# Petition for Writ of Certiorari — Star-Kist Foods, Inc. v. County of Los Angeles > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385011_2424%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1987 - **Citation:** 480 U.S. 930 ## Text x 6 - 8 7 6 3% ‘*y ~ ES NOV %4 \986 JOSEPH F. SPANIOL, JR. CLERK In the Supreme court OF THE United States OCTOBER TERM, 1986 StTaR-KistT Foops, INc., a California corporation, Petitioner, VS. COUNTY OF LOS ANGELES, CITY oF LoS ANGELES AND CITY OF LONG BEACH, Respondents. PETITION FOR WRIT OF CERTIORARI TO THE SUPREME COURT OF THE STATE OF CALIFORNIA CHARLES R. AJALAT, ESQ. 643 SOUTH OLIVE STREET, SUITE 200 Los ANGELES, CALIFORNIA 90014 (213) 622-7400 Attorney for Petitioner. TERRY L. POLLEY, ESQ. RICHARD J. AYooB, ESqQ., AND AJALAT & POLLEY, A Partnership Including Professional Corporations Of Counsel. Bowne of Los Angeles, Inc., Law Printers. (213) BOWNE CO QUESTIONS PRESENTED 1. Is the well-established rule that subordinate politi- eal entities, as “creatures” of the state, may not challenge state action, inapplicable to challenges by subordinate political entities under the Commerce Clause of the United States Constitution? 2. Did a state statute, valid when enacted, which confirmed the immunity of certain imported goods from state property taxation under the original package doc- trine of Low v. Austin, 80 U.S. (13 Wall.) 29 (1872), become unconstitutional as a regulation of foreign com- merece immediately following this Court’s decision in Michelin overruling Low v. Austin particularly when it is consistent with the policies of the Import-Export and Commerce Clauses favoring the free flow of commerce and there.is no showing of interference with the federal government’s ability to speak with one voice when regu- lating commercial relations with foreign governments under Japan Lines, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979), and Container Corp. v. Franchise Tax Board, 463 U.S. 159 (1983)? 3. Unlike the situation which existed prior to Michelin and the situation in Japan Lines, must state taxing stat- utes subsequent to Michelin treat foreign commerce and interstate commerce with meticulous equality? 4. Where there is no showing of an impermissible burden on interstate commerce, there is no penalty or disincentive on the choice to transact business in another state, local interests are not favored, and the exemption is available regardless of the residency of the shipper or the out-of-state place of manufacture of the goods, is a State prohibited from “ecompet[ing] with other States for a share of interstate commerce” under Boston Stock Ex- li change v. State Tax Comm’n, 429 U.S. 318 (1977) and Westinghouse Electric Corp. v. Tully, 466 U.S. 388 (1984)? 5. Is it sufficient to invalidate a state statute exempt- ing certain imported goods from property taxation simply to point out that a comparable exemption was not ac- eorded goods brought into the state from other states without any showing as to the extent of actual discrimina- tion against interstate commerce, if any? 6. If the property tax exemption violates the Com- merce Clause, particularly considering the fact that all other California counties (57 of 58) granted the property tax exemption, and this Court, without opinion, split 4-4, should the doctrine be applied retroactively prior to January 26, 1981, the time this Court issued a final decision in Sears, affirming the doctrine of Zee Toys v. County of Los Angeles, 85 Cal.App.3d 763 (1978)? ili TABLE OF CONTENTS QUESTIONS PRESENTED ................... ters d oan che sathasnenase es ex PRIOR UNITED STATES SUPREME COURT ACTION: SPLIT FOUR TO, FOUR PRECISELY IED oes kS cb ecb eds cewssteenee a ran 6 P66 6 in sb enecebes seuss CONSTITUTIONAL PROVISIONS AND STAT- ED oi SED 5 an 6 060 0 60060 ccs ee STATEMENT OF THE CASE.................. STATEMENT OF REASONS FOR GRANTING THE WRIT OF CERTIORARI ............... ge ERY PE SP There is Not an Exception, for Commerce Clause Attacks, to the Well-Established Rule that Subordinate Political Entities Cannot Chal- lenge a Statute of Their Creator............. Il. The Statute Involved Does Not Result in an Inva- lid Regulation of Foreign Commerce: It Was Valid when Enacted, Michelin Did Not Invali- date It, It Is Consistent with the Policies of the Import-Export and Commerce Clauses, Favor- ing the Free Flow of Commerce, and It Does Not Interfere with the Ability of the Federal Government to Speak with One Voice ........ Il. State Taxing Statutes Should Not Be Required to Treat Foreign Commerce and Interstate Com- merece With Meticulous Equality............. bho bk wo Ww 14 14 18 iv TABLE OF CONTENTS Page IV. The Statute Involved Does Not Burden Interstate Commerce Where There is no Showing of an Impermissible Burden, no Penalty or Disincen- tive on the Choice to Transact Business in another State, Local Interests are not Favored and the Exemption is Available Regardless of the Resideney of the Shipper or the Out-of- State Place of Manufacture of the Goods..... 22 V. The Extent if Any of Actual Discrimination Against Interstate Commerce Has Not Been FO ye ee Eee POT EST TET eee 24 VI. If States Could Not Facilitate the Free Flow of Foreign Commerce, as the Statute Involved Does, there Should Be a Grace Period of Adjustment, and/or Such Doctrine Should Not Be Applied Prior to the Affirmance by an Equally Divided Court in Sears, January 26, ieee Ana wee es Wis ban eae peas ea tous 25 INDEX TO APPENDICES Appendix A. California Supreme Court Opinion. Appendix RP. Brief for the Unitec States as Amicus Curiae. Appendix C. Court of Appeal Opinion. Appendix D. List of Star-Kist Foods, Inc. Subsidiaries. Vv TABLE OF AUTHORITIES CITED Cases Page Aldens, Inc. v. Ryan, 571 F.2d 1159 (10th Cir. SED. bn bn eek cndrctee i trie 24 Allied Stores v. Bowers, 358 U.S. 522 (1959) ....8,11, 21 Bacon v. Illinois, 227 U.S. 504 (1913) ........... 24 Board of Education v. Allen (1968) 392 U.S. 236 17 Beston Stock Exchange v. State Tax Comm’n, 429 Ca See CEOs) accccees i, ii, 7, 9, 13, 16, 18 23, 25, 26 Chevron Oil Co. v. Huson, 404 U.S. 97 (1971) .... 25 City of South Lake Tahoe v. California Tahoe Regional Planning Agency, 625 F.2d 231, cert. den., 449 U.S. 1039 (9th Cir. 1980) ........... 11,8 Complete Auto Transit v. Brady, 430 U.S. 274 (IOTE? cdc cdusewscidsaee ake eee 7, 8, 24 Container Corp. v. Franchise Tax Board, 463 U.S. 0D CORD ob eictnasceudecdacactaaaas i, 7, 8, 11, 20, 24 Japan Lines, Ltd. v. County of Los Angeles, 441 U.S. rere PPro re ery pep st ree i, 8, 22 Low v. Austin, 80 U.S. (13 Wall.) 29 (1872) ..... i, 4,5 Michelin v. Wages, 423 U.S. 276 (1976) ......... passim Richfield Oil Corp. v. State Board of Equalization, Bik me Bt | Peer eer ver errr ere 24 Rogers v. Brockette, 588 F.2d 1057, cert. den., 444 US, GET Ces Ca See bcd es eeeckceevnueen 7, 15, 16 San Diego Unified Port Dist. v. Gianturco (S.D. Cal. 1978) 457 F.Supp. 283 aff’d., 651 F.2d 1306, cert. Gen., Soe Ui Pe ae kee ckeeesusadéerdnens 7, 15, 16 vi TABLE OF AUTHORITIES CITED CASES Page Sears Roebuck & Co. v. County of Los Angeles, 85 Cal.App.3d 763 (1978) aff'd 449 U.S. 1119 CSUR) 4500005600ce0eleaeaeea 2, 6, 13, 18, 25, 26 Star-Kist Foods, Inc. v. County of Los Angeles, CS Gin, GB Cane B CIGGSD vc cucecscsdvences 16, 20, 21 Volkswagen Pacific Inc. v. City of Los Angeles, 7 CE ee COED ho bcc cceneseerudiveceeen 4 Walter Fleisher Co., Inc. v. County of Los Angeles, Ge Ces Ge REED 6a boa dadacatbenweaeerinle 2,6 Washington Rev. Dept. v. Stevedoring Assn., 435 Cie CO CRPTOD kaka cvdcndtssatuatacheniiee 24 Westinghouse Electric Corporation v. Tully, 466 U.S. Saw CHOSE és ib vats vasewbeen ii, 3, 8, 9, 12, 16, 22, 23 Williams v. Mayor of Baltimore, 289 U.S. 36 (1933) even eens s seen Ueubue ee eeneeeee 3, 7, 8, 14, 15, 17 Zee Toys v. County of Los Angeles, 85 Cal.App.3d Van RReUO) h0006ccaccaenee ii, 6, 13, 17, 25, 26 Constitution California Constitution, Article XIII............ 16 United States Constitution, Article 1, See. &, CHD Sc v.c vceseewaawen cals eueeaaaeaeeeies 3 United States Constitution, Fourteenth Amend- MOE ooccccncacctvcusabanwednensesdseensuuias 7,15 Statutes California Revenue and Taxation Code, See. 225 passim SS UA We. Seen os cunsaccescunvsaeanues 2 BO UDA. BOG, BSCE s6s4 car dncebacceneawass 17 In the Supreme Court OF THE United States OCTOBER TERM, 1986 STarR-Kist Foops, INc., a California corporation, Petitioner. Vs. COUNTY OF LOS ANGELES, CITY OF Los ANGELES, City OF LONG BEACH Respondents. PETITION FOR WRIT OF CERTIORARI TO THE SUPREME COURT OF THE STATE OF CALIFORNIA Petitioner Star-Kist Foods, Inc., a corporation’, re- spectfully prays that a writ of certiorari issue to the Supreme Court of the State of California, to review that Court's decision holding (1) that Defendants County of Los Angeles, City of Los Angeles and City of Long Beach have standing to attack the constitutionality of a statute of the State of California, and (2) that California Reve- ‘The parties to the proceeding in the California Supreme Court are Petitioner, (Plaintiff and Appellant), Star-Kist Foods, Inc., a Cali- fornia corporation, and Defendants and Respondents, County of Los Angeles, City of Los Angeles, and City of Long Beach. Star-Kist Foods, Inc. is a wholly-owned subsidiary of H. J. Heinz. The subsidi- aries of Star-Kist Foods, Inc. are set forth in Appendix D. 2 nue and Taxation Code Section 225, providing for an exemption from property taxation of imported goods brought into the state for shipment outside the state, is invalid on the grounds that such an exemption constitutes a regulation of foreign commerce and a diserimination against interstate commerce in contravention of the United States Constitution. OPINION BELOW The opinion of the Supreme Court of California is reported at 42 Cal.3d 1 (1986) and is set forth in Appendix A, hereto. PRIOR UNITED STATES SUPREME COURT ACTION The United States Supreme Court previously granted certiorari on these two important issues, and affirmed without opinion by an equally divided court, with J. Stewart not participating. Sears, Roebuck and Co. v. County of Los Angeles, 449 U.S. 1119 (1981), and Walter Fleisher v. County of Los Angeles, 449 U.S. 608 (1981). Contrary to the position of the Supreme Court of Califor- nia in the instant ease, in Sears, the Solicitor Genemal filed an amicus curiae brief recommending that the Cali- fornia statute be held constitutional, and such brief is set forth in Appendix B, hereto. JURISDICTION The decision of the Supreme Court of California to be reviewed was entered on June 30, 1986, with a dissenting opinion by Justice Lueas. A petition for rehearing was denied on August 28, 1986 with Justice Lucas of the opinion the petition should be granted. The jurisdiction of this Court is invoked under 28 United States Code, Seetion 1257(3). SO 3 This Court’s review by certiorari is sought on the grounds that the California Supreme Court has deter- mined novel and substantial questions arising under the United States Constitution involving the application of this Court’s decisions in Williams v. Mayor of Baltimore, 289 U.S. 36, 40 (1933), (“standing” issue), Westinghouse Electric Corporation v. Tully, 466 U.S. 388, 406 fn. 12, (1984), and Michelin v. Wages, 423 U.S. 276 (1976), (“Commerce Clause” issue), to one of California’s tax laws, and has decided them in a manner the petitioner believes to be erroneous. CONSTITUTIONAL PROVISIONS AND STATUTES INVOLVED 1. Artiele I, Seetion 8, Clause 3 of the United States Constitution: “Congress shall have the power to regulate ecommerce with foreign nations and among the several states.” 2. California Revenue and Taxation Code Section 225 reads in pertinent part: “Personal property manufactured or produced, (1) outside this state and brought into this state for transshipment out of the United States, or (2) outside of the United States and brought into this state for transshipment out of this state, for sale in the ordi- nary course of trade or business shall be exempt from taxation.” STATEMENT OF THE CASE Petitioner brought this suit for refund of ad valorem personal property taxes paid under protest to the County of Los Angeles, and the cities of Los Angeles, and Long Beach. Petitioner is a producer and seller of canned tuna. All of the tuna involved herein was manufactured or pro- 4 duced outside the United States and had been imported and held in warehouses in California on the tax lien date, March 1, 1976, awaiting shipment out of state in the ordinary course of petitioner’s business. All such goods were in their original packages and would have been Constitutionally immune from state taxation under the original package doctrine of Low v. Austin, if that ease had not been overruled by Michelin, decided in January, 1976. In 1972, in Volkswagen Pacific Inc. v. City of Los Angeles, 7 Cal.3d 48 (1972), the California Supreme Court held that goods which were imported by a whole- saler in sea vans and removed from the sea vans for sale. and delivery to dealers were not immune from a city license tax. Many county assessors erroneously inter- preted the Volkswagen case as holding that all goods imported in sea vans lost their immunity upon the open- ing of the vans. The resulting assessments caused wide- spread consternation among California importers many of whom commenced diverting their imports from California ports to ports in other states such as Oregon and Wash- ington which have previously enacted “free port” laws. Some 37 states at the time had such laws. In an effort to prevent the diversion of imports from California to other states having “free port’ laws, the California legislative enacted its own free port law, Cali- fornia Revenue and Taxation Code Section 225. Insofar as relevant, it provides that goods produced outside the United States and brought into California for shipment and sale outside the state are exempt from property taxation. The section was enacted in 1975 and became effective January 1, 1976. Both the date of enactment and the effective date preceded this Court’s decison in Michelin. ) The tax status of goods other than the imports de- seribed in the preceding paragraph was not affected by Section 225. Thus goods imported for sale or use in California were, at the time the section was enacted, either immune or taxable depending on whether or not they met the requirements of the original package doc- trine. Goods produced in the state and still in the state on its tax date remained fully taxable regardless of whether brought in for sale or use in, or for shipment and sale outside, the state. The Michelin case which overruled Low v. Austin, thereby terminating the original package doctrine, was decided in January, 1976. The state thus obtained juris- diction for the first time in 105 years to tax imported goods as fully as it coula tax goods produced locally or brought in from other states. Goods imported for sale and delivery in California thus became taxable. However, Section 225 continued to provide an exemption for goods imported into the state and held here temporarily for subsequent shipment and sale outside the state. A similar exemption was not accorded to goods brought into the state from other states and held here temporarily for subsequent shipment and sale outside the state. Respondents, through the Assessor of Los Angeles County, denied the claimed exemption. The other 57 of California’s 58 counties followed the statute, granted its taxpayers the exemption and such taxpayers have never been assessed taxes as a result of the exemption having been declared unconstitutional. Los Angeles County asserted that Section 225 violates the United States Constitution by regulating interstate and foreign commerce in interfering with foreign affairs, beeause it extended no exemption to interstate goods. Petitioner thereupon paid the tax under protest and 6 instituted this action for refund in the Superior Court of Los Angeles County. The same issues were involved in three other cases in the Los Angeles Superior Court, Zee Toys v. County of Los Angeles, Sears, Roebuck v. County of Los Angeles, and Walter Fleisher v. County of Los Angeles. The California Superior Court upheld the validity of the tax exemption in these cases but the California Court of Appeal re- versed, holding that the county and cities had standing to attack the state statute, but that Section 225 violated the Commerce Clause because it regulated interstate and foreign commerce. Zee Toys v. County of Los Angeles, Sears Roebuck & Co. v. County of Los Angeles, 85 Cal.App.3d 763 (1978). By a four to three vote, (three Justices dissenting), the Supreme Court of California denied a petition for hearing. A petition for certiorari in Sears was filed in this Court. Upon this Court’s invitation, the Solicitor General filed an amicus curiae brief and recommended that certiorari be granted and that the statute be held constitutional under the Commerce Clause. This Court granted certiorari in the Sears and Walter Fleisher cases, but split four to four: “The judgment is affirmed by an equally divided court. Justice Stewart took no part in the consideration or decision of this case.” 449 U.S. 119, 67 L.Ed.2d 106 (1981). In the instant case, based upon Zee Toys, the Los Angeles Superior Court held that the County and cities had standing to attack the state statute, and that Section 225 was unconstitutional. The California Court of Appeal reversed. (See Appendix C) While it held that the County and cities had standing to attack the statute, it went on to hold the statute was constitutional. The Supreme Court of California granted a petition for hearing, holding con- trary to the Court of Appeal and upholding the trial 7 eourt’s decision that the statute violated the Commerce Clause. The Supreme Court of California held that the well- established ruie that subordinate political entities, as “creatures” of the state, may not challenge state action, Williams v. Mayor of Baltimore, 289 U.S. 36, 40 (1933) applied under federal law only to challenges under the Fourteenth Amendment or the contract clause of the Federal Constitution and not to Commerce Clause chal- lenges, notwithstanding the opinion of the Ninth Circuit Court of Appeals to the contrary. City of South Lake Tahoe v. California Tahoe Regional Planning Agency, 625 F.2d 231, cert. den., 449 U.S. 1039 (White, Marshall, JJ., dis.) (9th Cir. 1980). The Court believed that a Fifth Cireuit Court of Appeal decision and a federal district court decision applied. Rogers v. Brockette, 588 F.2d 1057, cert. den. 444 U.S. 827 (5th Cir. 1979); San Diego Unified Port Dist. v. Gianturco (S.D. Cal. 1978) 457 F.Supp. 283, aff'd 651 F.2d 1306, cert. den., 455 U.S. 1000. Having held that there was standing to attack the statute, the Supreme Court of California held the statute violated the Commerce Clause, implying that it may offend Congress’ power to regulate foreign commerce under Michelin and Container Corp., and that it diserimi- nates unconstitutionally against interstate commerce under Boston Stock Exchange and Complete Auto Transit v. Brady, 430 U.S. 274 (1977). Justice Lucas dissented on the basis that the majority applied improper analysis and that the decision improp- erly precludes the Legislature from future use of this valid device to attract foreign commerce to California ports. Justice Lucas pointed out that although the majority conceded nondiseriminatory taxes would have no impact 8 on the foreign commerce power, that an exemption from tax might actually offend that power because it may operate to nuilify the curative effect of federally imposed tariffs. The dissent submitted that such speculation is not sufficient to strike down an otherwise valid exercise of state power. Citing Container Corp., Japan Line, and the amicus curiae brief of the Solicitor General in Sears, Justice Lucas found that the challenged exemption neither implicates foreign policy nor violates a clear federal directive, and does not impair federal uniformity, preventing the federal government from “speaking with one voice” in international trade. Rather than violate any policy of the foreign Commerce Clause, the exemption, if anything, facilitated the flow of foreign commerce. Justice Lucas also pointed out the majority’s error in using the Complete Auto analysis of whether a tax inter- feres with interstate commerce, to determine whether the exemption in question unduly burdens interstate com- merce. Justice Lucas believes Westinghouse Electric is controlling and upholds the constitutionality of the ex- emption under the Commerce Clause. He pointed out that there was no burden imposed on interstate commerce by placing a penalty or disincentive on the choice to transact business in another state, that local interests were not favored, and that the exemption is available regardless of the residency of the shipper, or the out-of-state place of manufacture of the goods. The dissent believed the respondent’s claim is really an equal protection attack and an inappropriate one under Allied Stores v. Bowers, 358 U.S. 522 (1959). Petitioner believes that the Supreme Court of Califor- nia misunderstands the rule of Williams v. Baltimore and the Ninth Cireuit opinion in City of South Lake Tahoe, and that local governments cannot attack a statute of their creator, the State of California. 9 Petitioner further believes that the Supreme Court of California misunderstands the Commerce Clause deci- sions of this Court, particularly the proper application of Westinghouse Electric and Boston Stock Exchange both of which emphasize that the Commerce Clause does “not prevent the states from structuring their tax systems to encourage the growth and development of intrastate com- merce and industry” and “we do not ‘hold that a state may not compete with other states for a share of inter- state commerce: such competition is at the heart of free trade policy.’” Boston Stock Exchange v. State Taz Comm’n 429 U.S. 318, 336-7 (1977); Westinghouse Electric Corp. v. Tully, 466 U.S. 388, 406, fn. 12 (1984). If Section 225 is not constitutional, it is questionable whether any state incentive can ever be constitutional. The California Supreme Court should be directed to recall its remittitur and hold that there is no standing of the local governments to attack the statute, and if there is, the statute is constitutional. STATEMENT OF REASONS FOR GRANTING THE WRIT OF CERTIORARI The Supreme Court of California has distorted and ignored this Court’s well-established rule, which is fol- lowed by the Ninth Circuit, that local governments can- not attack a statute of their creator. The question of whether this rule has been limited by the Fifth Circuit, and the federal district court for the southern district of California and the resolution of the conflict between the Ninth Cireuit and Fifth Cireuit, two federal courts of appeal, is a question that should be appropriately decided by this Court, and not the Supreme Court of California. With respect to the Commerce Clause question, the Supreme Court of California attempts to defend the interest of the United States, and to declare its own 10 statute unconstitutional, notwithstanding the position of the United States that the statute is constitutional. See Brief of the United States, attached as Exhibit B. As pointed out by the Solicitor General, there is no constitutional prohibition against favoring imports over domestic goods. The Import-Export Clause of the Consti- tution itself makes such a differentiation. The decisions of this Court involving imports, exports, and foreign com- merce uniformly emphasize that one of the principal purposes of the Constitution was to assure that the states did not impede or obstruct importation, exportation or foreign commerce. Although Michelin held a state was not constitutionally required to exempt imports, nothing in the decision suggested that the exemption that had previ- ously been constitutionally required under decisions over- ruled by Michelin was thereafter constitutionally prohibited. Nothing in the Commerce Clause prevents a state from favoring imports and exports, and their trans- shipment through a state, beyond the extent required by the Import-Export Clause. Although it is clear that a state may, for years subse- quent to Michelin, tax imported goods which were previ- ously immune, must it do so? Or, may a state in order to prevent the diversion of its import business to other States, such as Oregon and Washington which have en- acted free port laws, continue to exempt gvods which previously were immune from state taxation for over 100 years without at the same time revising its laws to exempt goods moving in interstate commerce which were histori- cally taxable even while the immunity of imported goods existed? If there is to be adopted a rule that foreign and domestic commerce must always meticulously be treated equally, numerous important state tax policies will be swept off the books. The rule urged by respondents and 11 upheld by the Court below that after Michelin state taxing statutes must treat foreign commerce and interstate com- merce with meticulous equality is contrary to the philoso- phy of Allied Stores v. Bowers, 358 U.S. 522 (1959), which held that a state may tax the goods of nonresidents more favorably than the goods of residents. The adoption of a rule requiring hard and fast equality would give rise to serious questions as to the validity of a great many state taxing policies. One of the most important of these involves the dra- matie international tension that has existed regarding California’s so called “unitary tax.” Respecting the im- portance of the State’s power to determine what and how to tax (and what and how not to tax), this Court in Container Corp. v. Franchise Tax Board, 463 U.S. 159 (1983) upheld worldwide combination. Because of the international: furor over the “unitary tax,” after Container, the President of the United States formed a Working Group to deal with the problem. Its keystone recommendation was that there be state legislation limiting combination of income to the “water's edge” and not including “foreign source” income as part of the taxing base. Such legislation has finally after many difficult years been enacted in California, under the threat of federal government legislation. If a rule were adopted in this ease that foreign and domestic commerce had to be treated the same, such Sing te me would be voided since domestic source income is ‘combined, but foreign source income is excluded. Under the decision below, such a distinction would violate the Commerce Clause. As noted above in the discussion of the dissent of Justice Lucas in the Supreme Court of California, not only are no policies of the foreign commerce clause 12 contravened, but the tax exemption statute at issue actu- ally furthers the free flow of commerce. Further, there is no violation of the interstate com- merce clause. If a statute such as the one in question (1) where there is no burden on interstate com- merce by placing a penalty or disincentive on the choice to transact business in another state, (2) where loeal interests are not favored, and (3) where the exemption is available regardless of the residency of the shipper or the out-of-state place of manufacture of the goods, is not constitutional, it would make meaningless this court’s emphasis on allowing states to structure their tax systems to encourage the growth and development of intrastate commerce and industry and to compete for a share of interstate commerce, with such competition be- ing at the heart of a free trade policy (Westinghouse Electric, 466 U.S. 388 (1984)). If Seetion 225 is not constitutional, presumably no state incentive can ever be constitutional. Respondents have made no effort whatsoever to estab- lish that Section 225 results in actual discrimination against interstate commerce. It may well be that goods brought into the state from other states for shipment and sale outside the state are seldom, if ever, assessed for property taxation in California. Certainly there is nothing in the record to support a contrary conclusion. For this reason alone the decision of the Court below should be reversed. It strikes down a state taxing statute solely on a per se basis contrary to recent pronouncements of this Court concerning the extent to which interference with commerce is required before the Commerce Clause invali- dates state tax provisions. 13 As a matter of proper judicial interpretation, the con- stitutionality of the statute should have been upheld unless it was ciear the statute is unconstitutional. The judicial history of the attack on the statute shows no one eould argue it is clearly unconstitutional: the California Supreme Court denied a petition for hearing in Sears four to three, this Court split four to four in Sears and the Court of Appeal in this ease upheld the statute as consti- tutional. Legislative enactments are presumed constitu- tional and local governments have long been prohibited from attacking statutes of their creator. Even if it should be held that state tax laws must hereafter deal equally with foreign and interstate com- merece, 2 period of grace should be allowed the states in which to revise their laws. Such grace period or nonretro- activity is particularly appropriate in the unique cireum- stances of the instant case: (1) a county with dubious authority to do so, attacked a statute of its creator, (2) in every other county of the state, the exemp- tion was granted, and (3) there were superior courts holding the statute constitutional, and others holding it uneonstitu- tional, the Zee Toys Court of Appeal held the statute unconstitutional, and the Star-Kist Court of Appeal held the statute constitutional, the California Su- preme Court denied a petition for hearing in Zee Toys four to three, and this Court split over the issues involved four to four. It is submitted that were there such a doctrine holding under Michelin and Boston Stock Exchange that the free flow of foreign com- merce could not be facilitated as Section 225 does, that such doctrine should not be applied to matters arising prior to the decision in Sears, January 26, 1981. 14 ARGUMENT 1. There is Not an Exception, for Commerce Clause At- tacks, to the Well-Established Rule that Subordinate Political Entities Cannot Challenge a Statute of Their Creator In Williams v. Baltimore, 289 U.S. 36 (1932), the Maryland Legislature had by statute exempted certain railroad property from all state taxation, including prop- erty taxation. The Mayor and City Council of Baltimore and similar officials of Annapolis attacked the constitu- tionality of the statute on federal (Fourteenth Amend- ment) constitutional and state constitutional grounds. The Fourth Cireuit Court of Appeals held the statute unconstitutional on those two sets of grounds, and the United States Supreme Court granted writs of certiorari. The Court held the Baltimore and Annapolis officials had no standing to attack the statute on federal constitutional grounds, although because it had not been objected to by the parties, the Court heard the attack based on state constitutional grounds. The Court held that local governmental entities do not have standing to attack statutes of a superior body on federal constitutional grounds: “A municipal corporation, created by a state for the better ordering of government has no privileges or immunities under the federal Consti- tution which it may invoke in opposition to the will of its creator...” Williams v. Baltimore, supra, 289 U.S. 36, at p. 40. The Court even questioned whether state constitu- tional grounds could be raised by the local governmental entities in attacking the statute, while simultaneously emphasizing their lack of standing to argue federal con- stitutional issues: “We have assumed, without deciding, that the respondents, though without standing to invoke the a ——— 15 protection of the Federal Constitution, will be heard to evmplain of a violation of the Constitution of the State . . .” Williams v. Baltimore, supra, at pp. 47-48. (Emphasis added) The lack of “standing to invoke the protection of the Federal Constitution” was certainly not limited in Wil- liams to the Fourteenth Amendment and the contract clause. Rather, as the Supreme Court of California recognizes “In City of South Lake Tahoe v. California Tahoe Regional Planning Agency (9th Cir. 1980) 625 F.2d 231, cert. den. 449 U.S. 1039 (White, Marshall, JJ., dis.) the Ninth Cireuit interpreted this ‘no standing’ rule as absolutely barring political subdivisions from challenging state stat- utes on any federal constitutional ground.” (42 Cal.3d 1, 7.) The Supreme Court of California, ignoring the clear cut rule, cited a Fifth Cireuit opinion and various federal district court opinions which have held that “the rule does not extend to supremacy clause challenges to state laws.” The Court found the Fifth Cireuit opinion — Rogers v. Brockette 588 F.2d 1057, cert. den., 444 U.S. 827 (5th Cir. 1979) — to imply a rule contrary to that of the Ninth Cireuit, although the Fifth Cireuit’s opinion seems strictly limited to the supremacy clause. The Supreme Court of California erroneously relies on a federal district court decision which allowed standing for a local government to “invoke the supremacy clause despite its lack of capacity to raise other constitutional claims” because the supremacy clause “establishes a structure of government which defines the relative powers of states and the federal government.” (San Diego Unified Port Dist. v. Gianturco (S.D. Cal. 1978) 457 16 F.Supp. 283, aff'd 651 F.2d 1036, cert. den., 455 U.S. 1000, at 457 F.Supp. 290.) Attempting to understand the rule from Rogers-Gian- turco, the Supreme Court of California found that “the commerce clause resembles the supremacy clause in that it albeit indirectly ‘defines the relative powers of states and the federal government. (Gianturco, supra, 457 F. Supp. at p. 290) The Court, thus, understood there to be an exception for Commerce Clause challenges by local governments under the doctrine of the lack of local government’s power to attack state statutes. The Court is incorrect in its comment that “In the present case, for example, there is a real possibility that the constitutionality of the Legislature’s scheme of differ- ential taxation of business inventories would have gone unchecked absent challenge by those entities charged with administration of the program.” Star-Kist Foods, Inc. v. County of Los Angeles, et al 42 Cal.3d 1, at p. 9. If, in fact, there was a discrimination against interstate com- merece, those involved in such commerce could well raise the claim. See, for example, the discriminated taxpayers in Westinghouse Electric or Boston Stock Exchange. The people of California entrusted their legislative representatives to determine what personal property should be exempt. “The constitution further empowers the Legislature ... to ‘classify such personal property for differential taxation or for exemption.’ (Cal. Const. Art. XIII.) By having its “creatures”, all of the forms of local government, be able to attack the statutes the State Legislature creates is only to spawn litigation upon litiga- tion, with an ever-expanding role of government. It is precisely this legislative-type role of making up new legal rules that has made the Supreme Court of California the subject of controversy in the California November, 1986 election. | a " 17 If the Court determines that the County and cities have no standing, petitioner requests that rather than dis- missing, the ease be remanded to the California Supreme Court for further proceedings consistent with its opinion inasmuch as the California Court misunderstood the rule of standing. Were this Court for any reason to consider dismissing for lack of standing rather than remanding, petitioner would, in the alternative, request this court to find in the context of this case that the County and local govern- ments do have standing on the basis that they were not attacking the statute of their creator, but continued to refuse the refunds based on the exemption granted by Section 225 simply because they felt bound by the judicial determination in Zee Toys, 85 Cal.App.3d 763 (1978) affirmed by a split court 449 U.S. 119 (1981) that Section 225 was unconstitutional. It would be unfair to petitioner who for over 10 years has sought a refund based on a state legislatively-granted exemption, to be refused that exemption on federal con- stitutional grounds, without the opportunity of having the highest arbiter of federal constitutional law, the United States Supreme Court, review the very important ques- tion of federal law. To avoid the “eateh 22” of the dismissal route, petitioner early in its case advised the members of the State Board of Equalization, the Attorney General, the individual members of the Board of Supervi- sors, the Assessor, the Tax Collector, and the Auditor- Controller that they may wish to intervene in the instant ease, so that if there be no standing under Williams v. Baltimore, there might be standing under Board of Educa- tion v. Allen (1968) 392 U.S. 236. The state and local officials contacted have not chosen to intervene. 28 U.S.C. § 2403(b) may be applicable to this case. 18 Constitutional law scholars and the bar have waited for many, many years to have the standing question resolved. It appeared it would be resolved in Sears but the Court split four to four. The issue of standing involved in the present case should now be addressed, but without prejudice to petitioner being heard by the Court on the important Commerce Clause substantive question dis- cussed below. II. The Statute Involved Does Not Result in an Invalid Regulation of Foreign Commerce: It Was Valid When Enacted, Michelin Did Not Invalidate it, it is Consis- tent with the Policies of the Import-Export and Com- merce Clauses, Favoring the Free Flow of Commerce, and it does not Interfere with the Ability of the Federal Government to Speak with One Voice The Solicitor General (see Exhibit B) distinguished Boston Stock Exchange from the instant situation: “Here, in contrast, the statutory property tax exemp- tion did not favor local business at the expense of out-of-state business. It favored imports and exports. There is, however, no constitutional prohibition against favoring wmports over domestic goods. The Import- Export Clause of the Constitution itself makes such a differentiation. Section 225... facilitates importation and exportation... Nothing in the Commerce Clause prevents a state from favoring imports and exports beyond the extent required by the Import-Export Clause.” (Page 6 of Brief of the United States, Exhibit B, emphasis added.) The position of the United States in the matter is that state statutes, such as Section 225, which favors imports over domestic goods, are not constitutionally prohibited 19 but, rather, constitutionally compatible with the Import- Export and Commerce Clauses of the Constitution. The federal government’s view though not dispositive, is of great help for three important reasons: (1) the logie of its position and its understanding of the cases are sound, and rooted in policy; (2) its views are independent and uninfluenced by a stake in the litigation (its views were requested by this Court); and (3) its views are those of the party whom the California Courts sought to protect, even though the federal government not only feels Section 225 is constitutional, but that it is in furtherance of impor- tant federal constitutional principles behind the Im- port-Export and Commerce Clauses. It is important to note that the statute in question was enacted in 1975 at a time when imported goods of the kind involved herein were immune from state taxation At the time, and for over 100 years prior thereto, it was permissible for a state to tax goods coming into the state in interstate commerce notwithstanding that goods im- ported from foreign countries were immune from such taxation. Thus the statute was entirely valid at the time of its enactment. If after Michelin the legislature had enacted a statute imposing a substantially higher tax on imported goods than it imposed upon other goods, one could accept the conclusion that the statute constituted an invalid regula- tion of foreign commerce. It is difficult to understand, however, how the simple continuation of a pattern of taxation which validly existed for over 100 years can suddenly overnight be converted into an unconstitutional regulation of foreign commerce. a 20 It is even more difficult to understand how the continu- ation of such a pattern in any way frustrates Congres- sional policy in establishing tariffs, as held by the iower court. To the best of petitioner’s knowledge, Congress has never taken state property taxes into account in the imposition of tariffs on imported goods. It would be extremely difficult, if not impossible, for it to do so. There are 50 different states with widely different tax systems and tax rates. Even if there were any merit to the argument, the effect of the statute in question is, in the overall context, de minimis. It is fanciful for the lower court to hold that the statute involved herein may frustrate Congress in the levying of tariffs. Such a speculative foundation should not be per- mitted to stand as the basis for invalidating a state tax statute under the United States Constitution. Some 37 states have free port laws under which goods brought into the state and held there temporarily for subsequent ship- ment outside the state are exempt from taxation. Before a statute can be invalidated on such grounds, there should be required a showing that there was an actual and substantial effect upon Congress’ ability to regulate for- eign commerce. The exemption of Section 225 is not “pre-empted by federa! law or fatally inconsistent with federal policy.” (Container Corp. v. Franchise Tax Board, 463 U.S. 159 at p. 197, emphasis added.) “Primarily, the majority has failed to demonstrate how the tax exemption at issue affects any foreign policy.”’ (See Container Corp., supra) (Dissent of Justice Lucas, Star-Kist Foods, Inc. v. County of Los Angeles, 42 Cal.3d 1, 18 (1986)) This is also no violation of a clear federal directive nor impairment of “speaking with one voice.” (Star-Kist Foods, Inc. v. County of Los Angeles, 42 Cal.3d 1, Dissent pp. 18-19 (1986) ) ’ ’ 21 Justice Lueas significantly notes, that ‘rather than impeding the flow of foreign commerce, this exemption, if anything, facilitated this channel of trade.” (Star-Kist v. County of Los Angeles, 42 Cal.3d 1, 19 (1986) ). Il. State Taxing Statutes Should Not Be Required to Treat Foreign Commerce and Interstate Commerce With Meticulous Equality A hard and fast rule of equality, such as that proposed by the lower court, would not only violate the policies of Allied Stores v. Bowers, 358 U.S. 522 (1959) but would lead to serious doubts as to the validity of various other state taxing policies. For example, California, as indicated above, as a result of intensive study by the President of the United States’ Working Group, and as a result of federal pressure, has alleviated international tensions by enacting a water's edge bill — limiting the combination of worldwide income in the franchise tax area. If the Court below is correct, there would be an unconstitutional discrimination in the new legislation. In the above and numerous other instances which could be mentioned, a hard and fast rule of equality would give rise to serious questions of validity in many state taxing statutes. 22 IV. The Statute Involved Does Not Burden Interstate Com- merce Where There is no Showing of an Impermissi- ble Burden, There is no Penalty or Disincentive on the Choice to Transact Business in Another State, Local Interests are not Favored and the Exemption is Available Regardless of the Residency of the Shipper or the Out-of-state Place of Manufacture of the Goods Respondent County has assumed any different treat- ment of foreign commerce vis-a-vis interstate commerce is prohibited by the Commerce Clause. This is not true. Clearly, foreign commerce can be favored over interstate ecommerce. Japan Lines v. County of Los Angeles, 441 U.S. 434 (1979); Westinghouse Electric v. Tully, 466 U.S. 388, 406 fn. 12 (1984). In fact, favoring the free flow of foreign ecommerce is totally consonant with the underlying pur- poses of the Commerce Clause. The Court in Westinghouse recognized “‘a State’s inter- est in exercising its taxing powers”... that the Commerce Clause does “not prevent the states from structuring their tax systems to encourage the growth and develop- ment of intrastate commerce and industry.”...and that “As in Boston Stock Exchange, we do not ‘hold that a state may not compete with other states for a share of inter- state commerce: such competition is at the heart of free trade policy.’” Westinghouse Electric v. Tully, 466 U.S. 388, 406 fn. 12 (1984). If a statute such as the one in question where (1) there is no burden on interstate commerce by placing a penalty or disincentive on the choice to transact business in another state, (2) loeal interests are not favored, and 23 (3) tke exemption is available regardless of the residency of the shipper or the out-of-state place of manufacture of the goods, is not constitutional, it would make meaningless this Court’s emphasis on allowing states to structure their tax systems to encourage the growth and development of intrastate commerce and industry and to compete for a share of interstate commerce, with such competition be- ing at the heart of a free trade policy (Westinghouse Electric Corp. v. Tully, 466 U.S. 388 (1984)). If Section 225 is not constitutional, presumably no state incentive ean ever be constitutional. The Supreme Court in Westinghouse stated clearly that a eredit or exemption favoring exports does not violate the Commerce Clause: We reiterate that it is not the provision of the [export] credit that offends the Commerce Clause, but the fact that it is allowed on an impermissible basis.” (Ibid. at 406, fn. 12 (emphasis added) ). As Justice Lucas correctly indicates in the dissent: “A recent United States Supreme Court case appears con- trolling... Westinghouse Electric Corp. v. Tully (1984) 466 U.S. 388,...” The Westinghouse and Boston Stock Exchange taxing schemes were not problematic because of the positive incentives they created, but were infirm due to the taxing state imposing automatic penalties on activities occurring in other states. The Court struck down the laws in question on the basis that such burdens cannot be imposed on such activities outside the state. Section 225 does not reach or tax or penalize activities occurring in other states. There is no use of the power of the state to force out of state manufacturers or producers to transship through Califor- nia. They can avoid California property taxation by ship- 24 ping directly through California to the ultimate destination. Goods in transit are constitutionally immune from property tax under the Commerce Clause if the transportation is not interrupted at the behest of the owner. Bacon v. Illinois, 227 U.S. 504 (1913). Or the non- importer/exporter could avoid California property taxa- tion by shipping through to an intermediate location in another state which does not tax inventory. Section 225 merely preserves the advantage that foreign goods have had from property taxation. Michelin v. Wages, 423 U.S. 276 (1976) did not require the taxation of foreign goods but only permitted such taxation. V. The Extent if Any of Actual Discrimination Has Not Been Established Without any support in the record for finding that the statute either regulates foreign commerce or affects com- petition, the lower Court held that the statute per se violates the Commerce Clause. The Court ignored estab- lished ease law which holds that state tax laws affecting commerce are invalid only if they seriously and unreason- abiy burden commerce in relation to benefits. Richfield Oil Corp. v. State Board of Equalization, 329 U.S. 69 (1946); Aldens, Inc. v. Ryan, 571 F.2d 1159, 1162 (10th Cir. 1978), citing Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). The clear trend of the Supreme Court is to not limit the states’ taxing power, e.g., Miche- lin Tire Corp. v. Wages, supra; Washington Rev. Dept. v. Stevedoring Assn., 435 U.S. 734 (1978). Container Corp. v. Franchise Tax Board, supra. 25 VI. If States Could Not Facilitate the Free Flow of Com- merce as the Statute Involved Does, there Should Be a Grace Period of Adjustment, and/or Such Doctrine Should Not Be Applied Prior to the Affirmance by an Equally Divided Court in Sears, January 26, 1981 The litigation in the instant case has been going on for ten years. Petitioner has the only remaining cases involv- ing Section 225 and they involve only the years 1976, (this case) and 1977, 1978 and 1979 (pending cases). Thus appiying Sears from the 1981 date would also grant the taxpayer the appropriate relief. The Sears or Zee Toys rationale should not be applied retroactively prior to 1981 in the instant case, and in all events it should not be applied retroactively prior to 1981 in the remaining cases that involve this issue (Plaintiff’s suits for the 1977, 1978, 1979 years). Nor in the context of this case would it be fair to require the taxpayer to wait another ten years to determine the beginning point of this new doctrine. It would be extremely unfair to have the legislative exemption granted to all taxpayers in the other 57 coun- ties (of California’s 58 counties), and to deny taxpayers in Los Angeles County the exemption their competitors received, because in a case of first impression and a case involving a very close question, the statute was ultimately held unconstitutional. This is an issue on which the highest courts’ have previously split 4-3, and 4-4, and on which two different Courts of Appeal have rendered opposite decisions. In such a ease of first impression, under Chevron Oil Co. v. Huson, 404 U.S. 97 (1971) the Sears, Zee Toys or Boston Stock Exchange-Michelin doc- trine must not be applied retroactively, or a grace period of adjustment should be allowed for the states (37 states have freeport exemptions and other states distinguish in their tax laws between foreign and domestic items). 26 In California Superior Court decisions related to the instant ease, the Court found, among ten grounds, that the retroactive application of the Sears-Zee Toys doctrine [Boston Stock Exchange-Michelin| would be unfair and would result in economic hardship, inequities, and injus- tices; and/or importers relied upon and could not have reasonabie foreseen that the exemption would be invali- dated; and/or Publie policy will be served by preventing the disruptive and unjust effect of applying the Zee Toys decision retroactively; and/or the California Legislature in passing Revenue and Taxation Code Section 225.3 provided relief from the retroactive application of the Zee Toys decision to importers and exporters in many coun- ties other than Los Angeles for the years 1976, 1977, and 1978; and that denying similar relief to taxpayers for taxes which became due in these years would be inequitable. It is clear under the judicia! doctrine of when new case law should not be applied retroactively, that a new Zee Toys-Sears |Boston Stock Exchange-Michelin| doctrine should not be applied retroactively under the facts and circumstances of this case. Rather the new doctrine should only be appiied prospectively from the affirmance of Sears by this Court, 7.e., from 1981 forward. CONCLUSION For the foregoing reasons, the petition for a writ of certiorari should be granted. Respectfully submitted, CHARLES R. AJALAT Attorney for Petitioner A-l APPENDIX A [42 Cal.3d 1] [L.A. No. 31918. June 30, 1986.] STAR-KIST FOODS, INC., Plaintiff and Appeilant, v. COUNTY OF LOS ANGELES et al., Defendants and Respondents. OPINION REYNOSO, J.— We consider two questions: whether counties and municipalities may challenge the constitu- tionality of a statute exempting from ad valorem taxation business inventories of foreign origin or destination which are transshipped through the state; and if so, whether such exemption violates the commerce clause. We conclude that counties and municipalities may raise such a challenge, and that the statute in question offends the commerce clause. The parties stipulated to the relevant facts. For tax year 1976-1977, defendants, Los Angeles County and the Cities of Los Angeles and Long Beach, assessed and levied ad valorem taxes on plaintiff Star-Kist Foods, Ine.’s' inventory of canned tuna present in its California warehouses on March 1, 1976, the lien date.” Star-Kist paid the tax, but sought a refund. 'Star-Kist is a California corporation. *In 1978, the Legislature enacted Revenue and Taxation Code section 538 which requires an assessor who questions the constitu- tionality of a particular tax provision to bring an action for declara- tory relief against the State Board of Equalization in lieu of making the disputed assessment. (Stats. 1978, ch. 1188, § 1, eff. Sept. 26, A-2 [42 Cal.3d 5] of the $44,197 assessed on that portion of Star-Kist’s inventory that had been manufactured or produced outside the United States and brought into California for shipment to other states for sale in the ordinary course.’ Star-Kist based its refund claim on the exemption contained in newly enacted Revenue and Taxation Code* section 225, which provided an exemption from taxation for “[p]Jersonal property manufactured or produced, (1) outside this state and brought into this state for trans- shipment out of the United States, or (2) outside of the United States and brought into this state for transship- ment out of this state, for sale in the ordinary course of trade or business...” After exhausting its administrative remedies, Star-Kist brought suit in Los Angeles County Superior Court for refund of the contested taxes. Defendants asserted that the statutory exemption was invalid in that it violated the commerce clause of the federal Constitution (U.S. Const., art. I, $8, el. 3) by interfering with Congress’ plenary power over commerce, in that it discriminated against interstate commerce. 1978.) As this controversy arose before section 538 was enacted, section 538 does not apply to these proceedings. “The inventory in question was valued at $655,140. The assessed value of Star-Kist’s total inventory for 1976-1977 was $5,699,300 upon which Star-Kist paid ad valorem taxes in the amount of $394,316. *All statutory references are to the Revenue and Taxation Code unless otherwise indicated. *Seetion 225 was repealed in 1984, Section 219 now exempts all business inventory from taxation. (Added by Stats. 1980, ch. 411, § 8, p. 801, urgency, eff. July 11, 1980, operative Jan. 1, 1981.) A-3 Relying on Zee Toys, Inc. v. County of Los Angeles (1978) 85 Cal.App.3d 763 [149 Cal.Rptr. 750], hearing denied, January 17, 1979, affirmed without opinion by an equally divided court in Sears, Roebuck and Co. v. County of Los Angeles (1981) 449 U.S. 1119 [67 L.Ed.2d 106, 101 S.Ct. 933], in which the Court of Appeal held that section 225 violated the commerce clause and was void, the trial eourt denied plaintiff's refund claim. This appeal followed. I (la) Before reaching the merits of defendants’ charge that section 225 violates the commerce clause, we must determine whether defendants have “standing” to raise such a challenge to a state law. The term “standing” in this context refers not to traditional notions of a plain- tiff’s entitlement to seek judicial resolution of a dispute,” but to a narrower, more specific in- (42 Cal.3d 6] quiry focused upon the internal political organization of the state: whether counties and municipalities may invoke the federal Constitution to challenge a state law which they are otherwise duty-bound to enforce. Counties and cities must look to the state Constitution and the Legislature for their creation and delegated powers. (Cal. Const., art. XI, §§ 1, 2.) (2) Counties are *One could argue that, in practical effect, defendants’ willful compaign to supplant section 225’s exemption by ignoring it and forcing plaintiff to bring a refund suit makes defendants the “true” plaintiffs in this controversy. Regardless of party designation, how- ever, the threshold question as to whether the county and cities may challenge the statute remains the same. A-4 ‘merely [] political subdivision[s] of state government, exercising only the powers of the state, granted by the state, created for the purpose of advancing ‘the policy of the state at large....’”’ (County of Marin v. Superior Court (1960) 53 Cal.2d 633, 638-639 [2 Cal.Rptr. 758, 349 P.2d 526].) (3) Though municipalities may enjoy a greater degree of autonomy with regard to local affairs. (Wilson v. Beville (1957) 47 Cal.2d 852, 858-859 [306 P.2d 789] [charter cities]), they too are subject to the sovereign’s right to extend, withdraw or modify the pow- ers delegated. (Trenton v. New Jersey (1923) 262 U.S. 182, 187 [67 L.Ed. 937, 941, 43 S.Ct. 534, 29 A.L.R. 1471]. See People v. California Fish Co. (1913) 166 Cal. 576, 606 [138 P. 79].)’ (4) This legislative control over cities and counties is reflected in the well-established rule that subordinate political entities, as “creatures” of the state, may not challenge state action as violating the entities’ rights under the due process or equal protection clauses of the Fourteenth Amendment or under the contract clause of the federal Constitution. “A municipal corporation, cre- ated by a state for the better ordering of government, has no privileges or immunities under the federal] constitution "The California Constitution provides that, with limited exception, “Ta]ll property is taxable...’ (Cal. Const., art, XIII, § 1, subd. (a).) The Constitution further empowers the Legislature to “provide for property taxation of all forms of tangible personal property,” and to “classify such personal property for differential taxation or for exemption.” (Cal. Const., art. XIII, § 2.) The Legislature, in turn, has delegated responsibility for assessment, levy and collection of property taxes to local government. (Gov. Code, §§ 23004, subd. (e), 43000 et seq., 51501.) This delegated authority, however, does not include the power to originate a tax; only those taxes expressly authorized by statute may be assessed. (County of Los Angeles v. Jones (1939) 13 Cal.2d 554, 561-562 [90 P.2d 802].) which it may invoke in opposition to the will of its creator. [Citations.]” (Williams v. Mayor of Baltimore (1933) 289 U.S. 36, 40 [77 L.Ed. 1015, 1020, 53 S.Ct. 431]. Accord Newark v. New Jersey (1923) 262 U.S. 192, 196 [67 L.Ed. 943, 946, 43 S.Ct. 539] [equal protection clause]; Trenton, supra, 262 U.S. at pp. 185-187 [67 L.Ed. at pp. 940-941] [contract clause and Fourteenth Amendment]; Mallon v. City of Long Beach (1955) 44 Cal.2d 199, 209 [282 P.2d 481] [contract clause]; City of Los Angeles v. City of Artesia (1977) 73 Cal.App.3d 450, 457 [140 Cal.Rptr. 684] [contract clause and due process clause].) This rule’s application beyond Fourteenth Amendment and contract clause challenges remains unsettled. [42 Cal.3d 7] In City of South Lake Tahoe v. California Tahoe (9th Cir. 1980) 625 F.2d 231, certiorari denied, 449 U.S. 1039 [66 L.Ed.2d 502, 101 S.Ct. 619] (White, Marshall, JJ., dis.) the Ninth Cireuit interpreted this “no standing” rule as absolutely barring political subdivisions from challenging state statutes on any federal constitutional ground. Regrettably, the South Lake Tahoe decision pro- vides little guidance as to the court’s reasoning in choos- ing a per se rule. The plaintiffs in South Lake Tahoe, the city and individ- ual city council members, brought an action of declara- tory and injunctive relief, attacking the validity of certain land use regulations and transportation plans adopted by a regional planning agency on four separate constitu- tional grounds: the plans and regulations violated the Fifth and Fourteenth Amendments in arbitrarily diserim- inating between similarly situated landowners, violated the right to travel, resulted in the taking of property without just compensation and conflicted with regulations A-6 of a congressionally approved bi-state planning agency in violation of the supremacy clause. The court rejected the city’s claim of standing to raise the constitutional claims based on the regulation’s injurious effects on its munici- pal finances. After noting that “‘[p]olitical subdivisions may not challenge the validity of a sate statute under the Fourteenth Amendment,’ ” and pointing out that it makes no difference whether the challenge is to the state or to a political subdivision thereof, the court simply concluded, “(t]hus, the city may not challenge: [the] plans and ordinances on constitutional grounds.” (South Lake Tahoe, supra, 625 F.2d at p. 233.) The court also denied the individual council members standing for lack of a personal stake in the matter, remarking in passing: ‘“[t]the eouncilmembers do not seek here to represent the City’s interests; if they did their claims would be barred along with the City’s.” (Id., at p. 237.) Other courts have declined to read the “no stainding” rule as an absolute bar to federal constitutional chal- lenges by political subdivisions. These courts have held that the rule does not extend to supremacy clause chal- lenges to state laws. (Rogers v. Brockette (5th Cir. 1979) 588 F.2d 1057, cert. den., 444 U.S. 827 [62 L.Ed.2d 35, 100 S.Ct. 52]; San Diego Unified Port Dist. v. Gianturco (S.D.Cal. 1978) 457 F.Supp. 283, affd. 651 F.2d 1306, eert den., 455 U.S. 1000 [71 L.Ed.2d 866, 102 S.Ct. 1631}; Triplett v. Tiemann (D.Neb. 1969) 302 F.Supp. 1239; Carlsbad Union School District of San Diego Country v. Rafferty (S.D.Cal. 1969) 300 F.Supp. 434 affd. (9th Cir. 1970) 429 F.2d 337; Douglas Independent School District No. 3 v. Jorgenson (D.S.D. 1968) 293 F.Supp. 849; Hergenreter v. Hayden (D.Kan. 1968) 295 F.Supp. 251.) — Rogers and Gianturco provide meaningful insight into the purpose of the “no standing” rule and its one established exception. A-7 [42 Cal.3d 8] The Rogers court recognized a school district’s stand- ing to raise a supremacy clause challenge to a state law requiring a district with a substantial number of low income students to participate in a federally subsidized school breakfast program. The court also upheld the statute against the school district’s challenge. In resolving the standing question, the Rogers court studied the historic basis of the “no standing” rule and concluded that the rule has generally been applied in two types of cases: those in which the state has altered political subdivisions’ boundaries (e.g., Hunter v. Pitts- burgh (1907) 207 U.S. 161 [52 L.Ed. 151, 28 S.Ct. 40]), and those involving state modification of a benefit previ- ously granted to a subdivision (e.g., Trenton, supra, 262 U.S. 182). (Rogers, supra, 588 F.2d at p. 1067.) The court then went on to suggest that “... these cases are substan- tive interpretations of the constitutional provisions in- volved” (id., at p. 1068), and, as such, simply “adhere to the substantive principle that the Constitution does not interfere with a state’s internal political organization.” (Id., at p. 1070.) Because there is no comparable limit on Congress’ power to “interfere” in a state’s internal politi- eal organization, the court concluded, a subdivision of the state may raise a claim that state law conflicts with federal law and is therefore void. (/d., at pp. 1070-1071.) The Gianturco court took a related, but somewhat different approach in reaching the conclusion that a politi- eal subdivision may invoke the supremacy clause despite its lack of capacity to raise other constitutional claims. In Gianturco, a port district operating an airport challenged a flight curfew imposed by the California Department of Transportation as violative of the supremacy clause in that the field was preempted by federal law. allie, | A-8 BAA rialaeaeans aes Discussing the standing issue, the Gianturco court noted that a distinction between the supremacy clause and other constitutional provisions lies in the purpose served by each. Provisions like the Fourteenth Amend- ment and the contract clause “confer fundamental rights on individual citizens’; the supremacy clause, in contrast, “establishes a structure of government which defines the relative powers of states and the federal government.” (Id., 457 F.Supp. at p. 290.) Political subdivisions cannot assert “constitutional rights which are intended to limit governmental action vis-a-vis individual citizens” but may invoke the supremacy clause to challenge preempted state law. (Jbid.) Otherwise “such legislation and regulation often would go unchecked even though expressly prohib- ited by the Constitution.” (Ibid.) (1b) Accepting the Rogers-Gianturco rationale for ex- empting supremacy clause claims from the rule that political subdivisions cannot challenge state law on the basis of the federal Constitution, the question remains whether [42 Cal.3d 9] this type of commerce clause claim also falls outside the confines of the rule. Based on the similarity between the commerce clause and the supremacy clause, we conclude that it does. The commerce clause empowers Congress “[t]o regu- late commerce with foreign nations, and among the sev- eral states, and with Indian tribes.” (U.S. Const., art. I, § 8, el. 3.) (5) As the United States Supreme Court has long emphasized, “ ‘[t]he Commerce Clause, even without implementing legislation by Congress is a limitation upon the power of the States.’ ”’ (Boston Stock Exchange v. State Tax Comm’n (1977) 429 U.S. 318, 328 [50 L.Ed.2d 514, 4 4 A-9 523, $7 S.Ct. 599], quoting Freeman v. Hewit (1946) 329 U.S. 249, 252 [91 L.Ed. 265, 271, 67 S.Ct. 274].) In this respect, the commerce clause resembles the supremacy clause in that it, albeit indirectly, ‘defines the relative powers of states and the federal government.” (Gian- turco, supra, 457 F.Supp. at p. 290.) (le) The defendants’ claim in the instant case accents this definitional framework. Defendants assert that the foreign commerce tax exemption interferes with Con- gress’ exclusive control over commerce by potentially nullifying the value of protective tariffs and by discrimi- nating against domestic commerce. The discrimination is merely a side effect of the institutional intrusion. As noted in Zee Toys, supra, 85 Cal.App.3d 763, which in- volved an identical challenge to section 225, “[t]he only function of the discriminatory nature of the tax is to demonstrate its capacity to interfere with the authority of Congress over commerce. The interest herein sought to be protected is not personal to dealers in nonexempt inter- state goods; it relates more to the national interest in observing the boundaries of state and federal power.”’ (Id., at p. 778.) (Italies added.) Viewing the commerce clause challenge in this light leads to the conclusion that political subdivisions might legitimately raise such claims. State action cannot be so insulated from serutiny that encroachments on the fed- eral government’s constitutional powers go unredressed. In the present case, for example, there is a real possibility that the constitutionality of the Legislature’s scheme of differential taxation of business inventories would have gone unchecked absent challenge by those entities charged with administration of the program. Moreover, because the foreign commerce exception precluded the local taxing agencies from taxing business inventories A-10 they otherwise would have been authorized to tax, the agencies experienced significant revenue loss.® Thus, their interest in testing the constitutionality of the statute is unmistakable. [42 Cal.3d 10] We therefore conclude that defendants have standing to raise this commerce clause challenge. This result com- ports with the Legislature’s implicit recognition of the right to raise federal constitutionai claims in section 538, enacted in 1978. (Ante, fn. 2.) Section 538, the Legisla- ture’s direct response to Los Angeles County’s refusal to implement section 225’s exemption (Stats. 1978, ch. 1188, § 4, p. 3840), requires an assessor who believes a tax measure to be unconstitutional or otherwise invalid to seek declaratory relief to that effect, instead of simply imposing an assessment contrary to the questioned law. Because the statutory language speaks to unconstitution- ality generally, without differentiating between the fed- eral and state Constitutions, and the legislative history reflects a concern with the commerce clause challenge to section 225, it is reasonably likely that the Legislature did anticipate claims based upon the federal Constitution. *When section 225 was enacted, federal law precluded taxation of imports in their original containers. That restriction was abandoned in Michelin Tire Corp. v. Wages (1976) 423 U.S. 276 [46 L.Ed.2d 495, 96 S.Ct. 535]. Thus, the Legislature’s assumption that under section 225 “the net loss of revenues to any local agency is not significant” (Stats. 1976, ch. 1126, § 4, p. 2746) did not prove to be correct. (See Zee Toys, supra, 85 Cal.App.3d at p. 783.) se ace ae A-11 et (6a) We turn to the question whether section 225, in exempting only certain business inventories from ad valorem taxation, violates the commerce clause. (7) The commerce clause reserves to Congress exclu- sive power “[t]o regulate commerce with foreign nations and among the several states...” (U.S. Const., art. I, § 8, el. 3.) The clause does not, however, abrogate the “ ‘power of the states to tax for the support of their own govern- ments.” (Boston Stock Exchange, supra, 429 U.S. at p. 328 [50 L.Ed.2d at pp. 523-524], quoting Gibbons v. Ogden (1824) 22 U.S. (9 Wheat.) 1, 199 [6 L.Ed. 23, 71].) Determining whether a state tax exceeds the bounds of permissible state action under the clause is often a difficult task. As the United States Supreme Court noted in Boston Stock Exchange, “... when ealled upon to make the delicate adjustment between the national inter- est in free and open trade and the legitimate interest of the individual States in exercising their taxing powers, the Court has counseled that the result turns on the unique characteristics of the statute at issue and the particular circumstances in each ease.” (/d., 429 U.S. at p. 329 [50 L.Ed.2d at p. 524].) (6b) As enacted, section 225 provided: “Personal property manufactured or produced, (1) outside this state and brought into this state for transshipment out of the United States or (2) outside of the United States and brougyt into this state for transshipment out of this state, for sale in the ordinary course of trade or business shall be exempt from taxation. The exemption under this sec- tion shall not apply to personal property in manufactur- ing process or production. Such process or production shall not include the breaking in bulk, labeling, packag- ing, relabeling, or repackaging. | A-12 (42 Cal.3d 11] of such property.” As all other business inventories were subject to ad valorem taxation (§ 201; former § 219 re- pealed by Stats. 1980, ch. 411, § 7), goods manufactured *The history of this exemption deserves mention. For over a century, states were prohibited from imposing even nondiscrimina- tory ad valorem taxes on imported goods while they retained their character as imports. (Low v. Austin (1872) 80 U.S. (13 Wall.) 29 [20 L.Ed. 517].) In 1972, this court held that imports could be taxed onee removed from their original containers. (Volkswagen Pacific v. City of Los Angeles (1972) 7 Cal.3d 48 [101 Cal.Rptr. 869, 496 P.2d 1237].) The Legislature subsequently enacted section 225, presuma- bly to countermand Volkswagen Pacific. Over 35 states have adopted similar “free port” laws, many of which extend tax-exempt status to stored imports. (Japan Line, Ltd. v. County of Los Angeles, The Foreign Commerce Clause: An Economic Approach to the Negative Effects of State Taxation (1980) 13 J. Mar. L.Rev. 793, 812.) In 1976, the United States Supreme Court overruled Low and lifted the ban on state imposition of taxation on imported goods. In 1978, in Zee Toys, supra, 85 Cal.App.3d 763, section 225 was held to be unconstitutional. After this court denied hearing, the United States Supreme Court granted certiorari, ultimately affirming with- out opinion based on a four-to-four split. (Sears, Roebuck & Co. v. County of Los Angeles (1981) 449 U.S. 1119 [67 L.Ed.2d 106, 101 S.Ct. 933].) In the meantime, Los Angeles County was the only county to disregard section 225 and assess taxes on imported goods in tax years 1976-1978. In 1978, on the basis of Zee Toys, the State Board of Equalization instructed the remaining counties to levy “escaped assessments” for the years in question. Once again the Legislature stepped in, and passed a protective measure prohibiting such escaped assessments for tax years prior to 1979-1980. (§ 225.3. Added by Stats. 1979, ch. 902, § 2, eff. Sept. 22, 1979; repealed by Stats. 1984, ch. 678, § 12.) Finally, in 1981, the Legislature enacted section 219, prohibiting taxation of all business inventories. Thus, only a limited number of importers were assessed ad valorem taxes during section 225’s limited lifespan. 5, A-13 in another state and transshipped through California to a third state were not entitled to the exemption. Thus, those domestic companies exclusively engaged in interstate commerce would be taxed, while those involved in export- ing or importing would not be. At first glance this distinction may not appear particu- larly troubling.’° Taxation of foreign commerce has tradi- tionally been off limits to the states. “Although [the commerce clause] grants Congress power to regulate commerce ‘with foreign Nations’ and ‘among the several Sates’ in parallel phrases, there is evidence that the Founders intended the scope of the foreign commerce power to be the greater.” (Japan Line, Lid. v. County of Los Angeles (1979) 441 U.S. 434, 448 [60 L.Ed.2d 336, 347-348, 99 S.Ct. 1813]. See also Michelin, supra, 423 U.S. at p. 286 [46 L.Ed.2d at p. 503].) “Laws which concern the exterior relations of the United States with other nations and governments are general in their nature, and should proceed exclusively from the legislative authority of the nation.” (Bowman v. Chicago & N. R. Co. (1888) 125 U.S. 465 482 [31 L.Ed. 700, 706, 8. [42 Cal.3d 12] S.Ct. 689].) (8) Thus, a state tax scheme may not inter- fere with Congress’ plenary power to regulate commerce with other nations. See e.g., Westinghouse Electric Corp. v. Tully (1984) 466 U.S. 388, 406, footnote 12 [80 L.Ed.2d 388, 403, 104 S.Ct. 1856] (“We reiterate that it is not the provision of the [franchise tax] credit [for export income] that offends the Commerce Clause, but the fact that it is allowed on an impermissible basis, i.e., the percentage of a specific segment of the corporation’s business that is conducted in New York.”’) A-14 The United States Supreme Court’s decision in Japan Lines reinforces this basic constitutional restriction. In Japan Lines the court struck down California’s imposition of ad valorem tax on cargo containers owned by a foreign entity, used exclusively in international commerce and fully taxed in the domiciliary country. After emphasizing that “[w]hen construing Congress’ power to ‘regulate commerce with foreign Nations,’ a more extensive consti- tutional inquiry is required” than that ordinarily em- ployed in determining whether a tax unduly burdens interstate commerce (441 U.S. at p. 446 [60 L.Ed.2d at p. 346]), the court proceeded to identify two additional factors to be considered: the risk of multiple taxation and potential impairment of the nation’s ability to “speak with one voice” in foreign affairs. (Jd., at pp. 446-449 [60 L.Ed.2d at pp. 346-348].) The court then held that appli- cation of the tax to instrumentalities of foreign commerce resulted in multiple taxation and interfered with federal uniformity in regulation of foreign trade, and, thus, vio- lated the commerce clause. (/d., at pp. 451-454 [60 L.Ed.2d at pp. 349-351].) The court acknowledged that this foreign commerce exemption might result in diserimi- nation against domestic commerce, but concluded that Congress would have to resolve such “problems that admit only of a federal remedy.” (/d., at p. 457 [60 L.Ed.2d at p. 353].) Japan Lines, however, does not support the proposition that any state tax on foreign commerce is per se invalid. In faet, in Container Corp. v. Franchise Tar Bd. (1983) 463 U.S. 159 [77 L.Ed.2d 545, 103 S.Ct. 2933] in which the court upheld California’s “three-factor” formula for unitary tax assessments against a commerce clause chal- lenge, the court stressed that the Japan Lines holding was limited to the narrow issue presented in the case: “*(W)hether instrumentalities of commerce that are A-15 owned, based and registered abroad and that are used exclusively in international commerce, may be subjected to apportioned ad valorem property taxation by a State.’ ” (Container Corp., supra, 463 U.S. at pp. 187-188, fn. 24 [77 L.Ed.2d at p. 568].) The court further implied that Japan Lines had gone too far in suggesting that the risk of multiple taxation alone would necessarily invalidate a state tax. The tax must be considered in context, inelud- ing the feasibility of alternative modes of taxation, even if it actually results in multiple taxation. (/d., at pp. 190- 194 [77 L.Ed.2d at pp. 569-571].) In addition, and of particular importance to our diseus- sion, the Container Corp. court also refined the second prong of the Japan Lines test: whether [42 Cal.3d 13] the tax interfered with the federal government’s ability to “speak with one voice” in foreign affairs. The court instructed: “In conducting this inquiry, ... we must keep in mind that if a state tax merely has foreign resonances, but does not implicate foreign affairs, we cannot infer, ‘[a]bsent some explicit directive from Congress, .. . that treatment of foriegn income at the federal level mandates identical treatment by the States.’ [Citations.] Thus, a state tax at variance with federal policy will violate the ‘one voice’ standard if it either implicates foreign policy issues which must be left to the Federal Government or violates a clear federal directive.” (Container Corp., supra, 463 U.S. at p. 194 [77 L.Ed.2d at pp. 571-572].) Absent interference with such a directive," nondiserim- inatory ad valorem taxation of business inventories does "For example, imported goods stored in customs bonded ware- houses [19 U.S.C. §1557(a)) are immune from state taxation. A-16 not intrude upon the federal government’s foreign com- merce power. In Michelin, supra, 423 U.S. 276 the court upheld, against an imvort-export clause challenge, Geor- gia’s assessment of a nondiscriminatory ad valorem tax on imported goods stored as business inventory.’ The court reasoned that because the purpose of such a prop- erty tax is to recover the costs, on an apportioned basis, of locally profided services such as police and fire protec- tion, and the tax is imposed on all property regardless of origin, the tax could not be characterized as an “impos: or duty” levied on imported goods. The tax was therefore valid. In reaching the conclusion that a nondiscriminatory ad valorem tax could be imposed on all goods including imports, the court dismissed the concern that the tax somehow interfered with the federal government’s com- merce power. The court stressed: “It is obvious that such nondiseriminatory property taxation can have no impact whatsoever on the Federal Government's exclusive regu- lation of foreign commerce, probably the most improtant purpose of the Clause’s prohibition. By definition, such a tax does not fall on imports as such because of their place of origin. It cannot be used to create special protective tariffs or particular preferences for certain domestic goods, and it cannot be applied selectively to encourage or discourage any importation in a manner inconsistent with federal regulation.” (Michelin, supra, 323 U.S. at p. (Xerox Corp. v. County of Harris (1982) 495 U.S. 145 [74 L.Ed.2d 323, 103 S.Ct. 523].) Although Michelin involved the import-export clause (U.S. Const., art. I, § 10, el. 2) the court noted in Japan Lines that the import-export clause and the commerce clause reflect virtually inden- tical policies with regard to regulation ov commerce with foreign nations. (/d., 441 U.S. at pp. 449-450, fn. 14 [60 L.Ed.2d at pp. 348- 349].) To ae “ Me, eee ee Se ——_ A-17 286 [46 L.Ed.2d at pp. 503-504].) The court further explained, “(t]he Import-Export Clause clearly prohibits stats taxation based on the foreign origin of the imported goods, but it cannot be read to accord imported goods preferential treatment that permits escape from uni- [42 Cal.3d 14] form taxes imposed without regard to foreign origin for services which the State supplies. [Citation.]” (Jd., at p. 287 [46 L.Ed.2d at p. 504].) Michelin teaches that nondiscriminatory ad valorem taxation of business inventories, including inventories linked to foreign commerce, is constitutional and has no impact on the federal government’s foreign commerce power. Though we deal, in the instant case, not with imposition of the tax, but with an exemption, the Michelin rule is fully applicable. Because the tax itself has no bearing on the foreign commerce power, an exemption from that tax cannot look to the foreign commerce power for its legitimacy. Stated differently, the exemption can- not be necessary to preserve Congress’ power to regulate foreign commerce if the tax itself does not interfere with the power to so regulate. The business inventories tax poses no threat to the federal government's ability to “speak with one voice” when regulating commerce with other nations. (6c) The exemption, then, which leaves in place a tax scheme that appears to discriminate against domestic commerce, cannot be sustained on the tradi- tional ground that the states may not interfere with congressional power “to regulate commerce with foreign nations.” (U.S. Const., art. I, $8, el. 3.) Though the exemption cannot be justified as an attempt to protect the foreign commerce power, it can be chal- lenged as interfering with that power. “Only the federal A-18 government can fix the rules of fair competition when such competition is on an international basis.” (Bethlehem Steel Corp. v. Board of Commissioners (1969) 276 Cal.App.2d 221, 226 [80 Cal.Rptr. 800}.) As the Zee Toys court noted, “[t]he principal mode through which Con- gress has exercised [this] power...is by the imposition of import tariffs, designed for the most part to afford protection to United States manufactured goods threatened by foreign competition.” (Jd., 85 Cal.App.3d at 774.) Taxation exemptions extended only to foreign goods may operate to nullify the curative effect of feder- ally imposed tariffs. Conversely, when all goods located within a state are taxed on a nondiscriminatory basis for provided services, federal regulation of competition be- tween interstate and foreign commerce is unimpeded by state policy. The nondiscriminatory tax “cannot be ap- plied selectively to encourage or discourage any importa- tion in a manner inconsistent with federal regulation.” (Michelin, supra, 423 U.S. at p. 286 [46 L.2d.2d at p. 504].) (Italics added.] Thus, the exemption may actually offend rather than preserve Congress’ exclusive power to regulate foreign commerce. Because Congress’ foreign commerce power may not be invoked to curtail serious examination of the tax scheme in question, we must consider whether section 225’s ex- emption results in discrimination against interstate com- merece. “A tailored tax, however accomplished, must receive the careful [42 Cal.3d 15] scrutiny of the courts to determine whether it produces a forbidden effect on interstate commerce.” (Complete Auto Transit, Inc. v. Brady (1977) 430 U.S. 274, 289, fn. 15 [51 L.Ed.2d 326, 337, 97 S.Ct. 1076].) A-19 Typically, cuestions involving discrimination against interstate commerce arise in the context of favored treat- ment of intrastate commerce over interstate commerce.” (E.g., Maryland v. Lowisiana (1981) 451 U.S. 725 [68 L.Ed.2d 576, 101 S.Ct. 2114]; Lewis v. BT Investment Managers, Inc. (1980) 447 U.S. 27 [64 L.Ed.2d 702, 100 S.Ct. 2009]; Hughes v. Oklahoma (1979) 441 U.S. 322 [60 L.Ed.2d 250, °9 S.Ct. 1727].) This juxtaposition is not exclusive however. For example, in Boston Stock Exz- change, supra, 429 U.S. 318 the court concluded that a state tax statute that discriminated between two classes of interstate commerce (securities sales) was unconstitu- tional. Despite the rather unique nature of the instant case, the same analysis should apply. (9) In Complete Auto Transit, supra, 430 U.S. 274, the court adopted a four-part test for determining whether a state tax imposed on interstate commerce will survive a commerce clause challenge. Such a tax is constitutional if it “...is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided.” (Id., at p. 279 [5] L.Ed.2d at p. 331].) Because a nondiscriminatory ad valorem personal property tax on business inventories would satisfy each of these requirements (see Michelin, supra, 423 U.S. 276) we need foeus our inquiry only on the third prong of the test. (6d) The exemption at issue not only removes the inventory of foreign companies transshipping through California from within the seope of the property tax, it ‘8 “The very purpose of the Commerce Clause was to create an area of free trade among the several States.’” (Boston Stock Exchange, supra, 429 U.S. at p. 328 [50 L.Ed.2d at 523].) A-20 exempts domestic companies involved in importing or exporting as well. Star-Kist is a California corporation which transships goods manufactured outside the country through California for sale in other states. To the extent that domestic companies, like Star-Kist, can take advan- tage of section 225’s tax exemption and thereby gain a competitive edge over domestic competitors operating exclusively within the United States, discrimination against a distinct class of interstate commerce is ocecur- ring. Thus the tax fails the Complete Auto Transit test of constitutionality. As the Michelin court noted, “there is no reason why an importer should not bear his share of [the] costs [of state services] along with his competitors handling only domes- tie goods.” (Jd., 423 U.S. 276, 287 [46 L.Ed.2d 495, [42 Cal.3d 16] 504].) Viewing the exemption, as we must, “‘... in light of its actual effect considered in conjunction with other provisions of the State’s tax scheme’” (Maryland v. Louisiana, supra, 451 U.S. 725, 756 [68 L.Ed.2d 576, 601]), we conelude that the exemption constitutes an undue burden on interstate commerce in violation of the commerce clause. owe The judgement is affirmed. Bird, C. J., Mosk, J., Broussard, J., Grodin, J., and Uchiyama (Mikio), J.,* coneurred. LUCAS, J. — I respectfully dissent. Applying improper analysis, the majority incorrectly strikes down as viola- *Judge, Justice Court for the Fowler-Caruthers Judicial District of Fresno County, assigned by the Chairperson of the Judicial Council. see ee ee iieiantina = A-21 tive of the federal ecommerce clause (U.S. Const., art. I, § 8, el. 3) former Revenue and Taxation Code section 225 which provided a tax exemption for business inventory of foreign origin or destination transshipped through Cali- fornia.’ Although presently all business inventory is ex- empt from taxation (Rev. & Tax. Code, § 219) and former section 225 has been repealed (Stats. 1984, ch. 678, § 10, p. 188), I write separately because today’s decision im- properly precludes the Legislature from future use of this valid device to attract foreign commerce to California ports. The commerce clause, investing in Congress the power “[t]o regulate commerce with foreign nations, and among the several States...” (U.S. Const., art. I, $8, el. 3) also acts, by its own force, as a limitation on state power. (Boston Stock Exchange v. State Tax Comm’n (1977) 429 U.S. 318, 328-329 (50 L.Ed. 2d 514, 523-524, 97 S.Ct. 599].) This limitation applies to laws implicating both the foreign and interstate components of the commerce clause, but has never been read as an absolute ban on the states’ authority to enact legislation touching upon either the foreign or interstate commerce powers. (Ibid.; Cooley v. Board of Wardens (1852) 53 U.S. (12 How.) 299, 319 [13 L.Ed. 996, 1004].) As I will demonstrate, the statute at issue here, extending a business inventory exemption to importers and exporters transshipping through Cali- fornia while denying the exemption to interstate shippers, does not violate either of these implicit limitations on state power. ‘All further statutory references are to the Revenue and Taxation Code. A-22 [42 Cal.3d 17] I. Foreign Commerce Clause Conceding that nondiscriminatory ad valorem taxes on foreign business inventories would have no impact on the federal government’s foreign commerce power (ante, p. 13), the majority concludes that the section 225 exemp- tion from this otherwise valid tax may actually offend that power, as it “may operate to nullify the curative effect of federally imposed tariffs.” (Ante, p. 14.) I submit that such speculation is not sufficient to strike down an other- wise valid exercise of state power. In Japan Line, Ltd. v. County of Los Angeles (1979) 441 U.S. 434, 449-450, footnote 14 [60 L.Ed.2d 336, 348-349, 99 S.Ct. 1813], the high court reiterated the three main policies used in federal commerce clause analysis: “(T]he Federal Government must speak with one voice when regulating commercial relations with foreign gov- ernments...; import revenues were to be the major suuree of revenue of the Federal Government and should not be diverted to the States; and harmony among the States might be distrubed unless seabord States... were prohibited from levying taxes on [goods in transit].’” The exemption provided by former section 225 does not conflict with any of these concerns. In Container Corp. v. Franchise Tax Bd. (1983) 463 U.S. 159, 193-194 [77 L.Ed.2d 545, 571, 103 S.Ct. 2933], the Supreme Court amplified upon the first policy concern identified in Jpana Line, inquiring whether the state legislation “impair[s] federal uniformity in an area where federal uniformity is essential” (Japan Line, supra, 441 U.S. at p. 448 [60 L.Ed.2d at p. 347]), preventing ‘the Federal Government from ‘speaking with one voice’ in international trade...” (id., at p. 453 [60 L.Ed.2d at p. 5 Seyret an pe lc . A-23 351]). The Container Corp. court stated that merely because a state tax has “foreign resonances,” it does not necessarily implicate foreign affairs; rather, violation of the ‘one voice” standard occurs if the state tax “either implicates foreign policy issues which must be left to the ‘Federal Government or violates a clear federal directive.” (Container Corp., supra, 463 U.S. at p. 194 [77 L.Ed.2d at pp. 571-572], italics in originel.) Container Corp. concerned, in part, whether application of California’s “unitary business” principle to tax foreign subsidiaries violated the federal commerce clause. In concluding that the state’s tax did not violate the “one voice” standard, the court found that the state tax did not implicate foreign policy by creating a threat of economic retaliation by other nations. Although recognizing foreign policy issues, other than economic retaliation could be implicated, the court noted that the absence of an amicus euriae brief by the Solicitor General raising such con- cerns, primarily the province [42 Cal.3d 18] of the executive branch and Congress, was some indica- tion that no such other considerations were involved. (Jd., at pp. 195-196 [77 L.Ed.2d at p. 571].) Analyzing whether the tax violated a “clear federal directive,” termed “essentially a species of pre-emption a. alysis,” the court observed that the existing tax treaties did not address state taxing powers, the regulation of which Congress had debated but chosen not to regulate. (Id., at pp. 196-197 [77 L.Ed.2d at pp. 573-574].) The eovrt concluded the California tax was thus not “pre- empted by federal law or fatally inconsistent with federal policy.” (Id., at p. 197 [77 L.Ed.2d at p. 573], italies A-24 added.) The same conclusion should be reached regard- ing the exemption in the present case. Primarily, the majority has failed to demonstrate how the tax exemption at issue affects any foreign policy. Clearly, the effect of this legislation would not offend our foreign trading partners. Rather, any equivalent ‘retalia- tion” by other nations, in the form of tax exemption for United States exports would be welcome. Additionally, we find the views of the Solicitor General as stated in Sears Roebuck and Co. v. County of Los Angeles et al. (1981) 449 U.S. 1119 [67 L.Ed.2d 106, 101 S.Ct. 933], persuasive evidence that former section 225 has not implicated any other foreign policy matters. In Sears Roebuck and Co. v. County of Los Angeles et al., supra 449 U.S. 1119, the Supreme Court reviewed a California Court of Appeal opinion finding former section 225 unconstitutional, and requested the Solicitor General to submit a brief on the matter. Responding to this request, the Solicitor General stated his view that the exemption did not violate the commerce clause. Though ultimately the Court of Appeal opinion was summarily affirmed by an equally divided court, the Solicitor General’s opinion remains significant to the extent that it serves as an indication that the Executive Branch itself did not perceive former section 225 as interfering with foreign policy. (See Container Corp., supra, 463 U.S. at pp. 195-196 [77 L.Ed.2d at pp. 572-573 ].) Neither does the challenged exemption violate a clear federal directive. Unlike Japan Line, where the court cited the Customs Convention on Containers (441 U.S. at p. 452 [60 L.Ed.2d at p. 350] ), a specific directive in conflict with the state’s taxing policy, the majority herein presents only the possibility that some hypothetical tariff may be impeded by the inventory exemption. Instead, like heal we hedinaann ‘Stendaciitiend A-25 the situation in Container Corp., there is no indication either that by imposing a tariff, Congress has intended to occupy the field, precluding taxation or exemption, or that allowing the exemption would defeat the purposes of congressional action. Neither the Supreme Court nor Congress has ever required states to impose ad valorem taxes. Absent some concrete showing that the exemption is preempted by federal [42 Cal.3d 19] law, or “fatally inconsistent with federal policy.” I would hold that this seemingly harmless exemption does not impair federal uniformity, preventing the federal govern- ment from “speaking with one voice” in international trade. The exemption also cannot be found to conflict with the other major federal commerce clause concerns. Obviously, providing an exemption does not divert import revenues to the states. Moreover, unlike a tax imposed by a sea- board state which could adversely affect inland states, leading to disharmony, this tax exemption would not lead to interstate rivalry.” The tax exemption provided by former section 225 did not violate any of the policies forming the basis of the foreign commerce clause. Rather than impeding the flow of foreign commerce, this exemp- tion, if anything, facilitated this channel of trade. "As the court noted in Japan Line, the concern of preserving harmony among the states requires essentially the same inquiry as whether a state tax interferes with interstate commerce (441 U.S. at p. 449, fn. 14 [60 L.Ed.2d at pp. 348-349]), a matter which we treat more fully post. (See post, pp. 7-9.) A-26 II. Interstate Commerce Clause Former section 225’s exemption also may not be invali- dated as interfering with interstate commerce. The major- ity applies the test of Complete Auto Transit, Inc. v. Brady (1977) 430 U.S. 274, 279 [51 L.Ed.2d 326, 331, 97 S.Ct. 1076], which is used to determine whether a state taz interferes with interstate commerce, to analyze whether this exemption unduly burdens interstate commerce. I submit that the application of Complete Auto in this wholly different context is erroneous. The majority cites no case where Complete Auto is used to analyze whether a state tax exemption or eredit vio- lates the commerce clause. Moreover, the inappropriate- ness of applying Complete Auto in this context is further demonstrated when one attempts to apply the three parts of its four-part analysis which the majority does not discuss.” For example, it seems absurd to say that a state’s choice not to impose a tax somehow violates the commerce clause unless the activity not taxed has a substantial nexus to that state. Likewise, it is difficult to imagine what commerce clause policy concerns are pro- moted by requiring that the exemption be “fairly appor- tioned” or “fairly related” to the services for which the state has chosen not to tax. "In Complete Auto, the high court stated that a state tax may be sustained “against a Commerce Clause challenge when [1] the tax is applied to an activity with a substantial nexus with the taxing State, [2] is fairly apportioned, [3] does not discriminate against interstate commerce, and [4] is fairly related to the services provided by the State.” (430 U.S. at p. 279 [51 L.Ed.2d at p. 331].) The majority diseusses only the third prong. A-27 [42 Cal.3d 20] (See ante, p. 15.) These various factors relate to the propriety of taxing the in-state activity, assuring that the taxes are properly exacted for the services rendered by the state; the test was not designed to determine whether it is proper to exempt such property from tax. The proper inquiry is whether the exemption statute, protecting only imports and exports, burdens the free flow of commerce among the several states. A recent United States Supreme Court case appears controlling. In Westinghouse Electric Corp. v. Tully (1984) 466 U.S. 388 [80 L.Ed.2d 388, 104 S.Ct. 1856], the State of New York, responding to federal tax legislation affecting “Domestic International Sales Corporations” (DISC), restructured its procedures for taxing distributions received by a parent corporation from its subsidiary. It also provided in part for a “partially offsetting tax credit,” applied to DISC ineome from export products “shipped from a regular place of business of the taxpayer within [New York].” (/d., at p. 393 [80 L.Ed.2d at p. 394].) The amount of the eredit, applied to the parent corporation’s tax obligation for business activity conducted in New York, was dependent not only on the amount of goods the DISC shipped from New York, but also upon the percent- age of the DISC’s shipping activity conducted in New York vis-a-vis other states.* Parent corporations with *Though computed according to a five-step formula (id., at pp. 393- 394 [80 L.Ed.2d at pp. 394-395]), the amount of the credit was, in essence, dependent upon the DISC’s “export ratio.” In other words, the eredit otherwise applied to the New York DISC revenues attribu- table to the parent was further multiplied by the quotient derived from dividing DISC’s New York gross receipts by the DISC’s total gross receipts. A-28 identical business allocation percentages (the percentage of its total business activity conducted in New York), and identical New York DISC income were taxed differently depending upon the amount of DISC income derived from shipping activities in other states. (/d., at pp. 400-402, fn. 9 [80 L.Ed.2d at pp. 398-400].) In analyzing whether “the method of allowing the credit is discriminatory in a manner that violates the Commerce Clause...” (id., at p. 399 [80 L.Ed.2d at p. 398], italics added), the court foeused on the fact that “not only does the New York tax scheme ‘provide a positive incentive for increased business activity in New York State’... it [also] penalizes increases in the DISC’s shipping activities in other States.” (Jd., at pp. 400-401 {80 L.Ed.2d at p. 398].) The court also reiterated the settled principles that “‘“[t]he very purpose of the Commerce Clause was to create an area of free trade among the several States”’” (id., at p. 402 [80 L.Ed.2d at p. 400]), and that “‘[n]o State, consistent with the Commerce Clause, may “impose a tax which discriminates against interstate commerce... by pro- [42 Cal.3d 21] viding a direct commercial advantage to local busi- ness.” ’” (Id., at p. 403 [80 L.Ed.2d at p. 400].) Acknowledging that in each case the court must bal- ance the national interest in free trade with the state’s interest in exercising its taxing powers (id., at p. 403), the court found the prii.. ples enunciated in Boston Stock Exchange, supra, and Maryland v. Lousiana (1981) 451 U.S. 725 [68 L.Ed.2d 576, 101 S.Ct. 2114], controlling.” ‘In Maryland v. Louisiana, supra, the court struck down Louisi- ana’s “First-Use” tax statute, imposing a tax on natural gas brought into the state, while providing exemptions and credits to local users, as “unquestionably discriminating against interstate commerce in A-29 In both cases, the court struck down state statutes impos- ing greater economic burdens on similar activities occur- ring out-of-state than occurring in-state. The court eoneluded that the New York tax credit violated the commerce clause because it “‘foreclose[d] tax-neutral decisions and ...create([d]...an advantage’ for firms operating in New York by placing ‘a discriminatory bur- den on commerce to its sister States.’ [Citation.]”’ (Westing- house Electric, supra, 466 U.S. at p. 406 [80 L.Ed.2d at p. 402], italics added.)*® Nonetheless, the Westinghouse Electric court hastened to add that not all schemes to attract a particular seg- ment of industry into a state are unconstitutional. The court stated: “We reiterate that it is not the provision of the credit that offends the Credit Clause, but the fact that it is allowed on an impermissible basis, i.e., the percent- age of a specific segment of the corporation’s business that is conducted in New York. As in Boston Stock Ex- change, we do not ‘hold that a State may not compete with other States for a share of interstate commerce; such competition lies at the heart of a free trade policy. We hold only that in the process of competition no State may favor of local interests.” (Jd., at p. 756 [68 L.Ed.2d at p. 602].) Likewise in Boston Stock Exchange, supra, the court found violative of the commerce clause a stock transfer tax reducing the tax burden on nonresidents engaged in in-state (but not out-of-state) sales of stock, and creating a maximum tax limit for all stock buyers for purchases made in-state (but not out-of-state). The court found the tax uncon- stitutional because it “discriminates between two types of interstate transactions in order to favor local commercial interests over out-of- state businesses. . .” (id., at p. 335 [50 L.Ed.2d at p. 528], italies added), concluding that a state may not build up its own commerce by burdening businesses in other states. (Jbid.) Significantly, the court did not cite or apply Complete Auto in either Westinghouse Electric or Maryland v. Louisiana, supra. A-30 discriminatorily tax the products manufactured or the business operations performed in any other State.’ (Id., at pp. 406-407, fn. 12 [80 L.Ed.2d at p. 403], italies added.) The tax exemption granted by former section 225 to attract commerce to California ports was not grounded on an “impermissible basis.”’ There was [42 Cal.3d 22] no penalty imposed on activity conducted outside of California. Shippers not wishing to pay the inventory tax, levied as a quid pro quo for the services rendered by California, simply may have chosen to transship through another state. Unlike Boston Stock Exchange, Westing- house Electric, and Maryland v. Louisiana, supra, no burden was imposed on interstate commerce by placing a penalty or disincentive on the choice to transact business in another state. Moreover, unlike the paradigm com- merece clause case, local interests are not favored. (See Westinghouse Electric, supra, 466 U.S. at p. 403 [80 L.Ed.2d at p. 400].) The exemption is available regard- less of the residency of the shipper or the place of manufacture of the goods, with the exception of those goods whose point of origin is California which do not qualify for the exemption because they are not being “transshipped” through California. In my view, respondents’ claim at bottom is really an equal protection attack. They are complaining in essence that the state’s differential treatment of import and ex- port business inventories from that of domestie goods lacks a rational basis. Assuming respondents would have standing to raise this issue, an unlikely conclusion under the majority’s analysis (see ante, p. 6), I submit that former section 225 would by upheld against such a chal- lenge because the distinction it draws “ ‘is neither capri- cious nor arbitrary, and rests upon some reasonable A-31 consideration of difference or policy ....’” (Allied Stores of Ohio v. Bowers (1959) 358 U.S. 522, 527 [3 L.Ed.2d 480, 485, 79 S.Ct. 437] [upholding against an equal protection clause challenge an Ohio statute providing only nonresidents an exemption for merchandise held in storage, from a tax otherwise imposed on “[a]l] personal property located and used in business in the state’’].) One such reasonable policy consideration may be the greater threat of business flight from California posed by importers and exporters rather than by those dealing in interstate commerce, which justifies a greater incentive for the former group. (See Zee Toys, Inc. v. County of Los Angeles (1978) 85 Cal.App.3d 763, 776 [149 Cal.Rptr. 750].) In any event, the Legislature was not required to expressly state these policy considerations. The statute would not violate the equal protection clause “if any state _ of facts reasonably can be conceived that would sustain it. [Citations.]”” (Allied Stores, supra, 358 U.S. at p. 528 [3 L.Ed.2d at p. 486].) The exemption provided by former section 225 does not run contrary to the limitations on state power implicit in either the foreign or interstaate components of the com- meree clause. The exemption neither interferes with the federal government’s ability to speak with one voice when reguiating commercial relations with foreign govern- ments, nor does it burden the free flow of interstate commerce by imposing a penalty on business activity con- {42 Cal.3d 23] dueted outside of California. I would find the tax exemp- tion constitutional and would reverse the trial court’s ruling denying plaintiff's claim for a refund of the im- properly levied inventory tax. B-1 APPENDIX B No. 78-1577 IN THE SUPREME COURT OF THE JINITED STATES OCTOBER TERM, 1978 SEARS, ROEBUCK AND CoO., PETITIONER v. CouNTY OFr LOS ANGELES AND CITY OF COMPTON ON PETITION FOR A WRIT OF CERTIORARI TO THE COURT OF APLEAL OF THE STATE OF CALIFORNIA, SECOND APPELLATE DISTRICT BRIEF FOR THE UNITED STATES AS AMICUS CURIAE WADE H. McCREE, JR. Solicitor General M. CARR FERGUSON Assistant Attorney General STUART A. SMITH Assistant to the Solicitor General ERNEST J. BROWN Attorney Department of Justice Washington, D.C. 20530 INDEX Page PN OD os ck can dna decent een 1 GIs 6.5 6.5 00k bcc0 6a taensas ee 1 Qmentiom Presented . oo .ccc ccc ccuccocstdecccn. 2 Constitutional provision and statutes involved..... 2 EPO ET EP EET CPE Rm? 3 IIE Ts 0.53 6.0.0 0c35a0500ais bene 5 IIS 6.0'0. 5.60 09k 45-000 bNe eae 12 CITATIONS Cases: Allied Stores of Ohio v. Bowers, 358 U.S. 522 .. 6 American Steel & Wire Co. v. Speed, 192 U.S. nah CECE C ET TORE ETT ETO ny 8 Asakura v. Seattle, 265 U.S. 332 ............. 6 Bacon v. Illinois, 227 U.S. 504............... i) Boston Stock Exchange v. State Tax Comm'n, ee Te ND CATED 6. oon ave ccdewovenstann. oe Braniff Airways v. Nebraska State Board, 347 PM ono ba0ks 6bknd hed sek 7 Brewing Co. v. Liquor Comm’n., 305 U.S. 391.. 9 Brown v. Houston, 114 U.S. 622.............. 8 Brown v. Maryland, 25 U.S. (12 Wheat). 419.. 7 Carson Petroleum Co. v. Vial, 279 U.S. 95..... 9 Chy Lung v. Freeman, 92 U.S. 275 ........... 6 Crew Levick Co. v. Pennsylvania, 245 U.S. 292 9 Dept. of Revenue v. James Beam Co., 377 U.S. UPN AS weak 00.806 sd shuns oew ee ese 9 Empresa Siderurgica v. Merced Co., 337 U.S. DN esd k een videncecdcudedece 8 B-3 Cases — (Continued): Page Fairfax’s Devisee v. Hunter’s Lessee, 11 U.S. 7 ne ses eee 8 ee General Oil Co. v. Crain, 209 U.S. 211........ Hauenstein v. Lynham, 100 U.S. 4838.......... Henderson v. Mayor of New York, 92 U.S. 259 Hines v. Davidowitz, 312 U.S. 52............. Hooven & Allison Co. v. Evatt, 324 U.S. 652 ... Hostetter v. Idlewild Liquor Corp., 377 U.S. DmaHDBDHA OO NH Re OW ana ssn ccc ccs e eee 6,9 Japan Line, Ltd. v. County of Los Angeles, No. 77-1876, (April 30, 1979) ................. 7,8 Joy Oil Co. v. State Tax Comm’n., 337 U.S. eC ylawinvscasscsees 8,9 Kolovrat v. Oregon, 366 U.S. 187............. 6 Low v. Autin, 80 U.S. (13 Wall.) 29.......... 9,10 Massachusetts v. United States, 4385 U.S. 444 RES = 13 McGoldrick v. Gulf Oil Corp., 309 U.S. 414 ... 6 Michelin Tire Corp. v. Wages, 423 U.S. 276.... 7,10 Minnesota v. Blasius, 290 U.S. 1 ............. 9 Nielsen v. Johnson, 279 U.S. 47 ..........45-. 6 Ott v. Mississippi Barge Line, 336 U.S. 169.... 7 People v. Compagnie Gen. Transatlantique, 107 I 6 Richfield Oil Corp. v. State Board, 329 U.S. 69 7 Sonneborn Brosl v. Cureton, 262 U.S. 506 ..... 8 State Board v. Young’s Market Co., 299 U.S. 59 9 Ware & Hylton, 3 U.S. (3 Dall.) 199 ......... 6 Cases — (Continued): Page Washington Rev. Dept. v. Stevedoring Assn., 435 ok | Serer re es errr sere ee 9 Si 0k ROO ECOL Ce ers 9 Wilow Corp. v. Pennsylvania, 294 U.S. 169 .... 8 Woodruff v. Parham, 75 U.S. (8 Wall.) 123 ... 8 Zaschernig v. Miller, 389 U.S. 429............ 6 Constitution, statutes and regulations: United States Constitution, Article I, Section 8, onan kare ck dc hs ot 0 ae a il 2, 5, 6, 8 Internal Revenue Code of 1954 (26 U.S.C.): ks, RP a range ae wn are eae 19 RO ee ree ree 10 I NS gy awiak cou dan daceees 10 re er ee err re 10 1975 Cal. Stats., ch. 1126, $§ 1 and 2......... 2 Ree Ss I, Hs I oko op heb eke 2 ROrt Rs es WE a Es hike ns a ds cca ys 2 Cal. Rev. & Tax. Code § 225 (West Supp. BPE 6 5.65 ke ee CAR RR CLM ERE Se Ce 2, 4, 5 Cal. Rev. & Tax. Code § 225.1 (West Supp. RR ish ok aoe edhe ae REN Co Re eS 2, 3,4 Cal. Rev. & Tax. Code § 253.10 (West Supp. i) Ee ee ee Ne trie mir ahi arin I ae 2 ) B-5 Constitution, statues and regulations — (Continued): Treasury Temporary Regulations in Connection with the Airport and Airway Revenue Act of 1970: soe Be & OS | errr 10 gee A M&O: } rere 10 ae ee Oe) errr rere 11 ke Me 8 err 11 B-6 IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1978 No. 78-1577 SEARS, ROEBUCK AND CO., PETITIONER Vv. CouNnTYy OF Los ANGELES AND CITY OF COMPTON ON PETITION FOR A WRIT OF CERTIORARI TO THE COURT OF APPEAL OF THE STATE OF CALIFORNIA, SECOND APELLATE DISTRICT BRIEF FOR THE UNITED STATES AS AMICUS CURIAE This brief is submitted in response to the Court's invitation of June 4, 1979. OPINIONS BELOW The order of the trial court is not officially reported. The opinion of the Court of Appeal (Pet. App. 1-29) is reported at 85 Cal.App. 3d 763. The denial by the Su- preme Court of California of a petition for hearing (Pet. 2) is reported at 149 Cal. Rptr. 764. B-7 JURISDICTION The decision of the Court of Appeal was entered on October 25, 1978 (Pet. 2; Pet. App. 1). The Supreme Court of California denied petition for hearing on Janu- ary 17, 1979 (Pet. 2). The petition for a writ of certiorari was filed on April 16, 1979. The jurisdiction of this Court is invoked under 28 U.S.C. 1257(3). J QUESTION PRESENTED The United States will discuss the following question: Whether the California property tax exemption for per- sonalty manufactured or produced (1) outside California and brought into the State for transshipment out of the United States; or (2) outside of the United States, and brought into California for transshipment out of the State, for sale in the ordinary course of trade or business, is invalid under the Commerce Clause of the United States Constitution. CONSTITUTIONAL PROVISION AND STATUTES INVOLVED Article I. Section 8, Clause 3 of the United States Constitution provides: “The Congress shall have Power *** To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes”. Sections 225 and 225.1 of the Cal. Rev. & Tax. Code (West), enacted by 1975 Cal. Stats., ch. 1126, at 2746, §§ 1 and 2, during the period here involved’ provided as follows: ‘Although Section 225.1 of the Cal. Rev. & Tax. Code (West) was repealed by 1977 Cal. Stats., ch. 246, § 4, its provisions were simulta- neously reenacted as Section 253.10 of the Rev. & Tax. Code, ny 1977 Cal. Stats., ch. 246, § 7. B-8 § 225. Personalty brought into state for transship- ment outside state or United States; exemption Personal property manufactured or produced, (1) outside this state and brought into this state for transshipment out of the United States, or (2) outside of the United States and brought into this state for transshipment out of this state, for sale in the ordinary course of trade or business shall be exempt from taxation. The exemption under this section shall not apply to personal property in manu- facturing process or production. Such process or production shall not include the breaking in bulk, labeling, packaging, relabeling, or repackaging of such property. § 225.1. Method of Claiming _ transshipment exemption A person claiming the transshipment exemption under Section 225 may either claim this exemption by (1) a percentage method of determining property held for transshipment on hand at a particular loca- tion by allocating a portion of the total inventory, using the percentage determined by dividing the total out-of-state shipments by the taxpayer from that location during the preceding year by the total of such shipments from that location during such year, or (2) an actual method as evidenced by con- tracts of sale on the tax lien date, and a full, true and correct inventory of ail property held for transship- ment together with the date of receipt of the same, the date of withdrawal of the same, the point of origin thereof, and the point of ultimate destination thereof. B-9 STATEMENT Petitioner brought this suit for refund of ad valorem personal property taxes paid under protest to the County of Los Angeles and the City of Compton. The facts were stipulated (Pet. App. 1-2, 4) and may be summarized as follows: Petitioner is engaged in the busi- ness of selling goods at retail, both in California and elsewhere. On March 1, 1976, the tax lien date for pur- poses of the annual California ad valorem tax on personal property, petitioner held tangible personal property in warehouses in the County of Los Angeles and City of Compton. The property in question had been manufac- tured or produced outside the United States, and had been imported by petitioner and placed in warehouses for distribution both within and without California for pur- poses of sale in the ordinary course of petitioner’s busi- ness. Petitioner’s distribution warehouses in the County of Los Angeles were devoted almost entirely to goods imported from foreign countries, particularly from loca- tions in the Pacific area. The rate of turnover at the warehouses averaged approximately three times per year. Petitioner intended to ship the goods as quickly as its distribution operations permitted. Pursuant to Sections 225 and 225.1 of the California Revenue and Taxation Code, petitioner applied to the total amount of goods manufactured or produced outside the United States and held in its warehouses in Los Angeles County on March 1, 1976, the fraction represented by the out-of-state ship- ments from those locations during the preceding year divided by the total shipments from those locations dur- ing that year. Petitioner accordingly claimed a transship- ment property tax exemption for property having a value of $19,373,089 (Pet. App. 1-3, 4-5). B-10 Respondents denied the claimed exemption. They as- serted (1) that properly construed, Section 225 exempted only goods in transit through the State, and (2) that even if Section 225 were construed to exempt imported goods held in the State by the owner for disposal or use, it would violate the United States Constitution by regulat- ing interstate and foreign commerce in interfering with foreign affairs, because it extended no exemption to inter- state goods. Petitioner thereupon paid the tax under protest and instituted this action for refund in the Supe- rior Court of Los Angeles County. The Superior Court upheld petitioner’s claimed exemption (Pet. App. 1-2, 5- 6). The Court of Appeal reversed (Pet. App. 29). Although it rejected respondents’ statutory argument that Section 225 applied only to goods “in transit” (Pet. App. 7-10), it held that the statutory exemption of foreign goods regu- lated interstate and foreign commerce and was therefore invalid under the Commerce Clause of the United States Constitution (Pet. App. 6, 10-18). It also suggested that the exemption interfered with the power of the Congress to impose tariffs (Pet. App. 15-16). In the Court of Appeal’s view, the statutory exemption gave goods of foreign origin a competitive advantage over goods manu- factured in other states and brought to California for transshipment in interstate commerce. It concluded that “state taxes which discriminate between classes of inter- state and foreign goods on the basis of their origin are not permitted” (Pet. App. 14). With three Justices dissent- ing, the Supreme Court of California denied a petition for hear (Pet. 2). B-11 ARGUMENT In holding that the California property tax exemption for foreign goods destined for interstate commerce or out-of-state goods destined for export violates the Com- ) merece Clause of the Constitution and interferes with Congress’ power to impose tariffs, the Court of Appeal misinterpreted the decisions of this Court. 1. Seetion 225 of the California Revenue and Taxation Code exempts from taxation while held in California, imported goods destined for other states and goods from other states destined for export. It does not, however, exempt domestic goods destined for interstate commerce. On the authority of this Court’s decision in Boston Stock Exchange v. State Tax Comm'n, 429 U.S. 318 (1977), the Court of Appeal held that the statute unconstitutionally discriminated against interstate commerce and therefore violated the Commerce Clause. But Boston Stock Ex- change has no bearing on the question presented in this ease. The prohibited discrimination in that case was one that provided “a direct commercial advantage to local business” by [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385011_2424%3A1. Public record. Not legal advice.