Record and brief — R.J. Reynolds Tobacco Co. v. Durham County (No. 85-1022)

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GRANTEC

Titles Re Je Reynolos Tobacco Companys Aopellant

Durham Countys North Carolins anc Forsyth County,

Nortn Carolina and Its Affected Punicipalities

Couris Court cf Apoeals of North Carolina

Counsel tor appellant: Griswold-Erwin N.

Counsel tor apoellee: Wolfe III-John Ge, KitchensS. Cer

Price JPesr?e Eugene

Note Proceecings anc Orders

1985 G

1986

1966

1986

1986 xX

1%¥ee

1986

19b6

1986

Statement as te jurisdiction filec.

Motion of apoellee Durham NCy et al. to cistiss or attire

tilec. VIDED.

Moticn of appellee Forsyth Countys N.C. to Cisriss or affira

tilec. VIDED.

VISTRIGUTED. February 217 1986

Reply briet of appellant R. Je Reynolds Tobacco Co. tiled.

vIDED.

Furtner consideration of the cquestion of jurisdiction is

POSTPONED to the hearing of the case on the merits. The

case is consolidated with 85-1021, arc a total of one

nour is allotted for oral argument.

REE EAEE REE EE REET EERREREEEEREERREEREEEEREE REE REED

kecord filed.

Certified copy of record receivec from Court of Appeal

of North Carolina.

vroer extending time to file brief of anpellant on the

merits until Aoril 15, 19864,

Priet cf appellant Re. Je Reynolds Tobacco Co. tiles. VIDED.

JOInt eppendix fileg. VIDED.

vroer extending time to file brief of apcellee on the

merits until June 12 1924.

Briet amicus curiae of Nat. Assn. of Counties, et al. tiled.

VIDED.

Brier of appellee Durham County» NCr et al. tilec. VIDED.

Reply briet of appellant R. J. Reynolds Tobacco Co. filec.

VICED.

CIRCULATED.

SET FOR ARGUMENT. Mondays Oc*ober 6+ 1986, (2nd case)

This case is consolicatec with No. 85-1021. (1 hour).

ARGUED.

EEE

JURISDICTIONAL

STATEMENT

eo" 2088 |) : FILED

| | DEC 16 1985

No.

JOSEPH F. SPANIOL, J

IN THE te

Supreme Court of the United States

OCTOBER TERM, 1985

R. J. REYNOLDS TOBACCO COMPANY,

Appellant,

DURHAM COUNTY, NORTH CAROLINA and

FORSYTH COUNTY, NORTH CAROLINA and

Its AFFECTED MUNICIPALITIES,

Appellees.

On Appeal from the North Carolina Court of Appeals

JURISDICTIONAL STATEMENT

Of Counsel ERWIN N. GRISWOLD

JAMES W. McGRATH (Counsel of Record)

FRANK SKINNER Bos C. GRIFFO

R. J. REYNOLDS JONES, Day, REAVIs & POGUE

INDUSTRIES, INC. 655 Fifteenth Street, N.W.

1100 Reynolds Boulevard Washington, D.C. 20005

Winston-Salem, NC 27102 (202) 879-3898

THOMAS L. KUMMER HUGH CALKINS

JOHN A. COCKLEREECE, JR. KATHLEEN B. BURKE

HorTON, HENDRICK & JOHN C. DuFry, JR.

KUMMER , JONES, DAY, REAvis & POGUE

450 NCNB Plaza 1700 Huntington Building

Winston-Salem, NC 27101 Cleveland, OH 44115

Counsel for Appellant

WILSON - Eres PRINTING Co.. INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. Whether a state is pre-empted from levying an

ad valorem property tax on goods brought in from a

foreign country and stored in a customs bonded ware-

house, particularly in view of the decision of this Court

in Xerox Corp. v. County of Harris, 459 U.S. 145 (1982),

and the legislative history surrounding the Trade and

Tariff Act of 1984.

2. Whether the Due Process Clause or the Import-

Export Clause prohibits a state from levying an ad

valorem property tax on goods brought in from a foreign

country and stored in a customs bonded warehouse.

(i)

STATEMENT UNDER RULE 15.1

Forsyth County entered an appearance in the court

below on behalf of itself and “its affected municipalities.”

The “affected municipalities” include the City of Win-

ston-Salem, North Carolina and the Town of Kerners-

ville, North Carolina. The Town of Kernersville, North

Carolina also appeared as a separate party in the court

below. The City of Durham, North Carolina appeared

as an amicus in the court below.

STATEMENT UNDER RULE 28.1 ;

R. J. Reynolds Tobacco Company [“Reynolds”] is a

wholly-owned, first-tier subsidiary of R. J. Reynolds

Industries, Inc. [{“‘Reynolds Industries’”’], a publicly-held

corporation. All domestic subsidiaries and affiliates of

Reynolds, except for Combibloc, a joint venture with

Jagenherg AG, are wholly-owned, directly or indirectly,

by either Reynolds or Reynolds Industries. With regard

to its foreign subsidiaries and affiliates, there are seventy-

seven such subsidiaries or affiliates which are not wholly-

owned, either directly or indirectly, by Reynolds or Reyn-

olds Industries. These are set forth in Appendix M,

pp. 101a-102a.

STATEMENT UNDER RULE 284

This appeal raises the question of the validity of a

North Carolina statute, as applied. Thus, 28 U.S.C.

§ 2403(b) may be applicable to this proceeding. A copy

of this Jurisdictional Statement has been served on the

Attorney General of North Carolina.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED .....W..20....n......eeeee cece i

STATEMENTS UNDER COURT RULES .................. ii

CEP ET PIED anno ona.snscnescnscncsencenssnsseneee iv

Neen i ascetcnneamiccnnonmmences 1

LETT 2

CONSTITUTIONAL PROVISIONS INVOLVED ........ 5

STATU" ES AND REGULATIONS INVOLVED .......... 5

EEE TTA A 5

GROUNDS FOP PLENARY CONSIDERATION ........ 8

I. THIS COURT DETERMINED IN THE 1982

XEROX CASE THAT CONGRESS PRE-

EMPTED STATE TAXATION OF IM-

PORTED PROPERTY STORED IN CUSTOMS

BONDED WAREHOUSES. CONGRESS SUB-

SEQUENTLY APPROVED THE XEROX DE-

CISION WHEN IT ENACTED THE TRADE

AND TARIFF ACT OF 1964................................. 8

Il. THE DUE PROCESS CLAUSE AND THE

IMPORT-EXPORT CLAUSE PROHIBIT A

STATE FROM LEVYING AN AD VALOREM

PROPERTY TAX ON IMPORTED GOODS

STORED IN A CUSTOMS BONDED WARE-

Ce cscvemmnereeoenee 15

ESE 17

The Appendix to this Jurisdictional Statement is separately

bound.

(iii)

TABLE OF AUTHORITIES

Cases: Page

American Smelting & Refining Co. v. County of

Contra Costa, 271 Cal. App. 2d 437, 77 Cal. Rptr.

570 (1969), appeal dismissed, 396 U.S. 273,

reh’g denied, 397 U.S. 958 (1970).................. 4,11, 12, 15

Ammex Warehouse Co. v. Department of Alcoholic

Beverage Control, 224 F.Supp. 546 (S8.D. Cal.

1963), aff'd, 378 U.S. 124 (1964) ~..........02........ 17

District of Columbia v. International Distributing

Corp., 118 U.S. App. D.C. 71, 331 F.2d 817

GID casiniicistincejetrniniicbaneseapinniubinniansewebianistbncediniiaahaies 16, 17

Doyle v. Ohio, 426 U.S. 610 (1976) ..........-............. 2,3

Fabbri v. Murphy, 95 U.S. 191 (1877) -................... 16

Hetrick v. Village of Lindsey, 265 U.S. 384 (1924).. 2

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

RTE ne en 9 enemas PEE NESDIS 5 a 3,4

Kosydar v. National Cash Register Co., 417 U.S.

REESE ESE RT a ier ene mer, Pie eee een 18

Matthews v. Huwe, Treasurer, 269 U.S. 262

I i isisacecel Fe -koe ERTeY NE Ee ree 2

McGoldrick v. Gulf Oil Corp., 309 U.S. 414 (1940). 10, 12,

Michelin Tire Corp. v. Wages, 423 U.S. 276, reh’g

denied, 424 U.S. 935 (1976) ...........------.eeeceeeeeeeeee 16

Tumey v. Ohio, 273 U.S. 510 (1927) ..........--.--0...-... 2

Union Refrigerator Transit Co. v. Kentucky, 199

aati IRS ee CO 16

United States v. Ehrgott, 182 F. 267 (C.C. S.D.N.Y.

ip NAAR a ls alee ace eae HAY Me 17

Van Huffel v. Harkelrode, Treasurer, 284 U.S. 225

UII ninstdhbioncteusseinuedbdiassatinsadiecadadmabaslimbentnhieatiaiess 2

Xerox Corp. v. County of Harris, 459 U.S. 145

(35GB) .......... ~cbieitaiaiiiiatilataes ial teatctiintaitacte bili apeidaaaall passim

Constitution of the United States:

Asticie I, Section GS, Clause 8 ...............................---.--- 7,15

Article I, Section 10, Clause 2 0.0.00. 7, 15, 16,17

a cenenmeseniigeall passim

Amendment XIV, Section 1 20.00.0000 7, 15,17

TABLE OF AUTHORITIES—Continued

United States Code: Page

«19 EEE Ea a eR SN, me 12

I ail hicccaincedleeentesdateannsnenestionommaaiaial 12

19 U.S.C. §§ 1202-1677¢ ........... pc An LE ent Melee Ww 4 R

TE a RS I se 9

RTA a Re cae 9

ER SD I A a a 9

28 U.S.C. § 1257(2) ........ EEN ale Ley Dee 3

EERE SA nt 18

United States Statutes at Large:

Foreign Trade Zone Act, ch. 590, 48 Stat. 998

Ee ee ee eae nS ee ee 12

Tariff Act of 1930, ch. 497, 46 Stat. 590 (1930)... 8

Trade and Tariff Act of 1984, Pub. L. No. 98-573,

98 Stat. 2948 (1984)... SL Dea SESS ORE RE CN OSS 11, 12, 15

Warehousing Act of 1846, ch. 84, 9 Stat. 53 (1846) —

North Carolina General Statutes:

en. sssinnsmmecionnnanes

eo a sa cacecenevenunensoseciotasons

Code of Federal Regulations:

cite tcacemsicnsicctesntotiascsiites pe

19 C.F.R. §§ 19.1-19.49............. spscheeisideininbcnnteclaansiatsicinntiin

bs ndrensenetecemieseeaiinie sini

TT isan ccnisinerpagiecichiteliciaisdessiagaeiciste

iin tac nelittincicbinidandnsiacinnianeen

| | ee ieicbsotepraipainiphalaisiecls ini

i cass cdreseuicihsiesesintaperesessenntennctetineiiainnston 12

we)

weowovw oe Oo Ow

Miscellaneous:

Certain Trade and Tariff Bills, Hearings before the

Subcomm. on Trade of the House Comm. on

Ways and Means, 98th Cong., Ist Sess. 330

(1983) (statement of Rep. Wright) .................. 13

129 Cong. Rec. S7748-49 (daily ed. June 6, 1983)

(statement of Gen. Tower)’.............-....................... 13, 14

TABLE OF AUTHORITIES—Continued

H.R. 717, 98th Cong., 1st Sess. (1983) -.................... 13

H. Rep. No. 267, 98th Cong., 1st Sess. 35 (1983)... 14, 15

Miscellaneous Tariff Bills, 1983-84, Hearings before

the Subcomm. on Int’! Trade of the Comm. on

Finance, 98th Cong., Ist Sess. 355 (1983) (state-

EE TIED diniahcscicienddbbepaisiegtinttinitindntginendscctan 14

S. 1411, 98th Cong., Ist Sess. (1983) ......................... 13, 14

S. Rep. No. 308, 98th Cong., Ist Sess. 36 (1983) .... 15

IN THE

Supreme Court of the United States

OCTOBER TERM, 1985

No.

R. J. REYNOLDS TOBACCO COMPANY,

Appellant,

DURHAM COUNTY, NORTH CAROLINA and

FORSYTH COUNTY, NORTH CAROLINA and

Its AFFECTED MUNICIPALITIES,

Appellees.

On Appeal from the North Carolina Court of Appeals

JURISDICTIONAL STATEMENT

DECISIONS BELOW

The Judgment Dismissing Appeal and Denying Peti-

tion for Discretionary Review of the Supreme Court of

North Carolina (App. A, pp. la-2a) is unreported. The

Opinion of the North Carolina Court of Appeals (App. C,

pp. 5a-19a) is reported at 73 N.C. App. 475, 326 S.E.2d

911. The Final Decision of the North Carolina Property

Tax Commission sitting as the State Board of Equaliza-

tion and Review (App. D, pp. 21la-37a) is unreported.

JURISDICTION

The judgment of the North Carolina Court of Appeals,

finding that the levy of an ad valorem property tax on

property stored in a customs bonded warehouse is not pro-

scribed by the United States Constitution, was entered

on April 8, 1985 (App. B, p. 3a). The judgment of

the Supreme Court of North Carolina, dismissing an ap-

peal from the judgment of the North Carolina Court of

Appeals and also denying a petition for discretionary re-

view of the judgment of the North Carolina Court of

Appeals was entered on October 2, 1985 (App. A, pp.

la-2a). A notice of appeal from the judgment of the

North Carolina Court of Appeals (App. F, p. 4la) was

filed in the North Carolina Court of Appeals on November

14, 1985.

This appeal was docketed within 90 days from the

judgment of the Supreme Court of North Carolina.’ The

1 Reynolds has also docketed an appeal from the judgment of the

Supreme Court of North Carolina by concurrently filing a separate

Jurisdictional Statement in support of that appeal which is identical

in substance to this Jurisdictional Statement. Reynolds has taken

this precaution because prior decisions of this Court would appear

to render the judgment of the Supreme Court of North Carolina,

dismissing an appeal of right, filed pursuant to N.C. Gen. Stat.

§ 7A-30 and docketed pursuant to N.C. App. R. 14(c) (2), for lack

of a substantial constitutional question, a decision on the merits.

Hetrick v. Village of Lindsey, 265 U.S. 384, 386 (1924); Matthews

v. Huwe, Treasurer, 269 U.S. 262 (1925) ; Tumey v. Ohio, 273 U.S.

510, 515 (1927) and Van Huffel v. Harkelrode, Treasurer, 284 U.S.

225, 230-231 (1931).

Reynolds has been advised, however, by the Clerk of the North

Carolina Supreme Court that a judgment dismissing an appeal of

right for lack of a substantial constitutionai question is not regarded

by that Court as a decision on the merits. Moreover, it appears that

Hetrick and its progeny may have been overruled, sub silentio, in

Doyle v. Ohio, 426 U.S. 610 (1976). In Doyle, the entry of the

Supreme Court of Ohio reflected essentially the same action taken

by the North Carolina Supreme Court here. (See pp. 68 and 70 of

the Joint Appendix in Doyle v. Ohio, No. 75-5014, October Term,

1975.) The only difference is that the Rules of Practice of the

jurisdiction of this Court rests on 28 U.S.C. § 1257(2).

The validity of a state statute,’ as applied, has been drawn

into question on the grounds of being repugnant to the

United States Constitution, and the statute has been

found to be valid, as applied, by the highest court of the

State in which a decision could be had.

In two recent cases, the Court clearly established its

jurisdiction over the issues raised here. In Japan Line,

Ltd. v. County of Los Angeles, 441 U.S. 434 (1979), the

Court held:

In this case, appellants drew in question the validity

of California’s ad valorem property tax, contending

that the tax, as applied to their containers, was re-

pugnant to the Commerce Clause and various treaties,

and the California Supreme Court sustained the va-

lidity of the tax. Under these circumstances, this

Court’s appellate jurisdiction would seem manifest.

. . . Appellants squarely ~hallenged the constitu-

tionality of the tax statute, as applied, and the Cali-

fornia Supreme Court just as squarely sustained its

validity, as applied. We have held consistently that

a state statute is sustained within the meaning of

§ 1257(2) when a State court holds it applicable to a

particular set of facts as against the contention that

Supreme Court of Ohio state that the record shall not be transmitted

by the clerk of the court of appeals “unless and until! the court has

overruled the motion to dismiss [the appeal].” Section 9, Rule II,

Rules of Practice of the Supreme Court of Ohio.

Reynolds seeks to protect its right to a full plenary consideration

by this Court of the questions presented in this appeal in the event

that jurisdiction is not governed by Doyle. Accordingly, it has

docketed the alternative appeal.

2 The state statute in issue is North Carolina’s statute imposing

an ad valorem personal property tax. N.C. Gen. Stat. § 105-274.

The tax has been levied here on imported goods stored in customs

bonded warehouses situated in North Carolina, notwithstanding a

claim by the owner that such goods are constitutionally immune

from the tax.

such application is invalid on federal grounds. [cita-

tions omitted] We conclude that we have appellate

jurisdiction of this case.

Id. at 440-441. The Court in Xerox Corp. v. County of

Harris, 459 U.S. 145 (1982), found jurisdiction under

circumstances almost identical to those in this case. In

Xerox, the Court accepted jurisdiction to review a Texas

court decision reversing an injunction against the assess-

ment of ad valorem personal property taxes on goods

stored under bond in a customs warehouse. The Court

found jurisdiction, noting that “an indispensable predi-

cate” to the Texas court decision “was a determination

that the taxes at issue were permissible under the United

States Constitution.” Jd. at 149.*

% American Smelting & Refining Co. v. County of Contra Costa,

271 Cal. App. 2d 437, 77 Cal. Rptr. 570 (1969), appeal dismissed,

396 U.S. 273, reh’g denied, 397 U.S. 958 (1970), was not involved

in Japan Line. It was cited in appellee’s motion to dismiss in

Xerox, but was not referred to by this Court. It does not appear

to have continuing validity after this Court’s decisions in Japan

Line and Xeroz.

CONSTITUTIONAL PROVISIONS INVOLVED

United States Constitution, Article I, Section 8, Clause 1

The Congress shall have Power To lay and collect

Taxes, Duties, Imposts, and Excises. .. .

United States Constitution, Article I, Section 8, Clause 3

[The Congress shall have Power] To regulate

Commerce with foreign Nations, and among the

several States, and with the Indian Tribes... .

United States Constitution, Article I, Section 10,

Clause 2

No State shall, without the Consent of the Con-

gress, lay any Imposts or Duties on Imports or Ex-

ports, except what may be absolutely necessary for

executing it’s inspection Laws... .

United States Constitution, Article VI, Clause 2

This Constitution, and the Laws of the United

States which shall be made in Pursuance thereof;

. . . Shall be the supreme Law of the Land; and the

Judges in every State shall be bound thereby, any

Thing in the Constitution or Laws of any State to

the Contrary notwithstanding.

United States Constitution, Amendment XIV, Section 1

No State shall . . . deprive any person of life, lib-

erty, or property, without due process of law... .

STATUTES AND REGULATIONS INVOLVED

The statutes involved are set forth in Appendix L, pp.

6la-72a; the regulations involved are set forth in Appen-

dix L, pp. 73a-100a.

STATEMENT

This is an appeal by Reynolds challenging the consti-

tutionality of North Carolina’s ad valorem personal prop-

erty tax levied for the 1983 tax year on imported tobacco

stored in customs bonded warehouses. The North Caro-

lina courts rejected Reynolds’ argument that its claim

of immunity from taxation is squarely governed by this

Court’s recent decision in Xerox Corp. v. County of

Harris, 459 U.S. 145 (1982), which held that Congress

has pre-empted the right of states to levy property taxes

on goods stored in customs bonded warehouses.

Reynolds is a New Jersey corporation authorized to

do business in North Carolina. It is engaged in the busi-

ness of manufacturing finished tobacco products, which

it sells to wholesale distributors and other authorized

purchasers in the United States. In addition, a portion

of its finished tobacco products are exported to purchasers

in foreign countries.

Reynolds uses tobacco grown both in the United States

and in foreign countries in manufacturing its finished

tobacco products. The foreign tobacco used in this process

is placed under customs bond at the various ports of

entry. Thereafter, it is shipped either to Durham County

or Forsyth County, North Carolina, by customs bonded

carriers, and is placed in customs bonded warehouses

owned by Reynolds.‘ The imported tobacco is usually held

in the customs bonded warehouses for about two years

before being withdrawn by Reynolds for use in its manu-

facturing operations. At the time of withdrawal, Reyn-

olds pays the applicable duty.

On the tax lien date for the 1983 tax year, Reynolds

owned imported tobacco which was stored in the customs

bonded warehouses located in both Durham and Forsyth

Counties. In listing its taxable personal property, Reyn-

olds claimed that the imported tobacco situated in the

customs bonded warehouses in both counties was immune

*The warehouses and the land on which they are situated are

subject to ad valorem taxes levied on real property in North Caro-

lina. These taxes have been paid and are not in issue here.

from taxation on federal constitutional grounds in ac-

cordance with the decision of this Court in Xerox Corp.

v. County of Harris, 459 U.S. 145 (1982). The separate

claims of immunity were denied by the respective tax

supervisors (assessors) of Durham County and Forsyth

County. The denials were subsequently affirmed by the

board of equalization and review for each county.

Reynolds, thereafter, filed separate appeals (which

were consolidated for hearing) with the North Carolina

Property Tax Commission claiming that the imported to-

bacco stored under bond in the customs warehouses in

each county was immune, under several clauses of the

Constitution of the United States, from the North Caro-

lina property tax. Reynolds’ claims of immunity from

ad valorem personal property taxes were denied by the

North Carolina Property. Tax Commission (App. D, pp.

34a-37a). Reynolds then appealed to the North Carolina

Court of Appeals. In affirming the decision of the North

Carolina Property Tax Commission, the Court of Ap-

peals concluded that a nondiscriminatory ad valorem per-

sonal property tax levied on “imported goods” stored

urder bond in a customs warehouse, which goods are “not

destined for foreign markets,” is not proscribed by the

Supremacy Clause, the Import-Export Clause, the For-

eign Commerce Clause or the Due Process Clause of the

United States Constitution (App. C, p. 16a).

Reynolds next appealed to the Supreme Court of North

Carolina, claiming that the denial of immunity from

taxation violated the Supremacy Clause, the Foreign

Commerce Clause, the Import-Export Clause and the Due

Process Clause of the United States Constitution. The

appeal was dismissed without opinion for lack of a sub-

stantial constitutional question and a petition for dis-

cretionary review of the decision of the North Carolina

Court of Appeals was concurrently denied (App. A, pp.

la-2a).

GROUNDS FOR PLENARY CONSIDERATION

The questions presented are substantial.

I. THIS COURT DETERMINED IN THE 1982 XEROX

CASE THAT CONGRESS PRE-EMPTED STATE

TAXATION OF IMPORTED PROPERTY STORED

IN CUSTOMS BONDED WAREHOUSES. CON-

GRESS SUBSEQUENTLY APPROVED THE XEROX

DECISION WHEN IT ENACTED THE TRADE AND

TARIFF ACT OF 1984.

In Xerox Corp. v. County of Harris, 459 U.S. 145

(1982), this Court was asked to decide whether it was

constitutionally permissible for a state to impose an ad

valorem property tax on personal property stored under

bond in a customs warehouse. In deciding the question,

the Court noted that Congress had, in the exercise of

“its powers under the Commerce Clause, . . . established

a comprehensive customs system which includes provi-

sions for Government-supervised bonded warehouses

where imports may be stored duty free for prescribed

periods.” * Jd. at 150. This Court specifically held in its

opinion that:

5 The Tariff Act of 1930, and the Regulations promulgated there-

under, set forth a comprehensive scheme regulating goods brought

into the United States. Ch. 497, 46 Stat. 590 (1930), codified as

amended at 19 U.S.C. §§ 1202-1677g (1982); 19 C.F.R. §§ 4-355.50

(1983). As part of the regulation of the importation process, the

statutes and regulations specify the process whereby goods are

maintained in customs custody before customs entry into the United

States. The role of customs warehouses in this comprehensive

scheme dates to the Warehousing Act of 1846, ch. 84, 9 Stat. 53.

Xerox, 459 U.S. at 150.

The regulation of the process whereby goods are unloaded from

vessels, placed in customs bond, transported to the bonded ware-

house, and stored therein is extensive. Control by customs officials

is assured by elaborate documentation and audit procedures. All

goods under customs bond are required by law to be segregated

from other property and, unless specifically authorized by law, the

goods are neither commingled with other goods, domestic or im-

[S]tate property taxes on goods stored under bond

in a customs warehouse are pre-empted by Con-

gress’ comprehensive regulation of customs duties.

Id. at 154.

Although the specific property in issue in Xerox was

finished goods imported and stored under bond in a Class

3 customs warehouse * with reexport expected, though not

required, this Court did not limit the scope of its holding

to property stored under bond while awaiting reexport.

Nonetheless, the North Carolina Court of Appeals con-

cluded that the decision in the Xerox case does not con-

trol the taxability of imported goods stored under bond

ported, nor manipulated while in bond. See, e.g., 19 U.S.C. §§ 1555-

1565 (1982), 19 C.F.R. §§ 19.1-19.49 (1983).

There are eight classes of customs warehouses. Involved in this

case are Class 2 and Class 8 customs warehouses. Class 2 ware-

houses are private bonded warehouses used exclusively for the

storage of merchandise belonging or consigned to the proprietor

thereof. 19 C.F.R. §19.1(a)(2) (1983). Class 8 warehouses are

bonded warehouses established for the purpose of cleaning, sorting,

repacking or otherwise changing in condition, but not manufactur-

ing, merchandise, under customs supervision and at the expense

of the proprietor. 19 C.F.R. §19.1(a) (8) (1983). Goods in Class

8 customs bonded warehouses may be manipulated only to the

extent permitted by law with the prior approval of customs. 19

C.F.R. §19.11(d) (1983).

At the request of the owner, however, goods may be destroyed

in bond and no duty is payable thereon. 19 U.S.C. § 1557(c) (1982).

Merchandise may be withdrawn for either consumption or export

within five years. 19 U.S.C. §1557(a) (1982). Withdrawal for

consumption within the customs territory of the United States, or

withdrawal for export, if desired, have always been equally available

options for the owner of goods stored in Class 2 and Class 8 cus-

toms warehouses. No duty is payable if goods are withdrawn for

export.

® A Class 3 customs warehouse is a privately-owned public bonded

warehouse used exclusively for the storage of merchandise of

foreign origin held under bond until removed for domestic con-

sumption or export. 19 C.F.R. §19.1(a) (3) (1983).

in a customs warehouse pending withdrawal for ex-

pected, though not required, domestic use or sale. This

is clearly an incorrect reading of the Xerox decision. The

opinion in Xerox specifically states that the “question”

considered by the Court included “goods [stored under

bond] destined for American consumption.” *

In its Xerox opinion, this Court examined the legisla-

tive history of the Warehousing Act of 1846 and stated

that:

Congress was willing to waive all duty on goods that

were reexported from the warehouse, and to defer,

for a prescribed period, the duty on goods destined

for American consumption. .. .

. . . The question is whether it would be compati-

ble with the comprehensive scheme Congress enacted

to effect these goals if the states were free to tax

such goods (referring, in part, to “goods destined for

American consumption”] while they were lodged

temporarily in Government-regulated bonded storage

in this country.

Id. at 151; emphasis and bracketed matter added.

The Court, in deciding the “question,” also noted that

it had previously considered the issue of pre-emption from

state taxation in McGoldrick v. Gulf Oil Corp., 309 U.S.

414 (1940). The Court stated in Xerox that its “anal-

ysis in McGoldrick applies with full force here.” 459

U.S. at 153. The Court then concluded that:

Although there are factual distinctions between

this case and McGoldrick, they are distinctions with-

out a legal difference. We can discern no relevance

to the issue of congressional intent in the fact that

the fuel oil in McGoldrick could be sold only as

ships’ stores whereas Xerox had the option to pay

the duty and withdraw the copiers for domestic

sale. .

459 U.S. at 153.

T Xeroz, 459 U.S. at 151.

The questioning of both counsel during oral argument

in the Xerox case also clearly indicates that the ultimate

destination of the stored goods was of no consequence to

the issue presented to the Court. The following question

was posed by the Court to counsel for the taxing authori-

ties:

Question: So it really doesn’t make any difference

in this case as to whether they were destined for a

foreign market.

Ms. Chapman: Absolutely not.*

A similar question to counsel for Xerox followed:

Question: Well, is an importer who says, yes, these

are going to be sold in the United States, and he

puts them in a bonded warehouse, and holds them

for two years, may Texas levy a tax while they are

in the warehouse?

Mr. Hoddinott: No, sir, that is directly opposed to

the legislative purpose of the Warehousing Act.°

Clearly, it was the pervasive and comprehensive scheme

enacted by Congress governing property in customs

warehouses, and not the ultimate destination of such

property, that led this Court to conclude in Xerox that

states are pre-empted from imposing ad valorem property

taxes on goods stored under bond in a customs ware-

house.*®

Ratification of Xerox by Congress

Congress expressed its approval of this Court’s holding

in the Xerox case when it adopted the Trade and Tariff

8 Transcript of Oral Argument in Xerox case at p. 36 (App. G,

p. 46a).

® Transcript of Oral Argument in Xerox case at pp. 48-49 (App.

G, p. 47a).

©The North Carolina Court of Appeals relied upon American

Smelting & Refining Co. v. County of Contra Costa, 271 Cal. App.

Act of 1984," which, inter alia, amended the Foreign

Trade Zone Act’ to provide a statutory exemption ™

from state and local ad valorem property taxes. This

amendment was prompted, in part, by Congressional

awareness that the State of Texas had forced Xerox Cor-

poration to undertake protracted litigation in order to

obtain immunity from state taxation for its property

2d 437, 77 Cal. Rptr. 570 (1969), appeal dismissed, 396 U.S. 273,

reh’g denied, 397 U.S. 958 (1970). American Smelting involved

a Class 7 customs bonded warehouse where ore was smelted under

bond for either domestic consumption or shipment abroad. The

California Court of Appeals in American Smelting, unlike this

Court in Xeroz, did not examine the legislative history of the

customs bonded warehouse provisions, and interpreted McGoldrick

to apply only to situations where goods are required by law or

regulation to be shipped abroad.

11 Pub. L. No. 98-573, 98 Stat. 2948 (1984).

2 Ch. 590, 48 Stat. 998 (1934), codified as amended 19 U.S.C.

§ 81 a-u (1982). Goods imported into foreign trade zones, as in

the case of customs bonded warehouses, are not subject to import

duties until withdrawn for domestic consumption. 19 U.S.C. § 81c

(1982). Unlike customs bonded warehouses, however, there are

no separate classes of foreign trade zones, and manipulation, manu-

facturing and exhibition are generally permitted subject to customs

supervision. 19 C.F.R. § 146.32 (1983).

18 Pub. L. No. 98-573, Sec. 231(b), 98 Stat. 2948, 2991 (1984)

provides:

(1) Section 15 of such Act of June 18, 1934 (19 U.S.C. 81o)

is amended by adding at the end thereof the following new

subsection :

“(e) Tangible personal property imported from outside the

United States and held in a zone for the purpose of storage,

sale, exhibition, repackaging, assembly, distribution, sorting,

grading, cleaning, mixing, display, manufacturing, or process-

ing, and tangible personal property produced in the United

States and held in a zone for exportation, either in its original

form or as altered by any of the above processes, shall be ex-

einpt from State and local ad valorem taxation.”

(2) The amendment made by paragraph (1) shall take effect

on January 1, 1983.

stored in a customs bonded warehouse. The legislative

history surrounding this amendment clearly indicates that

Congress was not making a substantive change in the

law governing the state taxation of property in foreign

trade zones. Rather, Congress made it clear that prop-

erty situated in a foreign trade zone was to be afforded

the same constitutional immunity from state ad valorem

property taxes which the Court, in Xerox, had afforded

property in a customs bonded warehouse.

Congressman Wright, sponsor of H.R. 717 explained

the rationale for the bill in testimony (App. H, 49a-51a)

before the Subcommittee on Trade:

Now, there is only one case that I am aware of

anywhere in the whole United States where a local

taxing authority, a local city has presumed a right

to levy local ad valorem taxes on goods in foreign

commerce, the inventories in the foreign trade zone,

and that, as luck would have it, occurred in my dis-

trict, at the Dallas-Fort Worth Foreign Trade Zone,

where the city of Irving, composed of some very fine

Texas citizens, simply misunderstood the nature of a

foreign trade zone and undertook to levy local ad

valorem taxes on all the inventories that are there

in the foreign trade zones.

Well, it occurs that a recent Supreme Court deci-

sion in the case of Xerox versus the County of Har-

ris already has ruled that you cannot do that with

respect to a bonded warehouse, and I should think

that the very same identical provision would apply

here."*

Senator Tower, cosponsor of S. 1411, a companion bill

to H.R. 717, in a statement (App. I, pp. 53a-54a) for the

record explained the rationale for the bill as follows:

14 Certain Trade and Tariff Biils, Hearings before the Subcomm.

on Trade of the House Comm. on Ways and Means, 98th Cong., Ist

Sess. 330 (1983) (statement of Rep. Wright).

Congress created foreign trade zones to make our

country competitive in the international market-

place. Local taxation of goods located in a foreign

trade zone would, of course, frustrate the Congres-

sional purpose. The Federal preemption of this type

of taxation has been uniformly recognized outside

of Texas. However, because of restrictions in the

Texas constitution, the formal recognition by the

State of Texas is not possible.

The lack of a definitive statute in Texas has cre-

ated a hesitation among businesses that might other-

wise use Texas foreign trade zones. A State statute

is, of course, not necessary to restate a Federal

preemption. A State statute would be merely gratui-

tous, to insure that local authorities comply with

Federal law. Without such a statute to show local

assessors, however, businesses are concerned that

they will be forced to go to court in order to secure

an ad valorem tax exemption to which they are en-

titled. Although the recent U.S. Supreme Court case

of Xerox Corporation against Harris County seems

to make the state of the law clear, businesses do not

like to operate based on how case law would help

them if they are forced to go to court.

By simply restating the existing Federal preemp-

tion of ad valorem taxation, the Bentsen-Tower bill

will be able to facilitate the development of foreign

trade zones.”

Further evidence that Congress intended to approve the

pre-emption recognized in Xerox is found in H. Rep. No.

267, 98th Cong., Ist Sess. 35 (App. J, pp. 55a-56a) stating

that “[t]he goal of this legislation is . . . to confirm that

Congress intended not to permit the imposition of [state

and local ad valorem] taxes” on imported property in a

15 129 Cong. Rec. S7748-49 (daily ed. June 6, 1983) (statement of

Sen. Tower) ; see also Miscellaneous Tariff Bills, 1983-84, Hearings

before the Subcomm. on Int’! Trade of the Comm. on Finance, 98th

Cong., 1st Sess. 355 (1983) (statement of Sen. Tower).

foreign trade zone, and S. Rep. No. 308, 98th Cong., 1st

Sess. 36 (App. K, pp. 57a-59a) stating that “the Supreme

Court of the United States has ruled that Congress’ com-

prehensive regulation of customs duties preempts state

property taxes on goods stored under bond in a customs

warehouse (Xerox Corp. v. County of Harris, Texas, and

City of Houston, Texas, No. 81-1489, December 13,

1982) .”

It is clear that Congress has pre-empted the states’

right to tax imported property stored under bond in a

customs warehouse. This Court so stated in Xeroz.

Moreover, Congress reaffirmed this fact in the exercise

of its authority under the Commerce Clause, by con-

firming the Xerox decision when enacting the Trade and

Tariff Act of 1984.

II. THE DUE PROCESS CLAUSE AND THE IMPORT-

EXPORT CLAUSE PROHIBIT A STATE FROM

LEVYING AN AD VALOREM PROPERTY TAX ON

IMPORTED GOODS STORED IN A CUSTOMS

BONDED WAREHOUSE.

Reynolds separately argued in its appeals to the courts

below that the ad valorem property taxes levied on its

imported goods stored in customs bonded warehouses vio-

lated both the Due Process Clause and the Import-Export

Clause of the United States Constitution. The North

Carolina Court of Appeals denied both claims. This

Court has never considered either question in a written

opinion.**

16 This Court was not asked to consider a Due Process argument

in Xerox Corp. v. County of Harris, 459 U.S. 145 (1982). Nor was

a Due Process argument raised in American Smelting & Refining

Co. v. County of Contra Costa, 271 Cal. App. 2d 437, 77 Cal. Rptr.

570 (1969), appeal dismissed, 396 U.S. 273, reh’g denied, 397 U.S.

958 (1970). This Court found it “unnecessary .. . to consider”

whether the Texas property tax ..volved in Xerox would “pass

muster” under the Import-Export Clause. 459 U.S. at 154. An

identical conclusion was stated with regard to the excise tax in-

volved in McGoldrick v. Gulf Oil Corp., 809 U.S. 414, 429 (1940).

In Union Refrigerator Transit Co. v. Kentucky, 199

U.S. 194 (1905), this Court stated that “[iJt is... es-

sential to the validity . . . [of an ad valorem property]

tax that the property [sought to be taxed] . . . be within

the territorial jurisdiction of the taxing power.” Jd. at

204. Later, in Michelin Tire Corp. v. Wages, 423 U.S.

276, reh’g denied, 424 U.S. 935 (1976), where no cus-

toms bonded warehouse was involved, the Court held

that a “nondiscriminatory property tax” levied on goods

“no longer in transit” was not proscribed by the Import-

Export Clause of the United States Constitution. Jd. at

302. Clearly, a state is without authority to levy an

otherwise valid ad valorem property tax if the property

sought to be taxed is not legally within the taxing juris-

diction.

This Court has consistently recognized in prior cases

that as long as imported property is stored under bond

in a customs warehouse, it is outside the taxing jurisdic-

tion of the individual states and the District of Colum-

bia. In Fabbri v. Murphy, 95 U.S. 191 (1877), the Court

stated that “Congress did not regard the importation as

complete while the goods remained in the custody of the

proper officers of the customs.” Jd. at 197-198. More

recently, in Xerox Corp. v. County of Harris, 459 U.S.

145, 153-154 (1982), this Court cited with approval the

decision in District of Columbia v. International Dis-

tributing Corp., 118 U.S. App. D.C. 71, 331 F.2d 817

(1964). The Court of Appeals there held that an excise

tax could not be levied on the sale of alcoholic beverages

stored in a customs bonded warehouse when the sale was

consummated while the goods were in the bonded ware-

house. In reaching this conclusion, the court approved

the rationale, stated by the D.C. Tax Court in its opinion,

that:

“The idea of bonded warehouses and their use by

the United States custom authorities negatives the

proposition that at the time of sale the alcoholic bev-

erages were in the possession of the petitioner [the

corporation}. True it is that the private bonded

warehouse was physically in the District of Colum-

bia; and the liquors were stored therein; and in that

sense they were in the District. In law, however,

they were still without that jurisdiction, and did not

become subject thereto until] they had been with-

drawn from the private bonded warehouse and re-

moved from the control of the customs official.”

118 U.S. App. D.C. at 73-74, 331 F.2d at 819-820. See

also Ammex Warehouse Co. v. Department of Alcoholic

Beverage Control, 224 F. Supp. 546, 555 (S.D. Cal. 1963),

affd, 378 U.S. 124 (1964), holding that goods in cus-

toms bonded warehouses “never become part of the com-

mon mass of goods in the State” and United States v.

Ehrgott, 182 F. 267, 273 (C.C. S.D.N.Y. 1910), holding

that placing imported goods under customs bond is as if

they were “detained at the borders.”

The conclusion of these cases that imported goods

brought to a customs bonded warehouse are not within

the taxing jurisdiction of the states reflects the recogni-

tion that “Congress intended to make customs bonded

warehouses federal enclaves free of state taxation .. .

[where] imported goods . . . [are] not subject to [the]

taxing jurisdiction until they [are] removed from the

warehouse.” Xerox, 459 U.S. at 154. Accordingly, the

court below erred in failing to find that imported to-

bacco stored under bond in customs bonded warehouses

was immune from taxation under the Due Process Clause

and the Import-Export Clause of the United States Con-

stitution.

CONCLUSION

Dismissal of this appéal would (1) open the door to

the imposition by state and local governments of sub-

stantial burdens on the foreign commerce of the United

States, and (2) create a rule of taxation based on intent,

which oftentimes may not be known, thereby generating

a multiplicity of suits. Moreover, dismissal would sub-

stantially change the effectiveness and utility of customs

bonded warehouses, limiting and perhaps destroying their

usefulness in foreign commerce. This case presents a

substantial federal question since it directly deals with

an issue “touching the accommodation of state and fed-

eral interests under the Constitution.” Kosydar v. Na-

tional Cash Register Co., 417 U.S. 62, 65 (1974).

Probable jurisdiction should be noted. Indeed, in view

of the clear failure of the court below to follow this

Court’s decision in Xerox, it would be appropriate for the

Court to reverse the decision below summarily. If, how-

ever, the Court should feel that it lacks jurisdiction either

to hear the case on appeal or to reverse summarily, the

questions are nevertheless important, and certiorari

should be granted under 28 U.S.C. § 2103.

Respectfully submitted,

Of Counsel:

JAMES W. McGRATH

FRANK SKINNER

R. J. REYNOLDS

INDUSTRIES, INC.

1100 Reynolds Boulevard

Winston-Salem, NC 27102

THOMAS L. KUMMER

JOHN A. COCKLEREECE, JR.

HorRTON, HENDRICK &

KUMMER

450 NCNB Plaza

Winston-Salem, NC 27101

December, 1985

ERWIN N. GRISWOLD

(Counsel of Record)

Bos C. GRIFFO

JONES, Day, REAvis & PoGUE

655 Fifteenth Street, N.W.

Washington, D.C. 20005

(202) 879-3898

HuGH CALKINS

KATHLEEN B. BuRKE

JOHN C. DuFFY, JR.

JONES, Day, REAvVis & PoGcusE

1700 Huntington Building

Cleveland, OH 44115

Counsel for Appeliant

APPENDIX

‘}

Hes. _ | JOSEPH F. SPANOL, JR.

IN THE Reeicncs aemannnes

Supreme Court of the United States

OCTOBER TERM, 1985

R. J. REYNOLDS TOBACCO COMPANY,

Appellant,

Vv.

DURHAM COUNTY, NORTH CAROLINA and

FORSYTH COUNTY, NORTH CAROLINA

and ITS AFFECTED MUNICIPALIT &S,

.. ppellees.

APPENDIX TO JURISDICTIONAL

STATEMENTS ON APPEALS FROM THE

SUPREME COURT OF NORTH CAROLINA AND

THE NORTH CAROLINA COURT OF APPEALS

Of Counsel: ERWIN N. GRISWOLD

JAMES W. McGRATH (Counsel of Record)

FRANK SKINNER Bos C. GRIFFO

R. J. REYNOLDs JONES, DAy, REAVis & POGUE

INDUSTRIES, INC. 655 Fifteenth Street, N.W.

1100 Reynolds Boulevard Washington, D.C. 20005

Winston-Salem, NC 27102 (202) 879-3898

THOMAS L. KUMMER HUGH CALKINS

JOHN A. COCKLEREECE, JR. KATHLEEN B. BURKE

HorTON, HENDRICK & JOHN C. DUFFY, JR.

KUMMER JONES, DAY, REAVIS & POGUE

450 NCNB Plaza 1700 Huntington Building

Winston-Salem, NC 27101 Cleveland, OH 44115

Counsel for Appellant

WILSON - Eres PrintinGc Co., Inc. - 789-0096 - WASHINGTON, D.C. 20001

APPENDIX

APPENDIX M—

TABLE OF CONTENTS

Page

Judgment Dismissing Appeal and

Denying Petition for Discretionary

Review of the Supreme Court of

a Fa

Judgment of the North Carolina

Court of Appeals

Opinion of the North Carolina

Court of Appeals eee

Final Decision of the North Caro-

lina Property Tax Commission sit-

ting as the State Board of Equaliza-

tion and Review

2la

Notice of Appeal to the Supreme

Court of the United States from the

Judgment of the Supreme Court of

North Carolina 39a

Notice of Appeal to the Supreme

Court of the United States from

the Judgment of the North Carolina

Court of Appeals 4la

Portions of the Transcript of the

Oral Argument in Xerox Corp. v.

County of Harris, 459 U.S. 145

(1982)

49a

53a

Statement of Congressman Wright..

Statement of Senator Tower...

House Report No. 267

Senate Report No. 308

Statutes and Regulations Involved.

Supplement to Statement Under

UUIEIPIIIIET 2 cs cksnandttndnabeemianieenienisimadenaasan

APPENDIX A

Judgment Dismissing Appeal and Denying

Petition for Discretionary Review of the

Supreme Court of North Carolina,

October 2, 1985

SS. eee ES

SUPREME COURT OF NORTH CAROLINA

TENTH DISTRICT

No. 222P85

IN THE MATTER OF:

THE APPEAL OF R. J. REYNOLDS TOBACCO COMPANY FROM

THE DENIALS OF ITS CLAIMS FOR EXEMPTION BY DURHAM

COUNTY AND FORSYTH COUNTY FOR 1983

(8410PTC481)

| October 2, 1985]

JUDGMENT DISMISSING APPEAL ON MOTION OF

FORSYTH & DURHAM COUNTIES AND DENYING

PETITION FOR DISCRETONARY REVIEW

Upon consideration of the R. J. Reynalds Tobacco Com-

pany’s notice of appeal from the North Carolina Court

of Appeals, filed in this matter pursuant to G.S. 7A-30,

and the Forsyth & Durham Counties’ motion to dismiss

the appeal for lack of a substantial constitutional ques-

tion and upon consideration of the R. J. Reynolds To-

bacco Company’s petition for discretionary review of the

decision of the North Carolina Court of Appeals, pur-

suant to G.S. 7A-31, the following order was entered and

is hereby certified to the North Carolina Court of Ap-

peals: Forsyth & Durham Counties’ motion to dismiss

the appeal is

“Allowed by order of the Court in conference, this

the 19th day of September 1985.

s/ Billings, J.

For the Court”

R. J. Reynolds Tobacco Company’s petition for discre-

tionary review is

“Denied by order of the Court in conference, this the

19th day of September 1985.

s/ Billings, J.

For the Court”

Therefore, it is considered and adjudged further that

R. J. Reynolds Tobacco Company do pay the sum of

Nine and no/100 Dollars ($9.00) and that execution is-

sue therefor.

WITNESS my hand and the seal of the Supreme Court

of North Carolina, this the 2nd day of October 1985.

/s/ J. Gregory Wallace

J. GREGORY WALLACE

Clerk of the Supreme Court

Copy to:

North Carolina Court of Appeals

Horton, Hendrick & Kummer, Attorneys at Law

Mr. P. Eugene Price, Jr., Attorney at Law

Mr. Jonathan V. Maxwell, Attorney at Law

Mr. John G. Wolfe, III, Attorney at Law

Mr. S. C. Kitchen, Attorney at Law

APPENDIX B

Judgment of the North Carolina Court of Appeals,

April 8, 1985

- j 4 .

: -_ —_— "eT ty ee . J

<a he ee - A eee See eS ee

COURT OF APPEALS OF NORTH CAROLINA

No. 8410PTC481

IN THE MATTER OF:

THE APPEAL OF R. J. REYNOLDS TOBACCO COMPANY FROM

THE DENIALS OF ITS CLAIMS FOR EXEMPTION BY DURHAM

COUNTY AND FORSYTH COUNTY FOR 1983

[April 8, 1985]

JUDGMENT

This cause came on to be argued upon the transcript

of the record from the N. C. Property Tax Commission.

Upon consideration whereof, this Court is of opinion that

there is no error in the record and proceedings of said

trial tribunal.

It is therefore considered and adjudged by the Court

here that the opinion of the Court, as delivered by the

Honorable JACK COZORT Judge, be certified to the said

trial tribunal to the intent that the JUDGMENT IS

AFFIRMED. And it is considered and adjudged further,

that the SAID R. J. REYNOLDS TOBACCO COMPANY

DO PAY the cost of the appeal in this Court incurred,

to wit, the sum of ONE HUNDRED TWENTY AND

NO/100 dollars ($120.00), and execution issue therefor.

Certified to N. C. Property Tax Commission this 8th day

of April 1985.

/s/ Francis E. Dail

Clerk of the Court of Appeals.

APPENDIX C

Opinion of the North Carolina Court of Appeals,

March 19, 1985

eee ne ye

bes Bile tans Ce Meeks ei nn

NORTH CAROLINA COURT OF APPEALS

No. 8410PTC481

IN THE MATTER OF:

THE APPEAL OF R. J. REYNOLDS TOBACCO COMPANY FROM

THE DENIALS OF ITS CLAIMS FOR EXEMPTION BY DURHAM

COUNTY AND FORSYTH COUNTY FOR 1983

Filed: 19 March 1985

Property Tax Commission

Appeal by R. J. Reynolds Tobacco Company from

Final Decision of the Property Tax Commission entered

14 December 1983. Heard in the Court of Appeals 9 Jan-

uary 1985.

Horton, Hendrick & Kummer by Thomas L. Kummer

and John A. Cocklereece, Jr., for R. J. Reynolds Tobacco

Company, appellant.

Assistant County Attorney S. C. Kitchen for County

of Durham, appellee.

P. Eugene Price, Jr., and Jonathan V. Maxwell for

Forsyth County and its Affected Municipalities; and

John G. Wolfe, III, for Town of Kernersville, appellees.

Assistant City Attorney Henry D. Blinder for City of

Durham, Amicus Curiae.

COZORT, Judge.

R. J. Reynolds Tobacco Company a s f

adverse decision of the Pannier Sn ag Mn

nolds had argued to the Commission that imported to-

bacco owned by Reynolds and stored in the United States

customs bonded warehouses located in Durham and For-

syth Counties was excluded from ad valorem taxation.

The Commission disagreed and denied Reynolds’ claims

for a property tax exemption. We affirm.

The basic facts are undisputed. R. J. Reynolds To-

bacco Company is a New Jersey corporation qualified to

do business in North Carolina with its principal offices

in Winston-Salem. Reynolds manufactures in Forsyth

County finished tobacco products which it sells to whole-

sale distributors and other authorized purchasers in the

United States and abroad. Reynolds uses tobacco grown

in the United States and in foreign countries in the

manufacture of its tobacco products. In May and June

of 1983, Reynolds appeared before the Durham County

and the Forsyth County Boards of Equalization and Re-

view, seeking a property tax exemption for imported

leaf tobacco stored in customs bonded warehouses lo-

cated in each county. The total tax inv i

aE An olved is

million dollars for 1983. ne

The allegedly “exempt” tobacco had been imported

from Bulgaria, Syria, Turkey, Lebanon, and Brazil. The

tobacco is shipped by bonded carrier to the United States

and unloaded from the carrier at a port of entry where

it is placed under customs bond. A “customs bond” is a

bond given by the importer at the time the tobacco is

physically imported into the United States for the pur-

pose of securing the payment of federal import duties

The tobacco is then transported by rail or truck to a

storage facility where it remains under customs bond

until it is withdrawn from storage.

The storage facilities used by Reynolds to hold its im-

ported tobacco are United States customs bonded ware-

houses. The customs bonded warehouses and the land on

which they are situated in Durham and Forsyth Coun-

ties are owned by Reynolds which is the sole user of the

warehouses. The warehouses themselves and the land

underlying them are subject to property taxation in both

counties. In all, Reynolds has twenty-six customs bonded

warehouses in Durham County and sixty-two customs

bonded warehouses in Forsyth County. Imported tobacco

is normally held in storage by Reynolds for two years

before it is withdrawn and blended with domestically-

grown tobacco in the manufacturing process. When the

imported tobacco is withdrawn from bonded storage for

manufacturing, customs duties are paid by Reynolds to

the federal government.

Virtually all the imported tobacco stored in these cus-

toms bonded warehouses in Durham and Forsyth Coun-

ties is used by Reynolds for the domestic manufacture

of finished tobacco products. Furthermore, virtually all

the tobacco products manufactured by Reynolds from

imported tobacco are sold and consumed in the United

States.

From the denial of its claims for property tax exemp-

tion by the Durham and Forsyth Counties Boards of

Equalization and Review, Reynolds appealed to the Prop-

erty Tax Commission. Prior to a hearing on the matter,

Durham County filed a motion to dismiss the appeal

from that County’s Board on the ground that Reynolds

had failed to properly perfect its appeal to the Commis-

sion. The denial of this motion is the subject of Durham

County’s cross-assignment of error.

The Property Tax Commission held that the Durham

and Forsyth Counties Boards of Equalization and Re-

view correctly denied Reynolds claims for exemption from

property taxation of imported tobacco stored as of |

January 1983 in customs bonded warehouses.

The scope of our review on appeal from a decision of

the Property Tax Commission is governed by G.S. 105-

345.2. See In re McElwee, 304 N.C. 68, 288 S.E.2d 115

(1981). Section (b) of this statute lists six grounds on

which an appellate court may reverse, remand, modify,

or declare null and void the findings, inferences, conclu-

sions, or decisions made by the Commission. Although

in the record Reynolds has taken other exceptions, for

example, to certain findings of fact, it has failed to bring

them forward in its brief. Instead, Reynolds has couched

its entire appeal on the ground set forth in G.S. 105-

345.2(b) (1) that the Commission’s conclusions of law

are in “violation of constitutional provisions.” Basing its

argument on three constitutional grounds, Reynolds ar-

gues that imposing ad valorem property taxes on im-

ported tobacco stored in United States customs bonded

warehouses is unconstitutional. Our review of Reynolds’

appeal is confined to this issue.

First, we briefly explain the concept of and purpose

behind customs bonded warehouses. In order to encourage

merchants here and abroad to use American ports, Con-

gress was willing to waive all duty on goods that were

reexported and to defer for a prescribed period the duty

on imported goods destined for domestic consumption.

See 19 U.S.C.A. 1557(a). To carry out this objective,

Congress, pursuant to its powers under the Commerce

clause, established a comprehensive customs system which

created secure and duty-free enclaves or government-

supervised bonded warehouses. For a five-year period,

imported goods may be stored in the warehouses duty-

free. If during this period the goods are withdrawn and

reexported, no duty is paid. If the goods are withdrawn

for American consumption or stored beyond five years,

any duty owed on the goods becomes due. Xerox Corp.

v. County of Harris, 459 U.S. 145, 103 S. Ct. 523, 74

L. Ed. 2d 323 (1982).

t the outset, we note three cases which guide our

elaine of the issue presented: Michelin Tire “7°

v. Wages, 423 U.S. 276, 96 S. Ct. 535, 46 L. Ed. es

495, rehearing denied, 424 U.S. 935, 96 S. Ct. 1151, 1

L. Ed. 2d 344 (1976); Xerox v. County of Harris,

supra; and American Smelting and Refining —~" >

County of Contra Costa, 271 Cal. App. 2d 437, 77 a

Rptr. 570 (1969), appeal dismissed for want of hen

stantial federal question, 396 U.S. 273, 90 S. Ct. 553,

L. Ed. 2d 462 (1970).

The first ground asserted by Reynolds as a basis for

holding unconstitutional the imposition of ad a

taxes on its imported tobacco in Durham and Fonyt

Counties is the Import-Export clause. Article I, : 10,

clause 2 of the United States Constitution provides in

part that “[nJo state shall, without the consent of con-

gress, lay any imposts or duties on imports or wey *

Reynolds maintains that the tobacco involved in ‘this

case is still in the import stream of commerce. It argues

that because Congress has decided that goods can remain

in customs bonded warehouses duty-free for five vears,

Congress has thereby defined the period during which

goods remain in foreign commerce.

This argument is without merit. In Michelin Tire

Corp. v. Wages, supra, county tax officials assessed

Georgia ad valorem property taxes against imported tires

and tubes which were included in the corporation's in-

ventory maintained at its wholesale distribution ware-

house located in the county. The US. Supreme Court

held that Georgia’s assessment of a nondiscriminatory

ad valorem property tax against imported goods that

were no longer in import transit did not violate the

Import-Export clause, regardless of whether the goods

had lost their status as imports by being mingled with

other goods of the importer. Id. at 279, 96 S. Ct. at

10a

538, 46 L. Ed. 2d at 499-500. This decision expressly

overruled Low v. Austin, 13 Wall 29, 20 L. Ed. 517

(1872), which had held that the states were prohibited

by the Import-Export clause from imposing a nondis-

criminatory ad valorem property tax on imported goods

until they have lost their character as imports and have

become incorporated into the mass of property in the

state. Id. at 279, 282, 96 S. Ct. at 538, 539, 46 L. Ed. 2d

at 500, 501. The Michelin decision indicates that “a state

or local tax on imported goods is permissible if the

goods have lost their status as imports, and that such

a tax is also permissible, even if the goods have not

lost their status as imports, if the tax is nondiscrim-

inatory.” Annot., 46 L. Ed. 2d 955, 967 (1977). The

focus of Import-Export clause cases has therefore been

changed “from the nature of the goods as imports to

the nature of the tax at issue.” Limbach v. Hooven &

Allison Co., —— U.S. ——, 104 S. Ct. 1837, 1842, 80

L. Ed. 2d 356, 363 (1984). It is unnecessary for this

Court to determine whether the imported tobacco in-

volved in this case was “still in the impert stream of

commerce.” Neither party disputes the fact that the

property taxes levied by Durham and Forsyth Counties

are nondiscriminatory. We hold that the imposition of

a nondiscriminatory ad valorem property tax on Rey-

nolds’ imported tobacco located in customs bonded ware-

houses in Durham and Forsyth Counties is not prohib-

a by the Import-Export clause of the U.S. Constitu-

ion.

Two companion cases, Youngstown Sheet & Tube Co.

v. Bowers and United States Plywood Corp. v. City of

Algoma, 358 U.S. 534, 79 S. Ct. 383, 3 L. Ed. 2d 490

(1959), which did not have the benefit of the Michelin

rule, saw no justification in allowing imported goods to

escape a nondiscriminatory property tax. In Youngs-

town, iron ores were imported from five countries for

use along with domestic ores in manufacturing at

lla

Youngstown’s Ohio plant. Unisied States Plywood im-

ported lumber and veneers for use as needed along with

domestic wood in its manufacturing processes. The im-

ported lumber was “green” when received and therefore

had to be dried before it could be used. These facts are

similar to the undisputed facts in the case sub judice.

Some of the tobacco imported by Reynolds must be held

in storage for aging purposes before it can be used in

manufacturing. The remaining imported tobacco has

already been aged and is ready to be blended with

domestically-grown tobacco in the manufacturing opera-

tions of Reynolds in Winston-Salem. The Supreme Court

concluded with regard to both Youngstown and United

States Plywood as follows:

The materials here in question were imported

to supply, and were essential to supply, the manu-

facturer’s current operating needs. When. . . they

were put to that use and indiscriminate portions of

the whole were actually being used to supply daily

operating needs, they stood in the same relation to

the State as like piles of domestic materials . . .

that were kept for use and used in the same way.

The one was then as fully subject to taxation as the

other. In those circumstances, the tax was not on

the materials because they had been imported, but

because at the time of the assessment they were

being used, in every practical sense, for the pur-

poses for which they had been imported. They were

therefore subject to taxation just like domestic prop-

erty that was kept . . . in the same way for the

same use. We cannot impute to the Framers of the

Constitution a purpose to make such a discrimina-

tion in favor of materials imported from other

countries as would result if we approved the views

pressed upon us by the manufacturers.

Id. at 549-50, 79 S. Ct. at 362, 3 L. Ed. 2d at 500-01.

12a

Furthermore, in In re Publishing Co., 281 N.C. 210,

188 S.E.2d 310 (1972), the North Carolina Supreme

Court similarly held that imported newsprint which was

kept on hand for use in connection with the taxpayer’s

printing operation was subject to property taxation by

Buncombe County in the same manner as the domestic

newsprint which was kept at the same place, in the

same manner, and for the same use. Our Supreme Court

concluded that the Import-Export cluuse did not prohibit

the assessment of a nondiscriminatory ad valorem tax

on imported newsprint held for use in the taxpayer’s

manufacturing process. We likewise hold that even

though the imported tobacco involved in this ease is

held in customs bonded warehouses the Import-Export

clause confers no immunity to it from nondiscrimina-

tory ad valorem property taxes.

A second argument proposed by Reynolds is that its

imported tobacco is exempt from ad valorem property

taxation under the Foreign Commerce clause and the

Supremacy clause of the United States Constitution.

Article I, § 8, clause 3 of the United States Constitu-

tion states that Congress shall have the power “[t]o reg-

ulate commerce with foreign nations.” Before a state

tax can be declared unconstitutional, it must be shown

to burden the interstate or foreign commerce involved.

See Halliburton Oil Well Cementing Co. v. Reily, 373

U.S. 64, 83 S. Ct. 1201, 10 L.Ed. 2d 202, rehearing de-

nied, 374 U.S. 858, 83 S. Ct. 1861, 10 L. Ed. 2d 1082

(1963). Not every burden is prohibited however, only

those which discriminate against the commerce. Mc-

Goldrick v. Berwind-White Coal Mining Co., 309 U:S.

33, 60 S. Ct. 388, 84 L. Ed. 565 (1940). See generally,

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

97 S. Ct. 1076, 51 L. Ed 2d 326, rehearing denied, 430

U.S. 976, 97 S. Ct. 1669, 52 L. Ed. 2d 3711 (1977). As

will be seen, because Reynolds’ imported tobacco is not

a ae

13a

forced to bear a heavier tax burden than its domestic

tobacco, local ad valorem property taxation is not a

discriminatory or an undue burden on foreign commerce.

The Supremacy clause, Article VI, clause 2 provides

that the “[Clonstitution, and the laws of the United

States which . . . shall be the supreme law of the land

... any thing in the [C]onstitution or laws of any state

to the contrary notwithstanding.”

Essentially, Reynolds’ argument with regard to these

two clauses is that federal regulation has been so per-

vasive in this field that it has preempted state action.

In Silkwood v. Kerr-McGee Corp., —— U.S. ——, 104

S. Ct. 615, 78 L. Ed. 2d 443, rehearing denied, —— U.S.

——, 104 S. Ct. 1430, 79 L. Ed. 2d 754 (1984), the U.S.

Supreme Court explained that state law can be pre-

empted in two ways. First, if Congress evidences an

intent to occupy a field, any state law falling within

that field is preempted. Secondly, if Congress has not

entirely displaced state regulation over the matter, state

law is still preempted to the extent it actually conflicts

with federal law or hinders the accomplishment of the

objectives of Congress. Jd. at ——, 104 S. Ct. at 621,

78 L. Ed. 2d at 452.

In Xerox Corp. v. County of Harris, supra, the United

States Supreme Court was confronted with the question

of whether a state may impose nondiscriminatory ad

valorem property taxes on imported goods destined for

foreign markets stored under bond in a customs ware-

house. Xerox imported and stored copiers previously

assembled in Mexico in customs bonded warehouses in

Texas. The copiers were not designed or intended for

domestic use. All of the copiers were ultimately sold

abroad, allowing Xerox to avoid paying any import duties

pursuant to 19 U.S.C. § 1557(a).

In determining whether Congress hae evidenced an

intent to preempt state action in this area, the Supreme

l4a

Court examined the legislative history and congressional

purpose behind the bonded warehousing system. A fore-

runner of the present statute, 19 U.S.C. § 1557(a). was

the Warehousing Act of 1846, 9 Stat. 53. Its objective

was to help establish the United States as a center of

world commerce. According to the Supreme Court

[t}he Act stimulated foreign commerce by allowing

goods in transit in foreign commerce to remain in secure

storage, duty free, until they resumed their journey in

export.” Id. at 150, 108 S. Ct. at 526, 74 L. Ed. 2d at

328. (Emphasis added.) Accordingly, the Supreme Court

held that state property taxes on goods awaiting export

stored under bond in a customs warehouse are preempted

by Congress’s comprehensive regulation of customs duties.

The Court reasoned that it would be incompatible with

the comprehensive scheme Congress enacted if the states

were free to tax such goods while they were lodged tem-

porarily in government-regulated bonde i i

msc g d storage in this

. However, Xerox is distinguishable from the case sub

judice In one crucial respect. It is undisputed by the

parties on appeal that virtually all the imported tobacco

involved in this case is destined for domestic, rather than

foreign, manufacture and consumption. Thus, we are

faced with a different question than the U.S. Supreme

Court faced in Xerox. While the imposition of ad va-

lorem taxes on imported goods stored temporarily in

this country prior to reexportation would make the United

States a less attractive storage center and i turn con-

travene congressional objectives, we fail to see how the

Imposition of property taxes on goods not intended to be

reexported would be inconsistent with the central pur-

poses behind the establishment of customs bonded ware-

houses.

A case which addressed the preemption question in

relation to facts similar to the present case was Ameri-

can Smelting and Refining Co. v. County of Contra Costa

a ag Pe A I, At,

15a

supra. In American Smelting, a California county levied

nondiscriminatory property taxes on imported metals

stored in customs bonded warehouses for eventual do-

mestic use. The California Court of Appeals sustained

the validity of the property tax on the metals held for

future domestic use. In a very thorough opinion, the

American Smelting court reasoned that the “mere inci-

dent of the time of payment of the federal duty, as con-

trolled by the taxpayer, does not appear to be a rational

criteria upon which to predicate the determination of

the local government’s right to tax.” Id. at 469, 77 Cal.

Rptr. at 593-94. It further stated that the law and

regulations governing customs bonded warehouses do not

compel the conclusion that Congress in the exercise of its

power to regulate foreign commerce meant to create a

warehouse enclave for foreign goods subsequently sold

and consumed in domestic commerce. “All that appears

is an intent to relieve the processor of the obligation to

pay the duty until the refined product is actually con-

sumed or sold in domestic commerce, and the intent to

relieve him of the obligation to pay any duty if the

refined product is exported.” Jd. at 470, 77 Cal. Rptr.

at 594.

We agree and, like the American Smelting court, can

find no “congressional intent [in the customs bonded

warehouse scheme of legislation] to interfere with the

right of the state to tax goods which have been imported

for, and have been appropriated to, processing for domes-

tic consumption, and that such right is not foreclosed be-

cause the importer-processor has withheld payment of

the duty and has given a bond to secure such payment.”

Id. at 481, 77 Cal. Rptr. at 601.

Moreover, both imported and domestic tobacco gener-

ally require aging before manufacture. To exempt im-

ported tobacco aging in customs bonded warehouses from

property taxation while imposing these taxes on domes-

tically-grown tobacco aging in ordinary warehouses would

be unfair. As the American Smelting court observed:

l6a

[I]t would amount to a bounty to the operator of

the tideland smelter processing metal-bearing mate-

rials of foreign origin which are destined for domes-

tic consumption, and a discrimination against oper-

ators of domestic smelters refining domestic ores

which are subject to local taxation.

Id. at 474, 77 Cal. Rptr. at 596-97. Also, since this im-

ported tobacco receives the same local governmental

services, such as police and fire protection, as domestic

tobacco, local taxpayers would be forced to provide a

subsidy in excess of a million dollars to Reynolds for its

imported tobacco if exempted from property taxation.

The U. S. Supreme Court in Michelin, supra, at 289,

96 S. Ct. at 542, 46 L. Ed. 2d at 505, recognized this

problem and determined that local property “taxaticn is

the guid pro quo for benefits actually conferred by the

taxing State. There is no reason why local taxpayers

should subsidize the services used by the importer.”

Therefore, we must affirm the Property Tax Commis-

sion’s conclusion that nondiscriminatory ad valorem per-

sonal property taxes on imported goods stored under

bond in a customs warehouse but not destined for foreign

markets are not prohibited. Since such taxation is not

inconsistent with Xerox or with the purposes behind

Congress’s comprehensive legislative scheme involving

customs bonded warehouses, we hold State property tax-

ation of this tobacco has not been preempted by federal

regulation. Also, because this taxation is not a discrim-

inatory burden on commerce, we hold it is similarly not

prohibited by the Commerce clause.

As its final constitutional argument against the impo-

sition of ad valorem property taxes on its imported to-

bacco, Reynolds asserts that due process prohibits state

taxation of property which is not within the State’s

jurisdiction. Reynolds contends that even though its

17a

imported tobacco may be physically located in ns

and Forsyth Counties, this tobacco is not ange =

State’s jurisdiction until it is withdrawn _— e —

toms bonded warehouse and removed from the con

of customs officials.

Ad valorem property taxation is governed by The

Machinery Act, G.S. 105-271, et seq. G.S. oe _

vides that all property—real and personal—wit in x

jurisdiction of this State, whether owned by a rice

domestic corporation is subject to taxation unless nga

cally excluded or exempted. Under Xerox, = a

ported goods destined for foreign markets wg 4

porarily in customs bonded warehouses have n }-

cluded from local property taxation. As the above “

cussion reveals, imported goods destined for domes .

consumption are not exempt from local property oe

tion. Also, our research has revealed no North oo ‘ina

law excluding the tobacco now in question from taxa oe

As stated in Transfer Corp. v. County of Davidson,

N.C. 19, 24-25, 170 S.E. 2d 873, 878 (1969) :

The test of whether a tax law violates due process

is “whether the taxing power exerted by the per

bears fiscal relation to protection, opportunities an

benefits given by the state. The simple but controlling

question is whether the state has given anything for

which it can ask return.” Wisconsin v. J. C. yen |

Co., 311 U.S. 435, 85 L. Ed. 267, 61 S. Ct. 246, 13

A.L.R. 1229 (1940).

i isputed in this case that the imported tobacco

ane "Reynolds? customs bonded warehouses a

fire and police protection and other services by _ am

and Forsyth Counties. Therefore, under a Due re

clause analysis, Reynolds’ imported tobacco is subject

property taxation just like its domestic tobacco receiving

the same services.

18a

Also, even though Reynolds is technically a New Jersey

corporation, its tobacco physically located in this State is

subject to North Carolina taxation. In In re Plushbottom

and Peabody, 51 N.C. App. 285, 289, 276 S.E.2d 505, 508,

disc. rev. denied, 303 N.C. 314, 281 S.E.2d 653 (1981),

this Court noted that although the situs of personal prop-

erty for purpeses of taxation is ordinarily the domicile

of the owner, when

the owner maintains said property in a jurisdiction

other than that of his domicile, in the conduct of

his business within such jurisdiction, the situs of

said property for purposes of taxation is its actual

situs, and not that of its domicile. [Citation omitted. ]

The “actual situs” of the imported tobacco in question in

this case is its physical location in Durham and Forsyth

Counties. It is clear that a local government may tax

goods, not otherwise exempted, which are receiving local

services and which are physically present within the

State. We hold that the imposition of ad valorem prop-

erty taxes on Reynolds’ imported tobacco does not violate

the Due Process clause of the U. S. Constitution.

In conclusion, we hold, as reflected by the above dis-

cussions, that the imposition of ad valorem property taxes

on Reynolds’ imported tobacco stored in its Durham and

Forsyth Counties customs bonded warehouses is consti-

tutional under the Import-Export clause, Commerce

clause, Supremacy clause, and Due Process clause of the

U. S. Constitution.

Il.

We also note that Durham County cross-assigned as

error the Property Tax Commission’s denial of its mo-

tion to dismiss Reynolds’ appeal on the ground that

Reynolds failed to comply with G.S. 105-324. This statute

species that to perfeet its appeal, the appellant must

file « notice of appeal with the Clerk of the Board of

County Commissioners and with the Property Tax Com-

19a

i i tice

mission. In the present case, Reynolds mailed its no

to S. Bruce Mangum as Clerk of the Board of County

Commissioners instead of Edmund Slade Swindell, J I

who was in fact the Board of County Commissioners

Clerk.

We hold the Property Tax Commission properly denied

Durham County’s motion to dismiss. The record reveals

that Reynolds properly filed its notice with the Commis-

sion. It also mailed the notice to the Durham County at-

torney, the Durham County Tax Supervisor, and to Mr.

S. Bruce Mangum, Clerk to the Durham County Board of

Commissioners, Room 206, County Judicial Building,

Durham, North Carolina 27701. This notice was received

by Durham County. The failure to name the proper per-

son as Clerk of the Board of County Commissioners was

a misnomer and did not preclude the Property Tax Com-

mission from exercising jurisdiction over the matter. Also,

according to the Commission, Durham County conceded

that it had not been prejudiced by Reynolds’ failure to

directly mail a copy to Edmund Slade Swindell, Jr. We

likewise fail to see how Durham County might have been

prejudiced. For these reasons and those given by the

Commission in its final decision, we affirm the denial of

Durham County’s motion to dismiss.

The decision of the Property Tax Commission in all

respects is

Affirmed.

Judges ARNOLD and EAGLES concur.

a a ee

APPENDIX D

Final Decision of North Carolina Property Tax Commission

sitting as the State Board of Equalization and Review,

December 14, 1983

ye oe ee, ee

oon

2la

BEFORE THE PROPERTY TAX COMMISSION

SITTING AS STATE BOARD OF EQUALIZATION

AND REVIEW

STATE OF NORTH CAROLINA

COUNTY OF WAKE

IN THE MATTER OF:

THE APPEAL OF R. J. REYNOLDS TOBACCO COMPANY FROM

THE DENIALS OF ITS CLAIMS FOR EXEMPTION BY DURHAM

COUNTY AND FORSYTH COUNTY FOR 1983

| December 14, 1983}

FINAL DECISION

This matter coming on to be heard, and being heard,

before the Property Tax Commission, sitting as the State

Board of Equalization and Review in the City of Raleigh,

Wake County, North Carolina, on October 27, 1983, pur-

suant to the appeal of the above taxpayer from the de-

nials of its claims for exemption by the Durham County

Board of Equalization and Review and the Forsyth

County Board of Equalization and Review for 1983.

STATEMENT OF CASE

Appellant R. J. Reynolds Tobacco Company (herein-

after Reynolds) timely applied for exemption from prop-

erty taxation for leaf tobacco stored in Durham and

Forsyth Counties as of January 1, 1983. Each county’s

tax supervisor denied the application, and each county’s

board of equalization and review upheld the denial. Ap-

pellant timely appealed the adverse decisions of the

boards to the Property Tax Commission. The appeals

were consolidated for hearing before the Commission.

22a

Prior to the hearing Durham County filed a Motion

to Dismiss the appeal from that county on the ground

that Reynolds failed to perfect its appeal to the Com-

mission. After hearing arguments on that motion at the

outset of the hearing, the Commission took the motion to

dismiss under advisement, and the parties proceeded to

present evidence in the matter.

Reynolds contended to the Commission that imported

tobacco owned by Reynolds and stored in United States

customs bonded warehouses located in Durham and

Forsyth Counties is excluded from ad valorem taxation

by the decision of the Supreme Court of the United States

in Xerox Corporation v. County of Harris, Texas, and

City of Houston, Texas, U.S. , 103 S.Ct. 523,

74 L.Ed. 2d 323 (1982). Durham and Forsyth Counties

contended that the imported tobacco is not excluded from

ad valorem taxation by that decision.

A Motion to Admit Francis H. Skinner to limited prac-

tice before the Commission in this case was allowed.

Reynolds was represented at the hearing by Mr. Skinner

and Thomas L. Kummer.

Durham County was represented by S. C. Kitchen, as-

sistant county attorney.

Forsyth County was represented by P. Eugene Price,

Jr., county attorney, and Jonathan V. Maxwell, assistant

county attorney.

Kernersville was represented by John G. Wolfe, III,

town attorney.

ISSUE

Is the imported tobacco owned by Reynolds and stored

in United States customs bonded warehouses located in

Durham and Forsyth Counties excluded from ad valorem

taxation by those counties in accordance with the deci-

sion of the Supreme Court of the United States in Xerox

Corporation v. County of Harris, Texas, and City of

A Ol lt

23a

Houston, Texas, —— U.S. ——, 103 S.Ct. 523, 74 L.Ed.

2d 323 (1982)?

EVIDENCE

The evidence presented by Reynolds and considered by

the Commission consists of the following:

llant’s Exhibit No. 1—1983 Durham

a ria North Carolina, Business Property

Statement with attached schedule; Letter dated

March 31, 1983, from James T. Barg to Bruce

Mangum; Application for Property Tax Exemp-

tion, dated March 30, 1983.

(2) Appellant’s Exhibit No. 2—Letter dated April

15, 1983, from S. Bruce Mangum to James T.

Barg.

F ibi Personal

(3) Appellant’s Exhibit No. 3—Real or

Saas Complaint, Durham County, dated

April 29, 1983, with attachment.

(4) Appellant’s Exhibit No. 4—Letter dated June 3,

1983, from S. Bruce Mangum to James » Bary;

Minutes, Durham County Board of Equaliza-

tion and Review, May 23, 1983.

(5) Appellant’s Exhibit No. 5A—1983 Forsyth

County Business Personal Property Listing with

attached schedule, Kernersville,

, ibi —- Forsyth

(6) Appellant’s Exhibit No. 5B 1983

an Business Personal Property Listing with

attached schedule, Winston-Salem.

(7) Appellant’s Exhibit No. 6—Letter dated June 2,

1983, from W. Harvey Pardue to James T. Barg.

i ibi — June

(8) Appellant’s Exhibit No. 7—Letter dated

13, 1983, from James W. McGrath to W. Harvey

Pardue.

24a

(9) Appellant’s Exhibit No. 8—Letter dated June

29, 1983, from W. Harvey Pardue to James W.

McGrath.

(10) Appellant’s Exhibit No. 9—Permit Warehouse

Entry, U. S. Customs Service form 7502-A;

Warehouse Permit, Continuation Sheet, Bureau

of Customs form 7502-C.

(11) Appellant’s Exhibit No. 10—Permit, Duty Paid,

Warehouse Withdrawal for Consumption, United

States Customs Service form 7505-A.

(12) Oral testimony of James T. Barg.

(13) Oral testimony of Harry L. Sapp.

The evidence presented by Durham County and con-

sidered by the Commission consists of the following:

(1) Oral testimony of S. Bruce Mangum.

The evidence presented by Forsyth County and consid-

ered by the Commission consists of the following:

(1) Forsyth County Exhibit No. 4—Letter dated

June 3, 1983, from W. Harvey Pardue to James

T. Barg.

(2) Forsyth County Exhibit No. 5—Letter dated

June 21, 1983, from James T. Barg to W. Har-

vey Pardue.

(3) Oral testimony of W. Harvey Pardue.

Reynolds, Durham County and Forsyth County sub-

mitted briefs to the Commission.

In addition to the evidence presented by the parties,

the Commission also considered the following exhibits:

Appeal from Durham County

C-1 Notice of Appeal and Application for Hearing,

dated June 14, 1983.

25a

C-2 Commission’s acknowledgement of Notice of Ap-

peal, dated June 16, 1983.

C-8 County’s Motion to Dismiss, dated July 6, 1983.

C-4 Commission’s acknowledgement of C-3, dated

July 7, 1983.

C-5 Notice to parties of date and time of hearing,

dated August 31, 1983.

C-6 Order on Final Pre-Hearing Conference, ap-

proved October 27, 1983.

C-7 Motion to Admit Francis H. Skinner to Limites

Practice.

Appeal from Forsyth County

C-1 Notice of Appeal and Application for Hearing,

dated July 7, 1983.

C-2 Commission’s acknowledgement of Notice of Ap-

peal, dated July 11, 1983.

C-3 Letter dated July 22, 1983, from P. Eugene

Price, Jr., to Commission, transinitting County’s

Response to Notice of Appeal.

C-4 County’s Response to Notice of Appeal, dated

July 22, 1983.

C-5 Commission’s acknowledgement of C-3 and C-4,

dated July 25, 1983.

C-6 Notices to parties of date and time of hearing,

dated August 31, 1983.

C-7 Letter, dated September 2, 1983, from P. Eugene

Price, Jr., to Commission, transmitting County’s

Amended Response.

C-8 County’s Amended Response, dated September 2,

1983.

26a

C-9 Commission’s acknowledgement of C-7 and C-8,

dated September 8, 1983.

C-10 Letter, dated October 13, 1983, to Commission

from Jonathan V. Maxwell.

C-11 Order on Final Pre-Hearing Conference, ap-

proved October 27, 1983.

C-12 Motion to Admit Francis H. Skinner to Limited

Practice.

FINDINGS OF FACT

Durham County and Reynolds stipulated to the follow-

ing facts, which are hereby adopted by the Commission

as its findings of fact:

(1) R. J. Reynolds Tobacco Company is a New Jer-

sey corporation qualified to do business in the

State of North Carolina, with its principal of-

fices and manufacturing facilities in Winston-

Salem, Forsyth County, North Carolina.

(2) Reynolds is engaged in Forsyth County, North

Carolina, in the business of manufacturing fin-

ished tobacco products.

(3) Reynolds sells such products to wholesale dis-

tributors and other authorized purchasers in

the United States and other countries.

(4) Durham County is a duly authorized taxing

unit of the State of North Carolina. Durham

County, through its tax supervisor, is duly au-

thorized by law to administer tax assessment

matters.

(5) Reynolds uses tobacco grown both in the United

States and in foreign countries in manufactur-

ing its finished tobacco products in Forsyth

County.

(6)

(7)

(8)

(9)

(10)

27a

Reynolds made an application with the County

of Durham for exemption or immunity of im-

ported leaf tobacco stored in customs bonded

warehouses in the County of Durham.

The Board of Equalization and Review of Dur-

ham County denied the application of Reynolds

and notified Reynolds of this denial on June 3,

1983.

Reynolds filed a Notice of Hearing and Appli-

cation for Hearing with the following parties

which was received on June 15, 1983:

Mr. S. Bruce Mangum

Clerk of the Durham County Board of Commis-

sioners

Room 206

County Judicial Building

Durham, North Carolina 27701

Lester W. Owen, Esquire

Durham County Attorney

Post Office Box 810

Durham, North Carolina 27702

Mr. S. Bruce Mangum

County Supervisor of Taxation

Room 206

County Judicial Building

Durham, North Carolina 27701

Eds» Slade Swindell, Jr., is the Clerk of the

Board vf County Commissioners of Durham

County during the time of the Application for

Exemption and continuing to the present.

Customs duties are paid on the imported tobacco

stored in Durham County when the tobacco

leaves the gate of the Durham facility, not

when it arrives in Forsyth County.

28a

Forsyth County and Reynolds stipulated to the follow-

ing facts, which are hereby adopted by the Commission

as its findings of fact:

(11) R. J. Reynolds Tobacco Company is a New Jer-

(12)

(13)

(14)

sey corporation qualified to do business in the

State of North Carolina, with its principal of-

fices and manufacturing facilities in Winston-

Salem, Forsyth County, North Carolina.

Reynolds is engaged in Forsyth County, North

Carolina, in the business of manufacturing fin-

ished tobacco products.

Forsyth County, the City of Winston-Salem, and

the Town of Kernersville are duly authorized

taxing units of the State of North Carolina.

Forsyth County, through its tax supervisor, is

duly authorized by law to administer tax as-

sessment matters on its own behalf and on be-

half of the City of Winston-Salem and Town of

Kernersville.

Reynolds uses tobacco grown both in the United

States and in foreign countries in manufactur-

ing its finished tobacco products in Forsyth

County.

Based on the evidence of record, the Commission makes

the following additional findings of fact:

(15)

(16)

Reynolds, in a schedule attached to its 1983

Durham County Business Property Statement,

informed the county that in addition to leaf

tobacco which it had listed as raw materials,

it also had “exempt” leaf tobacco in storage in

the city and county of Durham, as of December

31, 1982, at a cost of $86,610,659.

Reynolds, in a schedule attached to its 1983

Forsyth County Business Personal Property

(17)

(18)

(19)

(20)

(21)

(22)

(23)

29a

Listing, informed the county that in addition to

leaf tobacco which it had listed as raw mate-

rials, it had “exempt and or immune” leaf to-

bacco in storage in Kernersville, Forsyth

County, as of December 31, 1982, at a cost of

$247,675,428, and in Winston-Salem, Forsyth

County, as of December 31, 1982, at a cost of

$184,773,440.

All of this purportedly “exempt” tobacco in

storage in Durham and Forsyth Counties had

been imported by Reynolds from foreign coun-

tries, including Bulgaria, Syria, Lebanon and

Brazil.

After the tobacco had been shipped by bonded

carrier to the United States, it was unloaded

from the carrier at a port of entry. It was then

transported by rail or truck to a storage facility.

The imported tobacco is placed under customs

bond when it is unloaded at the port of entry,

and it remains under customs bond at all times

thereafter, until it is withdrawn from storage.

Appropriate United States customs documents

are prepared for each shipment of imported

tobacco.

The completed customs forms are maintained

by Reynolds; copies of the forms are submitted

to the United States customs office when each

shipment of the stored tobacco has been con-

sumed.

Until December, 1982, the United States cus-

toms office kept the bonded warehouse records.

The storage facilities in which Reynolds holds

the imported tobacco are United States customs

bonded warehouses, categorized as either Class

2 or Class 8 warehouses.

30a

(24) Reynolds has 26 customs bonded warehouses in

Durham County and 62 customs bonded ware-

houses in Forsyth County.

(25) The Class 8 bonded areas are storage sheds

located in both Durham and Forsyth Counties.

(26) The Class 2 bonded areas are located within the

manufacturing plants owned by Reynolds in

the area of Winston-Salem, Forsyth County,

known as Whitaker Park.

(27) The normal progress of the imported tobacco is

from a Class 8 area to a Class 2 area to the

manufacturing process.

(28) The United States customs bonded warehouses

and the land on which they are situated, in

both Durham and Forsyth Counties, are owned

by Reynolds.

(29) All the property within the bonded warehouses

is owned by Reynolds, and Reynolds is the sole

user of the warehouses.

(30) Reynolds pays all expenses of maintaining and

Supervising the warehouses and the imported

tobacco which is stored therein.

(31) Employees of Reynolds or private security

guards hired by Reynolds guard the storage

facilities.

(32) There are no federal customs Officials on the

bonded premises on a regular basis, although

federal customs officials appear “periodically”

to review the books and records maintained by

Reynolds.

(33) The United States customs office exerts control

over the bonded warehouses through auditors

and unannounced spot checks.

3la

(34) Customs officials have access to the warehouse

facilities 24 hours a day.

(35) As of October 27, 1983, at least three times

since January 1, 1983, a customs official has

appeared on the premises of the bonded ware-

houses.

(36) The imported tobacco may be moved or turned

over by Reynolds while it is in bonded storage.

The tobacco can also be repacked if it has in-

curred damage.

(37) Some of the imported tobacco is already aged

when it arrives in the United States. Ordi-

narily, the remaining tobacco requires an aging

process before it can be used in manufacturing.

(38) Tobacco imported by Reynolds is normally held

in storage for two years before it is used in the

manufacturing process.

(39) Virtually all the stored imported tobacco in

Durham County is or will be used for the do-

mestic manufacture by Reynolds of finished to-

bacco products in Forsyth County.

(40) Reynolds’s purpose for bringing imported to-

bacco into Forsyth County is to blend it with

domestically-grown tobacco in the manufactur-

ing operations in Winston-Salem.

(41) Any tobacco withdrawn from storage is nor-

mally manufactured into finished products within

two weeks.

(42) The manufactured tobacco products are trans-

ported to Reynolds’s wholesale and retail dealers

and distributors within 30 days.

(43) Virtually all the tobacco products manufactured

by Reynolds from imported tobacco are sold and

consumed in the United States.

(44)

(45)

(46)

(47)

(48)

(49)

(50)

(51)

(52)

(53)

32a

None of the imported tobacco in bonded storage

was being held for export by Reynolds.

The imported tobacco can be removed from

bonded storage whenever Reynolds has a need

for it or desires to remove it, upon payment of

the appropriate customs duties.

Customs duties are paid by Reynolds to the fed-

eral government when the imported tobacco is

withdrawn from bonded storage for manufac-

turing.

A customs form 7505-A is required for each

withdrawal.

As of January 1, 1983, customs duties paid or

to be paid by Reynolds on the imported tobacco

totalled 35-40 million dollars in Forsyth County

and 7-8 million dollars in Durham County.

The reason Reynolds stores the tobacco in cus-

toms bonded warehouse is to defer payments of

federal import duties.

All tobacco owned and stored by Reynolds in

non-bonded warehouses is taxed by Durham and

Forsyth Counties.

The customs bonded warehouses and the land

underlying them are subject to property taxa-

tion by both counties at their full tax rates.

The imported tobacco in storage receives fire

and police protection and other services pro-

vided by the city and county of Durham and by

Winston-Salem, Kernersville and Forsyth County.

The property taxes levied on the imported to-

bacco are nondiscriminatory. The applicable

city and county tax rates are the same for the

imported tobacco as for all other stored tobacco.

33a

CONCLUSIONS, DECISION AND ORDER

The Commission first addresses Durham County’s mo-

tion to dismiss the appeal.

Reynolds filed a written notice of appeal and a written

statement of the grounds of appeal with the Property Tax

Commission within the 30-day period prescribed by

N.C.G.S. 105.324(c). In its certificate of service at-

tached to the notice of appeal, Reynolds certified that it

mailed copies of the notice to the following parties:

Mr. S. Bruce Mangum

Clerk to the Durham County Board of Commissioners

Room 206

County Judicial Building

Durham, North Carolina 27701

Lester W. Owen, Esquire

Durham County Attorney

P.O. Box 810

Durham, North Carolina 27702

Mr. S. Bruce Mangum

County Supervisor of Taxation

Room 206

County Judicial Building

Durham, North Carolina 27701

Durham County’s motion to dismiss the appeal is based

on the fact that Edmund Slade Swindell, Jr., and not

S. Bruce Mangum, was clerk of the board of county com-

missioners of Durham County during the relevant time

period.

The Commission denies Durham County’s motion to

dismiss the appeal. Reynolds certified that it had mailed

a copy of its notice of appeal! to the “Clerk to the Durham

County Board of Commissiemers,” although Reynolds in-

correctly named Mr. S. Bruee Mangum as the clerk. The

Commission notes that under N.C.G.S. 105-322(d), it is

34a

the tax supervisor who is named to serve as clerk to the

board of equalization and review, and it is the decision

of the Durham County Board of Equalization and Review

from which Reynolds appealed in this case. Furthermore

Reynolds mailed copies of its notice of appeal to the

Durham County attorney and to the county tax super-

visor, and Durham County concedes that it was not

prejudiced by the failure of Reynolds to mail

Edmund Slade Swindell, Jr. rita

Durham County cites Walter Corporation v. Gilli

260 N.C. 211, 182 S.E. 2d 313 (1963), as authority for

the Commission’s dismissal of this appeal. In that case

there was “an utter disregard for the statutes, rules and

procedures governing appeals.” 260 N.C. at 212. Among

irregularities cited by the Court, there was never an

appeal entered on the judgment docket within 10 days

from the entry of the judgment, and “no notice as con-

templated by the statute was ever given to the adverse

party.” 260 N.C. at 213. The Commission cannot agree

with Durham County that such a situati ists j

situation

case before it. exists in the

The Commission now turns t .

: o the substantive j

presented in this appeal. i

In Xerox Corporation v. County of Harris, Texas, and

City of Houston, Texas, Chief Justice Burger formulated

the question for review by the Supreme Court as follows:

[T]o decide whether a state may impose nondiserimi-

natory ad valorem personal property taxes on imported

goods stored under bond in a customs warehouse and

destined for foreign markets.” 103 S. Ct. at 524, 74

L. Ed. 2d at 326. In that case the importe? yoods were

copying machines which had been assembled by Xerox’s

affiliate in Mexico and then transported to Houston

Texas, where the copiers were stored in a customs bonded

warehouse. For the duration of the storage period the

copiers were “awaiting sale and shipment to Xerox af-

35a

filiates in Latin America.” 103 S. Ct. at 524, 74 L. Ed.

2d at 326. The copiers were designed for sale in Latin

America, and, as the Court pointed out, “None of the

copiers assembled in Mexico and stored in Houston were

ever sold to customers for domestic use; all were ulti-

mately sold abroad. Consequently, Xerox paid no import

duties on them.” 103 S. Ct. at 525, 74 L. Ed. 2d at 327.

Under these factual circumstances, the Supreme Court

answered the question for its review in the negative.

The Property Tax Commission is of the opinion that

the question answered by the Supreme Court in Xerox

is significantly different from the essential question pre-

sented for the Commission’s review. Based on the Com-

mission’s findings of fact numbered 39, 44 and 48, the

Commission concludes that the imported tobacco at issue

in this case, although stored under bond in customs

warehouses in Durham and Forsyth Counties, was clearly

not “destined for foreign markets” as were the imported

copiers in Xerox. One of the criteria enunciated in Xerox,

therefore, is not met in the case before the Commission.

In its discussion in Xerox of the role of government

regulated, bonded warehouses in the history of foreign

commerce, the Court summarized as follows:

In short, Congress created secure and duty free

enclaves under federal control in order to encourage

merchants here and abroad to make use of American

ports. The question is whether it would be compati-

ble with the comprehensive scheme Congress enacted

to effect these goals if the states were free to tax

such goods while they were lodged temporarily in

government regulated bonded storage in this country.

103 S. Ct. at 526-27, 74 L. Ed. 2d at 329. |Em-

phasis supplied. ]

The Commission concludes that the imported tobacco in

this case is not “lodged temporarily in government regu-

lated bonded storage in this country.” Because none of

36a

the imported tobacco is being held for export by Reynolds,

there is nothing temporary about its existence in this

country.

The Xerox opinion cites two cases involving attempts

by the state to tax imported goods stored in customs

bonded warehouses. In McGoldrick v. Gulf Oil Co., 309

U.S. 414, 60 S. Ct. 664, 84 L. Ed. 840, (1939) it was

held that the City of New York could not impose a sales

tax on imported petroleum which, after being refined,

was sold as ships’ stores to vessels bound abroad. The

petroleum was free from all duties and the refined prod-

ucts were noi sold in domestic commerce. In District of

Columbia v. International Distributing Corp., 331 F. 2d

817 (CADC 1964), it was held that the District of Co-

lumbia could not impose an excise tax on the sale of im-

ported alcoholic beverages to foreign embassies while the

beverages were stored in a customs bonded warehouse.

The facts in the case before the Commission are clearly

distinguishable from the facts in the Xerox case and the

cases cited therein. The facts in the case before the

Commission are more nearly like the facts in American

Smelting and Refining Co. v. County of Contra Costa,

271 Cal. App. 2d 437, 77 Cal. Rptr. 570 (1969), appeal

dismissed, 396 U.S. 273, 90 S. Ct. 553, rehearing denied,

397 U.S. 958, 90 S. Ct. 940 (1970), in which it was held

that a state can impose a nondiscriminatory tax on im-

ported goods stored in bonded warehouses when the goods

have been imported for domestic consumption, and not

destined for foreign consumption. Finding of fact 53 sup-

ports the Commission’s conclusion that the property tax

imposed by Durham and Forsyth Counties on the im-

ported tobacco is not discriminatory.

Finally, the Commission notes that while the holding

in Xerox, read without reference to the remaining por-

tions of the opinion, and in particular the question for

review by the Court, might on its face appear to apply

37a

i toms ware .ouse,

oods stored under bond in a cus

: an clear to the Commission that the holding does

not preclude nondiscriminatory ad valorem personal prop-

i bond in a

on imported goods stored under

pir Monge tw Moony but which, and this is the crucial

fact, are not destined for foreign markets.

The Commission holds, therefore, that the ag

County Board of Equalization and Review and t e Fo

syth County Board of Equalization and Review were

correct in denying Reynolds’ claims for ae —

taxation for imported tobacco stored in cus

wh ee aac in Durham and Forsyth Counties as

of January 1, 1983.

WHEREFORE, IT IS ORDERED, ADJUDGED roe

DECREED that the taxation of Reynolds import 4 0-

bacco by Durham and Forsyth Counties be, and it is

hereby, affirmed. | :

Commission Member James E. Long did not participate

in this decision.

Entered this 14th day of December, 1983.

— NORTH CAROLINA PROPERTY

TAX COMMISSION

/s/ Clarence E. Leatherman

CLARENCE E. LEATHERMAN

Vice Chairman

Attest:

/s/ D. R. Holbrook

D. R. HOLBROOK

Secretary

APPENDIX E

Notice of Appeal to the Supreme Court of the

United States from the Judgment of the

Supreme Court of North Carolina,

November 14, 1985

39a

IN THE SUPREME COURT OF NORTH CAROLINA

No. 222P85

IN THE MATTER OF:

THE APPEAL OF R. J. REYNOLDS TOBACCO COMPANY FROM

THE DENIALS OF ITS CLAIMS FOR EXEMPTION By DuR-

HAM COUNTY AND FORSYTH COUNTY FOR 1983.

[Filed Nov. 14, 1985]

NOTICE OF APPEAL TO THE

SUPREME COURT OF THE UNITED STATES

R. J. Reynolds Tobacco Company hereby gives notice

of appeal to the Supreme Court of the United States from

the final judgment of the Supreme Court of North Caro-

lina, dismissing an appeal and denying a petition for dis-

cretionary review, entered on October 2, 1985.

This appeal is taken pursuant to 28 U.S.C. § 1257(2).

/s/ Thomas L. Kummer

THOMAS L. KUMMER

/s/ John A. Cocklereece, Jr.

JOHN A. COCKLEREECE, JR.

Horton, Hendrick & Kummer

450 NCNB Filaza

Winston-Salem, NC 27101

(912) 723-1826

Counsel for Appellant

R. J. Reynolds Tobacco Company

APPENDIX F

Notice of Appeal to the Supreme Court of the

United States from the Judgment of the

North Carolina Court of Appeals,

November 14, 1985

oe ae. EF

4la

IN THE NORTH CAROLINA COURT OF APPEALS

No. 8410PTC481

IN THE MATTER OF:

THE APPEAL OF R. J. REYNOLDS TOBACCO COMPANY FROM

THE DENIALS OF ITS CLAIMS FOR EXEMPTION By DuR-

HAM COUNTY AND FORSYTH COUNTY FOR 1983.

[Filed Nov. 14, 1985]

NOTICE OF APPEAL TO THE

SUPREME COURT OF THE UNITED STATES

R. J. Reynolds Tobacco Company hereby gives notice

of appeal to the Supreme Court of the United States from

the final judgment of the North Carolina Court of Ap-

peals, finding that the levy of an ad valorem property tax

on property stored in a customs bonded warehouse is not

proscribed by the United States Constitution, entered

on April 8, 1985.

This appeal is taken pursuant to 28 U.S.C. § 1257/2).

/s/ Thomas L. Kummer

THOMAS L. KUMMER

/s/ John A. Cocklereece, Jr.

JOHN A. COCKLEREECE, JR.

Horton, Hendrick & Kummer

450 NCNB Plaza

Winston-Salem, NC 27101

(919) 723-1826

Counsel for Appellant

R. J. Reynolds Tobacco Company

APPENDIX G

Portions of the Transcript of the Oral Argument

in Xerox Corp. v. County of Harris,

459 U.S. 145 (1982)

43a

IN THE SUPREME COURT

OF THE UNITED STATES

No. 81-1489

XEROX CORPORATION,

Appellant

Vv.

COUNTY OF HARRIS, TEXAS and

CiTy OF HOUSTON, TEXAS

Washington, D.C.

Wednesday, November 10, 1982

The above-entitled matter came on for oral argument

before the Supreme Court of the United States at 11:02

o’clock a.m.

APPEARANCES:

ALFRED H. HODDINOTT, JR., ESQ., Stamford, Con-

necticut; on behalf of the Appellant.

CHERYL HELENA CHAPMAN, ESQ., Senior Assist-

ant, City Attorney, Houston, Texas; on behalf of the

Appellee

ORAL ARGUMENT OF

ALFRED H. HODDINOTT, JR., ESQ.

ON BEHALF OF THE APPELLANT

* + * +

[10] QUESTION: But you say that this is different

even though Xerox’s stuff, if it had been destined for

44a

domestic use, you have paid taxes on it and it would be

taxable.

MR. HODDINOTT: I am sorry, I didn’t follow the

question, Your Honor.

QUESTION: If the same amount of Xerox computers

had been stored in exactly the same warehouse but

destined for domestic use, you, of course, have paid taxes

on them.

MR. HODDINOTT: When you say destined, Your

Honor, if they had already passed the Customs barrier,

and the duties had been paid, then I would agree, but

until the Customs duties are paid, I submit they are not

taxable.

QUESTION: But it makes no difference to your case

even if they were in the Houston warehouse for 20

[11] years, I take it.

MR. HODDINOTT: No. But it—the Customs stat-

utes permit storage for three years, and it makes a

difference as long as they were there for the three years

permitted by Congress.

* * & *

[21] MR. HODDINOTT: We believe that Xerox’s

copiers were in transit. The courts have consistently held

that when they are in a Customs bonded warehouse, it

is as if they were detained at the border. The cases [22]

cited by appellees and by the court below all related to

interstate commerce, where the goods fell into some state

when the journey ended or where it was—or it was there

before the journey stated. |

Those cases would be applicable to Xerox only if the

goods cleared Customs and entered interstate commerce.

The state can stand at the warehouse door, and the

moment the goods pass through, it can assert its tax,

but those cases involving interstate commerce are not

applicable until then, and our goods were still passing in

foreign commerce,

45a

ORAL ARGUMENT OF

CHERYL HELENA CHAPMAN, ESQ.

ON BEHALF OF THE APPELLEE

* * * ad

ESTION: Well, suppose you had automobiles

po in the same setting as this, destined for

England or Sweden or some other country where y=

have the righthand drive. They could be sold in - e

United [35] States, too, because a great many ogre

or at least some people use a righthand drive car in this

country, but because it was adaptable, if they had been

in bonded warehouses, would that adaptability have any

impact on the legal issues in this case? .

MS. CHAPMAN: Yes. The adaptability has no im-

pact on the legal issues. Our position is that as long as

those goods are stored in Houston for the business a4

venience of Xerox, and there is no question about that,

and the State of Texas has acquired a taxable situs, then

we are entitled to tax those copiers.

QUESTION: But that would be independent of

whether they could be modified for domestic use or not,

i r view.

2 “8. CHAPMAN: Yes, and this Court has addressed

that issue in the case of Kosydar versus—National —

designed for foreign use. a .

QUESTION: Well, a bonded warehouse isn’t avail-

able, is it, for an importer who simply wants to store

his goods in a bonded warehouse pending domestic dis-

tribution?

MS. CHAPMAN: Yes, it is.

QUESTION: So you can bring your goods in and

[36] delay the payment of duty until you get a market

for it in the United States? Sed

MS. CHAPMAN: And that was the original purpose

of the Customs bonded warehousing scheme.

—

46a

QUESTION: Does that have any other consequence

than deferring the payment of the duty?

MS. CHAPMAN: No.

QUESTION: When it enters the country, instead of

paying the duty immediately on entry if it goes into a

bonded warehouse, the duty is deferred until it is taken

out of the bonded warehouse for sale in the United

States. Is that not so?

MS. CHAPMAN: That’s correct.

QUESTION: So a company can just get cheaper

warehousing by using a bonded warehouse. It just de-

pends on what the cost of the bond is as compared to

the domestic taxes.

MS. CHAPMAN: That’s correct, and that is the likely

result if Xerox obtains immunity under the Customs bond

theory. ~

QUESTION: So it really doesn’t make any difference

in this case as to whether they were destined for a

foreign market.

MS. CHAPMAN: Absolutely not.

& * 2 &

ORAL ARGUMENT OF

ALFRED H. HODDINOTT, J., ESQ.,

ON BEHALF OF THE APPELLANT—REBUTTAL

[47] MR. HODDINOTT: I would be happy to try and

answer Justice Blackmun’s question. The copiers could

be worked over at a cost of over $100. It is not im-

possible for them to be used domestically, but it would be

somewhat like Justice Berger’s (sic) automobile. Presum-

ably there is some way to switch the steering wheel

from the right hand to the left hand.

QUESTION: Or you can use it just the way it is.

MR. HODDINOTT: You couldn’t use the Xerox

copier just the way it was—

[48] QUESTION: No, but the automobile.

MR. HODDINOTT :—because of the electricity.

47a

t i i that the

UESTION: Isn’t it true that—Is it true

wali warehouse can be used by an importer who wants

to distribute domestically? Can he use the bonding ware-

house just to postpone the payment of his duties until he

domestic market?

a HODDINOTT: Goods that come from abroad

coming into the United States may be held for up to

three years and then brought in. Indeed, that —

QUESTION: No matter where they are destined.

MR. HODDINOTT: No matter where they are des-

tined. That is indeed the legislative purpose that is set

forth in the Warehousing Act, Your Honor.

QUESTION: Now, would you say that Texas could

levy its tax on the importer who is—who intends to take

oods into the United States?

“a HODDINOTT: The minute it passes through

the warehouse door, Your Honor. Once they are into—

ass through the warehouse door—

. QUESTION: You mean to be stored?

MR. HODDINOTT: No. While they are stored—

QUESTION: Well, is an importer who says, yes,

these are going to be sold in the United States, and he

[49] puts them in a bonded warehouse, and holds them

for two years, may Texas levy a tax while they are in

rehouse?

ay HODDINOTT: No, sir, that is directly opposed

to the legislative purpose of the Warehousing Act.

APPENDIX H

Statement of Congressman Wright,

Certain Trade and Tariff Bills, Hearings before

the Subcomm. on Trade of the House Comm. on Ways

and Means, 98th Cong., Ist Sess., pp. 330-31,

May 10, 1983

49a

STATEMENT OF HON. JIM WRIGHT,

A REPRESENATIVE IN CONGRESS

FROM THE STATE OF TEXAS

Mr. WRIGHT. This is Ernie Dean, the executive di-

rector of the Dallas-Fort Worth Airport Board, and Bill

Methenitis is an attorney for the Dallas-Fort Worth

Foreign Trade Zone. He practices law with the firm of

Strasburger & Price, one of our leading law firms.

This is a very simple proposition which we propose in

H.R. 717, which, incidentally, is cosponsored by our col-

league, Jack Brooks. The bill, quite simply stated, would

exempt from local ad valorem taxation any goods in

foreign commerce that are in a foreign trade zone. That

is what it does, and that is all it does. It is what you

might call a general bill with a local application.

That is what we have here, Mr. Chairman. So far as

I know, in all the United States, there are about 74

active foreign trade zones employing a total of some

29,000 people, and dealing in literally billions of dollars

worth of goods in foreign trade every year.

They assist mightily in our attempting to cope with the

foreign trade deficits that have beset us. They create

employment for people in the United States, not just in

the zones, but in the companies affected by the zones. I

think all of us agree that it is a good thing to have

foreign trade zones permitting the freest flow of trade in

and out of the United States through them.

Now, there is only one case that I am aware of any-

where in the whole United States where a local taxing

authority, a local city has presumed a right to levy local

ad valorem taxes on goods in foreign commerce, the in-

ventories in the foreign trade zone, and that, as luck

would have it, occurred in my district, at the Dallas-Fort

Worth Foreign Trade Zone, where the city of Irving,

eemposed of some very fine Texas citizens, simply mis-

50a

understood the nature of a foreign trade zone and under-

took to levy local ad valorem taxes on all the inventories

that are there in the foreign trade zones.

Well, it occurs that a recent Supreme Court decision

in the case of Xerox versus the County of Harris already

has ruled that you cannot do that with respect to a bonded

warehouse, and I should think that the very same ideuti-

cal provision would apply here. Some States, including

Kentucky, I happen to know, have acted legislatively

within their State legislatures to exempt goods in foreign

trade zones.

We do not think that is necessary that that be done,

but they have undertaken nonetheless to do so, and make

it abundantly clear that none of their local communities

or counties are expected to levy taxes against goods in

transit in a foreign trade zone.

Now, the problem in Texas is compounded by the fact

that we could not just simply get a State legislative enact-

ment in our State legislature expressly exempting these

goods because of a peculiarity in the Texas constitution.

Were we to try to handle it at the local level, we would

have to amend the State constitution.

That, as you may be aware, is a matter of some diffi-

culty, though it has been done several hundred times in

the State of Texas. The legislature has to submit an

amendment on a referendum, and all the voters have to

vote for it, and it is always very confusing, because they

wait until they have about 7 or 8 or 10 such amendments

and then run them en bloc by the voters, and the legisla-

ture is just about to adjourn for the biennium.

Meanwhile, all of these goods out here that are in

inventory in the companies that are engaging in foreign

trade through our foreign trade zone are in jeopardy. It

is very difficult to consummate transactions when the

airport board and the foreign trade zone itself has to

tell additional companies attempting to come in, when

5la

they lie in jeopardy of their — ay — ws

i ing to work on them there 0

x one goods for sale locally or goods they

her with ot

ares to export, that they might be subject to local

taxation by the city of Irving. a

i i oreign trade and in the

refore, in the interest of )oreign

Bn of all of the 74 foreign ~~ “~: go

untry, but primariiy in the interest 0

Pare | Worth zone, where the problem peculiarly oy

would like to suggest and request that you pass this

and incorporate it in your legislation.

I am told that on the Senate side it is contemplated

that the two Texas Senators probably will join me in co-

sponsoring such legislation.

* * bad °

APPENDIX I

Statement of Senator Tower,

129 Cong. Rec. S7748-49

(daily ed. June 6, 1983)

53a

STATEMENT OF SENATOR TOWER

distinguished colleague from Texas, Senator BENTSEN,

in introducing the Bentsen-Tower bill. The Bentsen-

Tower bill is very simply a clarification of existing law

that will remedy a gap in the national uniformity of

treatment of international trade.

Congress created foreign trade zones to make our

country competitive in the international marketplace.

Local taxation of goods located in a foreign trade zone

would, of course, frustrate the congressional purpose.

The Federal preemption of this type of taxation has been

uniformly recognized outside of Texas. However, because

of restrictions in the Texas constitution, the formal

recognition by the State of Texas is not possible.

The lack of a definitive statute in Texas has created a

hesitation among businesses that might otherwise use

Texas foreign trade zones. A State statute is, of course,

not necessary to restate a Federal preemption. A State

statute would be merely gratuitous, to insure that local

authorities comply with Federal law. Without such a

statute to show local assessors, however, businesses are

concerned that they will be forced to go to court in order

to secure an ad valorem tax exemption to which they are

entitled. Although the recent U.S. Supreme Court case of

Xerox Corporation against Harris County seems to make

the state of the law clear, businesses do not like to op-

erate based on how case law would help them if they are

forced to go to court.

By simply restating the existing Federal preemption of

ad valorem taxation, the Bentsen-Tower bill will be able

to facilitate the development of foreign trade zones. In

the past 15 years, the number of jobs in foreign trade

zones have increased by 20 times, and the value of ship-

ments through foreign trade zones has increased to over

54a

$7 billion. This bill will further enhance the growth of

foreign trade zones, and by adding American value to

goods manufactured or assembled in foreign countries,

the deficit in the balance of trade is reduced.

I firmly believe that the enactment of the Bentsen-

Tower bill, by merely clarifying the existing Federal pre-

emption of ad valorem taxation of Federal trade zone

inventory, will enhance the development of all foreign

trade zones and fulfill the congressional intent in estab-

lishing foreign trade zones, the creation of new jobs, and

encouragement of capital investment.®

* * * #

APPENDIX J

House Report No. 267,

98th Cong., Ist Sess., pp. 35-36,

June 24, 1983

eto. ee ee =~ ee ee

=e or. a

55a

HOUSE REPORT NO. 267

PARAGRAPH (b)—EXEMPTION FROM STATE AND

LOCAL AD VALOREM TAXES

(Originally introduced as H.R. 717 by Mr. Wright)

Section 211, paragraph (b), would amend section 15

of the Foreign Trade Zones Act of 1934, to exempt from

State and locai ad valorem taxation tangible personal

property imported from outside the United States and

tangible personal property produced in the United States

and held in a zone for exportation.

The goal of this legislation is to affirm the original

purpose of FTZs (to expedite and encourage foreign com-

merce) and to confirm that Congress intended not to

permit the imposition of such taxes. The new subsection

is designed to insure that FTZs would be uniformly

treated by non-Federal taxing authorities. In addition,

the amendment would eliminate such tax concerns from

among the factors to be considered by potential FTZ

operators or users when deciding where an operation of

¥TZ is to be located.

Further, the bill was introduced due to a unique prob-

lem in the State of Texas in which local taxing jurisdic-

tion does not have the authority to exempt tangible

personal property in a FTZ from taxation due to the

State constitution. The State of Texas’ constitution spe-

cifically provides for certain articles to be exempt from

taxation. No other items can be exempted without a

change in the Constitution. It is expected that Federal

law would preempt State law in this case.

It is the intention of this legislation that the following

considerations would be applied when implementing this

legislation :

(1) Bona fide customs use of Foreign Trade Zone.—

Based upon the practice followed in states already grant-

ing this exemption, by interpretation, the benefits would

56a

apply only to goods in the zone for bona fide customs

reasons.

(2) Machinery and Equipment.—Since the Foreign

Trade Zone Act of 1934 does not apply to machinery and

equipment within a zone for use therein the benefits of

the bill would not extend to such items.

The FTZs were intended by Congress to be special

instrumentalities which would stimulate and facilitate

foreign commerce and which would not be considered as

part of the United States for customs purposes. The

zones are unique and limited federally-created entities;

while the States provide services to the zones, State tax-

ing authority should be viewed in the context of Federal

statutes and regulations and of the Constitution, as well

as the overall framework of State-Federal relations.

It would appear that the principal type of tax which

would be proscribed by the legislation is a personal prop-

erty tax, one levied on goods held by the potential tax-

payer on a given date, especially articles used in com-

merce or inventoried for future sale. Absent this legisla-

tion, such a tax could be arguably assessed on merchan-

dise or materials located or being stored in a FTZ, even

if the materials or articles were intended for export to

countries other than the United States. This form of tax

is generally aimed at raising revenue for the taxing au-

thority, rather than at controlling the use of the prop-

erty; however, the cost of paying a property tax might

be passed along to consumers, raising the price of the

merchandise. Thus, the tax might have the effect of a

duty when imposed on FTZ property, which might be im-

ported into this country, and impinge upon the Congress’

exercise of its Article I authority. While not every State

tax will be found on review to be a prohibited impost or

duty, and while a State may not be discriminating in

assessing the tax on all articles in its geographical terri-

tory regardless of origin, such a tax may constitute a

burden on foreign and interstate commerce, in light of

the subject of the tax.

APPENDIX K

Senate Report No. 308,

98th Cong., Ist Sess., pp. 35-37,

November 10, 1983

je e * 7) lS eee

57a

SENATE REPORT NO. 308

SECTION 214—PRECLUSION OF STATE AND

LOCAL TAXATION OF PERSONAL PROPERTY

IN FOREIGN TRADE ZONES

Current law.—In general, merchandise may be brought

into a foreign trade zone without being subject to the

customs laws of the United States (the Foreign Trade

Zones Act of 1934, 19 U.S. Code sec. 8la et seq.).

Merchandise may generally be stored, sold, exhibited,

broken up, repacked, assembled, distributed, sorted,

graded, cleaned, mixed with foreign or domestic merchan-

dise or otherwise manipulated in a foreign trade zone, or

be manufactured in a foreign trade zone, without being

subject to U.S. customs laws, and it may then be ex-

ported or destroyed without being subject to U.S. customs

laws. This exemption does not apply to machinery and

equipment that is imported for use (for manufacturing

or the like) within a foreign trade zone.

When foreign merchandise moves from a foreign trade

zone into customs territory of the United States it is

subject to the laws and regulations of the United States

affecting imported merchandise. At the point, U.S. im-

port duties apply.

A similar deferral of U.S. import duties applies to

goods stored in government supervised bonded customs

warehouses, which are generally treated as being outside

U.S. customs territory. Only if goods are withdrawn for

domestic sale or stored beyond a prescribed period does

any duty become due. The Supreme Court of the United

States has ruled that Congress’s comprehensive regula-

tion of customs duties preempts state property taxes on

goods stored under bond in a customs warehouse (Xerox

Corp. v. County of Harris, Texas, and City of Houston,

Texas, No. 81-1489, December 13, 1982).

The bill.—Section 214 would amend section 15 of the

Foreign Trade Zones Act of 1934 to make it clear that

58a

tangible personal property imported from outside the

United States and held in a foreign trade zone for the

purpose of storage, sale, exhibition, repackaging, as-

sembly, distribution, sorting, grading, cleaning, mixing,

display, manufacturing, or processing, and tangible per-

sonal property produced in the United States and held in

a zone for exportation, either in its original form or as

altered by any of the above processes, would be exempt

from State and local ad valorem taxation . . . The bill

would preempt State law of local law imposing ad

valorem taxation on such property.

As for imported goods, the benefits of the bill would

apply only to goods in a foreign trade zone for bona fide

customs reasons. That is, it would not apply to property

imported into the United States for use in manufactur-

ing within a foreign trade zone (rather than for sale).

Moreover, the Foreign Trade Zone Act of 1934 does not

apply to machinery and equipment within a zone for use

therein, so the benefits of the bill would not extend to

those items whatever their origin.

As for U.S.-produced property, the benefits of the bill

would apply only if the property were held in the zone

for exportation. The benefits would not apply to U.S.-

produced property that was present in the zone for com-

bination with imported property or for other processing

if the U.S.-produced property were destined for later use

in or sale into the United States. By contract, the bene-

fits would apply to U.S.-produced property that was pres-

ent in the zone for combination with imported property

or for other processing if the U.S.-produced property were

destined for later use or sale outside the United States.

Reason for provision.—Local taxing jurisdictions in

Texas may seek to declare exemptions for property taxes

on some tangible personal property stored in foreign trade

zones, but are precluded from doing so by the Texas

Constitution. The local foreign trade zones thus are dis-

59a

advantaged in promoting the benefits of zones in their

localities. The committee is unaware of any states or

localities outside the State of Texas that seek to impose

property taxes on tangible personal property located in

foreign trade zones for bona fide customs reasons, or have

a bar similar to that in Texas that would preclude locali-

ties from declaring an exemption to such a tax.

APPENDIX L

Statutes and Regulations Involved

1. Title 19, United States Code (1982) -.............

2. Article 12, North Carolina Genera! Statutes.

3. Title 19, Code of Federal Regulations (1983)

eee ewww nnne

6la

TITLE 19, UNITED STATES CODE (1982)

§ 1555. Bonded warehouses

Buildings or parts of buildings and other enclosures

may be designated by the Secretary of the Treasury as

bonded warehouses for the storage of imported merchan-

dise entered for warehousing, or taken possession of by

the appropriate customs officer, or under seizure, or for

the manufacture of merchandise in bond, or for the re-

packing, sorting, or cleaning of imported merchandise.

Such warehouses may be bonded for the storing of such

merchandise only as shall belong or be consigned to the

owners or proprietors thereof and be known as private

bonded warehouses, or for the storage of imported mer-

chandise generally and be known as public bonded ware-

houses. Before any imported merchandise not finally re-

leased from customs custody shall be stored in any such

premises, the owner or lessee thereof shall give a bond in

such sum and with such sureties as may be approved by

the Secretary of the Treasury to secure the Government

against any loss or expense connected with or arising

from the deposit, storage, or manipulation of merchan-

dise in such warehouse. Except as otherwise provided in

this chapter, bonded warehouses shall be used solely for

the storage of imported merchandise and shall be placed

in charge of a proper officer of the customs, who, to-

gether with the proprietor thereof, shall have joint custody

of all merchandise stored in the warehouse; and all labor

on the merchandise so stored shall be performed by the

owner or proprietor of the warehouse, under supervision

of the officer of the customs in charge of the same, at the

expense of the owner or proprietor. The compensation of

such officer of the customs and other customs employees

appointed to supervise the receipt of merchandise into

any such warehouse and deliveries therefrom shall be

62a

reimbursed to the Government by the proprietor of such

warehouse.

(June 17, 1930, ch. 497, title IV, § 555, 46 Stat. 743;

June 2, 1970, Pub. L. 91-271, title III, § 301(b), 84 Stat.

287.)

§ 1556. Bonded warehouses; regulations for establishing

The Secretary of the Treasury shall from time to time

establish such rules and regulations as may be necessary

for the establishment of bonded warehouses and to pro-

tect the interests of the Government in tne conduct, man-

agement, and operation of such warehouses and in the

withdrawal of and accounting for merchandise deposited

therein.

(June 17, 1930, ch. 497, title IV, § 566, 46 Stat. 743.)

§ 1557. Entry for warehouse

(a) Withdrawal of merchandise; time; payment of

charges

Any merchandise subject to duty, with the exception of

perishable articies and explosive substances other than

firecrackers, may be entered for warehousing and be de-

posited in a bonded warehouse at the expense and risk of

the owner’ purchaser, importer, or consignee. Such mer-

chandise may be withdrawn, at any time within 5 years

from the date of importation, for consumption upon pay-

ment of the duties and charges accruing thereon at the

rate of duty imposed by law upon such merchandise at

the date of withdrawal; or may be withdrawn for ex-

portation or for transportation and exportation to a for-

eign country, or for shipment or for transportation and

shipment to the Virgin Islands, American Samoa, Wake

Island, Midway Islands, Kingman Reef, Johnston Island,

or the island of Guam, without the payment of duties

1 So in original. Probably should be followed by a comma.

63a

thereon, or for transportation and rewarehousing at an-

other port or elsewhere, or for transfer to another bonded

warehouse at the same port: Provided, That the total

period of time for which such merchandise may remain

in bonded warehouse shall not exceed 5 years from the

date of importation. Merchandise upon which the duties

have been paid and which shall have remained continu-

ously in bonded warehouse or otherwise in the custody

and under the control of customs officers, may be entered

or withdrawn at any time within 5 years after the date

of importation for exportation or for transportation and

exportation to a foreign country, or for shipment or for

transportation and shipment to the Virgin Islands, Ameri-

can Samoa, Wake Island, Midway Islands, Kingman Reef,

Johnston Island, or the island of Guam, under such regu-

lations as the Secretary of the Treasury shall prescribe,

and upon such entry or withdrawal, and exportation or

shipment, the duties thereon shall be refunded.

(b) Transferral of right of withdrawal

The right to withdraw any merchandise entered in ac-

cordance with subsection (a) of this section for the pur-

poses specified in such subsection may be transferred

upon compliance with regulations prescribed by the Sec-

retary of the Treasury and upon the filing by the trans-

feree of a bond in such amount and containing such

conditions as the Secretary of the Treasury shall pre-

scribe. The bond shall include an obligation to pay, with

respect to the merchandise the subject of the transfer, all

unpaid regular, increased, and additional duties, all un-

paid taxes imposed upon or by reason of importation, and

all unpaid charges and exactions. Such transfers shall

be irrevocable, shall relieve the transferor from all cus-

toms liability with respect to obligations assumed by the

transferee under the bond herein provided for, and shall

confer upon the transferee all rights to the privileges pro-

vided for in this section and in sections 1562 and 1563

64a

of this title which were vested in the transferor prior to

the transfer. The transferee shall also have the right to

receive all lawful refunds of money paid by him to the

United States with respect to the merchandise the sub-

ject of the transfer, and shall have the right to file a

protest under section 1514 of this title to the same extent

that such right would have been available to the trans-

feror. Notice of liquidation shall be given to the trans-

feree in the form and manner prescribed by the Secretary

of the Treasury. A transferee may further transfer the

right to withdraw merchandise, subject to the provisions

of this subsection relating to original transfers.

Merchandise entered under bond, under any provision

of law, may, upon payment of all charges other than duty

on the merchandise, be destroyed, at the request and at

the expense of the consignee, within the bonded period

under customs supervision, in lieu of exportation, and

upon such destruction the entry of such merchandise shall

be liquidated without paymen’ of duty and any duties

collected shall be refunded.

(d) Withdrawal before payment

Merchandise may be withdrawn for consumption with-

out the payment of the duty thereon if the importer of

record or transferee is permitted to pay duty at a later

time pursuant to regulations prescribed by the Secretary

under section 1505 of this title.

(June 17, 1930, ch. 497, title IV, § 557, 46 Stat. 744;

June 25, 1938, ch. 679, §§ 2, 22(a), 23(a), 52 Stat. 1077,

1087, 1088; Aug. 8, 1953, ch. 397, § 21(a), 67 Stat. 519;

June 30, 1955, ch. 258, § 2(a) (4), 69 Stat. 242; June 2,

1970, Pub. L. 91-271, title III, § 301(t), 84 Stat. 290;

Jan. 12, 1971, Pub. L. 91-685, § 1, 84 Stat. 2069; Oct. 3,

1978, Pub. L. 95-410, title I, § 108(a), (b) (1), 92 Stat.

892; Jan. 12, 1983, Pub. L. 97-446, title II, § 201(f), 96

Stat. 2350.)

65a

§ 1558. No remission or refund after release of mer-

chandise

(a) Exceptions

No remission, abatement, refund, or drawback of esti-

mated or liquidated duty shall be allowed because of the

exportation or destruction of any merchandise after its

release from the custody of the Government, except in

the following cases:

(1) When articles are exported with respect to

which a drawback of duties is expressly provided

for by law;

(2) When prohibited articles have been regi arly

entered in good faith and are subsequently expurted

or destroyed pursuant to a law of the United States

and under such regulations as the Secretary of the

Treasury may prescribe; and

(3) When articles entered under bond, under any

provision of law, are destroyed within the bonded

period as provided for in section 1557 of this title,

or are destroyed within the bonded period by death,

accidental fire, or other casualty, and proof of such

destruction is furnished which shall be satisfactory to

the Secretary of the Treasury, in which case any

accrued duties shall be remitted or refunded and any

e.adition in the bond that the articles shall be ex-

ported shall be deemed to have been satisfied.

(b) Payment of duties: required notwithstanding export

or destruction of articles; exception

When articles are exported or destroyed under customs

supervision after once having been released from customs

custody, as provided for in subsection (c) of section 1304

of this title, such exportation or destruction shall not

exempt such articles from the payment of duties other

66a

than the marking duty provided for in such subsection

(ec).

(June 17, 1930, ch. 497, title IV, § 558, 46 Stat. 744;

June 25, 1938, ch. 679, § 24, 52 Stat. 1088.)

§ 1559. Warehouse goods deemed abandoned after 5 years

Merchandise upon which any duties or charges are un-

paid, remaining in bonded warehouse beyond 5 years

from the date of importation, shall be regarded as aban-

doned to the Government and shall be sold under such

regulations as the Secretary of the Treasury shall pre-

scribe, and the proceeds of sale paid into the Treasury, as

in the case of unclaimed merchandise covered by section

1493 of this title, subject to the payment to the owner

or consignee of such amount, if any, as shall remain

after deduction of duties, charges, and expenses. Mer-

chandise upon which all duties and charges have been

paid, remaining in bonded warehouse beyond 5 years

from the date of importation, shall be held to be no longer

in the custody or control of the officers of the customs.

(June 17, 1930, ch. 497, title IV, § 559, 46 Stat. 744;

June 25, 1938, ch. 679, § 23(a), 52 Stat. 1088; Oct. 3,

1978, Pub. L. 95-410, title I, § 108(b) (1), 92 Stat. 892.)

$1560. Leasing of warehouses

The Secretary of the Treasury may cause to be set

aside any available space in a building used as a custom-

house for the storage of bonded merchandise or may lease

premises for the storage of unclaimed merchandise or

other imported merchandise required to be stored by the

Government, and set aside a portion of such leased prem-

ises for the storage of bonded merchandise: Provided,

That no part of any premises owned or leased by the

Government may be used for the storage of bonded mer-

chandise at any port at which a public bonded warehouse

has been established and is in operation. All the premises

67a

so leased shall be leased on public account and the stor-

age and other charges shall be deposited and accounted

for as customs receipts, and the rates therefor shall not

be less than the charges for storage and similar services

made at such port of entry by commercial concerns for

the storage and handling of merchandise. No officer of

the customs shall own, in whole or in part, any bonded

warehouse or enter into any contract or agreement for

the lease or use of any building to be thereafter erected

as a public store or warehouse. No lease of any building

to be so used shall be taken for a longer period than

three years, nor shall rent for any such premises be

paid, in whole or in part, in advance.

(June 17, 1930, ch. 497, title IV, $560, 46 Stat. 745;

June 2, 1970, Pub. L. 91-271, title III, § 301/u), 84 Stat.

290.)

§ 1561. Public stores

Any premises owned or leased or leased by the Gov-

ernment and used for the storage of merchandise for the

final release of which from customs custody a permit has

not been issued shall be known as a “public store.”

(June 17, 1930, ch. 497, title IV, $ 561, 46 Stat. 745.)

$1562. Manipulation in warehouse

Unless by special authority of the Secretary of the

Treasury, no merchandise shall be withdrawn from

bonded warehouse in less quantity than an entire bale,

cask, box, or other package; or, if in bulk, in the entire

quantity imported or in a quantity not less than one ton

weight. All merchandise so withdrawn shall be with-

drawn in the original packages in which imported un-

less, upon the application of the importer, it appears to

be the appropriate customs officer that it is necessary

to the safety or preservation of the merchandise to re-

pack or transfer the same: Provided, That upon permis-

68a

sion therefor being granted by the Secretary of the

Treasury, and under customs supervision, at the expense

of the proprietor, merchandise may be cleaned, sorted

repacked, or otherwise changed in condition, but not man-

ufactured, in bonded warehouses established for that

purpose and be withdrawn therefrom for exportation to

a foreign country or for shipment to the Virgin Islands

American Samoa, Wake Island, Midway Islands, King-

man Reef, Johnston Island, or the island of Guam. with-

out payment of the duties, or for consumption, upon pay-

ment of the duties accruing thereon, in its condition and

quantity, and at its weight, at the time of withdrawal

from warehouse, with such additions to or deductions

from the final appraised value as may be necessary by

reason of change in condition. The basis for the assess-

ment of duties on such merchandise so withdrawn for

consumption shall be the adjusted final appraised value

and if the rate of duty is based upon or regulated in any

manner by the value of the merchandise, such rate shall

be based upon or regulated by such adjusted final ap-

praised value. The scouring or carbonizing of wool shall

not be considered a process of manufacture within the

provisions of this section. Under such regulations as the

Secretary of the Treasury shall prescribe, imported mer-

chandise which has been entered and which has remained

In continuous customs custody may be manipulated in ac-

cordance with the provisions of this section under ens

toms supervision and at the risk and expense of the

consignee, but elsewhere than in a bonded warehouse. in

cases where neither the protection of the revenue nor ‘the

proper conduct of customs business requires that such

manipulation be done in bonded warehouse.

(June 17, 1930, ch. 497, title IV, § 562 :

June 25, 1938, ch. 679, §§2, 25, 52 righ yh

Aug. 8, 1953, ch. 397, § 18(f), 67 Stat. 518: Jane 30

1955, ch. 258, §2(a) (5), 69 Stat. 242: June 2 1970,

Pub. L. 91-271, title III, §391(b), 84 Stat.287)

69a

§ 1563. Allowance for loss, abandonment of warehouse

goods

(a) Abatement or allowance for deterioration, loss or

damage to merchandise in customs custody; exception

In no case shall there be any abatement or allowance

made in the duties for any injury, deterioration, loss, or

damage sustained by any merchandise while remaining

in customs custody, except that the Secretary of the

Treasury is authorized, upon production of proof satisfac-

tory to him of the loss or theft of any merchandise while

in the appraiser’s stores, or of the actual injury or de-

struction, in whole or in part, of any merchandise by ac-

cidental fire or other casualty, while in bonded ware-

house, or in the appraiser’s stores, or while in transpor-

tation under bond, or while in the custody of the officers

of the customs, although not in bond, or while within the

limits of any port of entry and before having been

landed under the supervision of the officers of the cus-

toms, to abate or refund, as the case may be, the duties

upon such merchandise, in whole or in part, and to pay

any such refund out of any moneys in the Treasury not

otherwise appropriated, and to cancel any warehouse bond

or bonds, or enter satisfaction thereon in whole or in

part, as the case may be, but no abatement or refund

shall be made in respect of injury or destruction of any

merchandise in bonded warehouse occurring after the

expiration of three years from the date of importation.

The decision of the Secretary of the Treasury as to the

abatement or refund of the duties on any such mer-

chandise shall be final and conclusive upon all persons.

The Secretary of the Treasury is authorized to pre-

scribe such regulations as he may deem necessary to

carry out the provisions of this subdivision and he may

by such regulations limit the time within which proof

of loss, theft, injury, or destruction shall be submitted,

and may provide for the abatement or refund of duties,

70a

as authorized herein, by appropriate customs officers in

cases in which the amount of the abatement or refund

claimed is less than $25 and in which the importer has

agreed to abide by the decision of the customs officer.

The decision of the customs officer in any such case shall

be final and conclusive upon all persons.

(b) Abandonment of merchandise to Government; re-

mittal or refund of duties paid

Under such regulations as the Secretary of the Treas-

ury may prescritgend subject to any conditions imposed

thereby the consignee may at any time within three years

from the date of original importation, abandon to the

Government any merchandise in bonded warehouse, where-

upon any duties on such merchandise may be remitted or

refunded as the case may be, but any merchandise so

abandoned shall not be less than an entire package and

shall be abandoned in the original package without hav-

ing been repacked while in a bonded warehouse (other

than a bonded manipulating warehouse).

(June 17, 1930, ch. 497, title IV, § 563, 46 Stat. 746;

June 25, 1938, ch. 679, § 23(a), 52 Stat. 1088; June 2,

1970, Pub. L. 91-271, title III, § 301(v), 84 Stat. 290.)

§1564. Liens

Whenever a customs officer shall be notified in writing

of the existence of a lien for freight, charges, or con-

tribution in general average upon any imported mer-

chandise sent to the appraiser’s store for examination,

entered for warehousing or taken possession of by him,

he shall refuse to permit delivery thereof from public

store or bonded warehouse until proof shall be produced

that the said lien has been satisfied or discharged. The

rights of the United States shall not be subjected or af-

fected by the filing of such lien, nor shall the United

States or its officers be liable for losses or damages con-

sequent upon such refusal to permit delivery. If mer-

Tla

chandise, regarding which such notice of lien has been

filed, shall be forfeited or abandoned and sold, the freight,

charges, or contribution in general average due thereon

shall be paid from the proceeds of such sale in the same

manner as other lawful charges and expenses are paid

therefrom.

(June 17, 1930, ch. 497, title IV, § 564, 46 Stat. 747;

June 2, 1970, Pub. L. No. 91-271, title III, § 301(w), 84

Stat. 290.)

§ 1565. Cartage

The cartage of merchandise entered for warehouse shall

be done by cartmen to be appointed and licensed by the

appropriate customs officer and who shall give a hond

in a penal sum to be fixed by such customs officer, for, the

protection of the Government against any loss of, or dam-

age to, such merchandise while being so carted. The

cartage of merchandise designated for examination at the

appraiser’s stores and of merchandise taken into custody

by the customs officer as unclaimed shall be performed by

such persons as may be designated, under contract or

otherwise, by the Secretary of the Treasury, and under

such regulations for the protection of the owners thereof

and of the revenue as the Secretary of the Treasury

shall prescribe.

(June 17, 1930, ch. 497, title IV, §$ 565, 46 Stat. 747;

June 2, 1970, Pub. L. 91-271, title III, § 301(x), 84

Stat. 290.)

72a

ARTICLE 12, GENERAL STATUTES OF

NORTH CAROLINA

§ 105-274. Property subject to taxation—(a) All

property, real and personal, within the jurisdiction of

the State shall be subject to taxation unless it is:

(1) Excluded from the tax base by a statute of state-

wide application enacted under the classification

power accorded the General Assembly by Ar-

ticle V, § 2(2), of the North Carolina Constitu-

tion, or

(2) Exempted from taxation by the Constitution or

by a statute of statewide application enacted

under the authority granted the General As-

sembly by Article V, § 2(3), of the North Caro-

lina Constitution.

(b) No provision of this Subchapter shall be construed

to exempt from taxation any property situated in this

State belonging to any foreign corporation unless the

context of the provision clearly indicates a legislative

intent to grant such an exemption. (1939, c. 310, ss. 303,

1800; 1961, c. 1169, s. 8; 1967, ¢. 1185; 1971, c. 806,

s. 1.)

73a

TITLE 19, CODE OF

FEDERAL REGULATIONS (1983)

$19.1 Classes of customs warehouses.

(a) Customs warehouses shall be designated according

to the following classifications:

(1) Class 1. Premises owned or leased by the Govern-

ment and used for the storage of merchandise undergoing

examination of the Customs Officer, under seizure, or

pending final release from Customs custody. Unclaimed

merchandise stored in such premises shall be held under

“general order.” ?

‘Vhen such premises are not sufficient or available for

the storage of seized and unclaimed goods, such goods

1“Any premises owned or leased by the Government and used

for the storage of merchandise for the final release of which from

customs custody a permit has not been issued shall be known as a

‘public storage.’” (Tariff Act of 1930, sec. 561; 19 U.S.C. 1561)

2“The Secretary of the Treasury may cause to be set aside any

available space in a building used as a customhouse for the storage

of bonded merchandise or may lease premises for the storage of

unclaimed merchandise or other imported merchandise required

to be stored by the Government, and set aside a portion of such

leased premises for the storage of bonded merchandise: Provided,

That no part of any premises owned or leased by the Government

may be used for the storage of bonded merchandise at any port

at which a public bonded warehouse has been established and is in

operation. All the premises so leased shall be leased on public

account and the storage and other charges shall be deposited and

accounted for as customs receipts, and the rates therefor shall not

be less than the charges for storage and similar services made at

such port of entry by commercial concerns for the storage and

handling of merchandise. No collector or other officer of the customs

shall own, in whole or in part, any bonded warelouse or enter into

any contract or agreement for the lease or use of any building to be

thereafter erected as a public store or warehouse. No lease of any

building to be so used shall be taken for a longer period than three

years, nor shall rent for any such premises be paid, in whole or in

part, in advance.” (Tariff Act of 1930, sec. 560; 19 U.S.C. 1560)

74a

may be stored in a warehouse of class 3, 4, or 5. So far

as such warehouses are used for this purpose, they shall

be designated “bonded stores.” If there are no ware-

houses of these classes available, the district director may,

with the approval of Headquarters, U-S. Customs Service,

rent suitable premises for the storage of seized and un-

claimed goods.*

(2) Class 2. Importers’ private bonded warehouses used

exclusively for the storage of merchandise belonging or

consigned to the proprietor thereof. A warehouse of class

4 or 5 may be bonded exclusively for the storage of goods

imported by the proprietor thereof, in which case it shall

be known as a private bonded warehouse.

(3) Class 3. Public bonded warehouses used exclusively

for the storage of imported merchandise.

(4) Class 4. Bonded yards or sheds for the storage of

heavy and bulky imported merchandise; stables, feeding

pens, corrals, or other similar buildings or limited en-

closures for the storage of imported animals; and tanks

for the storage of imported liquid merchandise in bulk.

If the district director deems it necessary, the yards shall

be enclosed by substantial fences with entrances and exit

gates capable of being secured by the proprietor’s locks.

The inlets and outlets to tanks shall be secured by means

of seals or the proprietor’s locks.

3“Buildings or parts of buildings and other inclosures may be

designated by the Secretary of the Treasury [Commissioner of

Customs] as bonded warehouses for the storage of imported mer-

chandise entered for warehousing, or taken possession of by the

collector, or under seizure, or for the manufacture of merchandise

in bond, or for the repacking, sorting, or cleaning of imported

merchandise. Such warehouses may be bonded for the storing of

such merchandise only as shall belong or be consigned to the owners

or proprietors thereof and be known as private bonded warehouses,

or for the storage of imported merchandise generally and be known

as public bonded warehouses. * * *” (Tariff Act of 1930, sec. 555;

19 U.S.C. 1555)

75a

(5) Class 5. Bonded bins or parts of buildings or of

elevators to be used for the storage of grain. The bonded

portions shall be effectively separated from the rest of the

building.

(6) Class 6. Warehouses for the manufacture in bond,

solely for exportation, of articles made in whole or in part

of imported materials or of materials subject to internal-

revenue tax; and for the manufacture for home consump-

tion or exportation of cigars in whole of tobacco im-

ported from one country.*

*“All articles manufactured in whole or in part of imported

materials, or of materials subject to internal-revenue tax, and in-

tended for exportation without being charged with duty, and with-

out having an internal-revenue stamp affixed thereto, shall, under

such regulations as the Secretary of the Treasury may prescribe,

in order to be so manufactured and exported, be made and manu-

factured in bonded warehouses similar to those known and desig-

nated in Treasury Regulations as bonded warehouses, class six:

Provided, That the manufacturer of such articles shall first give

satisfactory bonds for the faithful observance of all the provisions

of law and of such regulations as shall be proscribed by the Secre-

tary of the Treasury:

Provided, further, That the manufacture of distilled spirits from

grain, starch, molasses, or sugar, including all dilutions or mixtures

of them or either of them shall not be permitted in such manu-

facturing warehouses.

“Whenever goods manufactured in any bonded warehouse estab-

lished under the provisions of the proceding paragraph shall be

duly laden for transportation and immediate exportation under the

Supervision of the proper officer who shall be duly designated for

that purpose, such goods shall be exempt from duty and from the

requirements relating to revenue stamps.

“No flour, manufactured in a bonded manufacturing warehouse

from wheat imported after ninety days from the date of the enact-

ment of this Act shall be withdrawn from such warehouse for

exportation without payment of a duty on such imported wheat equal

to any reduction in duty which by treaty will apply in respect of

such flour in the country to which it is to be exported.

“Any materials used in the manufacture of such goods, and any

packages, coverings, vessels, brands, and labels used in putting up

76a

the same may, under the regulations of the Secretary of the

Treasury, be conveyed without the payment of revenue tax or duty

into any bonded manufacturing warehouse, and imported goods

may, under the aforesaid regulations be transferred without the

exaction of duty from any bonded warehouse into any bonded

manufacturing warehouse; but this privilege shall not be held to

apply to implements, machinery, or apparatus to be used in the

construction or repair of any bonded manufacturing warehouse or

for the prosecution of the business carried on therein.

“Articles or materials received into such bonded manufacturing

warehouse or articles manufactured therefrom may be withdrawn

or removed therefrom for direct shipment and exportation or for

transportation and immediate exportaticn in bond to foreign coun-

tries or to the Philippine Islands under the supervision of the officer

duly designated therefor by the collector of the port, who shall

certify to such shipment and exportation, or ladening for transpor-

tation, as the case may be, describing the articles by their mark

or otherwise, the quantity, the date of exportation, and the name of

the vessel: Provided, That the by-products incident to the processes

of manufacture, including waste derived from cleaning rice in

bonded warehouses under the Act of March 24, 1874, in said bonded

warehouses may be withdrawn for domestic consumption on the

payment of duty equal to the duty which would be assessed and

collected by law if such waste or by-products were imported from

a foreign country: Provided, That all waste material may be

destroyed under Government supervision. All labor performed and

services rendered under these provisions shall be under the super-

vision of a duly designated oificer of the customs and at the expense

of the manufacturer.

“A careful account shall be kept by the collector of all merchandise

delivered by him to any bonded manufacturing warehouse, and a

sworn monthly return, verified by the customs officers in charge,

shall be made by the manufacturer containing a detailed statement

of all imported merche~dise used by him in the manufacture of

exported articles.

“Before commencing business the proprietor of any manufactur-

ing warehouse shall file with the Secretary of the Treasury a list

of all the articles intended to be manufactured in such warehouse,

and state the formula of manufacture and the names and quantities

of the ingredients to be used therein.

“Articles manufactured under these provisions may be with-

drawn under such regulations as the Secretary of the Treasury may

77a

(7) Class 7. Warehouses bonded for smelting and re-

fining imported metal-bearing materials for exportation

or domestic consumption.®

prescribe for transportation and delivery into any bonded ware-

house at an exterior port for the sole purpose of immediate export

therefrom: Provided, That cigars manufactured in whole of tobacco

imported from any one country, made and manufactured in such

bonded manufacturing warehouses, may be withdrawn for home

consumption upon the payment of the duties on such tobacco in its

condition as imported under such regulations as the Secretary of

the Treasury may prescribe and the payment of the internal-revenue

tax accruing on such cigars in their condition as withdrawn, and

the boxes or packages containing such cigars shall Le stamped to

indicate their character, origin of tobacco from which made, and

place of manufacture.

“The provisions of section 3433 of the Revised Statutes shall, so

far as may be practicable, apply to any bonded manufacturing

warehouse established under this Act and to the merchandise con-

veyed therein.

“Distilled spirits and wines which are rectified in bonded manu-

facturing warehouses, class six, and distilled spirits which are

reduced in proof and bottled in such warehouses, shall be deemed

to have been manufactured within the meaning of this section, and

may be withdrawn as hereinbefore provided, and likewise for ship-

ment in bond to Puerto Rico, subject to the provisions of this

section, and under such regulations as the Secretary of the Treasury

may prescribe, there to be withdrawn for consumption or be reware-

housed and subsequently withdrawn for consumption: Provided,

That upon withdrawal in Puerto Rico for consumption, the duties

imposed by the customs laws of the United States shall be collected

on all imported merchandise (in its condition as imported) and

imported containers used in the manufacture and putting up of

such spirits and wines in such warehouses: Provided further, That

no internal-revenue tax shall be imposed on distilled spirits and

wines rectified in class six warehouses if such distilled spirits and

wines are exported or shipped in accordance with the provisions of

this section, and that no person rectifying distilled spirits or wines

in such warehouses shall be subject by reason of such rectification

to the payment of special tax as a rectifier.” (Tariff Act of 1930,

sec. 311, as amended, 19 U.S.C. 1311)

5“(a) Any plant engaged in smelting or refining, or both, of

metal-bearing materials as defined in this section may, upon the

78a

(8) Class 8. Bonded warehouse established for the pur-

pose of cleaning, sorting, repacking, or otherwise chang-

ing in condition, but not manufacturing, imported mer-

chandise, under Customs supervision and at the expense

of the proprietor.*®

giving of satisfactory bond, be designated a bonded smelting or

refining warehouse. * * *” (Tariff Act of 1930, sec. 312, as amended;

19 U.S.C. 1312.)

*“Unless by special authority of the Secretary of the Treasury,

no merchandise shall be withdrawn from bonded warehouse in less

quantity than an entire bale, cask, box, or other package; or, if in

bulk, in the entire quantity imported or in a quantity not less

than one ton weight. All merchandise so withdrawn shall be with-

drawn in the original packages in which imported unless, upon the

application of the importer, it appears to the collector that it is

necessary to the safety or preservation of the merchandise to

repack or transfer the same: Provided, That upon permission

therefor being granted by the Secretary of the Treasury, and

under customs supervision, at the expense of the proprietor, mer-

chandise may be cleaned, sorted, repacked, or otherwise changed in

condition, but not manufactured, in bonded warehouses established

for that purpose and be withdrawn therefrom for exportation to a

foreign country or for shipment to the Virgin Islands, American

Samoa, Wake Island, Midway Islands, Kingman Reef, Johnston

Island, or the island of Guam, without payment of the duties, or

for consumption, upon payment of the duties accruing thereon, in

its condition and quay ~ nd at its weight, at the time of with-

drawal from warehr 3s ' uch additions to or deductions from

in condition. The

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