 337.

On numerous occasions the Court has struck down

facially discriminatory taxes for which no legitimate pur-

pose or need was shown. In Maryland v. Louisiana, 451

U.S. 725 (1981), the Court reviewed a Louisiana tax on

natural gas that on its face imposed a greater burden on

interstate commerce than on intrastate commerce. The

tax’s facial discrimination was enough to justify applica-

tion of the per se rule because the state’s purported justi-

fications did not satisfy the “strictest scrutiny” the Court

gives to discriminatory statutes.

The Court used the same analysis to strike down a

Tennessee law substantially identical to the Hawaii Liquor

Tax in J. M. Darnell & Son Co. v. Memphis, 208 U.S. 113

(1908). The Tennessee tax’s discrimination against inter-

state commerce was clear. It taxed all property in the state

other than “the direct product of the soil of this state in

the hands of the producer and his immediate vendee, and

manufactured articles from the produce of the state in the

hands of the manufacturer.” 208 U.S. at 115.

The Tennessee tax had many of the characteristics that

the Hawaii Supreme Court thought established the con-

stitutional validity of the Hawaii tax. Tennessee imposed

a tax on all goods and then granted exemptions to in-state

products, Teunessee treated all taxpayers equally, whether

state residents or not; the tax discriminated only against

goods from other states. As is the case with the Hawaii

Liquor Tax, the “burden” of the Tennessee tax could be

said to Zall wholly within the state. Finally, Darnell could

have reduced its tax burden simply by dealing exclusively

in Tennessee products.”

However, Tennessee failed to show any legitimate pur-

pose for the discrimination. The tax’s constitutionality was

therefore “clearly foreclosed by prior decisions of this

court.” 208 U.S. at 119. Those decisions had “long since

clearly established the want of power in a state to dis-

criminate by taxation in any form against property brought

from other states.” 7d. at 120-21. See also Hughes v. Okla-

homa, 441 U.S. 322 (1979) (state law discriminating on its

face against interstate commerce in minnows held invalid

per se); Welton v. Missourt, 91 U.S. 275 (1876) (Missouri

tax on peddlers selling goods manufactured outside Mis-

souri held to discriminate against interstate commerce in

an unconstitutional manner).*°

*The Hawaii Supreme Court apparently believed the ability of a

taxpayer to avoid the liquor tax by switching to Hawaiian wine was

a point in favor of its constitutionality. AJS A-25. But a state tax

which is designed to, and does, create incentives to shift economic

activity into the state is for that very reason unconstitutional. Boston

Stock Exchange v. State Tax Commission, 429 U.S. 318, 331, 335-36

(1977).

In Guy vo. Baltimore, 100 U.S. 434, 439, 442 (1880) the Court

stated the same rule:

In view of these and other decisions of this court, it must be

regarded as settled that no State can, consistently with the

Federal Constitution, impose upon the products of other States,

brought therein for sale or use, . . . more onerous public bur-

dens or taxes than it imposes upon the like products of its own

territory.

. .. The concession of such a power to the States would render

wholly nugatory all national control of commerce among the

States, and place the trade and business of the country at the

mercy of local regulations, having for their object to secure

exclusive benefits to the citizens and products of particular

States.

Guy held unconstitutional duties imposed by Baltimore solely on

goods “other than the product of the State of Maryland.”

The vice of the taxes in the above cases was that they,

like the Hawaii Liquor Tax, were crafted to promote local

interests. But even a statute that does not directly benefit

local business is invalid if it discriminates on its face

against interstate commerce. In Philadelphia v. New Jersey,

437 U.S. 617, 624 (1978), New Jersey landfill operators were

among those challenging New Jersey’s ban on the trans-

portation of waste products into the state for disposal. 437

U.S. at 626. The Court assumed that the law conferred no

benefit on local business and that the purpose of the statute

was, as expressed by the state legislature, to protect the

environment and the public health and safety. But the law’s

discriminatory means were just as objectionable as a pro-

tectionist purpose. New Jersey failed to show any reason—

apart from origin—why it needed to discriminate against

waste products frem other states. Moreover, an evenhanded

law treating all waste equally was a feasible and less dis-

criminatory alternative.

An unjustified discriminatory tax on any product, includ-

ing alcoholic beverages, e.g., Walling v. Michigan, 116 U.S.

446 (1886), is unconstitutional. Hawaii has identified no

legitimate objective served by its tax. Accordingly, the tax’s

facial discrimination requires that it be held invalid.

D. The State’s Arguments That the Hawaii Liquor Tax

Does Not Discriminate Against Interstate Commerce

Are both Irrelevant and Incorrect

Despite the protectionist nature of the liquor tax and its

violation of the fundamental Commerce Clause principle

prohibiting taxes that discriminate against interstate com-

merce, the state nonetheless attempts to assert the tax’s

constitutionality. Hawaii's claim is that the tax does not dis-

criminate. But the nondiscrimination arguments advanced

by the attorney general—and adopted seemingly without

question by the Hawaii Supreme Court—are without any

basis.

Although not clearly elaborated by the state or by the

Hawaii court’s opinion, the nondiscrimination argument ap-

pears to be based upon two propositions: (1) that appel-

lants did not make a sufficient showing of the liquor tax’s

practical discriminatory operation; and (2) that, in any

event, the liquor tax does not discriminate against inter-

state commerce because all taxpayers, whether Hawaiian

or not, are treated equally. Neither proposition supports

the conclusion the state desires.”

1. Given Hawaii's Protectionist Purpose and the

Liquor Tax’s Facial Discrimination, Appellants

Were Not Required to Show Discrimination in the

Tax’s Practical Operation

The Hawaii Supreme Court ignored the rule that a state

law with protectionist purposes, or one that is discrimina-

tory on its face, is invalid per se. Instead, the court held

that “taxpayers have failed to demonstrate that the Hawaii

Liquor Tax in its practical operation works discrimination

against interstate commerce.” AJS A-50 (emphasis added).

Both the imposition of this burden and the conclusion that

it was not sustained were erroneous.

First, when a tax is protectionist, as in this case, there

is neither a reason nor a need to consider its practical

operation. Baldwin v. G.A.F’. Seelig, 294 U.S. at 522 (direct

or indirect burdens on commerce “are irrelevant when the

avowed purpose of the obstruction . . . is to suppress or

mitigate the consequences of competition between the

“The state has also claimed that because some Hawaiian liquor

(sake and fruit liquors) is taxed, there is no discrimination against

interstate commerce. R. 269, 276-78. The Hawaii Supreme Court

apparently found this argument to have some force. AJS A-21 n.15.

states”). Similarly, evidence of the practical operation of

a statute discriminating on its face against interstate com-

merce is irrelevant. Only where (1) legitimate state objec-

tives are credibly advanced, (2) there is no patent discrimi-

nation against interstate trade, and (3) the effect on

interstate commerce is incidental, will the Court look past

legislative history and facial discrimination to consider

the law’s practical effect and relative burden on com-

merce.” Philadelphia v. New Jersey, 437 U.S. 617, 624

(1978) ; Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).

Second, the Hawaii tax inexorably discriminates against

interstate commerce by its very terms, and no further evi-

dence was necessary. Any burden of showing discrimina-

tion was met conclusively by the terms of the statute. See

Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 529-30

(1959).

2. A Tax That Discriminates Against Products in In-

terstate Commerce Is Unconstitutional Even if In-

State and Out-of-State Taxpayers Are Treated

Equally

The Hawaii Supreme Court, ignoring the disparate treat-

ment of liquor products according to place of origin,

focused on the equal treatment purportedly received by all

taxpayers:

Bacchus, Paradise, and Eagle gain nothing over a for-

eign corporation because of their incorporation under

Hawaii law. That McKesson is a Maryland corporation

and engaged in business elsewhere plays no part in fix-

ing its liability under HRS § 244-4. The corporation

presumably is also free to engage in the wholesaling of

**The best example from this Court's decisions is the “

ing” tax approved in Henneford v. Silas Mason Co., 300 U.S. 577

(1937). Because both the objective and the “practical operation” of

Washington's compensatory use tax was to equalize the burden on

interstate and intrastate commerce, it was held valid under the

Commerce Clause. No similar argument is available to Hawaii.

okolehao and pineapple wine if it has reason to believe

this will relieve its tax burden.

The Hawaii court tried to distinguish Maryland v. Louisi-

ana, 451 U.S. 725 (1981), Boston Stock Exchange v. State

Tax Commission, 429 U.S. 318 (1977), and Halliburton Oil

Well Cementing Co. v. Reily, 373 U.S. 64 (1963) as cases

in which the burden of the discrimination fell out-of-state.

AJS A-25 to A-29."

But this case involves a claim of discrimination against

out-of-state products. The Commerce Clause protects goods

in interstate commerce regardless of the residence of those

on whom the burden of the state’s discrimination falls.

Philadelphia v. New Jersey, 437 U.S. at 626-27 (“whatever

New Jersey’s purpose, it may not be accomplished by dis-

criminating against articles of commerce coming from

outside the state”); 1.M. Darnell & Son Co. v. Memphis,

208 U.S. 115 (1908) (Tennessee tax discriminating against

products from other states held unconstitutional).

The Hawaii Liquor Tax’s unlawful protectionist purpose

and discriminatory burden on commerce are not mitigated

by the fact that both Hawaiian and non-Hawaiian tax-

payers must pay its unconstitutional levy. Minnesota v.

Barber, 136 U.S. 313, 326 (1890).

THE IMPOSITION OF THE HAWAII LIQUOR TAX ON

IMPORTS VIOLATES THE FOREIGN COMMERCE

CLAUSE AND THE IMPORT-EXPORT CLAUSE

In addition to bringing wine into Hawaii from other

states, Bacchus and Eagle import wine from foreign coun-

tries. JA 9, 14. The Hawaii Liquor Tax, by taxing the first

*"The Hawaii Supreme Court was surprised a Hawaii resident

would even complain:

We noted earlier that Paradise, a Hawaii corporation engaged

in the wholesaling of okolehao, also claims the tax violates the

We find it difficult to give much credence to a claim that the

tax creates an undue burden on interstate commerce when the

sale of imports by Bacchus and Eagle while exempting

Hawaiian products, violates both the foreign Commerce

Clause and the Import-Export Clause.

A. By Discriminating Against Imports the Hawaii Liquor

Tax Violates the Foreign Commerce Clause

The Commerce Clause applies not only to interstate

commerce but also to “Commerce with foreign Nations.”

U.S. Const. art. I, § 8, cl. 3. The Court’s interpretation of

the foreign Commerce Clause has, for the most part,

paralleled its analysis of the interstate Commerce Clause,

see section I.C., supra, although the Court has recently

stated that the states’ power to regulate foreign commerce

is even more limited because “the taxation of foreign

commerce may necessitate a uniform nationa! rule.” Japan

Line, Lid. v. County of Los Angeles, 441 U.S. 434, 449

(1979). As a result of the need for national uniformity,

the fundamental principle of nondiscrimination recognized

in the area of interstate commerce applies with equal if not

greater force under the foreign Commerce Clause. Cook

v. Pennsylvania, 97 U.S. 566 (1878).

Two Pennsylvania taxes were challenged in Cook. The

first statute imposed a tax of one-half of one percent on.

the sale price of “all domestic articles and groceries” sold

‘at auction While taxing “foreign drugs, glass, earthenware,

hides, marble-work, and dye-woods”’ sold at auction at the

rate of three-quarters of one percent. The second statute

amended the first to impose a tax on auctioneers of one-

quarter of one percent on all sales of “loans or stocks”

argument is advanced by one who logically would be a “bene-

ficiary” of the alleged discrimination.

AJS A-38 n.17.

“Although the Constitution . . . grants Congress power to

regulate Commerce ‘with foreign Nations’ and ‘among the several

States’ in parallel phrases, there is evidence that the Founders in-

tended the scope of the foreign commerce power to be the greater.”

Japan Line, Ltd., 441 US. at 448.

and “on all other sales as aforesaid, except on groceries,

goods, wares, and merchandise of American growth or

manufacture.” 97 U.S. at 569. The Court held both taxes

invalid under the foreign Commerce Clause:

In Woodruff v. Parham (8 Wall. 123) and Hinson

v. Lott (id. 148) it was held that a tax laid by a law

of the State in such manner as to discriminate un-

favorably against goods which were the product or

manufacture of another State, was a regulation of com-

merce between the States, forbidden by the Constitu-

tion of the United States. ... The Congress of the

United States is granted the power to regulate com-

merce with foreign nations in precisely the same

language as it is that among the States. If a tax

assessed by a State injuriously discriminating against

the products of a State of the Union is forbidden by

the Constitution, a similar tax against goods imported

from a foreign State is equally forbidden.

97 U.S, at 573.% See also Welton v. Missouri, 91 U.S. 275

(1876) (tax discriminating against goods from foreign

countries and other states violates interstate and foreign

components of Commerce Clause) ; Brown v. Maryland, 25

U.S. (12 Wheat.) 419, 448 (1827) (discriminatory tax on

imports held invalid under foreign Commerce Clause and

Import-Export Clause).

**In reaching this holding the Court rejected several arguments

on which Hawaii now relies, over one hundred years later. For

example, the state has argued that Hawaii's liquor tax is not on the —

imported goods but on the privilege of doing business. R. 264.

Precisely that argument was rejected in Cook. 97 U.S. at 570-73.

Another argument made below and accepted by the Hawaii court-—

that the liquor tax is not discriminatory because it treats all tax-

payers alike—was also unsuccessful in Cook. 97 U.S. at 573 (focus

is on discrimination against goods). Finally, Hawaii has contended

The Hawaii Liquor Tax, like the tax struck down in

Cook, discriminates on its face against liquor imported by

Bacchus and Eagle by taxing such imports while exemp-

ting Hawaiian products. Hawaii thus treats foreign im-

ports differently from its local goods. This discrimination

is no more valid than the discrimination against products

of sister states.

B. By Taxing Imports on the Basis of Their Origin the

Hawaii Liquor Tax Violates the Import-Export Clause

The Constitution provides that “[n]o State shall... lay

any Imposts or Duties on Imports or Exports.” U.S. Const.

art. I, $10, el. 2. “[TJhe Import-Export Clause states an

absolute ban” on the states’ power to tax. Department of

Revenue v. Ass’n of Washington Stevedoring Cos., 435

U.S. 734, 751 (1978). As shown below, the Hawaii Liquor

Tax is a duty on imports and therefore violates the

clause’s absolute ban.

1. Taxes Imposed on Imports Because of Their For-

eign Origin Fall Within the Absolute Ban of the

Import-Export Clause

In Department of Revenue v. James B. Beam Distilling

Co., 377 U.S. 341 (1964), the Court was presented with a

challenge to a Kentucky statute prohibiting importation of

distilled spirits without payment of a tax of ten cents per

proof gallon.” The tax was thus imposed on imports solely

because of their origin. Beam objected to the imposition of

this tax on whisky imported from Scotland, contending

that it was unconstitutional under the Import-Export

Clause as an impost or duty on imports. The Court agreed

that the tax was “clearly of a kind prohibited by the Ex-

port-Import Clause,” 377 U.S. at 343, and ruled it uncon-

stitutional.

Beam broke no new ground in holding unconstitutional

a state tax discriminating against imports on the basis of

their foreign origin. Indeed, Cook v. Pennsylvania reached

a similar conclusion. In Cook, as already noted, two Penn-

sylvania tax statutes discriminated against imports, in one

instance by taxing domestic articles at a lower rate, and in

the other by imposing the tax on all imports while exemp-

ting certain domestic articles (but like Hawaii, not all).

After rejecting Pennsylvania’s argument that the tax was

on the privilege of auctioning goods rather than on the

imports themselves, the Court held the discriminatory tax

void as “laying a duty on imports.” 97 U.S. at 573. See

also People v. Maring, 3 Keyes 374 (N.Y. Ct. App. 1867)

(tax discriminating against the sale of “foreign wines and

ardent spirits” and other imports held to violate Import-

Export Clause).

~ In Welton v. Missouri, 91 U.S. 275 (1876), the Court struck

down a tax imposed on peddlers of goods other than those which

were the growth, product, or manufacture of Missouri. Although

the tax was invalidated under the Commerce Clause, the Court

borrowed heavily from Import-Export Clause jurisprudence, includ-

ing the seminal case of Brown v. Maryland, 25 U.S. (12 Wheat.)

419 (1827). In holding that Missouri had invaded a province of

exclusive federal power, the Court emphasized that it was the tax’s

discrimination on the basis of foreign origin which condemned

it, and noted that under either the Commerce or Import-Export

Clauses

[t]he commercial power [of Congress] continues until the com-

modity has ceased to be the subject of discriminating legisla-

tion by reason of its foreign character. That power protects it,

even after it has entered the State, from any burdens imposed

by reason of its foreign origin.

91 U.S. at 282. As discussed below, Welton and Cook presaged the

Court's analysis in Michelin Tire Corp. o. Wages, 423 US. 276

(1976).

s ‘

2. The Court’s Michelin Decision Provides Recent

Authority for the Continuing Validity of Beam

and Cook and for the Conclusion That the Hawaii

Liquor Tax Is Unconstitutional

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

the Court was faced with an Import-Export Clause chal-

lenge to a Georgia ad valorem property tax. Michelin im-

ported tires and stored them in a warehouse in Georgia

for distribution in six southeastern states. Georgia assessed

its nondiscriminatory ad valorem property tax on the value

of Michelin’s property in the state, including the imported

tires. Michelin argued that the imported tires had not lost

their character as imports and that, under Low v. Austin,

80 U.S. (13 Wall.) 29 (1872), Georgia’s ad valorem prop-

erty tax was unconstitutional as applied to the imported

tires.”

The Court declined to decide whether the tires retained

their character as imports. Instead, it reexamined what it

found to be the three concerns of the Import-Export Clause:

(1) that the federal government speak with one voice in

regulating foreign commerce, without interference from

State tariffs; (2) that federal revenues from import taxes

not be diverted to the States; and (3) that there be no dis-

harmony among the states caused by one state’s imposing

duties on imports destined for another state. These con-

cerns would be frustrated, the Court held, by a discrimina-

tory tax falling “on imports as such because of their place

of origin.” 423 U.S. at 286. Thus, “[t]he Import-Export

Clause clearly prohibits state taxation based on the foreign

origin of the imported goods.” Jd, at 287. Because Georgia's

nondiscriminatory ad valorem property tax did not fall on

™*Low held that, as long as goods retained their character as

imports, “a tax upon them, in any shape, is within the constitutional

prohibition.” 80 U.S. (13 Wall.) at 34. Accordingly, it invalidated a

nondiscriminatory ad valorem property tax imposed by California

on all property in the state including imported goods.

imports because of their origin, it did not implicate the Im-

port-Export Clause’s concerns and it was, therefore, consti-

tutional. To the extent Low held otherwise it was overruled.

Michelin is fully consistent with Beam and Cook. Both of

those cases, unlike Low, involved discriminatory taxes tar-

geted at imports on the basis of their origin, precisely the

sort of tax that Michelin reaffirmed is within the prohibi-

tion of the Import-Export Clause. 423 U.S. at 288 n.7.

Neither case depends on the rejected original package doc-

trine of Low, and the Court itself has noted their continuing

validity. Michelin, 423 U.S. at 288 n.7 (Cook); California

Retail Liquor Dealer Ass'n v. Midcal Aluminum, Inc., 445

U.S. 97, 108 (1980) (Beam),

3. The Hawaii Liquor Tax Is an Unconstitutional

Tax on Imports Under Beam, Cook, and Michelin

The Hawaii Liquor Tax, like the taxes struck down in

Beam and Cook, is imposed on imports on the basis of their

foreign origin. Hawaiian wine, brandy, and rum are not

taxed; imported wine, brandy, and rum are. As Michelin

makes clear, such discrimination, whether practiced at the

moment of importation, at the time of wholesale, or at the

point of retail sale, is by its very nature a duty on imports.

423 U.S. at 288 n.7.”

The Hawaii Supreme Court simply glossed over the fact

that the liquor tax is imposed on products based on their

foreign origin. Instead it upheld the tax because of its con-

clusion that “the Hawaii Liquor Tax offends none of the

policy considerations delineated by the Court in Michelin

. .’ AJS A-20 to A-21. This statement is demonstrably

incorrect.

' *Michelin thus adopts the reasoning, originally stated in Welton

v. Missouri, see note 27, supra, that the Import-Export Clause ap-

plies whenever a state attempts to discriminate against

because of its foreign character.

The first policy consideration under the Import-Export

Clause—that a state tax on imports would undermine the

federal government’s exclusive regulation of foreign com-

merce—is “the most important purpose of the Clanuse’s

prohibition.” Michelin, 423 U.S. at 286. A state could use a

tax on imports “to create special protective tariffs or

particular preferences for certain domestic goods” or to

“encourage and discourage ... importation in a manner

inconsistent with federal regulation.” Jbid. The Hawaii

Supreme Court’s holding that the liquor tax presented none

of these dangers ignores the plain fact that the very pur-

pose of the Hawaii Legislature was to protect and nurture

certain domestic industries. By its very nature the tax thus

acts in derogation of the federal government’s exclusive

power to tax imports and regulate foreign commerce.

The Hawaii Liquor Tax also interferes with the federal

government’s exclusive right to duties on imports, the

second policy concern of the Import-Export Clause, by

substantially raising the price of imported wine, brandy,

and rum relative to competing Hawaiian products. See

Statement of Case, supra.” A principal fault of such a

state tax is that it can be “selectively imposed and in-

creased so as to substantially impair or prohibit importa-

tion,” Michelin, 423 U.S. at 288, thereby affecting the

import duties received by the federal government.

Thus Hawaii’s tax is imposed on imports solely because

of their foreign origin; it thereby invokes the two most

important policy concerns inherent in the constitutional

prohibition of state taxes on imports. Under any reason-

“This is not a case, like Department of Revenue v. Ass'n of

Washington Stevedoring Cos., 435 U.S. 734, 753 (1978), where

such effects can be considered “insubstantial.” The Stevedoring case

involved a mere 1% tax on the gross income of a stevedore’s entire

business. In contrast, Hawaii imposes a 20% tax on the wholesale

price of the product itself, which can substantially raise its price.

JA 1L.

able reading of the Import-Export Clause the Hawaii tax

is unconstitutional.”

SECTION 2 OF THE TWENTY-FIRST AMENDMENT

DOES NOT SAVE THE DISCRIMINATORY TAX

Because this case involves a discriminatory state tax on

alcoholic beverages, rather than other articles of commerce,

it presents a potential issue as to whether the tax may be

justified by section 2 of the Twenty-first Amendment. Sec-

tion 2—on which the state has placed no reliance and which

was not discussed by the courts below—provides no basis

for discriminatory state taxes. Section 2 does not authorize

protectionist state legislation nor concern any local inter-

est involved in this case. The central purpose of section 2

was to allow states wishing entirely to exclude alcoholic

beverages from their borders to do so. That purpose, and

the history behind section 2, provide no more justification

"The Hawaii court also rejected appellant's equal protection

claims on the ground that the statute did not “establish a classifica-

tory scheme that disfavors any of the taxpayers.” AJS A-8, However,

within a given class of taxpayers (such as liquor wholesalers),

equal protection requires that all who are subject to a given law

“shall be treated alike, under like circumstances and [conditions]

both in the privileges conferred, and in the liabilities imposed.”

Connolly v. Union Sewer Pipe Co., 184 U.S. 540, 559 (1902), quot-

ing Hayes v. Missouri, 120 U.S. 68, 71 (1887). The taxation of

appellants’ goods of wine originating outside Hawaii, while exemp-

ting for illegitimate purposes the sales of Hawaiian products by tax-

payers in competition with appellants, treats taxpayers in the same

class differently in respect to the same transaction. Compare Wheel-

ing Steel Corp. v, Glander, 337 U.S. 562 (1949) with Allied Stores

of Ohio, Inc. v. Bowers, 358 U.S. 522 (1959). Cf. Southern Ry.

Corp. v. Greene, 216 U.S. 400 (1910) (additional tax imposed on

out-of-state corporation unconstitutional). See State v.

170 Mo. 81, 109, 113-117, 70 S.W. 710, 718-720 (1902) (gallonage

tax imposed on all liquor manufactured or imported for sale in

state, which exempted native wines, as well as liquor manufactured

in state for export, violated equal protection clause).

for the promotion of a state's local alcoholic beverage in-

dustry through discriminatory taxation than does the lan-

guage of section 2.

A. The Purpose of Section 2 of the Twenty-first Amend-

ment Was to Provide a Constitutional Basis for Dry

States to Remain Dry

Section 2 is limited by its terms to a prohibition on the

“transportation or importation into any State” of alco-

holic beverages in violation of state law. This narrow

language reflects the history that led to section 2, and the

limited state interests to which it is addressed.

This Court’s nineteenth-century Commerce Clause opin-

ions established a clear rule absolutely prohibiting state

regulation of goods so long as they remained “in” in-

terstate commerce. E.g., Letsy v. Hardin, 135 U.S. 100;

(1890); Bowman v. Chicago & Northwestern Ry. Co., 125

U.S. 465, 507-08 (1888). Thus, although the police powers

of the states to regulate alcoholic beverages within their

borders were firmly established, e.g., Mugler v. Kansas,

123 U.S. 623 (1887), License Cases, 46 U.S. (5 How.) 504

(1847), those powers did not extend to alcoholic beverages

or any other commodities in commerce. Leisy v. Hardin,

135 U.S. at 119. The Court’s “in commerce” rulings im-

posed a significant restraint on state power because of

the “original package” doctrine. Under that doctrine, im-

portation of goods was not complete until the original

package in which the goods were shipped was broken or

was sold. Leisy v. Hardin, 135 U.S. at 110.

The specific application of the original package doctrine

to alcoholic beverages in Leisy v. Hardin led Congress to

pass the Wilson Act, 27 U.S.C. § 121. The Wilson Act was

designed to prevent the immunity of goods in commerce

from frustrating state prohibition efforts. See 21 Cong.

Ree, 4954 (1890) (remarks of Senator Wilson). Obviously,

a local ban on alcoholic beverages would be seriously cur-

tailed so long as interstate shippers were free to import

and sell them in their original packages.

The Wilson Act addressed its narrow purpose by ren-

dering alcoholic beverages subject to state power “to the

same extent and in the same manner as though” they had

been produced within the state, “upon arrival” in the state.

The Wilson Act removed the absolute immunity from state

regulation afforded goods in commerce, but it allowed no

discriminatory treatment of alcoholic beverages and offered

the states no police powers they did not possess in the regu-

lation of domestic products. See Scott v. Donald, 165 U.S.

58, 100 (1897) (Wilson Act did not allow discrimination

against products of sister states).

The Wilson Act was soon stripped of its practical value

by this Court’s interpretation of the point at which goods

arrived in a state. In Rhodes v. Iowa, 170 U.S. 412 (1898),

the Court concluded that alcoholic beverages “arrived” for

purposes of the Wilson Act only when they were received

by the consignee. 170 U.S. at 423. Despite the Wilson Act,

then, the states had no power to prevent out-of-state firms

from shipping alcoholic beverages into the state. As before,

the immunity of goods in commerce prevented prohibition

states from preventing unwanted importation.

Congress again responded, with the passage of the Webb-

Kenyon Act, 27 U.S.C. § 122. Webb-Kenyon also addressed

the narrow problem of unwanted importation by forbid-

ding the “shipment or transportation ... of .. . intoxi-

cating liquor of any kind, from one state ... into any other

state... or from any foreign country into any state”

for receipt, possession, or sale in violation of state law.

Webb-Kenyon thus accomplished what Wilson had not. It

gave the states power to block unwanted imports at their

borders. Like Wilson, Webb-Kenyon did not attempt to

confer any other power. It did not address the manner in

which the states might regulate alcoholic beverages once

their police powers attached. This Court upheld the Webb-

Kenyon Act in Clark Distilling Co. v. Western Maryland

Ry. Co., 242 U.S. 311 (1917), and the Court’s divided ruling

took on great significance in 1933 when Congress consid-

ered the repeal of the Eighteenth Amendment.”

The Court made clear in Clark Distilling Webb-Kenyon’s

limited purpose.

[T]here is no room for doubt that [the Webb-Kenyon

Act] was enacted simply to extend that which was

done by the Wilson Act; that is to say, its purpose

was to prevent the immunity characteristic of inter-

state commerce from being used to permit the receipt

of liquor through such states contrary to their laws,

and thus in effect afford a means of subterfuge and

indirection to set such laws at naught.

242 U.S. at 324. No question of discrimination against com-

merce was involved.

As this Court recognized in Craig v. Boren, 429 U.S. 190

(1976), section 2 was intended to constitutionalize the state

power allowed by Webb-Kenyon.

The history of state regulation of alcoholic bever-

ages dates from long before adoption of the Eighteenth

Amendment. In the License Cases, the Court recog-

nized a broad authority in state governments to reg-

ulate the trade of alcoholic beverages within their

"Clark Distilling is also significant in its recognition of state

police powers. Although section 2 is sometimes seen as a grant of

police powers to the states, it neither was necessary as nor intended

to be a grant of police powers. The police power is inherent in state

sovereignty, and the police power over alcoholic beverages was

acknowledged by this Court long before the Twenty-first Amend- —

ment. E.g., Mugler v. Kansas, 123 U.S. 623 (1887). Clark Distilling,

which preceded the Twenty-first Amendment by sixteen years, itself

sustained an exercise of state police powers over alcoholic bever-

ages. 242 U.S. at 320. ,

Wilson, Webb-Kenyon and section 2 thus would be redundancies

if they were meant to confer police powers. Their history shows

that they were intended to allow the states to exercise a power that

they did not have before—the power to regulate interstate com-

merce in a limited way.

borders free from implied restrictions under the Com-

merce Clause. Late in the century, however, Leisy v.

Hardin undercut the theoretical underpinnings of the

License Cases. This led Congress, acting pursuant to

its powers under the Commerce Clause, to reinvigorate

the state’s regulatory role through the passage of the

Wilson and Webb-Kenyon Acts. ... With passage of

the Eighteenth Amendment, the uneasy tension be-

tween the Commerce Clause and state police power

temporarily subsided.

The Twenty-first Amendment repealed the Eigh-

teenth Amendment ir 1933. The wording of § 2 of the

Twenty-first Amendment closely follows the Webb-

Kenyon and Wilson Acts, expressing the framers’ clear

intention of constitutionalizing the Commerce Clause

framework established under those statutes.

429 U.S. at 205-206 (footnotes and citations omitted). That

framework gave the states power to treat alcoholic bev-

erages transported from outside the state in the same man-

ner as they treated domestic products. It allowed nothing

more.”

The constitutionalizing of the state power created by

Webb-Kenyon was necessary in the eyes of the proponents

of section 2 because of the tenuous balance created by the

divided opinion in Clark Distilling. President Taft and

Attorney General Wickersham had found Webb-Kenyon

unconstitutional, and the President based his veto of the

* act on its asserted unconstitutionality. 76 Cong. Rec. 4170

(remarks of Senator Borah). Thus, faced with the dubious

constitutionality of the act, a Court able to overrule the

prior ruling in Clark Distilling, and Congress’ ever-present

power of repeal, the proponents of state power set about

**Section 2 did not, of course, eliminate the Import-Export Clause

prohibition of taxes on imports. California Retail Liquor Dealers

Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 108 (1980).

providing constitutional status to Webb-Kenyon. The con-

gressional debates confirm this narrow reach of section 2.

Senator Blaine was the manager of S.J. Res. 211, § 2 of

which became section 2 of the Twenty-first Amendment.

As such, he reported the views of the Senate Judiciary

Committee to the full Senate. Senator Blaine explained the

purpose of section 2 as follows:

In the case of Clark against Maryland Railway Co.

there was a divided opinion. There has been a divided

opinion in respect to the earlier cases, and that division

of opinion seems to have come down to a very late day.

So, to assure the so-called dry states against the impor-

tation of intoxicating liquor into those states, it is

proposed to write permanently into the Constitution

a prohibition along that line. Mr. President, the pen-

ding proposal will give the states that guarantee ....

76 Cong. Rec. 4141.

Senator Borah, a member of the Senate Judiciary Com-

mittee, a participant in the earlier congressional debates

on Webb-Kenyon, see 49 Cong. Rec. 702 (1912), and a lead-

ing opponent of the repeal of Prohibition, explained section

2 in the same way. He responded to an amendment that

would have eliminated section 2 by arguing that section 2,

“which provides for the protection of the so-called dry

states,” 76 Cong. Rec. 4170, was needed because the Webb-

Kenyon Act did not provide “sufficient protection to the

dry states,” as it was “still of doubtful constitutionality.”

Ibid. Moreover, he argued, eliminating section 2 would

mean “asking the dry states to rely upon the Congress

of the United States to maintain indefinitely the Webb-

Kenyon law.” Ibid. “It does not seem to me that we can

afford to strip the amendment of all effort to protect the

dry States.” Ibid. See also 76 Cong. Rec. 4219 (remarks of

Senator Walsh).

The Court’s Commerce Clause doctrine, the frustrations

of state power it created, and the congressional efforts to

ease those frustrations, all show what the debates on

section 2 confirm. The Wilson Act, the Webb-Kenyon Act,

and section 2 allow the states to preclude importation of

alcoholic beverages. That authorization was necessary

because without it a dry state could not hope to remain

dry. The articulated historical need for section 2 must be

considered when its meaning is addressed.”

Even if the history is ignored, however, section 2 cannot

be seen as an unrestricted grant of power to the states.

Section 2 is limited to the prevention of unwanted “trans-

portation or importation” into a state. That language can-

not be read to justify discriminatory treatment of alco-

holic beverages allowed into the state and treated, along

with domestic products, as legitimate articles of commerce.

B. This Court’s Opinions Establish That State Interests

Must Be Subordinated to Federal Law and Policy in

Appropriate Circumstances

No opinion of this Court has ever interpreted section 2

in a manner that would justify the discriminatory imposi-

tion of state taxes such as that found here. Instead, the

Court has interpreted section 2 in a practical way that

requi~°s careful consideration of the “issues and interests

at stake in any concrete case.” Hostetter v. Idlewild Bon

“This Court has been hesitant to consider the legislative history

of section 2 in its opinions, ¢.g., Cclifornia Retail Liquor Dealers

Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97, 106-07 n.10 (1980);

State Bd. of Equalization v. Young’s Market, 299 U.S. 59, 63-64

(1936), although the Court has noted the importation focus of

section 2. E.g., Midcal, 445 U.S. at 106-08. In Midcal, the Court's

hesitance to examine the legislative history wes attributed to

canons of construction and a “reluctance to wade into the complex

currents beneath the congressional proposal of the Amendment and

its ratification in the state conventions.” 445 U.S. at 107 n.10.

In Young’s Market, the Court rejected an effort to narrow the literal

meaning of section 2 by resort to the history showing its purpose of

protecting the dry states. 299 U.S. at 64. Any reliance by Hawaii

on section 2 in this case would require ignoring both the language

and history of section 2.

Voyage Liquor Corp., 377 U.S. 324, 332 (1964). The con-

sideration of the issues involved in a given case must

address the relationship of the asserted state interest to

the core importation purpose of section 2, and avoid undue

impairment of federal interests. Even when the federal

power in question is based on or derived from the Com-

merce Clause, the constitutional provision most directly

related to section 2, federal interests may overcome those

asserted by the state. E.g., California Retail Liquor Dealers

Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980). More-

over, state interests play a far less significant role when

the central importation concern is not in issue.

The Court's earliest opinions under section 2 are some-

times said to establish a broad scope for state power under

section 2. These cases, Joseph S. Finch & Co. v. McKittrick,

305 U.S. 395 (1939), Indianapolis Brewing Co. v. Liquor

Control Comm’n, 305 U.S. 391 (1939), Mahoney v. Joseph

Triner Corp., 304 U.S. 401 (1938), and State Bd. of Equali-

zation v. Young’s Market, 299 U.S. 59 (1936), have not been

read so broadly by this Court. Each case addressed the

importation powers granted by section 2.

This Court made clear in the early years following

adoption of the Twenty-first Amendment that by virtue

of its provisions a State is totally unconfined by tradi-

tional Commerce Clause limitations when it restricts

the importation of intoxicants destined for use, distri-

bution, or consumption within its borders.

Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U.S.

at 330. The importation focus of the early cases again was

recognized in Midcal.

Young's Market, supra, concerned a license for inter-

state imports of alcohol; another case focused on a law

restricting the types of liquor that could be imported

.from other States, Mahoney v. Joseph Triner Corp.,

304 U.S. 401 (1938); two others involved “retaliation”

statutes barring imports from States that proscribed

shipments of liquor from other States, Joseph S. Finch

é Co. v. McKittrick, 305 U.S. 395 (1939) ; Indianapolis

Brewing Co. v. Liquor Control Comm'n, 305 U.S. 391

(1939).

445 U.S. at 107-08. These cases, the Court stated, were de-

cided “largely on the basis of the States’ special power

over the ‘importation and transportation’ of intoxicating

liquors.” 445 U.S. at 108, They did not recognize any gen-

eral, preeminent state power over alcoholic beverages.

Nor has the Court interpreted its initial Twenty-First

Amendment decisions as subordinating the federal com-

merce power to the state interests recognized by section 2.

To draw a conclusion from this line of decisions

that the Twenty-first Amendment has somehow oper-

ated to “repeal” the Commerce Clause wherever regu-

lation of intoxicating liquors is concerned would, how-

ever, be an absurd oversimplification. If the Commerce

Clause had been pro tanto “repealed” then Congress

would be left with no regulatory power over interstate

or foreign commerce in intoxicating liquor. Such a con-

clusion would be patently bizarre and is demonstrably

incorrect.

Idlewild, 377 U.S. at 331-32.

The early cases themselves rejected the contention that

section 2 eviscerated all federal power over alcoholic

beverages:

Yet even when the States had acted under the expli-

cit terms of the Amendment, the Court resisted the

contention that § 2 ‘freed the States from all restric-

tions upon the police power to be found in other pro-

visions of the Constitution.’ Young’s Market, supra,

at 64.

Midcal, 445 U.S. at 108. Thus, Midcal recognized that even

the early, most expansive readings of section 2 do not allow

state law to override federal policy simply because state

law regulates alcoholic beverages.

The Court’s opinions have not adopted any hard and

fast rule to identify the scope of the respective federal

and state powers. Instead, the Court has required that the

Twenty-first Amendment and the Commerce Clause be

read and considered together and the issues presented by

the competing interests they represent addressed in a

practical way.

Both the Twenty-first Amendment and the Com-

merce Clause are parts of the same Constitution. Like

other provisions of the Constitution, each must be

considered in the light of the other, and in the context

of the issues and interests at stake in anv concrete

case.

Idlewild, 377 U.S. at 331-32. See also Joseph E. Seagram €

Sons, Inc. v. Hostetter, 384 U.S. 35 (1966). Thus, any sug-

gestion of “absolute” state power over alcoholic beverages

has been rejected by the Court.

Consistent with Jdlewild’s directive that Commerce

Clause interests be considered along with those presented

by section 2, the Court has abandoned the view of the early

cases that other provisions of the Constitution are over-

ridden by the Twenty-first Amendment. Young’s Market

stated in dictum that the Equal Protection Clause was ir-

relevant in the case of alcoholic beverages because a classi-

fication allowed by the Twenty-first Amendment could not

be forbidden by the Fourteenth. Mahoney v. Joseph Triner

Corp. followed this dictum in an opinion addressed solely

to an equal protection argument. This Court’s Fourteenth

Amendment opinions in Craig v. Boren, 429 U.S. 190, 204-

10 (1976) (equal protection) and Wisconsin v. Constanti-

neau, 400 U.S, 433, 436 (1971) (due process) rejected these

contradictions of /dlewild’s teaching on the coexistence of

these different provisions of the “same Constitution.” Both

cases held Fourteenth Amendment concerns to prevail over

state interests asserted under the Twenty-first Amendment.

See Midcal, 445 U.S. at 108. They showed both the Court's

rejection of the broad implications of the early cases and

any rule of state preeminence.”

CO. Inthe Context of the “Issues and Interest at Stake” in

this Case, the Twenty-first Amendment Provides No

Basis for Upholding Hawaii's Discriminatory Tax

Hawaii has not relied on the Twenty-first Amendment in

attempting to justify the tax involved here. The state’s

failure to do so reflects the absence of any legitimate state

interest to assert against the undisputed federal interest

in free trade that has led to the rule discussed above

establishing a “virtual” per se prohibition on discrimina-

tory state taxes. Hawaii can articulate no legitimate state

interest because the tax is based solely on the forbidden

purpose of fostering local industry at the expense of for-

eign and interstate commerce. This state purpose carries

no weight in the accommodaticu of the interests presented

by this case.

As in Midcal, the state court has provided an identifica-

tion of the state policies alleged to be served by the statute

in question. Not only has the highest state court identified

and articulated the protectionist goal of the statute, AJS

at A-12 to A-13, the state attorney general, R. 268,"° and

the state legislature, in a specific policy statement, also

have explained that the statute before the Court is based

on a goal that is in no way connected with any of the con-

cerns that led to the enactment of section 2 and one that is

“For the reasons enunciated in Craig and Constantineau, the

Twenty-first Amendment does not foreclose Fourteenth Amendment

equal protection review of the discrimination involved here.

“In Midcal, the Court noted that the intervenor and amicus state

attorney general failed to identify state interests in the resale price

maintenance scheme other than those articulated by the state

courts. 445 U.S. at 111 n.12. Here, the attorney general not only

identifies uo additional interests, he affirmatively asserts the purpose

stated by the legislature and articulated by the Hawaii Supreme

Court.

40)

prohibited to the states by well-established Commerce

Clause jurisprudence. There is no question of restricting

the importation of alcoholic beverages, and nothing at all

related even to traditional state police power interests in

the regulation of alcoholic beverages. Instead, the Hawaii

tax is designed only to promote local industry over out-of-

state industry, a concern nowhere addressed by the lan-

guage or history of section 2 or this Court’s rulings on

state power to regulate alcoholic beverages.

In Midcal, the state courts’ articulation of the state inter-

ests and their assessment of the usefulness of the chal-

lenged state law in obtaining concededly appropriate local

goals were accepted by the Court. 445 U.S. at 111-114. In

this case, the state has also provided an articulation of the

local interest. Because that interest is not permissible

under section 2 or the Commerce Clause, this case presents

no true conflict between federal and state interests, and no

need to accommodate competing concerns. All that it re-

quires is recognition of the force of the federal interest in

the free flow of commerce among the states.”

**As did Midcal, this case presents a clear and fundamental fed-

decisions barring discriminatory state taxes. The case thus does not

present any issue regarding the weight to be given more general

federal

CONCLUSION

Hawaii’s discriminatory liquor tax violates basic prin-

ciples of federalism. The decision of the Hawaii Supreme

Court upholding the tax is contrary to these principles as

consistently applied by this Court. For this reason, and

the other reasons set forth in this brief, the judgment below

should be reversed.

Respectfully submitted,

W. Reece Baper Autan 8. Haiey

Ropsert E. Freitas

James A. Hucues Attorney for Appellants

Or Orrick, Herrinoton & Bacchus Imports, Ltd. and

SuTCLIFFE Eagle Distributors, Inc.

A Professional Corporation

Of Counsel

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.