# Appellees Brief — Bacchus Imports, Ltd. v. Dias

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appellees Brief
- **Published:** January 1, 1984
- **Citation:** 468 U.S. 263

## Text

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.,

j
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 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).

10

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).

12

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).

13

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.

14

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).

15

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

16

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

17

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.

19

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.

20

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.

to
to

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.

24

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.

25

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),

26

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
fees. Stipulation of Facts © 13. (J.A. 21-22). The Stipulation states that each
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
Facts © 19. (J.A. 23). Hence acase of California wine with a F.O.B. price 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).

*’Stipulation of Facts © 19. (J.A. 23). The portion of the cost to the
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).

27

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.

28

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.

30

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-

31

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
tax assessed on each of these costs. Statement of Facts ©€ 13, 17-19. (J.A.
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.

33

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).

34

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).

35

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.

A-3

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.

A-4

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.

A-5

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.

A-6

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_0666%3A09. Public record. Not legal advice.