Reply Brief — United States v. International Business MacHines Corp. Certiorari to the United States Court of Appeals for the Federal Circuit

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In the Supreme Court of the United States

OCTOBER TERM, 1995

UNITED STATES OF AMERICA, PETITIONER

V.

INTERNATIONAL BUSINESS MACHINES CORPORATION

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

REPLY BRIEF FOR THE UNITED STATES

Drew S. Days, III

Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 514-2217

TABLE OF AUTHORITIES

Cases: Page

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

———ññ ———ꝛñ 4. 5

Cornell v. Coyne, 192 U.S. 418 (1904) .............. 7

Department of Revenue of Washington v.

Association of Washington Stevedoring Cos.,

435 U.S. 734 (1978) ......... — 5

Low v. Austin, 80 U.S. (13 Wall.) 29 (1872) 4

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

—— 4

Rodrigues de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477 (1989) . . . 3

Thames & Mersey Marine Ins. Co. v. United

Sdates, BIT US. 19 (IDI) eee 3

United States v. Gainey, 380 U.S. 63 (1965) .... 2

United States v. Goodyear Tire & Rubber Co.,

I ctipreetcenetsitenbtnnsiiteninmnenninsencese 2-3

United States Shoe Corp. v. United States,

No. 95-173 (Ct. Int’l Trade Oct. 25, 1995) ........ 2

Constitution and statutes:

U.S. Const. Art. I:

§ 9, Cl. 5 (Export Clause .. 2, 3, 5, 6, 7,

§ 10, Cl. 2 (Import-Export Clause) 3,4

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Miscellaneous:

Madison’s Notes of Debates in the Federal

1 — 6

Warren, The Making of the Constitution

—..—— ů ů ͤ — — 6

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In the Supreme Court of the United States

OcTOBER TERM, 1995

No. 95-591

UNITED STATES OF AMERICA, PETITIONER

*.

INTERNATIONAL BUSINESS MACHINES CORPORATION

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNFTED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

REPLY BRIEF FOR THE UNITED STATES

1. Respondent errs in contending that the ques-

tion presented lacks substantial continuing impor-

tance. The Federal Circuit held a federal tax to be

unconsti.utional in this case. That decision, if valid,

would require the return of millions of dollars of

federal revenues that have been collected from a large

number of affected taxpayers. It would also directly

undermine the congressional policy of placing foreign

and domestic insurers on a more equal competitive

footing. See Pet. 14-15. Review by this Court of the

Federal Circuit’s exercise of the Judiciary’s most

“grave power of annulling an Act of Congress” is

(1)

2

fully warranted. United States v. Gainey, 380 U.S.

63, 65 (1965).

Respondent mistakenly contends that the decision

below implicates “no broad principle applicable to

other revenue measures” (Br. n Opp. 6). Only four

weeks ago, citing and relying the decision entered

in this case, the United States Court of International

Trade held the federal “tax on any port use” (26

U.S.C. 4461(a)) to be unconstitutional as applied to

transactions involving goods for export. United

States Shoe Corp. v. United States, Slip op. 95-173, at

23 (Oct. 25, 1995). That decision, which involves more

than $500,000,000 in revenues that have aiready been

collected from the plaintiffs (id. at 8), is appealable

only to the Federal Circuit.“ See Pet. 13-14.

Since all taxpayers are entitled to pay a challenged

tax and sue for a refund within the Federal Circuit, it

is unlikely that other courts of appeals will have an

opportunity to review the constitutional question

presented in this case. This Court has long noted

that plenary review is appropriate for decisions of the

Federal Circuit that present issues of such sub-

stantial and recurring importance. See, e.g., United

As respondent notes (Br. in Opp. 14-15), the United States

Shoe Corp. case presents the additional question whether the

“tax on port use” is a fee for services, rather than a “tax.”

That question is relevant, however, only if a generally

applicable federal tax that applies without discrimination to

both domestic and international transactions would violate the

Export Clause. In determining that such a generally applicable

tax would violate the Export Clause, the Court of International

Trade cited as authoritative, and applied the reasoning of, the

decision of the Federal Circuit in this case. United States Shoe

Corp. v. United States, slip op. 95-173, at 17-24.

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States v. Goodyear Tire & Rubber Co., 493 U.S. 132,

138 (1989); Pet. 14.

Moreover, as the court of appeals emphasized (Pet.

App. lla), only this Court has “the prerogative of

overruling its own decisions.” Rodrigues de Quijas

v. Shearson/American Express, Inc., 490 U.S. 477,

484 (1989). Only this Court can determine whether

the considerations that led it to uphold generally

applicable, nondiscriminatory state taxes under the

Import-Export Clause—and to overrule numerous

inconsistent decisions in the process—apply equally

to challenges to federal taxes under the Export

Clause. In the absence of further review in this case,

the Federal Circuit will be compelled to follow

Thames & Mersey Marine Ins. Co. v. United States,

237 U.S. 19 (1915), even though, as the petition

explains in detail (Pet. 15-30), the reasoning of that

early decision has been repudiated by subsequent

decisions of this Court.

2. a. Respondent contends that textual distinctions

between the language of the Import-Export Clause

and the Export Clause require that significantly dif-

ferent analyses be applied to constitutional chal-

lenges under those Clauses (Br. in Opp. 7-12). In

particular, respondent suggests that an “impost or

duty” under the Import-Export Clause is something

different from—and narrower than—a “tax or duty”

under the Export Clause (id. at 8-9).

In making that contention, respondent ignores the

balance of the text of these Clauses. The Import-

Export Clause precludes States from imposing “Im-

posts or Duties on Imports or Exports”; the Export

Clause specifies that no federal “Tax or Duty shall be

laid on Articles Exported.” U.S. Const. Art. I, § 10,

Cl. 2; Art. I, § 9, Cl. 5. A “tax” that is laid on” an

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“article exported” is an “impost” on an “export.” An

“impost” on an “export” is a “tax” that is “laid on” an

“article exported.” These constitutional phrases

have an identical meaning, as this Court has con-

sistently held. Giving effect to the entire text of both

Clauses, the Court stated as long ago as Brown v.

Maryland, 25 U.S. (12 Wheat.) 419, 445 (1827), that

“[t}here is some diversity in language, but none is

perceived in the act which is prohibited.”

b. Respondent also errs in contending that the

slight difference in phrasing of these two Clauses was

“central to the Michelin and Washington Steve-

doring holdings” (Br. in Opp. 9). In Michelin Tire

Corp. v. Wages, 423 U.S. 276 (1976), the Court first

explained the origin of the “original package” doc-

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

and that Low’s reliance on Brown v. Maryland for

that doctrine was misplaced. 423 U.S. at 281-283. See

Pet. 16-18, 22-24. The Court then concluded, based

upon a historical analysis of the origins and purposes

of the Import-Export Clause, that “a nondiscrimina-

tory ad valorem property tax is not the type of state

exaction which the Framers of the Constitution or

the Court in Brown had in mind as being an ‘impost’

or duty.““ 423 U.S. at 283. The Court explained that

the history of the Import-Export Clause revealed that

it was not designed to bring into question the con-

stitutionality of a generally applicable state tax that

applies to imported and domestic goods without

discrimination. Id. at 286-290. See Pet. 23-24. The

Court concluded that, consistent with its limited

purpose, the Clause must be understood to permit

general exactions that do not apply exclusively, or

discriminatorily, to import or export transactions

(423 U.S. at 293-294):

en Se

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[Slince prohibition of nondiscriminatory ad va-

lorem property taxation would not further the

objectives of the Import-Export Clause, only the

clearest constitutional mandate should lead us to

condemn such taxation. The terminology em-

ployed in the Clause— “Imposts or Duties”—is

sufficiently ambiguous that we decline to presume

it was intended to embrace taxation that does not

create the evils the Clause was specifically in-

tended to eliminate.

In Department of Revenue of Washington v. Asso-

ciation of Washington Stevedoring Cos., 435 U.S. 734

(1978), the Court again relied on the purposes of the

Import-Export Clause—and not on the long-rejected

contention that its text varies in substance from the

Export Clause—in concluding that a nondiscrimina-

tory, generally applicable state tax is not uncon-

stitutional as applied to transactions involving

imports or exports. The Court noted that the chal-

lenged tax “violates none of the constitutional

policies identified in Michelin” and concluded that

“ijt is, therefore, not among the ‘Imposts or Duties’

within the prohibition of the Import-Export Clause.”

Id. at 761 (emphasis added). That holding makes clear

that the decisions in Michelin and Washington

Stevedoring were based upon the “constitutional poli-

cies identified in Michelin” (ibid.) and were not pre-

mised upon the inconsequential “diversity in lan-

guage” of the two Clauses (Brown v. Maryland, 25

U.S. (12 Wheat.) at 445).

3. The reasoning of the Court in Michelin and

Washington Stevedoring applies equally to nondis-

criminatory federal taxes under the Export Clause.

Those decisions demonstrate that, when a generally

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applicable, nondiscriminatory tax is at issue, the

mere fact that the tax applies also to goods that are in

the export or import process does not provide a

constitutitional immunity from taxation. See Pet. 27-

30.

As the court of appeals acknowledged in this case

(Pet. App. 4a), and as Madison’s Notes of Debates and

Warren’s Making of the Constitution demonstrate,

the Export Clause resulted from one of the sectional

divisions that marked the Constitutional Convention

(Pet. 28-29). In particular, it stemmed from the “con-

cern that a Congress controlled by the more numer-

ous and populous Northern States would impose

burdensome levies on Southern exports” (Pet. App.

4a), including the “three great crops which grew

nowhere else—tobacco, rice, and indigo” (Pet. 28

n.10). This narrow historical purpose of the Export

Clause is complemented by the narrow language

employed in the Clause, which proscribes only federal

taxes “laid on” an “article exported.”

There is obviously no basis for respondent to

contend that the generally applicable tax on insur-

ance imposed by Section 4371 of the Internal Revenue

Code conflicts with the policies that the Export

Clause embodies. This federal tax applies to many

forms of insurance that have no relation whatever to

exports or the export process (such as life insurance,

sickness and accident policies, indemnity bonds and

annuity contracts). See 26 U.S.C. 4371(1), (2). Even

as applied to casualty insurance, the tax obviously has

only an incidental and remote relationship to exports

and the export process—and it applies equally to

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wholly domestic commerce as well.“ That the statute

does not discriminate against exports is clear from

its text, for it applies to insurance for any risk that

arises either “wholly or partly within the United

States” (26 U.S.C. 4372(d)(1), (2)).

In view of the limited purpose and narrow language

of the Export Clause, there is no adequate rationale

for sifting through all possible applications of a

generally applicable, nondiscriminatory federal tax to

proscribe its application in remote contexts involving

exported goods. Consider, for example, a hypothetical

transaction that is not unrelated to the facts of this

case. A ship sets out from California with a cargo

produced in Arizona. Part of the cargo will be off-

loaded in British Columbia to a buyer doing business

there. The remainder of the cargo will be delivered to

a buyer in Alaska. The cargo has been insured by a

foreign insurer against damage or loss for its entire

journey—beginning with its loading on trucks in

Arizona and until delivery at the places of business of

the buyers in British Columbia and Alaska. The

nondiscrimination policies embodied in the Export

Clause plainly do not require that the insurance

covering the part of the cargo delivered in British

Columbia be made exempt from the federal tax on

insurance while the Alaska portion of the cargo is

not. That would turn the constitutional shield

against discrimination in the Export Clause into a

sword requiring discrimination. As this Court noted

in Cornell v. Coyne, 192 U.S. 418, 427 (1904), the

* Even within the specific category of casualty insurance,

the statute applies to risks that have little or no connection

with exports and exportation—such as fire, flood and earth- -

quake.

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Export Clause “does not mean that articles exported

are relieved from the prior ordinary burdens of

taxation which rest upon all property similarly

situated.” See Pet. 19-20. |

A federal tax on insurance for risks that occur

“wholly or partly within the United States”—and

that applies without discrimination to both domestic

and international commerce—is not a tax “laid on” an

“article exported” within the meaning of the Export

Clause. The contrary conclusion of the Federal Cir-

cuit in this case, and that court’s annulment of an Act

of Congress, warrants review by this Court.

For the reasons stated above and in the petition, the

petition for a writ of certiorari should be granted.

Respectfully submitted.

Drew S. Days, III

Solicitor General

NOVEMBER 1995