Appellees Brief — Bacchus Imports, Ltd. v. Dias

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NO, 82-1565

IN THE a

Supreme Court of the United States ~

OCTOBER TERM, 1983

BACCHUS IMPORTS, LTD., et al.,

ippeliants,

GEORGE FREITAS,

Director of Taxation of the State of Hawai, et al.,

ippellees

ON APPEAL FROM THE SUPREME COURT OF THI

~ STATE OF HAWAII

BRIEF FOR APPELLEE IN

SUPPORT OF APPELLANTS

BRUCE C. BIGELOW*

ERIC K. YAMAMOTO

TOD Z. TANAKA

Suites 2500 and 2600

Grosvenor Center, Mauka Tower

737 Bishop Street

Honolulu, Hawaii 96813

(808) 547-5400

(*Counsel of Record)

Attorneys for Appellee

in Support of Appellants

FOREMOST McKESSON, INC

dba McKESSON WINE &

SPIRITS CO

September |, 1983

QUESTIONS PRESENTED

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

wholesale level of all liquor sold in Hawaii, which exempts

certain locally produced liquors for the express purpose of

fostering and protecting local industries, discriminate against

imported liquors and constitute an undue burden on interstate

and foreign commerce in violation of the Commerce Clause of

the United States Constitution?

2. Does such a discriminatory state tax by taxing imports

based on their place of origin constitute an impost or duty on

imports prohibited by the Import-Export Clause of the United

States Constitution?

3. Does such a discriminatory state tax, by exempting

certain locally made liquors while taxing liquors imported from

foreign and out-of-state sources by certain wholesalers, deny

them the equal protection of the laws?

PARTIES TO THE PROCEEDINGS BELOW

The parties to the proceeding in the Supreme Court of

Hawaii, Case No.7802, October Term 1979, were Bacchus

Imports, Ltd., Eagle Distributors, Inc., Paradise Beverages,

Inc. and Foremost-McKesson, Inc., dba McKesson Wine &

Spirits Co., as Petitioners, and George Freitas, Director of

Taxation of the State of Hawaii, as Respondent.

STATEMENT OF CORPORATE RELATIONSHIPS

Pursuant to Supreme Court Rule 28.1, Foremost-

McKesson, Inc.,* doing business as McKesson Wine & Spirits

Co., submits the following list naming all of its parent com-

* Foremost-McKesson, Inc., changed its name to McKesson Corporation

effective July 27. 1983. It continues to do business under the trade name

McKesson Wine & Spirits Co.

panies, subsidiaries (except wholly owned subsidiaries) and

affiliates.

City Properties, S.A.; Corporacion Bonima, S.A.; Intercal,

Inc.; Mount Gay Distilleries, Ltd.; Organizacion Far-

maceutica Americana, S.A.; Foremost-Baldwin Partners;

Foremost Genetics Associates; Influential Homes Co.;

Visitacion Associates; Foremost Dairies Company

(Bangkok) Ltd.; Formac Trading (Taiwan) Ltd.; Taiwan

Merchant Supply Co., Ltd.; Crockers Homes, A Joint

Venture; Ditz-Crane Associates; Ditz-Crane of Arizona, A

Joint Venture; Foremost Hawaiiana; Foremost H.P.1.;

Foremost-McCormack Development; Jackson Albany As-

sociation; Norwalk Santa Fe Springs Associates; La Vas-

congada, S.A.C. e 1.; Foremost Dairies (Taiwan) Ltd.;

Calox Panamena, S.A.; Distribuidora Farmaceutica Calox

Colombiana, S.A.; Foremost Dairies (Nigeria) Ltd.;

Jamjoom-Foremost, Ltd.; Laboratories Calox, C.A.;

Lebanese Foremost Dairies S.A.L.; Nosi Sales Corpora-

tion; and National Optical Services, Inc.

TABLE OF CONTENTS

Page

sou yee re i

PARTIES TO THE PROCEEDINGS BELOW ........ i

STATEMENT OF CORPORATE RELATIONSHIP .... i

RR Ie PUMP UMURMEE IED 6 ook a cic cde ws wcdoaccees V

NS iS cade Asp Gas es w wale weaves l

a TERT RS SARS a eee 2

CONSTITUTIONAL AND STATUTORY

ee crt ce sp eis esc 00.00 news 2

PRUE GE DEUS GARUEE coco 5 iwc ccovotacswvess 3

EE GP PUUOEIMEIO Dg cu ccm sec sidievce ces 6

NG 920s dN aay coe eck Wh yibs ve'elwaess )

I. THE HAWAII LIQUOR TAX, BY ITS

TERMS, IN OPERATION, AND IN

ACCORDANCE WITH EXPRESS

LEGISLATIVE INTENT, DISCRIMINATES

AGAINST INTERSTATE AND FOREIGN

COMMERCE IN VIOLATION OF THE

os ea ere Pee v)

A. The Hawaii Liquor Tax Intentionally Effects

NN 5s a cada week eccdeew es 10

B. The Hawaii Liquor Tax Is A Classic

Example Of Discriminatory Taxation....... 13

1. The Federal Precedents Compel The

Invalidation Of The Hawaii Liquor Tax .. 14

2. The Hawaii Supreme Court Failed To

Follow The Federal Law .............. 21

Il. THE HAWAII LIQUOR TAX IS AN IMPOST

OR DUTY PROHIBITED BY THE

IMPORT-EXPORT CLAUSE ............... 29

Ill. THE HAWAII LIQUOR TAX VIOLATES THE

EQUAL PROTECTION CLAUSE OF THE

FOURTEENTH AMENDMENT ............. 32

Th 46 dadkd chanede se eetdedateokoesas 35

Page

APPENDIX

A. S. Stand. Comm. Rep. No. 87, Ist Hawaii

State Leg., Budget Sess. (1960), reprinted

in 1960 Hawaii Senate Journal 224 ......... 10

B. S. Stand. Comm. Rep. No. 222, Ist Hawaii

State Leg., Budget Sess. (1960), reprinted in

1960 Hawaii Senate Journal 256 .......... 10

C. H. Stand. Comm. Rep. No. 322, Ist Hawaii

State Leg., Budget Sess. (1960), reprinted

in 1960 Hawaii House Journal 373 ........ 10

D. H. Stand. Comm. Rep. No. 246, 6th, Hawaii

State Leg., Reg. Sess. (1971), reprinted in

1971 Hawaii House Journal 793-94 ........ 11

E. S. Stand. Comm. Rep. No. 408-76, 8th

Hawaii State Leg., Reg. Sess. (1976),

reprinted in 1976 Hawaii Senate Journal

Weee eG hale diaaet rhs 6 0hk eu ined cueeeeee 11

F. H. Stand. Comm. Rep. No. 689-76, 8th

Hawaii State Leg., Reg. Sess. (1976),

reprinted in 1976 Hawaii House Journal

Bs Sains mae ewan os0s kb kade silee ames 11

G. H. Conf. Comm. Rep. No. 31, 11th Hawaii

State Leg., Reg. Sess. (1981), reprinted in

1981 Hawaii House Journal 911-12........ 12

H. S. Conf. Comm. Rep. No. 29, 11th Hawaii

State Leg., Reg. Sess. (1981), reprinted in

1981 Hawaii Senate Journal 917 .......... 12

TABLE OF AUTHORITIES

Cases Page

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

Oe pais oe ee cic peed ba kata Coes 8, 33, 34

American Modulars Corp. v. Lindley, 54 Ohio St.2d

ea eet Sees EP COED ha ede e ev eene nee 20

American Trucking Associations, Inc. v. Quinn,

page Me a) Ot | a ener 20

Archer Daniels Midland Co. v. State, Minn.

See § ee Re eT CRED a apace cad) v0 Hide eas 20

Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511

PE oc She Gn eter Ae ate re eres e rere Cah 13; 20

Best & Co. v. Maxwell, 311 U.S. 454 (1940) .. 18, 25, 2

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

SIs CeTi) ..... 6, 7,9, 10, 14, 18, 19, 22, 23, 25, 26, 27

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

Ls cai ply 2 ST Saya GN Sa er ead oP ei nee 24

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274

NN ay Ces er Penn ee ARE wo 4 bbe cae Y)

Concordia Fire Insurance Co. v. Illinois, 292 U.S.

NC eS ha Ls 5 Ta au ea orc ew es os é 33

Dayton Power & Light Co. v. Lindley, 58 Ohio

5t.26 465, 391 N.E.2d 716 (1979) ............. ®, 21

Dean Milk Co. v. Madison, 340 U.S. 349 (1951) ... 9, 18

Exxon Corp. v. Wisconsin Department of Revenue,

ee de asl ie, oy -e% Wik «wine idea's 4

Guy v. Baltimore, 100 U.S. 434

eka ves cade aes 4. 15, T7, B22.

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

Ma a eg AS deur ia 13

Halliburton Oil Well Co. v. Reily, 373 U.S. 64

Sy co alg a odin 14, 19, 22, 23, 25

Hanover Fire Insurance Co. v. Carr, 272 U.S. 494

Toe, FRR Pa aa REI A ek, AE ea 33

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

ORE erie a on ats Cake 14, 17, 20, 22, 23

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

UND Swiss <6 etra'd oe. v.bie 6's MAS Read Aes mee 12

Page

Mapco, Inc. v. Grunder, 470 F. Supp. 401

ee OD oe o's.k oc ve apa trae pinta a 66,0 con Ohta 21

Maryland v. Louisiana, 451 U.S. 725

Ls) Ce mr Ae 7, 14, 18, 19, 22, 24, 23, 26, 27

Matter of Bacchus Imports, Ltd., 65 Hawaii

G6 P28 TIA AIFRZ) . oe eo Lit, U2, 13, 21, 22, 23

Memphis Steam Laundry v. Stone, 342 U.S. 389

reas codec ek Sant en Bie ne enews 25, 26

Michelin Tire Corp. v. Wages, 423 U.S. 276

Baas aerate i Sagi pa rera nase 8, 9, 29, 30, 31, 32

Mobil Oil Corp. v. Commissioner of Taxes, 445

C8 EE RS A care Mr be et 9

Moorman Manufacturing Co. v. Blair, 437 U.S. 267

Ne i Ce aid eh pele OEM een en ESOS 9

National Geographic Society v. State Board of

Equalization, 430 U.S. 551 (1977) ............-405. )

Nippert v. Richmond, 327 U.S. 416 (1946)........... 27

Northwestern States Portland Cement Co. v.

Minnesota, 358 U.S. 450 (1959) .............. 10, 18

Philadelphia v. New Jersey, 437 U.S. 617

ia rot ie ene yg a ee ere 6, 15, Zi, #4

Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) .. 20, 21

Southern Railway Co. v. Greene, 216 U.S. 400

SL, ah eh ehrd ake RRR Rae Or Ren 33

Standard Pressed Steel Co. v. Washington Revenue

Department, 419 U.S. 560 (1975) .............--0-- 9

ee Cen! 2 ON, ke rcir bine be mcny ee oe ome 16

State, Department of Fisheries v. Dewatto Fish Co.,

34 Wash. App. 135, 660 P.2d 298 (1983) .......... 20

Toomer v. Witseil, 334 U.S. 385 (1948) ............. 21

United Air Lines, Inc. v. Mahin, 410 U.S. 623 (1973) .. 9

Walling v. People of Michigan, 116 U.S. 446

WU ns nts aaela st 6a} 8, 14, 15, 16, 17, 19, 22, 23

Washington Revenue Department v. Washington

Stevedoring Association, 435 U.S. 734 (1978) ... 30, 32

Welton v. Missouri, 91 U.S. 275

| Serra 7, 10, 14, 15, 16, 17, 18, 19, 22, 23

Page

Western & Southern Life Insurance Co. v. Board of

Equalization, 451 U.S. 648 (1981) ................ 34

Western Live Stock v. Bureau of Revenue, 303 U.S.

to 0 | ed ia erie NR PEE graye pment ct ct" )

Wheeling Steel Corp. v. Glander, 537 U.S. 562

CE ois oN aioe ci Oa ee ea eee 5: 32,30

WHYY, Inc. v. Glassboro, 393 U.S. 117 (1968) .... 8, 33

United States Constitution

1 OR Be Os Ose bone e een aeveaeyen 2

ihe. GE OR We ep ev eos eee 2

Cr ee, WN, © Ls nos oktecuate utes 2

Statutes

Arkansas Statutes Annotated

Ark. Stat. Ann. § 48-402 (Supp. 1983) ......... 28

Ae. Sot. Aan. 9 48-GS6. (IST 1). . ac eos uns 28

<<. a mee Syd Wh’ ¢) eeenenee ene ree 28

Connecticut General Statutes Annotated

Conn. Gen. Stat. Ann. § 12-451 (West 1983) .... 28

Delaware Code Annotated

Del. Code Ann. tit. 4, § 728 (1975)............ 28

Florida Statutes Annotated

Fla. Stat. Ann. § 564.06 (West Supp. 1983) ..... 28

Fla. Stat. Ann. § 565.12 (West Supp. 1983) ..... 28

Fla. Stat. Ann. § 565.14 (West Supp. 1983) ..... 28

Code of Georgia Annotated

Ga. Code Ann. § 3-4-60 (1982) ............... 28

Ga. Code Ann. § 3-6-50 (Supp. 1983) ......... 28

Hawaii Revised Statutes

Hawaii Rev. Stat. § 40-35 (Supp. 1982) ........ 5

Hawaii Rev. Stat. § 237-13 (Supp. 1982) ....... 4

Hawaii Rev. Stat. § 244-1 et seq. (Repl. 1976) .. 3

Hawaii Rev. Stat. § 244-2 (Rep. 1976) ......... 3

Hawaii Rev. Stat. § 244-4 (Supp. 1982) ........ 2,4

Hawaii Rev. Stat. § 244-4(6) (Supp. 1982) ...... 2

Hawaii Rev. Stat. § 244-4(7) (Supp. 1982) ...... 3

Hawaii Rev. Stat. § 244-4(8) (Supp. 1982) ...... 3

Hawaii Rev. Stat. § 281-31 (Supp. 1982) ....... 3

Vili

Illinois Annotated Statutes

Ill. Ann. Stat. ch. 43, § 158-1 (Smith-Hurd Supp.

Sea bed sce sercssvcccceces

Indiana Code Annotated

Ind. Code Ann. § 7.1-2-7-3 (Burns 1978).......

lowa Code Annotated

Iowa Code Ann. § 123.136 (West Supp. 1983-84)

Iowa Code Ann. § 123.146 (West Supp. 1983-84)

Kentucky Revised Statutes Annotated

Ky. Rev. Stat. Ann. § 243.720 (Michie Supp.

ES ie ay iy habs sve cece coe.

Maine Revised Statutes Annotated

Me. Rev. Stat. Ann. tit. 28, § 452 (Supp.

er ahs ls ces ccc c cece

Me. Rev. Stat. Ann. tit. 28, § 501 (Supp.

Annotated Code of Maryland

Md. Ann. Code art. 4, § 5 (1981) .............

Md. Ann. Code art. 4, § 133 (Supp. 1982) ......

Michigan Statutes Annotated

Mich. Stat. Ann. § 18.987 (1) (Callaghan Supp.

ny ce ccd csv ccccccccsccs

Mich. Stat. Ann. § 18.1011 (Callaghan Supp.

Vices e pacescscvcccccccces

Minnesota Statutes Annotated

Minn. Stat. Ann. § 340.436 (West Supp. 1983) ..

Mississippi Code Annotated

Miss. Code Ann. § 27-71-7 (Supp. 1982) .......

New Jersey Statutes Annotated

N.J. Stat. Ann. § 54:43-1 (West Supp. 1983-84) .

New Mexico Statutes Annotated

N.M. Stat. Ann. § 60-6A-11 (1981) ...........

General Statutes of North Carolina

N.C. Gen. Stat. § 105-113.86 (Supp. 1981) .....

N.C. Gen. Stat. § 105-113.95 (1979)...........

Ohio Revised Code Annotated

Ohio Rev. Code Ann. § 4301.54 (Page 1982)....

Ohio Rev. Code Ann. § 4301.55 (Page 1982) ....

Oregon Revised Statutes

Or. Rev. Stat. § 473.040 (1981) ............... 28

Pennsylvania Statutes Annotated

Pa. Stat. Ann. tit. 47, § 105 (Purdon 1969)...... 28

General Laws of Rhode Island

R.I. Gen. Laws § 3-10-1 (Supp. 1982) ......... 28

R.J. Gen. Laws § 3-10-15 (1976).............. 28

R.I. Gen. Laws § 3-10-17 (1976).............. 28

Code of Laws of South Carolina Annotated

S.C. Code Ann. § 12-21-1040 (Law. Co-op

PN ers G cc ek Olas a an ewe kaa e<s 28

South Dakota Codified Laws Annotated

S.D. Codified Laws Ann. § 35-5-3.1 (1977)..... 28

Tennessee Code Annotated

Tenn. Code Ann. § 57-3-207 (1980) ........... 28

Tenn. Code Ann. § 57-3-302 (1980) ........... 28

Texas Codes Annotated, Alcoholic Beverage Code

Tex. Alco. Bev. Code Ann. § 203.08 ( Vernon

PT eo dhe t Sharad eee botks Vecyciaee eee 28

Code of Virginia Annotated

Va. Colin 6 Boke. fb CA9Gs) ote ince c eect edvec mas 2

1959 Hawaii Séss. Laws, ¢. 222, O59 0.0 ecciep wows

1947 Hawaii Sess. Laws, c. 111, § 14[b).........

1949 Hawaii Sess. Laws, c. 343, §3.............

1957 Hawaii Special Sess. Laws, c. 1, § 7[b] .....

1960 Hawaii Sess. Laws, c. 26,§ 1..............

1965 Hawaii Sess. Laws c. 155,§ 8 .............

1971 eawelk Sees: Lows, ¢: 62,9 1: 0. eee

1976 Mawali Sess. Laws, ©: 39, 9.) 6 ccce feccesees

1981 Hawaii Sess. Laws, c. 182, § 1.............

Te: Oe RAE) 6 65s Fae be cre eN ee ee weaee

NuUhl hub ann n oo

Legislative Reports

S. Stand. Comm. Rep. No. 87, Ist Hawaii State

Leg., Budget Sess. (1960), reprinted in 1960

Hawaii Senate Journal 244..............0000e- 10

S. Stand. Comm. Rep. No. 222, Ist Hawaii State

Leg. Budget Sess. (1960), reprinted in 1960

Siewrets Semeee FOUN FIG oon a ceive ere ns

H. Stand. Comm. Rep. No. 322, Ist Hawaii State

Leg., Budget Sess. (1960), reprinted in 1960

Pemwvads FINNS FORUM FID. occ cote cewsdenses

H. Stand. Comm. Rep. No. 246, 6th Hawaii State

Leg., Reg. Sess. (1971), reprinted in 1971 Hawaii

Sr cn ie ae er

S. Stand. Comm. Rep. No. 408-76, 8th Hawaii

State Leg., Reg. Sess. (1976), reprinted ir 1976

Hawaii Senate Journal 1056................44.

H. Stand. Comm. Rep. No. 689-76, 8th Hawaii

State Leg., Reg. Sess. (1976), reprinted in 1976

Hawaii House Journal 1590 ..................4..

H. Conf. Comm. Rep. No. 31, 11th Hawaii State

Leg., Reg. Sess. (1981), reprinted in 1981 Hawaii

2 ES It Sa or oar ge ican pee eee

S. Conf. Comm. Rep. No. 29, 11th Hawaii State

Leg., Reg. Sess. (1981), reprinted in 1981 Hawaii

SG EE Fa S535 ¢ owen eke otc0 c eirees aes

Other Authorities

Hellerstein, ‘Constitutional Limitations on State

Taxation Exportation,’* 1982 American Bar

Foundation Research Journal 1 (1982) ..........

Page

NO. 82-1565

IN THE

Supreme Court of the United States

OCTOBER TERM, 1983

BACCHUS IMPORTS, LTD., et al..

Appellants,

Vs.

GEORGE FREITAS,

Director of Taxation of the State of Hawaii. et al..

Appellees.

ON APPEAL FROM THE SUPREME COURT OF THE

STATE OF HAWAII

BRIEF FOR APPELLEE IN

SUPPORT OF APPELLANTS

OPINIONS BELOW

The opinion of the Supreme Court of the State of Hawaii is

reported in Matter of Bacchus Imports, Ltd., 65 Hawaii

, 656 P.2d 724 (1982).

JURISDICTION

The judgment of the Supreme Court of the State of Hawaii,

which sustained the validity of the Hawaii liquor tax statute,

was entered on January 5, 1983. The notice of appeal was filed

by appellants with the Hawaii Supreme Court on March 3,

1983. The jurisdiction of this Court is invoked under 28 U.S.C.

§ 1256(2).

CONSTITUTIONAL AND STATUTORY PROVISIONS

Article I, Section 8, Clause 3 of the United States Constitu-

tion provides in part: ‘The Congress shall have power. . . [t]o

regulate Commerce with foreign nations, and among the several

States. .. .’’ U.S. Const. art. I, § 8, cl. 3.

Article I, Section 10, Clause 2 of the United States Con-

stitution provides in part: **No State shall, without the consent

of Congress, lay any Imposts or Duties on Imports or Exports.

~eve U.S. Const. at. I, § 10, cl. 2.

Section | of the Fourteenth Amendment provides in part:

‘‘No State shall . . . deny to any person within its jurisdiction

the equal protection of the laws.’’ U.S. Const. amend. XIV.

§ 1.

Section 244-4 of the Hawaii Revised Statutes, as amended

to date, provides in part:

Every person who sells or uses any liquor not taxable

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: pro-

vided, that the tax shall be paid only once upon the same

liquor; provided, further, that the tax shall not apply to:

(6) Okolehao manufactured in the State for the period

May 17, 1971, to June 30, 1981: or

(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

Foremost- McKesson, Inc. (McKesson) is a Maryland cor-

poration registered to do business in the State of Hawaii, and

doing business as McKesson Wine & Spirits Co., a division of

Foremost-McKesson, Inc. (Joint Appendix [hereinafter

“*J.A.°’] 18). It is licensed by the liquor commission for each

county of the State of Hawaii as a liquor wholesaler pursuant to

Hawaii Revised Statutes § 281-31 (Supp. 1982) and by the

Department of Taxation for the State of Hawaii as a permittee

pursuant to Hawaii Revised Statutes § 244-2 (Repl. 1976).

(J.A. 18). Appellee George Freitas is the Director of Taxation

of the State of Hawaii and, in such capacity, is charged with

administering the Hawaii liquor tax for the State of Hawaii.

(J.A. 18). See generally Hawaii Rev. Stat. §§ 244-1 et seq.

(Repl. 1976).

McKesson imports foreign and domestic liquer into the

State of Hawaii, warehouses such liquor on premises licensed

by agencies of both the United States and the State of Hawaii,

and sells such liquor at wholesale. (J.A. 19). Foreign-produced

liquors are either shipped directly to Honolulu, Hawaii, or

indirectly through other states. (J.A. 19-21). Domestic liquors

are shipped from the other states. (J.A. 21).

Section 244-4 of the Hawaii Revised Statutes imposes a tax

on the first sale at wholesale of liquor, at a rate of 20% of the

wholesale price (which includes freight charges, customs duties

and federal taxes, and the wholesaler’s markup).' 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. (J.A. 22). McKesson generally sells liquor to busi-

nesses in Hawaii at a price equal to its wholesale price plus the

20% tax imposed by Section 244-4, plus the 0.5% general

excise tax imposed by Hawaii Revised Statutes § sail 13 (Supp.

1982). (J.A. 22).

Since 1960, Hawaii's legislature has enacted various

exemptions from the liquor tax designed to foster local liquor

industries. From 1960 to 1965, okolehao (a brandy distilled

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

from the tax.? This exemption expired in 1965, but was

reenacted in 1971,* and extended again in 1976.* It expired in

1981. By the same act in 1976, a five-year exemption from the

liquor tax was also granted to wine made in Hawaii from fruit

grown in the state.* This exemption also lapsed in 1981. How-

ever, in its 1981 session, while the present case was pending

‘Wholesale price for imported liquors is determined by adding a per-

centage markup to its “‘landed cost’* for such liquor. Landed cost is deter-

mined by adding the following costs to the original cost (F.O.B.) of the

liquor:

(1) United States Customs duties (foreign liquors);

(2) United States Internal Revenue Service gallonage taxes;

(3) Customs brokerage fees;

(4) Inland freight to port of shipment to Honolulu;

(5) Ocean (or air) freight to Honolulu (including currency adjustment

fees added by the shipment company);

(6) Wharfage tees at Honolulu;

(7) Drayage charges for transportation to the warehouse:

(8) Warehouse handling charges.

(J.A. 21-22).

21960 Hawaii Sess. Laws, c. 26, § 1.

31971 Hawaii Sess. Laws, c. 62, § 1.

*1976 Hawaii Sess. Laws, c. 39, § 1; Hawaii Rev. Stat. § 244-4(6)

(Supp. 1982).

51976 Hawaii Sess. Laws, c. 39, § 1; Hawaii Rev. Stat. § 244-4(7)

(Supp. 1982).

before the Hawaii Supreme Court, the legislature enacted a new

exemption for **[r}um manufactured in the State for the period

May 17, 1981 to June 30, 1986.°**

The rate of the tax has been steadily increased over the years

to the present rate of 20%. Originally, the tax was imposed at

the rate of 6% of sales at retail or wholesale if the sale was

directly to the consumer.’ In 1947, the rate was raised to 8% .*

Two years later, responsibility for payment of the tax was

shifted from the retailers to the wholesalers, and the rate was

increased from 8 to 12%.’ In 1957, the rate was further in-

creased to 16%.'° Lastly, in 1965, the rate was raised to the

current 20%.!!

On September 6, 1979, McKesson protested the assessment

of the liquor tax by a letter directed to the Department of

Taxation. (J.A. 19).'* Shortly thereafter, it filed suit seeking a

refund of taxes paid since August, 1974. (J.A. 19). The com-

plaint alleged, among other things, that the Hawaii liquor tax

discriminated in favor of locally produced liquor in contraven-

tion of the Import-Export, Commerce and Equal Protection

Clauses of the United States Constitution.

The case was consolidated with similar suits filed by Bac-

chus Imports, Ltd., Eagle Distributors, Inc., and Paradise

Beverages, Inc. (hereinafter collectively referred to as ‘‘tax-

payers’’), and was heard on stipulated facts in the Hawaii Tax

(Supp. 1982).

71939 Hawaii Sess. Laws, c. 222, § 5.

*1947 Hawaii Sess. Laws, c. 111, § 14{b].

*1949 Hawaii Sess. Laws, c. 343, § 3.

'°1957 Hawaii Special Sess. Laws, c. 1, § 7 [b].

‘11965 Hawaii Sess. Laws, c. 155, § 8.

'? Payment of taxes under protest, and subsequent suit for their refund, is

provided for in Hawaii Rev. Stat. § 40-35 (Supp. 1982). The taxes paid with

the protest and all subsequent taxes paid during the pendency of this action

were deposited into an escrow known as the “‘litigated claims fund.*’

Depending upon the outcome of this appeal, the taxes in the fund will either

be returned to the taxpayers or become a realization of the state.

Appeal Court. The court upheld the tax, ruling against the

taxpayers’ constitutional claims. The taxpayers then appealed

to the Hawaii Supreme Court, which continued the consolida-

tion effected by the Tax Appeal Court.

In its opinion and by single judgment against all of the

taxpayers in the consolidated suit, the Hawaii Supreme Court

rejected each of the constitutional challenges and sustained the

validity of the tax. A timely appeal-to this Court from the

consolidated judgment was filed by Bacchus Imports, Ltd., and

Eagle Distributors, Inc. McKesson and Paradise Beverages,

Inc., did not file separate appeals, but are parties to the appeal

pursuant to Rule 10.4 of the Supreme Court Rules.

SUMMARY OF ARGUMENT

The State of Hawaii imposes an excise tax on the first sale at

wholesale of all liquor sold or used in the state. The tax rate is

20% of the wholesale price of the liquor so sold or used, and is

payable monthly by the wholesaler. To promote the develop-

ment and growth of the state's economy, Hawaii has granted

five-year renewable exemptions from the tax to various local

liquor industries. The exemptions confer a significant, albeit

artificial, cost advantage on the favored local products versus

Out-of-state products subject to the tax.

A. Commerce Clause. By exempting locally manufactured

products from the imposition of its liquor tax, Hawaii violates

the Constitution. The exemptions provide a substantial and

‘direct commercial advantage to local business’’ in contraven-

tion of the Commerce Clause. Boston Stock Exchange v. State

Tax Commission, 429 U.S. 318, 329 (1977). This Court has

long held that the Commerce Clause does not permit a state to

encourage the development of its local industry by means of

taxing measures which, like the Hawaii tax, impose greater

economic burdens on products produced outside the state than

are imposed on similar products produced within the state.

Indeed, such simple economic protectionism is subject to a

‘virtually per se rule of invalidity,’’ Philadelphia v. New

Jersey, 437 U.S. 617, 624(1978), since the ‘‘basic purpose ”’ of

the Commerce Clause is ‘‘to prohibit the multiplication of

preferential trade areas destructive of the free commerce antici-

pated by the Constitution.’ Maryland v. Louisiana, 451 U.S.

725, 754 (1981).

The lower court justified the discrimination against out-of-

State products by finding that the ‘‘incidence of the tax is on

wholesalers in Hawaii and the ultimate burden is borne by

consumers in Hawaii.’ Matter of Bacchus Imports, Ltd., 65

Hawaii , 656 P.2d 724, 734 (1982). The fact that an

otherwise discriminatory tax is imposed on a local event at the

end of the interstate commerce has never been a defense to a

Commerce Clause challenge. *‘[T]he commercial power [of the

federal government] continues until the commodity has ceased

to be the subject of discriminatory legislation 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.’’ Boston Stock Exchange v. State Tax Commis-

sion, 429 U.S. at 332 n.12 (quoting Welton v. Missouri, 91

U.S. 275, 282 (1876)).

Nor can the liquor tax be justified by the lower court's

assumption that the exempted liquor does not pose a ‘*‘competi-

tive threat’’ to liquor produced out-of-state. First, the lower

court failed to. realize that the test is not the extent of the

discrimination, but whether discrimination exists. ‘‘We need

not know how unequal the Tax is before concluding that it

unconstitutionally discriminates.’’ Maryland v. Louisiana, 451

U.S. at 760. Second, a dollar-and-cents comparison of the

actual tax burden on liquors produced in-state and out-of-state

shows that the Hawaii tax unconstitutionally discriminates

against the latter. For example, given the pyramid effect of the

tax, a case of California wine with a F.O.B. cost of $10.00 per

bottle would incur a tax of $56.40 upon its sale in Hawaii. No

tax would be assessed on a sale of like wine produced in Hawaii.

Such an inequality of tax burden is plainly discriminatory

within the meaning of this Court's Commerce Clause cases.

Finally, the lower court ignored several early decisions of

this Court, in particular, Walling v. People of Michigan, 116

U.S. 446 (1886), which clearly established that no state may,

consistent with the Commerce Clause, discriminatorily tax the

products of other states or persons engaged in the sale of such

products. In view of these precedents, it may be said of the

Hawaii tax, as it was of the tax at issue in Walling, *‘[i]f this is

not a discriminating tax levied against persons for selling goods

brought into the State from other States or countries, it is

difficult to conceive of a tax which would be discriminating. *’

116 U.S. at 454.

B. Import-Export Clause. Under the test established in

Michelin Tire Corp. v. Wages, 423 U.S. 276, 289 (1976), a

State tax which falls on imports must be invalidated if, among

other things, it usurps the exclusive federal authority to regulate

foreign commerce or deprives the federal government of import

revenues. The disparate tax treatment accorded in-state and

foreign liquors creates, in practical effect, a preferential trade

area for locally produced liquor. This is plainly inconsistent

with the constitutional requirement that the nation speak ‘‘with

one voice”’ in its commercial relations with foreign govern-

ments. Further, the high rate of the tax and its pyramid effect

reduc > the demand for foreign liquor which, in turn, decreases

the volume of imports and the fed.rai government's import

revenues. The tax is, therefore, invalid under Michelin as an

impost or duty prohibited by the Import-Export Clause.

C. Equal Protection Clause. The liquor tax denies the

equal protection of the laws to out-of-state liquor manufactur-

ers and wholesalers of out-of-state liquor by taxing liquor sales

based solely on the origin of the liquor. See Wheeling Steel

Corp. v. Glander, 337 U.S. 562, 571 (1948); WHYY, Inc. v.

Glassboro, 393 U.S. 117, 119-20 (1968). Since the sole pur-

pose of the classification is simple economic protectionism, the

Equal Protection Clause must be applied ‘‘to give effect to its

role to protect our federalism*’ by denying Hawaii *‘the power

constitutionally to discriminate in favor of its own residents

against the other state members of our federation.** Allied

Stores of Ohio v. Bowers, 358 U.S. 522, 533 (Brennan, J.,

concurring) (1959).

ARGUMENT

I. THE HAWAII LIQUOR TAX BY ITS TERMS, IN

OPERATION, AND IN ACCORDANCE WITH

EXPRESS LEGISLATIVE INTENT, DISCRIMI-

NATES AGAINST INTERSTATE AND FOREIGN

COMMERCE IN VIOLATION OF THE COM-

MERCE CLAUSE.

The prohibition against state taxes which discriminate

against interstate commerce has been a fundamental tenet of

Commerce Clause doctrine from the beginning. The rule *‘fol-

lows inexorably from the basic purpose of the Clause. Permit-

ting the individual States to enact laws that favor local enter-

prises at the expense of out-of-state businesses ‘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)).

The clear trend in the Court's recent decisions has been to

permit the states broad discretion in forcing interstate com-

merce to ‘pay its own way."’'? The Court has, ace -rdingly,

shown increasing deference to state assertions that a questioned

tax has a sufficient nexus with'* or is fairly apportioned to'* the

taxing state. In distinct contrast to this trend, there has been no

corresponding liberalization of Commerce Clause restrictions

on discriminatory state taxation. In decisions covering more

than 100 years of Commerce Clause analysis, this Court has

'3 Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254 (1938).

See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). Cf.

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

'*See, e.g., National Geographic Society v. State Board of Equaliza-

tion, 430 U.S. 551 (1977); Standard Pressed Steel Co. v. Washington

Revenue Department, 419 U.S. 560 (1975); United Air Lines, Inc. v.

Mahin, 410 U.S. 623 (1978).

'S See, e.g., Exxon Corp. v. Wisconsin Department of Revenue, 447

U.S. 207 (1980); Mobil Oil Corp.v. Commissioner of Taxes, 445 U.S. 425

(1980); Moorman Manufacturing Co. v. Blair, 437 U.S. 267 (1978).

steadfastly adhered to the constitutional policy of free trade and

competition among the states. The principle first articulated in

Welton v. Missouri, 91 U.S. 275 (1876) remains true today:

‘*No State may, consistent with the Commerce Clause, ‘impose

a tax which discriminates against interstate commerce. . . by

providing a direct commercial advantage to local business.’”’

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

318, 329 (1977) (quoting Vorthwestern States Portland Cement

Co. v. Minnesota, 358 U.S. 450, 458 (1959)). The reason is

plain. Discriminatory state taxation creates, in practical effect,

a tariff destructive of the free flow of commerce among the

States.

Accordingly, any state tax which, by its terms or practical

Operation, imposes greater burdens on out-of-state goods or

activities than on competing in-state goods or activities will be

struck down as discriminatory under the Commerce Clause.

Hawaii's liquor tax is such a discriminatory tax.

A. THE HAWAII LIQUOR TAX INTENTIONALLY

EFFECTS DISCRIMINATION.

The legislative history of the liquor tax exemptions makes

their purpose clear: To promote the development and growth of

specified state liquor industries by providing five-year renewa-

ble tax exemptions which grant the favored local products a

substantial cost advantage over out-of-state products. The pur-

pose of the original 1960 exemption for okolehao was stated to

be *‘to encourage and promote the establishment of a new

industry.’*'® When the exemption was reenacted in 1971, the

legislature expressed the hope that *‘the taxes temporarily saved

by [the okolehao manufacturers] may be channelled into na-

tional promotion and competitive pricing, the result of which is

'©S. Stand. Comm. Rep. Nos. 87 and 222, Ist Hawaii State Leg.,

Budget Sess. (1960), reprinted in 1960 Hawaii Sen. Journal 224, 256

(Appendices A and B). See also H. Stand. Comm. Rep. No. 322, Ist Hawaii

State Leg., Budget Sess. (1960), reprinted in 1960 Hawaii House Journal

373 (Appendix C).

a linking of okolehao to Hawaii as tequila is to Mexico."’'’ The

1976 extension of the okolehao exemption and the enactment of

an additional exemption for the local wine industry was justified

by the Hawaii 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

[sic] 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 indicates 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 most recent ex-

emption, for Hawaii-manufactured rum, evidences the Leg-

islature’s continued use of its tax system to benefit local

manufacturers:

The purpose of this bill is to exempt rum manufactured

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, 1866 and 1867,

under the name Bacchus Imports, Ltd., et al. v. Freitas,

currently pending in the State Supreme Court, regarding the

validity of certain liquor tax exemptions, and has had exten-

sive 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 pro-

duced in Puerto Rico and therefore makes no findings on

'7H. Stand. Comm. Rep. No. 246, 6th Hawaii State Leg., Reg. Sess.

(1971), reprinted in 1971 Hawaii House Journal 793-94 (Appendix D).

'SS. Stand. Comm. Rep. No. 408-76, 8th Hawaii State Leg., Reg. Sess.

(1976), reprinted in 1976 Hawaii Senate Journal 1056 (Appendix E). See

also H. Stand. Comm. Rep. No. 689-76, Sth Hawaii State Leg., Reg. Sess.

(1976), reprinted in 1976 Hawaii House Journal 1590 (Appendix F).

that issue. Your Committee does feel, however, that pro-

viding a tax incentive in the form of a liquor tax exemption

for a period of years is an appropriate method of en-

couraging the development of a new industry in the State

and is therefore in agreement with the intent of the bill.'°

Consistent with this history, the Hawaii Supreme Court

found that the okolehao and wine exemptions were specifically

intended to benefit local producers, concluding that *‘[nJo one

could quarrel with the proposition that the promotion of domes-

tic industry is a legitimate state purpose.’ Matter of Bacchus

Imports, Ltd., 656 P.2d at 730. While the court’s comment

might be relevant to an Equal Protection Clause analysis, it is

well settled that discriminatory legislation cannot be justified

under the Commerce Clause as a measure to assure the eco-

nomic health of local industry. As Mr. Justice Blackmun stated

in Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 43-44

(1980):

In almost any Commerce Clause case it would be possi-

ble for a State to argue that it has an interest in bolstering

local ownership, or wealth, or contro! of business enter-

prise. Yet these arguments are at odds with the general

principle that the Commerce Clause prohibits a State from

using its regulatory power to protect its own citizens from

outside competition.

'9§. Conf. Comm. Rep. No. 29, 11th Hawaii State Leg., Reg. Sess.

(1981), reprinted in 1981 Hawaii Senate Journal 1056 (emphasis added)

(Appendix H). See also H. Conf. Comm. Rep. No. 31, 11th Hawaii State

Leg., Reg. Sess. (1981), reprinted in 1981 Hawaii House Journal 911-12

(Appendix G).

Indeed, such ‘‘simple economic protectionism”’ is subject to a

‘virtually per se rule of invalidity.”’ Philadelphia v. New

Jersey, 437 U.S. 617, 624 (1978).?°

Where. as here, the state baldly announces its intent to

confer a direct economic benefit upon local manufacturers by

utilizing the liquor tax as a protective tariff against out-of-state

products and justifies this policy on grounds repeatedly rejected

by this Court, the tax is obviously repugnant to the Commerce

Clause.

B. THE HAWAII LIQUOR TAX IS A CLASSIC EXAM-

PLE OF DISCRIMINATORY TAXATION.

The Hawaii Supreme Court held that *‘[t}he taxpayers have

failed to demonstrate that the Hawaii Liquor Tax in its practical

operation works discrimination against interstate commerce."

Matter of Bacchus Imports, Ltd., 656 P.2d at 735. This conclu-

20S ee Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511 (1935) (New York

statute excluding Vermont milk held invalid); H. P. Hood & Sons, Inc. v.

Du Mond, 336 U.S. 525 (1949) (New York required to permit state milk

producer to export milk to other states, though price increases may result in

New York). The Baldwin decision is particularly pertinent. After holding

that the Commerce Clause prohibits obstructions to competition between the

states. Mr. Justice Cardozo expressly rejected the proposition that such

obstructions may be justified as measures to assure the economic health of

local industry

If New York in order to promote the economic welfare of her

farmers, may guard them against competition with the cheaper prices of

Vermont, the door has been opened to rivalries and reprisals that were

meant to be averted by subjecting commerce between the states to the

power of the nation.

The Constitution was framed under the dominion of a political

philosophy less parochial in range. It was framed upon the theory that the

peoples of the several states must sink or swim together, and that in the

long run prosperity and salvation are in union and not division.

294 U.S. at 522-23.

sion misreads this Court's recent Commerce Clause decisions?!

and ignores its earlier, and dispostitive, cases.** Indeed, one of

the early cases, Walling v. People of Michigan, 116 U.S. 446

(1886), is identical in all material respects to the present case. In

striking down the tax there at issue, the Court made an observa-

tion which is equally applicable here: ‘‘If this \s not a dis-

criminating tax levied against persons for selling gdods brought

into the State from other States or countries, it is\difficult to

conceive of a tax which would be discriminating.’ /d. at 454.

1. The Federal Precedents Compel The Invalidation Of

The Hawaii Liquor Tax.

In a series of cases commencing with Welton v. Missouri,

91 U.S. 275 (1876) and ending with/. M. Darnell & SonCo. v.

Memphis, 208 U.S. 113(1908), this Court considered a number

of state tax schemes similar to the Hawaii liquor tax. As in the

present case, the state statutes at issue imposed taxes on mer-

chants selling goods produced out-of-state, and exempted

similarly situated merchants selling locally produced goods. In

each case, this Court held that the taxes were discriminatory and

invalidated them under the Commerce Clause.

In its Welton decision, the Court struck down as discrimi-

natory a Missouri license tax which applied to peddlers of goods

which were ‘‘the growth, product or manufacture of other

States or countries,’* but did not apply to peddlers selling

merchandise which was ‘‘the growth, product or manufacture’

of Missouri. 91 U.S. at 275. The Court grounded its ruling on

the necessity to prevent an economic Balkanization of the

nation:

2! Maryland v. Louisiana, 451 U.S. 725 (1981); Boston Stock Exchange

v. State Tax Commission, 429 U.S. 318 (1977); Halliburton Oil Well Co. v.

Reily, 373 U.S. 64 (1963).

2217. M. Darnell & Son Co. v. Memphis, 208 U.S. 113 (1908); Walling v.

People of Michigan, 116 U.S. 446 (1886); Guy v. Baltimore, 100 U.S. 434

(1880); Welton v. Missouri, 91 U.S. 275 (1876).

The power of the State to exact a license tax of any

amount being admitted, no authority would remain in the

United States or in this court to control its action, however

unreasonable or oppressive. Imposts operating as an abso-

lute exclusion of the goods would be possible, and all the

evils of discriminating state legislation, favorable to the

interests of one State and injurious to the interests of other

States and countries, which existed previous to the adoption

of the Constitution, might follow, and the experience of the

last fifteen years shows would follow, from the action of

some of the States.

Id. at 281.

The Court reached the same conclusion a few years later in

Guy v. Baltimore, 100 U.S. 434 (1880). There, the Court

invalidated an ordinance of the City of Baltimore, authorized by

a Maryland statute, which assessed wharfage fees against ves-

sels which landed at the city’s public wharves laden with the

products of other states, but not against vessels landing there

with the products of Maryland. Citing Welton and earlier deci-

sions by the Court, Mr. Justice Harlan declared that **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, or upon citizens because en-

gaged in the sale therein . . . of the products of other States,

more one-ous public burdens or taxes than it imposes upon the

like products of its own territory. "’ 100 U.S. at 439. To concede

such 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 regula-

tions, having for their object to secure exclusive benefits to the

citizens and products of particular States.’* /d. at 442.

The Court's next decision, Walling v. People of Michigan,

116 U.S. 446 (1886), deserves close scrutiny because it is, in all

material respects, analogous to the present controversy. In that

case, the State of Michigan imposed a tax on persons selling at

wholesale, or soliciting orders for, liquor manufactured in other

states, without imposing a like tax upon persons engaged in the

same business in reference to liquor manufactured in the state.

Walling, a traveling wholesale salesman for an out-of-state

manufacturer, challenged the validity of the tax. Mr. Justice

Bradley, for a unanimous court, concluded that the violation of

the Commerce Clause was beyond reasonable dispute:

.. . [I]t is very difficult to find a plausible reason for

holding that it [the tax] is not repugnant to the Constitution.

It certainly does impose a tax or duty on persons who, not

having their principal place of business within the State,

engage in the business of selling, or of soliciting the sale of,

certain described liquors, to be shipped into the State. /f this

is not a discriminating tax levied against persons for selling

goods brought into the State from other States or countries,

it is difficult to conceive of a tax that would be discriminat-

ing. It is clearly within the decision of Welton v. Missouri

116 U.S, at 454 (emphasis added).?> McKesson, like Walling,

is a wholesaler representing out-of-state manufacturers. It must

pay tax on all of its sales whereas wholesalers representing the

favored state manufacturers pay no tax. As in Walling, such

differential taxation of liquor based on its origin is a ‘regulation

in restraint of commerce among the States, and as such is a

usurpation of the power conferred by the Constitution upon the

Congress of the United States.’’ 116 U.S. at 455.

*3In his opinion, Mr. Justice Bradley referred to state decisions ac-

knowledging the states’ lack of authority to prescribe regulations on articles

in commerce based on their place of origin. His discussion of a decision of

the Supreme Court of Missouri is particularly relevant to the issues in this

case:

In State v. North, 27 Mo. 464, where an Act of Missouri imposed a

tax upon merchants for all goods purchased by them, except such as

might be the growth, product or manufacture of that State, and man-

ufactured articles the growth or product of other States, it was held by the

Supreme Court of that State that the law was unconstitutional and void.

The court says: *‘From the foregoing statement of the law and facts of

this case it will be seen that it presents the question of the power of the

States, in the exercise of the right of taxation, to discriminate between

1.M. Darnell & Son Co. v. Memphis, 208 U.S. 113 (1908),

rounds out the Court's early decisions, The Darnell Company

operated a mill in Tennessee purchasing logs from both within

and without the state. The disputed personal property tax was

assessed against Darnell’s inventory of logs purchased from

out-of-siate sources, but, based on an exemption, not against

logs procured in Tennessee. The tax was declared unconstitu-

tional on the ground that it ‘was a direct burden on interstate

commerce, since the law of Tennessee in terms discriminated

against property the product of the soil of other states brought

into the State of Tennessee, by exempting like property when

produced from the soil of Tennessee.*’ 208 U.S. at 126.

Welton, Guy, Darnell and particularly Walling are disposi-

tive of the issues raised by this appeal. When Hawaii's legisla-

ture sought to encourage the development of its local liquor

industry by enactment of taxing measures disadvantaging out-

of-state manufacturers, it resurrected the precise taxing scheme

condemned in each of these decisions. Welton and its progeny,

therefore, compel the invalidation of Hawaii's liquor tax law,

products of this State and those manufactured in our sister States.'* And

after an examination of the causes which led to the adoption of the

Federal Constitution, one of the principal of which was the necessity for

the regulation of commerce and the laying of imposts and duties by a

single government, the court says: **But, whatever may be the motive for

the tax, whether revenue, restriction, retaliation or protection of domes-

tic manufactures, it is equally a regulation of commerce, and in effect an

exercise of the power of laying duties on imports; and its exercise by the

States is entirely at war with the spirit of the Constitution, and would

render vain and nugatory the power granted to Congress in relation to

these subjects. Can any power more destructive to the union and har-

mony of the States be exercised than that of imposing vtscriminating

taxes or duties on imports from other States? Whatever may be the

motive for such taxes, they cannot fail to beget irritation and to lead to

retaliation; and it is not difficult to foresee that an indulgence in such a

course of legislation must inflame and produce a state of feeling that

would seek its gratification in any measures regardless of the conse-

quences."

116 U.S. at 457-58 (citations omitted).

While this Court's recent decisions have allowed the states

greater leeway in exercising their taxing powers,** the Court

plainly has not retreated from the antidiscrimination principle

established in the Welton line of cases. Rather, the Cour: has

continued to be zealous in setting aside any state tax which by its

terms or in practical operation favors local over out-of-state

interests. Best & Co. v. Maxwell, 311 U.S. 454(1940), Indeed,

the chief feature distinguishing the earlier from the more recent

cases is that the state laws in question are usually more artfully

drawn to disguise the discrimination,

The Court's decisions in Boston Stock Exchange v. State

Tax Commission, 429 U.S. 318 (1977) and Maryland y.

Louisiana, 451 U.S. 725 (1981), are illustrative.

In Boston Stock Exchange, New York had amended its

stock transfer tax so that the tax payable by nonresidents was

reduced by 50% when the transaction involved an in-state sale,

but not when it involved an out-of-state sale. Also, a maximum

of $350.00 was applied to limit the tax on a single transaction

(by either a resident or a nonresident) when the sale took place

in-state, but not when 1! took place elsewhere. In his opinion for

a unanimous Court, Mr. Justice White reiterated that *‘[t}he

very purpose of the Commerce Clause was to create an area of

free trade among the several States.’ 429 U.S. at 328. To

permit ‘‘the individual States to enact laws that favor local

enterprises at the expense of out-of-state businesses ‘would

invite a multiplication of preferential trade areas destructive’ of

the free trade which the Clause protects.’’ /d. at 329 (quoting

Dean Milk Co. v. Madison, 340 U.S. 349, 356 (1951)). Sur-

veying the Court's decisions balancing the national interest in

free trade with the interest of the states in exercising their taxing

powers, Mr. Justice White noted:

This case-by-case approach has left *‘much room for con-

troversy and confusion and little in the way of precise guides

to the States in the exercise of their indispensable power of

taxation.’’ Northwestern States Portland Cement Co. y.

*4See cases cited supra notes 13 and 14.

Minnesota, 358 U.S. 450, 457 (1959). Nevertheless, as

observed by Mr. Justice Clark in the case just cited: *‘From

the quagmire there emerge . . . some firm peaks of decision

which remain unquestioned.** /d. at 458. Among these is

the fundamental principle that we find dispositive of the

case now before us: No State may, consistent with the

Commerce Clause, ‘impose a tax which discriminates

against interstate commerce ... by providing a direct

commercial advantage to local business.** /bid.

429 U.S. at 329. The transfer tax amendment was, accordingly,

held unconstitutional. Because it ‘*foreclose[d] tax-neutral de-

cisions and create[d] both an advantage for the [stock] ex-

changes in New York and a discriminatory burden on com-

merce to its sister States,’" /d. at 331, the tax violated the

principle that *‘in the process of competition no State may

discriminatorily tax the products manufactured or the business

Operations performed in any other State."’ Jd. at 337.25

Similarly, in Maryland vy. Louisiana, 451 U.S. at 725,

Louisiana imposed a tax on the “‘first-use’’ of natural gas

brought into the state which had not previously been taxed by

another state or by the United States. Through a series of

exemptions and credits, Louisiana users of the natural gas were

generally not burdened by the tax, while it uniformly applied to

gas moving out of the state to consumers in the rest of the

country. /d, at 732-33. The Court struck down the tax, holding

that it ‘‘unquestionably discriminates against interstate com-

merce in favor of local interests.’ Jd. at 756.

Maryland y. Louisiana and Boston Stock Exchange thus

reaffirm the principle first established in Welton, Guy, Walling

**See also Halliburton Oil Well Co. v. Reily, 373 U.S. 64 (1963), in

which the Court considered a Louisiana use tax which was applied to an

Out-of-state taxpayer's labor and shop overhead costs associated with as-

sembling specialized equipment that was brought into the state for use in the

taxpayer's business. These costs would have been excluded from the tax

base had the taxpayer assembled the equipment in Louisiana. Applying a

“strict rule of equality ,’* the Court set aside the tax as discriminatory against

products assembled out-of-state. 373 U.S. at 73.

and Darnell that discriminatory state taxation is subversive of

the most fundamental economic principles embodied in the

Constitution. The Coust has made no changes in doctrine or

other departures from the earlier cases. A state tax which

provides *‘a direct commercial advantage to local business"’ is

per se invalid.*°

*©State court decisions in other jurisdictions have consistently applied

this principle and invalidated discriminatory taxes under the Commerce

Clause. See, e.g., Archer Daniels Midland Co. v. State, —____. Minn.

. 315 N.W.2d 597 (1982); Dayton Power & Light Co. v. Lindley,

58 Ohio St. 2d 465, 391 N.E.2d 716 (1979): American Trucking Associa-

tions, Inc. v. Quinn, 437 A.2d 623 (Me. 1981); American Modulars Corp.

v. Lindley, 54 Ohio St. 2d 273, 376 N.E.2d 575 (1978); State, Dept. of

Fisheries v. Dewatto Fish Co., 34 Wash. App. 135, 660 P.2d 298 (1983).

In Archer Daniels Midland Co. v. State, 315 N.W.2d 597, Minnesota’s

Supreme Court declared unconstitutional a portion of a statute which pro-

vided for a four-cent per gallon reduction in a gasoline excise tax for gasohol

produced and distilled in Minnesota. The court held that the tax was per se

invalid since it facially discriminated against out-of-state gasohol by placing

a more onerous tax burden on such products simply because of their origin in

another state. 315 N.W.2d at 599. The court also found the tax unconstitu-

tional under the balancing test set forth in Pike v. Bruce Church, 397 U.S.

137, 142 (1970). First, the tax statute did not regulate even-handedly.

Second, the statute did not serve legitimate local interest such as public

safety which may justify state regulation of interstate commerce. Rather, as

in the present case, the statute attempted *‘to unfairly preserve local markets

for local interests by conferring an artificial economic advantage to local

interests under the state's taxing power."’ 315 N.W.2d at 599. The court

concluded, therefore, that the statute *‘imposes a burden on interstate com-

merce which is clearly excessive in relation to the local benefit.*’ /d.

In American Trucking Associations, Inc. v. Quinn, 437 A.2d 623, the

Supreme Judicial Court of Maine struck down a truck tax which required

Owners and operators of foreign based trucks using state highways to

purchase highway use permits, but which exempted entirely from tax

gasoline -powered trucks based in state. The court found that the tax was

invalid on its face because it discriminated against interstate commerce,

since it set much higher permit fees for foreign-based trucks than for

Maine-based ones. The court also noted the lower court finding that the

Statute was even more discriminatory in its practical effect than it appeared

on its face, because it increased the average per-mile operating costs for

2. The Hawaii Supreme Court Failed To Follow The

Federal Law.

Despite the patently discriminatory legislative purpose of

the liquor tax and its inevitable practical effect, the Hawaii

Supreme Court concluded that *‘[t]he taxpayers have failed to

demonstrate that the Hawaii Liquor Tax . . . works discrimina-

tion against interstate commerce. *’ Matter of Bacchus Imports,

Lid., 656 P.2d at 735.

The lower court's fundamental error is that it failed to

recognize that the Commerce Clause forbids precisely the sort

of economic protectionism which the Hawaii liquor tax fosters.

Indeed, as Pike v. Bruce Church, Inc., 397 U.S. 137, 145-46

(1970) makes clear, the fact that the tax exemptions are in-

tended *‘to preserve or secure employment for the home State,"

as they are here, is further proof of their unconstitutionality. A

State May not use its power to tax or to regulate business ** ‘to

divert to [itself] employment and business which might other-

wise go’"’ elsewhere; ‘*‘the necessary tendency’”* of such

enactments ** ‘is to impose an artificial rigidity on the economic

pattern of the industry.’ ** /d. at 146 (quoting Toomer v. Wit-

sell, 334 U.S. 385, 403-04 (1948)).*7

Perhaps as a consequence of its misperception of the thrust

of the Commerce Clause cases, the Hawaii Supreme Court

foreign-based trucks 200 times more than it did for trucks registered in

Maine. 437 A.2d at 626.

In Dayton Power & Light Co. v. Lindley, 391 N.E.2d 716, the Supreme

Court of Ohio invalidated an Ohio coal consumption tax which imposed

higher taxes on low sulphur coal than on high sulphur coal. Since Ohio

produced predominantly high sulphur coal and very little low-sulphur coal

the Court found that the practical effect of the tax was to encourage the

purchase of Ohio high sulphur coal and discourage the purchase of out-of-

state low sulphur coal. See also Mapco, Inc. v. Grunder, 470 F. Supp. 401

(N.D. Ohio 1979).

2" See also Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978) and

Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 523-24 (1935), discussed

supra note 20 and accompanying text.

misread this Court's holdings in Maryland v. Louisiana, Boston

Stock Exchange and Halliburton.

The former was distinguished by the lower court as follows:

‘Unlike the situation in Maryland vy. Louis:ana, supra, the

incidence of the tax here is on wholesalers of liquor in Hawaii

and the ultimate burden [of the tax] is borne by consumers in

Hawaii.’’ Matter of Bacchus Imports, Ltd., 656 P.2d at 734.

This ostensible distinction misses the point of the Commerce

Clause cases. The discrimination created by the Hawaii tax

scheme is directed against out-of-state products and the man-

ufacturers of those products. Their products, solely by reason of

their foreign origin, are subject to a significant tax burden

whereas the products of domestic manufacturers are not. This is

plainly the selfsame discrimination condemned in Welton, Guy,

Walling, Darnell and Halliburton. That the ultimate tax burden

fell on local consumers did not save the otherwise objectionable

tax schemes. Indeed, Mr. Justice White specifically noted that

‘the statutes at issue in those cases [including, among others,

Welton and Halliburton] had the primary effect of prohibiting

or discriminatorily burdening a resident's purchase of out-of-

state goods and services.** Boston Stock Exchange v. State Tax

Commission, 429 U.S. at 336.

That the liquor tax is paid by wholesalers in Hawaii is

likewise no ground of distinction. A state tax is not immune

from challenge simply because it is imposed on a local event or

local entities at the end of interstate commerce. This point was

made manifest in Boston Stock Exchange:

Because of the discrimination inherent in § 270-a [the

transfer tax}, we also reject the Commission's argument that

the tax should be sustained because it is imposed on a local

event at the end of interstate commerce. While it is true that,

absent an undue burden on interstate commerce, the Com-

merce Clause does not prohibit the States from taxing the

transfer of property within the State, the tax may not dis-

criminate between transactions on the basis of some in-

terstate element. As was held in Welton v. Missouri, 91

U.S. 275, 282 (1876): **[T]he commercial power [of the

Federal Government] continues until the commodity has

ceased to be the subject of discriminating legislation 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.”

429 U.S. at 332 n.12 (citations omitted).** See also 1. M.

Darnell & Son Co. v. Memphis, 208 U.S. at 113 (where the

incidence of the tax was clearly borne by local merchants and

where, just as clearly, it made no difference in the outcome of

the case).

The Boston Stock Exchange and Halliburton decisions,

while discussed by the Hawaii Supreme Court, were quickly

dismissed as factually inapposite. Marter of Bacchus Imports,

Lid., 656 P.2d 734-35. While it is obvious that New York's

transfer tax and Louisiana's use tax are factually dissimilar to

Hawaii's liquor tax, the antidiscrimination principle articulated

in those decisions is directly applicable to the constitutional

question posed by Hawaii's law. Further, the lower court chose

to ignore the cases most directly on point: Welton, Guy, Walling

and Darnell. It commented merely that its **survey of the case

law of Commerce Clause litigation in the Supreme Court has

uncovered no instance where a state tax of similar nature has

been voided.’’ Matter of Bacchus Imports, Ltd., 656 P.2d at

735.

In one further effort to distinguish the federal precedents,

the Hawaii Supreme Court implied that the extent of the dis-

criminatory impact of the Hawaii liquor ‘ax is insubstantial and

that the tax therefore does not violate the Commerce Clause.

656 P.2d at 735. To reach this conclusion the court

‘‘assume[d]"’ that okolehao and pineapple wine sold in Hawaii

involve an insubstantial volume of commerce and thus **pose

no competitive threat to othe: liquors produced elsewhere and

consumed in Hawaii."’ /d. at 735 n. 21. It also noted its belief

that these products are unique to Hawaii. /d. at 735 n. 20. Even

assuming, for the sake of argument, that the Hawaii Supreme

28See also Mr. Justice Harlan’s discussion of this issue in Guy v.

Baltimore, 100 U.S. at 443.

Court is correct in these assumptions,*’ they have no re.evance

to the question before this Court.

First, as early as Brown v. Maryland, 25 U.S. (12 Wheat.)

419 (1827), the Court established that the constitutionality of a

State tax does not turn on the extent of the alleged discrimina-

tion:

It is obvious that the same power which imposes a light duty

Can impose a very heavy one, one which amounts to a

prohibition. Questions of power do not depend on the de-

gree to which it may be exercised. If it may be exercised at

all, it must be exercised at the will of those in whose hands it

is placed.

25 U.S. (12 Wheat.) at 439. More recently, in Maryland v.

Louisiana, 451 U.S. at 725, this Court granted judgment on the

pleadings to the taxpayers challenging the first use tax. In so

ruling, the Court rejected the recommendations of its Special

Master that further evidentiary hearings be conducted to deter-

mine the extent of the discrimination effected by the tax:

It may be true that further hearings would be required to

provide a precise determination of the extent of the dis-

crimination in this case, but this is an insufficient reason for

not now declaring the Tax unconstitutional and eliminating

the discrimination. We need not know how unequal the Tax

is before concluding it unconstitutionally discriminates.

451 U.S. at 759-60 (emphasis added). The inquiry, then, is not

the degree of discrimination, but whether discrimination exists.

This rule is clearly salutary. Drawing the constitutional line

between a valid and invalid state tax on the basis of the existence

**Such assumptions would clearly nor be appropriate for rum since it is a

very popular liquor and is manufactured in many parts of the United States

and the world. As noted earlier, locally manufactured rum was granted a tax

exemption by the Hawaii legislature in 1981 and, accordingly, was being

sold in the Hawaii market when this matter was heard by the Hawaii

Supreme Court. Since rum was not manufactured in Hawaii when this action

was begun (J.A. 16), any success the local industry now enjoys would

appear to be directly traceable to its tax exempt status.

of a ‘“‘competitive threat’’ measured by the volume of com-

merce actually affected is unsound. The constitutionality of a

particular tax statute could fluctuate from year to year or even

month to month depending upon changes in the marketplace or

the fortunes of a particular business.*° This is an unworkable

standard for judicial review. The state's authority to tax would

turn on an economic analysis of the cross-elasticity of demand

in the relevant market. Proof would necessarily include volume

of sales, market shares, pricing trends and the like. The out-

come would be determined not by consistently applied con-

stitutional principles. but by the vagaries of the economy.

Second, in determining whether discrimination exists, this

Court has compared the actual tax burden on in-state and

out-of-state goods or services with respect to a particular trans-

action.! As noted in Halliburton Oil Well Co. v. Reily,

‘equality (of tax treatment) for the purposes of competition and

the flow of commerce is measured in dollars and cents, not legal

abstractions.’’ 373 U.S. at 70.

A dollars-and-cents comparison of the actual tax burden on

in-state and out-of-state liquors shows that the Hawaii tax

imposes a substantially greater burden on the latter. According

to the Stipulation of Facts filed in the Hawaii Tax Appeal Court,

acase of California wine priced at $10.00 a bottle (F.O.B. at the

‘For example, if the discriminatory effect of the okolehao exemption

was measured in 1960, the year of its initial enactment, it is likely that no

competitive effect would be found. If, however, the effect was determined in

1981, the last year of its several exemptions, the result might be considerably

different.

5! See Boston Stock Exchange, 429 U.S. at 334; Maryland v, Louisiana,

45] U.S. at 757 n. 28; Memphis Steam Laundry v. Stone, 342 U.S. 389

(1951); Best & Co. v. Maxwell, 311 U.S. 454 (1940),

winery) would cost the Hawaii consumer $285.60.°? The por-

tion of this figure represented by the 20% Hawaii liquor tax is

stipulated to be $56.40.** By contrast, a wholesaler selling

wine manufactured in Hawaii is not subject to any liquor tax.

Such a large tax penalty for selling out-of-state liquor cannot be

deemed to have no practical effect on interstate commerce. See

Boston Stock Exchange, 429 U.S. at 334.

A tax burden of $56.40 for a single case of wine is at least

equal to the discriminatory burdens condemned in many of the

Commerce Clause cases. For example, in Memphis Steam

Laundry v. Stone, 342 U.S. 389 (1951), this Court found

discriminatory a $50 license tax on each truck used by an

out-of-state laundry business soliciting and picking up business

in Mississippi because resident laundries were required to pay

only $8 per truck. Similarly, in Best & Co. v. Maxwell, 311

U.S. 454 (1940), a discrepancy between the $1 annual tax paid

by local merchants and the $250 annual tax paid by itinerant

solicitors was found discriminatory. And in Maryland vy.

Louisiana, the Court used an example *‘to illustrate the possible

discrimination’ of the credit feature of the first use tax in which

the tax differential was only $35. 451 U.S. at 757 n. 28. See

also Boston Stock Exchange, 429 U.S. at 334.

** Due to its ad valorem nature, the Hawaii liquor tax is assessed against

every item of expense which is included in the cost of the wine to the

consumer. These expenses include the producer's costs, freight, whartfage

fees, drayage charges, warehousing charges, federal taxes, wholesaler’s

mark-up and, in the case of foreign wines, customs duties and brokerage

increase of $1.00 in the producer's cost for a case of California wine (F.O.B.

the winery) results in a price to the Hawaii consumer of $2.38. Stipulation of

$120.00 (12 bottles x $10.00 per bottle = $120.00) will cost $285.60 in

Hawaii. ($120.00 x 2.38 = $285.60).

consumer attributable to the liquor tax is agreed to be $0.47 per $1.00 of

F.O.B. price, which calculates to a tax of $56.40 on the case of wine posited

in the example. ($120.00 x .47 = $56.40).

Thus, contrary to the belief of the Hawaii Supreme Court,

the inequality of treatment accorded in-state and out-of-state

products by Hawaii's liquor tax is discriminatory within the

meaning of the Commerce Clause cases.

The obvious economic effect of such inequality of treatment

is to encourage out-of-state business to relocate in Hawaii and

to engender retaliatory taxes by other states. ** The avoidance of

a 20% tax on wholesale value is a strong incentive to relocate to

Hawaii. Encouraging out-of-state business to relocate in-state

by discriminating in favor of in-state transactions or goods

produced in-state is violative of the Commerce Clause. In

Maryland v. Louisiana, 451 U.S. at 725, for example, this

Court found that an ‘obvious economic effect’ of Louisiana's

severance tax credit was to encourage outer continental shelf

gas producers ‘‘to invest . . . within Louisiana rather than to

invest in further OCS deveiopment or in production in other

States.’ 451 U.S. at 756. This relocation incentive contributed

to the Court's holding that the Louisiana tax unconstitutionally

discriminated ‘‘against interstate commerce in favor of local

interests,’’ /d. at 756. Similarly, in Boston Stock Exchange,

429 U.S. at 318, the Court found that the *‘obvious effect”’ of

the New York stock transfer tax was to ‘extend a financial

advantage to sales on the New York exchanges at the expense of

the regional exchanges.*’ 429 U.S. at 331.

In addition to its relocation incentive, Hawaii's discrimi-

natory liquor tax encourages retaliatory actions by other states.

Indeed, the Hawaii legislation here at issue appears to be

symptomatic of a trade war which is gaining momentum in the

4The ‘‘practical operation’ ’ of a tax statute is to be assessed in terms of

the statute's ‘‘actual and potential’’ discriminatory effect. Nippert v.

Richmond, 327 U.S. 416, 424 n. 9 (1940) (“‘It is old doctrine, not-

withstanding many early deviations, that the practical operation of the tax,

actual or potential, rather than its descriptive label or former character is

determinative.’’) (emphasis added and citations omitted). The Court has

continued its scruntiny of potential effects by focusing on the ‘obvious

economic effect’’ of a tax. Maryland vy. Louisiana, 451 U.S. at 756-57;

Boston Stock Exchange v. State Tax Commission, 429 U.S. at 331.

nation’s liquor industry. At the present time, at least 20 states

have adopted liquor tax statutes which discriminate in favor of

locally produced liquor.** The recently enacted Maryland sta-

tute is typical: Wine produced by certain wineries from locally

grown fruit is taxed at the rate of two cents per gallon, while

Out-of-state wine pays a tax of forty cents per gallon. Md. Ann.

Code, art. 4, §§ 133(b)(1) and 133(g) (Supp. 1982). Moreover,

the existence of these barriers to free trade has prompted a

number of states to enact retaliatory taxes on liquors from states

which discriminate against their products.*° The prevention of

such trade wars among the states is precisely the reason dis-

criminatory taxation is strictly prohibited by the Commerce

Clause.

See Ark. Stat. Ann. §§ 48-402, 48-636, 48-711 (1977 & Supp.

1983); Fla. Stat. Ann. §§ 564.06, 565.12, 565.14 (West Supp. 1983); Ga.

Code Ann. §§ 3-6-50, 3-4-60 (1982 & Supp. 1983); III. Ann. Stat. ch. 43,

§ 158-1 (Smith-Hurd Supp. 1983-84); Iowa Code Ann. §§ 123.136,

123.146 (West Supp. 1983-84): Ky. Rev. Stat. Ann. § 243.720 (Michie

Supp. 1982); Me. Rev. Stat. Ann. tit. 28, §§ 452, 501 (Supp. 1982-83);

Md. Ann. Code art. 4, §§ 5, 133 (1981 & Supp. 1982): Mich. Stat. Ann.

§ 18.987(1) (Callaghan Supp. 1983-84); Minn. Stat. Ann. § 340.436 (West

Supp. 1983); Miss. Code Ann. § 27-71-7 (Supp. 1982); N. J. Stat. Ann.

§ 54:43-1 (West Supp. 1983-84); N.M. Stat. Ann. § 60-6A-11 (1981);

N.C. Gen. Stat. §§ 105-113.86, 105-113.95 (1979 & Supp. 1981); R. I.

Gen. Laws § 3-10-1 (Supp. 1982); S. C. Code Ann. § 12-21-1040 (Law.

Co-op 1982); S.D. Codified Laws Ann. § 35-5-3.1 (1977); Tenn. Code

Ann. §§ 57-3-207, 57-3-302 (1980); Tex. Alco. Bev. Code Ann. § 203.08

(Vernon 1978); Va. Code § 4-25.1 (1983).

**See Conn. Gen. Stat. Ann. § 12-451 (West 1983); Del. Code Ann. tit.

4, § 728 (1975); Ind. Code Ann. § 7.1-2-7-3 (Burns 1978); Mich. Stat.

Ann. § 18.1011 (Callaghan Supp. 1983-84); Ohio Rev. Code Ann.

§§ 4301.54, 4301.55 (Page 1982); Or. Rev. Stat. § 473.040 (1981); Pa.

Stat. Ann. tit. 47, § 105 (Purdon 1969); and R. I. Gen. Laws §§ 3-10-15,

3-10-17 (1976).

Il. THE HAWAII LIQUOR TAX IS AN IMPOST OR

DUTY PROHIBITED BY THE IMPORT-EXPORT

CLAUSE.

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

Court overturned a century of precedent in ruling that the

Import-Export Clause does not prohibit a state from imposing a

nondiscriminatory property tax on imported goods in their

original carton.*” In an opinion by Mr. Justice Brennan, the

Court identified three principal concerns of the Framers under-

lying their adoption of a constitutional restraint on state taxation

of imports:

(1) The Federal Governmental must speak with one voice

when regulating commercial relations with foreign

governments, and tariffs, which might affect foreign

relations, could not be implemented by the States con-

sistently with that exclusive power:

(2) Import revenues were to be the major source of revenue

of the Federal Government and should not be diverted

to the States; and

(3) Harmony among the States might be disturbed unless

seaboard States, with their crucial ports of entry, were

prohibited from levying taxes on citizens of other States

by taxing goods merely flowing through their ports to

the inland States not situated as favorably geographic-

ally.

423 U.S. at 285-86 (footnotes omitted).

Applying this test, the Court upheld the application of

Georgia’s nondiscriminatory ad valorem property tax to

Michelin's inventory of imported tires. It was ‘‘obvious’’ that

such a tax could have *‘no impact whatsoever on the Federal

Government's exclusive regulation of foreign commerce’ be-

cause it did not ‘‘fall on imports as such because of their place of

7See generally Walter Hellerstein, ‘Constitutional Limitations On

State Tax Exportation,’* 1982 Am. B. Foundation Research J. 1, 6-8, from

which the following discussion of Michelin draws.

origin.’’ 423 U.S. at 286. As a general tax applicable to all

property in the state. it could not have been used ‘to create

special protective tariffs or particular preferences for certain

domestic goods,"’ and could not be ‘‘applied selectively to

encourage or discourage any importation in a manner inconsist-

ent with federal regulation.’’ /d. The Court likewise found that

the imposition of a nondiscriminatory ad valorem property tax

would not threaten the federal government's reliance upon

imposts and duties as a source of revenue. Since a nondis-

criminatory tax ‘‘cannot be selectively imposed and increased

SO as substantially to impair or prohibit importation,’’ id. at

288, such a tax has at most an “incidental effect’’ on federal

import revenues. /d, at 287. Finally, the Court found that the

tax would not disturb the harmony among the states because the

coastal jurisdictions would receive compensation only for

services and protection extended to the imports by the local

government. /d, at 289. See Washington Revenue Department

v. Washington Stevedoring Association, 435 U.S. 734, 751-55

(1978),

In his analysis of the foreign policy and revenue issues, Mr.

Justice Brennan made it clear that state taxation which falls on

imports must be nondiscriminatory to pass muster under the

Iriport-Export Clause. This is because such taxes create special

p’otective tariffs which undermine the federal government's

ability to speak ‘'with one voice’ and, by discouraging impor-

tation, decrease its revenues. To the point in this case, Mr.

Justice Brennan's example of a prohibited discriminatory tax in

footnote 7 of the Michelin opinion plainly embraces the tax here

involved:

Of course, discriminatory taxation in such circum-

stances is not inconceivable. For example, a State could

pass a law which only taxed the retail sale of imported

goods, while the retail sale of domestic goods was not

taxed. Such a tax, even though operating after an ‘‘initial

sale’’ of the imports would, of course, be invalidated as a

discriminatory imposition that was, in practical effect, an

impost. Nothing in the opinion of Brown v. Maryland

should suggest otherwise. The Court in Brown merely pre-

sumed that at these later stages of commercial activity, state

impositions would not be discriminatory, But merely be-

cause Brown would have authorized a nondiscriminatory

charge on even an importer’s use of the services of a public

auctioneer, see 12 Wheat, at 443, 6 L.Ed. 678, does not

mean that it would have disapproved the holding of Cook v,

Pennsylvania, 7 Otto 566, 24 L.Ed. 1015 (1878), which

invalidated a tax on the sale of goods by auction that dis-

criminated against foreign goods.

Michelin Tire Corp. v. Wages, 423 U.S, at 288 n. 7 (emphasis

added).

That Hawaii's liquor tax creates a preferential trade area for

locally produced liquors antithetical to the federal govern-

ment’s exclusive control of foreign commerce is obvious. In

operation, it is no less destructive of the government's import

revenues. The rate of the tax has been repeatedly increased over

the years to its present 20%.** This rate, plus the **pyramid”’

effect of the tax (particularly its assessment on top of federal

customs duties), acts as a substantial deterrent to the importa-

tion of foreign liquors. For example, utilizing the data provided

in the Stipulation of Facts, a case of French wine priced at $10

per bottle (F.O.B. the winery) would cost $387.60 by the time it

reached the consumer in Hawaii. Fully $78 of this sum is liquor

tax.?% The cost of acase of Hawaii wine with an F.O.B. price of

$10 per bottle would be $229.20, with no tax component. The

difference in cost between the two cases of wine is $158.40,*°

nearly one-half of which is tax.*! This price differentia, seuuces

the demand for foreign wines which, in turn, decreases the

**See supra notes 7-11 and accompanying text.

‘9 See supra notes 31-32 and accompanying text. The higher cost of the

French wine is attributable to the greater distances involved in transporting

the wine to Hawaii, federal customs brokerage fees, and the additional liquor

21-23).

49$387.60 (French wine) —$229.20 (Hawaii wine) = $158.40.

*!§78.00 (tax applicable to French wine) + 158.40 (cost difference) =

49%,

volume of imports and the federal government's import rev-

enues.

Hawaii's liquor tax is also distinguished from the taxes

imposed in Michelin and Washington Revenue by its rate. In

Michelin, the personal property tax rate was only 1.2%;

Washington Revenue involved a 1% business and occupation

tax on stevedoring services. The tax challenged here is 20% of

the wholesale value of the liquor sold. In view of this high rate,

Hawaii's liquor tax has more than an “‘incidental’’ effect on the

volume of foreign liquors imported into Hawaii. See Michelin

Tire Corp. v. Wages, 423 U.S. at 286-88.

It is clear, then, that the Hawaii liquor tax does not satisfy

the first two criteria of the Michelin test.** It is, therefore,

invalid as an impost or duty prohibited by the Import-Export

Clause.

Ill. THE HAWAII LIQUOR TAX VIOLATES THE

EQUAL PROTECTION CLAUSE OF THE

FOURTEENTH AMENDMENT,

By limiting its tax exemptions to locally produced liquor,

Hawaii fails to treat out-of-state manufacturers and the Hawaii

wholesalers who represent their products in the same manner as

it treats such businesses operating entirely in Hawaii. Once a

state allows foreign corporations to do business within their

borders, *‘the adopted ccrporations are entitled to equal protec-

tion with the state's own corporate progeny.*’ Wheeling Steel

Corp. v. Glander, 337 U.S, 562, 571 (1949). In Wheeling, this

Court declared unconstitutional a provision of Ohio's ad val-

orem property tax which subjected certain intangible property

of non-Ohio corporations to a tax not applied to identical

property of Ohio corporations. This Court concluded that the

provision violated the Equal Protection Clause since the in-

equality of treatment was ‘‘not because of the slightest differ-

ence in Ohio's relation to the decisive transaction, but solely

*2Since the tax does not apply to liquor whose ultimate sale or use is

outside Hawaii, the third criteria in Michelin is not applicable.

because of the different residence of the owner.’* 337 U.S. at

§72.43 In Allied Stores of Ohio v. Bowers, 358 U.S. 522 (1959),

this Court sustained a provision of Ohio's ad valorem property

tax which exempted property held in storage warehouses by

non-resident corporations, but did not exempt identical prop-

erty of Ohio corporations.

In his concurring opinion in Allied Stores, Mr. Justice

Brennan explained that the critical distinction between the

Court's rulings in Allied Stores and Wheeling is rooted in our

federal system:

Wheeling applied the Equal Protection Clause to give effect

to its role to protect our federalism by denying Ohio the

power constitutionally to discriminate in favor of its own

residents against the other state members of our federation.

358 U.S. at 533. In contrast, the tax at issue in Allied Stores

discriminated in favor of non-residents and against the state's

own residents. Such taxes do not disrupt the federal system. /d.

The practical effect of the tax was to encourage interstate

commerce. The discrimination thus did not invoke the protec-

tion of the Equal Protection Clause. In such cases, it is the

choice of the particular state 's legislature to balance the benefits

gained in encouraging foreign corporations to do business in the

state against the cost of taxing its own resident corporations.

But where the tax discriminates against non-residents in

favor of residents of the taxing state, as in Wheeling, the

praciical effect of the tax is to discourage interstate commerce

and to disrupt the federal system. 358 U.S. at 533. The Equal

Protection Clause must then be applied as an ‘‘instrument of

federalism’’ to eradicate the discrimination. /d. at 532.

43See also WHYY. Inc. v. Glassboro, 393 U.S. 117, 119-20 (1968);

Concordia Fire Insurance Co. vy. Illinois, 292 U.S. 535, 545-47 (1934);

Hanover Fire Insurance Co. v. Carr, 272 U.S. 494, 507-08 (1926); South-

ern Railway Co. v. Greene, 216 U.S. 400, 412, 417-18 (1910).

While Mr. Justice Brennan's view has not been adopted by a

majority of this Court, Western & Southern Life Insurance Co.

v. Board of Equalization, 451 U.S. 645, 667 n.21 (1981), the

problems raised by the tax classification at issue here demon-

strate the need to apply the principles of federalism embraced by

the Clause. The tax was not enacted to further any valid state

interests such as public health or safety. The sole purpose of the

Hawaii tax is to favor the economic interests of resident liquor

manufacturers and wholesalers who sell such liquor. Such sim-

ple economic protectionism must not be condoned as a legiti-

mate state purpose under the Equal Protection Clause. Phila-

delphia v. New Jersey, 437 U.S. 617, 624 (1978). But rather,

the Clause must be applied *‘to give effect to its role to protect

our federalism** by denying Hawaii ‘‘the power constitution-

ally to discriminate in favor of its own residents against the

residents of other members of our federation. ** Allied Stores of

Ohio v. Bowers, 358 U.S. at 533 (Brennan, J. concurring).

CONCLUSION

For the reasons stated above, McKesson respectfully re-

quests that the consolidated judgment of the Hawaii Supreme

Court sustaining the validity of the Hawaii liquor tax be re-

versed, and the tax invalidated in its entirety. Accordingly, the

taxes presently held in escrow should be returned or a credit

applied against future tax liabilities in accordance with statutory

requirements. Finally, the state should be enjoined against any

future collection of the tax.

September 1, 1983

Respectfully submitted,

BRUCE C. BIGELOW*

ERIC K. YAMAMOTO

TOD Z. TANAKA

Suites 2500 and 2600

Grosvenor Center

Mauka Tower

737 Bishop Street

Honolulu, Hawaii 96813

(808) 547-5400

(*Counsel of Record)

Attorneys for Appellee in

Support of Appellants

FOREMOST McKESSON,

INC., dba McKESSON

WINE & SPIRITS CO.

APPENDIX

APPENDIX A

§. Stand. Comm. Rep. No. 87, 1st Hawaii State Leg., Budget

Sess. (1960), reprinted in 1960 Hawaii Senate Journal 224.

The purpose of this bill is to exempt the firm of Ti Root Okolehao

Hawaii. Inc. from the 16% alcohol tax in Section 124-4 of the

Revised Laws of Hawaii 1955. The object of the bill is to encourage

and promote the establishment of a new industry.

Your Committee on Ways and Means is in accord with the intent

and purpose of Senate Bill No. 88 and recommends that it pass second

reading and be re-referred to the Committee on Ways and Means.

Signed by all members of the Committee. Senator Yoshinaga did

not concur.

APPENDIX B

S. Stand. Comm. Rep. No. 222, 1st Hawaii State Leg., Budget

Sess. (1960), reprinted in 1960 Hawaii Senate Journal 256.

The purpose of this bill is to encourage and promote the estab-

lishment of the ti root okolehao industry.

Your Committee did not think it proper to give an exemption to

one particular firm, and accordingly made the exemption applicable

to all wino are similarly situated.

The title was amended to read as follows:

‘*AN ACT TO AMEND SECTION 124-4, REVISED LAWS

OF HAWAII 1955, AS AMENDED, TO EXEMPT TI ROOT

OKOLEHAO DISTILLED IN THE STATE OF HAWAII,

FROM THE 16% ALCOHOL TAX.”’

Section 1 was amended by deleting the phrase **. . . Ti Root

Okolehao Hawaii Inc.** and inserting in lieu thereof the phrase **. . .

ti root okolehao distilled in the State of Hawaii *”

Your Committee on Ways and Means is in accord with the intent

and purpose of this bill and does therefore recommend that Senate

Bill No. 88, as amended in S. D. 1. pass Third Reading.

Signed by all members of the Comraittee excepting Senators

Yoshinaga and Ariyoshi.

APPENDIX C

H. Stand. Comm. Rep. No. 322, 1st Hawaii State Leg., Budget

Sess. (1960), reprinted in 1960 Hawaii House Journal 373.

The purpose of this bill is to grant liquor tax exemption on the

wholesale price of the liquor sold by the distillers of ti root okolehao

in the State of Hawaii for a period of 5 years.

Your Committee is in accord with the intent and purpose of this

bill and recommends its passage.

Signed by all members of the Committee. Representatives

Kamaka, Kato, Kennedy and Milligan did not concur.

APPENDIX D

H. Stand. Comm. Rep. No. 246, 6th Hawaii State Leg., Reg.

Sess. (1971), reprinted in 1971 Hawaii House Journal 793-94.

The purpose of this bill is to exempt okolehao manufactured in

Hawaii from the state liquor tax law for a period of five years.

Section 244-4 imposes a twenty percent excise tax upon the

wholesale price of liquor in respect of the transaction by which the

seller, user or his vendor acquired the same. Exceptions thereto are

enumerated, including, inter alia, liquor held for sale by a permittee

but not yet sold or sold between permittees, liquor sold or used for

sacramental or prescription purposes, or liquor neither delivered or to

be used in the state or which is otherwise constitutionally exempt.

Enactment of this bill would add to the list of exemptions,

okolehao manufactured in Hawaii for a period of five years. The

department of taxation is opposed to any type of exemption without

‘*strong justification."’ Your Committee has considered the argu-

ments advanced in favor of the exemption and finds them sufficiently

strong.

Testimonies were received that over the past decade well over a

million dollars has been lost attempting to create a significant market

for ti root okolehao, fabled in song and legend as Hawaii's own spirit

product. Once before, in fact, the industry similarly requested, and

the legislature granted, a five year period of exemption which has

since expired.

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According to the Distilled Spirits Institute, Hawaii now realizes

over $9 million from the twenty percent tax annually. However,

according to the state department of taxation, since expiration of the

previous exemption several years ago, only a very small share (less

than 1.0%) of this sum is attributable to sales of various liquors

manufactured locally (only a part of which is okolehao, for which the

exemption is sought).

It is hoped by industry that the taxes temporarily saved by this

relatively new and expanding business may be channeled into na-

tional promotion and competitive pricing, the result of which is a

linking of okolehao to Hawaii as tequila is to Mexico. Even with the

anticipated expanded sales, it is expected that the total annual tax

otherwise due on okolehao sales would amount to less than $15,000

per year. Relief is not sought from the general excise tax.

Considering the jobs this industry creates and the prospects pre-

sented by proper promotion of its product, your Committee believes

that the tax revenue loss is nominal only compared with the benefit,

particularly when reviewed in light of the thousands of dollars appro-

priated annually by the state in matching funds to promote other

products grown and manufactured in Hawaii. Thus, the benefit to this

industry (and the state) is by parity if not in kind.

Your Committee respectfully recommends the changes which it

has effected to the amendment: (1) correct spelling of the word

‘“‘okolehao,’* (2) substitute the word “‘manufacture’’ for the word

‘*made,’’ and delete the words ‘‘of Hawaii’’ following the word

“Stace.”

Your Committee on Finance is in accord with the intent and

purpose of H. B. No. 588, as amended herein, and recommends that

it pass second reading in the form attached hereto as H. B. No. 588,

H. D. 1, and be placed on the calendar for third reading.

Signed by all members of the Committee.

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APPENDIX E

S. Stand. Comm. Rep. No. 408-76, 8th Hawaii State Leg., Reg.

Sess. (1976), reprinted in 1976 Hawaii Senate Journal 1056.

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 v' olehao industry 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

indicates that there may be an economic potential to the State in this

area which, hopefully. this bill can help stimulate.

Your Committee on Ways and Means is in accord with the intent

and purpose of §.B. No. 2230-76, as amended herein, and recom-

mends that it pass Second Reading in the form attached hereto as S.B.

No. 2230-76, S.D. 1, and be placed on the calendar for Third

Reading.

Signed by all members of the Committee

APPENDIX F

H. Staid. Comm. Rep. No. 689-76, 8th Hawaii State Leg., Reg.

Sess. (1976), reprinted in 1976 Hawaii House Journal 1590.

The purpose of this bill is to grant liquor tax exemption [sic] for

five years to the local okolehao industry and local fruit wine industry.

The exemption to the okolehao industry is an extension of a

present exemption for another five years. The exemption granted to

the fruit wine industry is new. The intent is to stimulate these

industries and help to place them on a firm financial foundation.

Your Committee on Finance is in accord with the intent and

purpose of S.B. No. 2230-76, S.D. 1, and recommends that it pass

Second Reading and be placed on the calendar for Third Reading.

Signed by all members of the Committee except Representative

Amaral.

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APPENDIX G

H. Conf. Comm. Rep. No. 31, 11th Hawaii State Leg., Reg. Sess.

(1981), reprinted in 1981 Hawaii House Journal 911-12.

The purpose of this bill is to exempt rum manufactured in the

State from the liquor tax for five years and to delete the prohibition on

labeling or selling rum as ‘‘Hawaii Rum"’ or ‘“‘Hawaiian Rum"’

unless it has been aged for at least two years. The bill also provides

that liquor may be labeled or sold using the word ‘‘Hawaii,’’ *‘Ha-

waiian,’’ or ‘Aloha State "’ as long as it is at least partially manufac-

tured in the State.

Under present law, it is required that rum be aged for at least two

years from the date of distillation if it is to be labeled or sold as

‘Hawaii Rum" or ‘‘Hawaiian Rum.*’ Your Committee notes that the

labeling prohibition has proved to be an effective bar to local distillers

establishing a market for Hawaiian rum.

Your Committee feels that the labeling requirement bears no

reasonable relationship to insuring the quality of the product and

therefore agrees with the intent of the bill that there is no need for such

an aging requirement prior to labeling.

Your Committee is aware of the consolidated cases in the State

Tax Appeal Court, Civil Nos. 1852, 1862, 1866 and 1867, under the

name Bacchus Imports, Lid., et al. v. Freitas, currently pending in

the State Supreme 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 finding on that issue. Your

Committee does feel, however, that providing a tax incentive in the

form of a liquor tax exemption for a period of years is an appropriate

method of encouraging the development of a new industry in the State

and is therefore in agreement with the intent of the bill.

Your Committee has made a technical correction to the bill.

Your Committee on Conference is in accord with the intent and

purpose of H.B. No. 247, S.D. 2, as amended herein, and recom-

mends that it pass Final Reading in the form attached hereto as H.B.

No. 247, S.D. 2, C.D. 1.

Representatives Blair, Andrews, Baker, Hirono and Liu,

Managers on the part of the House.

Senators Yamasaki, Abercrombie and Henderson,

Managers on the part of the Senate.

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APPENDIX H

S. Conf. Comm. Rep. No. 29, 11th Hawaii State Leg., Reg. Sess.

(1981), reprinted in 1981 Hawaii Senate Journal 917.

The purpose of this bill is to exempt rum manufactured in the

State from the liquor tax for five years and to delete the prohibition on

labeling or selling rum as ‘‘Hawaii Rum"’ or ‘‘Hawaiian Rum’”’

unless it has been aged for at least two years. The bill also provides

that liquor may be labeled or sold using the word *‘Hawaii,"’ ‘‘Ha-

waiian,”’ or ‘Aloha State "’ as long as it is at least partially manufac-

tured in the State.

Under present law, it is required that rum be aged for at least two

years from the date of distillation if it is to be labeled or sold as

‘Hawaii Rum"' or ‘‘Hawaiian Rum.’ Your Committee notes that the

labeling prohibition has proved to be an effective bar to local distillers

establishing a market for Hawaiian rum.

Your Committee feels that the labeling requirement bears no

reasonable relationship to insuring the quality of the product and

therefore agrees with the intent of the bill that there is no need for such

an aging requirement prior to labeling.

Your Committee is aware of the consolidated cases in the State

Tax Appeal Court, Civil Nos. 1852, 1862, 1866 and 1867, under the

name Bacchus Imports, Ltd., et al. v. Freitas, currently pending in

the State Supreme Court, regarding the validity of certain liquor tax

exemptions, and has had extensive discussions with the Attorney

Generai’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 rurn produced in

Puerto Rico and therefore makes no finding on that issue. Your

Committee does feel, however, that providing a tax incentive in the

form of a liquor tax exemption for a period of years is an appropriate

method of encouraging the development of a new industry in the State

and is therefore in agreement with the intent of the bill.

Your Committee has made a technical correction to the bill.

Your Committee on Conference is in accord with the intent and

purpose of H.B. No. 247, §.D. 2, as amended herein, and recom-

mends that it pass Final Reading in the form attached hereto as H.B.

No. 247, S.D. 2, C.D. 1.

Senators Yamasaki, Abercrombie and Henderson,

Managers on the part of the Senate

Representatives Blair, Andrews, Baker, Hirono and Liu,

Managers on the part of the House

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