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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0180%3A02

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1993
- **Citation:** 507 U.S. 60

## Text

BLP Fe | Freep
AUG 21 199?

No.
cnet THE
nay

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)

ii
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)

iv
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

Vv

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

vi

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).

2

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

3

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

4

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.

5

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,

6

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.

7

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,

8

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-

9

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:

10

[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.

11

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

12

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

13

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).

14

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.

15

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

16

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.

17

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).

18

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-

19

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).

29
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,

21

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.

22

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

23

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. -

24

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

25

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.

26

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

27

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

la
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.

2a
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

3a

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.

T
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

4a

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.

|

5a

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

6a

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

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;

(c) The term “persons” shall mean both nat-
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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0180%3A02. Public record. Not legal advice.