Petitioners Brief — Itel Containers Int'l Corp. v. Huddleston
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] Supreme Goert, U.S.
FILED
~ : | APR 5° W92
No. 91-321 i
|
Iu 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
On Writ of Certiorari to the
Supreme Court of Tennessee
BRIEF OF PETITIONER
PHILIP W. COLLIER ANDREW L. FREY
Counsel of Record CHARLES ROTHFELD
JAMES C. SEIFFERT Mayer, Brown & Platt
T. MORGAN WARD, JR. 2000 Pennsylvania Ave., N.W.
Stites & Harbison Washington, D.C. 20006
600 West Main Street (202) 463-2000
Louisville, KY 40202
(502) 587-3400
Lisa D. LEACH
Vice President & General Counsel
Itel Containers International Corporation
550 California Street
San Francisco, CA 94104-1006
(415) 984-4508
Counsel for Petitioner
WILSON - Eras PRINTING Co., INC. - 789-0096 - WASHINGTON, D.<c. 20001
QUESTIONS PRESENTED
Whether the Customs Conventions on Containers pre-
empt the imposition of a state sales tax upon the
lease of cargo containers that enter the United States
under Customs bond and are used exclusively in for-
eign commerce.
. Whether the imposition of such a tax is prohibited
by the Foreign Commerce Clause.
Whether the Import-Export Clause prohibits the im-
position of a state sales tax on imported or exported
goods while they are in transit,
(i)
TABLE OF CONTENTS
QUESTIONS PRESENTED .................2..-.sccseceesseeeeeeseees
_ TE
a iaainaltaennetneegnetencennnineceese
Ss dinteteiniceenneniineneeenenccessssocestenesenseceenee
CONSTITUTIONAL, STATUTORY, AND REGULA-
TORY PROVISIONS INVOLVED .......0000000000............
STATEMENT OF THE CASE ..002200.......eeeeeeeeeeeeeeee -
SUMMARY OF ARGUMENT ......00000000..00.000.. cece
ELA
I. THE TERMS AND OBJECTIVES OF THE
II.
CONTAINER CONVENTIONS PREEMPT
THE IMPOSITION OF TENNESSEE’S
latin eieenicanieennsesenecsensesnsececs
A. The Tennessee Tax Cannot Be Reconciled
With the Language of the Conventions ..........
B. The Executive Branch and Congress Intended
to Preempt State Regulation of Federally
Bonded Containers Used Exclusively in For-
Ne censtounnsne
1. The Tax Is Inconsistent With Objectives
of the Container Conventions ....................
2. McGoldrick and Xerox ................................
APPLICATION OF STATE SALES TAXES
TO CONTAINERS USED EXCLUSIVELY IN
FOREIGN COMMERCE VIOLATES THE
FOREIGN COMMERCE CLAUSE ........... a
(iii)
Page
12
12
17
17
21
27
iv Vv
TABLE OF CONTENTS—Continued TABLE OF AUTHORITIES
ath a a Page CASES: Page
. Tennessee’s es Tax Creates a Substantia ;
Risk of International Multiple Taxation ........ 29 Air France v. Saks, 470 U.S. 392 (1985) ............ 12, 14, 16
American Trucking Associations v. Scheiner, 483
B. Tennessee’s Tax Prevents The United States fo (See 32
From Speaking With One Voice in Regulat- Armco Inc. v. Hardesty, 467 U.S. 638 (1984) ........ 34
i EE 36 Beare Co. v. Olsen, 711 S.W.2d 603 (Tenn. 1986) ... ~
lll. TENNESSEE’S TAX VIOLATES THE IM- Container Corp. of America v. Franchise Tax Bé.,
PORT-EXPORT CLAUSE ........................ 40 BB UB. 16D (BBGB) ...~----22-creee.-ce-vecneeeee-ceee 18, 32-33, 39
D.H. Holmes v. McNamara, 486 U.S. 24 (1988)... 30
A. The Purpose of the Clause ............................. 40 Evco v. Jones, 409 U.S. 91 (1972) 2... e-eeeeeeenee 32
B. The Richfield Decision ........-.--..cccccccc-ccccee00.- 41 Fidelity Federal Savings & Loan Association v. de
' ' , la Cuesta, 458 U.S. 141 (1982) .................-.---....... 12
C. The Michelin Analysis .............-.--.--.-----0--0-00--+- 42 Freeman v. Hewit, 829 U.S. 249 (1946) 00.0... 34
D. The Richfield Holding Is Valid After Miche- Goldberg v. Sweet, 488 U.S. 252 (1989) ................. 80
| ORO ai HES eet ne NR alt aR 44 Henneford v. Silas Mason Co., 300 U.S. 577
° ERAS RIESE EMR PIE PSC Aevum eer ne nee 30
CONCLUSION .......................... Phe et Ns ees I Sse 47 Hines v. Davidovitz, 312 U.S. 52 (1941) —.............. 17
Hooten v. Carson, 209 S.W.2d 273 (Tenn. 1948) .... 38
Japan Line, Ltd. v. County of Los Angeles, 441
a tel passim
Louisiana Land & Exploration Co. v. Pilot Petro-
leum Corp., 900 F.2d 816 (5th Cir.) , cert. denied,
I Bi, Ss III saciicctesicnehetacchbsceitninerniniseniiagiasianatsanicn 42, 44
Mazimov v. United States, 378 U.S. 49 (1963) ........ 17
McGoldrick v. Gulf Oil Corp., 309 U.S. 414 (1940)... 9, 11,
21-27, 46
Michelin Tire Corp. v. Wages, 423 U.S. 276
ITI cscaissicrsishepsinintidn stitniaihatchiailaabiaieididiesadtaelaniea 10, 11, 40-47
Mobil Oil Co. v. Commissioner of Taxes, 445 U.S.
I a cicicaclhetal uiciiataae Sah Eee 34
Nielsen v. Johnson, 279 U.S. 47 (1929) ................... 14.
O’Connor v. United States, 479 U.S. 27 (1986)... 16
R.J. Reynolds Tobacco Co. v. Durham County, 479
8 FO eee es 23, 26, 43
Richfield Oil Corp. v. State Board of Equalization,
SS eer eee 9, 11, 41-42, 44
Sam Carey Lumber Co. v. Sixty-One Cabinet
Shop, Inc., 773 S.W.2d 252 (Tenn. App. 1989) .... 38
Standard Oil Co. v. Peck, 342 U.S. 382 (1952) ........ 32
vi
TABLE OF AUTHORITIES—Continued
Trans World Airlines, Inc. v. Franklin Mint Corp.,
1 esiiaanmanenihins 15, 16
Trinova Corp. v. Michigan Dept. of Treasury, 111
SX | RAR AES Soe: 2a 13, 31
Tyler Pipe Industries, Inc. v. Washington State
Dept. of Revenue, 483 U.S. 232 (1987) ................ 34
Wardair Canada, Inc. v. Florida Dept. of Revenue,
gE RRS ALS a ER a 31, 37
Washington Revenue Dept. v. Association of Wash-
ington Stevedoring Cos., 435 U.S. 734 (1978) ..10, 40, 42,
43, 45-47
Williams v. Vermont, 472 U.S. 14 (1985) —............ 30
Xerox Corp. v. Harris County, 459 U.S. 145
RE EERE IS eee. ee 9, 11, 12, 21-27
UNITED STATES CONSTITUTION:
Foreign Commerce Clause, Art. I, § 8, Cl. 3 —..000000.... passim
Supremacy Clause, Art. VI, Cl. 2 0000-02-02... passim
Import-Export Clause, Art. I, § 10, Cl. 2 000-00... 40-47
Tax Clause (Art. I,, $8, Cl. 1) .................................. 40
TREATIES OF THE UNITED STATES:
Customs Convention on Containers, May 18, 1956,
RE passim
Customs Convention on Containers, Dec. 2, 1972,
5 _f | 2. + 3 SSSaR SSE SaeeeeencnneNee passim
International Convention for Safe Containers, Dec.
2, 1972, [1979] 39 U.S.T. 3707 ..............00000......... 20
FEDERAL STATUTES:
SN I onic. cnensncncccnnedetoreoenecccntes Casa 1
a aiandenladinliommebeeiainenal 6, 18, 25
19 U.S.C. § 66 ................. ER eD ss PERC Re Ie 25
FEDERAL REGULATIONS:
I sesamiae 6, 18, 25
a cicinencubetine I SEE 6, 25
I i a cusenianelon 6, 25
vii
TABLE OF AUTHORITIES—-Continued
TENNESSEE STATUTES: Page
Tenn. Code Ann. 67-6-102 (23) (A) (1989) —............ 8
Tenn. Code Ann. 67-6-313(f) (1989) —.........0--0. 30, 36
Tenn. Code Ann. 67-6-502 (1971) ..........-...--.---.....-..... 8
Tenn. Code Ann. 67-6-507 (1990) -....00.0000-0.---2-e eee. 30
MISCELLANEOUS:
Bureau of the Census SM705 ..............-.-. eee 4
Consumption Tax Law, art. 17 (2) (ii) —..................... 15
M. Farrand, The Records of the Federal Conven-
eR ae a 40-41
J. Hellerstein, State Taxation (1983) .. a See 44, 45
O.J. European Comm, (No. L 145) (1977) (Sixth
ER EEE RT a ae 15
President’s Letter of Transmittal, 1956 Customs
Convention on Containers, 89th Cong., 2d Sess.
(June 30, 1966), reprinted in Journa! of the
Executive Proceedings of the Senate, Vol. 108,
ERE ee a 18
President’s Message Transmitting the Customs
Convention on Containers, 1972, and the Inter-
national Convention for Safe Containers, both
signed at Geneva on Dec. 5, 1972, Exec. X, 93d
Sa I a scmpetenanenens 20, 24
Sen. Rep. No. 1618, 90th Cong., 2d Sess. 2 (1968),
reprinted in 1968 U.S.C.C.A.N. 4563 200000000. 18
Sen. Comm. on Foreign Relations, Exec. Rep. No.
33, 94th Cong., 2d Sess. (1976) ............0.0000000000... 4, 6, 20
Simon, The Law of Shipping Containers, 5 J. Mar.
SR AE ET ie 3
Tariff Schedules of the United States 0.0.0... 20
U.N. Doc. E.ConrF. 59/2 (Feb. 22,1971) .....00000000...... 4,19
U.N. Doc. E/Conr.59/SR.1 (Nov. 18, 1972) .......... 3
U.N. Doc. E.ConrFr. 59/16 (Nov. 26, 1971) —............... 19
U.N. Doc. E/CONF.59/2 at 1 (Feb. 22, 1971) -........... 5
U.N. Doc. E/CONF.59/IPG.2 (Feb. 14-18, 1972) _.... 19
U.N. Doc. E/Conr.59/24 (June 23, 1972) ....... iaaiaenia 19
U.S. Br. in Support of Prob. Jur., No. 77-1378 ......18, 27, 32
U.S. Dept. of State, Treaties in Force (1990) ........... 5
In the Supreme Court of thy United States
OCTOBER TERM, 1991
No. 91-321
ITEL CONTAINERS INTERNATIONAL CORPORATION,
PETITIONER
Vv.
JOE HUDDLESTON, COMMISSIONER OF REVENUE,
STATE OF TENNESSEE, RESPONDENT
On Writ of Certiorari to the
Supreme Court of Tennessee
BRIEF OF PETITIONER
OPINIONS BELOW
The opinion of the Supreme Court of Tennessee is re-
ported at 814 S.W.2d 29. It is reprinted in the appendix
to the petition for a writ of certiorari at la-18a. The
unreported opinion of the Tennessee Court of Chancery
appears at Pet. App. 19a-26a.
JURISDICTION
The judgment of the Tennessee Supreme Court was
entered on April 22, 1991. On July 10, 1991, Justice
Stevens extended the time within which to file the peti-
tion to and including August 21, 1991. The petition was
filed on August 21, 1991, and the Court granted the
petition on February 24, 1992. The jurisdiction of this
Court is invoked under 28 U.S.C. 1257(a).
(1)
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 petitition at 38a-44a: the Foreign
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, [1985]
988 U.N.T.S. 43; the Customs Convention on Containers,
May 18, 1956, [1969] 20 U.S.T. 301; 19 U.S.C. 1322(a);
19 C.F.R. 10.41a; 19 C.F.R. Pt. 115; and Tenn. Code
Ann. 67-6-102 (23) (A) (1989).
STATEMENT OF THE-CASE
This case represents a collision between the power of
the Federal Government and of a State to regulate for-
eign commerce. Tennessee has imposed a sales tax on
the lease of Customs bonded and sealed cargo containers
used exclusively and continuously in foreign commerce.
The United States and 58 other nations have signed
two treaties that prohibit the imposition of taxes in con-
nection with the importation of cargo containers. Ten-
nessee is the only State—and indeed the only subnational
unit within the borders of the 59 signatory nations to
these treaties—that imposes such a tax. Tennessee’s sales
tax assessment is prohibited by the 1956 and 1972 Cus-
toms Conventions on Containers (the “Container Con-
ventions”) and is inconsistent with the objectives pro-
moted by the comprehensive scheme of regulation ema-
nating from the Conventions.
Further, Itel contends that the tax violates the Foreign
Commerce and Import-Export Clauses of the United
States Constitution. Because Tennessee taxes the full
value of a transaction with substantial taxable nexus
around the globe, it creates a risk of international mul-
tiple taxation. In addition, most container lessees, who
3
in large part absorb the tax, are foreign domiciliaries.
The exaction of the tax therefore both creates an asym-
metry in international taxation of containers and threat-
ens to prompt retaliation by our trading partners against
American firms.
The Container Revolution. Cargo containers are spe-
cifically 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 equip-
ment. See Japan Line, Ltd. v. County of Los Angeles,
441 U.S. 434, 436 n.1 (1979). Because they are reusable,
may be loaded and unloaded mechanically, and are de-
signed to be carried by truck, rail and eceangoing vessel,
containers have greatly reduced the cost of shipping cargo.
See Simon, The Law of Shipping Containers, 5 J. Mar.
L. & Com. 507, 513 (1974). Containerization provides a
number of significant economies in the transport of cargo:
elimination of intermediate repacking and handling be-
tween the points of origin and destination; ease of storage
on oceangoing vessels; reduction of damage to cargo re-
sulting from manual handling; elimination of expensive,
disposable packaging; and speedy loading and discharg-
ing, which reduces the idle time of a vessel and crew
while in port. See Simon, supra, at 510-13.
While permanent, reusable cargo containers were in
use for many years, “|wl]ith the container revolution of
the 1960’s, large containers and specially-built container
ships to accommodate them came into use.” Summary
Record of the First Plenary Meeting, [1972] U.N. Doc.
E/CoNnF.59/SR.1 at 7 (United Nations/IMCO Confer-
ence on International Traffic, considering the 1972 Con-
vention). This revolution, described as “[one] of the most
important technological developments in the transporta-
tion of goods by sea since steam replaced sail” (see
Simon, supra, at 507), has fueled a boom in international
imports and exports. “It would be difficult to overesti-
mate the impact on virtually all phases of international
d
trade of the dramatic expansion * * * of the use of large,
intermodal freight containers.” Sen. Comm. on Foreign
Relations, Exec. Rep. No. 33, 94th Cong., 2d Sess. 4
(1976) (statement of John B. O’Loughlin, Acting Assist-
ant Commissioner (Operations), U.S. Customs Service).
The United States is a world leader in container use;
containers now provide the principal means for marine
transportation of U.S. imports and exports. Containers
carried 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 Amer-
ican goods exported by container in 1990 exceeded $84
billion. Jbid, Containers were used for the marine trans-
port of a variety of crucial American exports in 1990:
59% of the value of exported chemicals and related prod-
ucts, 61% of the value of exported machinery and trans-
port equipment, 69% of the value of manufactured goods
and 89% of the value of exported beverages and tobacco
were carried in containers. Jbid. More than 25% of these
containers, with a replacement value of approximately
$3.2 billion, are owned by firms domiciled in the United
States. Br. of Cronos Containers, et al., at 4.
The Container Conventions. The United States and
many of its trading partners have for several decades pro-
vided special benefits to containers by treaty. In fact,
the “need for providing for the temporary importation of
containers free of import duty and taxes, and for har-
monizing or unifying technical provisions applicable to
containers used for transport under Customs seal was felt
in Europe well before the advent of the ‘Container Revo-
lution.’” U.N. Doc. E/CoNnF.59/2 at 1 (Feb. 22, 1971).
Twelve European nations originally signed the 1956 Cus-
toms Convention on Containers (the “1956 Convention’’),
May 18, 1956, [1969] 20 U.S.T. 301. The 1956 Conven-
tion entered into force with respect to the United States
on March 3, 1969.
5
Article 2 of the 1956 Convention requires each signa-
tory nation to “grant [containers] temporary admission
free of import duties and taxes and free of import pro-
hibitions and restrictions.” 20 U.S.T. at 304. The Con-
vention defines the term “import duties and import taxes”
to mean “not only Customs duties, but also all duties and
taxes whatsoever chargeable by reason of importation.”
Ibid. The legal fiction of temporary importation thus
prevents containers from entering the domestic commerce
of any signatory nation.
The 1972 Convention, which entered into force with re-
spect to the United States on May 12, 1985,' expanded the
prohibition of container taxation. The 1972 Convention’s
definition of prohibited “import duties and taxes” en-
compasses “Customs duties and all other duties, taxes,
fees and other charges which are collected on, or in con-
nexion with, the importation of goods, but not including
fees and charges limited in amount to the approximate
cost of services rendered.” 988 U.N.T.S. at 44 (emphasis
added). The 1972 Convention requires strict regulatory
compliance to qualify for these benefits, generally provid-
ing that containers must be re-exported within three
months of their importation (see art. 4, id. at 45) and
limiting their use in internal traffic (see annex 3, id. at
52).* Including the United States, 59 nations now are
signatories to one or the other of the Container Conven-
tions. See U.S. Dept. of State, Treaties in Force 303-305
(1990).
1 The United States signed the 1972 Convention on December 5,
1972. Upon entry into force, the 1972 Convention replaced the
1956 Convention in relations between the parties to the 1972 Con-
vention. See 1972 Convention, 988 U.N.T.S. at 48.
2 The 1972 Convention also provides for the admission of con-
tainer parts and accessories (art. 10-11, 988 U.N.T.S. 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 marking of containers
(Annex 1, id. at 51-52), the obligations of container owners (Annex
2, id. at 52), and the design of containers (Annex 4, id. at 52-61).
6
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 des-
ignated containers as “instruments of international
traffic” that are excepted from application of the Customs
laws. 19 C.F.R. 10.4la(a) (1), (3). To receive this spe-
cial treatment, however, a container owner must provide
assurances that its containers will not be used in inter-
state or intrastate commerce; if the containers are di-
verted to point-to-point local use within the United States,
the owner must make entry and pay the applicable Cus-
toms duty. Each owner must post a continuous bond with
the Customs Service to secure compliance with this un-
dertaking. 19 C.F.R. 10.4la(a), (c), 113.66. In addi-
tion, 19 C.F.R. pt. 115 implements the 1972 Convention’s
procedures for the certification and approval of contain-
ers used in transporting goods under Customs seal. Com-
pliance with these procedures allows steamship lines to
move containers from the point of loading to the ultimate
destination without the presentation of papers to, or in-
spection by, Customs officials.*
Itel’s Business. Itel* is a Delaware corporation with
its principal place of business in California. Stip. 4, Pet.
App. 27a.° During the relevant period, it leased cargo
3“Tt is not surprising that containerization * * * has impacted on
worldwide customs procedures. Containers are designed for uninter-
rupted movement of large unit loads of goods over potentially great
distances without the need for customs authorities to carry out
their controls using traditional methods. Obviously, if containers
were opened and the goods examined at every frontier or port, the
efficiency gained through containerization would be nearly completely
lost.” Exec. Rep. No. 94-33, supra, at 4.
4 Itel’s Rule 29.1 statement appears in the Petition at ii.
5 Itel submitted an extensive stipulation of facts, presented tes-
timony of two witnesses and introduced 27 exhibits which were
admitted without objection at trial. Stip. 92; Trial Transcript
(“Tr.”) 21, 22, 52, 53, 87. The Tennessee Department of Revenue
offered no testimony or exhibits in rebuttal. Tr. 99.
7
containers that were used exclusively in foreign commerce
by steamship lines. The containers were manufactured
and purchased abroad by Itel, and entered the United
States certified for the transport of goods under Customs
seal. Itel posted a continuous bond with the Customs Ser-
vice undertaking not to withdraw its containers from for-
eign commerce. All of Itel’s leases accordingly restricted
use of the containers to international commerce. Stip.
72-73, Pet. App. 34a. The leases were solicited and nego-
tiated through marketing offices in California, Texas, Illi-
nois, New Jersey, South Carolina and Washington; none
of the leases during the relevant period was solicited,
negotiated or executed in Tennessee. Stip. 3, 41; Pet.
App. 27a, 3la. In addition, Itel operated container
terminals and made use of so-called “third-party” ter-
minals—facilities operated by independent contractors
that tendered delivery and accepted returns of containers
—worldwide.
Itel 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.
Eighty percent of the lessees who accepted delivery of
Itel’s containers in Tennessee were international steam-
ship lines domiciled in foreign countries, including com-
panies domiciled in Australia, Colombia, France, Ger-
many, Iceland, Israel, New Zealand, Norway, Singapore,
Sweden, Switzerland, the United Kingdom, and Venezuela.
Tr. 31-33. While each container initially was used to
export American goods to foreign ports, most containers
were used continuously in multiple import-export ship-
ments. All of Itel’s leases culminated with an import
® For the greater part (January 1, 1983-June 30, 1985) of the
audit period, Ite! did not have any employees or terminals located
in Tennessee. Stip. 31, Pet. App. 3la. Before July 1, 1985, Itel al-
lowed its containers to be delivered and picked up at two or three
third party depots located in Tennessee. Stip. 32, Pet. App. 3la.
During the latter portion of the audit period, Itel leased real prop-
erty and buildings located in Memphis and employed four persons
to operate the terminal. Stip. 33-35, Pet. App. 31a.
8
shipment terminating in a Customs Convention signatory
nation; 61% of the leases concluded with an importation
into the United States.’
The Assessment. In 1986, the Tennessee Department
of Revenue assessed $382,465 in sales taxes, penalties and
interest on the proceeds earned from the lease of con-
tainers that Itel delivered in Tennessee to international
carriers.* 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).° While Itel is obligated to col-
lect 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 im-
position. See Beare Co. v. Olsen, 711 S.W.2d 603, 605
(Tenn. 1986). Itel accordingly paid the tax under pro-
test and began this action for a refund, challenging the
constitutionality of the tax under the Commerce, Import-
Export, and Supremacy Clauses of the United States Con-
stitution. The Tennessee Chancery Court reduced the as-
sessment on state law grounds but rejected the federal
constitutional claims, sustaining a revised assessment of
$158,012. Pet. App. 19a-26a.
7 Trial Exhibits (“Ex.’’) 7, 13, 15 and 22 indicate the location for
each container redelivery.
8 Stip. 1, 84; Pet. App. 27a, 35a. A sample transaction drawn
from the audit period is illustrative. On March 5, 1985, the Ship-
ping Company of New Zealand accepted possession of a 40 Itel dry
van container. The container was loaded onto the chassis of a com-
mon carrier hired by the steamship line, loaded with cargo and
carried by rail to an international port. The container then traveled
the globe until it was returned at Itel’s San Francisco terminal on
May 5, 1986. Because the lease term was 427 days and Itel charged
$3.50 per day, the steamship line paid $1,494.50 for the use of the
container from the first importation to the return of the container
in San Francisco. Tennessee’s sales tax totaled 5.5% of the gross
proceeds, or $82.20. Ex. 7, 13, 15.
® Petitioner already was paying sales and use taxes on fees col-
lected in connection with repair services performed at its Memphis
terminal. Stip. 38, Pet. App. 3la. Those taxes are not at issue here.
9
The Opinion Below. The Tennessee Supreme Court
affirmed. Pet. App. la-8a. 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 acknowl-
edged that “Itel’s containers, like Japan Line’s contain-
ers, 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 happens to fall
on a domestic domiciliary. Jd. at Ta-8a. Instead, the
eourt found a constitutional distinction between 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 inter-
fere with the federal government’s management of foreign
relations or international trade. /d. at 15a-16a.
The court next held that the Tennessee tax was not
preempted by the Container Conventions and the Treasury
Department’s implementing regulations. It distinguished
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) (which held state property and
sales taxes preempted by federal statutes that exempted
goods from Customs duties when stored under bond in
designated warehouses), finding that federal regulation
of Customs bonded containers is “less pervasive” than
th. regulation of Customs bonded warehouses. Pet. App.
14a. The court also reasoned that preemption is in-
appropriate because the Container Conventions were not
intended to benefit container owners. Jd. 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
10
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 Pet. App. 16a-17a.
And in applying the Import-Export Clause test set out in
Michelin, the court again found it dispositive that the tax
at issue here is one on sales rather than on property.
Id. at 18a.
SUMMARY OF ARGUMENT
I. Tennessee’s sales tax imposed on container leases is
repugnant to both the letter and the spirit of the Con-
tainer Conventions, treaties between the United States
and 58 other nations. The Conventions expressly prohibit
the imposition of taxes collected “by reason of” or “in
connexion with” the importation of containers. The 1972
Convention allows the signatory nations to impose only
taxes “limited to the approximate cost of services ren-
dered.” Tennessee’s sales tax is levied “by reason of”
or “in connexion with” the importation of containers;
the containers would not be subject to taxation but for
their importation into Tennessee, and the tax is assessed
upon the entire value of container leases throughout a
continuous series of import/export shipments. This read-
ing of the Conventions is confirmed not only by their
plain language, but also by the uniform custom of the
signatory nations. -
Aside from the Conventions’ express prohibition, Ten-
nessee’s sales tax is preempted because it undermines the
principal objectives of the Conventions and the federal
regulatory scheme. The impact of Tennessee’s tax is sub-
stantial enough to erase the very benefit provided by Con-
gress—the waiver of Customs duties. And by substan-
tially increasing the cost of container transport, the tax
discourages container use in foreign commerce, places
American container owners at a competitive disadvan-
tage, and stunts American export trade—the precise ob-
jectives the United States seeks to promote. It is mani-
fest that Tennessee’s tax is preempted by the force of
11
this Court’s reasoning in McGoldrick v. Gulf Oil Corp.,
309 U.S. 414 (1940), and Xerox Corp. v. Harris County,
459 U.S. 145 (1982).
II. In addition, like the California property tax at
issue in Japan Line, Tennessee’s sales tax violates the
Foreign Commerce Clause because it creates an unaccept-
able risk of international multiple taxation and prevents
the United States from speaking with one voice with re-
spect to its foreign trade. Tennessee’s tax on the full
value of container leases invites multiple international -
burdens; many foreign nations have a sufficient taxable
nexus to impose equivalent taxes upon the lease proceeds
—and would, in fact, impose such taxes were it not for
the prohibitions of the Container Conventions. The Ten-
nessee sales tax, moreover, whether imposed on foreign
container lessors or lessees, will inevitably lead to foreign
retaliation felt not just by Tennessee, but by the United
States as a whole. Such retaliation already has been at
least implicitly threatened. And the United States, of
course, cannot “speak with one voice” with respect to
foreign trade if Tennessee and other States subject con-
tainers to “various degrees of multiple taxation, depend-
ing on which American ports they enter.” Japan Line,
441 U.S. at 453.
III. Finally, Tennessee’s direct tax on “in-transit”
containers violates the Import-Export Clause—not only
because it prevents the Federal Government from speak-
ing with one voice, but because it is “no more than
[a] transit fee!| on the privilege of moving through a
State.” Michelin Tire Corp. v. Wages, 423 U.S. 276, 290
(1976). The Court has never construed the Clause to per-
mit the type of tax imposed by Tennessee. Under both
the Court’s modern analysis and the Court’s holding in
Richfield Oil Corp. v. State Board of Equalization, 329
U.S. 69 (1946), which is indistinguishable from this case,
a state sales tax on an in-transit export or import vio-
lates the Import-Export Clause.
12
ARGUMENT
I. THE TERMS AND OBJECTIVES OF THE CON-
TAINER CONVENTIONS PREEMPT THE IMPO-
SITION OF TENNESSEE’S SALES TAX
State regulations that “actually conflict[] with fed-
eral law” must fall. Fidelity Federal Savings & Loan
Ass’n v. de la Cuesta, 458 U.S. 141, 153 (1982). Ten-
nessee’s tax—which is “collected on, or in connexion with,
the importation of goods” *°—is preempted because it is
flatly inconsistent with the plain terms of the Container
Conventions. In fact, Tennessee’s application of its sales
tax to the leasing of containers engaged in foreign com-
merce is a remarkable departure from what has been
universal practice under the Conventions. For the 36
years that one or the other of the Conventions has been
in effect, so far as we have been able to determine, not
one of the 59 signatories or their innumerable political
subdivisions has imposed such a tax. But even without
regard to the clear language of and consistent practice
under the Conventions, Tennessee’s tax is preempted be-
cause it “offset[s] substantially the very benefits Con-
gress intended to confer” by excepting cargo containers
from customs duties. Xerox Corp. v. Harris County, 459
U.S. 145, 153 (1982).
A. The Tennessee Tax Cannot Be Reconciled With The
Language Of The Conventions
When interpreting a treaty, this Court begins “with
the text of the treaty and the context in which the writ-
ten words are used.” Air France v. Saks, 470 U.S. 392,
397 (1985). Here, the 1956 Convention provides for the
temporary admission of containers free of import duties
and taxes, which are defined as “not only Customs duties
but also all duties and taxes whatsoever chargeable by
reason of importation.” 20 U.S.T. at 304 (emphasis
added}. The 1972 Convention offers a similar but broader
10 1972 Convention, Art. 1(b), 988 U.N.T.S. at 44. The prohibition
expressed in the 1956 Convention is similar, prohibiting all “taxes
whatsoever chargeable by reason of importation.” Art. l(a), 20
U.S.T. at 304.
13
description of the proscribed taxes, prohibiting the im-
position of “Customs duties and all other duties, taxes,
fees and other charges which are collected on, or in
connexion with, the importation of goods.” 988 U.N.T.S.
at 44 (emphasis added). The 1956 Convention ensures a
broad interpretation of the prohibition by modifying “all
* * * taxes” with the adjective “whatsoever.” The 1972
Convention also proseribes “all” taxes and then makes
the prohibition as inclusive as possible by the reference
to “fees and other charges.”
The Container Conventions do not except taxes imposed
by subnational units, such as States. To the contrary,
“all * * * taxes” are prohibited. The breadth of the
prohibition is magnified by the 1972 Convention’s sole,
narrow exception of “fees and charges limited in amount
to the approximate cost of services rendered” (988
U.N.T.S. at 44), an exception that has no bearing here.
If the parties to the 1972 Convention intended to allow
sales or transaction taxes on container transfers, they
could easily have expanded the exception clause.
Tennessee’s sales tax is “chargeable by reason of im-
portation” and collected “in connexion with the importa-
tion of goods.” The texts of the Conventions recognize
that the concept of importation describes the continuous
status of a container while present in a signatory nation,
not a discrete event temporally related to the crossing of
a border. Article 3 of the 1956 Convention describes con-
tainers as “temporarily imported” when they are within
national borders. Article 1(b) of the 1972 Convention
similarly describes the containers as subject to “tem-
porary importation.” Under the fiction of “temporary
admission,” the containers remain temporarily imported
throughout their stay in the United States. Thus, when
Tennessee’s tax was imposed, Itel’s containers were tem-
porarily imported goods.'"' Further, the tax here—which
attaches only when containers physically are transferred
1 The containers’ status as temporarily imported goods is not
changed upon leasing for re-export from the United States.
14
in Tennessee—is triggered in a direct sense by the entry
of goods into the taxing jurisdiction; it is the containers’
visit to Tennessee that (in part) is responsible for the
tax. And a tax that is assessed only because the taxed
good entered into the taxing jurisdiction surely is one
that is imposed “by reason of” or “in connexion with”
importation.
In addition, because Tennessee makes no effort to appor-
tion its sales tax to the fraction of the lease term during
which a container is present in Tennessee or the dis-
tance traveled by the container—and because all of Itel’s
leases culminated with an importation to a Container
signatory nation—its sales tax necessarily is imposed “by
reason of” or “in connexion with” one or more importa-
tions. Ex. 7, 13, 15, 22. Thus, Tennessee’s tax was im-
posed upon the time-value of “temporarily imported” con-
tainers throughout the term of each lease.
Indeed, the court below sensibly did not take issue with
the proposition that Tennessee’s sales tax on containers
is one imposed “by reason of” or “in connexion with” the
importation of the containers. Instead, the court avoided
a finding of preemption only by pointedly ignoring the
Conventions’ language, which the court nowhere so much
as mentioned. But when the language is considered, it
seems self-evident that the levy—which undoubtedly is a
“tax” within the meaning of both Conventions—must be
preempted.”
12 Although we find the Conventions unambiguous on this point,
it is worth adding that any doubt should be resolved in favor of
preemption. Cf. Air France, 470 U.S. at 396 (treaties “are con-
strued more liberally than private agreements”). Treaties must be
construed to effectuate the intent of the signatories—signatories
that are not concerned with respecting principles of American fed-
eralism. In contrast, preemption is disfavored in cases involving
federal statutes because Congress is presumed not to have sought
to displace state law. Consequently, as the Court has noted in
finding a state tax preempted by a treaty: “When a treaty provision
fairly admits of two constructions, one restricting, the other enlarg-
ing rights which may be claimed under it, the more liberal inter-
15
The “actual, reasonably harmonious practice adopted
by the United States and other signatories” to the Con-
ventions confirms this interpretation. Trans World Air-
lines, Inc. v. Franklin Mint Corp., 466 U.S. 248, 259
(1984). None of the 59 signatories—or their subna-
tional units, with the sole exception of Tennessee—has
sought to tax the transfer of containers. To the contrary,
those nations and their political subdivisions, including
the principal trading nations of the European Community
and Japan, have affirmatively exempted from their sales
and use tax equivalents all transactions involving con-
tainers that are engaged in international commerce.”
pretation is to be preferred. [Citations omitted.| And as the treaty-
making power is independent of and superior to the legislative power
of the States, the meaning of treaty provisions so construed is not
restricted by any necessity of avoiding possible conflict with State
legislation, and when so ascertained must prevail over inconsistent
State enactments.” Nielsen v. Johnson, 279 U.S. 47, 51-52 (1929).
‘8 The member countries of the European Community, for example,
have adopted a suggested uniform system of value added taxation
that imposes “output” and “input” taxes, which are collected in a
manner similar to sales and use taxes. O.J. European Comm. (No.
L 145) arts. 2, 6 (1977) (Sixth Directive 77/388). Cf. Trinova
Corp. v. Michigan Department of Treasury, 111 S. Ct. 818, 825 n.3
(1991). The leasing of goods is considered a taxable supply of
services. See Sixth Directive art. 6. The Community nevertheless
honors its member countries’ obligations under the Conventions by
exempting from value added taxation (1) imported goods that qual-
ify for Customs duty exemptions and (2) supplies of services that
are directly linked to the transit or export of goods. /d. arts.
14(1) (ec), 15(1). See United Kingdom Br. 7-8 & n.14 (explaining
operation of and exemptions to VAT). Similarly, Japan grants an
exemption under its consumption tax to rents from the lease of con-
tainers that are used in international commerce. Consumption Tax
Law, art. 17(2) (ii). Eleven of our principal trading partners have
lodged a diplomatic note with the State Department protesting the
Tennessee tax and representing that, “[c]onsistent with obligations
under the Conventions, neither the Governments [signatory to the
note] nor any political subdivisions impose sales taxes (or equiva-
lent taxes of different nomenclatures) on the lease of cargo con-
tainers thet are used in international commerce among the Con-
tracting Parties to the Conventions.” (A copy of the note is ap-
pended to the brief filed by the United Kingdom in this case.)
16
This uniform practice cuts powerfully in favor of pre-
emption here. Cf. O’Connor v. United States, 479 U.S.
27, 33 (1986); Air France, 470 U.S. at 403; Trans
World Airlines, 466 U.S. at 260.
Indeed, we have more in this case than the implicit
endorsement of our reading that may be derived from
the custom of nations. Eleven of our most significant
trading partners have lodged a note with the State De-
partment explaining their “view that the application of
Tennessee’s sales tax to leases of international-commerce
cargo containers is in direct contravention of the Govern-
ment of the United States’ undertakings in these Conven-
tions.” (A copy of the note is appended in the brief filed
in this case by the United Kingdom.) And the United
Kingdom, a signatory to the 1956 Convention and one
of the world’s leading maritime nations, has informed
the Court expressly that
International-commerce containers leased while in
Tennessee are there precisely “by reason of importa-
tion,” having entered the U.S. in the course of their
continuous use in the cross-border commerce that the
Convention is designed to facilitate. The presence
of a marine container, for example, in Tennessee is
due to its “temporary admission” into the United
States under Article 3 of the Convention, which al-
lows entry of a container into the territory of a Con-
tracting Party for only a limited time (up to three
months) before it once again embarks on a journey
on the high seas en route to the territory of another
Contracting Party. In other words, the container is
in Tennessee only by reason of the fact that it has
been imported as an international-commerce con-
tainer, i.e., “by reason of importation.”
Br. of the United Kingdom (“U.K.”) 7. In these cir-
cumstances, it would be “particularly inappropriate for
a court to sanction a deviation from the clear import of a
solemn treaty between this Nation and * * * foreign
sovereign{s], when, as here, there is no indication that
17
application of the words of the treaty according to their
obvious meaning effects a result inconsistent with the
intent or expectations of its signatories.” Maximov v.
United States, 373 U.S. 49, 54 (1963).
B. The Executive Branch and Congress Intended to
Preempt State Regulation of Federally Bonded Con-
tainers Used Exclusiveiy in Foreign Commerce
1. The Tax Is Inconsistent With The Objectives of
the Container Conventions
Tennessee’s tax is not invalid only because of the ex-
press language of the Conventions. It is equally pre-
empted if, “under the circumstances of this particular case,
[the tax} stands as an obstacle to the accomplishment
and execution of the full purposes and objectives of Con-
gress” and the Executive Branch. Hines v. Davidovitz,
312 U.S. 52, 67-68 (1941). Tennessee’s tax presents
such an obstacle.
The “container revolution” was driven by tremendous
savings in labor costs due to the elimination of inter-
mediate loading and unloading of cargo. Nevertheless,
transporting goods by container carried its own unique
disadvantage. The reusable metal containers are them-
selves valuable articles that were subject to duties and
taxes imposed as they travelled the oceans and conti-
nents—levies that would add to the cost, and thus dis-
courage the use, of container transport.
The signatories to the 1956 Container Convention de-
sired generally to “develop and facilitate the use of con-
tainers in international traffic’ by addressing this very
problem. The Convention accomplishes this goal by re-
ducing the cost of container use through the broad pro-
hibition of duties and taxes. In recommending that the
Senate consent to the United States’ accession to the
treaty, President Lyndon Johnson recognized that the
protections provided by the 1956 Convention not only
18
aided container transport generally but also were “of
special importance to those Americans engaged in busi-
ness in foreign countries” and would “aid the American
export drive.” President’s Letter of Transmittal, 1956
Customs Convention on Containers, 89th Cong., 2d Sess.
(June 30, 1966), reprinted in 108 Journal of the Execu-
tive Proceedings of the Senate, Pt. 1 at 668, 669 (1966).
The Senate thus consented to this country’s accession to
the 1956 Convention both to “simplify|] and facilitat|e]
the movemént of goods in international trade” generally
and to provide “direct benefit to American business inter-
ests in the territories of other parties to the conven-
tion[].” S. Rep. No. 1618, 90th Cong., 2d Sess. 2 (1968).
After its ratification, the 1956 Convention was imple-
mented in the United States by Treasury Department
regulations designating containers “instruments of in-
ternational 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 United States explained
to this Court in Japan Line that “|a] state tax [on con-
tainers| would frustrate accomplishment of the federal
objective” (No. 77-1378, U.S. Br. 28) and therefore
“conflict|| with the spirit and design of the federal
scheme.”” /d. at 29 (footnote omitted). The Court agreed,
quoting from the 1956 Convention’s provision prohibiting
import duties and taxes and concluding that the “Con-
vention reflects a national policy to remove impediments
to the use of containers as ‘instruments of international
traffic.’ Japan Line, 441 U.S. at 453. The Court, utiliz-
ing “a species of pre-emption analysis” (Container Corp.
v. Franchise Tax Bd., 463 U.S. 159, 194 (1983), rea-
soned that California’s property tax on containers placed
“impediments before this Nation’s conduct of its foreign
relations and its foreign trade.” Japan Line, 441 U.S. at
453.
Since that time, the international! proscription on local
regulation of containers has become considerably stricter
19
with ratification of the 1972 Container Convention.
Adoption of the 1972 Convention was prompted by “the
considerable increase in numbers of containers used in
international traffic’ and the “need both for simplifying
Customs formalities and facilitating container transport.”
U.N. Doc. E/Conr. 59/2 (Feb. 22, 1971), at 1 (Note
by the Secretariat). As the United States noted in its
comment on the draft 1972 Convention, the revision of
the 1956 treaty was designed to “contribute significant
economic benefits to the development and facilitation of
international container traffic on a global basis.” U.N.
Doc. F ‘Conr. 59/16 (Nov. 26, 1971), at 2." The pre-
amble 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), which it accom-
plishes, in part, through its prohibition of “Customs du-
ties and all other duties, taxes, fees and other charges”
on containers. /bid.
4 The United States further explained that its “role in the evolu-
tion of the container system” is “dedicated largely to eliminating the
artificial barriers which the division of the world into nation States
poses for efficient movement and trade.” U.N. Doc. E/COoNF.59/
IPG.2, Annex at 14 (Feb. 14-18, 1972). With regard to the contem-
poraneously-drafted International Convention for Safe Containers,
Dec. 2, 1972, [1979] (39 U.S.T. 3707), which establishes safety
standards for containers, the United States similarly commented
that “[a] plethora of dissimilar national regulations would work
great hardship upon the international system and would be at vari-
ance with the objective of facilitating container traffic on a global
basis.” U.N. Doc. E/Conr.59/IPG.2 at 15 (Feb. 14-18, 1972). With
respect to the proposed draft convention on the International Com-
bined Transport of Goods, the United States expressed related goals:
“The United States Government strongly supports the further de-
velopment of containerization which promises so much in reducing
unit transport cost. * * * It sees containerization as having a pro-
found effect in the transport system through the technology and
possibilities for efficiency inherent in it. Consequently, it maintains
that the legal and documentary regime governing the use of this
transport should be as forward-looking as the technology.” U.N.
Doc. E/Conr.59/24 at 3 (June 23, 1972).
20
The United States entered into the 1972 Convention,
as it had the 1956 Convention, both generally to encour-
age the use of containers and specifically to promote the
interests of American container owners. The Department
of State and the Senate both concluded not only that the
1972 Convention “should contribute significantly to the
development of international container traffic on a global
basis,” but also that “[a] primary effect of the Con-
vention will be to facilitate the use of United States-
owned and operated containers in international traffic
by ensuring that they receive treatment in the territories
of the Parties to the Convention similar to that which
is afforded to foreign-owned containers in the United
States at the present time.” Message from the Pres-
ident of the United States Transmitting the Customs Con-
vention on Containers, 1972, and the International Con-
vention for Safe Containers, both signed at Geneva on
Dec. 5, 1972, Exec. X, 93d Cong., Ist Sess. vi (1973);
Exec. Rep. No. 94-33, at 1.
Against this background, it is manifest that the im-
position of a tax on the transfer of containers would
frustrate federal policy in the most direct imaginable
manner: it would add expense to a transaction that Con-
gress intended to be cost-free—and it would substantially
reduce the very benefit that Congress intended to confer
by exempting containers from federal Customs duties.
The magnitude of this effect may be demonstrated on
the record here. During the tax audit period, reusable
cargo containers of the kind leased by Itel were subject
to Customs duty unless otherwise exempted. General
Headnotes 6(a) and (b) (ii) to the Tariff Schedules of
the United States (TSUS). Ad valorem Customs duties
during the audit period ranged from 2.5% to 0.6%.
TSUS 640.30. Because the replacement value of the con-
tainers leased during the audit period was $11,189,172,
the Customs exemption benefited Itel by some $178,550."°
15 The Tennessee Department of Revenue audited the delivery of
Itel’s containers in Tennessee from January 1, 1983 through Novem-
21
By comparison, Tennessee’s revised sales tax assessment
was $158,012, which nearly erased the benefit provided
by the Customs duty exemption. This charge on the
transfer of containers that have entered Tennessee surely
is an “impediment[] to the use of containers” in inter-
national traffic. Japan Line, 441 U.S. at 453, discourages
the “use of American-owned containers” and frustrates
the “American export drive.”’
2. McGoldrick and Xerox
In circumstances that are in all relevant respects iden-
tical to those here, this Court has invalidated state taxes
that substantially reduce economic benefits provided by
Congress. In McGoldrick v. Gulf Oil Corp., 309 U.S. 414
(1940), and Xerox Corp. v. Harris County, 459 U.S. 145
(1982), the Court held state sales and property taxes on
Customs bonded goods preempted by the federal Customs
bonded warehouse statutes. The federal statutes at issue
in those cases excepted the bonded goods only from Cus-
toms duties; the state sales and property taxes at issue
were not expressly prohibited."
ber 30, 1986, examining lease transaction data from two one-month
test periods (Feb. 15-Mar. 14, 1985 and Mar. 1986). Itel transferred
possession of 122 containers in Tennessee during the two test
months. The container leases establish replacement values ranging
from $2,875 to $6,560 for each container. The United States Customs
Service calculates the dutiable “transaction value” of imported leased
goods by determining the consideration that would be paid to pur-
chase identical goods. 19 C.F.R. 152.101(b). By projecting the
number and replacement value of the containers leased during the
test months for the full 47-month audit period, and by applying the
prevailing duty rates during each calendar year (2.5%, 1.9%, 1.3%
and 0.6%, respectively), the duties may be estimated. See TSUS
640.30; Tr. 33; Ex. 7, 13, 15, 22.
' The McGoldrick Court did not rely upon Art. 942 of the Customs
regulations that exempted bonded warehouse goods from state taxa-
tion, stating that the regulations expressed “only what is implicit in
the congressional regulation of commerce.” 309 U.S. at 429. The
Treasury Department later deleted the regulation exempting State
taxation, effective December 1, 1982. The deletion of the regulation
22
The McGoldrick and Xerox Courts examined the federal
objectives promoted by the Customs duty exemptions to
determine whether the state taxes were inconsistent with
them. The purpose of the exemption in McGoldrick was
to remedy a competitive disadvantage experienced by
American fuel oil manufacturers caused by a federal duty
upon the importation of crude petroleum. See 309 U.S.
at 427. The bonded warehouse statutes considered in
Xerox were enacted “to encourage merchants here and
abroad to make use of American ports” and “to stimu-
late business for American industry and work for Ameri-
cans.” 459 U.S. at 151. Exempting bonded goods from
import duties, the Court found, encourages those engaged
in foreign trade to transship goods through American
ports and stimulates the shipbuilding industry. See 459
U.S. at 150-151.
In both cases, the Court found the imposition of state
taxes on the bonded goods to be incompatible with the
policies underlying the Customs duty exemptions granted
by Congress. The McGoldrick Court concluded that the
imposition of a local sales tax upon the transfer of pos-
session of fuel oil would frustrate the objectives of the
federal regulation exempting the fuel from Customs
duties:
It is evident that the purpose of the Congressional
regulation of the commerce would fail if the state
were free at any stage of the transaction to impose
a tax which would lessen the competitive advantage
conferred on the importer by Congress, and which
might equal or exceed the remitted import duty.
309 U.S. at 429. The Xerox Court followed McGoldrick,
concluding that the state tax was large enough “to offset
substantially the very benefits Congress intended to
confer by remitting the duty.” 459 U.S. at 153.
did not alter the Xerox Court’s conclusion “that the ad valorem
taxes [were] preempted by the statutory scheme.” 459 U.S. at 152
n.8.
23
The common thread in McGoldrick and Xerox is that
the imposition of each state tax substantially reduced the
benefit provided to goods dedicated to foreign commerce.
In analyzing these cases, the Court noted that “|t]he dif-
ference in the types of taxes in the two cases was of no
importance, for imposition of either [a sales or a prop-
erty] tax would detract from the benefit accruing to the
importer from the waiver of the duty.” R.J. Reynolds
Tobacco Co. v. Durham County, 479 U.S. 130, 143 n.10
(1986). In other words, “{b]ecause the [federal govern-
ment’s] waiver of import duties [in Xerox] so clearly fur-
thered the Act’s purposes, any attempt to remove its bene-
fit, such as would occur through State taxation, was
incompatible with these goals.” Jd. at 143.
McGoldrick and Xerox compel a finding of preemption
here. The primary means selected by Congress to facili-
tate the use of containers is the waiver of Customs duties.
Tennessee’s sales tax of $158,012 upon Itel’s container
leases is “large enough * * * to offset substantially the
very benefits Congress intended to confer” by relinquish-
ing $178,550 in duties. Xerox, 459 U.S. at 153. Like the
American fuel oil] manufacturers in McGoldrick and the
American shipbuilders in Xerox, the imposition of Ten-
nessee’s tax upon Itel, an American container leasing com-
pany, discourages the use of “United States-owned and
operated containers.” Because more than $84 billion in
American exports are carried in containers annually, the
routine application of state sales and use taxes to con-
tainers will frustrate “the American export drive.”
More fundamentally, however, the frustration of fed-
eral policy is not limited to the Tennessee tax’s effect
on American industry. While the federal statutes in
McGoldrick and Xerox benefited only American interests,
the Container Conventions are designed generally to bene-
fit all signatories by encouraging the use of containers
internationally and thus lowering the cost of transporting
cargo. This purpose of the Conventions would fail if
Tennessee “were free at any stage of the transaction to
24
impose a tax which would lessen the * * * advantage con-
ferred” by its provisions. McGoldrick, 309 U.S. at 429.
Indeed, the United States’ interest in the regulation of
Customs-bonded containers is even more compelling than
its concern with the regulation of imported crude oil in
McGoldrick or the transshipment of copy machines in
Xerox. That is because containers also are the subject of
international treaties that prohibit local taxes, a factor
not present in McGoldrick or Xerox, As the system of
federal container regulation is just as pervasive as the
bonded warehouse system examined in those cases, the
United States regulatory scheme has left Tennessee no
room to impose general sales taxes upon containers.
The court below offered two reasons for declining to
follow McGoldrick and Xerox, which seem self-evidently
controlling here. First, it found the decisions 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.”
Pet. App. 10a. But that reasoning involves an obvious
non sequitur. Observing that the warehouse statutes and
the Container Conventions serve different purposes (even
if that observation is correct) has nothing to do with the
question whether the purposes served by both sets of pro-
visions are defeated by state taxation."’ And in fact, the
federal policy underlying the Container Conventions that’
was identified by the Court in Japan Line—general facili-
17[n fact, the court below was incorrect if it meant to suggest
that American participation in the Conventions was not designed to
benefit American container operators. As explained above, supra, at
17-18, President Johnson, in his message to the Senate, noted that
the 1956 Convention was “of special importance to those Americans
engaged in business in foreign countries” and would “aid the
American export drive.” President Nixon later explained that the
“[1972] Convention is important because it will insure United
States-owned containers the same treatment in the territories of
States parties to this Convention as that afforded in the United
States to foreign-owned containers.” Exec. X, 93d Cong., lst Sess.
iii (1972).
25
tation of the use of containers—is frustrated by a state
tax in precisely the same way as were the federal goals
at issue in McGoldrick and Xerox.
The Tennessee court also found preemption inappro-
priate because, in its view, “Congress’ regulation of cargo
containers is less pervasive than its regulation of bonded
warehouses.” Pet. App. 14a. In fact, the court was sim-
ply wrong in this; the relevant regulations (which were
not so much as cited by the court below) and the Con-
ventions themselves (whose terms were wholly ignored
by the court) impose elaborate requirements relating to
the admission, operation, and design of containers that
parallel those imposed on Customs warehouses.’*
18 See 1972 Convention art. 3-8, 988 U.N.T.S. 45-46 (temporary
admissions facilities and procedures); art. 9, id. at 46 (conditions
on use of containers granted temporary admission) ; art. 10-11, ibid.
(admission of parts and accessories) ; art. 12, id. at 47 (approval of
containers used to transport goods under Customs seal); Annex 1,
id. at 51-52 (identification and marking of containers); Annex 2,
id. at 52 (obligation of container owners to provide detailed records
concerning movement of temporarily admitted containers and to pay
duties when condition 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). Federal
regulations adopted under the authority of 19 U.S.C. 1322 and 19
U.S.C. 66 serve to comprehensively implement the directives of the
Conventions: 19 C.F.R. 10.4la (excepting containers from the re-
quirement of entry and payment of duties); 19 C.F.R. 113.66(a)
(bond conditions) ; 19 C.F.R. Pt. 115 (procedures for approval and
certification of containers). These regulations require that con-
tainers certified for transport under Customs seal meet the stringent
design and construction requirements provided by the Container
Conventions. Containers must be used solely in international com-
merce to qualify as “instruments of international traffic.” In the
event that a container is damaged, regulations detail the conditions
under which it may be repaired or destroyed without the imposition
of duties. Container owners must execute a special bond before
release of containers into the United States. If a container is di-
verted to intrastate or interstate commerce, regulations provide for
the payment of duties and liquidated damages. Neither the federal
26
More fundamentally, the state court’s observation about
the pervasiveness of federal regulation also is beside the
point. Whether or not the container regulations are as
detailed as those governing Customs bonded warehouses,
the crucial factor here is that the Tennessee tax frus-
trates federal policy. Cf. R.J. Reynolds Tobacco, 479
U.S. at 148-149. McGoldrick and Xerox make clear that
preemption is required in such circumstances."” Again,
the United States took the position in Japan Line that the
bonded warehouse provisions are “analogous” to the 1956
implementing statute nor the regulations allow local taxation of
containers.
While it is true that goods in Customs warehouses are held under
the supervision and control of Customs officers (see 19 C.F.R. 19.4;
Xerox, 459 U.S. at 147-148 & n.2) while containers are not, that is
wholly a function of the practicalities of container operation; con-
tainers, of course, must remain in continuous movement along with
the goods they transport. That does not detract either from the
pervasiveness of the container regulations or from the force of the
policies underlying those regulations. Indeed, while Customs officers
cannot accompany every container on every journey, the 1972 Con-
vention takes the next best step by providing that “the owner or
operator [of the container] * * * will undertake in writing * * * to
supply the Customs authorities, * * * at their request, detailed in-
formation concerning the movements of each container granted tem-
porary admission including the dates and places of entry into and
exit from [the] country.” Annex 2(2) (b) (i), 988 U.N.T-.S. at 52.
1® The court below also seemed 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.” Pet. App. 13a; see id. at 9a. In fact, however, the Conven-
tions themselves, which of course have the force of federal law,
expressly preclude 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 that in terms
addressed only Customs duties. And the property tax disapproved
in Japan Line as inconsistent with the 1956 Container Convention
was no more a Customs duty than is the sales tax at issue here.
27
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). That reasoning was cor-
rect, and preemption accordingly is warranted in this
case.
II. APPLICATION OF STATE SALES TAXES TO CON-
TAINERS USED EXCLUSIVELY IN FOREIGN
COMMERCE VIOLATES THE FOREIGN COM-
MERCE CLAUSE
Japan Line. The decision that established the prevail-
ing test for examination of state taxes on foreign com-
merce, Japan Line, providentially considered taxation of
containers subject to the 1956 Container Convention. The
Japan Line Court invalidated California’s property tax on
Japanese-owned containers used exclusively in foreign
commerce. 441 U.S. at 437. Because taxation of foreign
commerce creates an “enhanced risk of multiple taxa-
tion” and “may impair federal uniformity in an area
where federal uniformity is essential,” the Court con-
cluded that such taxes must be scrutinized more closely
than those on interstate commerce.” Jd. at 446, 448. If a
state tax either “creates a substantial risk of interna-
tional multiple taxation” or “prevents the Federal Gov-
ernment from ‘speaking with one voice when regulating
commercial relations with foreign governments,’” the tax
violates the Foreign Commerce Clause. /d. at 451.
California’s property tax failed both prongs of the test.
Since Japan collected a property tax on the full value of
the containers, California’s apportioned tax inevitably re-
sulted in multiple taxation. Jd. at 451-452. California’s
tax also prevented the United States from “speaking with
one voice” in regulating foreign trade:
20 The tax must first satisfy the four-part test enunciated in
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), for
taxation of interstate commerce.
28
The desirability of uniform treatment of contain-
ers used exclusively in foreign commerce is evidenced
by the Customs Convention on Containers, which the °
United States and Japan have signed. [citation
omitted]. Under this Convention, containers tempo-
rarily imported are admitted free of “all duties and
taxes whatsoever chargeable by reason of importa-
tion.” 20 U.S.T., at 304. The Convention reflects
a national policy to remove impediments to the use
of containers as “instruments of international traf-
fic.” 19 U.S.C. § 1322 (a).
Id. at 452-453. The Court swiftly concluded that Cali-
fornia’s tax would “frustrate aitainment of federal uni-
formity” because the risk of Japanese retaliation against
American-owned containers was acute. Ibid. Moreover, if
other States followed California’s example, “foreign-
owned containers [would] be subjected to various de-
grees of multiple taxation, depending on which Ameri-
can ports they enter,” preventing the United States from
“speaking with one voice” in international trade. [bid.
The kinship between this case and Japan Line is strik-
ing. The articles taxed are identical. The containers
were used exclusively in foreign commerce and regulated
by one or both of the Container Conventions, 19 U.S.C.
§1322(a) and 19 C.F.R. §10.4la. Federal Customs
bonds secured the containers from diversion to domestic
commerce. The containers were in constant transit save
for time spent undergoing repair or awaiting loading and
unloading of cargo. The containers engaged in no intra-
state or interstate transportation of cargo except as con-
tinuations of international voyages. Any movements or
periods of nonmovement of containers in the taxing juris-
diction were essential to, and inseparable from, the con-
tainers’ efficient use as instrumentalities of foreign com-
merce. 441 U.S. at 436-37; Stip. 2, 21, 76, 77, 79, 82;
Pet. App. 27a, 35a.
In nevertheless distinguishing Japan Line—which it
evidently recognized otherwise would be controlling—the
Ee ee ee
;
:
:
1
;
+
;
29
Tennessee court found a difference of constitutional di-
mension between California’s property tax and Tennes-
see’s sales tax. See Pet. App. 16a. The court explained
that “the transfer of possession of cargo containers is a
discrete transaction, occurring only within Tennessee,
which creates no risk of multiple international taxation.”
Id. at 14a (footnote omitted). As for the other concerns
identified in Japan Line, the court similarly reasoned that
none “are implicated by a sales tax on a discrete trans-
action occurring only in one jurisdiction.” Jd. at 16a.
These conclusions, however, were far too facile: the Ten-
nessee tax raises precisely the dangers to foreign com-
merce and to this nation’s international relations that
were dispositive in Japan Line.
A. Tennessee’s Sales Tax Creates a Substantial Risk
of International Multiple Taxation
Tennessee’s Tax Invites Multiple Taxation. At the
outset, the court below was simply wrong in suggesting
that, because the taxable event occurs only in one juris-
diction, duplicative taxation is impossible in the case of
a transaction tax. Tennessee’s sales tax is imposed on
the “full value” of the proceeds from container leases.
Because Tennessee’s only nexus with the lease transactions
is a naked transfer of possession, foreign nations may
impose a tax on other incidents of the leases, such as
their execution, that occur within their borders. Others
might tax the use of containers within their jurisdiction.
The prospect of such taxes is hardly hypothetical. As
might be expected, some of the 59 Convention signa-
tories and their innumerable political subdivisions—which
among them employ every imaginable type of taxation—
impose use taxes on leased goods. Others, such as the
members of the European Community, assess value added
taxes on lessees who make productive use of leased prop-
erty. Were containers used in international commerce
not specifically excepted from application of these value
added taxes (see page 15 & n.13, supra), a lessee obtain-
30
ing a container in Tennessee and transporting it to Europe
accordingly would be liable to pay a value added tax on
precisely the same base as that already subjected to tax
in the State—the gross proceeds of the lease.*' And the
prospect that foreign taxes of this sort could be directed
at values already taxed by Tennessee are greatly com-
pounded by the reach of the state levy: once a container
is transferred to the lessee in Tennessee, the State applies
its tax to all amounts paid throughout the course of what
may be a very long and indefinite lease period.
The imposition of such foreign levies based upon the
execution of the lease or use of the container is indeed
equivalent to Temnessee’s sales tax.” All are imposed on
21 The member countries of the European Community typically
define a “taxable person” to include any company that exploits
“tangible * * * property for the purpose of obtaining income there-
from on a continuing basis.” OJ. European Comm. (No. L 145)
Art. 4 (1977) (Sixth Directive 77/388). EC member nations clearly
wouid have sufficient taxing nexus to impose a tax upon leased con-
tainers used within their borders since “the place where [taxable |
transport services are supplied is the place where the transport takes
place, having regard to the distances covered.” Jd. art. 9(2)(b).
And each taxing jurisdiction applies the tax to “everything which
coustitutes the consideration which has been or is to be obtained by
the supplier from the purchaser.” Jd. Art. 11(A)(1)(a). The
United Kingdom offers an example of this effect, describing the
operation of its tax statutes. See U.K. Br. 8.
22 Tennessee itself recognizes the equivalence between its sales
tax and compensating use taxes by providing a sales-tax offset
for use taxes that are paid to other States when interstate commerce
is involved. ‘fenn. Code Ann. 67-6-313(f) (1989), -507 (1990).
While the Court has formally reserved in the interstate setting
whether a State that imposes a compensating use tax is constitu-
tionally compelled 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); D.H. Holmes Co. v. McNamara, 486
U.S. 24, 31 (1988) (the “taxing scheme is fairly apportioned, for
it provides a credit against its use tax for sales taxes that have been
paid in other States”) ; Goldberg v. Sweet, 488 U.S. 252, 264 (1989)
(“to the extent that other States’ telecommunication taxes pose a
31
the full value of the same lease. And, as explained b:
the United Kingdom (Br. at 7-9), foreign salen have 4
sufficient taxable nexus to tax the lease proceeds. That
the labels selected by Tennessee and foreign nations to
characterize their taxes are different “does not permit
[the] Court to forgo examination of the actual tax
base . * *. ‘A tax on sleeping measured by the number
of pairs of shoes you have in your closet is a tax on
shoes.’” Trinova Corp. v. Michigan Dept. of Treasury,
111 S. Ct. 818, 829 (1991) (citation omitted).
The risk that foreign nations will apply equivalent
taxes to container leases is real. In the event that this
Court rules that the imposition of the tax is not pre-
empted by the Container Conventions, the remaining 44
States thac impose a form of sales taxation will likely
follow Tennessee’s example. The other 58 signatory na-
tions that have relinquished their right to collect revenues
on containers will be encouraged to respond by taxing all
container leases or singling out containers owned or
leased by American companies. Because Tennessee’s tax
is based upon “full value,” like Japan’s tax in Japan
Line, even if a foreign nation “should seek to tax the
same instrumentality on an apportioned basis, multiple
a inevitably results.” Japan Line, 441 U.S. at
447.
In the face of this prospect of multiple taxation, the
lower court’s conclusion that “the transfer of possession
of cargo containers in Tennessee is a discrete transaction,
occurring only within Tennessee, which creates no risk
of multiple international taxation,” was based upon a
plain misreading of this Court’s decision in Wardair Can-
ada, Inc. v. Florida Dept. of Revenue, 477 U.S. 1 (1986).
The Wardair Court’s conclusory remark dismissing the
risk of multiple taxation arising from a sales tax on
aviation fuel was based upon the taxpayer’s concession
risk of multiple taxation, the credit provision contained in the Tax
Act operates to avoid actual multiple taxation’).
32
and unique circumstances concerning the product taxed.
The Wardair court found that Article 24(a) ¢° the Chi-
cago Convention on International Civil Aviation prohib-
ited States from taxing aviation fuel that is “ ‘on board
an aircraft * * * on arrival * * * and retained on
board on leaving’ a contracting party; it does not pro-
hibit taxation of fuel purchased in that country.” Jd. at
10. In addition, as the United States explained, aviation
fuel is a product that is consumed during the journey
to the next potential taxing jurisdiction. U.S. Br. in
support of prob. jur., No. 84-902, at 31. Thus, fuel sold
in Florida could not be subjected to a multiple tax
burden upon arrival abroad.
Multiple Taxation of Foreign Commerce. Duplicative
taxation invariably has been deemed fatal to state levies
in the interstate context because, by making an inter-
state transaction more expensive than an equivalent one
that is performed entirely within one State, such taxes
“exert[] an inexorable hydraulic pressure on interstate
businesses to ply their trade within” one State “rather
than ‘among the several States.’” American Trucking
Ass’ns v. Scheiner, 483 U.S. 266, 286-287 (1987) (cita-
tion omitted). See, e.g., Japan Line, 441 U.S. at 446,
447; Evco v. Jones, 409 U.S. 91, 94 (1972); Standard
Oil Co. v. Peck, 342 U.S. 382, 384-385 (1952). That
conclusion applies with greatly increased force in the
setting of foreign commerce, where “[e]ven a slight over-
lapping of tax—a problem that might be deemed de
minimis in a domestic context—assumes importance when
sensitive matters of foreign relations and national sov-
ereignty are concerned.” Japan Line, 441 U.S. at 456.
The propriety of this understanding—that a state tax
cannot survive when it is the cause of inevitable multiple
taxation—is confirmed by the Court’s decision in Con-
tainer Corp. There, the Court upheld California’s method
of apportioning foreign source income to itself for pur-
poses of its corporate income tax, rejecting the claim
that the use by other nations of differing income alloca-
a te a
ee ed
Se ee ns ee a
la te Pity
33
tion methods would lead to impermissible multiple tax-
ation. But the Court added that, “[i]f California’s method
of formula apportionment ‘inevitably’ led to double tax-
ation * * * that might be reason enough to render it
suspect.” 463 U.S. at 192-193. See Japan Line, 441 U.S.
at 455 (“This case * * * involves no mere mathematical im-
precision in apportionment; it involves a situation where
true apportionment does not exist and cannot be policed
by this Court at all”). Here, Tennessee seeks to tax the
full value of container leases, rather than apportioning
the value of the lease by time or distance. Accordingly,
the fact of multiple taxation flows from the nature of
Tennessee’s tax, in contrast to the dilemma in Container
Corp. of trading one allocation method that “sometimes
results in double taxation” in favor of another that
creates the same risk. 463 U.S. at 193.
It is plain, moreover, that when duplicative taxation
Is present the state tax must yield to the one imposed
by a foreign nation. Holding in Japan Line that even an
apportioned state tax must fall when it leads to duplica-
tive taxation of foreign commerce, the Court emphasized
that a state levy “must be evaluated in the realistic frame-
work of the custom of nations. Japan has the right and
the power to tax [the taxpayers’] containers at their full
value; nothing could prevent it from doing so.” 441 U.S.
at 454. Indeed, the impossibility of assuring foreign
*8 If that conclusion is not sufficient to invalidate the tax, the other
factors also considered by the Court in Container Corp.—the con-
text in which the double taxation takes place and the alternatives
reasonably available to the taxing state” (463 U.S. at 189)—also
militate against the Tennessee tax’s constitutionality. Tennessee
may “entirely eliminate one important source of double taxation
simply by adhering to one bright-line rule: do not [ impose a sales
or use] tax, to any extent whatsover, [on] cargo containers ‘that
are * * * used exclusively in international commerce * * *,’” Jd. at
189-30, quoting Jupan Line, 441 U.S. 444. To require Tennessee to
adhere to this rule is “by no means unfair, because the rule [does]
no more than reflect consistent international practice and express
federal policy.” Jd. at 190.
34
compliance with our notions of tax equity requires that
the state levy fall even when it is the foreign tax that
is in some sense the more responsible for the duplicative
taxation. “In interstate commerce, if the domiciliary
State is ‘to blame’ for exacting an excessive tax, this
Court is able to insist upon rationalization of the ap-
portionment. * * * [H]owever, this Court is powerless
to correct malapportionment of taxes imposed from
abroad in foreign countries.” /bid.**
The “Risk” Test. Although the Court did not reach
the question in Japan Line (see 441 U.S. at 452 n.17), it
plainly should not matter to this analysis that Itel’s lease
transaction now faces the risk, rather than the actuality,
of multiple taxation. In assessing claims of duplicative
taxation in the interstate setting, the Court has regarded
it as elementary that “the constitutionaliy of [one
State’s] tax should not depend on the vagaries of [an-
other State’s] tax policy.” Mobil Oil Co. v. Commis-
sioner of Taxes, 445 U.S. 425, 444 (1980). The reason
for that is manifest: “The immunities implicit in the
Commerce Clause and the potential taxing power of the
State can hardly be made to depend, in the world of prac-
tical affairs, on the shifting incidence of the varying tax
laws of the various States at a particular moment.” Free-
man v. Hewit, 329 U.S. 249, 256 (1946). See generally
Tyler Pipe Industries, Inc. v. Washington State Dept. of
Revenue, 483 U.S. 232, 242 (1987); Armco Ine. v. Har-
24 Here, of course, there is no sense in which Tennessee has the
greater entitlement to impose its tax: value added taxes are re-
garded as entirely legitimate by “the custom of nations” and are,
in fact, among the most widely used form of taxation in the world.
Having said this, it of course bears emphasis that, apart from inter-
national obligations such as the Container Conventions, it is within
the power of Congress either itself to impose duplicative taxes on
foreign commerce or to authorize such taxes by the States. But
unless it does so, the States must take the international regime of
taxing authority as they find it, and must refrain from the imposi-
tien of duplicative taxes that will have a destructive effect on the
conduct of international trade.
eee Oe
ee ee ee a eee ee ae
a me we
ete ee ee
35
desty, 467 U.S. 638, 644-645 (1984). That reasoning has
greatly magnified force in the international context, where
the laws of more than 50 nations and thousands of sub-
national units intersect.
In fact, a test that turned on the presence of actual
multiple taxation would be both unmanageable and wholly
divorced from the purposes of the Commerce Clause.
Having the validity of a tax depend upon whether the
taxpayer already had paid a tax in another jurisdiction—
a sort of “first-come, first-tax basis’” (I J. Hellerstein,
State Taxation, $ 4.6[1]{b] at 119 (1983) )}—would sim-
ply be irrational; it would have taxing power turn on the
order of particular transactions and the alacrity of the
local taxing authorities. And in the setting of foreign
commerce, a test that looked to whether other taxing jur-
isdictions actually had tax laws on the books that might
be employed against the taxpayer would require United
States courts to master the tax laws of many other juris-
dictions, while inviting continuing disputes about the
equivalence (and thus about the economic substance) of
foreign taxes that are based on unfamiliar theories.
Such a test also would be impossible to administer when
the tax at issue involved a sale or lease of property that
was to travel in foreign commerce to destinations (and
taxing authorities) not yet identified. See generally id.
at 117-120.
Indeed, a requirement of actual multiple taxation would
have an especially perverse effect in this case. Other na-
tions have specifically withheld exercise of their taxing
authority against containers in deference to the Con-
tainer Conventions, as part of an attempt to encourage
unrestricted international trade. Having the forbearance
of those nationse validate Tennessee’s tax would be a
peculiar irony that cannot be required by the policies
underlying the Foreign Commerce Clause.
Discriminatory Scheme of Tax Credits. The harmful
effects of the duplicative taxation threatened by the Ten-
36
nessee system is compounded by a related element of the
state tax regime: it discriminates against foreign and
in favor of interstate commerce. In Japan Line, Cali-
fornia imposed a non-discriminatory apportioned tax
that collided with Japan’s right to tax the “full value” of
the containers. Here, Tennessee has chosen to “prevent
actual multi-state taxation” by providing a credit for com-
pensating taxes “paid in another state” without provid-
ing a corresponding credit for taxes paid in a foreign
nation. Tenn. Code Ann. 67-6-313(f). Thus, while the
full value of intrastate and interstate container leases
may be taxed only once, Tennessee does not even attempt
to relieve container leases from multiple foreign tax
burdens.
B. Tennessee’s Tax Prevents the United States From
Speaking With One Voice in Regulating Foreign
Trade
While the prospect of duplicative taxation is enough to
invalidate application of Tennessee’s tax, the “one voice”
test articulated in Japan Line provides an independent
basis to scuttle the tax. The tax fails 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., 463 U.S. at
194. The Court has recognized that the second considera-
tion is “essentially a species of pre-emption analysis.”
Ibid. For the reasons explained above, the collision be-
tween the purposes of the Container Conventions and
Tennessee’s tax makes clear that the levy cannot survive
that inquiry. But the tax also must fall because it “im-
plicates foreign policy issues which must be left to the
Federal Government.” /bid.
Interference with Foreign Relations. In Japan Line,
California’s taxation of Japanese-owned containers im-
plicated foreign policy issues because it created a risk
of retaliatory taxes upon American-owned containers in
Japan. Japan Line, 441 U.S. at 453. Like California’s
—- rn ee
37 :
property tax, Tennessee’s sales tax on containers is “a
novel state tax [that] creates an asymmetry in the in-
ternational tax structure” (id. at 450)—a_ proposition
that the Tennessee court did not dispute. Instead, the
court asserted that the risk of foreign retaliation is not
“implicated by a sales tax on a discrete transaction oc-
curring only in one jurisdiction.” Pet. App. 16a. This
ipse dixit is insupportable.**
There is no reason to doubt that imposition of Ten-
nessee’s sales tax on containers owned by foreign con-
tainer lessors will invite retaliation by other nations.?°
And the prospect that the Tennessee tax will irritate for-
eign interests is not limited just to its direct effects on
foreign lessors. Although the legal incidence of Tennes-
see’s sales tax falls upon Itel, a Delaware corporation
headquartered in California, state law mandates that the
tax be separately stated on the bill submitted to the lessee
and requires that the tax “be collected by the retailer
from the consumer insofar as it can be done.” Tenn.
*5 In Wardair, which involved a Florida sales tax similar to the
one at issue here, Justice Blackmun, the only Member of the Court
to reach the constitutional issue, flatly rejected reasoning of the sort
relied upon by the state court here. As he explained, “[t]he tax
imposed in this case by Florida * * * is indistinguishable, for Com-
merce Clause purposes, from the tax imposed by California on con-
tainers in Japan Line.” 477 U.S. at 18 (Blackmun, J., dissenting).
That was the case, he continued, because “other countries may react
to Florida’s tax with various retaliatory measures against United
States carriers abroad, retaliation that ‘of necessity would be felt
by the Nation as a whole.’” Jd. at 20, quoting Japan Line, 441 U.S.
at 453. The Court held in Wardair that the Federal Government had
affirmatively permitted application of the Florida tax, notwithstand-
ing the levy’s effects on foreign commerce. See 477 U.S. at 3-4,
9-10, 12. The Court expressly reserved the question discussed by
Justice Blackmun, noting that “nothing in this opinion should be
understood to address[] whether, in the absence of the international
agreements [permitting state taxation], the Foreign Commerce
Clause would invalidate Florida’s tax.” Jd. at 13.
26 The record establishes that at least one foreign container owner
transfers containers to lessees in Tennessee. Tr. 89-90.
38
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 transaction
may bring an action against the purchaser or lessee for
the amount due or paid. See Sam Carey Lumber Co. v.
Siaty-One Cabinet Shop, Inc., 773 S.W.2d 252, 254-55
(Tenn. App. 1989).
Thus, the practical and legal burden of the tax falls in
substantial part on Itel’s lessees, 80% of which during
the tax period were steamship lines domiciled in foreign
countries. Tr. 31-33. Most of those nations have signed
the Container Conventions (Tr. 30-31) and thus now
refrain from collecting taxes on the transfer of contain-
ers. But if forced to pay the tax, Itel’s foreign customers
may well demand that their governments impose corre-
sponding tax burdens on American shipping companies
who lease containers overseas. “The risk of retaliation
* * * under these circumstances, is acute, and such re-
taliation of necessity would be felt by the Nation as a
whole.” 441 U.S. at 453. As in Japan Line, “[t)his re-
sult, obviously, would make ‘speaking with one voice’ im-
possible.” Jbid.
The prospect of retaliation here, it should be empha-
sized, is not hypothetical. The United Kingdom, in its
submission to this Court, has represented that “[i]f the
United States were now to interpret the Convention other
than in the manner in which it has been uniformly imple-
mented for decades, the United Kingdom and other na-
tions of similar persuasion are not likely to tolerate a
situation in which they refrain from imposing taxes while
U.S. political subdivisions impose theirs.” U.K. Br. at
10-11.. Not surprisingly, the Court has rejected the con-
tention that a State is free to impose such “demonstrable
burdens” on the commerce of the United States. Japan
Line, 441 U.S. at 454.
The Need for a Uniform National Rule. The substan-
tial likelihood that it will provoke retaliatory action by
NR la at ain ce tee et I
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39
other nations is not the only way in which the Tennessee
tax “would make ‘speaking with one voice’ impossible.”
Japan Line, 441 U.S. at 453. The area of container
taxation is one that, the United States and its trading
partners have made clear through their actions, must
be addressed at a national level. Yet, as in Japan Line,
“liJf other States follow [Tennessee’s] example * * *,
foreign-owned containers will be subjected to various
degrees of multiple taxation, depending on which Amer-
ican ports they enter.” Jd. at 453. At the same time,
Tennessee’s tax, while of parochial benefit to that one
State, will increase the price both of containers travel-
ing through the United States and of the cargo exported
in them. As the Court has suggested in a related setting,
that will have “harmful effects on American industry and
workers” by discouraging use of American ports and
the consumption overseas of American goods. R.J. Rey-
nolds, 479 U.S. at 145. The requirements of the Foreign
Commerce Clause surely mean that Tennessee, “by its
unilateral act, cannot be permitted to place these im-
pediments before this Nation’s conduct of its foreign
relations and its foreign trade.” Japan Line, 441 U.S. at
453.
Itel’s Domestic Domicile. It is worth adding that, for
present purposes, it is immaterial that Itel is a domestic
domiciliary. The court belew, of course, disclaimed re-
liance on that consideration. See Pet. App. 7a-8a. It
may be that, in certain factual circumstances, a tax on
domestic taxpayers will be less likely than one on foreign
concerns to disturb international relations. Cf. Container
Corp., 463 U.S. at 195. But that is not the case here.
The tax here must be passed on to Itel’s customers, most
of whom are foreigners who surely will complain to their
governments. That is powerfully demonstrated by the
support accorded Itel in this Court by associations both
of domestic and foreign container lessors and lessees.
See Br. of Asia North America Eastbound Rate Agree-
40
ment, et al.; Br. of Cronos Containers, et al; Br. of Pa-
cific Merchant Shipping Ass’n, et al. And it is par-
ticularly telling that the United Kingdom has taken
the unusual step of expressing its views to this Court—
and that many of our trading partners have filed a
diplomatic note challenging the Tennessee tax—in a case
that does not involve one of their domiciliaries. As in
Japan Line, the state tax thus plainly prevents the United
States from speaking with one voice in regulating foreign
trade.
III. TENNESSEE’S TAX VIOLATES THE IMPORT-
EXPORT CLAUSE
A. The Purpose of the Clause
The Import-Export Clause provides that “No State
shall, without the Consent of Congress, lay any Imposts
or Duties on Imports or Exports, except what may be
absolutely necessary for executing its Inspection Laws.”
U.S. Const. Art. I, § 10, cl. 2. In Michelin Tire Corp. v.
Wages, 423 U.S. 276 (1976), the Court explained the
purpose of the Clause: “In effect, the Clause was fash-
ioned to prevent the imposition of exactions which were
no more than transit fees on the privilege of moving
through a State.” Jd. at 290 (citing License Cases, 5
How. 504, 575-576 (1847) (Taney, C.J.)). While the
Court has explained that “the term ‘Impost or Duty’ is
not self-defining and does not necessarily encompass all
taxes” Washington Revenue Dept. v. Association of
Washington Stevedoring Cos., 435 U.S. 734, 759 (1978) ),
the Court has never construed the Clause to permit the
type of state tax imposed by Tennessee—a direct tax on
goods merely in transit through the State.
Indeed, it was commonly understood at the Constitu-
tional Convention of 1787 that States were not to be
permitted to place direct taxes on exports. During the
debate on the last draft of the Tax Clause (Art. I,
$8, cl. 1), James Madison, contending that the Federal
ed ee ee ee ee ee eee Late Se ae
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Government should have the power to tax exports, argued
that since “the States cannot with propriety exercise it
[the power of taxing exports] separately, it ought to
be vested in them collectively.” 2 M. Farrand, The Rec-
ords of the Federal Convention of 1787, p. 306 (1911):
(emphasis added). Later, the predecessor to the Import-
Export Clause was amended by “insert[ing] after the
word ‘imports’ the words ‘or exports’ so as to prohibit
the States from taxing either.” Id. at 442 (emphasis
added).
By definition, cargo containers that are traveling in
international commerce pursuant to the Conventions have
characteristics both of imports and of exports; they have
arrived in this country from overseas and will imme-
diately leave as part of a continuous journey. The im-
position of a tax on these containers, which are “instru-
mentalities of foreign commerce, both as a matter of fact
and as a matter of law” (Japan Line, 441 U.S. at 445-
46), cannot be reconciled with the Import-Export Clause.
B. The Richfield Decision
It is undeniable that the Tennessee tax is unconsti-
tutional under the principles announced in this Court’s
earlier holdings applying the Clause, where “the dis-
positive question was whether the goods had entered the
‘export stream,’ the final, continuous journey out of the
country.” Washington Stevedoring, 485 U.S. at 752. The
Court thus held in Richfield Oil Corp. v. State Board of
Equalization, 329 U.S. 69 (1946) that California’s sales
tax imposed on a shipment of oil bound for New Zealand
violated the Import-Export Clause. Like the tax here,
the state tax invalidated in Richfield was a generally-
applicable sales tax levied on sellers “[f]or the priv-
ilege of selling tangible personal property at retail,”
who in turn were “authorized to collect the tax from the
consumers.” 329 U.S. at 83. The Richfield Court dis-
missed the State’s attempt to label the tax as a mere
42
“privilege” tax that did not fall directly on the goods
and determined that where “the incident which gave
rise to the accrual of the tax was a step in the export
process” (id. at 84), the tax constituted an impost upon
an export and therefore was unconstitutional. /d. at 86.
Richfield is on all fours with the situation here: it
invalidated a general state sales tax upon the transfer
in the taxing jurisdiction of goods that were being sent
abroad. The Tennessee tax therefore may survive only
if Richfield no longer is good law.
C. The Michelin Analysis
As the Fifth Circuit recently noted, “Richfield has not
been overruled.” Louisiana Land & Exploration Co. v.
Pilot Petroleum Corp., 900 F.2d 816, 819 (5th Cir.), cert.
denied, 111 S. Ct. 248 (1990). In Michelin and Wash-
ington Stevedoring, however, the Court announced a new
test to determine whether a nondiscriminatory state tax
levied on imported or exported goods no longer in transit
violates the Import-Export Clause. This approach looks
at the three policies that underlie the Clause:
[T]he Federal Government must speak with one voice
when regulating commercial relations with foreign
governments, and tariffs, which might affect foreign
relations, could not be implemented by the States con-
sistently with that exclusive power; import revenues
were to be the major source of revenue of the Fed-
eral Government and should not be diverted to the
States; and harmony among the States might be dis-
turbed unless seaboard States, with their crucial
ports of entry, were prohibited from levying taxes
on citizens of other States by taxing goods merely
flowing through their ports to the other States not
situated as favorably geographically.
Michelin, 423 U.S. at 285-286 (footnotes omitted); see
Washington Stevedoring, 435 U.S. at 752-53.°7
27 The Washington Stevedoring Court stated that a State tax on
exports “can be tested for its conformance with the first and third
43
The Michelin Court held that the state property tax
in that case did not violate any of the three policies, but
emphasized that the levy was imposed “on imported
goods that are no longer in import transit.” 423 U.S.
at 286 (emphasis added) ; see id. at 302 (goods “were no
longer in transit”). In so holding, the Court strongly
suggested that the imposition of a tax on goods that
are in transit could not stand, noting that “[i]n effect,
the Clause was fashioned to prevent the imposition of
exactions which were no more than transit fees on the
privilege of moving through a State.” /d. at 290 (foot-
note omitted). The Court therefore explained that the
third purpose of the Clause “may be secured merely by
prohibiting the assessment of even nondiscriminatory * * *
taxes on goods which are merely in transit through the
State when the tax is assessed.” J/bid.
In Washington Stevedoring, the Court noted this limi-
tation on the Michelin holding and left open the possi-
bility that state taxes on goods in transit remain uncon-
stitutional. Because the tax in that case fell “upon a
service distinct from the goods and their value” (435
U.S. at 757), the Washington Stevedoring Court upheld
Washington’s business and occupation tax on stevedoring
services. In so holding, the Court stated that it did “not
reach the question of the applicability of the Michelin
approach when a State directly taxes imports or exports
in transit.” Jd. at 757 n.23.
Most recently, in R.J. Reynolds, the Court again “ob-
served that in Michelin [the Court] limited its holding
to the imported goods ‘no longer in transit.’” 479 U.S.
at 154 (citation omitted). The Court upheld the property
tax there at issue because the imported material had
policies” enunciated in Michelin. 435 U.S. at 758. The second policy
—protecting federal revenues—is not implicated because the Con-
stitution forbids federal taxation of exports. U.S. Const., Art. I, § 9,
cl. 5; see Washington Stevedoring, 435 U.S. at 758.
44
“nothing transitory about it.” Jd. at 155. Richfield is
reconcilable with Michelin and Washington Stevedoring
on that basis: the goods subject to the state sales tax
in Richfield were in transit (they were actually heading
into the hold of a foreign vessel) when the levy attached.
See Richfield 329 U.S. at 82-83.
D. The Richfield Holding Is Valid After Michelin
In our view, the instinct that led the Court repeatedly
to suggest that state taxes on goods in transit may be
per se unconstitutional is sound. As one of the leading
commentators in this area has explained, a
basis for deciding the in-transit tax cases under the
new Import-Export jurisprudence 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 ex-
ported that is imposed at the point of delivery of title
and possession of the goods to the purchaser 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 Hellerstein, supra § 5.4 at 189-90 (footnotes omitted).
The Fifth Circuit has come to an identical conclusion,
holding recently that the Clause invalidates “a [state
sales] tax that is levied on the goods themselves while
they are in transit.” Louisiana Land, 900 F.2d at 820.
This case graphically demonstrates the wisdom of such
an approach. The containers subject to tax simply pass
through Tennessee en route to other destinations. The
containers’ only contact with the State is their delivery
there to a common carrier for transfer elsewhere in the
first step of an“export journey; indeed, the containers
were not subjected to tax until they were delivered to a
common carrier for transport overseas. Tennessee thus
is taking advantage of its “favorabl[e]” location (Mich-
a te et ie Me
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I
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45
elin, 423 U.S. at 286) as a convenient spot for the
transfer of containers to “exact[] a tax on ‘goods merely
flowing through [its] ports.’” I Hellerstein, supra, at
189. That aspect of the levy is made especially clear by
the operation of the tax: once possession of a container
is transferred in Tennessee, the State continues to tax
the proceeds as the lessees’ per diem obligations add up
throughout the extended life of the lease. Tennessee
thus asserts that, once the containers have passed through
the State, it is permitted to impose a continuing tax on
them as they accompany import and export shipments
around the world. This is surely an appropriate setting
for the invalidation “of even nondiscriminatory * * *
taxes on goods which are merely in transit through the
State when the tax is assessed.” Michelin, 423 U.S. at
290.
It is worth adding that, if the Import-Export Clause is
not understood to establish a per se bar on the taxation
of goods in transit, it will serve hardly any purpose at
all. The first and third elements of the Michelin test
are essentially identical to policies already effected by
the Commerce Clause, while the second Michelin policy
has no bearing in cases involving exports.** Yet the
*8 The first element, which looks to the necessity that the Federal
Government speak with “one voice when regulating commercial rela-
tions with foreign governments,” requires “the same inquiry as to
the effect of a state tax as the Foreign Commerce Clause.” Japan
Line, 441 U.S. at 449 n.14. The third prong of the Michelin test,
the Court has added, is satisfied so long as the state tax satisfies the
four-part Complete Auto test governing burdens on interstate com-
merce. See Washington Stevedoring, 435 U.S. at 754-755, 761. And
the second Michelin factor (which certainly was not the principal
policy underlying the Import-Export Clause, see generally Michelin,
423 U.S. at 283-285) does not come into play in cases involving
exports. Although the Court has expressed skepticism that per se
Import-Export Clause rules are necessary to distinguish that provi-
sion from the Commerce Clause (see Washington Stevedoring, 435
U.S. at 759), it did so before it announced the “one voice’ Commerce
Clause test in Japan Line.
46
Import-Export Clause “states an absolute ban [on im-
posts and duties], whereas the Commerce Clause merely
grants power to Congress.” Washington Stevedoring, 435
U.S. at 751. A firm bar against the taxation of goods
in transit thus gives the former Clause an independent
purpose that fulfills its role as a guarantor of “harmony
among the States.” Michelin, 423 U.S. at 286.”
In nevertheless rejecting Itel’s Import-Export Clause
argument, the court below ignored the fact that Itel’s con-
tainers were in transit when the tax was assessed. Rather,
the court found it crucial that “the transfer of possession
of cargo containers is a discrete transaction”; that “Ten-
nessee’s tax only compensates the state for providing
protective services, so the tax will not disturb harmony
among the states’; and that “the indirect nature of the
tax distinguishes it from the direct taxes held invalid
in Xerox and McGoldrick.” Pet. App. 18a. But this rea-
soning plainly is without substance. For reasons we
explain above, a tax on a discrete transaction may pre-
clude the Federal Government from speaking with “one
voice” in its relations with foreign nations. The boiler-
plate suggestion that the State provides protection to
containers traveling through its jurisdiction does not dis-
tinguish the Tennessee tax from any transit fee. See I
Hellerstein, supra, at 187. And the sales tax here is no
less directly imposed on the subject goods than were the
sales taxes invalidated in Richfield and McGoldrick. In-
deed, the Court has made clear that “[i]n Richfield, the
tax fell upon the sale of goods and was overturned because
the Court had always considered 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.”
2° Of course, for the reasons that we explain above in connection
with the Commerce Clause, the Tennessee tax fails the “one voice”
test. Thus, even without a per se ban under the Import-Export
Clause, the Tennessee tax cannot survive scrutiny under the Michelin
test.
47
Washington Stevedoring, 435 U.S. at 756 n.21. That is
true here as well.
CONCLUSION
The decision of the Tennessee Supreme Court should
be reversed.
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 Ave., N.W.
Stites & Harbison Washington, D.C. 20006
600 West Main Street (202) 463-2000
Louisville, KY 40202
(502) 587-3400
Lisa D. LEACH
Vice President & General Counsel
Itel Containers International Corporation
550 California Street
San Francisco, CA 94104-1006
(415) 984-4508
Counsel for Petitioner
APRIL 1992
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.