Amicus Curiae Brief — Itel Containers Int'l Corp. v. Huddleston

| M@preme Court, U.S. ix.

FILED

se Cy) JUN 25 1992

[8 CTS. SME Beal CLERK

In the Supreme Court of the United States

OCTOBER TERM, 1991

ITEL CONTAINERS INTERNATIONAL CORPORATION,

PETITIONER

VU.

JOE HUDDLESTON, COMMISSIONER OF REVENUE OF

TENNESSEE

ON WRIT OF CERTIORARI TO THE

SUPREME COURT OF TENNESSEE

BRIEF FOR THE UNITED STATES AS AMICUS

CURIAE SUPPORTING RESPONDENT

KENNETH W. STARR

Solicitor General

JAMES A. BRUTON

Acting Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

KENT L. JONES

Assistant to the Solicitor General

Gary R. ALLEN

ERNEST J. BROWN

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 514-2217

QUESTION PRESENTED

The Tennessee Retailers’ Sales Tax Act (Tenn. Code

Ann. $§ 67-6-101 et seg. (1989 & Supp. 1991)) imposes

a tax, at the rate of 5.5% of the transaction amount,

upon the sale of “tangible personal property at retail in

this state” (Tenn. Code Ann. § 67-6-201 (1989)). The

statute defines a “sale” as “any transfer of title or pos-

session, or both, exchange, barter, lease or rental * ~*~ *

of tangible personal property for a consideration” (id.

§$ 67-6-102 (23) (A) ).

The question presented is whether application of that

Act to the lease of shipping containers, delivered at points

within the State for use in international transportation

of goods, is barred by the Commerce Clause (Art. I, § 8,

Cl. 3) or the Import-Export Clause (Art. I, § 10, Cl. 2)

of the Constitution of the United States or is preempted

by the Customs Convention on Containers, May 18, 1956,

20 U.S.T. 301, T.ILA.S. No. 6634, 338 U.N.T.S. 103,

acceded to by the United States effective March 3, 1969,

or the Customs Convention on Containers, Dec. 2, 1972,

S. Exec. Doe. X, 98d Cong., Ist Sess. (1973), 98 U.N.T.S.

43, acceded to by the United States effective May 12, 1985.

(1)

TABLE OF CONTENTS

Page

Interest of the United States 2.000. 1

os ksneccscenecsccoveverees 1

Neen epeuenensoenes 5

Argument:

I. The Customs Conventions on Containers do not

proscribe a tax on the lease of containers .... ..... 7

1. The Customs Conventions on Containers are

inapplicable to the domestic taxation of

domestically owned containers _...................... 8

2. The Customs Conventions do not proscribe

application of general sales taxes to the

Ne cecnsscccsencses 11

3. The “objective” of the Customs Conventions

does not forestall application of the Tennes-

Ne esasmunconacocces 18

II. The Commerce Clause does not prohibit state

taxation of container leases ............ Ue 21

III. The Import-Export Clause does not prohibit

state taxation of container leases .....0000.00... 26

Conclusion ................... a SL 28

TABLE OF AUTHORITIES

Cases:

Air France Vv. Saks, 470 U.S. 392 (1985)... 11

Brown Vv. Maryland, 25 U.S. (12 Wheat.) 419

a cnneddasvanseucceccevenes 12-13

Canton R.R. v. Rogan, 340 U.S. 511 (1951) ........ 6-7, 25,

27, 28

Commonwealth Edison Co. v. Montana, 453 U.S.

609 (1981) SEE 21

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

Tee ee emeapessecerecees 4

D.H. Holmes Co. V. McNamara, 486 U.S. 24

EE 22, 25

IV

Cases—Continued :

Empresa Siderurgica v. County of Merced, 337

Ss

Hays Vv. Pacific Mail S.S. Co., 58 U.S. (17 How. )

i

Hinson V. Lott, 75 U.S. 148 (1869) 2.000000.

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

ee 4, 6, 9, 19, 20, 23,

Joy Oil Co. v. State Tax Comm’n, 337 U.S. 286

SD sich iaictan nas

Kraft General Foods, Inc. v. lowa Dep’t of Reve-

nue and Finance, No. 90-1918 (June 18, 1992)...

Louisiana Land & Exploration Co. Vv. Pilot Petro-

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

ER REE rons Seo ee

Maximov V. United States, 373 U.S. 49 (1963)......9,

McGoldrick v. Berwind-White Coal Mining Co., 309

EES RARE En Toe

McGoldrick v. Gulf Oil Corp., 309 U.S. 414

ER ane ER SPs ars Ae, Se el? (OW eR cach ne I

Michelin Tire Corp. Vv. Wages, 423 U.S. 276

(1976) ..... LEGA yO Se ER RETRO OE 11, 18, 21,

Mobil Oil Corp. v. Commissioner of Taxes, 445

I celeb alas

Morgan v. Parham, 83 U.S. (16 Wall.) 471

AT SRI ge Co Te Se OT ee

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

ETT i a ea OSS LORE POORER

Richfield Oil Corp. v. State Board of Equalization,

RES SSE EE eae cr

Southern Pacific Co. v. Kentucky, 222 U.S. 63

EA eee ce eRe ae met ee a ET Ba ee eee

Trinova Corp. V. Michigan Dep’t Treasury, 111

STIS Fr onto ne ys ne

Wardair Canada Inc. V. Florida Dep’t of Revenue,

I

Washington Revenue Dep’t v. Stevedoring Ass’n,

Se TE QUE -eesiciniiieresisenssinnioncsiniens 12, 21, 24,

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

I iaiincatean aca aa eae

24, 25

26

13

26

11,19

22

19

23, 26

20, 27

25, 27

Vv

Constitution, treaties, and statutes: Page

U.S. Const. :

Art. 1:

§ 8, Cl. 3 (Commerce Clause) .............. 4, 13, 24, 25

§ 10, Cl. 2 (Import-Export Clause) ........ 5, 6, 7, 11,

13, 26, 27

Customs Convention on Containers, May 18, 1956,

20 U.S.T. 301, T.I.A.S. No. 6634, 338 U.N.T.S.

ree rane, wantea en MeRe ae tere eeet aD A ae LRT 8

TERT A eRe eae eco ae 13

Us a RC 13

Proclamation, 20 U.S.T. 388 ............................... 8

Customs Convention on Containers, Dec. 2, 1972,

S. Exec. Doc. X, 93d Cong., Ist Sess. (1973),

EERE ek Re, Se ne ee ee ie 9

Se: a 13

Shc ie 13

Convention For the Avoidance of Double Taxation,

Mar. 8, 1971 United States-Japan, 23 U.S.T. 967,

Te i 5

Para. 1 (a), 23 U.S.T. 1084-1085 0... 5

Convention for the Avoidance of Double Taxation,

Dec. 3, 1971, United States-Kingdom of Norway,

Exchange of Notes, para. 1, 23 U.S.T. 2832,

Se a ee 9

Convention for the Avoidance of Double Taxation,

Apr. 13, 1976, United States-United Kingdom-

Northern Ireland, Exchange of Notes, para. 4,

31 U.S.T. 5668, T.I.A.S. No. 9682 ............. ka ee 9

Convention for the Avoidance of Double Taxation,

Aug. 8, 1986, United States-Netherlands Antilles,

Art. 8, para. 3, 2 CCH Tax Treaties 37,011-

I ea 9

EC Sixth Directive (CCH Common Mkt. Rep.

3507 (1977) ):

) | | a sasvidies isniaiiaiclbsaciacetladatiioeahin eaeanicabvaed 14

I Seciiceinle ease diaesiatla nina ina Sinidiopkiddbicdaldeckiainces 14, 16

Art. 11B(3) (b) iecdarmbieasiiapiaeiserasiticeanass

Art. 14 ....... jenna diva dep tiesivialieaiincdatiibanangiineiaesiapeiibaiians 16

PU scnthcrininahvssouesicbittininiateteastaiaditiaesinaions 15, 16

Customs Simplification Act of 1953, ch. 397, § 14,

ee TINIE aenieiciseciceininnienaaisetidanalaesiianaiahctatiiciaie 8

VI

Statutes and regulations—Continued : Page

I dl 2, 5, 8, 9, 10, 11, 20, 21

Tennessee Retailers’ Sales Tax Act, Tenn. Code

Ann. §§ 67-6-101 et seq. (1989 & Supp. 1991) :

GERD cosenersscosscessonneninsniettanmensamennase 12

ince cibeienhleibadnninaneianbiltannieiion 22

SN I iss icaiteicinhibinpisiiiaiaccmsesideaitinanienmannitetinntetinti 13

SEED ciinsisntimnsorccnenesiiastnitencannatitnneuneinatnnancnnione 13

UK Value Added Tax Act of 1983 (48 Halsbury’s

Statutes of England and Wales 598 (4th ed.

1988) ):

(| MESES SERIA, SER ae snr Ca Pe 16

a cl eelaantebanatellin 16

I alee ceeeinentiaids 15, 16

ET! | ATEN i 16

19 C.F.R.:

Section 10.7 (a) .......... St a ee SENET eee 10

ETE PR ren ct ne ee comes 10

I caibeglianasinniaen 10

I ceileaenaceadl 8,10

RY IND GD cc ccecsesencccnsnnsssnnmons 2, 8,11, 20

EET SETI EANT AE EM SARE TOT 2

A ATE ear REARS 2

ELE LS a ce enero awe Tse 2

Section 113.66 ................ i a cea a 2,10

Miscellaneous:

Harmonized Tariff Schedule of the United States

ETE eee ee 18

J. Due, Sales Tawation (1967) .................................... 17

T.D. 55,078, 25 Fed. Reg. 2530 (1960) _........ 8

L. Tribe, American Constitutional Law (2d ed.

IEE as ie Seer Rerneeeers Pree moore rere 26

S. Exec. Doc. X, 93d Cong., Ist Sess. (1973) ........... 9

Tariff Schedules of the United States Annotated:

ses 18

SEER Sy ACO A ae 18

Treasury Department Report To The President:

Tax Reform For Fairness, Simplicity, And

Economic Growth, Vol. 3, Value Added Tax 8

STIITTIEED ‘sisctusiiccionssticthhnimetpeeiisd aacseiieeiediaiihaeindieiainicciiiiedtinihidinte 14,17

Iu the Supreme Court of the United States

OCTOBER TERM, 1991

No. 91-321

ITEL CONTAINERS INTERNATIONAL CORPORATION,

PETITIONER

v.

JOE HUDDLESTON, COMMISSIONER OF REVENUE OF

TEN NESSEE

ON WRIT OF CERTIORARI TO THE

SUPREME COURT OF TENNESSEF

BRIEF FOR THE UNITED STATES AS AMICUS

CURIAE SUPPORTING RESPONDENT

INTEREST OF THE UNITED STATES

The United States is implicated directly in the questions

presented in this case through petitioner’s invocation of

the Customs Conventions on Containers, to which the

United States is a party. The United States also has an

interest in matters before this Court involving foreign

commerce that implicate the Import-Export Clause and

the Commerce Clause of the Constitution. At the Court’s

invitation, the United States filed a brief amicus curiae

at the petition stage of this case.

STATEMENT

1. Petitioner is a Delaware corporation with its prin-

cipal place of business in San Francisco, California. It

(1)

2

is engaged in the business of leasing cargo containers '

for international use. Petitioner purchases these contain-

ers abroad, where they were manufactured. Pursuant to

19 U.S.C. 1322(a) and regulations thereunder (19 C.F.R.

10.4la(ai(1), (ce), (d), and (g), 113.66), the containers

enter the United States duty-free as “instruments of

international traffic,” with a continuous bond given by

petitioner guaranteeing payment of all duties, taxes, or

liquidated damages that could be assessed for failure to

comply with regulations regarding diversion or with-

drawal of the containers from international commerce.

Pet. App. 2a, 28a-30a.

Petitioner solicits leases for its containers through its

offices located in numerous cities in the United States, but

has no marketing office in Tennessee. The leases are on a

per diem basis and restrict the use of containers to inter-

national commerce. Subject to that restriction, the lessee

determines the route of travel and, to some extent, the

period of use. Pet. App. 2a, 30a-31la, 34a.

Petitioner’s containers are ordinarily leased at depots

in Europe or the United States on an as-available basis

under the standardized terms of a Master Interchange

agreement. The written lease is normally executed after

the container is delivered to the lessee. In some instances,

petitioner permits shippers to pick up and load contain-

ers and transport them to a steamship line at an inter-

national port. In these situations, the steamship line then

1The Statement of Stipulated Facts filed by the parties in the

Chancery Court describes these containers as follows (Pet. App.

28a) (numbering of sentences omitied): “Containers are specially

manufactured steel boxes, 20 or 40 feet long, 8 feet wide and 8.5

or 9.5 feet tall. The containers are uniquely designed so that they

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

semi-trailer truck, rail car, or oceangoing vessel. The containers are

secured to rolling stock while transported overland in international

commerce. Because these containers are designed to be used in a

variety of transportation modes, they are uniquely suited for use in

international commerce.”

3

enters into the lease agreement directly with petitioner.

Pet. App. 32a-34a.

Prior to July 1, 1985, petitioner had no employees or

terminals located in Tennessee. Instead, petitioner made

arrangements for its containers to be delivered and picked

up in that State at depots operated by other persons.

Effective August 1, 1985, petitioner leased a tract of land

and buildings in Memphis, Tennessee, where it thereafter

maintained a terminal building and work station to re-

ceive, store, deliver, and, in some circumstances, repair

containers.’ Petitioner continued to allow customers to

interchange containers at other depots in Tennessee, al-

though it had no employees at those points. Pet. App.

2a, 3la.

2. Petitioner was audited by the Tennessee Department

of Revenue for the period of January 1983 through No-

vember 1986. In December 1986, the Department issued

an assessment determining that petitioner owed additional

sales tax for the audit period. Petitioner paid the addi-

tional tax, penalty, and interest (in the amount of

$382,465) and then filed a request for refund. After the

refund was denied, petitioner brought this suit in state

court. Pet. App. 19a, 24a, 34a-36a.

Upon consideration of the testimony and stipulated

facts (Pet. App. 27a-37a), the trial court held, as a

matter of state law, that the Tennessee Retailers’ Sales

Tax Act applies only to transactions in which possession

of the containers is transferred to lessees in Tennessee

and does not apply when lessees take possession outside

of the State ‘id. at 20a-2la). The court therefore con-

cluded that the state tax does not apply when the shipper

* Petitioner “collects and remits sales and use tax on fees which

it collects for repair services rendered in Tennessee” (Pet. App.

2a-3a). The State’s sales tax on repair services for containers was

not challenged in this case (see id. at 3a). Nor does it appear that

petitioner has challenged application of either federal or siate in-

come taxes that apply to the income petitioner receives from repair-

ing or leasing containers.

4

loads the container and delivers it to the lessee outside

of Tennessee at the port of exit (ibid.). Based upon that

ruling, the court reduced the assessment of tax, penalty,

and interest to $158,012 (id. at 24a-25a).

With respect to situations where transfer of possession

to the lessee takes place in Tennessee, the court held that

application of the State’s sales tax is not unconstitu-

tional (Pet. App. 21a). The court observed (ibid.) that,

under the criteria of Complete Auto Transit, Ine. V.

Brady, 430 U.S. 274 (1977), businesses are not relieved

of their just share of the State’s tax burden simply be-

cause they are engaged in interstate commerce. The

court concluded that the Commerce Clause does not re-

quire a different result in this case merely because the

containers are used for international, rather than inter-

state, shipments (Pet. App. 2la-22a).

3. The State accepted the decision of the trial court

and did not appeal. On petitioner’s appeal, the Supreme

Court of Tennessee affirmed the judgment of the trial

court (Pet. App. la-18a). The court rejected petitioner’s

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

441 U.S. 434 (1979), pointing out that (i) in this case,

the owner and transferor of the leased containers is

a domestic corporation, not a foreign corporation sub-

ject to tax in its own nation: and (ii) the tax involved

in this case applies to a transaction that occurs within

one nation only, so that the Tennessee statute does not

impose multiple taxes on a single international transac-

tion (Pet. App. 12a-l4a). Because the state tax other-

wise satisfies the tests established by Coinplete Auto, the

court concluded that its imposition does not violate the

Commerce Clause (Pet. App. 12a-16a).

The Tennessee Supreme Court also rejected petition-

er’s reliance on the Customs Convention on Containers.

The court noted that the Convention exempts containers

only from customs duties and other taxes imposed by rea-

son of importation, and “Tennessee’s sales tax is not a

federal customs duty” (Pet. App. 13a). The Court

a

5

pointed out that bilateral tax treaties exempt only the

“income derived by a resident of a contracting state

* * * from the use, maintenance and lease of containers

{used in international traffic] * * * from tax in the other

contracting state” (Pet. App. 7a (quoting Convention

for the Avoidance Of Double Taxation, Mar. 8, 1971,

United States-Japan, 23 U.S.T. 967, 1084-1085, T.I.A.S.

No. 7365)). Those treaty provisions manifest an under-

standing that income derived by domestic corporations

from the “lease” of containers is not exempt from do-

mestic taxation (Pet. App. 7a).

Finally, the court observed that the state tax is im-

posed on the proceeds of leases of shipping containers

and “not {on| the value of the goods themselves” (Pet.

App. 18a). The court therefore concluded that the state

tax is not subject to challenge under the Import-Export

Clause of the Constitution (Pet. App. 16a-18a).

SUMMARY OF ARGUMENT

I

The containers involved in this case are owned and

leased by a corporation that is organized within, and a

resident of, the United States. The Customs Conventions

on Containers do not govern the domestic taxation of

these domestically owned containers. Instead, petitioner’s

containers enter the United States under the provisions

of 19 U.S.C. 1322(a), which protects them from the ex-

action of federal customs duties. The Tennessee Supreme

Court correctly held (Pet. App. 13a) that the State’s

general sales tax is not a customs duty. Neither the

statute nor the Conventions thus proscribe the State’s tax.

Even if the Customs Conventions did apply to peti-

tioner’s containers, the Conventions do not restrict im-

position of general sales taxes on container leases. Such

taxes are not duties or taxes “chargeable by reason of

importation” (Pet. App. 41a). They are therefore not

within the scope of the Ccnventions’ prohibitions. This

6

conclusion is manifest from the language and context of

the Conventions. It is also evidenced by the practice of

many Nations.

II

The Commerce Clause does not proscribe application

of the State’s general sales tax to container leases. There

is no uniform international custom or practice of exempt-

ing container leases from the effect of generally applica-

ble tax laws. To the contrary, the value of container

leases is commonly subjected to income taxation, as well

as value added taxation, among the Nations that are sig-

natories to the Customs Convention. The State’s tax thus

does not interfere with an accepted international practice

in a manner that impedes our Nation’s ability to speak

with one voice on matters concerning foreign commerce.

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

U.S. 434 (1979), the California property tax on foreign-

owned containers conflicted with the internationally ac-

cented “home port” rule governing property taxation of

instruments of international traffic. By contrast, the

Tennessee sales tax on leases of domestically owned con-

tainers is both consistent with the “home port” rule and

not inconsistent with any other international practice.

Any potential multiple taxation that may result when

other Nations impose similar sales or use or VAT taxes

on these same transactions—but do not follow our do-

mestic practice of providing a credit for the prior tax

paid—cannot make the Tennessee tax unconstitutional.

in this context, the neutral Tennessee tax cannot be said

to be responsible for the potential multiple tax that

could result from differing, rather than consistent, inter-

national practices. The States are not required by the

Commerce Clause to serve as the equilibrator of all world-

wide tax burdens.

Ill

The Tennessee sales tax is not prohibited by the

Import-Export Clause. A tax on container leases “is not

on the goods but on the handling of them” (Canton R.R.

7

v. Rogan, 340 U.S. 511, 514 (1951) ). The Import-Export

Clause prohibits the States from imposing customs duties

on goods; it does not apply to generally applicable taxes

imposed on “hauling them to or from distant points”

(id. at 515).

ARGUMENT

I. THE CUSTOMS CONVENTIONS ON CONTAINERS

DO NOT PROSCRIBE A TAX ON THE LEASE OF

CONTAINERS

The Customs Conventions on Containers provide for

the “temporary admission” of containers “free of import

duties and taxes and free of import prohibitions and

restrictions” (Pet. App. 39a, 42a). The phrase “import

duties and taxes” is defined by the 1972 Convention to

mean customs duties and taxes “collected on, or in con-

nexion with, the importation of goods” (id. at 39a) and

by the 1956 Convention to mean “all duties and taxes

whatsoever chargeable by reason of importation” (id.

at 4la).

The Tennessee Supreme Court correctly concluded that

the Conventions do not proscribe application of the State’s

general sales tax to the lease of containers. This conclu-

sion is supported not only by the plain and limited lan-

guage of the Conventions, but also by the practice of the

signatery parties. As we discuss at pp. 11-17, infra,

contrary to petitioner’s submission, the practice of many

signatory Nations is to apply their general tax provisions

to the vaiue of the lease of containers used in interna-

tional traffic. As we discuss first, however, the Conven-

tions do not apply at all to the domestic taxation of

domestically owned containers, and petitioner’s invocation

of the Conventions to proscribe taxation by governmental

units in its own Nation is thus entirely misplaced.

8

1. The Customs Conventions On Containers Are In-

applicable To The Domestic Taxation of Domesti-

cally Owned Containers

Petitioner misunderstands the genesis and scope of 19

U.S.C. 1822(a) and the manner in which that statute

interrelates with the Customs Conventions on Containers.

Petitioner erroneously states that, “|a]fter its ratifica-

tion, the 1956 Convention was implemented in the United

States by Treasury Department regulations designating

containers ‘instruments of international traffic’ (19 C.F.R.

10.41a(a)(1)) and by a statute excepting such instru-

ments from application of the Customs laws. 19 U.S.C.

1322(a)” (Pet. Br. 18). Petitioner’s chronology, and its

understanding of the scope of these provisions, are flawed.

The 1956 Customs Convention on Containers was not

acceded to by the United States until 1969. See 20

U.S.T. 333 (1969). 19 U.S.C. 1322(a) was adopted

years prior to, and independently of, the Convention.

The statute was enacted in 1953 to allow citizens of

all Nations (including United States citizens) to ob-

tain temporary admission of “instruments of interna-

tional traffic’ (ibid.) free “from the application of the

customs laws” of this country (ibid.).° It authorizes the

Secretary of the Treasury to adopt regulations designat-

ing the “instruments of international traffic’ for which

temporary admission is allowed. /bid. Pursuant to this

authority, the Secretary adopted 19 C.F.R. 10.4la(a) (1)

in 1960, designating various types of “cargo vans” as

“instruments of international traffic’ subject to tempo-

rary admission without “payment of [customs] duty”

(ibid.). It is pursuant to this statute and regulations—

not pursuant to the Customs Conventions on Containers

—that petitioner’s foreign-manufactured containers have

319 U.S.C. 1322(a) was enacted as Section 14 of the Customs

Simplification Act of 1953, ch. 397, 67 Stat. 516. Reciting develop-

ments in containerization practices in the shipment of merchandise,

19 C.F.R. 10.4la was adopted by T.D. 55,078, 25 Fed. Reg. 253

(1960).

9

been “temporarily” admitted duty-free into the United

States.

The Customs Conventions are designed to secure for

domestically owned containers abroad the same tempo-

rary, duty-free admission that the United States provides

for “instruments of international traffic’ under 19 U.S.C.

1322(a).* As is customary with international agree-

ments, however, the Conventions do not purport to dictate

to each Nation how it will treat its own citizens. See

Maximov v. United States, 373 U.S. 49, 52-56 (1963).

Thus, while the Conventions generally provide that “each

Contracting Party shall grant temporary admission to

containers” (Pet. App. 40a; see id. at 42a)), they fur-

ther provide that (id. at 40a; see id. at 42a):

Each Contracting Party reserves the right not to

grant temporary admission to containers which have

been the subject of purchase, hire-purchase, lease or

a contract of a similar nature, concluded by a per-

son resident or established in its territory.

* The 1972 Convention seeks to “insure United States-owned con-

tainers the same treatment in the territories of States parties to

this Convention as that afforded in the United States to foreign-

owned containers.” S. Exec. Doc. X, 93d Cong., Ist Sess. iii (1973).

5In Japan Line, Ltd. v. County of Los Angeles, 441 U.S. at 446

n.10, this Court noted that, in a bilateral tax convention between

Japan and the United States, it was agreed that income derived by

a resident of a Contracting State from the use and lease of con-

tainers and related equipment is exempt from tax in the other

Contracting State. Similar agreements are set forth in, or in con-

nection with, conventions for the avoidance of double taxation with

the Netherlands Antilles (Art. 8, para. 3, 2 CCH Tax Treaties at

37,011-37,012), with Norway (Dec. 3, 1971, United States-Kingdom

of Norway, Exchange of Notes, para. 1, 23 U.S.T. 2832, T.I.A.S. No.

7474), and with the United Kingdom (Apr. 13, 1976, United States-

United Kingdom-Northern Ireland, Exchange of Notes, para. 4, 31

U.S.T. 5668, T.I.A.S. No. 9682). Neither the Customs Conventions

on Containers, nor the conventions for avoidance of double taxation,

impose an obligation upon a contracting party to refrain from

imposing taxes with respect to its own residents. See Maximov V.

United States, 373 U.S. at 52-56.

10

Since petitioner is “established” within, and a “resident”

of, the territory of the United States, the status of its

containers within the United States is determined inde-

pendently of the Customs Conventions—under 19 U.S.C.

1322(a). The Conventions impose no obligation upon the

United States, or on any State of the United States, with

respect to domestically owned containers. See also note 5,

supra.

This express limitation on the scope of the Customs

Conventions is reflected in other regulatory provisions.

If petitioner had purchased containers of domestic manu-

facture, there would have been, of course, no restriction

on their use in domestic commerce. Pursuant to 19

C.F.R. 10.7(a), their movements in and out of the coun-

try would have been governed by “the general regulations

governing the free entry of domestic products exported

and returned” (ibid.). Having purchased containers “of

foreign production,” if petitioner had “imported |them|

duty paid,” they would thereafter be available for domes-

tic commerce and would also be exempt from duty for

exit and re-entry upon compliance with the formalities

set forth in 19 C.F.R. 10.7(b) through (f)/

As permitted by 19 U.S.C. 1322(a) and 19 C.F.R.

10.41a, however, petitioner chose to avoid paying duty on

its containers of foreign origin by applying for release of

those containers and filing the bond conditioned upon

devoting the containers solely to international traffic pur-

suant to 19 C.F.R. 113.66. It is these statutory and regu-

latory provisions, not the Customs Conventions on Con-

tainers, that govern the treatment of domestically owned

containers by the United States.

The command of Congress in 19 U.S.C. 1322(a) is

quite specific and limited. It is to except designated

instruments of international traffic

from the application of the customs laws to such

extent and subject to such terms and conditions as

may be prescribed in regulations or instructions of

the Secretary.

11

Ibid. In designating containers as instruments of inter-

national traffic, the Secretary provided only that they

may be temporarily admitted without “the payment of

[customs} duty” (19 C.F.R. 10.4la(a)‘1)). No other

state or federal taxes are proscribed by the Secretary’s

regulations or by 19 U.S.C. 1322(a).

The Tennessee Supreme Court correctly observed that

the State’s general “sales tax is not a federal customs

duty” (Pet. App. 13a). See Michelin Tire Corp. v.

Wages, 423 U.S. 276, 290-294 (1976). If it were a cus-

toms duty, it would violate the Import-Export Clause of

the Constitution (see ibid.), as well as 19 U.S.C. 1322(a).

Not being a customs duty, however, the state tax violates

neither.*®

2. The Customs Conventions Do Not Proscribe Appli-

cation Of General Sales Taxes To The Leasing Of

Containers

Failing to recognize that the Customs Conventions do

not apply to the taxation of domestically owned contain-

ers, petitioner asserts ‘Pet. Br. 12-21) that the Conven-

tions should be interpreted to proscribe application of

general sales taxes to the leasing of containers. That

contention is also incorrect.

a. To determine the scope of the Conventions, it is,

of course, appropriate first to look to their language. See

Air France Vv. Saks, 470 U.S. 392, 397 (1985); Maximov

v. United States, 373 U.S. at 52. The limitations of the

Conventions’ undertakings are expressed in plain and

simple terms. When applicable, the Conventions pro-

seribe assessment of customs duties and all other taxes

6 Petitioner appears to acknowledge that “19 U.S.C. 1222(a) ex-

cepts instrumentalities of foreign commerce only from the Customs

laws” (Pet. Br. 26 n.19). Petitioner’s reliance on the notion that a

statute preempting customs “duties” also preempts general state

sales taxes (ibid.) is discussed at pages 17-21, infra. We note here

only the significant overbreadth of such a contention, for many

goods are admitted duty-free and are unquestionably not thereby

made immune from general sales tax.

12

“collected on, or in connexion with, the importation of

goods” (Pet. App. 39a) or “chargeable by reason of

importation” (Pet. App. 4la). Petitioner contends (Pet.

Br. 12-13) that a state sales tax on container leases is

“chargeable by reason of importation” because the con-

tainer is present, and available for lease, in the United

States due to its importation. That contention is funda-

mentally misconceived.

It is not the presence of the container, but the duty or

tax that must be “chargeable by reason of importation.”

The State’s general sales tax on container leases is indif-

ferent as to whether the containers are in Tennessee “by

reason of importation” or otherwise. The tax is imposed

upon the proceeds of “any transfer of title or possession,

or both, exchange, barter, lease or rental * * * of tangible

personal property for a consideration.” Tenn. Code Ann.

§ 67-6-102(23) (A) (1989). Whether the property sub-

ject to the State’s tax is of domestic or foreign origin has

no bearing on imposition of the tax. See ibid.; Washing-

ton Revenue Dep’t v. Stevedoring Ass’n, 435 U.S. 734

(1978) (upholding application of the State’s gross re-

ceipts tax to the loading and unloading of cargo ships

engaged in foreign and domestic commerce) ; Hinson V.

Lott, 75 U.S. 148, 153 (1869).

The proscription in the Conventions of duties and other

taxes “chargeable by reason of importation” is designed

to capture customs or importation charges travelling

under any name, but “chargeable by reason of importa-

tion.” What is known as a “customs duty” in English

may be described by some entirely different name or con-

cept in the usage of other Nations: the Convention thus

identifies its subject as “not only Customs duties but also

all duties and taxes whatsover chargeable by reason of

importation” (Pet. App. 4la).’ By thus broadly identify-

7 Another example of a tax “chargeable by reason of importation”

that departs from the ordinary mold of a “customs duty” was con-

sidered by this Court in Brown v. Maryland, 25 U.S. (12 Wheat.)

419 (1827). That case concerned a state license tax that applied only

13

ing the particular subject of the Conventions, the lan-

guage does not alter the subject of the Conventions.’

b. Petitioner states (Pet. Br. 12) that, so far as it has

been able to determine, no signatory of the Conventions

nor any political subdivision of any signatory (other than

Tennessee) has imposed a sales tax, or other similar tax,

on the lease of containers. That petitioner found its

inquiry to be fruitless does not establish that there are

no fruits.

Petitioner’s claim that container leases are not subject

to tax in other jurisdictions is incorrect. The-income that

petitioner derives from the lease or sale of its containers

is subject to the federal income tax (26 U.S.C. 11, 61)

and to state income taxes (see Mobil Oil Corp. v. Com-

missioner of Taxes, 445 U.S. 425, 448 (1980) (“{c]on-

current federal and state taxation of income, of course,

is a well-established norm’). The income derived by

foreign owners of containers is also subject to tax abroad.

“to persons selling “foreign articles or commodities.” Jd. at 436.

The state tax did not also apply to persons selling domestic articles.

The Court thus concluded that the tax was imposed solely by reason

of importation and was proscribed by the Import-Export Clause. Jd.

at 439-443. See Michelin Tire Corp. v. Wages, 423 U.S. at 294-298.

The general sales tax applied by Tennessee does not differ in its

treatment of domestic and foreign goods. It thus cannot be said to

be “chargeable by reason of” or “in connection with” importation.

The present case is similar, in this regard, to Hinson v. Lott, 75

U.S. at 153, where the Court held that a state sales tax on imported

liquors did not violate the Commerce Clause because an equivalent

state tax was imposed on the manufacture of liquors within the

State. See also Kraft General Foods, Inc. v. lowa Department of

Revenue and Finance, No. 90-1918 (June 18, 1992), slip. op. 7.

§ That the focus of the Conventions is on customs duties, and not

upon internal taxes imposed without reference to the origin of the

goods involved, is indicated not only by the narrow language em-

ployed by the Conventions but also by their Protocol of Signature.

Each convention provides that the Protocol of Signature is an in-

tegral part of the convention. Para. 22, 20 U.S.T. 312; Para. 17, 988

U.N.T.S. 47. The Protocol of Signature provides: “The terms of

the present Convention shall not preclude the application of national

provisions or of internal agreements not of a Customs nature, regu-

lating the use of containers.” Para. 2, 988 U.N.T.S. 74. See Para. 2,

20 U.S.T. 326.

14

See note 5, supra. Petitioner offers no explanation why

income taxation applied to such containers is permitted

but revenue taxation is not.

Petitioner instead contends (Pet. Br. 15 & n.13) that

Tennessee should not be allowed to impose its sales tax

because various foreign nations have exempted transac-

actions involving containers engaged in international

commerce from their value added tax (VAT), which is

their domestic analogue to the State’s sales tax.’ Peti-

tioner and its amicus (United Kingdom Amicus Br. 9)

suggest that the United Kingdom (UK) and other Euro-

pean Community (EC) Nations “refrain from imposing

* * * VAT or similar taxes on international container

leases” (ibid.). That contention is inaccurate and mate-

rially incomplete.

Under the EC Sixth Directive, and under the UK

Value Added Tax Act of 1983 (on which petitioner and

amicus rely), a VAT is applied in two basic situations:

(i) when goods or services are supplied within the taxing

jurisdiction, a VAT on the value of those goods or serv-

ices is paid by the supplier; (ii) when goods are imported,

a VAT on the value of imported goods is imposed on the

importer."® The value of imported goods is defined for

® The basic characteristics of value added taxes are discussed in

Trinova Corp. Vv. Michigan Dep’t of Treasury, 111 S. Ct. 818, 823-

824 (1991). The United Kingdom and other EC Nations apply the

“credit” method of value added taxation. See Treasury Department

Report To The President: Tax Reform For Fairness, Simplicity,

And Economic Growth, Vol. 3, Value Added Tax 8 (1984):

The credit, or invoice, method is used by all of the member

countries in the European Economic Community (EEC) and by

most other countries that have a value-added tax. Under the

credit method, a firm’s tax liability is determined by allowing

the firm to subtract value-added tax paid on purchases from tax

due on its sales.

* * * [A)ny value added tax evaded by firms prior to the

retail level would result in higher taxes at the retail level; lower

tax rates at pre-retail stages would be offset by full collection of

the tax at the retail level. ‘

10 See EC Sixth Directive, Art. 2(1) and (2); UK Value Added

Tax of 1983, Art. 1. The EC Sixth Directive is reproduced at CCH

15

purposes of the VAT—under both the EC Sixth Directive

(Art. 11B(3)(b)) and the UK Value Added Tax Act of

1983 (Art. 11(2) (b))—to include the price of the im-

ported goods plus the cost of transport of those goods to

the importing destination.

For example, if a London importer purchases goods at

a price of $100,000 in Tennessee, leases containers in Ten-

nessee from ITEL for $2,000 for the purpose of shipping

those goods to London, and also pays a freighter $1,000 to

load the containers in Tennessee and transport them to

London, the UK VAT will be applied at its ordinary rate

(15°) to the total sum of $103,000. It is thus incorrect

to say—as petitioner and amicus have said (Pet. Br. 15

& n.13; UK Amicus Br. 8, 9)—that the UK and other

IC Nations do not impose a VAT on the value of “in-

ter1.ational container leases,” for the value of such leases

is included in the cost of transport to which the VAT

on imported goods applies."

{n support of the contention that the UK has “relieved

|invernational containers] from the VAT” (UK Amicus

Br. 8), the UK Brief cites various provisions of the EC

Sixth Directive and of the UK Value Added Tax Act of

1983 that concern the separate VAT applicable to the

“supply of goods and services” within the taxing juris-

diction. The provisions that the UK Brief cites do not

restrict, but rather complement, the VAT on imported

goods,

In particular, Art. 14(1) (i) of the EC Sixth Directive,

on which petitioner and amicus rely, contains a telling

Common Mkt. Rep. 3507. The UK Value Added Tax Act of 1983 is

reproduced at 48 Halsbury’s Statutes of England and Wales 598

(4th ed. 1988).

11 Alternatively, if the importer purchases $100,000 of goods in

Tennessee and engages a shipping company to arrange the transport

of the goods to London, and the cost of the shipment (including the

allocated cost of the container lease) is $3,000, the VAT will apply

to the same total of $103,000. The container lease is indirectly sub-

jected to the VAT in this situation, but the effect of the tax is the

same. See note 13, infra.

16

cross-reference (which petitioner and amicus fail to men-

tion or address) to the tax on imported goods.” Article

14(1) (i) provides that “the supply of services, in con-

nection with the importation of goods” shall not be sub-

ject to the VAT, but only “where the value of such serv-

ices is included in the taxable amount in accordance with

Article 11B(3)(b)” (ibid.) (emphasis added). Article

11B(3) (b), which is cross-referenced in Article 14(1) (i),

is the provision that specifies that the VAT on imported

goods “shall include” not only the price of the imported

goods but also “incidental expenses, such as * * * trans-

port * * * incurred up to the first place of destination.”

Thus, the effect of Article 14 is not to exempt interna-

tional transport services from the VAT, as petitioner and

its amicus erroneously state, but is to provide that, when

such services are captured in the VAT on imported goods,

12 The other provisions of the EC Sixth Directive that are cited

in the UK brief are simply off the point, for they relate to the fact

that goods supplied for export, and services provided to such goods,

are not subject to the VAT because, once exported, any VAT paid

will be credited back to the supplier. Such goods and services do not

escape VAT taxation; the VAT on such goods and services is col-

lected by the importing Nation. See EC Sixth Directive, Arts. 2(2),

11B(3)(b); UK Value Added Tax Act of 1983, Arts. 1, 11(2)(b).

The various sources cited in footnote 14 of the UK Brief also are

irrelevant, both for this reason and also because they are designed

to limit the broad statement in Article 6(5) of the 1983 Act that

any supply of services is treated as supplied in the UK, and is thus

subject to the UK VAT, “if the supplier belongs in the United

Kingdom”. Schedule 5, Group 10, Item 11 of the Value Added Tax

narrows this broad proposition by providing that such services will

not be treated as supplied in the UK, even when provided by a UK

supplier, if they involve the “supply of services performed outside

the United Kingdom, which are ancillary to the transport of goods.”

These provisions relate specifically to calculating the VAT on the

supply of goods and services (see UK Value Added Tax Act of 1983,

Art. 16) ; they do not affect calculation of the separate VAT imposed

on the importation of goods. As discussed above, the VAT on im-

ported goods specifically includes the cost of transport of the goods,

including the cost of container leases in connection with such trans-

port.

17

they are not subjected to an additional VAT as a “supply

of goods and services.” Far from exempting international

transport services, the EC Sixth Directive and the UK

Value Added Tax Act of 1983 are designed to insure that

they are subject to the VAT at least once. See also note

9, supra,

To the extent that the practice of Nations informs in-

terpretation of the Customs Conventions, as petitioner

contends (Pet. Br. 15-17), it is evident that the practice

of the UK and other EC Nations is to tax the value of

transportation services provided by contaimers, including

the leasing of such containers. The UK and EC prac-

tice, if relevant, thus supports the conclusion that the

Tennessee tax on container leases is not precluded by the

Conventions. If the Tennessee tax is precluded by the

Conventions, then so too would be the UK VAT applied

to similar leasing charges in connection with its VAT on

imported goods.'*

The UK tax is not distinguishable from the Tennessee tax on

the grounds that, while the VAT system of taxation allows the

provider of goods and services and the importer a credit against the

VAT owed for prior VAT taxes paid, the VAT does not allow such

a credit for non-VAT taxes (such as the Tennessee sales tax) (see

note 9, supra). It is purely a matter of domestic policy for the UK

not to give such a credit for the Tennessee tax. Whether or not the

UK or other EC Nations wish to give a credit for this tax has

nothing to do with the Customs Conventions on Containers, which

hardly can be regarded as adopting and imposing on all signatories

an international VAT system of taxation.

Nor does the UK tax differ from the Tennessee tax in terms of

its ultimate burden. The Tennessee tax, like the UK VAT, may be

assessed on intermediaries, but the burden of the tax in both

instances is generally passed on to the final consumer as a part of

the cost of the final good. See Treasury Department Report To The

President: Tax Reform For Fairness, Simplicity, And Economic

Growth, Vol. 3, Value Added Tax 5, 13 (1984): J. Due, Sales Tara-

tion 5, 12-25, 365-366 (1957). The Tennessee tax and the UK VAT

are also similar in that certain commodities and services are ex-

empted from their coverage. The Tennessee general sales tax differs

from the VAT in that it applies at a lower rate, and with a different

credit mechanism, than the UK VAT. None of these similarities and

18

3. The “Objective” Of The Customs Conventions Does

Not Forestall Application Of The Tennessee Tax

Passing beyond the narrow and specific language of the

Conventions, petitioner argues (Pet. Br. 17-27) that the

Tennessee tax is inconsistent with the “objective” of the

Conventions. Recognizing that the literal scope of the

Conventions goes no farther than proscribing application

of customs duties, petitioner claims that the Tennessee tax

“would substantially reduce the very benefit that Con-

gress intended to confer by exempting containers from

federal Customs duties” (Pet. Br. 20)."

differences, however, has any bearing on whether either tax is

chargeable “by reason of importation.” Indeed, since the UK applies

its tax to the value of container leases at the time of importation

of the goods, it would appear that the UK tax—rather than Ten-

nessee’s generally applicable sales tax—-more closely proximates a

tax “chargeable by reason of importation” (Pet. App. 41a) within

the language of the Customs Conventions.

14 Petitioner states (Pet. Br. 20-21 & n.15) that the duty rate

generally applicable to foreign-manufactured containers (not entered

into the United States under customs bond) fell from 2.5% in 1983

to 0.6% in 1986. The duty rate to which petitioner refers became

zoro in 1987. See Tariff Schedules of the United States Annotated

(TSUS) para. 640.50 (1987).

The duty rate provided by the schedule to which petitioner refers,

however, was not applicable to modern freight containers used for

intermodal traffic and, therefore, presumably was not applicable to

petitioner's containers (see note 1, supra). Beginning in 1983 (the

first year of relevance to this case), and continuing to the present

date, no duty is assessed on “[f]reight containers specially designed

and equipped to facilitate the carriage of goods by one or more

modes of transport without intermediate reloading, each having a

gross mass rating of at least 40,000 pounds (provided for in 640.30)

* * *” TSUS 911.80 (1983). See also TSUS 911.80 (1987);

Harmonized Tariff Schedule of the United States 8609.00 (1992)

(no duty for containers “specially designed and equipped for car-

riage by one or more modes of transport’’).

Petitioner thus errs in its speculations (Pet. Br. 20-21) concerning

the amount of duties that it saved by entering its containers under

bond during 1983-1986. No customs duties were owed during those

years for intermodal cargo containers, even for foreign-manufactured

19

Of course, the Tennessee tax does nothing of the sort.

The exemption “from federal Customs duties” is wholly

unaffected by the Tennessee tax. The benefit conferred by

exemption “from federal Customs duties” exists independ-

ently of the Tennessee tax and is not altered or reduced

by that tax. As this Court stated in rejecting a simiiar

claim that the “objective of [a tax] treaty” extended be-

yond the confines of its language, “[t]he immediate and

compelling answer to this contention is that * * * the

language of the Convention itself not only fails to sup-

port the petitioner’s view, but is contrary to it” (Mazx-

imov V. United States, 373 U.S. at 53, 54).

Nor does Japan Line Ltd. v. County of Los Angeles,

441 U.S. 434 (1981), support petitioner’s argument in

this regard. In Japan Line, the Court relied on the Com-

merce Clause, not the “objective” of the Customs Conven-

tions, ‘o preempt the State’s property tax on foreign-

owned containers. See id. at 451-457. In the context of

its Commerce Clause analysis, the Court made reference

to the Customs Conventions only as indicating “[t]he

desirability of uniform treatment of containers used ex-

ciusively in foreign commerce” (id. at 452). The Court

did not adept or rely upon the argument—advanced by

petitioner in this case—that this “objective” of the Cus-

toms Conventions, by its own force, preempts the States

from imposing general taxes.

Petitioner also errs in suggesting (Pet. Br. 21) that

containers that have been temporarily admitted under

customs hond are, by virtue of that fact, shielded from

all forms of state taxation. Neither in Japan Line nor

elsewhere has this Court adopted the broad proposition

that the temporary admittance of an article under cus-

toms bond immunizes the article from all forms of fed-

eral or state taxation. In particular, McGoldrick v. Gulf

Oil Corp., 309 U.S. 414 (1940), and Xerox Corp. v. County

containers entered without customs bond. That is not, of course,

to say that duties on such articles could not be imposed in the

future.

20

of Harris, 459 U.S. 145 (1982)—-which interpreted the

preemptive force of the statutory scheme involving bonded

Customs Warehouses—do not support this broad submis-

sion. Instead, as this Court has stated, the scope of the

preemption resulting from a customs bond must be deter-

mined by analysis of the “congressional intent” in pro-

viding bonded admission (Xerox Corp. v. County of

Harris, 459 U.S. at 153).”

Here, as in R.J. Reynolds Tobacco Co. v. Durham

County, 479 U.S. 130 (1986), imposition of the State’s

sales tax on container leases is “nothing more than an

expected cost of doing business” (id. at 145). A tax on

the value of such services is assessed not only by Ten-

nessee, but abroad. There is nothing in the history of

the Conventions or of 19 U.S.C. 13822(a) to suggest that

Congress intended “[d]omestic producers and local tax-

payers [to] ‘subsidize’’’ (479 U.S. at 145) the use of

instruments of international traffic. To the contrary,

both the Conventions and the regulations under 19 U.S.C.

1322(a) go no farther than allowing temporary impor-

tion of containers without “payment of duty” (19 C.F.R.

10.4la(a)(1)). There is no suggestion in the language

15 To the extent that the brief filed by the United States in Japan

Line suggested that McGoldrick could have application in interpret-

ing the effect of the Container Conventions (see Pet. Br. 26-27),

that suggestion was not adopted by this Court in Japan Line and

is inconsistent with the Court’s subsequent analysis in R.J. Reynolds.

Moreover, Japan Line concerned the treatment of foreign-owned

containers under the Container Conventions. The Conventions have

no application to the domestically owned containers involved in this

case. See pages 7-11, supra. Furthermore, Japan Line involved

application of a local property tax in a manner that was inconsistent

with the customary practice of Nations (441 U.S. at 447). It was in

that context that the local tax was said to conflict with the general

“desirability of uniform treatment of containers involved in foreign

commerce” (id. at 452). By contrast, there is no customary (and

certainly no uniform) practice for Nations not to apply their general

taxes to container leases. The unanchored goal of “uniformity” on

which petitioner seeks to rely is thus not offended by the State’s

tax in this case. =

21

or history of the Conventions or of 19 U.S.C. 1322(a)

that petitioner’s imported containers should not share

the cost of government that protects them, along with

domestically produced containers used in international

traffic and similar instruments of domestic traffic. Cf.

Michelin Tire Corp. v. Wages, 423 U.S. at 286, 288-289,

293-294; Washington Revenue Dep’t v. Stevedoring Ass’n,

435 U.S. at 745, 748, 751-755.

In any event, as we have shown, nothing in the Con-

ventions addresses the treatment afforded by any Nation

to its own residents. Nothing in the Conventions or the

statute proscribes duties or taxes other than those charged

“by reason of importation.” And, the common practice

of signatory Nations is to permit general sales taxes—

or value added taxes—to be applied, either directly or

indirectly (see note 11, supra), to the value of container

leases. To the extent the Conventions and the statute

speak at all to domestic taxation of domestically owned

containers, they do not proscribe sales taxes on container

leases.

II. THE COMMERCE CLAUSE DOES NOT PROHIBIT

STATE TAXATION OF CONTAINER LEASES

The Tennessee sales tax applies to container leases

only when delivery to the lessee occurs within the borders

of the State (Pet. App. 20a-2la). Petitioner nonetheless

claims that, because this sales tax is not apportioned

among the jurisdictions where the leased container is

used (Pet. Br. 32-33), and because other Nations may

also apply a sales tax to such leases (id. at 29-31), the

State’s tax offends the Commerce Clause.

Apportionment is not ordinarily required for sales

taxes, precisely because “the tax is imposed only upon

* * * a discrete transaction which occurs within one * * *

jurisdiction only.” Wardair Canada Inc. v. Florida Dep’t

of Revenue, 477 U.S. 1, 9 (1986). See also Common-

wealth Edison Co. v. Montana, 453 U.S. 609, 617 (1981)

(upholding state severance tax as to coal shipped out of

22

state, for “the severance can occur in no other state’) ;

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

33, 58 (1940) (upholding state sales tax “conditioned

upon a local activity, delivery of goods within the state

upon their purchase’’).'" For example in Wardair, the

Court upheld Florida’s tax on the sale of fuel to common

carriers for use in international travel. 477 U.S. at 9."

Here, as in Wardair, “there is no threat of multiple in-

ternational taxation” (ibid.) because the State’s tax is

limited to leases of containers delivered to lessees in

Tennessee, “a discrete transaction which occurs within

one #seernational jurisdiction only” (ibid.).

It is true that the United Kingdom and other Euro-

pean Community Nations may also apply their sales tax

equivalent—or VAT—to the lease of the same contain-

ers. See pages 14-17, supra. It also appears that those

Nations would not provide a credit in calculating their

VAT for sales taxes paid in non-VAT jurisdictions. See

16 When an article is moved from one State to another, it is not

uncommon for the second State to apply a “use” tax on the article

and to give a credit, in the calculation of that tax, for the sales tax

paid in the first State. See D.H. Holmes Co. v. McNamara, 486 U.S.

24, 31 (1988). In calculating its use tax—which is not involved in

this case—Tennessee follows the practice of providing a credit for

prior sales taxes “paid * * * in another state.” Tenn. Code Ann.

§ 67-6-313(f).

Petitioner claims, without citation of authority, that the State

would interpret its use tax credit provision not to apply to foreign

sales taxes (Pet. Br. 36). Even if it did, that would have no hearing

on the constitutionality of the State’s sales tax as applied in this

case.

17 [In Wardair, the Court noted that the taxpayer’s only challenge

to the State’s tax was based upon the claim that the tax “threat-

enfed] the ability of the Federal Government to ‘speak with one

voice’’”’ on matters affecting foreign commerce. 477 U.S. at 9. The

Court observed that the other wing of the Japan Line analysis—the

“threat of multiple international taxation”—was not present in that

case because the tax was “imposed only upon the sale of fuel, a

discrete transaction which occurs within one national jurisdiction

only.” Ibid.

23

note 13, supra. Unlike the situation that existed in Japan

Line, however, the risk of multiple taxation that may

occur in this situation is not proscribed by the Commerce

Clause.

In Japan Line, there was an international custom

(endorsed by this Court in a long line of decisions) that

an ocean-going vessel (and any other instrument of inter-

national traffic) was subject to property taxes only at its

“home port.” See Hays v. Pacific Mail S.S. Co., 58 U.S.

(17 How.) 596, 599 (1855); Morgan v. Parham, 83 U.S.

(16 Wall.) 471, 472 (1873); Southern Pacific Co. V.

Kentucky, 222 U.S. 63 (1911). Recognizing that those

decisions “expressing the mandate of the Constitution,

express as well the custom of nations,” the United States

argued in its brief in Japan Line that positive law over-

riding the accepted practice of Nations “can be enacted

only at the national level if the nation is to speak with

one voice in matters of foreign commerce” (77-1378 U.S.

Amicus Br. at 15 (Sept. 1978) ). Since the uniform prac-

tice of Nations had been “to exempt foreign-owned” ves-

sels and containers from property taxes, and to allow the

“home port” Nation to tax the full value of such prop-

erty, the United States submitted in Japan Line that the

California tax was responsible for the resulting double

taxation of the property and that it should therefore

yield under the Commerce Clause (id. at 28-29 & n.22).

While the Court found no fixed, constitutional require-

ment for the “home port” rule in Japan Line (441 U.S.

at 441-444), the Court agreed that the California prop-

erty tax on foreign-owned containers conflicted with

established international practice (id. at 447) and there-

by interfered with our government’s ability to “speak

with one voice when regulating commercial relations with

foreign governments” (id. at 449 (quoting Michelin Tire

Corp. Vv. Wages, 423 U.S. at 285)). The Court also noted

that, since “the country of domicile” has the “right, con-

sistently with the custom of nations, to impose a tax on

{the} full value” of “instruments of international traffic”

T AVAILABLE COPY

24

(id. at 447), a double tax on the property “inevitably

results” when the State taxed the foreign-owned instru-

ments of international traffic. /bid.

There is no international custom exempting the owners

of containers from tax in their own Nation. See notes

5, 13, supra. The rationale for the “home port” rule

requires precisely the opposite conclusion: international

custom permits governments to tax containers owned do-

mestically. Moreover, as the EC and UK practice reflects,

there is also no international custom exempting the value

of container leases or other international transport serv-

ices from general sales tax or VAT taxation. See pages

14-17, supra.

Far from conflicting with international custom, the

Tennessee tax appears to promote it. The Tennessee tax

thus does not interfere with our ability “to speak with

one voice” on this issue involving foreign commerce. If

the United States desires, through future multilateral

negotiations, to seek an international custom or practice

proscribing such taxation, there will be time enough for

appropriate conventions or treaties to be adopted. Until

then, we see no deviation from international custom in

the Tennessee tax sufficient to require constitutional pro-

scription under the Commerce Clause.

Nor, in this context, can it be said that Tennessee is

responsible for any dup'ication in the taxes that the UK

or other EC Nations may impose as the result of those

Nations’ refusal to provide a credit for the Tennessee tax

in their VAT calculations. See note 13, supra. While the

States of the United States customarily provide such a

18 Petitioner’s argument would suggest that a state retail sales tax

could not constitutionally be applied to the sale or lease of an air-

plane for use in transporting passengers internationally if the for-

eign nation elected to impose a “use” tax on the airplane and gave

no credit for prior sales tax payments. The Commerce Clause, how-

ever, does not deprive the States of all taxing authority with respect

to instruments employed, or services provided, in connection with

international trade. See, e.g., Washington Revenue Dep't v. Steve-

doring Ass’n, 435 U.S. at 743-751.

25

credit in imposing use taxes on goods already subjected

to sales tax in another State (e.g., D.H. Holmes Co. Vv.

McNamara, 486 U.S. at 31; note 15, supra), Tennessee

can not be faulted for the failure of other Nations to

provide such a credit in application of their conceptually

different tax systems. Any double tax on container leases

that results in these circumstances is the product of

differing national tax practices, not international custom.

The Commerce Clause has never been held to require the

States to serve as the equilibrator of world-wide tax

burdens.

- It bears emphasis that the “multiple taxation” argu-

ment that petitioner advances under the Commerce Clause

with respect to container leases is equally applicable, and

equally unavailing, with respect to any other product

sold or service provided in connection with export com-

merce. Foreign nations that apply a VAT system of

taxation—and that do not give a credit in the calculation

of their VAT for sales taxes collected in the United

States—impose a tax on all goods (including the cost of

transporting those goods) imported in their borders; in

this respect, these foreign taxes could be said to create a

“multiple” burden on export traffic. Under petitioner’s

view of the Commerce Clause, the States would be de-

prived of their ability to apply neutral sales and gross

receipts taxes not only to all such export activities, but

also to the initial and intermediate economic activities

that precede the export stage. There is no basis for such

an intrusive and expansive interpretation of the Com-

merce Clause. See Washington Revenue Dep’t v. Steve-

doring Ass’n, 435 U.S. at 757: Canton R.R. v. Rogan,

340 U.S. 511 (1951).

For the same reasons that led this Court in Japan Line

to conclude that foreign nations possess a prior right to

tax foreign-owned instrumentalities of commerce, so too

does this Nation—and the States—possess the power to

tax domestically owned instrumentalities of commerce.

20

Ill. THE IMPORT-EXPORT CLAUSE DOES NOT

PROHIBIT STATE TAXATION OF CONTAINER

LEASES

Petitioner also asserts (Pet. Br. 40-47) that the Ten-

nessee sales tax on container leases is barred by the

Import-Export Clause of the Constitution and claims that

the decisions upholding the state tax in this case “un-

deniabl[y]” conflict with Richfield Oil Corp. v. State

Board of Equalization, 329 U.S. 69 (1946). Richfield Oil

concerned application of a state sales tax to oil sold

and delivered into a tanker waiting in the Los Angeles

harbor for shipment to Auckland, New Zealand. The

Court held that the State could not impose its sales tax

on this export sale of goods.'” By contrast, in Michelin

Tire Corp. v. Wages, this Court upheld application of a

general state tax to imported goods awaiting shipment

in inland warehouses. 423 U.S. at 302. Petitioner ex-

plores at some length (Pet. Br. 42-47) whether the

Court’s reasoning in Michelin Tire undercuts the rationale

of Richfield Oil and deprives it of further validity. See

also Joy Oil Co. v. State Tax Comm'n, 337 U.S. 286

(1949); Empresa Siderurgica v. County of Merced, 337

U.S. 154 (1949); L. Tribe, American Constitutional Law

472-473 (2d ed. 1988).

However interesting that question might be, it has no

bearing on the disposition of this case. Neither Michelin

Tire nor Richfield Oil applies here because the leasing

of containers does not concern either “exports” or “im-

ports.” The American-owned truck or railroad car that

carries goods from points in this country to consignees

in Canada or Mexico carries exports, but is not itself an

export. The same is true of American-owned ships or

19 In Louisiana Land & Exploration Co. v. Pilot Petroleum Corp.,

900 F.2d 816 (5th Cir.), cert. denied, 111 S. Ct. 248 (1990), the

court similarly concluded that the Import-Export Clause proscribed

application of the state sales tax to an export sale of oil into a

tanker waiting in the Mobile harbor for shipment to Halifax, Nova

Scotia.

27

airplanes carrying goods to more remote consignees. The

goods will be left at their foreign destinations while the

instrument of international traffic, not itself an export,

returns for further voyages. The same is true, of course,

of the containers that petitioner leases for the carriage

of goods out of the United States. The containers will be

returned to petitioner for further leases and further

voyages. The goods the containers carry are exports, but

the containers are not.

This distinction was recognized by this Court in Canton

R.R. v. Rogan, 340 U.S. 511 (1951). The railroad in

that case operated solely within Baltimore, moving freight

between its marine terminal at the port of Baltimore

and connecting railroads. Invoking the Richfield case,

the railroad claimed that the portion of its gross receipts

that represented the proceeds of handling imports and

exports was exempt from Maryland’s gross receipts tax.

In rejecting that claim, the Court stated (id. at 513-514):

If this were a tax on the articles of import and ex-

port, we would have the kind of problem presented

in * * * Richfield Oil Corp. v. State Board * * * and

Joy Oil Co. v. State Tax Comm’n * * *. But the

present tax is not on the articles of import and ex-

port |.] * * * The difference is that in the present

case the tax is not on the goods but on the handling

of them at the port.

See also Washington Revenue Dep’t v. Stevedoring Ass’n,

435 U.S. at 757 ‘upholding a gross receipts tax that fell

“upon a service distinct from the goods and their

value”).

20In R.J. Reynolds Tobacco Co. v. Durham County, 479 U.S. at

153, the Court rejected the claim that a state ad valorem property

tax interfered with federal regulation of foreign commerce or con-

stituted a “duty” proscribed by the Import-Export Clause. The

Court noted that the State’s generally applicable tax “falls on im-

ported and domestic goods alike and does not single out imported

goods for unfavorable treatment.” Jbid. That same conclusion ap-

plies to this case.

28

As the Court concluded in Canton R.R. v. Rogan, “if

the handling of the goods at the port were part of the

export process, so would hauling them to or from distant

points or perhaps mining them or manufacturing them.”

340 U.S. at 515 (emphasis added). The Tennessee Su-

preme Court was thus correct in concluding (Pet. App.

18a) that application to container leases of a generally

applicable tax on the sale or lease of tangible personal

property is not a tax on exports even though the leased

containers may be used in “hauling [imports and ex-

ports] to or from distant points” (340 U.S. at 515).

CONCLUSION

The judgment of the Supreme Court of Tennessee

should be affirmed.

Respectfully submitted.

KENNETH W. STARR

Solicitor General

JAMES A. BRUTON

Acting Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

KENT L. JONES

Assistant to the Solicitor General

GARY R. ALLEN

ERNEST J. BROWN

Attorneys

JUNE 1992

W ov. S. GOVERNMENT PRINTING OFFICE, 1992 312324 45476