Opposition Brief — Itel Containers Int'l Corp. v. Huddleston

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Gupreme Court, U.S

- } FILED

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No. 91-321 SEP 20 1992

In The

Supreme Court of the United States

October Term, 1991

ITEL CONTAINERS INTERNATIONAL

CORPORATION,

Petitioner,

JOE HUDDLESTON, COMMISSIONER

OF REVENUE, STATE OF TENNESSEE,

Respondent.

Petition For A Writ Of Certiorari

To The Supreme Court Of Tennessee

BRIEF IN OPPOSITION TO THE PETITION

Cuar.es W. Burson

Tennessee Attorney General

Counsel of Record

JOHN KNox WaALKkuP

Solicitor General

Daryt J. BRAND

Assistant Attorney General

450 James Robertson Parkway

Nashville, Tennessee 37243-0485

(615) 741-2041

Counsel for Respondent

COCKLE LAW BRIEF PRINTING CO., (800) 225-4964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

1. Whether a state sales tax levied on the privilege

of engaging in business in the taxing state, which is

measured by the gross proceeds derived by a lessor from

lease contracts in which the leased property is located in

and delivered to the lessee in the taxing state, is pre-

cluded by the Foreign Commerce Clause from being

imposed on such leases of cargo containers which are

ultimately used in international commerce.

2. Whether such a state tax is preempted by the

Customs Conventions on Containers.

3. Whether such a state tax is precluded by the

Import-Export Clause.

TABLE OF CONTENTS

Page

CC OCED PUNE ccd cvebesacescesnnsukees i

Tees Ge Fs nc ccc covcsecesvesenceuns iii

Des e GE Ce Ge 6 06.06.66-6608066n08ks eR 1

REASONS FOR DENYING THE WRIT............. 3

I. THE TENNESSEE COURT PROPERLY

ANALYZED THE NATURE OF THE TAX

AND THE TRANSACTIONS IN THIS CASE,

CONSISTENT WITH THIS COURT’S DECI-

Il. THE TENNESSEE SUPREME COURT’S DECI-

SION IN THIS CASE DOES NOT CONFLICT

WITH APPLICABLE DECISIONS OF THIS

COURT OR OF OTHER COURTS............ 8

ee) Peer 10

TABLE OF AUTHORITIES

Page

CASEs:

Beare Co. v. Olsen, 711 S.W.2d 603 (Tenn. 1986)....... 7

Beecham Laboratories v. Woods, 569 S.W.2d 456

Ne ns necceuccececes 6

Dept. of Revenue v. Ass'n of Washington Stevedoring

Companies, 435 U.S. 734 (1978) ..............255:- 8, 9

Furniture Lease Co. v. Tidwell, 495 S.W.2d 535

EEE 5

Hooten v. Carson, 186 Tenn. 282, 209 S.W.2d 273

Nee vac ecccccccccees 4

Jack Daniel Distillery v. Jackson, 740 S.W.2d 413

EE EE 6

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

ES 4, 5, 8, 9

Louisiana Land and Exploration Co. v. Pilot Petroleum

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

ED) ee 9

Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976)...9, 10

Saverio v. Carson, 186 Tenn. 166, 208 S.W.2d 1018

eee ei edeseneenscevssescacessecses 5

Smoky Mountain Canteen Co. v. Kizer, 193 Tenn. 598,

EN cr adcecccscccsceccccccssceses 7

Wardair Canada, Inc. v. Florida Dept. of Revenue, 471

ee eae ensacccccscccscnescccece 8, 9

CONSTITUTIONAL PROVISIONS:

Commerce Clause, U.S. Const. Art. I, §8, cl. 3...... 3,9

Import-Export Clause, U.S. Const. Art. I, §10, cl. 3

DU UMUMMUUENESUN GD eee S06 60s0cssccccccecess 3, 9, 10

TABLE OF AUTHORITIES

STATUTES:

ee, See cu cnc accteeassensuupnws

Be. Ge BI BG 6 6 oc cc cactecscccccces 6, 7

OTHER AUTHORITIES:

Convention Between the United States of America

and Japan for the Avoidance of Double Taxa-

tion, Mar. 8, 1971 [1972], 23 U.S.T. 967, T.I.A.S.

a a ea aie ale ee ee OE gg

1956 Customs Convention on Containers, May 18,

9956 [39605, 2D UST. SOU, Ast. UB)... ..ccccccccces

1972 Customs Convention on Containers, Dec. 2,

1972 [1985], 988 U.N.T.S. 43, Art. 1(a)..............

No. 91-321

In The

Supreme Court of the United States

October Term, 1991

ITEL CONTAINERS INTERNATIONAL

CORPORATION,

Petitioner,

JOE HUDDLESTON, COMMISSIONER

OF REVENUE, STATE OF TENNESSEE,

Respondent.

Petition For A Writ Of Certiorari

To The Supreme Court Of Tennessee

BRIEF IN OPPOSITION TO THE PETITION

STATEMENT OF THE CASE

The Tennessee Department of Revenue assessed sales

tax against Itel Containers International Corporation as a

result of Itel’s substantial business activities transacted

wholly within Tennessee. Itel is a Delaware corporation,

based in California, which operates business facilities and

locates substantial amounts of its property in Tennessee.

Itel is primarily engaged in the business of furnishing, as

lessor, cargo containers to its customers for their use in

transporting goods in international commerce.

The Department assessed tax for business activities

which occurred in Tennessee during the audit period of

January 1, 1983, through November 30, 1986. Tax was

assessed upon the gross proceeds derived by Itel from its

lease contracts in which containers stored in Tennessee

were delivered in Tennessee to Itel’s lessees or their

agents.

During the audit period, containers belonging to Itel

were placed at depots at such Tennessee locations as

Memphis, Nashville, and Chattanooga. Also, during the

latter part of the audit period, Itel maintained a terminal

of its own at Memphis. The terminal, staffed by a number

of Itel employees, was used by Itel to receive incoming

containers being returned at the conclusion of their

leases, to store containers, and to perform repair work,

and as the site at which containers going out on lease

were delivered to and picked up by Itel’s customers.

Itel’s containers, while under lease, were used exclu-

sively in international commerce. However, Itel was not

itself an importer, exporter, or shipper of the goods trans-

ported in such containers. Each container was brought

into Tennessee at the conclusion of one lease and stored

there until it was delivered to another customer at the

beginning of another lease. Thus, the container’s pres-

ence in Tennessee was not a part of a continuous lease

term or of a continuous journey carrying goods.

Originally, the sales tax assessment in this case also

included Itel’s proceeds from leases in which containers

stored in Tennessee were delivered at out-of-state loca-

tions. The trial court disallowed that portion of the

assessment, holding that where delivery was consum-

mated outside Tennessee the transactions were not prop-

erly taxable by Tennessee. (App. at 20a-21la). The

Department of Revenue did not appeal that holding, but

accepted it as a proper decision under the facts and law.

Both the trial court and the Tennessee Supreme Court

upheld the portion of the assessment attributable to Itel’s

leases in which delivery to the lessees occurred within

Tennessee. Itel now seeks further review of that Tennes-

see Supreme Court decision.

REASONS FOR DENYING THE WRIT

The decision of the Tennessee Supreme Court does

not conflict with the decisions of this Court, federal

courts of appeals, or other state courts of last resort. This

case was correctly decided, based upon Tennessee law

interpreting the nature and scope of the sales tax statutes,

and upon analytical guidelines announced by this Court

in prior cases. Because the tax in this case was upon the

proceeds of business activities conducted by an American

corporation entirely within the taxing state, this case has

very little significance to the development of foreign pol-

icy issues or Import-Export or Commerce Clause juris-

prudence. For all of these reasons, further review is

unwarranted.

I. THE TENNESSEE COURT PROPERLY ANALYZED

THE NATURE OF THE TAX AND THE TRANSAC-

TIONS IN THIS CASE, CONSISTENT WITH THIS

COURT’S DECISIONS.

Itel misapprehends, and thus mischaracterizes, the

nature of the tax in this case. The sales tax here was

imposed on Itel’s business activities; it was not a property

tax on the containers, such as the tax stricken in Japan

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

Tenn. Code Ann. § 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 chapter . . . or who

leases or rents such property, either as lessor or

lessee, within the State of Tennessee... .

The sales tax is not an ad valorem property tax, but

instead a privilege tax on persons engaging in certain

types of business activities in Tennessee. Hooten v. Carson,

186 Tenn. 282, 285, 209 S.W.2d 273 (1948). Property taxes

are direct taxes on the value of the property, and there-

fore require some appraisal and assessment of the actual

value. The Tennessee sales tax, on the other hand, is

measured not by the value of the property, but by the

total consideration, or the “gross proceeds,” received

under a contract of sale or lease. Itel erroneously asserts

that the rentals received under a lease are simply that

portion of the value of the leased property corresponding

to the time limits of the lease. Realistically, however, the

consideration in a lease contract is simply a figure agreed

upon by the parties to reflect numerous factors. Often the

consideration in a lease contract bears scant reiationship

to the actual value of the leased property.

Tennessee’s sales tax on leasing activity is measured

by the “gross proceeds” of the lease, which includes

everything of value received by the lessor under the

lease, and is not determined necessarily by the value of

the leased property. Furniture Lease Co. v. Tidwell, 495

S.W.2d 535, 536 (Tenn. 1973). The taxable gross proceeds

of a lease include charges, often hidden or “built-in,” for

services rendered by the lessor. Saverio v. Carson, 186

Tenn. 166, 168, 208 S.W.2d 1018 (1948). Therefore, Tennes-

see’s sales tax on leases is not a direct tax on property,

and is not measured by the value of property. Instead,

Tennessee’s tax measured by the gross proceeds of leases

is more akin to a tax on income derived from leases. Such

a tax is patently distinguishable from the flat, direct

property tax in Japan Line.!

Itel also incorrectly characterizes the Tennessee tax as

a “transit fee on the privilege of moving through a State.”

1 In Japan Line, this Court took note of the Convention

Between the United States of America and Japan for the Avoid-

ance of Double Taxation, Mar. 8, 1971 [1972], 23 U.S.T. 967,

1084-1085, T.I.A.S. No. 7365, which provided that income

“derived by a resident of a Contracting State . . . from the use,

maintenance, and lease of containers and related equip-

ment ... in connection with the operation in international

traffic of ships or aircraft .. . is exempt from tax in the other

Contracting State.” Japan Line, 441 U.S. at 446, n.10. Thus, as

that international agreement, and this Court, recognized, a tax

on proceeds derived from the lease of containers is plainly

different from a direct property tax on the containers them-

selves.

However, the tax here is a generally applicable tax on all

business activity in Tennessee involving the transfer of

possession of tangible personal property for consider-

ation, and is not aimed selectively at items merely pass-

ing through the state. To the contrary, Tenn. Code Ann.

§ 67-6-313(a) expressly provides:

It is not the intention of this chapter to levy a

tax upon articles of tangible personal property

imported into this state or produced or manu-

factured in this state for export.

This “import-for-export” exemption clearly provides that

if, for example, Itel imported its containers into Tennessee

and then itself exported the containers, without transfer-

ring them to lessees while in Tennessee, the sales tax

would not be imposed. Beecham Laboratories v. Woods, 569

S.W.2d 456, 458 (Tenn. 1978). It is only when some inter-

vening transfer of title or possession occurs in Tennessee

- in other words, when specific business activity occurs

in Tennessee — that the tax is imposed. Jack Daniel Distill-

ery v. Jackson, 740 S.W.2d 413, 416 (Tenn. 1987). Thus, the

sales tax in this case does not necessarily reach all of Itel’s

containers moving through Tennessee. Tax is imposed

only when Itel engages in specific and substantial busi-

ness activity — transfer of possession to a lessee for con-

sideration - in Tennessee. The trial court recognized this

when it disallowed tax on transactions in which Itel

delivered containers from its various Tennessee locations,

but where the transfer of possession to the lessee for

consideration occurred outside Tennessee. (Chancery

Court Memo., App. at 20a-21a). It should be noted that

this portion of the trial court’s ruling, favorable to Itel,

was not appealed by the Commissioner of Revenue.

Similarly, Itel is incorrect in characterizing the Ten-

nessee sales tax as a tax “chargeable by reason of impor-

tation,” or “collected on, or in connexion with, the

importation of goods,” as those terms are used in the

Customs Conventions on Containers. See 1956 Customs

Convention on Containers, May 18, 1956 [1969], 20 U.S.T.

301, Art. 1(a) (App. at 41a); 1972 Customs Convention on

Containers, Dec. 2, 1972 [1985], 988 U.N.T.S. 43, Art. 1(a)

(App. at 39a). The Tennessee tax simply is not levied on

imports, but is a generally applicable sales tax. Further,

many imports, including many of Itel’s imported con-

tainers, are never involved in taxable transactions in light

of the “import-for export” exemption expressly provided

by Tenn. Code Ann. § 67-6-313(a). The Customs Conven-

tions on Containers, so broadly relied upon by Itel, do not

even address, much less forbid, Tennessee’s sales tax.

The fact that Itel’s transfers of containers in Tennes-

see are taxable, while containers from Tennessee which

are transferred out-of-state are not taxable, further illus-

trates that the tax here is not upon the containers them-

selves, but rather upon the business activity engaged in

by Itel in Tennessee. Further still, the incidence of the

sales tax in this case was not upon the containers, or the

lessees of the containers, but upon Itel as lessor. Beare Co.

v. Olsen, 711 S.W.2d 603, 605 (Tenn. 1986). Although Ten-

nessee statutes provide for Itel to pass the tax on to its

customers, if possible, the legal burden of and ultimate

liability for the tax are only upon Itel. Id.; Smoky Mountain

Canteen Co. v. Kizer, 193 Tenn. 598, 603, 247 S.W.2d 69

(1952). The tax is not upon the value of certain property,

but upon the business activities in Tennessee of a com-

pany which chooses to locate its business in Tennessee

and enjoy the benefits and protections furnished by the

State.

Therefore, the Tennessee Supreme Court correctly

held that the tax in this case is not a direct tax on the

containers, such as the property tax in Japan Line (App. at

12a), but is a tax on Itel’s business activities, discrete

transactions occurring only within Tennessee. (App. at

14a).

II. THE TENNESSEE SUPREME COURT’S DECISION

IN THIS CASE DOES NOT CONFLICT WITH

APPLICABLE DECISIONS OF THIS COURT OR

OF OTHER COURTS.

Because the Tennessee Supreme Court correctly

understood the true nature of the Tennessee sales tax, it

correctly held that the tax withstood Itel’s constitutional

challenges.

The Tennessee court correctly found that the tax in

this case is different from the direct ad valorem property

tax in Japan Line, and that the Japan Line opinion does not

even purport to reach the facts of this case. (App. at

7a-8a). Japan Line, 441 U.S. at 444, n.7. Instead, the sales

tax on Itel’s business activities in Tennessee is more anal-

ogous to the taxes upheld against similar constitutional

challenges in Wardair Canada, Inc. v. Florida Dept. of Reve-

nue, 471 U.S. 1 (1986) (sales tax on fuel used in interna-

tional aviation), and Dept. of Revenue v. Ass'n of

Washington Stevedoring Companies, 435 U.S. 734 (1978)

(business and occupation tax on stevedoring activities).

(App. at 12a). Nonetheless, the Tennessee court followed

the guidelines set forth in the Japan Line decision for

analysis of the foreign commerce element of the Com-

merce Clause, U.S. Const. Art. I, §8, cl. 3. (App. 12a).

Therefore, the decision in this case does not conflict with

the Japan Line decision, but instead follows the analytical

path laid out by Japan Line, Wardair, and Washington

Stevedoring.

Similarly, the Tennessee court’s rejection of Itel’s

challenges under the Import-Export Clause, U.S. Const.

Art. I, §10, cl. 3, does not conflict with the recent decision

in Louisiana Land and Exploration Co. v. Pilot Petroleum

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

, 111 S.Ct. 248 (1991), relied upon by Itel. In Louisiana

Land, the challenged Alabama tax was levied specifically

on fuel, and was not a generally applicable sales tax such

as the Tennessee tax in this case. 900 F.2d at 817, n.1.

Because the Alabama tax was aimed at a specific category

of goods, it was susceptible to being used to create a

special tariff, in violation of the Import-Export Clause. See

Washington Stevedoring, 435 U.S. at 753. Further, the inci-

dence of the Alabama tax was on the consumer, unlike

the Tennessee tax which is levied upon the seller. 900 F.2d

at 818. Therefore, the Alabama tax was not a tax on the

seller’s business activities, but arguably constituted a

direct tax on property purchased by the consumer. For

those reasons, the tax in Louisiana Land is distinguishable

from the tax in this case. Regardless of whether goods are

“in transit,” the Import-Export Clause analysis of direct

taxes employed in Louisiana Land does not apply when,

such as in the present case, the challenged tax is not a

direct tax. Washington Stevedoring, 435 U.S. at 757.

Instead, the Tennessee Supreme Court correctly applied

the modern three-prong policy analysis of Michelin Tire

Corp. v. Wages, 423 U.S. 276, 285-6 (1976), in upholding

the tax against Itel’s Import-Export Clause challenge.

(App. at 17a).

In summary, the decision in this case does not con-

flict with any decision of this Court, of a court of last

resort of any other state, or of any federal court of

appeals. The Tennessee Supreme Court correctly decided

this case, and further review is unwarranted.

CONCLUSION

For the reasons set forth above, the Commissioner of

Revenue of the State of Tennessee respectfully submits

that the decision of the Tennessee Supreme Court in this

case is correct, and that further review of this case is

unwarranted. Therefore, the petition for writ of certiorari

should be denied.

Respectfully submitted,

CHar.es W. Burson