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

JAN 19 19%

No. 95-591 |

In the Supreme Court of the United States

OCTOBER TERM, 1995

UNITED STATES OF AMERICA, PETITIONER

D.

INTERNATIONAL BUSINESS MACHINES CORPORATION

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

BRIEF FOR THE UNITED STATES

Drew S. Days, III

Solicitor General

LORETTA C. ARGRETT

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. 20520

(202) 514 227 7

QUESTION PRESENTED

Section 4371 of the Internal Revenue Code, 26

U.S.C. 4371, imposes a tax of four cents per dollar on

casualty insurance premiums paid to a foreign

insurer for the risks of a domestic insured that are

“wholly or partly within the United States” (26

U.S.C. 4372(d)(1)). The question presented in this

case is:

Whether, as applied to casualty insurance for losses

incurred during the shipment of goods from locations

within the United States to purchasers abroad, the

tax imposed by Section 4371 of the Internal Revenue

Code violates the Export Clause of the Constitution

of the United States (U.S. Const. Art. I, § 9, Cl. 5).

(I)

TABLE OF CONTENTS

Page

— — U —⁰ 8 l

Ee 1

Constitutional and statutory provisions involved 2

111111 —— 5

? . 12

Argument:

Section 4371 of the Internal Revenue Code imposes

a generally applicable, nondiscriminatory tax that

does not fall specifically upon articles of export or

export transactions and does not violate the Export

Clause of the Constitution „„ 14

8 —— ——y—-— ——— 37

TABLE OF AUTHORITIES

Cases:

Almy v. California, 65 U.S. (24 How.) 169 (1861) ... 21

Anglo-Chilean Nitrate Sales Corp. v. Alabama,

1 Kͤ“iaV 19

Board of Trustees v. United States, 289 U.S. 48

— — — ——— —-—. 36

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

—.— . — 17, 18

Canton R. R. v. Rogan, 340 U.S. 511 (61951) 27

Colonial Pipeline Co. v. Traigle, 421 U.S. 100

8. —.— 26

Complete Auto Transit, Inc. v. Brady, 430 US.

NA a ae 22, 27, 29, 30

Cook v. Pennsylvania, 97 U.S. 566 (1878) . 19

Cornell v. Coyne, 192 U.S. 418 (1904) .. 13. 17, 20, 21, 35

Crew Levick Co. v. Pennsylvania, 245 U.S. 292

— . — 24

Crutcher v. Kentucky, 141 U.S. 47 (1891) 22

Department of Revenue of Washington v. Associa-

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

Zr 9, 27, 30, 31

(IIT)

IV

Cases—Continued: Page

DiSanto v. Pennsylvania, 273 U.S. 34 (1927) .......... 22

Fairbank v. United States, 181 U.S. 283 (1901) ...... 21

General Motors Corporation v. Washington, 377

?- . 26

Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824) ......... 36

Hooven & Allison Co. v. Evatt, 324 U.S. 662

— — 19

Joseph v. Carter & Weekes, 330 U.S. 422 (1947) ...... 24

Kosydar . National Cash Register Co., 417 US.

20 —ñ—ñ—— — —— 17

License Cases, 46 U.S. (5 How.) 504 (1847) ............... 18

Limbach v. Hooven & Allison Co., 466 U.S. 353

(1984) ...ccccccee. 6 27, 31, 32

Low v. Austin, 80 U.S. (13 Wall.) 29 (1872) ............ 19

May v. New Orleans, 178 U.S. 496 (1900 19

Memphis Steam Laundry Cleaner, Inc. v. Stone,

. 22

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

. — 9, 14, 27, 28, 29, 35

Moller-Butcher v. United States Department of

Commerce, 12 F.3d 249 (D.C. Cir. 1994) 36

Nippert v. Richmond, 327 U.S. 416 (1946) .............. 22

Pace v. Burgess, 92 U.S. 372 (1876) ................... 19, 20

Peck & Co. v. Lowe, 247 US. 165 (1918) .............. 13, 24

25, 34, 36

Postal Telegraph-Cable Co. v. City of Richmond,

ü- 2 26

Puget Sound Stevedoring Co. ». State Tar Commis-

N? L 24

Robbins v. Shelby County Taxing District, 120 US.

en 22

Rodriquez de Quijas v. Shearson/American Express,

Inc., 490 U.S. 477 (1880 ————;.— 10, 11

A. G. Spalding & Bros. v. Edwards, 262 US. 66

ee 24

V

Cases— Continued: Page

Spector Motor Service, Ine. vy. O'Connor, 340 US.

— %* 22, 30

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

gg SRE Een nner ee 9, 21, 23

Turpin v. Burgess, 117 U.S. 504 (1886) ........... 17, 20, 23

United States v. Bozarov, 74 F.2d 1037 (9th Cir.

1992), cert. denied, 113 8. Ct. 1273 (196) 36

United States v. Hvoslef, 237 U.S. 1 (1915) ............ 21

United States v. Marigold, 50 U.S. (9 How.) 560

—— ee 36

United States Shoe Corp. v. United States,

Slip Op. 96-173 (Oct. 25, 1956) 15

United States v. The William, 28 Fed. Cas. 614

r 46

Western Live Stock v. Bureau of Revenue, 308 US.

e 26

Woodruff v. Parham, 75 U.S. (8 Wall.) 123 (1869) . 16

Youngstown Sheet & Tube Co. v. Bowers, 35% US.

D a ee 19

U.S. Const. Art. I:

§ & CL 3 (Commerce Clause 2, 22

23, 26, 29, 30, 36

§ 9, Cl. & (Export Clause) .......................... passim

§ 10, CL 2 (import-Export Clause) .............. passim

Act of Aug. 8, 1882, ch. 46%, 22 Stat. 72 20

Export Administration Act of 1979, 50 U.S.C.

EE ee a , ,., 36

Internal Revenue Code (26 U.S. C..

1 4

r vl... last aaa 4

—[—ẽ— . T 7⁰— passim

JJ „ 34

D // 34

Be GI — teen taiie tes 3

Ee 5

—-— . 5, 12, 14, 15, 34

VI

Statutes and regulation—Continued: Page

W 4

J1·˙’—w8 — hind iniertinintateniitinidintiiemenis 5

TTP 4. 5. 8

ccc 15

J ˙ 41444... eee 15

IL. „ een 15

I. 1 K[,öãjʒỹI r 88 15

War Revenue Act of 1898, ch. 448, 30 Stat. 448 21

f * 0c 21

Schedule A, 30 Stat. 458:

en a Ree a eT 21

Seis TIT A 21

War Revenue Act of 1917, ch. 63, 40 Stat. 300 23

2 Cc 5

Miscellaneous:

H.R. Rep. No. 2333, 77th Cong., 2d Sess. (1942) 5, 16

Madison's Notes of Debates in the Federal Convention,

reproduced in 2 M. Farrand, The Records of the

Federal Convention of 1787 (1966) 33

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

..... — — 24-25

Miscellaneous—C ontinued: Page

C. Warren, The Making of the Constitution (reprint

— . 33

In the Supreme Court of the United States

OcToBER TERM, 1995

No. 95-591

UNITED STATES OF AMERICA, PETITIONER

V.

INTERNATIONAL BUSINESS MACHINES CORPORATION

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

BRIEF FOR THE UNITED STATES

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-

lla) is reported at 59 F.3d 1234. The opinion of the

Court of Federal Claims (Pet. App. 12a-30a) is

reported at 31 Fed. Cl. 500.

JURISDICTION

The judgment of the court of appeals (Pet. App. 31a)

was entered on July 10, 1995. The petition for a writ

of certiorari was filed on October 10, 1995 (a Tuesday

following a Monday holiday), and was granted on

December 8, 1995. The jurisdiction of this Court

rests upon 28 U.S.C. 1254(1).

(1)

CONSTITUTIONAL AND STATUTORY PROVISIONS

INVOLVED

1. The Constitution of the United States provides,

in relevant part:

a.

Art. I, § 8, Cl. 3:

The Congress shall have Power * * * To

regulate Commerce with foreign Nations,

and among the several States, and with the

Indian Tribes.

Art. I. § 9, Cl. 5:

No Tax or Duty shall be laid on Articles

exported from any State.

Art. I, § 10, Cl. 2:

No State shall, without the Consent of the

Congress, lay any Imposts or Duties on

Imports or Exports, except what may be

absolutely necessary for executing it's

inspection Laws * * *.

2. The Internal Revenue Code provides, in relevant

part:

a.

26 U.S.C. 4371:

There is hereby imposed, on each policy

of insurance, indemnity bond, annuity con-

tract, or policy of reinsurance issued by any

foreign insurer or reinsurer, a tax at the

following rates:

(1) 4 cents on each dollar, or fractional

part thereof, of the premium paid on the

3

policy of casualty insurance or the in-

demnity bond, if issued to or for. or in

the name of, an insured as defined in

section 4372(d);

(2) 1 cent on each dollar, or fractional

part thereof, of the premium paid on the

policy of life, sickness, or accident

insurance, or annuity contract, unless

the insurer is subject to tax under

section 819, and

(3) 1 cent on each dollar, or fractional

part thereof, of the premium paid on the

policy of reinsurance covering any of the

contracts taxable under paragraph (1) or

(2).

b. 26 U.S.C. 4372:

(a) For purposes of section 4371, the term

“foreign insurer or reinsurer” means an

insurer or reinsurer who is a nonresident

alien individual, or a foreign partnership, or

a foreign corporation. * * *

(b) For purposes of section 4371(1), the

term “policy of casualty insurance” means

any policy (other than life) or other

instrument by whatever name called, where-

by a contract of insurance is made, con-

tinued, or renewed.

x RM X **

(d) For purposes of section 43710), the

term “insured” means—(1) a domestic

corporation or partnership, or an individual

resident of the United States, against, or

with respect to, hazards, risks, losses, or

liabilities wholly or partly within the United

States.

XR * * * *

—

e. 26 U.S.C. 4373 (1982).

The tax imposed by section 4371 shall not

apply to—

(1) any policy, indemnity bond, or

annuity contract signed or countersigned

by an officer or agent of the insurer in a

State, or in the District of Columbia,

within which such insurer is authorized

to do business; * * *

R * * * *

d. 26 U.S.C. 4374:

The tax imposed by this chapter shall be

paid, on the basis of a return, by any person

who makes, signs, issues, or sells any of the

documents and instruments subject to the

tax, or for whose use or benefit the same are

made, signed, issued or sold.

This provision was amended in 1988 to conform to

terminology elsewhere employed by Congress to describe

activities that are “effectively connected” to activities within

the United States and are therefore subject to the federal

income tax. See 26 U.S.C. 864(c), 882(a)(1). The amendment

does not alter the application of the statute in the context of

this case.

STATEMENT

1. Respondent International Business Machines

Corporation brought this suit in the Court of Federal

Claims to obtain a refund of $1.5 million in taxes

assessed under Section 4371 of the Internal Revenue

Code. IBM does not dispute that the taxes were

correctly assessed under the statute. Instead, IBM

contends that the statute is unconstitutional as

applied to the facts of this case.

a. Section 4371 of the Internal Revenue Code, 26

U.S.C. 4371, imposes a tax of four cents per dollar on

casualty insurance premiums paid to a foreign

insurer for the risks of a domestic insured that are

“wholly or partly within the United States” (26

U.S.C. 4372(d)(1)).2 The tax is to be paid by “any

person * * * for whose use or benefit” the policy is

“made, signed, issued, or sold.” 26 U.S.C. 4374.

Section 4371 was enacted in 1942 to “eliminate an

unwarranted competitive advantage now favoring

foreign insurers” who are not subject to the federal

income tax. H.R. Rep. No. 2333, 77th Cong., 2d Sess.

61 (1942). The tax therefore does not apply if the

policy issued by the foreign insurer is “signed or

countersigned by an officer or agent of the insurer in

a State, or in the District of Columbia, within which

such insurer is authorized to do business.” 26 U.S.C.

4373(1) (1982). See also note 1, supra; 26 C. F. R.

46.4371-2(a).

b. IBM manufactures a variety of business pro—

ducts that it sells throughout the world. During the

* The term “foreign insurer” is defined to mean an insurer

“who is a nonresident alien individual, or a foreign partnership,

or a foreign corporation” (26 U.S.C. 4372(a)).

6

period involved in this case, IBM shipped products for

international sales from its manufacturing facilities

or warehouses in Arizona, California, Colorado,

Florida, Minnesota, New York, North Carolina,

Texas, and Virginia (Pet. App. 13a-14a). IBM made its

international sales through a network of more than

one hundred wholly owned subsidiaries (Pet. App. 14a-

da):

Sales outside the United States of IBM pro-

ducts manufactured within the United States

were accomplished by a purchase order to IBM

from its foreign subsidiary, under which IBM

billed the subsidiary and generally shipped the

goods directly to the subsidiary’s customer.

Lower priced goods might be shipped to a con-

solidation center in the foreign country, and

maintained as inventory by the foreign subsidiary

to fill future orders. * * *

Shipment of products from the United States to

the foreign customer began by truck on a common

carrier (from the manufacturing plant or

warehouse). The goods generally were destined

for a United States airport (typically John F.

Kennedy in New York for shipments to Europe

and the Middle East, Miami International for

shipments to Latin America, and San Francisco

International for shipments to the Far East), but

some shipments were by sea. While traveling

within the United States, the products would

typically be unloaded at one or more intermediate

freight forwarder locations, where they would

typically remain for two to five days, but could

remain * * * as long as thirty days. The

products would be reloaded at the freight for-

warders’ facilities and continue ultimately to the

point of embarkation, where they were loaded onto

an airplane or a ship. Once the products reached

the air or sea port in the foreign country, they

were unloaded, cleared customs, and loaded on

trucks for shipment to their final destination.

The terms of sale specified that title to the goods,

and risk of loss, passed from IBM to its foreign

subsidiary only when the goods cleared customs in

the foreign country. The foreign subsidiaries were

nonetheless required to bear the cost of insuring the

products against damage or loss during the entire

shipment (Pet. App. 15a).

The insurance obtained for these shipments was

“point to point”: it covered the risk of damage or loss

during transportation of the goods from the IBM

facility in the United States to the point of foreign

delivery. When IBM made the arrangements, the

insurance was placed with a domestic insurer and the

cost was billed to the foreign subsidiary. When the

foreign subsidiary made the arrangements, the

insurance was often placed with a foreign carrier,

which the subsidiary paid directly. In both situations,

IBM and its foreign subsidiary were listed as joint

beneficiaries on the policies of insurance (Pet. App.

15a-16a).

If damage or loss occurred before the goods cleared

customs —while IBM retained title to the goods and

risk of loss—IBM received the insurance proceeds

directly under these policies. If the loss occurred

after the goods cleared customs—when title and risk

of loss had passed to the importing foreign subsidiary

—the insurance proceeds were paid to the subsidiary.

In the latter event, the proceeds were used by the -

subsidiary to pay the full purchase price of the

damaged or lost goods to IBM or, if IBM had already

been paid, to reimburse the subsidiary for its loss

(Pet. App. 16a).

c. IBM filed federal excise tax returns for 1975

through 1984 but did not report any liability under

Section 4371 of the Internal Revenue Code. On audit,

the Internal Revenue Service determined that the

premiums paid to foreign insurers were subject to the

tax imposed by Section 4371 and that, pursuant to

Section 4374, IBM was liable for the tax as a named

beneficiary of the insurance policies.

The foreign subsidiaries reported to IBM that,

during 1980, they had paid premiums of $2,065,137 to

foreign insurers for “point to point” insurance

covering shipments of products that IBM had manu-

factured in the United States. The tax applicable to

those premiums under Section 4371(1) of the Code—

calculated by multiplying the premiums by four

percent—is $82,605. The parties stipulated that the

foreign insurance premiums attributable to ship-

ments of IBM products in each of the years 1975-1979

and 1981-1984 were the same as in 1980. The IRS

therefore assessed the same amount of tax for each of

those years under Section 4371 (Pet. App. 18a).

2. IBM paid the resulting assessments and filed

claims for refund. When those claims were denied,

IBM commenced this refund suit in the Court of

Federal Claims. The relevant facts were stipulated

by the parties (Pet. App. 34a-41a).

a. IBM contended that the tax imposed by Section

4371 of the Internal Revenue Code—as applied to

insurance premiums on policies covering the ship-

ment of goods from locations within the United

States to purchasers abroad—violates the Export

9

Clause of the Constitution, which provides that In jo

Tax or Duty shall be laid on Articles exported from

any State.” U.S. Const. Art. I, § 9, Cl. 5. IBM

contended that the tax on insurance for export

shipments is a “Tax or Duty * * * laid on Articles

exported” and is invalid under the specific holding of

this Court in Thames & Mersey Marine Ins. Co. v.

United States, 237 U.S. 19 (1915). In Thames &

Mersey, the Court held a federal stamp tax on policies

insuring marine risks unconstitutional as applied to

policies covering shipments for export.

The United States contended that the analysis of

Thames & Mersey is no longer valid. The govern-

ment reasoned that subsequent decisions of this

Court, such as Michelin Tire Corp. v. Wages, 423

U.S. 276 (1978), and Department of Revenue of Wash-

ington v. Association of Washington Stevedoring

Cos., 435 U.S. 734 (1978), require the conclusion that

the Export Clause does not invalidate a generally

applicable, nondiscriminatory tax that does not fall

specifically on articles of export or export trans-

actions.

b. The Court of Federal Claims held that

application of the tax imposed by Section 4371 to

insurance premiums for goods in export transit

violates the Export Clause because it “amounts to a

tax on exports” (Pet. App. 26a). The court reasoned

that this conclusion follows from the precise holding

of this Court’s 1915 decision in Thames & Mersey,

which stated (237 U.S. at 26):

It cannot be doubted that insurance during the

voyage is by virtue of the demands of commerce an

integral part of the exportation.

10

The Court of Federal Claims emphasized that,

under Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477, 484 (1989), lower courts

“must adhere to the accepted practice of following

Supreme Court precedent unless the Supreme Court

clearly states that it is overruling earlier cases and

explains why it is doing so” (Pet. App. 28a). The court

found no clear evidence that Thames & Mersey had

been overruled or that its analysis has been discarded

by this Court. The court held that Thames & Mersey

therefore remains authoritative and that it compels

the conclusion that the tax imposed by Section 4371 is

unconstitutional as applied in this case (Pet. App.

29a).

The court acknowledged that this Court’s more

recent decisions under the Import-Export Clause in

Michelin Tire and Washington Stevedoring have

upheld application of nondiscriminatory state taxes to

goods and services involved in importation and ex-

portation. The court concluded, however, that those

decisions could be distinguished on their facts. The

court explained that Washington Stevedoring—

which upheld application of a state gross receipts tax

to a stevedoring company that handled export and

import shipments—concerned “stevedoring” rather

than “insurance” and that “stevedoring is a service

whose value is not necessarily tied to the value of the

goods it serves” (Pet. App. 29a). The court further

stated that Michelin Tire—which upheld application

of a state property tax to imported goods located

within the borders of the State—is inapposite because

“in Michelin the [imported goods] had left the import

stream and were * * * thus outside the scope of the

Import-Export Clause” (Pet. App. 29a).

11

3. The court of appeals affirmed (Pet. App. la-11a).

The court noted (id. at lla) that this Court has

admonished the lower courts that (Rodriquez de

Quijas v. Shearson/American Express Co., 490 U.S.

at 484)

if a precedent of this Court has direct application

in a case, yet appears to rest on reasons rejected

in some other line of decisions, the Court of

Appeals should follow the case which directly

controls, leaving to this Court the prerogative of

overruling its own decisions.

The court of appeals stated that it was therefore

bound to follow Thames & Mersey, and hold the tax

imposed by Section 4371 unconstitutional as applied in

this case, unless subsequent decisions of this Court

“clearly signaled” an intent to overrule that earlier

decision (Pet. App. 8a).

The court of appeals concluded that it was “not so

sure” (Pet. App. 8a) that Washington Stevedoring

and Michelin Tire signaled the requisite clear intent

of this Court to abandon the analysis of Thames &

Mersey. The court of appeals did not dispute that, if

an analysis “similar” to that applied under the

Import-Export Clause in Michelin Tire and Wash

ington Stevedoring were applied under the Export

Clause, the holding and reasoning of Thames &

Mersey would be discredited (Pet. App. Ta-Sa).

Instead, the court stated that it was not certain that a

similar analysis would be applied because there is a

difference in the language of the two Clauses that

could require a different result: the Import-Export

Clause bars States from laying Imposts or Duties on

Imports or Exports”; the Export Clause bars the

United States from laying any “Tax or Duty * * *

12

on Articles exported from any State.” The court of

appeals stated (id. at 9a-10a):

Although the [Supreme] Court at first expressed

the view that the “diversity in language” between

the two clauses did not reflect any difference in

“the act which is prohibited,” Brown v. Maryland,

25 U.S. (12 Wheat.) 419, 425 (1827), in both

Michelin and Washington Stevedoring the Court

has noted and attached significance to the

difference between the narrow term “Imposts and

Duties” * * * and the broader term “Tax”

See Michelin, 423 U.S. at 290,

Washington Stevedoring, 435 U.S. at 759.

Reasoning that a “tax” that might be permitted

under the “narrow” language of the Import-Export

Clause might nonetheless be invalid under the

“broader” language of the Export Clause (Pet. App.

10a), the court concluded that the recent Import-

Export Clause decisions fail to provide the requisite

clear guidance that would permit a lower court to

“disregard|| a higher court decision that all agree is

binding precedent if it is still valid” (id. at 10a-11a). *

The court therefore held “that [its] duty is to follow

Thames & Mersey and hold Section 4371 invalid as

applied” (id. at Ila).

SUMMARY OF ARGUMENT

The federal tax on insurance premiums paid to a

foreign insurer for risks that are “wholly or partly

within the United States” (26 U.S.C. 4372(d)(1)) is a

nondiscriminatory tax of general application. It does

The court of appeals noted that the United States had

conceded that, “if Thames & Mersey is still good law, the

assessments at issue in this case are invalid” (Pet. App. 6a).

13

not apply specifically to export transactions; to the

contrary, it applies only to insurance risks that are

either “wholly” or “partly” domestic. The tax was

enacted to diminish the competitive advantage that

existed for foreign insurers who were otherwise not

subject to the federal income tax.

The court of appeals erred in concluding that

application of this tax to casualty insurance for

shipments from within the United States to foreign

countries violates the Export Clause of the Con-

stitution. In particular, the court erred in relying on

this Court’s 1915 decision in Thames & Mersey

Marine Ins. Co. v. United States for this conclusion.

This Court’s more recent decisions have repudiated

the reasoning of Thames & Mersey. Under the

analysis of these modern decisions, the tax imposed

by Section 4371 does not violate the Export Clause

because it is a generally applicable, nondiscrimina-

tory tax that does not fall specifically on articles of

export or export transactions. As this Court stated

in upholding a similarly nondiscriminatory federal

tax against an Export Clause challenge in Peck & Co.

v. Lowe, 247 U.S. 165, 175 (1918): “There is no

discrimination. At most, exportation is affected only

indirectly and remotely.”

As this Court has noted, the Export Clause “does

not mean that articles exported are relieved from the

prior ordinary burdens of taxation which rest upon all

property similarly situated.” Cornell v. Coyne, 192

U.S. 418, 427 (1904). The history of the Export Clause

reflects that it was designed to protect the exports of

individual States from repressive discrimination by

other States acting through their representatives in

the National government. That nondiscrimination

policy does not require that exports be relieved “from

14

uniform taxes” applicable to all commerce generally

or that Congress give “preferential treatment” to

exports by exempting them from generally applicable

taxes (Michelin Tire Corp. v. Wages, 423 U.S. at 293-

294). The nondiscriminatory, generally applicable tax

imposed by Section 4371 is therefore constitutional

and should be upheld. .

ARGUMENT

SECTION 4371 OF THE INTERNAL REVENUE

CODE IMPOSES A GENERALLY APPLICABLE,

NONDISCRIMINATORY TAX THAT DOES NOT

FALL SPECIFICALLY UPON ARTICLES OF EX-

PORT OR EXPORT TRANSACTIONS AND DOES

NOT VIOLATE THE EXPORT CLAUSE OF THE

CONSTITUTION

The court of appeals concluded that the federal tax

on insurance premiums paid to a foreign insurer for

risks that are “wholly or partly within the United

States” (26 U.S.C. 4372(d)(1))}—as applied to casualty

insurance for shipments from the United States to

foreign countries—represents a Tax or Duty * * *

laid on Articles exported” (U.S. Const. Art. I, § 9, Cl.

5) and therefore violates the Export Clause of the

Constitution. The court stated that it was compelled

to follow this Court’s 1915 decision in Thames &

Mersey Marine Ins. Co. v. United States in reaching

that conclusion.

This Court’s more recent decisions, however, have

repudiated the reasoning of Thames & Mersey.

Under the analysis of these modern decisions, the tax

imposed by Section 4371 does not violate the Export

Clause because it is a generally applicable, nondis-

15

criminatory tax that does not fall specifically on

articles of export or export transactions.

I. The Tax Imposed By Section 4871 Is A

Generally Applicable, Nondiscriminatory Tax. The

tax imposed by Section 4371 of the Internal Revenue

Code is not specifically directed to nor directly “laid

on Articles exported” (U.S. Const. Art. I, § 9, Cl. 5).

Instead, it applies to insurance premiums paid to

foreign insurers for many forms of insurance,

including any casualty risk that is “wholly or partly

within the United States” (26 U.S.C. 4372(d)(1)). It

thus applies without discrimination to “wholly”

domestic transactions as well as to risks that are

only “partly” within the United States. As the House

Ways and Means Committee observed when the

statute was first enacted in 1942, Section 4371 is

The proper scope of the Export Clause has significance

not only for the tax imposed under Section 4371 but also for

other nondiscriminatory federal taxes of general application.

For example, Section 4461 of the Internal Revenue Code

imposes on all shippers a “tax on any port use” of 0.125 percent

of the value of all commercial cargo loaded or unloaded in

United States ports. See 26 U.S.C. 4461(a), (b) (Supp. V 1993),

4462(a)(1). In cases brought by over 700 shippers involving

more than $500,000,000 in revenues that have already been

collected, the United States Court of International Trade

recently held Section 4461 to be unconstitutional as applied to

transactions involving goods for export. United States Shoe

Corp. v. United States, Slip op. 95-173, at 8, 23 (Oct. 25, 1995).

In determining that such a generally applicable, nondiscrimina-

tory 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 (id.

at 17-24). The Federal Circuit has exclusive jurisdiction over

appeals from decisions of the Court of International Trade. 28

U.S.C. 1295(a)(5).

16

designed to “eliminate an unwarranted competitive

advantage now favoring foreign insurers” who are not

subject to the federal income tax. H.R. Rep. No. 2333,

supra, at 61.

It is unquestioned that the tax imposed under

Section 4371 could and would be applied to a policy of

casualty insurance issued by a foreign insurer

covering risks that are “wholly” within the United

States—for example, insurance for the transit of

goods from Minnesota to Hawaii. As long ago as

Woodruff v. Parham, 75 U.S. (8 Wall.) 123 (1869), it

was established that goods moving from one State to

another are not “exports” from the shipping State or

“imports” in the receiving State within the meaning

of the Constitution. The question addressed in this

case is thus limited to whether the tax imposed by

Section 4371 on premiums for casualty insurance for

shipments “partly” outside of the United States is

unconstitutional even though application of that tax

to shipments “wholly” within the United States is

unquestionably valid.

2. The Export And Import-Export Clauses Are

Complementary In Scope. The proper resolution of

this narrow question requires consideration of the

text and history of, and the rulings of this Court

under, both the Export Clause and the Import-Export

Clause. The court of appeals suggested, however,

that the language of the Export Clause may be

“broader” in its prohibitive scope than the language of

the Import-Export Clause (Pet. App. 10a) and that

decisions under the latter Clause therefore may not

be relevant in interpretation of the former.

That suggestion, however, does not withstand

analysis. The entire text of the two Clauses must be

considered. The Import-Export Clause precludes

17

States from imposing “Imposts or Duties on Imports

or Exports”; the Export Clause specifies that no

federal “Tax or Duty shall be laid on Articles ex-

ported.” U.S. Const. Art. I, § 10, Cl. 2; Art. I, § 9, Cl.

5. An “impost” or “duty” on an “export” is a “tax” on

an “Article exported”; a “tax” on an “Article ex-

ported” is an “impost” or duty.“ Giving effect to

the entire text of both Clauses, Chief Justice Mar-

shall stated in this Court’s first decision under either

the Import-Export Clause or the Export Clause

(Brown v. Maryland, 25 U.S. (12 Wheat.) at 445):

The States are forbidden to lay a duty on exports,

and the United States are forbidden to lay a tax or

duty on articles exported from any State. There is

some diversity in language, but none is perceivable

in the act which is prohibited.

That observation has been repeated by this Court

on numerous occasions.” In the more numerous cases

under the Import-Export Clause and the less numer-

ous cases under the Export Clause, the Court has

routinely cited cases under the two Clauses without

differentiation. Moreover, as we shall discuss, the

analysis applied in opinions under the two Clauses

has not varied.

3. The “Original Package” Doctrine and Early

Decisions Addressing Generally Applicable, Non-

In Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 437

(1827), Chief Justice Marshall explained that an “impost” is a

“duty on imports” and represents “a tax levied on articles

brought into a country * * *.”

® See, e.g., Turpin v. Burgess, 117 U.S. 504, 506-507 (1586);

Cornell v. Coyne, 192 U.S. 418, 427 (1904); United States vy.

Hvoslef, 237 U.S. 1, 14 (1915); Kosydar v. National Cash

Register Co, 417 U.S. 62, 67 n.5 (1974).

18

discriminatory Taxes Under the Import-Export

Clause. In Brown v. Maryland, a Maryland statute

required that importers or wholesalers of foreign

goods purchase a license costing $50 before selling

such goods. Brown was convicted of having imported

and sold a package of foreign goods without having

obtained the license. In holding that the statute

violated the Import-Export Clause, the Court ex-

plained that a tax on the privilege of selling foreign

goods was, in substance, a duty upon things imported

for sale. 25 U.S. (12 Wheat.) at 439. Rejecting the

suggesticn that this would mean that imported goods

would be permanently immune from taxation by the

States, the Court stated that an import retained its

“distinctive character” only while in the “original

form or package in which it was imported” (id. at 442).

The statute involved in Brown v. Maryland dis-

criminated against imported goods because it imposed

no comparable licensing requirement for the sale of

domestic goods. See 25 U.S. (12 Wheat.) at 436. In the

License Cases, 46 U.S. (5 How.) 504 (1847), the Court

upheld a similar licensing requirement that applied to

the sales of both imported and domestic goods. Chief

Justice Taney, who had argued the case of Brown v.

Maryland for the State, did not question the validity

of the “original package” doctrine and acknowledged

that a tax directed uniquely at imports would be

invalid. Id. at 574-575. He explained, however, that a

generally applicable, nondiscriminatory state tax

would not be unconstitutional merely because the tax

also applies to imported goods (id. at 576):

Undoubtedly a State may impose a tax upon its

citizens in proportion to the amount they are

respectively worth; and the importing merchant is

19

liable to this assessment like any other citizen,

and is chargeable accordingly to the amount of his

property, whether it consists of money engaged in

trade, or of imported goods which he proposes to

sell, or any other property of which he is owner.

But a tax of this description stands upon a very

different footing from a tax on the thing imported,

while it remains a part of foreign commerce, and is

not introduced into the general mass of property

in the State.

Twenty-five years after the License Cases,

however, the Court reached a different conclusion in

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

the Court held that a nondiscriminatory, generally

applicable California property tax could not be

imposed upon a shipment of French champagne held in

an importer’s warehouse in the “original package” in

which shipped. Id. at 35. In so ruling, the Court

neglected to consider the contrary conclusion of

Chief Justice Taney in the License Cases, although

his approval of the “original package” doctrine was

cited by the Court. Id. at 33-34.

4. The Early Export Clause Cases. The Export

Clause was invoked in Pace v. Burgess, 92 U.S. 372

(1876), by a tobacco manufacturer who, in 1868, was

subject to a federal excise tax on tobacco products.

Although tobacco intended for export was exempt

from the tax, the exemption was subject to the

The “original package” rule was also followed in Cook v.

Pennsylvania, 97 U.S. 566 (1878), Anglo-Chilean Nitrate Sales

Corp. v. Alabama, 288 U.S. 218 (1983), and Hooven & Allison

Co. v. Evatt, 324 U.S. 652 (1945). See also May v. New Orleans,

178 U.S. 496 (1900); Youngstown Sheet & Tube Co. v. Bowers,

358 U.S. 534 (1959).

20

requirement that packages for export be identified by

an engraved stamp costing 25 cents. The manufac-

turer brought suit to recover the price of the stamps,

claiming that they constituted a prohibited tax on

exports. The Court denied recovery, explaining that

the stamps were designed to prevent fraud and did not

represent a tax. Id. at 375.

In 1882, however, Congress discontinued the charge

for the exemption stamp in a statute that referred to

the stamp as an “export tax.” Act of Aug. 8, 1882, ch.

468, 22 Stat. 372. On that basis, another tobacco

manufacturer sued to recover the amounts he had paid

for these stamps before the charge was discontinued.

The Court adhered to its decision in Pace v. Burgess,

but with a somewhat different rationale. In describ-

ing the Export and Import-Export Clauses, the Court

stated (Turpin v. Burgess, 117 U.S. 504, 507 (1886)

(emphasis added)):

The prohibition in both cases has reference to the

imposition of duties on goods by reason or because

of their exportation or intended exportation, or

whilst they are being exported. * * * But a

general tax, laid on all property alike, and not

levied on goods in course of exportation, nor

because of this intended exportation, is not

within the constitutional prohibition.

Quoting and relying upon the above passage, the |

Court subsequently held in Cornell v. Coyne, 192

U.S. 418, 427-428 (1904), that a manufacturer who

produced filled cheese under a contract for export sale

could not—merely because the cheese was designated

for export—escape liability for the federal tax of one

cent per pound on that product. The Court explained

that the Export Clause “does not mean that articles

21

exported are relieved from the prior ordinary burdens

of taxation which rest upon all property similarly

situated” (id. at 427).

5. The Decisions Leading to Thames & Mersey.

The direct predecessor of Thames & Mersey was

Fairbank v. United States, 181 U.S. 283 (1901). That

case involved a provision of the War Revenue Act of

1898 that imposed a variety of stamp taxes on written

instruments, including Ab ſills of lading * for

any goods, merchandise, or effects, to be exported

from a port or place in the United States to any

foreign port or place” (ch. 448, § 25 (Schedule A), 30

Stat. 459). In Fairbank, the Court held that this

stamp tax on bills of lading, which applied only to

exported goods, violated the Export Clause. Invoking

a prior, similar holding under the Import-Export

Clause (Almy v. California, 65 U.S. (24 How.) 169

(1861)), the Court held that the tax upon a bill of

lading was invalid because it was equivalent to a tax

upon the exported goods themselves.

Two later cases, argued on the same day, are the

cases upon which respondent relies. Like Fairbank,

they involved stamp taxes imposed by the War

Revenue Act of 1898. Unlike Fairbank, however,

neither tax was imposed expressly or uniquely on

export transactions. United States v. Hvoslef, 237

U.S. 1 (1915), involved a federal stamp tax upon any

“Contract or agreement for the charter of any ship”

without reference to the intended destination of the

ship or its cargo (30 Stat. 460). Thames & Mersey

Marine Ins. Co. v. United States, 237 U.S. 19 (1915),

upon which respondent most directly relies, involved

a federal stamp tax on policies of marine insurance

“whether covering peril by sea or on inland waters”

(25, 30 Stat. 461). Since these statutory provisions

22

did not differentiate between domestic voyages and

shipments to foreign ports, it might have been

supposed that they would be sustained as

nondiscriminatory taxes of general applicability

under the reasoning of the 1886 decision in Turpin v.

Burgess and the 1904 decision in Cornell v. Coyne.

See pages 20-21, supra.

In Hvoself, however, the Court invoked its decision

in Fairbank without acknowledging that the stamp

tax challenged in Hvoslef—unlike the tax challenged

in Fairbank — was of general applicability and was

not limited to voyages involving exports. In support of

its conclusion in Hvoslef that a tax of general

applicability would violate the Export Clause if it

applied to export trade, the Court invoked Robbins v.

Shelby County Taxing District, 120 U.S. 489 (1887).

Robbins was the first of “a long line of ‘drummer’

cases” in which the Court held, under the Commerce

Clause, that a State could not impose a licensing fee

on a person who solicited orders for goods to be

shipped from another State.” The Court stated in

Robbins (id. at 497):

See Memphis Steam Laundry Cleaner, Inc. v. Stone, 342

U.S. 389, 392 (1952). Robbins had a numerous progeny. See,

e.g., Crutcher v. Kentucky, 141 U.S. 47 (1891); DiSanto v.

Pennsylvania, 273 U.S. 34 (1927); Nippert v. Richmond, 327

U.S. 416 (1946). Among the more recent was Spector Motor

Service. Inc. v. O'Connor, 340 U.S. 602 (1951), which this Court

overruled in Complete Auto Transit, Inc. v. Brady, 430 U.S.

274 (1977). In Complete Auto Transit, Inc., the Court held,

contrary to Robbins and Spector, that generally applicable

state licensing statutes could be applied according to their

terms, without granting exemption to those whose business was

solely interstate. See 430 U.S. at 279-289; pages 29-30, infra.

These decisions concerning the negative implications of the

Commerce Clause are not logically relevant to analysis under

23

It is strongly urged, as if it were a material

point in the case, that no discrimination is made

between domestic and foreign drummers—those of

Tennessee and those of other states; that all are

taxed alike. But that does not meet the difficulty.

Interstate Commerce cannot be taxed at all, even

though the same amount of tax should be laid on

domestic commerce, or that which is carried on

solely within the state.

Having applied Fairbank and Robbins to exempt

export transactions from broadly applicable, nondis-

criminatory taxing provisions in Hvoslef, the Court

entered its decision in Thames & Mersey two weeks

later on the authority of Hvoslef. 237 U.S. at 27. In

neither Hvoslef nor Thames & Mersey did the Court

discuss the reasoning of prior decisions (such as

Cornell v. Coyne, supra) that had upheld application

of nondiscriminatory taxes that apply generally “to

all property alike” and are not levied upon or because

of the “exportation” or “intended exportation” of the

goods (Turpin v. Burgess, 117 U.S. at 507).

The decisions in Hvoslef and Thames & Mersey

established a pattern that this Court subsequently

followed of immunizing export transactions from

generally applicable federal taxes. For example, when

Congress imposed a general tax on various sporting

goods under the War Revenue Act of 1917, ch. 63, 40

Stat. 300, 317, the Court invoked not Cornell v. Coyne

but Hvoslef and Thames & Mersey to hold that the

Export Clause prohibited imposition of that tax upon

a shipment of baseballs and bats to a purchaser in

the Export Clause. Although the Commerce Clause operates as

a limitation on the powers of the States, it confers powers on

the United States. See page 36, supra.

24

Venezuela. A.G. Spalding & Bros. v. Edwards, 262

U.S. 66 (1923). See also Crew Levick Co. ».

Pennsylvania, 245 U.S. 292 (1917) (same under the

Import-Export Clause). Similarly, in Puget Sound

Stevedoring Co. v. State Tax Commission, 302 U.S.

90 (1937), and Joseph v. Carter & Weekes, 330 U.S. 422

(1947), the Court held that state sales or gross re-

ceipts taxes could not be imposed upon payments for

loading and unloading ship cargoes transported in

interstate or foreign commerce.

6. The Modern Decisions Upholding Application

of General, Nondiscriminatory Taxes to Export

Transactions.

a. Three years after the Court’s decisions in

Hvoslef and Thames & Mersey, the Court returned to

an interpretation of the Export Clause that focussed

on whether the challenged tax applied without dis-

crimination to both domestic and foreign trans-

actions. In Peck & Co. v. Lowe, 247 U.S. 165 (1918),

the Court rejected the contention that the Export

Clause precludes the United States from taxing the

income that a taxpayer derives from export trans-

actions. In Peck & Co., more than two thirds of the

taxpayer’s income had been derived from export sales.

Id. at 172. The taxpayer paid the federal income tax

on its entire income and brought suit to recover the

part of the tax paid on the income from export sales.

In a relatively brief opinion by Justice Van

Devanter, the Court denied recovery. The decision is

often stated to rest upon the fact that the tax was

upon net, rather than gross, income. See L. Tribe,

25

American Constitutional Law 8 6-19, at 463 n.18 (2d

ed. 1988).” Indeed, the opinion states (247 U.S. at 175):

At most, exportation is affected only indirectly

and remotely. The tax is levied after exportation

is completed, after all expenses are paid and losses

adjusted, and after the recipient of the income is

free to use it as he chooses. Thus what is taxed—

the net income—is as far removed from

exportation as are articles intended for export

before the exportation begins.

But the Court did not rest its decision in Peck &

Co. wholly upon that explanation. Instead, the Court

further stated (247 U.S. at 174-175 (emphasis added)):

The tax in question is unlike any of those

heretofore condemned. * * * On the contrary, it

is an income tax laid generally on net incomes.

And while it cannot be applied to any income

which Congress has no power to tax (see Stanton

v. Baltic Mining Co., supra, pp. 113), it is both

nominally and actually a general tax. It is not laid

on income from exportation because of its source,

or in a discriminative way, but just as it is laid on

other income. The words of the act are “net

income arising or occurring from all sources”.

There is no discrimination. At most, exportation

is affected only indirectly and remotely.

) That explanation, however, suggests as many questions as

it purports to answer. What if the income tax were imposed

only on net income from export sales? Or what if net income

from export sales were taxed at a rate higher than net income

from domestic transactions? Would either such “net” income

tax survive a challenge under the Export Clause?

26

The fact that the federal income tax is a “general

tax” that applies to all sources of income without

“discrimination” is the more persuasive basis for the

Court’s decision in Peck & Co. That reasoning is a

more complete explanation of the Court’s conclusion

(see note 9, supra) and it builds directly upon the

analysis applied by the Court in Turpin v. Burgess

and Cornell v. Coyne. That reasoning also antici-

pates the recent decisions of this Court under the

Import-Export and Commerce Clauses.

b. During the following decades, there were

further indications that the Court was reconsidering

whether the Constitution immunizes interstate and

foreign transactions from generally applicable, non-

discriminatory taxes. For example, in Western Live

Stock v. Bureau of Revenue, 303 U.S. 250 (1938), in

upholding application of a nondiscriminatory,

generally applicable state tax to a taxpayer engaged

in interstate commerce, the Court heavily qualified

the broad Commerce Clause rationale of Robbins on

which Hvoslef relied (303 U.S. at 254, quoting Postal

Telegraph-Cable Co. v. City of Richmond, 249 U.S.

252, 259 (1919)):""

It was not the purpose of the commerce clause to

relieve those engaged in interstate commerce

from their fair share of state tax burden even

though it increases the cost of doing the business.

“Even interstate business must pay its way”

R * £

— — —

See also General Motors Corporation v. Washington, 377

U.S. 436 (1964); Colonial Pipeline Co. ». Traigle, 421 U.S. 100

(1975).

27

And, in Canton R. R. v. Rogan, 340 U.S. 511 (1951), the

Court indicated a revised view of the proper

treatment of taxes upon transactions related or

collateral to importation and exportation when it

wrote (id. at 514-515):

The difference [between this case and cases such

as Spalding) is that in the present case the tax is

not on the goods but on the handling of them at

the port. [When the tax is on activities

connected with the export or import the range of

immunity cannot be so wide.

e. Full reconsideration of these issues ultimately

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

(1976), Complete Auto Transit, Inc. v. Brady, 430

U.S. 274 (1977), and Department of Revenue of

Washington v. Association of Washington Stevedor-

ing Cos., 435 U.S. 734 (1978). See also Limbach v.

Hooven & Allison Co., 466 U.S. 353 (1984). Those

decisions expressly overruled several of the decisions

previously discussed and, without cataloging them in

detail, rejected other decisions that had disposed of

the same issues in the same fashion.

(i) Michelin Tire involved the constitutionality of

a state property tax as applied to imported tires held

in the importer’s warehouse in Georgia. Invoking the

“original package” doctrine applied in Low v. Austin,

the importer maintained that its imported tires were

exempt from state tax. The Court rejected that

claim, holding that (423 U.S. at 279):

Georgia's assessment of a nondiscriminatory ad

valorem property tax against the imported tires is

not within the constitutional prohibition against

laying “any Imposts or Duties on Imports” * * *

and * * * insofar as Low v. Austin, 13 Wall. 29

28

(1872) is to the contrary, that decision is over-

ruled.

In reaching that decision, the Court reviewed the

text and objectives of the Import-Export Clause, as

well as its historical origin. 423 U.S. at 283-286. The

Court noted that the considerations that gave rise to

the Clause were that: (i) the federal government

must speak with one voice in regulating commercial

relations with foreign governments, and state tariffs

on exports and imports could conflict with that

requirement; (ii) import revenues were to be the

major source of revenue to the federal government

and should not be diverted to the States; and (iii)

harmony among the States would be disrupted if the

seaboard states with good harbors could tax goods

passing through their harbors to or from their neigh-

bors. Id. at 285.

The Court concluded that nondiscriminatory prop-

erty taxes would interfere with none of the objectives

of the Import-Export Clause. 423 U.S. at 286-290.

Noting that the text of the Import-Export Clause—

proscribing imposts and duties on imports and

exports—did not clearly encompass general property

taxes, the Court “decline{[d] to presume it was

intended to embrace taxation that does not create the

evils the Clause was specifically intended to

eliminate” (423 U.S. at 293-294). The Court empha-

sized that (id. at 287):

The Import-Export Clause clearly prohibits state

taxation based on the foreign origin of the

imported goods, but it cannot be read to accord

imported goods preferential treatment that

permits escape from uniform taxes imposed

29

without regard to foreign origin for services

which the State supplies.

The Court further explained that the “original

package” language of Brown v. Maryland had been

misunderstood (423 U.S. at 298):

In is clear that the Court’s view in Brown v.

Maryland] was that merely because certain

actions taken by the importer on his imported

goods would so mingle them with the common

property within the State as to “lose their

distinctive character as imports” and render them

subject to the taxing power of the State, did not

mean that in the absence of such action, no

exaction could be imposed on the goods. Rather,

the Court clearly implied that the prohibition

would not apply to a state tax that treated

imported goods in their original packages no

differently from the “common mass of property in

the country”; that is, treated it in a manner that

did not depend on the foreign origins of the goods.

The Court noted that the opinion in Low v. Austin

had misread Chief Justice Taney’s opinion in the

License Cases, which “makes crystal clear that the

prohibition applied only to state exactions upon

imports as imports and did not apply to nondis-

criminatory ad valorem property taxes.” 423 U.S. at

300. See pages 18-19, supra.

(ii) In Complete Auto Transit, Inc. v. Brady, 430

U.S. 274 (1977), the Court held that the Commerce

Clause does not bar application of a generally applica-

ble state tax to the gross revenues of a company

engaged exclusively in the transportation of motor

vehicles in interstate commerce. The Court recon-

sidered and overruled its decision in Spector Motor

30

Service. Inc. v. O'Connor, 340 U.S. 602 (1951), which,

following Robbins, had held that a State could not

impose a generally applicable licensing fee on persons

engaged in interstate commerce. See page 22 & note

8, supra. The Court noted in Complete Auto that it

was unquestioned that the activity engaged in was

sufficiently connected to the State to justify a tax,

that the tax was fairly related to the benefit provided

to the taxpayer, that the tax did not discriminate

against interstate commerce, and that it was not

unfairly apportioned. 430 U.S. at 287. Under those

circumstances, the Court concluded that “the Spector

rule does not address the problems with which the

Commerce Clause is concerned” and overruled that

decision. Id. at 288. The Court’s holding in Complete

Auto necessarily, albeit implicitly, overruled Robbins

and the “long line of ‘drummer cases’” that that

decision had spawned. See note 8, supra.

(iii) In Department of Revenue of Washington v.

Association of Washington Stevedoring Companies,

435 U.S. 734 (1978), the Court considered the State of

Washington’s renewed attempt to apply its gross

receipts tax to the proceeds from loading and un-

loading ocean-going vessels. In the earlier decisions

in Puget Sound and Joseph v. Carter & Weekes, the

Court had invoked the Commerce Clause to hold

unconstitutional the application of state gross re-

ceipts taxes to the proceeds of stevedoring cargoes in

interstate and foreign commerce. See page 24, supra.

In Washington Stevedoring, however, the Court had

little difficulty, after Complete Auto, in overruling

those decisions insofar as the Commerce Clause was

involved. 435 U.S. at 743-751.

The Import-Export Clause required separate con-

sideration. Michelin Tire had inquired whether a

31

generally applicable tax that did not favor or disfavor

imports or exports conflicted with any of the policies

leading to the adoption of the Import-Export Clause

and had upheld the application of the property tax to

imported goods, whether or not in the original

package, when it found no friction or inconsistency.

A similar inquiry led the Court to conclude in

Washington Stevedoring that the generally applica-

ble Washington tax on gross receipts from stevedor-

ing offended none of the policies of the Import-Export

Clause. 435 U.S. at 754-755. The Court specifically

rejected the suggestion that the fact that Michelin

Tire dealt only with goods no longer in transit

required that the cases be differentiated. Jd. at 755-

757. The Court explained that Canton Railroad

demonstrated that the analysis applied in Michelin

Tire was not to be discarded simply because the goods

were in transit. Jbid. Moreover, the fact that

Michelin Tire involved only imports while the tax

involved in Washington Stevedoring related to pro-

ceeds from services for both imports and exports did

not call for a different conclusion. Id. at 757-758. The

Court held that the considerations that led to the

decision in Michelin Tire were equally applicable to

the Washington tax. /bid."

(iv) The Court's decision in Limbach v. Hooven &

Allison Co., 466 U.S. 353 (1984), serves as a supple-

ment to these three significant modern decisions. In

Justice Powell concurred separately in Washington Steve-

doring. He concluded that the controlling factor in that case,

as in Michelin Tire, was that local taxpayers should not be

required to subsidize the services used and enjoyed by im-

porters and exporters; instead, the consumer of such goods

should pay for the services rendered by government just as

they paid transportation costs. 435 U.S. at 761-764.

32

Limbach, the Court made clear that more than a few

named decisions had been overruled by Michelin Tire,

Complete Auto, and Washington Stevedoring. In

overruling an earlier decision that had invalidated the

application of a “nondiscriminatory ad valorem per-

sonal property tax to imported fibers still in their

original packages” (466 U.S. at 354), the Court

emphasized that the reasoning that underlay such

decisions had been “repudiated” (id. at 362). The fact

that the Court had not explicitly named and cataloged

all of the cases whose reasoning had been rejected in

its more recent decisions did not mean that those

earlier decisions retained “current validity.” Id. at

361.

7. Application of The Modern Doctrine to the

Export Clause. The reasoning of the Court in

Michelin Tire and Washington Stevedoring applies

equally to nondiscriminatory federal taxes under the

Export Clause. Those decisions demonstrate that,

when a generally 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 constitutional immunity from taxation.

See pages 27-29, supra. And, as the Court has

repeatedly emphasized since Brown v. Maryland, the

Export and Import-Export Clauses are comple-

mentary in scope. See pages 16-17, supra.”

As the court of appeals acknowledged in this case

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

Warren’s The Making of the Constitution demon-

2 Most recently, in Washington Stevedoring, the Court cited

Spalding (an Export Clause case) along with cases involving

state taxes and the Import-Export Clause to illustrate rea-

soning that was no longer approved. 435 U.S. at 752.

33

strate, the Export Clause resulted from one of the

sectional divisions that marked the Constitutional

Convention.” In particular, it stemmed from the

concern that a Congress controlled by the more

numerous 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” (note 13,

See Madison’s Notes of Debates in the Federal Convention,

reproduced in 2 M. Farrand, The Records of the Federal Con-

vention of 1787, at 305-308, 359-363, 441-442 (1966) (proceedings

of August 16, 21, 28, 1787); C. Warren, The Making of the

Constitution 570-574 (reprint 1993) (1928). The central portion

of Warren’s description is as follows (at 571-572) (foot note

omitted):

The question of a prohibition of taxes and duties on exports

now brought these sectional differences into an outbreak in

the Convention.

It is to be noted, as a preliminary to consideration of this

clash, that the Committee's proposal to forbid export duties

was a very radical departure from the theory and practice

theretofore prevailing in government taxation. As has

been well said: “To attempt to organize a Government

without the power to tax exports was a innovation. From

time immemorial, every nation had taxed whatever pro-

ductions of its soil its inhabitants might presume to export.

In the old economy, its maxim was to tax exports but to

admit imports free.” The prohibition of export duty now

inserted in the new Constitution was not based, however,

on any change in economic theory but on purely political

and sectional conditions. The South, being agricultural

and having three great crops which grew nowhere else,—

tobacco, rice, and indigo—feared that the possession of this

power by Congress could enable the North to discriminate

against it, by a tax which would operate only on the

peculiarly Southern articles of export. This fear had been

expressed early in the Convention.

34

supra). This narrow historical purpose of the Export

Clause is complemented by the narrow language

employed in the Clause, which proscibes only federal

taxes “laid on Articles exported” (U.S. Const. Art. I,

$9, Cl. 5).

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 or agen: Mag nec to

exports or the export process (such as life insurance,

— and — policies, indemnity bonds and

annuity contracts). See 26 U.S.C. 43710), (2). Even

as applied to casualty insurance, the tax unquestiona-

bly has only an incidental and remote relationship to

exports and the export process—and it applies equally

to 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)). As this Court stated in

upholding the constitutionality of the federal tax

challenged in Peck & Co. v. Lowe, 247 U.S. at 175,

“There is no discrimination. At most, exportation is

affected only indirectly and remotely.”

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

„Even within the specific category ka peg —

the statute applies to risks that have little or no connection

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

quake.

35

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

offloaded 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 cargo is not.

That would turn the constitutional shield against

discrimination in the Export Clause into a sword

requiring “preferential treatment” for exports and

“that permits escape from uniform taxes” imposed

without discrimination (Michelin Tire Corp. v.

Wages, 423 U.S. at 287).

As this Court noted in Cornell v. Coyne, 192 U.S.

at 427, the Export Clause “does not mean that articles

exported are relieved from the prior ordinary burdens

of taxation which rest upon all property similarly

situated.“ The United States—like the States

assists and protects respondent’s shipments over

highways within the United States (financed in

substantial part by the federal government) as well as

in the movement of such goods by sea or air beyond

our borders. As a nondiscriminatory, generally appli-

cable tax designed to raise revenues for the perform-

ance of government services, the tax imposed by

36

Section 4371 is not unconstitutional. Here. as in Peck

& Co. v. Lowe, the tax should be upheld because it is

“not laid on” exports or the export process uniquely

“or in a discriminative way” (247 U.S. at 174).

It should be emphasized that the Commerce Clause

provides Congress with comprehensive authority

over exports as well as imports. It was established

early that Congress has the power to embargo or

otherwise control the export of such goods or

materials as the national interest indicates. Gibbons

v. Ogden, 22 U.S. (9 Wheat.) 1, 191-192 (1824); United

States v. Marigold, 50 U.S. (9 How.) 560, 566-567

(1850); United States v. The William, 28 Fed. Cas.

614, 620-623 (D. Mass. 1808) (No. 16.700).“ It is also

clear that Congress may take into account—both in

regulating commerce with foreign nations and in

laying and collecting taxes—the competitive advan-

tages enjoyed by foreign nationals and foreign

corporations. Board of Trustees v. United States, 289

U.S. 48, 58 (1933). The Export Clause removes only a

small and narrowly defined area from the wide-

ranging authority provided to the Congress by the

Constitution.

Considering the origin, text and narrow objectives

of the Export Clause, the role of that Clause within

the broader structure of the Constitution, and this

Court’s recent decisions, the prohibitions of that

Clause should be confined to discriminatory taxes

‘ne authority has recently been exercised in the

enacir. of the Export Administration Act of 1979, 50 U.S.C.

App. 2401-2420. See Moller-Butcher v. United States Depart-

ment of Commerce, 12 F.3d 249 (D.C. Cir. 1994); United States

v. Bozarov, 974 F.2d 1037 (9th Cir. 1992), cert. denied, 113 8.

Ct. 1273 (1993).

37

imposed specifically upon “Articles exported.” The

generally applicable, nondiscriminatory tax on in-

surance imposed by Section 4371 of the Internal

Revenue Code does not violate that standard.

CONCLUSION

The judgment of the court of appeals should be

reversed.

Respectfully submitted.

Drew S. Days, III

Solicitor General

LORETTA C. ARGRETT

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

KENT L. JONES

Assistant to the Solicitor

General

GARY R. ALLEN

ERNEST J. BROWN

Attorneys

JANUARY 1996