Petition for Writ of Certiorari — Itel Containers Int'l Corp. v. Huddleston

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In the Supreme Court of the United States

OCTOBER TERM, 1991

ITEL CONTAINERS INTERNATIONAL CORPORATION,

PETITIONER

Vv.

JOE HUDDLESTON, COMMISSIONER OF REVENUE,

STATE OF TENNESSEE, RESPONDENT

Petition for a Writ of Certiorari to the

Tennessee Supreme Court

PETITION FOR A WRIT OF CERTIORARI

PHILIP W. COLLIER ANDREW L. FREY

Counsel of Record CHARLES ROTHFELD

JAMES C. SEIFFERT Mayer, Brown & Platt

T. MORGAN WARD, JR. 2000 Pennsylvania Avenue, N.W.

Stites & Harbison Washington, D.C. 20006

600 West Main Street (202) 463-2000

Louisville, KY 40202

(502) 587-3400

Counsel for Petitioner

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

QUESTIONS PRESENTED

1. Whether the Foreign Commerce Clause precludes the

imposition of a state sales tax on the lease of instruments

of international traffic that enter the United States under

Customs bond and are used exclusively in foreign com-

merce.

2. Whether the imposition of such a tax is preempted

by the Customs Conventions on Containers.

3. Whether the Import-Export Clause precludes the

imposition of a state sales tax on imported or exported

goods while they are in transit.

(i)

RULE 29.1 STATEMENT

Petitioner Itel Containers International Corporation is

a wholly owned subsidiary of Itel Corporation. Itel Con-

tainers International Corporation has two partially-owned

subsidiaries, SSI Containers, Ltd., and Itel Containers

International, SRL.

TABLE OF CONTENTS

Page

ny: | i

> ii

En iv

OPINIONS BELOW .................... Saatiiaddiesiinaaseiesussteaisdi 1

EE ESE 1

CONSTITUTIONAL, STATUTORY, AND REGULA-

TORY PROVISIONS INVOLVED |... 2

isa ccentscmsscnesssiniesccstsavacscnssecoses 2

REASONS FOR GRANTING THE PETITION __....... 8

I. APPLICATION OF A STATE SALES TAX TO

INSTRUMENTALITIES OF FOREIGN COM-

MERCE IS INCONSISTENT WITH THE FOR-

EIGN COMMERCE CLAUSE .........0002.020000........ 9

Il. A STATE SALES TAX ON CONTAINERS

USED EXCLUSIVELY IN FOREIGN COM-

MERCE VIOLATES THE CONTAINER CON-

EES EE 17

Ill. A STATE TAX ON GOODS THAT ARE MOV-

ING IN FOREIGN COMMERCE VIOLATES

THE IMPORT-EXPORT CLAUSE 0... 23

Nee cs sca ssnsnssentsseneccesorersseccsee 28

(iii)

TABLE OF AUTHORITIES

CASES: wage

Beare Co. v. Olsen, 711 S.W.2d 603 (Tenn. 1986)... 6, 16

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

CIQTT) nccnnneoeceeeasecinsevneescosesscccencssnsensssesesneveocsonsoonsnsees 10

Container Corp. v. Franchise Tax Board, 463 U.S.

DI CIID cnceceeccccnesisvss snes nnenenssecsnetevcenenminiee 10, 12, 13, 17

Department of Revenue v. Ass’n of Washington

Stevedoring Cos., 435 U.S. 734 (1978) .........7, 9, 23, 24,

26, 27

Henneford v. Silas Mason Co., 300 U.S. 577

CBOIDD oan cccnensnsnnenassvnsecsenencccrrvsnvnntesansesnenenenscsnonse 13

Hines v. Davidowitz, 312 U.S. 52 (1941) .............. ai 17

Hooten v. Carson, 209 S.W.2d 273 (Tenn. 1948) .... 14

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

is @ 8) | eee passim

Louisiana Land & Exploration Co. v. Pilot Petro-

leum Corp., 900 F.2d 816 (5th Cir. 1990), cert.

denied, 111 S. Ct. 248 (1990) ........ WSs oS ROO 9, 23, 25

Low v. Austin, 80 U.S. (13 Wall.) 29 (1872) ....... 23

McGoldrick v. Gulf Oil Corp., 309 U.S. 414 (1940)... 7, 17,

20, 21

Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976)... 7, 23,

24, 27

Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S.

GE CD vaiiciaccinstinesinsnsntsssninnntcinnninnivanitatnnniaetiiinioncamtiies 11

National Life & Accident Ins. Co. v. Keaton, 1986

Westlaw 4846 (Tenn. App.) _................---------------- 26

R.J. Reynolds Tobacco Co. v. Durham County, 479

MN a ocasnaniamnninabennanien 15, 16, 20, 22, 24

Richfield Oil Corp. v. State Board of Equalization,

IT, Ge I cock cctcncaisercsnesncessondanevnanmnabereesersons 7,9, 23

Sam Carey Lumber Co. v. Sixty-One Cabinet Shop,

Inc., 773 S.W.2d 252 (Tenn. App. 1989) ............. 14

Sears Roebuck & Co. v. County of Los Angeles, 449

A fearon 16

South Central Timber Development, Inc. v. Wun-

colatnn,, GET TEED. GR CIE) ncce-aonceece-enccccecereconsecensee 9

Star-Kist Foods, Inc. v. Los Angeles, 719 P.2d 987

(Cal. 1986), cert. denied, 480 U.S. 930 (1987)... 17

TABLE OF AUTHORITIES—Continued

; Page

Wardair Canada, Inc. v. Dept. of Revenue, 477 U.S. ,

SRR een Theta airborne) (2: 11, 12, 20

Willams v. Vermont, 472 U.S. 14 RRR ats 13

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

SEAT RRS LS EOS ee Dee eel 7, 15, 17, 20, 21, 22

UNITED STATES CONSTITUTION:

Commerce Clause, Art.I,§8,ClL3..... sis passim

Supremacy Clause, Art. VI,Cl.2. sts passim

NT: 22, 23, 24,

25, 26, 27

TREATIES OF THE UNITED STATES:

Customs Convention on Containers, May 18, 1956,

ee ee 2,3, 8, 14,17

Customs Convention on Containers, December 2,

1972, [1985] 988 U.N.T.S.48... 2, 3, 8, 19, 22

International Convention for Safe Containers, De-

cember 2, 1972, [1979] 39 U.S.T. 3707... 19

FEDERAL STATUTES:

ee aD 2, 4, 18, 22

1.1. Ve)... &»

FEDERAL REGULATIONS

I I i ecceesteoceemre ies srtineceoe sc, 2,4, 5

1...

WO I ese

19C.F.R. pt.115 8 § 889

SrCerz2. +13... er

| TENNESSEE STATUTES:

Tenn. Code Ann. 67-6-102 (23) (A) I sts 2,4,6

Tenn. Code Ann. 67-6-313 (1989). sit 13

Tenn. Code Ann. 67-6-502 (1971) ..... sits 6,14

Tenn. Code Ann. 67-6-507 (1990)... ss 13

MISCELLANEOUS:

Bureau of the Census SM705

TABLE OF AUTHORITIES—Continued

International Institute of Container Lessors as

Amicus Curiae .......---------- aconseeceennnteeeennnesecenness suiiabel

I J. Hellerstein, State Taxation (1983) eve sescenseseenees

McCray, Commerce Clause Sanctions Against Tax-

ation on Mail Order Sales: A Re-Evaluation, 17

Urb. Law. 529 (1985) .............-....---------- seesesssenseees

O0.J. Eur. Comm. (No. L 145) 1 (1977) (Sixth

Directive, 77/388) .......----------------- sovseeeeenngeseeecensses

Simon, The Law of Shipping Containers, 5 J. Mar.

L. & Com. 507 (1974) .......-------------e-eeeeeeeeeeeteeeetees

Treasury Department’s Model Income Tax Treaty

of June 16, 1981, Tax Treaties (CCH) { 211, at

10,576 (1990) ...........-----------c-eeeceeeeseeeseeeceeteenaeseseess

United Nations Doc. E.ConrF. 59/2 (Feb. 22,1971)...

United Nations Doc. E.Conr. 59/16 (Nov. 26,

BITE * :sccciicscsnnsiabunleneivinangetuddeiieies seseeececenennnasssteneeennnnessseee

U.S. Br. in support of prob. jur., No. 84-902 ..........

U.S. Br. as Amicus Curiae, No. 77-1378 ................--

Page

In the Supreme Court of the United States

OCTOBER TERM, 1991

No.

ITEL CONTAINERS INTERNATIONAL CORPORATION,

PETITIONER

Vv,

JOE HUDDLESTON, COMMISSIONER OF REVENUE,

STATE OF TENNESSEE, RESPONDENT

Petition for a Writ of Certiorari to the

Tennessee Supreme Court

PETITION FOR A WRIT OF CERTIORARI

OPINIONS BELOW

The opinion of the Supreme Court of Tennessee ( App.

infra, la-18a) is designated for publication but has not

yet been published. The opinion of the Tennessee Court

of Chancery (App., infra, 19a-26a) is not reported.

JURISDICTION

The judgment of the Tennessee Supreme Court was

entered on April 22, 1991. On July 10, 1991, Justice Ste-

vens extended the time within which to file the petition

to and including August 21, 1991. The jurisdiction of this

Court is invoked under 28 U.S.C. 1257(a).

CONSTITUTIONAL, STATUTORY, AND

REGULATORY PROVISIONS INVOLVED

The relevant portions of the following constitutional,

statutory, and regulatory provisions are reproduced in

the appendix to the petition at 38a-44a: the Commerce

Clause (Art. I, § 8, Cl. 3), the Import-Export Clause

(Art. I, § 10, Cl. 2) and the Supremacy Clause (Art. VI,

Cl. 2) of the United States Constitution; the Customs

Convention on Containers, Dec. 2, 1972, 988 U.N.T.S. 43;

the Customs Convention on Containers, May 18, 1956,

[1969] 20 U.S.T. 301; 19 U.S.C. 1822(a); 19 C.F.R.

10.41a(1) (a); 19 C.F.R. 115.1; and Tenn. Code Ann.

67-6-102 (1989).

STATEMENT

This case involves a challenge to the imposition of Ten-

nessee’s sales tax on the lease of cargo containers used

exclusively in foreign commerce; the tax was upheld by

Tennessee courts against an attack grounded on the

United States Constitution. The containers subject to tax

were Customs bonded and sealed instruments of interna-

tional traffic prohibited from use in domestic commerce.

Most lessees of the containers, who in large part absorb

the tax, are foreign domiciliaries. The exaction of the

tax therefore both imposes an unwarranted burden on

goods exported from and imported to the United States,

and threatens to prompt retaliation by our trading part-

ners against American firms. Because the decision below

is inconsistent with holdings of this Court—and because

the Tennessee tax places the United States in violation

of its international treaty obligations—further review is

warranted.

The Container Industry. Cargo containers are spe-

cially manufactured steel boxes, typically eight feet high,

eight to 9.5 feet wide, and between eight and 40 feet

long, that are used as articles of transport equipment.

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

434, 436 n.1 (1979). Because they are reusable, may be

a and unloaded mechanically, and are designed

ee by truck, rail, and oceangoing vessel, con-

a ave greatly reduced the cost of shipping cargo.

a ee ytd Shipping Containers, 5 J. Mar. L

. 507, ). Their use in recent 5 is

often described as having revolutionized the ati of

goods (see id. at 507), and containers now provide the prin-

cipal means for marine transportation of imported and

exported goods. Containers accounted for 60% of the

value of American marine imports and 52% of the value

of American marine exports in 1990. Bureau of the

Census SM705. The value of American goods exported b

container in 1990 exceeded $84 billion. Jbid. rae snd

were utilized for the marine transport of a variet f

crucial American exports in 1990: 59% of the a :

exported chemicals and related products, 61% of the

a of exported machinery and transport equipment

Yo of the value of manufactured goods and 89% of th '

value of exported beverages and tobacco. Ibid a

25% of these containers, with a market value of 2 a,

mately $2.5 billion, are owned by firms domiciled in the

United States. Br. of Internationa] Institute of Con-

tainer Lessors ; ;

Ce at 2 as Amicus Curiae before the Tenn. Sup.

The Customs Conventions. The use i i

foreign commerce is promoted and bacon d rey the 1972

eg Convention on Containers (the “1972 Conven-

wy A sped eng 43, acceded to by the United States

oh 5, and the 1956 Customs Convention on Containers

" a see Convention”), May 18, 19638, [1969] 20

. .-T, 301." The chief device for promoting international

shipment of goods by container is the fiction of “tempo-

rary admission”: the Conventions prevent pels

from entering th :

e domestic commer q :

nation. ce of any signatory

'The 1972 Convention re

; ; places the 1956 Convention i

between signatories to the 1972 Convention. eS oe

The 1972 Convention obligates signatory nations to ad-

mit containers “free of import duties and taxes and —

of import prohibitions and restrictions’ (Arts. 1(b), ,

988 U.N.T.S. 44-45). The term “import duties and taxes

is broadly defined to ‘mean Customs duties and all wea

duties, taxes, fees and other charges which are collecte

on, or in connection with, the importation of goods, but

not including fees and charges limited in amount to the

approximate cost of services rendered.” Art. 1(a), id. at

44 (emphasis supplied). The 1972 Convention regures

strict regulatory compliance to qualify for these benefits.

The Conventions have been implemented in the United

States by statute and regulation. The Secretary of the

Treasury, acting pursuant to 19 U.S.C. 1322 ( a) , has desig-

nated containers as “instruments of international traffic

that are excepted from application of the Customs laws.

19 C.F.R. 10.41a(a) (1), (3).° To receive this special treat-

ment, however, a container owner must provide assur-

ances that its containers will not be used in interstate or

intrastate commerce; if the containers are diverted to

point-to-point local use within the United States, the

owner must make entry and pay the applicable Customs

duty. Each owner must post a continuous bond with the

Customs Service to secure compliance with this under-

2 The 1972 Convention limits the use of containers in domestic

traffic (art. 9, id. at 46; Annex 3, id. at 52) and provides for the

admission of container parts and accessories (art. 10-11, id. at 46),

the approval of containers used to transport goods under Customs

seal (art. 12, id. at 47; Annex 5, id. at 61-67), the making of con-

tainers (Annex 1, id. at 51-52), the obligations uf container owners

(Annex 2, id. at 52), and the design of containers (Annex 4, id. at

52-61).

3 Containers are one of many articles that have been designated

as instruments of international traffic by the Customs Service, in-

cluding skids, pallets, cores for textile fabrics and other permanent

items used to facilitate international transport. The Secretary of

the Treasury has similarly excepted locomotives, buses, trucks and

taxicabs that are used solely in foreign commerce from entry or

the payment of duties. 19 C.F.R. pt. 123.

taking. 19 C.F.R. 10.4la(a), (c), 113.66. In addition,

19 C.F.R. pt. 115 implements the 1972 Convention’s pro-

cedures for the certification and approval of containers

used in transporting goods under Customs seal. Compli-

ance with the procedures allows steamship lines to move

containers from the point of loading to the ultimate des-

tination without the presentation of papers to or inspec-

tion by Customs officials.

Itel’s Business. Itel is a Delaware corporation with

its principal place of business in California. During the

relevant period, it leased cargo containers that were used

exclusively in foreign commerce. The containers were

manufactured and purchased abroad by Itel, and entered

the United States certified for the transport of goods un-

der Customs seal. Itel posted a continuous bond with

the Customs Service undertaking not to withdraw its con-

tainers from foreign commerce. All of Itel’s leases accord-

ingly restricted use of the containers to international

commerce. App., infra, 2a. The leases were solicited and

negotiated through marketing offices in California, Texas,

Illinois, New Jersey, South Carolina and Washington. In

addition, Itel operated container terminals and made use

of so-called “third-party” terminals—facilities operated

by independent contractors that tendered delivery and

accepted returns of containers—worldwide. Itel allowed

its lessees to accept delivery of and return containers at

the terminals. Jd. at 31a.

Ite] operated one terminal and used several third party

terminals in Tennessee. Containers were delivered at

those points to common carriers hired by Itel’s lessees, who

initially’ used the containers to export goods from the

United States. None of the leases during the relevant

period, however, was solicited, negotiated, or executed in

Tennessee. App., 2a-3a, 30a-33a. Most of the lessees who

accepted delivery of containers in Tennessee were inter-

national steamship lines domiciled in foreign countries,

including companies domiciled in Australia, Colombia,

France, Germany, Iceland, Israel, New Zealand, Norway,

Singapore, Sweden, Switzerland, the United Kingdom,

and Venezuela. Trial Tr. 31-33. While each container

initially was used to export American goods to foreign

ports, most containers were used continuously in multi-

ple import-export shipments. All of Itel’s leases culmi-

nated with an import shipment terminating in a Customs

Convention signatory nation; 61% of the leases concluded

with the importation of goods into the United States.

Itel Trial Ex. 3, 7, 13.

The Assessment. In 1986, the Tennessee Department

of Revenue assessed Itel $348,571 in back sales taxes,

penalties and interest on the proceeds earned from the

lease * of containers that Itel delivered in Tennessee to

international carriers.’ While Itel is obligated to collect

the tax from its lessees “insofar as it can be done” (Tenn.

Code Ann. 67-6-502 (1971)), the legal incidence of the

tax falls on Itel, and only Itel may contest its imposition.

See Beare Co. v. Olsen, 711 S.W.2d 603, 605 (Tenn.

1986). Itel accordingly paid the tax under protest and

began this action for a refund, challenging the constitu-

tionality of the tax under the Commerce, Import-Export,

and Supremacy Clauses of the United States Constitu-

tion. The Tennessee Chancery Court rejected the claim.

App., infra, 19a-26a.°

The State Court Opinion. The Tennessee Supreme

Court affirmed. App., infra, la-18a. It recognized this

Court’s holding in Japan Line that a state ad valorem

property tax on containers owned by foreign domiciliaries

violates-the Foreign Commerce Clause. The court also

4 Tennessee’s 5.5% sales tax is imposed on “any transfer of title

or possession, or both, exchange, barter, lease or rental * * * for a

consideration.” Tenn. Code Ann. 67-6-102(23)(A) (1989).

5 Petitioner already was paying sales and use taxes on fees col-

lected in connection with repair services performed at its Memphis

terminal. Those taxes are not at issue here. See App., infra, 2a-3a.

6 The court reduced the assessment by $224,453 on other grounds,

however. The State did not appeal the reduction.

acknowledged that “Itel’s containers, like Japan Line’s

containers, are instrumentalities of foreign commerce”

(id. at 7a), and it expressly declined to distinguish

Japan Line on the ground that in this case the tax hap-

pens to fall on a domestic domiciliary. Jd. at Ta-Sa.

Instead, the court found a constitutional distinction be-

tween sales and property taxes (see id. at 12a), holding

that state sales taxes by their very nature satisfy the

requirements of the Foreign Commerce Clause because

they pose no risk of multiple taxation (id. at 14a-15a)

and cannot interfere with the federal government’s man-

agement of foreign relations or international trade. Jd.

at 15a-16a. |

The court next held that the Tennessee tax was not

preempted by the Container Conventions and the Treas-

ury Department’s implementing regulations. It distin-

guished this Court’s decisions in Xerox Corp. v. Harris

County, 459 U.S. 145 (1982), and McGoldrick v. Gulf

Oil Corp., 309 U.S. 414 (1940) (holding that state prop-

erty and sales taxes are preempted by federal statutes

that exempt goods from Customs duties when they are

stored under bond in designated warehouses), finding

that federal regulation of Customs bonded containers is

“less pervasive” than the regulation of Customs bonded

warehouses. App., infra, 14a. The court also reasoned

that preemption is inappropriate because the Container

Conventions were not intended to benefit container own-

ers. Id. at 10a.

Finally, the court turned aside Itel’s claim under the

Import-Export Clause. In rejecting the argument that

the Tennessee tax is invalid under Richfield Oil Corp. v.

State Board of Equalization, 329 U.S. 69 ( 1946), the

court below evidently concluded that Richfield’s holding

did not survive this Court’s more recent decisions in

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

Department of Revenue v. Ass’n of Washington Steve-

doring Cos., 485 U.S. 734 (1978). See App., infra,

16a-17a. And in applying the Import-Export Clause

test set out in Michelin, the court again found it disposi-

tive that the tax at issue here is one on sales rather than

on property. Jd. at 18a.

REASONS FOR GRANTING THE PETITION

This case presents issues of considerable importance to

the foreign relations and import/export trade of the United

States. The United States and 52 other nations, as sig-

natories to the Customs Conventions on Containers, have

pledged to erase international borders for purposes of

container transport. To this end, the Customs Conven-

tions prohibit import duties or taxes except fees limited

to the approximate cost of services rendered. The Con-

ventions do not allow any other form of local taxation.

Moreover, the custom of the signatory nations under the

Conventions is to abstain from imposing transaction

taxes upon sales or leases of containers. Because the

Conventions reflect ‘‘a national policy to remove impedi-

ments to the use of containers as ‘instruments of inter-

national traffic,’”’ Tennessee’s imposition of sales tax

“impair[s] federal uniformity in an area where federal

uniformity is essential.” Japan Line, Ltd. v. County of

Los Angeles, 441 U.S. 434, 448, 453 (1979). Moreover,

since Tennessee’s sales taxes will be paid, in substantial

part, by foreign steamship lines and container lessors,

the decision below invites retaliation against domestic

firms by our trading partners.

At the same time, the tax will both increase the cost

of American exports and discourage the use of American

containers, effects that will impose disproportionate bur-

dens on American firms engaged in foreign commerce.

Because more than $84 billion in American exports are

carried in containers annually, the imposition of a “transit”’

fee on the cransfer of containers will have a substantial

impact on America’s import and export trade. Further,

approximately 25% of all containers, representing a mar-

ket value of $2.5 billion, are owned by firms domiciled in

the United States; state taxes on the transfer of these

containers will put this crucial domestic industry at a

significant competitive disadvantage.

Finally, this case presents recurring issues of considerable

importance under the Foreign Commerce, Supremacy and

Import-Export Clauses. The decision of the Tennessee

Supreme Court disregards “sensitive matters of foreign

relations and national sovereignty” recognized by the

Court in Japan Line, 441 U.S. at 456, and conflicts di-

rectly with the Court’s holding in Richfield and the Fifth

Circuit’s recent decision in Louisiana Land & Exploration

Co. v. Pilot Petroleum Corp., 900 F.2d 816 (5th Cir.

1990), cert. denied, 111 S. Ct. 248 (1990). In Dept. of

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

U.S. 734, 737 n.23 (1978), the Court explicitly reserved

the Import-Export Clause issue present here. Further

review accordingly is warranted.

I. APPLICATION OF A STATE SALES TAX TO IN-

STRUMENTALITIES OF FOREIGN COMMERCE IS

INCONSISTENT WITH THE FOREIGN COMMERCE

CLAUSE

Japan Line. in Japan Line, the leading case under

the Foreign Commerce Clause, this Court invalidated a

state ad valorem property tax on containers that were

owned by foreign domiciliaries and used in foreign com-

merce. See 441 U.S. at 437. The Court observed that

state taxes on foreign commerce, in contrast to parallel

levies on interstate trade, pose both an “enhanced risk of

multiple taxation” (id. at 446) and the prospect of “im-

pair{ing] federal uniformity in an area where federal

uniformity is essential.” Jd. at 448. See also South Cen-

tral Timber Development, Inc. v. Wunnicke, 467 U.S. 82,

92 n.7 (1984). The Court accordingly held that an in-

quiry into the constitutionality of a state tax on foreign

commerce has two parts:

[A] court must * * * inquire, first, whether the tax,

notwithstanding apportionment, creates a substantial

risk of international multiple taxation, and, second,

whether the tax prevents the Federal Government

from ‘speaking with one voice when regulating com-

mercial relations vith foreign governments.’ If a

state tax contravenes either of these precepts, it is

unconstitutional under the Commerce Clause.

Japan Line, 441 U.S. at 451.7 The Court later explained

that a state tax “will violate the ‘one voice’ standard if

it either implicates foreign policy issues which must be

left to the Federal Government or violates a clear federal

directive.” Container Corp. v. Franchise Tax Board, 463

U.S. 159, 194 (1983).

Like Japan Line, this case involves a state tax on con-

tainers whose movements in the taxing jurisdiction “are

essential to, and inseparable from, the containers’ efficient

use as instrumentalities of foreign commerce.” 441 U.S.

at 437. In distinguishing Japan Line—which it recog-

nized would otherwise be controlling—the court below

grounded its decision entirely on the legal conclusion that

a state sales tax “is distinguishable from a direct ad

valorem property tax” for purposes of the Foreign Com-

merce Clause. App., infra, 12a. In going on to hold

that a sales tax is exempt from the requirements of the

Clause, the court explained that “the transfer of con-

tainers is a discrete transaction, occurring only in Ten-

nessee, which creates no risk of multiple international

taxation.” Jd. at 14a (footnote omitted). As for the

other concerns identified in Japan Line, the court simi-

larly reasoned that none “are implicated by a sales tax

on a discrete transaction occurring only in one jurisdic-

tion.” Jd. at 16a.

7A state tax on foreign commerce also must satisfy the separate

test established in Complete Auto Transit, Inc. v. Brady, 430 U.S.

274 (1977), for the analysis of burdens on interstate commerce. See

Japan Line, 441 U.S. at 451. At this point, it is not disputed that

the Tennessee tax passes the Complete Auto test.

Sales Taxes and the Foreign Commerce Clause. This

issue—whether sales and similar transaction taxes are

inherently immune from challenge under the Foreign

Commerce Clause—is a recurring one of great practical

importance. While the Court has addressed the applica-

tion of the Clause to state property taxes (in Japan Line)

and apportioned net income taxes (in Container Corp.;

see also Mobil Oil Corp. v. Commissioner of Taxes, 445

U.S. 425, 448 (1980)), it has reserved the question as

to sales taxes. Holding in Wardair Canada, Inc. v. Dept.

of Revenue, 477 U.S. 1 (1986), that the federal govern-

ment had affirmatively permitted application of the

Florida sales tax to aviation fuel sold to foreign carriers

(see 477 U.S. at 3-4, 9-10, 12), the Court expressly noted

that “nothing in this opinion should be understood to ad-

dress{] whether, in the absence of these international

agreements .[permitting state taxation], the Foreign

Commerce Clause would invalidate Florida’s tax.” Jd. at

13. That sales tax issue, which may arise frequently,

warrants the “ourt’s attention and is fairly presented in

this case. Sales and use taxes, currently imposed by 45

States, are ubiquitous; if the decision below is left stand-

ing, many States surely will follow Tennessee’s lead and

apply their local taxes to containers and other instru-

mentalities of foreign commerce. Cf. Japan Line, 441

U.S. at 453 & n.19. And as the examples of Wardair and

this case make clear, Foreign Commerce Clause issues in-

volving sales taxes may appear in a wide range of con-

texts. The Court should grant review to settle the consti-

tutionality of such taxes. |

That is especially so because the decision below cannot

be reconciled with the principles set down by this Court.

In Wardair, Justice Blackmun, the only Member of the

Court to reach the constitutional issue, flatly rejected

reasoning of the sort relied upon by the court below,

finding that “|t]he tax imposed in this case by Florida

on fuel is indistinguishable, for Commerce Clause pur-

poses, from the tax imposed by California on containers

in Japan Line.” 477 U.S. at 18 (Blackmun, J., dissent-

ing). That was the case, Justice Blackmun explained,

because “other countries may react to Florida’s tax with

various retaliatory measures against United States car-

iers abroad, retaliation that ‘of necessity would be felt by

the Nation as a whole.’” Jd. at 20, quoting Japan Line,

441 U.S. at 45. Similarly, the United States, whose views

are entitled to considerable deference in this area (see

Container Corp., 463 U.S. at 195-196), took the position

in Wardair that Florida’s sales tax involved “the regula-

tion of those aspects of foreign commerce which by their

very nature require uniform national treatment.” U.S.

Br. in support of prob. jur., No. 84-902 at 9. :

Risk of Multiple Taxation. These conclusions, which

are compelled by the Court’s decisions, apply with equal

force to Tennessee’s tax. At the outset, the state court’s

suggestion that duplicative taxation is impossible in the

ease of a transfer tax, because the taxable event occurs

only in one jurisdiction, was far too facile. In fact, other

nations may impose compensating use or similar taxes

upon containers delivered in Tennessee; similarly, be-

cause liability for the Tennessee taxes arises from only

one of several facets of a lease—the transfer of physical

possession—a sales tax may be imposed in other nations

on the same lease transaction (for example, by taxing

the execution of the lease). As a matter of economic sub-

stance, such taxes would duplicate Tennessee’s sales tax."

§ The court below relied (App., infra, 14a) on the Court’s ob-

servation in Wardair that there was no prospect of duplicative

taxation because the Florida tax was imposed on “a discrete trans-

action which occurs within one national jurisdiction only.” 477

U.S. at 9. As the point was conceded by the taxpayer, however

(see ibid.), the Court had no occasion to consider the prospect of

compensating taxes in other nations. In fact, the special nature of

the event taxed in Wardair made compensating levies impossible.

First, as a matter of law, the prospect of double taxation of aviation

fuel was precluded by a treaty that prohibits localities from taxing

fuel “‘on board an aircraft * * * on arrival’ * * * [but] does not

prohibit taxation of fuel purchased in that country.” Jd. at 10.

Second, as a matter of fact, the United States carefully explained

Bites

Indeed, Tennessee recognizes this and provides an offset

for such taxes paid to other States when interstate com-

merce is involved; no such credit is provided, however,

when foreign commerce suffers multiple taxation. See

Tenn. Code Ann. 67-6-313(f) (1989), -507 (1990). If

applied by other nations, such taxes “ ‘inevitably’ [would

lead] to double taxation.” Container Corp., 463 U.S. at

193. Whether the risk of such duplicative taxation is

enough to invalidate a state tax is an important question

that was expressly left open in Japan Line. 441 US. at

452 n.17.

The “One Voice” Test. As for the so-called “one voice”

prong of the Japan Line test, the Court has explained

that “{a] state tax on instrumentalities of foreign com-

merce may frustrate the achievement of federal uniform-

ity in several ways.” Japan Line, 441 U.S. at 450. In

particular, “{i]f a novel state tax creates an asymmetry

in the international tax structure, foreign nations disad-

vantaged by the levy may retaliate against American-

owned instrumentalities present in their jurisdictions. “

Id. at 450. And so far as containers are concerned, the

Court concluded in Japan Line that “{t]he desirability

of uniform treatment of containers used exclusively in

foreign commerce is evidenced by the [1956] Customs

Convention on Containers.” 441 U.S. at 452.

Here, the Tennessee tax is a novel one that “creates

an asymmetry in international maritime taxation.”

that, “far from being able to tax the event of sale, foreign nations

could not purport to tax even the fuel itself, which typically will be

consumed in international air space en route from the United

States.” U.S. Br. in support of prob. jur., No. 84-902, at 31. While

the Court has formally left open in the interstate setting whether a

State that imposes a compensating use tax is constitutionally com-

pelled to provide a credit for sales tax paid elsewhere (see Williams

v. Vermont, 472 U.S. 14, 23 n.7 (1985)), it seems plain that the

taxes are equivalent. See Henneford v. Silas Mason Co., 300 U.S.

577, 583-587 (1937); McCray, Commerce Clause Sanctions Against

Taxation on Mail Order Sales: A Re-Evaluation, 17 Urb. Law. 529,

‘557 (1985).

Japan Line, 441 U.S. at 453. While they impose general

taxes on the lease of goods, none of our trading part-

ners imposes a tax on the transfer overseas of contain-

ers owned by American domiciliaries.* Imposition of

the Tennessee tax on transfers in this country of con-

tainers owned by foreign domiciliaries accordingly will

invite retaliation.’? See ibid. And there is a related area

of concern here. While the legal incidence of the Ten-

nessee tax falls on the container lessor, state law pro-

vides that the tax must be separately stated on the bill

submitted to the lessee and “shall be collected by the

retailer from the consumer insofar as it can be done.’’

Tenn. Code Ann. 67-6-502. This obligation to collect the

tax from the lessee is mandatory. See Hooten v. Carson,

209 S.W.2d 273, 275 (Tenn. 1948). Indeed, a seller or

lessor who fails to collect the tax at the time of the trans-

action may bring an action against the purchaser or

lessee for the amount due or paid. See Sam Care, y Lum-

® The member countries of the European Community, for example,

have adopted a uniform system of value added taxation upon the

“supply of goods and services” and the “importation of goods.” O.J.

European Comm. (No. L 145) art. 2 (1977) (Sixth Directive, 77/

388). The system’s equivalent of a sales tax is the “output” tax;

the equivalent of a use tax is the “input” tax. The leasing of goods

is considered a taxable supply of services. Jd. art. 6. The Com-

munity honors its members countries’ obligations under the Customs

Conventions by exempting the following from value added taxation:

(1) imported goods which qualify for Customs duty exemptions;

and (2) supplies of services directly linked to the transit or export

of goods. Jd. arts. 14(1)(c), 15(1). Further, the United States

represented in Japan Line that “[a]ll the other nations have adhered

to the international custom of allowing containers * * * to be in-

troduced for the exclusive purpose of conducting [foreign] commerce

free of all customs duties and general taxes.”” No. 77-1378, U.S. Br.

at 15.

10 In addition, if other States follow Tennessee’s example, foreign

owned containers “will be subjected to various degrees of multiple

taxation, depending on which American ports they enter. This result,

obviously, would make ‘speaking with one voice ‘impossible.” Japan

Line, 441 U.S. at 453.

ber Co. v. Sixty-One Cabinet Shop, Inc., 773 S.W.2d 252,

254-55 (Tenn. App. 1989). As a consequence, Itel’s for-

eign customers, who will bear the burden of the tax, may

demand that their governments impose corresponding tax

burdens on American shippers who lease containers over-

seas. Furthermore, foreign nations will be encouraged to

impose an entirely new class of local taxes on container

use and transfer.

Uniform National Policy. The court below also went

astray in its bald assertion that a sales tax cannot

interfere with essential uniformity by “hinder[ing] the

policies embodied in the Customs Convention on Con-

tainers.” App., infra, 16a. As explained more fully

below, this Court has read the Container Convention to

“reflect[] a national policy to remove impediments to the

use of containers as ‘instruments of international traf-

fic.’”” Japan Line, 441 U.S. at 453 (citation omitted).

A tax that makes the transfer of containers more expen-

sive damages that policy in precisely the same way as did

the property tax at issue in Japan Line. Indeed, in

closely analogous settings the Court has made clear that

the difference between sales and property taxes is “of no

importance, for imposition of either tax would detract

from the benefit” conferred by federal policy. R.J. Rey-

nolds Tobacco Co. v. Durham County, 479 U.S. 130,

142 n.10 (1986) ; see Xerox Corp. v. Harris County, 459

U.S. 145, 153 (1982) (distinction between a sales and

property tax “without a legal difference’’).

Finally, the Tennessee law intrudes in an area “where

federal uniformity is essential” by taxing the transfer of

containers that are used to transport to other countries

goods that are produced in Tennessee and other States.

While benefitting Tennessee, the tax will increase the

price both of containers originating in the United States

and of the cargo exported in them. That will have

“harmful effects on American industry and workers” by

discouraging use of American ports and the consumption

overseas of American goods. R. J. Reynolds Tobacco,

479 U.S. at 145. Tennessee, “by its unilateral act, can-

not be permitted to place these impediments before this

Nation’s conduct of its for eign relations and its foreign

trade.” Japan Line, 441 U.S. at 453.

For present purposes, it is immaterial that the con-

tainer owner was domiciled abroad in Japan Line and is

a domestic domiciliary here. The court below expressly

declined to rely on this distinction (App., infra, Ta-

8a); as a result, the only issue presented in this case

is whether there is a necessary constitutional difference

between sales and property taxes. A consequence of the

court’s decision, moreover, is that the State appears bound

to apply its tax to foreign owners who transfer posses-

sion of their containers in Tennessee.'' And because state

law requires Itel to pass on the tax to its lessees, Ten-

nessee effectively imposes its tax in substantial part

on the 80% of Itel’s customers that are domiciled in

foreign countries (see Trial Tr. 31-33)—customers who,

under state law, have no means of challenging the

constitutionality of the levy. See Beare Co. v. Olsen, 711

S.W.2d 603, 605 (Tenn. 1986). Prospects of retaliatory

treatment therefore are squarely presented by the tax

at issue here.

Any suggestion that the substantial Foreign Commerce

Clause problems presented by Tennessee’s tax could be

avoided by withholding enforcement of the tax against

containers ieased by foreign lessors would itself raise

serious constitutional questions, as the court below rec-

ognized. App., infra, Ta-8a. This Court divided four-

to-four on the constitutionality under the Commerce

Clause of a state tax that gave preferential treatment to

foreign over domestic commerce. Sears Roebuck & Co.

v. County of Los Angeles, 449 U.S. 1119 (1981), affirm-

11 The record establishes that at least one foreign container owner

transfers containers to lessees in Tennessee. See App., infra, at Trial

Tr. 89-90.

ing 85 Cal. App.3d 763 (Cal. Ct. App. 1978).% And

Justice Powell, writing for the three Members of the

Container Corp. Court who reached the question, subse-

quently concluded that a State cannot discriminate

against a corporation domiciled in another State and “in

favor of an overseas corporation” unless it receives “ex-

plicit congressional authorization.” 463 U.S. at 203

(Powell, J., dissenting). See id. at 204 n.6. Indeed, in

Japan Line itself the Court expressly reserved the ques-

tion whether domestically owned instrumentalities of for-

eign commerce are subject to state taxation. 441 U.S. at

444 n.7. Without resolution of the issues left open in

these decisions, Itel’s domestic domicile must be deemed

immaterial to the constitutionality of Tennessee’s tax.

Il. A STATE SALES TAX ON CONTAINERS USED

EXCLUSIVELY IN FOREIGN COMMERCE VIO-

LATES THE CONTAINER CONVENTIONS

Clear Federal Directive. The Tennessee tax also is

flawed for a closely related reason: it is flatly inconsist-

ent with the “clear federal directive” (Container Corp.,

463 U.S. at 194) embodied in the Container Conventions

and their implementing regulations. As the Court ex-

plained in Container Corp., a problem of this sort calls

for “a species of preemption analysis” (ibid.), which

turns on whether the state tax “stands as an obstacle to

the accomplishment and execution of the full purposes

and objectives” of federal policy. Hines v. Davidowitz,

312 U.S. 52, 67 (1941). Where the federal directive is

designed to preclude interference with the international

trade or foreign relations of the United States, this

Court historically has been vigilant in setting aside in-

consistent state taxes. See, e.g., Xerox Corp. v. Harris

County, 459 U.S. 145 (1982); McGoldrick v. Gulf Oil

12 The California Supreme Court subsequently held that the dif-

ferential tax violated the Commerce Clause. Star-Kist Foods, Inc.

v. Los Angeles, 719 P.2d 987 (Cal. 1986), cert. denied, 480 U.S. 930

(1987).

Corp., 309 U.S. 414 (1940). Because these interests are

at stake here—and, even more fundamentally, because

the state court’s departure from Japan Line validates a

state tax that places the United States in violation of

its international obligations—review by this Court is

warranted.

The 1956 Convention, which was addressed by the

Court in Japan Line, provided for the temporary admis-

sion of containers into the signatory states free of “all

duties and taxes whatsoever chargeable by reason of im-

portation” so long as they were used solely in foreign —

commerce and were subject to reexportation. 20 U.S.T.

at 304. See Japan Line, 441 U.S. at 446 n.10, 453. The

Convention was implemented by Treasury Department

regulations designating containers “instruments of inter-

national traffic” (19 C.F.R. 10.4la(a)(1)) and by a

statute excepting such instruments from application of

the customs laws. 19 U.S.C. 1322(a). Pointing to this

regime, the Court concluded in Japan Line that “(t]he

desirability of uniform treatment of containers used ex-

clusively in foreign commerce is evidenced by the Customs

Convention on Containers. * * * The Convention reflects

a national policy to remove impediments to the use of

containers as ‘instruments of international traffic.’” 441

U.S. at 452-453, quoting 19 U.S.C. 1322(a). The Court’s

conclusion that state taxation of containers was inconsist-

ent with this policy was a central aspect of its holding.

See 441 U.S. at 453.

Since that time, the international proscription on local

regulation of containers has become considerably stricter

with ratification of the 1972 Container Convention, which

was joined by the United States in 1985. Adoption of the

1972 Convention was prompted by “the considerable in-

crease in numbers of containers used in international

traffic’ and the “need both for simplifying Customs for-

malities and facilitating container transport.” U.N. Doc.

E.CONF. 59/2 (Feb. 22, 1971), at 1 (Note by the Secre-

tariat). As the United States noted in its comment en

the draft 1972 convention, the revision of the 1956 Con-

tainer Convention was designed to “contribute significant

economic benefits to the develepment and facilitation of

international container traffic on a global basis.” U.N.

Doc. E.CONF. 59/16 (Nov. 26, 1971), at 2.

The preamble to the 1972 Convention thus affirms the

treaty’s purpose “to develop and facilitate international

carriage by container.” 988 U.N.T.S. 43, 44. And the

1972 Convention provides a broader and more precise

description of proscribed taxes than did its predecessor,

prohibiting the imposition of “Customs duties and all

other duties, taxes, fees and other charges which are col-

lected on, or in connection with, the importation of goods,

but not including fees and charges limited in amount to

the approximate cost of services rendered.” Ibid. It also

provides detailed and comprehensive regulations relating

to the admission, use, design, and marking of containers.

See id. at 45-74. These regulations are supplemented by

the contemporaneously drafted International Convention

for Safe Containers (39 U.S.T. 3707), which establishes

safety standards, and by a network of bilateral treaties

between the United States and its trading partners govern-

ing income taxation of the profits of container lessors."

Pervasive Scheme of Regulation. Against this back-

ground, the Tennessee tax plainly is preempted, both by

the plain terms of the Conventions, particularly the 1972

Convention, and by virtue of the pervasive scheme of

federal regulation. A tax on the transfer of containers

temporarily admitted to the Uni 2d States as part of a

continucus process of importation and exportation is one

“in connection with” the import of goods—a conclusion

that is evident when Tennessee’s tax is contrasted with

the narrow user fees that expressly are permitted by the

'S See Treasury Department's Modei Income Tax Treaty of June

16, 1981, Tax Treaties (CCH) §211 at 10,576 (1990) (for the

avoidance of double income taxation).

Convention. This understanding also is confirmed by the

failure of any party to the Convention to impose a tax

such as the one at issue here. Cf. Wardair, 477 U.S. at

12. And, of course, the Tennessee tax plainly works as an

‘“impediment|{] to the use of containers as ‘instruments

of international traffic.” Japan Line, 441 U.S. at 453

(citation omitted). Indeed, in Japan Line the United

States pointed to the 1956 Convention as establishing that

“disparate state laws offend a perceived need for federal

uniformity” (No, 77-1378, U.S. Br. 27 n.20), explaining

that “{a] state tax would frustrate accomplishment of

the federal objective” (id. at 28) and therefore “conflicts”

with the spirit and design of the federal scheme.” Jd. at

29 (footnote omitted).

Any doubt about the preemptive effect of the Conven-

tions is dispelled by the Court’s decisions in McGoldrick

and Xerox, which respectively invalidated state sales and

property taxes on goods stored under bond in Customs

bonded warehouses. Like the Container Conventions, the

statutes governing such warehouses (the current versions

of which appear at 19 U.S.C. 1555-1560) provide that

goods may temporarily enter the United States free of

Customs duties, so long as they are stored under bond in

a designated facility; the goods may then be reexported

or, upon payment of the duty, distributed in the United

States. See R. J. Reynolds Tobacco, 479 U.S. at 133-134

n.3. In McGoldrick and Xerox the Court noted the policy

behind the warehouse statutes of “encourag|/ing| mer-

chants here and abroad to make use of American ports.”

Xerox, 459 U.S. at 151. See McGoldrick, 309 U.S. at 427.

And—although the statutory language in terms precluded

the imposition only of Customs duties *—the Court held

144 Customs regulation in force at the time McGoldrick was

decided provided that goods in bonded warehouses were not subject

to the process of state courts and were exempt from taxation under

the general] laws of the States. See 309 U.S. at 426. As the Court

noted in Xerox, however, the McGoldrick Court expressly declined to

rely on this regulation in finding preemption. See 459 U.S. at 152,

that the state taxes were preempted in both cases because

“the purpose of the Congressional regulation of the com-

merce would fail if the state were free at any stage of the

transaction to impose a tax which would lessen the com-

petitive advantage conferred on the importer by Con-

gress.” McGoldrick, 309 U.S. at 429. See Xerow, 459

U.S. at 153. In reaching this conclusion, the Court ex-

pressly found “no relevance” in the distinction between

sales and property taxes. 459 U.S. at 153.

The court below offered two reasons for declining to

follow McGoldrick and Xerox. First, it found the deci-

sions inapposite because, while the warehouse statutes

were designed to benefit American shippers and _ ports,

“the Court in Japan Line found no Congressional intent

to benefit container companies in the statutes regulating

cargo containers.” App., infra, 10a. But that reasoning

is defective. The Court in Japan Line identified a closely

related federal policy: general facilitation of the use of

containers. See 441 U.S. at 152-153. Tennessee’s sales

tax frustrates federal policy in precisely the same way

as did the state taxes at issue in McGoldrick and Xerox:

the imposition of a state tax on the transfer of contain-

ers that enter and exit the United States in a continuous

cycle of importation and exportation will “offset substan-

tially the very benefits Congress intended to confer by

remitting the duty.” Xerox, 459 U.S. at 153 (footnote

omitted}.

The state court also found preemption inappropriate

because, in its view, “Congress’ regulation of cargo

containers is less pervasive than its regulations of

bonded warehouses.” App., infra, 14a. This finding

is incorrect; the relevant regulations (which were not

so much as cited by the court below) and the Convention

quoting 309 U.S. at 429. The regulation had been deleted by the

time of the decision in Xerox; the Court held that “[tlhe deletion

* * * does not alter our conclusion that the ad valorem taxes here

are pre-empted by the statutory scheme.” 459 U.S. at 152-153 n.8.

itself impose elaborate requirements relating to the ad-

mission, operation, and design of containers that parallel

those imposed on Customs warehouses.’® But the court’s

observation also is beside the point: regardless of whether

the container regulations are as detailed, the crucial fac-

tor here is that the Tennessee tax frustrates federal pol-

icy. Cf. R. J. Reynolds Tobacco, 479 U.S. at 148-149.

McGoldrick and Xerox make clear that preemption is re-

quired in such circumstances.’* Furthermore, the United

15 See 1972 Convention art. 38, 988 U.N.T.S. at 45-46 (temporary

admissions facilities and procedures) ; art. 9, id. at 46 (conditions

on use of containers granted temporary admission); arts. 10, 11,

ibid. (admission of parts and accessories); art. 12, id. at 47 (ap-

proval of containers used to transport goods under Customs seal) ;

Annex 1, id. at 51, 52 (marking of containers); Annex 2, id. at 52

(obligation of container owners to provide detailed records concern-

ing movement of temporarily admitted containers and to pay duties

when conditions of admission not satisfied) ; Annex 3, id. at 52 (use

of containers in internal traffic); Annex 4, id. at 52-61 (technical

conditions on design and structure of containers) ; Annex 5, id. at

61-67 (procedures for approval of containers); 19 C.F.R. 113.66(a)

(bond conditions) ; 19 C.F.R. Pt. 115 (procedures for approval and

certification of containers). Compare 19 C.F.R. 19.1-19.6 (regula-

tions for Customs warehouses). While it is true that goods in

Customs warehouses remain under the supervision and control of

Customs officers (see 19 C.F.R. 19.4; Xerox, 459 U.S. at 147, 148

& n.2), whereas containers do not, that is wholly a function of the

practicalities of container operation; containers, of course, must

move from place to place along with the goods they transport. That

does not detract either from the pervasiveness of the container regu-

lations or from the force of the policies underlying those regulations.

16 The court below also semed to suggest that preemption is in-

appropriate because 19 U.S.C. 1322(a) excepts instrumentalities of

foreign commerce only from the Customs laws; the court concluded

that “[t]he regulations adopted pursuant to that statute, therefore,

can go no further than to provide exceptions from federal customs

duties.” App., infra, 13a; see id. at 9a. In fact, however, the Con-

vention itself, which of course has the force of federal law, expressly

precludes a range of taxes in addition to Customs duties. In any

event, the state court’s observation hardly serves to distinguish

McGoldrick and Xerox, which found preemptive force in statutes

and regulations that in terms addressed only Customs duties. Indeed,

the property tax disapproved in Japan Line as inconsistent with the

States took the position in Japan Line that the bonded

warehouse provisions are “analogous” to the Convention

(No. 77-1378, U.S. Br. at 25), concluding that “|t]he

rationale of McGoldrick applies here as well.” Id. at 27

(footnote omitted). This Court should intervene to bring

state law into accord with federal policy.

Ill. A STATE TAX ON GOODS THAT ARE MOVING IN

FOREIGN COMMERCE VIOLATES THE IMPORT-

EXPORT CLAUSE

This case also presents another recurring issue that

bears on the international trade of the United States:

whether the Import-Export Clause invalidates state taxes

that are imposed directly on imported or exported goods

while they are in transit. The Court reserved that

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

(1976), and in later decisions. The Fifth Circuit, in

Louisiana Land & Exploration Co. v. Pilot Petroleum

Corp., 900 F.2d 816 (5th Cir. 1990), cert. denied, 111 S.

Ct. 248 (1990), held that such a tax is an unconstitu-

tional charge on exports in transit. The decision below,

which cannot be reconciled with Louisiana Land, offers

the Court an opportunity to resolve the issue.

Before Michelin, the Court invalidated all state taxes

imposed on imported or exported goods contained in their

original packaging. See Michelin, 423 U.S. at 282-283,

discussing Low v. Austin, 80 U.S. (13 Wall.) 29 (1872).

During that period, the Court decided Richfield Oil Corp.

v. State Board of Equalization, 329 U.S. 69 (1946), which

struck down a state sales tax on exported oil while in

transit; the Import-Export Clause invalidated the tax

because the transfer of possession of the oil “was a step

in the export process.” Id. at 84.

In Michelin, the Court adopted a new test to determine

whether a nondiscriminatory state tax levied on imported

1956 Container Convention was no more a Customs duty than is the

sales tax at issue here. -

goods no longer in transit violates the Import-Export

Clause. The test analyzes “the nature of the tax to de-

termine whether it i[s] an ‘Impost or Duty.’” Depart-

ment of Revenue v. Ass’n of Washington Stevedoring

Cos., 435 U.S. 734, 752 (1978). Under the test, three

policies must be considered: (1) the federal govern-

ment must speak with one voice when regulating com-

mercial relations with foreign governments; (2) import

revenues should not be diverted from the federal govern-

ment to States; and (3) interstate harmony might be dis-

turbed unless seaboard States are prohibited from levying

taxes on citizens of other States by taxing goods merely

flowing through their ports. Michelin, 423 U.S. at 285-

286.

In using its new approach to uphold the ad valorem

property tax at issue in Michelin, however, the Court em-

phasized that the levy was imposed “on imported goods

that are no longer in import transit.” 423 U.S. at 286.

See id. at 302 (goods “were no longer in transit”). In

Washington Stevedoring Cos., the Court noted this limita-

tion on the Michelin holding and declined to resolve

whether state taxes on goods in transit remain per se un-

constitutional; the Court upheld a state tax on stevedor-

ing services because “the taxation falls upon a service

distinct from the goods and their value.” 435 U.S. 757

(footnote omitted). The Court added that it did “not

reach the question of the applicability of the Michelin

approach when a State directly taxes imports or exports

in transil,” “prefer[ring] to defer decision until a case

with pertinent facts is presented.” Jd. at 757 n.23. See

id. at 755. Most recently, in R. J. Reynolds, the Court

again “observed that in Michelin it limited its holding to

the imported goods “ ‘no longer in transit.”’” 479 U.S.

at 154 (citation omitted). The Court upheld the prop-

erty tax there at issue because the imported material had

“nothing transitory about it.” Jd. at 155.

In Louisiana Land, the Fifth Cireuit answered the

question reserved in Michelin, finding it fatal to a state

sales tax that the goods were in transit at the time the

tax attached. The Fifth Circuit noted that “Richfield

has never been overruled” (900 F.2d at 819) and that in

Michelin “the Court limited its holding to taxes levied

on goods no longer in transit.” Id. at 820. The court

therefore found the crucial question in the case before it

to be “whether a state may directly tax imports or ex-

ports that are in transit.” Jbid. It answered that ques-

tion in the negative, coneluding that “the Import-Export

Clause was specifically intended to prevent the types of

_ taxation involved in this case” (ibid.) and that the im-

position of such taxes would disrupt foreign policy and

discourage use of American ports. Jd. at 821. The court

accordingly held that the Import-Export Clause invali-

dates “a tax that is levied on the goods themselves while

they are in transit.” /bid.

This case presents an identical issue.’ Neither the

State nor the court below denied that the containers sub-

ject to tax are themselves imports or exports, even though

they also are used to transport other goods. That con-

clusion clearly is correct; the containers would, after ail,

be subject to federal import duties were it not for the

Convention. And by definition, the containers are goods

in transit. Indeed, their movements in Tennessee “are es-

sential to, and inseparable from, the containers’ efficient

use as instrumentalities of foreign commerce.” Japan

Line, 441 U.S. at 437.

In nevertheless affirming the constitutionality of the

state tax, the court below—in contrast to the Fifth Cir-

cuit in Louisiana. Land—evidently viewed Michelin and

Washington Stevedoring Cos. as holding the transitory

character of the goods at issue to be immaterial. See

App., infra, 16a-17a. The state court thus moved imme-

17 The Japan Line court did not consider the taxpayer’s argument

that California’s tax violated the Import-Export Clause because it

disposed of the case under the Foreign Commerce Clause and the

1956 Convention. 441 U.S. at 439 n.4.

diately to the application of the Michelin test. In uphold-

ing the tax, the court found it crucial that “the transfer

of possession of cargo containers is a discrete transac-

tion”; that “Tennessee’s tax only compensates the state

for providing protective services, so the tax will not dis-

turb harmony among the states’; and that “the indirect

nature of the tax distinguishes it from the direct taxes

held invalid in Xerox and McGoldrick.” Id. at 18a.

It is manifest, however, that these observations can-

not serve to distinguish Richfield and Louisiana Land,

and the court below made no serious attempt to do so.

Like this case, both of those decisions involved sales taxes

on “discrete transactions.” The taxes at issue there were

no less “compensation to] the state for providing protec-

tive services” than is the levy here. And the sales tax

here is no less directly imposed on the subject goods than

were the sales taxes invalidated in Richfield, McGoldrick,

and Louisiana Land. Indeed, the Court has made clear

that “[iJn Richfield, the tax fell upon the sale of goods

and was overturned because the Court had always con-

sidered a tax on the sale of goods to be a tax on the goods

themselves. * * * The sale had no value or significance

apart from the goods.” Washington Stevedoring Cos.,

435 U.S. at 756, n.21. That is true here as well.'®

While review is waranted to resolve the issue reserved

in Michelin, the decision below is wrong even on its own

18 The court below also suggested that “[f]ederal import revenues

are not affected, because Tennessee taxes only the lease proceeds

on containers delivered here, not the value of the goods themselves.”

App., infra, 18a; see also id. at 8a. If this observation was meant

to draw a distinction between sales and lease proceeds, in which the

former are said to be related “to the value of the goods themselves”

and the latter are not, it plainly is insupportable. Lease payments

represent the value of the goods for the term of the rental. Indeed,

Tennessee, like many other States, assesses the “true value” of

tangible property for ad valorem tax purposes by capitalizing rental

income. Tenn. Code Ann. 67-5-602(c)(1); National Life & Accident

Ins. Co. v. Keaton, 1986 Westlaw 4846 (Tenn. App.).

Set el

eee we

terms. Because the containers are in transit to other

nations, the Tennessee tax is “no more than [a] transit

fee[] on the privilege of moving through a State” (Mich-

elin, 423 U.S. at 290 (footnote omitted)); the Clause

was intended to invalidate just such levies.’* While the

policies served by the Import-Export and Foreign Com-

merce Clauses are closely related (see Japan Line, 441

U.S. at 449-450 n.14), the former “states an absolute

ban, whereas the [latter] merely grants power to Con-

gress.” Washington Stevedoring Cos., 485 U.S. at 751.

The application of a per se ban on state taxes imposed on

American imports and exports while in transit serves the

broader purposes of the Import-Export Clause by pre-

venting States from taking advantage of their location

to the detriment of American export trade. Indeed, the

United States explained in Japan Line that the tax there

at issue violated the Import-Export Clause because “the

tax affects foreign relations, causes multiple tax burdens,

and is levied on containers that are still part of foreign

commerce and have never been formally entered into

United States commerce.” No. 77-1378, U.S. Br. at 32

n.23. The decision below discounted all of these conse-

quences. Review by this Court accordingly is warranted.

19 As a jeading commentator has explained, a “basis for deciding

in-transit tax cases under the new Import-Export Clause jurispru-

dence may be found in the purpose of the clause to prevent the

seaboard States from exacting a tax on ‘goods merely flowing through

their ports.’ A sales tax on goods being exported that is imposed at

the point of delivery of title and possession of goods to the pur-

chaser or his shipper for transport to the purchaser can be fairly

regarded as such an exaction and, therefore, as a ‘transit fee’ that

is repugnant to the Import-Export Clause.” I J. Hellerstein, State

Taxation § 5.4 at 189-190 (1983).

28 :

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

PHILIP W. COLLIER ANDREW L. FREY

Counsel of Record CHARLES ROTHFELD

JAMES C. SEIFFERT Mayer, Brown & Platt

T. MORGAN WARD, JR. 2000 Pennsylvania Avenue, N.W.

Stites & Harbison Washington, D.C. 20006

600 West Main Street (202) 463-2000

Louisville, KY 40202

(502) 587-3400

Counsel for Petitioner

APPENDICES

Louisville, Kentucky

APPENDIX A

IN THE SUPREME COURT OF TENNESSEE

AT NASHVILLE

S/C No. 01-S-01-9005-CH-00038

ITEL CONTAINERS INTERNATIONAL CORPORATION,

Plaintiff / Appellant,

vs.

CHARLES E. CARDWELL,

Commissioner of Revenue, State of Tennessee,

Defendant /Appellee.

DAVIDSON CHANCERY

Hon. ROBERT BRANDT, Chancellor

FOR PUBLICATION

Filed April 22, 1991

For Appellant: For Appellee:

Phillip W. Collier Charles W. Burson

James C. Seiffert Attorney General

T. Morgan Ward, Jr. and Reporter

Daryl J. Brand

James C. Gooch Assistant Attorney General

Michael D. Sontag Nashville, Tennessee

Nashville, Tennessee

For Amicus Curiae: Institute of International

Container Lessors

Charles A. Trost Edward A. Woolley

Nashville, Tennessee Bedford, New York

Affirmed.

ANDERSON, J.

OPINION

This case presents the question whether Tennessee may

constitutionally impose a sales tax upon the transfer of

possession in Tennessee of domestically-owned cargo con-

tainers used exclusively in international commerce. The

Chancellor held that the imposition of such a tax is con-

stitutionally permissible. We agree and affirm.

The facts were stipulated at trial as follows:

Itel Containers International Corporation (“Itel’’) is a

Delaware corporation, with its principal place of business -

in San Francisco, California. Itel’s principal business is

the leasing of cargo containers which are used exclusively

in international commerce. These containers are manu-

factured and purchased abroad by Itel, and enter the

United States as instruments of international traffic. Itel

has posted with the United States Customs Service a con-

tinuous bond which guarantees payment of all duties,

taxes, or liquidated damages which could be assessed for a

failure to comply with government regulations regarding

Itel’s withdrawal of any of the containers from interna-

tional commerce.

Itel solicits container leases world-wide through its

marketing offices located in numerous U.S. cities, but Itel

conducts no marketing solicitation from any Tennessee

location. Itel accepts leases of its containers only in its

San Francisco office. All of its container leases restrict

the use of the containers to international commerce. As

a result of its international operations, Itel allows its

customers to pick up and re-deliver containers at numer-

ous locations around the world and in the United States.

In Tennessee, itel receives, repairs, stores, and delivers

containers at its terminal building in Memphis, and also,

by contract with other independent terminals, at two

other Tennessee locations. Itel is registered as a dealer

with the Tennessee Department of Revenue, and collects

and remits sales and use tax on fees which it collects for

repair services rendered in Tennessee.

The tax assessment complained of in this appeal is

based upon Itel’s leases of its cargo containers which were

delivered in Tennessee to international carriers for inter-

national shipments. These leases began when the carriers

took delivery of the containers at Itel’s Tennessee loca-

tions.

Itel earns no revenue from the use of the containers

while they are present in Tennessee, until they are picked

up by the international carrier/lessee. The Department

of Revenue computed the sales tax based upon its caleu-

lation of the average container days leased, and the aver-

age number of containers leased per month. Itel paid

the assessment of tax, penalties, and interest under pro-

test, and filed this action to recover those sums.

QUESTIONS PRESENTED

Itel challenges the validity of the tax assessment, I. on

the statutory grounds that the mere transfer of posses-

sion of cargo containers in Tennessee is not a “sale” ac-

cording to Tenn. Code Ann. § 67-6-102 (23) (A), and that

because its containers have not “become a part of the

mass of property in this state,” they are exempt from

Tennessee sales tax pursuant to Tenn. Code Ann.

§ 67-6-211, II. alternatively, Itel aserts that Tennessee’s

imposition of a sales tax upon leases of federally bonded

instruments of international traffic violates the Com-

merce, Supremacy, Import/Export, and Due Process

-clauses of the United States Constitution.

STATUTORY AUTHORITY TO TAX

Itel argues that the mere transfer of possession of

leased property in Tennessee is not a taxable event. The

Tennessee Retailer’s Sales Tax Act imposes sales tax on

the lease or rental of tangible personal property in this

state. ‘Tennessee Code of Annotated § 67-6-201 provides:

It is declared to be the legislative intent that every

person is exercising a taxable privilege who engages

in the business of selling tangible personal property

at retail in this state... or who rents or furnishes

any of the things or services taxable under this chap-

ter . . . or who leases or rents such property, either

as lessor or lessee, within the state of Tennessee... ..

“Lease or rental” is also included within the statutory

definition of “sale:”

: ,

‘Sale” means any transfer of title or possession,

or both, exchange, barter, lease or rental, conditional

or otherwise, in any manner or by any means what-

soever of tangible personal property for a considera-

tiom....

Tenn. Code Ann. § 67-6-102(23) (A) (emphasis added).

Itel cites Magnavox Consumer Electronics v. King, 707

S.W.2d 504 (Tenn. 1986), in support of its assertion that

the legislature intended only to tax proceeds of leases

entered into within Tennessee. In Magnavox we consid-

ered whether the use of vehicles by a lessee pursuant to

a vehicle lease entered into in the state of Indiana were

Subject to Tennessee’s use tax, Tenn. Code Ann. § 67-6-

210. Itel’s reliance on Magnavox could not be more mis-

placed, however, because in Magnavox we held that the

use tax may be imposed upon lessees who lease property

outside of this state for use in Tennessee.

No other authority is cited by Itel for its assertion, and

we find that the statutory language quoted above is a

clear declaration of the legislature’s intent to tax the

transfer of possession of tangible personal property in

Tennessee, pursuant to lease agreements executed out-

side of Tennessee.

Itel argues that the delivery of its containers in Ten-

nessee is exempt from taxation pursuant to Tenn. Code

Ann. § 67-6-211, because its containers have not “come

to rest” in Tennessee. Tennessee Code Annotated § 67-6-

211 declares:

It is the intention of this chapter to levy a tax on

the sale at retail, the use, the consumption, the dis-

tribution, and the storage to be used or consumed in

this state of tangible personal property after it has

come to rest in this state and has become a part of

the mass of property in this state.

We have held that this statute was intended “to extend

the taxing power of the state of Tennessee to the fullest ex-

tent under the Commerce Clause,” Texas Eastern Trans-

mission Corporation v. Benson, 480 S.W.2d 905, 907

(Tenn. 1972), and that “where a tax does not constitute

a violation of the Commerce Clause, no exemption is

available under [the statute],” Williams Rentals, Ine. v.

Tidwell, 516 S.W.2d 614, 615 (Tenn. 1974). Conse-

quently, the next question to be resolved is whether the

challenged tax assessment violates the Commerce Clause

of the United States Constitution.

Il.

UNITED STATES CONSTITUTIONAL

AUTHORITY TO TAX

Initially, we note that the United States Supreme

Court has held that California’s imposition of its ad

valorem property tax, assessed upon the value of identi-

cal cargo containers used exclusively in foreign commerce,

violated the Commerce Clause. In Japan Line, Ltd. v.

County of Los Angeles, 441 U.S. 434, 99 S. Ct. 1813

(1979), the Court held that

the Constitution confers no immunity from state

taxation, and . . . interstate commerce must bear its

fair share of the state tax burden. Instrumentalities

of interstate commerce are no exception to this rule

. if the state tax is applied to an activity with a

substantial nexus wtih the taxing state, is fairly

apportioned, does not discriminate against interstate

commerce, and is fairly related to the services pro-

vided by the state, no impermissible burden on inter-

state commerce will be found. Complete Auto

Transit v. Brady, 430 U.S. 274, 279, 97

1079 (1977). , ; S. Ct. 1076,

441 U.S. at 444-45, 99 S. Ct. at 1819 (other citations

omitted). The Court assumed that “if the containers

were instrumentalities of interstate commerce, Complete —

Auto would apply and be satisfied ” 441

445, 99 S. Ct. at 1820, Pi ree

Next, however, the Court held that Japan Line’s con-

tainers “are instrumentalities of foreign commerce, both

as a matter of fact and as a matter of law,” 441 US at

445-446, 99 S. Ct. at 1820, and that when a state seeks

to tax the instrumentalities of foreign commerce, rather

than of interstate commerce,

a court must also inquire, first, whether the tax, not-

withstanding apportionment, creates a_ substantial

risk of international multiple taxation, and, second

whether the tax prevents federal government from

speaking with one voice when regulating commercial

relations with foreign governments. If a state tax

contravenes either of these precepts, it is unconstitu-

tional under the Commerce Clause.

Japan Line, 441 U.S. at 451, 99 S. Ct. at 1823. Applying .

this test, the Supreme Court held that California’s im-

position of its property tax upon Japanese-owned ship-

ping containers violated the Commerce Clause because

the tax “results in multiple taxation of the instrumentali-

ne . pean <p and the tax “prevents this

nation from speaking with one voice i i i

trade.” Japan Line, 99 S. Ct. at 1823, a

Itel’s containers, like Japan Line’s containers, are in-

strumentalities of foreign commerce. The United States

is a signatory to at least two international agreements

concerning these containers. The Customs Convention on

Containers! grants containers “temporary admission free

of import duties and import taxes and free of import

prohibitions and restrictions,” provided they are used

solely in foreign commerce and subject to re-exportation.

Japan and the United States are signatories to a Bilateral

Tax Convention ? which, in order to prohibit double taxa-

tion of cargo containers, provides that

income derived by a resident of a contracting state

... from the use, maintenance, and lease of contain-

ers and related equipment . . . in connection with

the operation in international traffic of ships or air-

craft ... is exempt from tax in the other contract-

ing state.”

Id. (emphasis added).

However, two features distinguish this case from

Japan Line: First, unlike Japan Line, Ltd., Itel is a do-

mestic American corporation, and the lease of its contain-

ers delivered in Tennessee are not taxed abroad; thus, the

sales tax imposed by Tennessee creates no multiple inter-

national taxation in fact. The Japan Line Court recog-

nized that foreign-owned shipping containers are distin-

guishable from domestically-owned containers, for the

Court stated: “{Wle do not reach questions as to the

taxability . . . of domestically-owned instrumentalities en-

gaged in foreign commerce.” Japan Line, 99 S. Ct. at

1819, fn. 7. Second, Japan Line concerned a direct ad

valorem property tax on the value of the containers, while

Itel challenges the validity of a sales tax assessed upon

120 U.S.T. 301, 304, T.I.A.S. No. 6634 (1969).

2 Convention between the United States of America and Japan for

the Avoidance of Double Taxation (Bilateral Tax Convention),

March 8, 1971 [1972], 23 U.S.T. 967, 1084-85, T.I.A.S. No. 7365.

the proceeds of leases of containers delivered in Tennessee.

Since a state tax which discriminates against domes-

tically-owned containers by exempting foreign-owned

containers raises serious Equal Protection problems, we

decline to consider the domicile of the owner of the con-

tainers as relevant.

As a threshold question, therefore, we consider whether

the property tax held invalid in Japan Line is distinguish-

able from the sales tax assessed against Itel for the pur-

pose of determining the constitutionality of the tax. Itel

insists, of course, that the two taxes are not distinguish-

able, citing Xerox Corporation v. Harris County, Texas,

459 U.S. 145, 103 S. Ct. 523 (1982), McGoldrick v. Gulf

Oil Corporation, 309 U.S. 414, 60 S. Ct. 64 (1940),

Ritchfield Oil Corp. v. State Board of Equalization, 329

U.S. 59, 67 S. Ct. 156 (1946), and Louisiana Land &

Exploration Co. v. Pilot Petroleum Corp., 900F.2d 816

(5th Cir. 1990), as authority.

In Ritchfieid and Louisiana Land, the Supreme Court

and the 5th Circuit Court of Appeals, respectfully, found

that sales taxes, like property taxes, violate the Import/

Export Clause when imposed directly on goods destined

for export. Because Tennessee’s tax on container leases

is not a direct tax on the value of goods destined for ex-

port, however, those cases are unpersuasive.

In Xerox and McGoldrick, the Supreme Court held that

both property taxes and sales taxes assessed upon goods

held in government-bonded warehouses violated the Su-

premacy Clause,* because “Congress intended to make cus-

toms-bonded warehouses federal enclaves free of state tax-

ation.” Accordingly, the Court held that “state property

taxes on goods stored under bond in a customs warehouse

%’“This Constitution, and the laws of the United States .. . shall

be the supreme law of the land; and the judges in every state shall

be bound thereby, anything in the Constitution or laws of any state

to the contrary notwithstanding.” U.S. Const. art. VI, el. 2.

are pre-empted by Congress’ comprehensive regulation of

customs duties.” The Court found it

unnecessary . . . to consider whether, absent con-

gressional regulation, the taxes here would pass mus-

ter under the Import-Export Clause or the Commerce

Clause.

Xerox, 459 U.S. at 154, 103 S. Ct. at 528.4

The Federal Customs Warehouse statutes, 19 U.S.C.

$§ 1555 and 1557, differ significantly from the statute

regulating cargo containers, 19 U.S.C. § 13832. While in

bonded warehouses, imported goods are in the joint cus-

tody and continuous control and supervision of customs

officers of the United States Customs Service and the

warehouse proprietor. 19 U.S.C. § 1555(a). “Detailed

regulations control every aspect of the manner in which

the warehouses are to be operated.” Xerox, 459 U.S. at

150, 103 S. Ct. at 526; see 19 C.F.R. $$ 19.1-19.6 (1982).

In contrast, the statute “regulating” cargo containers

merely provides that “instruments of international traf-

fic . . . shall be granted the customary exceptions from

the application of the customs laws.” 19 U.S.C. § 1322(a)

(emphasis added). Cargo containers are neither under

the supervision nor in the custody of customs officers.

Clearly, Congress has the power to prohibit state sales

taxes on cargo container leases, in order to benefit cargo

container companies. In Xerox, the Court explicitly held

that the customs-bonded warehouse statutes were in-

4The broad holdings of Xerox and McGoldrick have since been

limited to provide a prohibition of state taxation only of goods

destined for export. In R.J. Reynolds Tobacco v. Durham County,

N.C., 479 U.S. 130, 107 S. Ct. 499 (1986), the Court stated:

It is difficult . . . to believe that the purposes in forming the

customs-bonded warehouse scheme identified by the Court in

Xerox would be disserved by the imposition of ad valorem

property taxes on Reynold’s imported tobacco.

Id., 479 U.S. at 144, 107 S. Ct. at 509.

10a

tended by Congress “to stimulate business for American

industry and work for Americans.” Xerox, 459 U.S. at

451, 103 S. Ct. at 526. In both Xerox and McGoldrick,

the Court found that it would be incompatible

with the comprehensive scheme Congress enacted to

effect [its] goals if the states were free to tax such

goods while they were lodged temporarily in govern-

ment-regulated bonded storage in this country... .

First, Congress sought, in the statutory scheme re-

viewed in McGoldrick, to benefit American industry

by remitting duties otherwise due. The import tax on

crude oil was remitted to benefit oil refiners employ-.

ing labor at refineries within the United States,

whose products would not be sold in domestic com-

merce. [In Xerox], the remission of duties benefited

those shippers using American ports as trans-ship-

ment centers. Second, the system of customs regula-

tion is as pervasive for the stored goods in [Xerox]

as it was in McGoldrick for the refined petroleum. In

both cases, the imported goods were segregated in

warehouses under continual federal custody and su-

pervision. Finally, the state tax was large enough in

each case to offset substantially the very benefits

Congress intended to confer by remitting the duty.

Xerox, 459 U.S. at 151-53, 103 S. Ct. at 527. In contrast,

the Court in Japan Line found no Congressional intent to

benefit container companies in the statutes regulating

cargo containers. In the absence of any such Congres-

sional intent, Xerox and McGoldrick support the conclu-

sion that Congress has not preempted state sales taxes

on the transfer of possession of cargo containers. There-

fore, nothing in those cases persuades us that sales

taxes are indistinguishable from property taxes.

The United States Supreme Court has held that it “was

not the purpose of the Commerce Clause to relieve those

engaged in interstate commerce from their just share of

state tax burden even though it increases the cost of

lla

doing business,” Complete Auto, 430 U.S. at 288, 97

S. Ct. at 1079, and the Court has endorsed that proposi-

tion in the international commerce context. In R.J.

Reynolds Tobacco v. Durham County, N.C., 479 U.S. 130,

107 S. Ct. 499 (1986), the Supreme Court recognized

that “since this imported tobacco receives the same local

governmental services, such as police and fire protection,

as domestic tobacco, [if the tax is invalidated] local tax-

payers would be forced to provide a subsidy in excess of

a million dollars to Reynolds.” 479 U.S. at 146, 107 S.

Ct. at 510. Similarly, in Department of Revenue v, Asso-

ciation of Washington Stevedoring Company, 435 U.S.

734, 747, 98 S. Ct. 1388, 1896 (1978), the Supreme Court

also held that “the Commerce Clause balance tips against

the tax only when it unfairly burdens commerce by exact-

ing more than a just share from the interstate ° activity.

The Court then weighed the state’s interest in exacting

from international commerce “its fair share of the cost

of state government” against the burden imposed by the

tax on international commerce, and concluded that Wash-

ington state’s “business and occupation tax” on the dis-

crete activity of loading and unloading ships engaged

in interstate and international commerce did not violate

the Commerce Clause. Washington Stevedoring, 435 U.S.

at 748, 87 S. Ct. at 139d.

Moreover, the Supreme Court has recently upheld a

state sales tax which burdened foreign commerce. In

Wardair Canada, Inc. v. Florida Department of Revenue,

477 U.S. 1, 106 S. Ct. 2369 (1986), the Court applied

its Japan Line test to determine that Florida’s imposition

5 Washington Stevedoring predates Japan Lines, so the Court made

no distinction between interstate and foreign commerce in its Com-

merce Clause analysis. Nevertheless, the holding of A gg

Stevedoring applies to both interstate and foreign commerce, an

the case was cited with approval in Japan Line, 441 U.S. at 444, 99

S, Ct. at 1819,

12a

of a sales tax on jet fuel sold to international carriers

did not violate the Commerce Clause. Thus, while sales

taxes which burden foreign commerce have been upheld

(Wardair) and a “Business and Occupation” tax on the

service of loading and unloading goods in foreign com-

merce has been upheld (Washington Stevedoring) never

has a direct property tax on goods still in international

commerce been upheld. Tennessee’s sales tax on the trans-

fer of possession of containers used to move goods in for-

eign commerce is more analogous to a sales tax on fuel

used to move passengers in foreign commerce, and to an

occupation tax on the activity of loading and unloading

cargo in foreign commerce, than to the direct ad valorem

property tax imposed by California on Japan Line’s cargo

containers.

We conclude, therefore, that the sales tax assessed

against Itel is distinguishable from a direct ad valorem

property tax, and we hold that Japan Line, while instruc-

tive of the appropriate Commerce Clause analysis, is not

dispositive of this case. Consequently, we return to the

facts of this case and proceed to apply the J ,

to those facts. Pply apan Line test

A. THE COMMERCE CLAUSE *

The first step in Japan Line’s Commerce Clause anal-

ysis consists of Complete Auto’s four-fold requirements

We are persuaded that Itel’s containers have a “substan-

tial nexus” with Tennessee, since they are present within

the state at the time of transfer of possession to each

lessee, and since the containers are in the custody of

Itel’s employees and agents in Tennessee. Moreover, the

tax is “fairly apportioned,” since it is levied only on the

®“Congress shall have pow

' power ... to regulate commerce with

foreign Nations, and amon evi

, g the several sta ” TY

art. I, § 8, cl. 3. states... .” U.S. Const.

13a

proceeds of leases pursuant to which the lessee takes de-

livery in Tennessee. The tax does not “discriminate,”

since it falls evenhandedly on all leased personal property

in the state; and finally, the tax is “fairly related to the

services provided by [Tennessee], services that include

not only police and fire protection, but also the benefit of

a trained work force and the advantages of a civilized

society.” /epan Line, 441 U.S. at 445, 99 5S. Ct. at 1820.

Itel argues that federal customs regulations, specifically

19 C.F.R. § 1041A(c) and (d), require that bonded cargo

containers are to be treated as having never entered the

United States. Therefore, since Itel’s containers have no

“presence” in Tennessee for U.S. Customs purposes, they

may not be taxed because the “nexus test” of Complete

Auto is not satisfied. Essentially, this is a variation of

Itel’s preemption and Supremacy Clause argument.

The federal statute pursuant to which the customs

regulations were adopted, 19 U.S.C. § 1822(a), provides

merely that “instruments of international traffic . . . shall

be granted the customary exceptions from the application

of the customs laws.” (Emphasis added.) The regula-

tions adopted pursuant to that statute, therefore, can go

no further than to provide exceptions from federal cus-

toms duties. Because Tennessee’s sales tax is not a fed-

eral customs duty, the customs statute and regulations

are inapposite. Cargo containers bonded by the customs

agency of the United States Treasury Department may

well not be “present” in Tennessee for U.S. Customs pur-

poses; but we hold the Itel’s containers are present in the

state of Tennessee for Tennessee sales tax purposes.’

7 This disposes also of Itel’s argument that the sales tax violates

the Due Process Clause of the Fourteenth Amendment, which has

been construed to permit state taxation on the basis of “the habitual

employment of . . . property within the state.” Braniff Airways v.

Nebraska State Board of Eq. & A., 347 U.S. 590, 601, 74 S. Ct. 757,

764 (1954) (citation omitted).

l4a

Williams Rentals, Inc. v. Tidwell, supra, 516 S.W.2d 614

(Tenn. 1974).

Moreover, the same argument was made and disposed

of R.J. Reynolds, supra, 479 U.S. at 156, 107 S. Ct. at

515, in the context of goods stored in a government-

bonded warehouse. Because we have found that Congress’

regulation of cargo containers is less pervasive than its

regulation of bonded warehouses, the argument that Con-

— has preempted state taxation must fail here as

well.

We hold that Tennessee’s sales tax meets the four-foid

requirements of Complete Auto. Therefore, we proceed

next to consider the additional two-part test articulated

in Japan Line for determining whether a state tax on

the instrumentalities of foreign commerce violates the

Commerce Clause.

The first such question is whether the tax creates an

enhanced risk of multiple international taxation. In

Wardair Canada, Ine. v. Florida Department of Reve-

nue, 477 U.S. 1, 106 S. Ct. 2369 (1986), supra, the Court

summarily dismissed the possibility that a sales tax on

jet fuel sold to international carriers created an enhanced

risk of multiple international taxation:

[There is no threat of multiple international taxa-

tion in this case, since the tax is imposed only upon

. a discreet transaction which occurs within one

national jurisdiction only.

Id., 477 U.S. at 9, 106 S. Ct. at 2873 (emphasis added).

Other nations very well may adopt similar taxes on

the transfer of possession of leased containers within

their taxing jurisdictions. However, we hold that the

transfer of possession of cargo containers in Tennessee

is a discrete transaction, occurring only within Tennessee,

which creates no risk of multiple international taxation.*

* The fact that other j risdictions might tax other transactions

involving these containers is irrelevant. For example, other nations

15a

The second test for validity of state taxation of instru-

ments of foreign commerce articulated in Japan Line is

whether the tax “prevents the federal government from

speaking with one voice when regulating commercial re-

lations with foreign governments.” In Department of

Revenue v. Association of Washington Stevedoring Com-

panies, supra, 435 U.S. 734, 98 S. Ct. 1388 (1978), the

Court held that:

the assessments in this case are only upon business

conducted entirely within Washington. No foreign

business or vessel is taxed. Respondents, therefore,

have demonstrated no impediment posed by the tax

upon the regulation of foreign trade by the United

States.

Id., 435 U.S. at 754, 98 S. Ct. at 1401. Likewise, Itel has

demonstrated no impediment posed by Tennessee’s tax

upon the regulation of foreign trade by the U.S. govern-

ment.

In Japan Line, the Court identified three reasons for

its elaborate Commerce Clause analysis:

A state tax on instrumentalities of foreign com-

merce may frustrate the achievement of federal uni-

formity in several ways. If the state imposes an

apportioned tax, international disputes over reconcil-

ing apportionment formulae may arise. If a novel

state tax creates an asymmetry in the international

tax structure, foreign nations disadvantaged by the

levy may retaliate against American-owned instru-

mentalities present in their jurisdictions. Such re-

taliation of necessity would be directed at American

transportation equipment in general, not just that of

the taxing state, so that the nation as a whole would

may impose landing fees on Wardair Canada’s jets, or sales taxes

on the passenger tickets; this clearly is not what is meant by “mul-

tiple international taxation” in Wardair or Japan Line, or by “double

taxation” in the Bilateral Tax Convention, swpra, at fn. 3.

l6a

suffer. If other states followed the taxing state’s

example, various instrumentalities could be subject

to carrying degrees of multiple taxation, a result that

would plainly prevent this nation from speaking with

one voice in regulating foreign commerce.

Japan Line, 441 U.S. at 450-51, 99 S. Ct. 1822-23. None

of these concerns are implicated by a sales tax on a dis-

crete transaction occurring only in one jurisdiction.

Wardair, supra; Washington Stevedoring, supra.

Because Tennessee’s sales tax is imposed upon the

discrete transaction of the transfer of possession of

leased cargo containers in Tennessee, we find that the

sales tax will not hinder the policies embodied in the

Customs Convention on Containers, impair uniformity

where essential, or prevent the Federal Government from

speaking with one voice when regulating commercial re-

lations with foreign governments. Consequently, we hold

that the tax assessed against Ite] is not prohibited by the

Commerce Clause.

B. THE IMPORT/EXPORT CLAUSE ®”

Relying on Richfield Oil Corp. v. State Board of Equal-

ization, 329 U.S. 69, 67 S. Ct. 156 (1946), Itel also

contends that the Tennessee sales tax violates the Im-

port/ Export Clause.

Richfield has never been overruled by the United

States Supreme Court. However, in Michelin Tire

Corp. v. Wages, 423 U.S. 276, 96 S. Ct. 535 (1976),

the Court initiated a new approach to the Import/

®“No state shall, without the consent of the congress, lay any

imposts or duties on imports or exports, except what may be ab-

solutely necessary for executing its inspection laws; and the net

produce of all duties and imposts, laid by any state on imports or

exports, shall be for the use of the treasury of the United States;

and all such laws shall be subject to the revision and control of the

congress.” U.S. Const. art. 1, § 10, cl. 2.

17a

Export Clause... . The Michelin Court focused on

the nature of the [state] tax. Specifically, the Court

outlined three policies that were to be served by the

Clause.

First, the federal government must speak with

one voice when regulating commercial relations with

foreign governments ... . Second, import revenues

were to be the major source of revenue for the fed-

eral government and should not be diverted to the

states. Finally, harmony among the states might be

disturbed unless seaboard states, with their crucial

ports of entry, were prohibited from levying taxes

on citizens of other states by taxing goods merely

flowing through their ports to the other states not

situated as favorably geographically. Michelin, 423

U.S. at 285-86, 96 S. Ct. at 540-41.

Louisiana Land & Exploration v. Pilot Petroleum, 900

F.2d 816, 819 (5th Cir. 1990).

In Washington Revenue Dept. v. Stevedoring Associa-

tion, supra, 435 U.S. 734, 98 S. Ct. 1388 (1978), the

Court applied the Michelin three-prong policy test, and

found that none of those policies were threatened by

Washington’s business and occupation tax on the dis-

crete service of loading and unloading ships in inter-

national commerce. Specifically, the federal govern-

ment’s ability to conduct foreign policy was not affected,

because the tax was assessed against all businesses, upon

discrete transactions occurring wholly within the state.

Federal import revenues were not affected, because

Washington taxed only the value of the loading and

unloading of the goods, not the value of the goods them-

selves, and since the tax only compensated the govern-

ment for providing protective services, it would not dis-

turb harmony among the states. Most important to the

Court was the indirect nature of the tax, the fact that the

tax did not relate to the value of the goods, and the

fact that the tax was applied to discrete services provided

wholly within the state.

18a

We have carefully considered the “one voice” test as

part of our Commerce Clause analysis, above, and con-

cluded Tennessee’s tax meets this test. Like the business

of stevedoring, the transfer of possession of cargo con-

tainers is a discrete transaction which does not impair

the federal government’s ability to speak with one voice

in its conduct of foreign policy.

Federal import revenues are not affected, because Ten-

nessee only taxes the lease proceeds on containers delivered

here, not the value of the goods themselves. Tennessee’s

tax only compensates the state for providing protective

services, so the tax will not disturb harmony among the

states. Moreover, the indirect nature of the tax distin-

guishes it from the direct taxes held invalid in Xerox

and McGoldrick. For these reasons, we hold that Ten-

nessee’s sales tax, as applied to the transfer of possession

of cargo containers in Tennessee, does not violate the

Import/Export Clause.

CONCLUSION

We have held that the Tennessee Department of Rev-

enue has statutory authority to tax the transfer of pos-

session of cargo containers in Tennessee, and that the

imposition of that tax upon Itel does not violate the

Commerce, Import/Export, Supremacy, or Due Process

Clauses of the United States Constitution. Consequently,

‘the judgment of the Chancellor is affirmed. Costs are

taxed to the appellant.

/s/ E. Riley Anderson

E. RILEY ANDERSON

Justice

Concur:

Reid, C.J.

Drowota, O’Brien, and Daughtrey, JJ.

19a

APPENDIX B

IN THE CHANCERY COURT FOR THE

STATE OF TENNESSEE

20TH JUDICIAL DISTRICT

DAVIDSON COUNTY

PART THREE

No. 88-3479-III

ITEL CONTAINERS INTERNATIONAL CORPORATION

vs,

CHARLES E. CARDWELL,

Commissioner of Revenue, State of Tennessee

[Filed Dee. 20, 1989]

MEMORANDUM

This case is before the Court on the plaintiff taxpayer’s

suit for refund of taxes, penalties, and interest paid to

defendant Tennessee Department of Revenue. At issue is

whether leases on overseas cargo containers distributed in

Tennessee should be subject to taxation under the Re-

tailers’ Sales Tax Act, T.C.A. § 67-6-101, et seq.

The plaintiff, Itel Containers International Corpora-

tion, a Delaware corporation based in San Francisco,

leases cargo containers to steamship carriers for over-

seas shipments. Itel enters its leases through two types

of transactions: shipper pool arrangements and Master

20a

Interchange (“MI”) agreements.* With shipper pool

arrangements, shippers intending to use overseas Car-

riers pick up empty cargo containers free of charge from

Itel at regional locations, then load and transport them

to the port of exit. Shipper pool leases between Itel and

the steamship carriers for the containers do not begin

until the containers arive at port. MI agreements per-

mit the carriers themselves to reserve cargo containers

for later use. These leases begin when the carriers take

delivery of the containers at the regional locations.

Itel has several container pickup locations in Tennessee,

including its own terminal and storage depots owned and

operated by third parties. The Department claims that

Itel owes state sales tax on any lease of cargo containers

distributed to either shippers and carriers from these

pickup sites in the state.

Under the Retailers’ Sales Tax Act, a taxable sale is

defined in part as “. . . any transfer of title or posses-

sion, or both, exchange, barter, lease or rental, condi-

tional, or otherwise, in any manner or by any means

whatsoever of tangible property for a consideration. .. .

T.C.A. § 67-6-102(23) (A). The Department argues that

this definition of a taxable sale so long as Itel’s cargo

both shipper pool and MI lease agreements fall within

containers change hands in Tennessee as part of their

leasing arrangements.

Since it is the transfer of possession for consideration

that is being taxed by Tennessee, the difference in the

parties taking delivery of the containers in the state

under the two types of lease transactions calls for a dis-

tinction in tax treatment. With shipper pool arrange-

ments, the taxable event under T.C.A. § 67-6-102(23)

(A), transfer of possession for consideration, takes place

* A third type of taxed transaction, the short term lease, is similar

to a MI lease in most respects, and will be included with MI leases

for purposes of discussion.

2la

at the port of exit when the containers are turned over

to the carriers. It is at port that the carriers’ control

over the containers and their obligation to pay under the

lease begin. The Retailers’ Sales Act, therefore, would

not apply to these transactions since they occur out of

State. Any taxes paid by Itel for leases under shipper

pool arangements should be refunded by the Department.

The MI agreements, however, provide for direct release

of the containers to the carriers themselves in Tennessee.

These transactions fall squarely within the definition of

a taxable sale, since transfer of possession from Itel to

the leasing parties is completed in the state. Insofar as

Itel has paid taxes, interest, and penalties on its MI lease

agreements, Itel is not entitled to any refund.

In reaching this decision, the Court finds no intrusions

on international commerce. See U.S. Const. art. I, section

8, cl 3. See also T.C.A. § 67-6-313(a). Businesses are

not relieved of their just share of state tax burden simply

because they are engaged in interstate commerce. Com-

plete Auto Transit, Inc. v. Brady, 430 U.S. 274, 288, 97

S. Ct. 1076, 1083, 51 L. Ed. 2d at 326, 336-37 (1977). A

state may tax any business activity having a substantial

connection with that state, so long as the tax is appor-

tioned, does not discriminate against interstate commerce,

and is fairly related to the services provided by the state.

Id. at 279, 97 S. Ct. at 1079, 51 L. Ed. 2d at 331. The

same rule applies to international commerce. Japan Line,

Ltd. v. County of Los Angeles, 44 U.S. 434, 444-445, 99

S. Ct. 1813, 1819, 60 L. Ed. 2d 336, 345 (1979). The

Tennessee tax is justified under these criteria.

Itel located cargo container storage facilities in this

state for the business advantage of regional deliveries.

This connection with the state is a sufficient threshold for

tax liability to Tennessee. Further, Itel’s advantage of

location in Tennessee is realized when it earns the right

to payment by delivering over its containers to leasing

22a

customers in this state. It is logical that this should also

be the event being taxed by to Tennessee. The state tax

goes no further than this portion of Itel’s business. There

are no discriminatory effects on international commerce

by taxing Itel since the tax assessed on MI leases is no

different from the tax assessed by the state whenever

any goods change hands for consideration in Tennessee.

Itel enjoys the economic benefits of locating part of its

operations in Tennessee as well as the protections the

state provides while its containers are stored here. Itel

is simply being asked to pay for what it is getting.

None of the additional factors suggesting a burden —

on international commerce in Japan Lime are present

with Tennessee’s sales tax on Itel’s MI lease transac-

tions. See 44 U.S. at 451-53, 99 S. Ct. at 1823-24, 60

L. Ed. 2d at 350. In that case, the federal government’s

interest in “speaking with one voice” regarding matters

of foreign commerce was affected by several local gov-

ernments’ decision to place an ad valorem property tax

on Japanese-owned cargo containers temporarily in this

county. The same cannot be said for Tennessee’s decision

to place a sales tax on all transfers of leased property in

the state, including cargo containers, since the tax is on

a transaction and not specifically on an item used for

carrying on foreign trade. It is the value of doing busi-

ness in this state that is being taxed, not the value of the

cargo containers. The Court finds no impairment of

uniform trade regulation by the Tennessee sales tax.

Moreover, none of the risks of multiple taxation iden-

tified in Japan Line can result from taxing transfers of

possession of leased goods. It is a one-time event in a

lease that can only occur in one taxing jurisdiction. Since

Itel is a United States corporation enjoying the benefits

of transferring cargo in containers Tennessee, it is Ten-

nessee’s prerogative to tax this activity.

23a

The Court finds that Itel is entitled to a refund of

taxes, penalties and interest attributable to taxes levied

against its leases under shipper pool arrangements only.

Counsel for Itel should submit the judgment order. Costs

are assessed to the defendant.

/s/ Robert S. Brandt

ROBERT S. BRANDT

Chancellor

December 20, 1989

ec: James C. Gooch

Michael D. Sontag

Daryl J. Brand

Philip W. Collier

24a

IN THE CHANCERY COURT

FOR DAVIDSON COUNTY, TENNESSEE

20th JUDICIAL DISTRICT

PART III

No. 88-3479-II1

[TEL CONTAINERS INTERNATIONAL CORPORATION

Vv.

CHARLES E, CARDWELL

Commisisoner of Revenue, State of Tennessee

[Order Filed & Entered Feb. 23, 1990; Minute Book 56,

Page 241]

FINAL ORDER

This case was tried on November 29, 1989. Upon the

pleadings, the stipulations of the parties, the testimony

of plaintiff’s witnesses presented at trial, exhibits intro-

duced at trial, the briefs and arguments of counsel and

the entire record and after consideration of all the evi-

dence presented, the Court, on December 20, 1989, an-

nounced its findings of fact and conclusions of law in

a Memorandum, filed with the Clerk and Master on the

same date, and which is incorporated herein by reference.

The Court found that the parties had agreed upon a

revised assessment, which reduced the amount in dispute

in this case from the sum of $382,465.00 in tax, penalty,

and interest paid by Itel to a revised total of $259,504.00

in tax, penalty, and interest, and that the Department of

25a

Revenue had agreed to refund to Itel the difference be-

tween those amounts, i.e., $122,961.00. In addition, the

Court found that the parties had agreed to recompute the

assessment to account for a shift in one of the audit

sample test periods from March 1985 period originally

sampled in the audit to a period of February 15 to March

15, 1985 which recomputation further reduced the amount

in dispute in this case to the sum of $238,894.00 in tax,

penalty, and interest and that the Department of Revenue

had agreed to refund to Itel $20,610.00 (i.e. the differ-

ence between $259,504.00 — $238,894.00).

After trail, and as set forth in the Memorandum, the

Court found that (i) Itel is entitled to a refund from

the State of Tennessee of taxes, penalty and interest

attributable to taxes levied against its leases under

shipper pool arrangements in the amount of $80,882.00,

and (ii) all master interchange agreements which pro-

vide for the delivery of the containers to the lessees’

carriers themselves in Tennessee fall within the definition

of taxable sale and insofor as Itel has paid taxes, interest

and penalties on its master interchange lease agreements,

it is not entitled to any refund. Therefore, the revised

assessment of $158,012.00 in tax penalty and interest

attributable to those transactions is sustained.

IT IS THEREFORE ORDERED, that judgment is

entered in favor of Itel and against the State of Ten-

nessee in the amount of $224,453.00 plus interest pursu-

ant to T.C.A. § 67-1-1803(b) and that the costs of this

cause are taxed against the State of Tennessee.

Entered this — day of ——, 1990.

/s/ Robert S. Brandt

ROBERT S. BRANDT

Chancellor

/s/

26a

Approved for entry:

Philip W. Collier

PHILIP W. COLLIER

JAMES C. SEIFFERT

Stites & Harbison

600 West Main Street

Louisville, KY 40202

Counsel for Itel Containers

International Corporation

Michael D. Sontag

MICHAEL D. SONTAG

JAMES C. GOOCH

Bass, Berry & Sims

2700 First American Center

Nashville, TN 37238

Co-Counsel for Itel Containers

International Corporation

Daryl J. Brand

DARYL J. BRAND (10203)

Assistant Attorney General

450 James Robertson Parkway

Nashville, TN 37219

Counsel for Charles E. Cardwell

Commissioner of Revenue

State of Tennessee

27a

APPENDIX C

IN THE CHANCERY COURT FOR

DAVIDSON COUNTY, TENNESSEE

No. 88-3479-III

ITEL CONTAINERS INTERNATIONAL CORPORATION

Plaintiff

Vv.

CHARLES E. CARDWELL

Commissioner of Revenue

State of Tennessee

Defendant

[Filed Nov. 27, 1989]

STATEMENT OF STIPULATED FACTS

1. This is a civil action brought by Itel Containers

International Corporation (“Itel’”) against the Commis-

sioner of Revenue to recover the sum of $382,465.00 rep-

resenting sales taxes, penalties and interest paid by Itel

to the Department of Revenue (“Department”) under

protest on April 7, 1988. 2. The alleged sales tax de-

ficiency was assessed upon the proceeds received by Itel

from leases of its cargo containers which were used ex-

clusively in international commerce. 3. Each of the leases

was negotiated, delivered and executed outside the state

of Tennessee and each of the cargo containers was de-

livered within the state of Tennessee to each respective

lessee’s trucker or a shipper for future leasing.

4. Itel is a delaware corporation, with its principal

corporate office in San Francisco, California. 5. Itel’s

28a

principal business is the leasing of cargo containers for

international use. 6. The particular containers whose

lease proceeds were assessed by the Department for the

audit period beginning January 1, 1983 through Novem-

ber 30, 1986 (the “Audit Period”) are referred to as

“Container(s).” 7. Itel’s commercial domicile and prin-

cipal place of business is San Francisco, California.

8. Containers are specially manufactured steel] boxes,

20 or 40 feet long, 8 feet wide and 8.5 or 9.5 feet tall.

9. The containers are uniquely designed so that they

may be used to transport goods by a variety of modes,

including semi-trailer truck, rail car or oceangoing vessel.

10. The containers are secured to rolling stock while

transported overland in international commerce. 11. Be-

cause these containers are designed to be used in a variety

of transportation modes, they are uniquely suited for use

in international commerce.

12. The United States is a signatory and contracting

party to the Customs Convention on Containers, effective

1956 and the Customs Convention on Containers, effective

1972. 13. Attached as plaintiff’s exhibits 11 and 12 are

true,gaccurate, complete, authentic and admissible copies

of the Customs Conventions on Containers, effective 1956

and 1972, one or both of which, were signed by countries

in which companies leasing eighty-four percent (84%)

of the containers were domiciled.

14. The United States Congress has provided in 19

U.S.C. § 1322(a) that “[vJehicles and other instruments

of international traffic, of any class specified by the Sec-

retary of the Treasury, shall be excepted from the appli-

cation of the customs laws to such extent and subject to

such terms and conditions as may be prescribed in regu-

lations or instructions of the Secretary of the Treasury.”

15. The Secretary of the Treasury, through the United

States Customs Service, has promulgated regulations

which in accordance with the Convention, identify con-

tainers as instruments of international traffic:

29a

(a)(1) ... [Clargo vans . .. in use or to be used

in the shipment of merchandise in international traf-

fic are hereby designated as “instruments of inter-

national traffic’ within the meaning of Section

322(a) Tariff Act of 1930, as amended. .. . Such

instruments may be released without entry or the

payment of duty, subject to the provisions of this

section.

19 C.F.R. § 10.41(a) (1). . 16. Subparagraph (3) pro-

vides that “instruments of international traffic” includes

the normal accessories and equipment imported with any

such instrument which is a “container,” as defined in

Article 1 of the Customs Convention on Containers. 17.

Article 1 of the Customs Convention on Containers de-

fines “container” as follows:

An article of transport equipment (life-van, movable

tank or other similar structure) :

(i) Fully or partially enclosed to constitute a

compartment intended for containing goods;

(ii) Of a permanent characjer and accordingly

strong enough to be suitable for repeated use;

(iii) Specially designed to facilitate the car-

riage of goods, by one or more modes of trans-

port, without intermediate reloading;

(iv) Fitted with devices permitting its ready

handling, particularly its transfer from one

mode of transport to another;

(v) So designated to be easy to fill and to

empty; and

(vi) Having an internal volume of one cubic

metre or more and shall include the normal ac-

cessories and equipment of the container, when

imported with the container; the term “con-

tainer” includes neither vehicles nor conventional

packing.

30a

18. As long as the Containers are “in use or to be

used in the shipment of merchandise in international

traffic,” they are instruments of international traffic and

are not subject to the payment of import and export

duties and taxes. 19. If a Container is withdrawn from

its exclusive use in international commerce without the

prior approval and release of the United States Gov-

ernment and payment of all duties and taxes, the appli-

cant is liable for the payment of liquidated damages. 19

C.F.R. § 10.41 (a) (g).

20. The Containers were all manufactured and pur-

chased abroad by Itel and entered the United States and

approved and identified by design type as instruments of

international traffic. 21. Itel has posted a continuous

bond with the United States Customs Service, a true,

accurate, authentic and admissible copy of which is at-

tached as plaintiff’s exhihit 16, which covers all duties,

taxes or liquidated damages which could be assessed for

a failure to comply with government regulations regard-

ing Itel’s withdrawal of any of containers from interna-

tional commerce.

22. Itel solicits container leases worldwide through its

marketing offices located in San Francisco and Los

Angeles, California; Houston, Texas; Chicago, Illinois;

Teaneck, New Jersey; Charleston, South Carolina and

Seattle, Washington. 23. No Ite] leasing or marketing

employees are or were located in Tennessee. 24. Itel

accepts leases of its containers only in its San Francisco

office. 25. As a result of its international operations,

Itel allows customers to interchange containers at numer-

ous locations around the world and in the United States.

26. Itel principally leases its containers to international

shipping companies. 27. Itel leases the containers on a

per diem basis. 28. White the lessee determines the con-

tainers’ route of travel and to a limited extent the length

of use, all container leases restrict the use of Containers

3la

to international commerce. 29. With certain restrictions,

the lessee determines where the container shall be re-

delivered at the close of the lease term. 30. For this rea-

son, the inventory of containers at a particular terminal

location may fluctuate widely, depending on the conven-

ience and needs of lessees.

31. Prior to July 1, 1985, Itel did not have any em-

ployees or terminals located in Tennessee. 32. Before

that time, Itel allowed its containers to be delivered and

picked up at two-three “neutral” or “third party” depots.

located in Tennessee. 33. Effective August 1, 1985, Itel

leased a tract of land and buildings located at 3126 Car-

rier Street, Memphis, Tennessee. 34. A terminal byild-

ing and workstation were used to receive, store, defer

and in certain circumstances, repair Containers. 35.

From July 1, 1985 to the close of the audit period, Itel

employed four persons at the Memphis terminal. 36.

These employees were responsible for the receiving, tem-

porary storage, delivery, and in certain circumstances,

repair of the Containers. 37. After July 1, 1985, Itel

continued to allow customers to interchange containers

at two-three neutral depots located in Tennessee. 38.

Itel is registered as a dealer with the Department and

collects and remits sales and use tax to the Department

on fees which it collects for repair services rendered, and

some of the Containers were repaired while temporarily

located in Tennessee during the audit period.

39. Itel had no employees at the three neutral or third

party pool locations in Tennessee during the audit

period. 40. Itel has never had any marketing office lo-

cated in Tennessee. 41, There is not and has never been

any Itel employee located in Tennessee for the purpose of

soliciting or receiving offers for the leasing of Containers.

42. No Itel employees or representatives execute leases

in Tennessee. 43. None of Itel’s lessees during the audit

period were Tennessee corporations, entities or individ-

32a

uals. 44. None of the Containers were leased for use

in intrastate Tennessee commerce.

45. There are three kinds of Itel lease transactions

upon which the Department has collected a tax: (1)

Master Interchange (“MI”) leases; (2) short term

leases; and (3) shipper pool arrangements. 46. Most

of the Containers leased by Itel are leased under MI

agreements.

47. The chief difference between MI leases and short

term leases is that in the former, Ite] and a prospective

lessee agree to certain terms which will apply to future

leases and in the latter, all of the commercial terms are

determined on a case by case basis. 48. In most other

respects, both kinds of leases are executed in a similar

fashion. 49. Under the MI agreement, Itel and a pros-

pective lessee agreed to certain terms which apply pros-

pectively to future leases of Containers. 50. These terms

include the price, approved locations for pickup and re-

delivery, minimum lease periods and the general contract

terms and conditions which shall apply to all future leases.

51. Under the MI agreement, Itel “agrees to lease Con-

tainers to Lessee on an as available basis at any Itel depot

in Europe and United States or any United States neutral

pool location.” |

52. Itel receives lease commitments from prospective

lessees by telephone. 53. None of the Container lessees

had offices located in Tennessee and thus, none of the

telephone calls were initiated from Tennessee. 54. The

prospective lessee telephoned one of Itel’s Intermodal

Services Group, located in San Francisco, California.

56. Accordingly, a prospective lessee initially contacted

either a regional marketing office or the Intermodal Serv-

ices Group. 57. After determining that the container to

be leased is located in a Tennessee terminal or pool, the

prospective lessee would be referred to Intermodal Serv-

ices for the lease commitment. 58. The Intermodal Serv-

33a

ices Group would call up a lease commitment form on

the computer screen. 59. If the lessee was subject to a

MI agreement, the price, redelivery locations and other

terms were fixed. 60. The prospective lessee would pro-

vide the desired pickup date, equipment type and quan-

tity. 61. In the case of a short term lease, all commer-

cial terms would be addressed by telephone with the In-

termodal Services Group. 62. Itel’s marketing repre-

sentative would conditionally agree to the release of the

type and quantity of containers, the pickup date and

provide a release number. 63. The release number would

be communicated by telephone, telex or intercompany

computer to Itel’s delivery location. 64. At the close of

the telephone conversation between the lessee and Itel’s

marketing representative, the lessee would be obligated

to lease a particular type and quantity of container be-

ginning from the designated pickup date under the terms

and conditions set forth in the master interchange agree

ment or the short term lease. 65. Based upon that bind-

ing commitment, Itel would then reserve the type and

quantity of containers leased at the selected location.

66. Itel provided the leased containers to the lessee’s

carrier or trucker on the pickup date and an Itel repre-

sentative and the lessee’s truck driver signed a one-

page document entitled “Equipment Condition Report”

(“ECR”), which acknowledged delivery of the container

on the pickup date in good condition.

67. After the pickup of the Container by the carrier,

Itel issued a typed lease agreement from its San Fran-

cisco offices reflecting the terms and conditions of the

lease, container identification numbers, date of the lease,

replacement value of the container, permitted redelivery

locations, lease number, terminal of origination, date of

master interchange agreement (if applicable), date of

lease preparation and any additional terms and condi-

tions.

34a

68. Shipper pool arrangements differ from MI agree-

ment leases and short term leases in that the shipper

picked up the container prior to the acceptance of any

lease commitment by a steamship company lessee. 69. A

shipper signed an equipment condition report acknowl-

edging that the container was in good condition. 70.

After the container was picked up, the shipper loaded

the container and transported it to an international port

for transportation in international commerce. 71. Upon

delivery of the loaded container to an approved ocean

going steamship line, a binding lease commitment, either

an MI or short lease, was made by the steamship line

subject to Itel’s acceptance at its San Francisco offices.

72. All Itel leases have the following provision printed

in large type on the front page of the lease:

CONTAINER(S) LEASED HEREINABOVE

SHALL BE USED SOLELY IN INTERNATIONAL

TRADE UNLESS IT IS SPECIFICALLY STATED

BELOW TO THE CONTRARY.

73. All leases of the Containers include the above pro-

vision and none of the Container leases included terms

which allow use contrary to the international trade stipu-

lation. 74. Paragraph 7(b) of each master interchange

agreement provided that “a standard Ite] Lease shall be

issued to and signed by Lessee for each and every con-

tainer leased.” |

75. The standard lease agreement provided in para-

graph 11(f) as follows:

In the event Lessee has not executed Master or Long

Term Agreement with Lessor covering the leasing of

this equipment, this Lease shall contain the entire

agreement between the parties with respect to the

subject matter hereof and may be amended, modi-

fied, or changed only by an agreement in writing

executed by the parties hereto. If Lessee fails, how-

ever, to give to Lessor a written objection to its

35a

contents within seven (7) days after this Lease is

received, or if Lessee takes possession of any of the

equipment provided for hereunder and retains it

after receipt of this Lease then this Lease shall be

effective and binding upon Lessee whether or not

signed. Notwithstanding any Master or Long Term

Agreement, this Lease is subject to acceptance by

Lessor at its office in San Francisco, California, and

shall be deemed accepted if Lessee is not notified to

the contrary within reasonable time. If the Lease

is not accepted, Lessee shall return the equipment

to any of Lessor’s terminals within sixty (60) days

from such notification.

76. None of the Containers were dedicated to any local

use during their stay in the state. 77. Itel and all Con-

tainer lessees have agreed and intended that the Contain-

ers be used solely in international trade.

78. The Containers are not goods which are consumed

by any lessee. 79. While the goods which may be car-

ried in the Containers had a final destination which led

to an end use in local or intrastate commerce, none of the

Containers has been used in local or intrastate commerce.

80. While the Containers were temporarily in Tennessee,

some of the Containers were temporarily not subject to

a lease agreement. 81. Itel earns no revenue from the

use of the Containers while present at its Memphis, Ten-

nessee terminal or any of the two-three neutral depot

locations located in Tennessee. 82. The interruption of

movement in Tennessee was not for the purpose of any

use of the Containers prior to the continuation of inter-

national movement.

83. Itel was audited by the state of Tennessee Depart-

' ment of Revenue, Sales and Use Tax Division, for the

period of January, 1983 through November, 1986. 84.

On December 31, 1986, Itel received an assessment letter

from the Department, stating that additional Tennessee

36a

sales and/or use tax was due for the above period. 85.

The Department computed the tax based upon the calcu-

lation of the “average container days leased” and “aver-

age containers leased per month.” 86. To calculate the

“average container days leased,” the total number of

days that all containers leased during the test period were

on lease was divided by the total number of containers

leased during the test period. 87. The Department de-

termined the “average containers leased per month” by

dividing the total number of containers leased during the

test period by the total number of months of the test

period, or two months. 88. The Department’s tax, inter-

est and penalty assessment was based on 194.27 “average

container days leased” and 65.5 “average containers leased

per month” for the test period. 89. Itel paid the assess-

ment of additional tax, penalties and interest on April 7,

1988 under protest. 90. On June 27, 1988, Itel filed a

request for refund with respect to the assessment in

accordance with T.C.A. § 67-1-1801. 91. The request for

refund was denied on June 29, 1988. 92. Each of plain-

tiff’s trial exhibits identified as exhibits 1-21 in the plain-

tiff’s pretrial compliance is authentic and admissible in

evidence at the trial of this action, except that the de-

fendant does not stipulate that Exhibits 13 and 15 in-

clude documentation of all of the taxable transactions

during the audit test period.

HAVE SEEN AND AGREED:

/s/ Daryl J. Brand

Assistant Attorney General

450 James Robertson Parkway

Nashville, Tennessee 37219

Counsel for Defendant

37a

/s/ Philip W. Collier

/s/

PHILIP W. COLLIER, Esq.

JAMES C. SEIFFERT, Esq.

Stites & Harbison

600 West Main Street

Louisville, Kentucky 40202

(502) 587-3400

Counsel for Plaintiff

Michael D. Sontag

JAMES C, GOOCH, Esq.

MICHAEL D. SONTAG, Esq.

Bass, Berry & Sims

2700 First American Center

Nashville, Tennessee 37238

(615) 244-5370

Co-Counsel for Plaintiff

38a

APPENDIX D

The Commerce Clause of the United States Constitu-

tion, Art. I, § 8, Cl. 3, provides in relevant part:

Congress shall have the Power * * * To regulate

commerce with foreign Nations, and among the sev-

eral States.

The Import-Export Clause of the United States Con-

stitution, Art. I, § 10, Cl. 2, provides:

No State shall, without the Consent of Congress,

lay any Imposts or Duties on Imports or Exports, -

except what may be absolutely necessary for execut-

ing its inspection Laws.

The Supremacy Clause of the United States Consti-

tution, Art. VI, Cl. 2, provides:

This Constitution, and the Laws of the United States

which shall be made in pursuance thereof; and all

Treaties made, or which shall be made, under the

Authority of the United States, 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.

The 1972 Customs Convention on Containers, Decem-

ber 2, 1972, [1985] 988 U.N.T.S. 43, provides in relevant

part:

PREAMBLE

The Contracting Parties,

Desiring to develop and facilitate

international carriage by container,

Have agreed as follows:

Chapter I. General

Article I. For the purposes of the present Con-

vention :

39a

(a) The term “import duties and taxes” shall

mean Customs duties and all other duties, taxes,

fees and other charges which are collected on, or

in connexion with, the importation of goods,

but not including fees and charges limited in

amount to the approximate cost of services

rendered ;

(b) The term “temporary admission” shall

mean temporary importation, subject to re-ex-

portation, free of import duties and taxes and

free of import prohibitions and restrictions;

ticle of transport equipment (lift-van, movable

tank or other similar structure) :

(i) fully or partially enclosed to consti-

tute a compartment intended for containing

goods ;

(ii) of a permanent character and ac-

cordingly strong enough to be suitable for

repeated use;

(iii) specially designed to facilitate the

carriage of goods, by one or more modes

of transport, without intermediate reload-

ing;

(iv) designed for ready handling, partic-

ularly when being transferred from one

mode of transport to another;

(v) designed to be easy to fill and to

empty; and

(vi) having an internal volume of one

cubic metre or more;

the term “container” shal] include the accessories

and equipment of the container, appropriate for

the type concerned, provided that such accessor-

40a

ies and equipment are carried with the con-

tainer. The term “container” shall not include

vehicles, accessories or spare parts of vehicles,

or packaging;

(d) The term “internal traffic’ shall mean

the carriage of goods loaded in the territory of

a State for unloading at a place within the ter-

ritory of the same State;

(e) The term “person” shall mean both nat-

ural and legal persons;

(f) The term “operator” of a container shall

mean the person who, whether or not its owner,

has effective control of its use.

Article 2. In order to benefit from the facilities

provided for in the present Convention, containers

shall be marked in the manner prescribed in annex 1.

Chapter II. Temporary Admission

(a) Temporary admission facilities

Article 3. 1. Subject to the conditions laid down >

in articles 4 to 9, each Contracting Party shall grant

temporary admission to containers, whether loaded

with goods or not.

2. Each Contracting Party reserves the right not

to grant temporary admission to containers which

have been the subject of purchase, hire-purchase,

lease or a contract of a similar nature, concluded

by a person resident or established in its territory.

Article 4. 1. Containers granted temporary ad-

mission shall be re-exported within three months

from the date of importation. However, this period

may be extended by the competent Customs

authorities.

4la

2. Containers granted temporary admission imay

be re-exported through any competent Customs office,

even if that office is different from the one of tem-

porary admission.

The 1956 Customs Convention on Containers, May 18,

1956, [1969] 20 U.S.T. 301, provides in relevant part:

PREAMBLE

The Contracting Parties,

Desiring to develop and to facilitate the use of

containers in international traffic,

Have agreed as follows:

CHAPTER I

DEFINITIONS

Article 1

For the purposes of this Convention:

(a)The term “important duties and import

taxes” shall mean not only Customs duties but

also all duties and taxes whatsoever chargeable

by reason of importation;

(b) The term “container” shall mean an ar-

ticle of transport equipment (lift-van, movable

tank or other similar structure) :

(i) Of a permanent character and accord-

ingly strong enough to be suitable for re-

peated use;

(ii) Specially designed to facilitate the

carriage of goods by one or more modes of

transport, without intermediate reloading;

(iii) Fitted with devices permitting its

ready handling, particularly its transfer

from one mode of transport to another ;

42a

(iv) So designed as to be easy to fill and

empty; and

‘v) Having an internal volume of one

cubic metre or more;

and shall include the normal accessories and

equipment of the container, when imported with

the container; the term “container” includes

neither vehicles nor conventional packing;

ural and legal persons unless the context other-

wise requires.

CHAPTER II

TEMPORARY IMPORTATION FREE OF IMPORT DUTIES AND

IMPORT TAXES AND FREE OF IMPORT PROHIBITIONS

AND RESTRICTIONS

Article 2

Each of the Contracting Parties shall grant tem-

porary admission free of import duties and import

taxes and free of import prohibitions and restric-

tions, subject to re-exportation and to the other con-

ditions laid down in articles 3 to 6 below, to con-

tainers when they are imported loaded to be re-

exported either empty or loaded, or imported empty

to be re-exported loaded. Each Contracting Party

shall retain the right to withhold these facilities in

the ease of containers which are imported on pur-

chase or otherwise taken into effective possession and

control by a person resident or established in its ter-

ritory; the same applies to containers imported from

a country which does not apply the provisions of this

Convention.

Article 3

Containers temporarily imported free of import

duties and import taxes shall be re-exported within

three months from the date of importation. This

43a .

period may be extended for valid reasons by the

Customs authorities within the limits laid down by

the legislation in force in the territory into which

containers have been temporarily imported.

19 U.S.C. 1322(a) provides:

Vehicles and other instruments of international traf-

fic, or any class specified by the Secretary of the

Treasury, shall be excepted from the application of

the customs laws to such extent and subject to such

terms and conditions as may be prescribed in regu-

lations or instructions of the Secretary of the Treas-

ury. The authority delegated to the Secretary by

this subsection shall not extend to communications

satellites and components and parts thereof.

19 C.F.R. 10.41a provides in relevant part:

(a) (1) Lift vans, cargo vans, shippitig tanks, skids,

pallets, caul boards, and cores for textile fabrics,

arriving (whether loaded or empty) in use or to be

used in the shipment of merchandise in international

traffic are hereby designated as “instruments of in-

ternational traffic” within the meaning of Section

392(a), Tariff Act of 1930, as amended. The Com-

missioner of Customs is authorized to designate as

instruments of international traffic, in decisions to

be published in the weekly Customs Bulletin, such

additional articles or classes of articles as he shall

find should be so designated. Such instruments may

be released without entry or the payment of duty,

subject to the provisions of this section.

* . * *

(a) (3) As used in this section, “instrumentalities

of international traffic” includes the normal acces-

sories and equipment imported with any such instru-

ment which is a “container” as defined in Article 1

of the Customs Convention on Containers.

* * * *

44a

(g) For failure promptly to report the diversion or

withdrawal or promptly to make the required entry

and pay the duties due, the applicant shall be liable

for the payment of liquidated damages equal to the

domestic value of the instrument established in ac-

cordance with Section 606, Tariff Act of 1930.

19 C.F.R. 115.1 provides:

This chapter establishes procedures for certifying

containers and road vehicles in conformance with

the Customs Convention on Containers (1956)

(TIAS:+6634), the Customs Convention on the Inter-

national Transport of Goods Under Cover of TIR-

Carnets (1959) (TIAS 6633), the Customs Conven-

tion on the International Transport of Goods Under

Cover of TIR Carnets, November 14, 1975 (TIAS),

and the Customs Convention on Containers, 1972

(TIAS), by applying the procedures and technical

conditions set forth in the annexes to these conven-

tions.

Tenn. Code Ann. 67-6-102(23) (A) (1989) provides in

relevant part:

“Sale” means any transfer of title or possession, or

both, exchange, barter, lease or rental, conditional,

or otherwise, in any manner or by any means what-

soever of tangible personal property for a considera-

ef ny

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