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

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FILED

FEB 16 1996

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| SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1995

UNITED STATES OF AMERICA, Petitioner,

INTERNATIONAL BUSINESS MACHINES CORPORATION,

BEST AVAILABLE COPY

QUESTION PRESENTED

Whether the Export Clause of the U.S. Constitution pre-

cludes the application of § 4371 of the Internal Revenue Code

to premiums paid for casualty insurance on export shipments.

To accept the Government’s argument that the Export Clause

permits the tax, this Court would have to overrule Thames &

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

_—

TABLE OF CONTENTS

Page

re se oe as bes ea ee be old a i

ED & ils < OW) oe 068% 0 SUC os ii

nn aes 6 dON ow 6 CSR ON c's os we iv

Constitutional Provisions Involved ............. |

POPPED cei ce We ec deo ee deesoce 3

Ee se ea ee ee 7

i. cbs oe le We beweb Se coenes code 9

1. This Court Has Consistently Held that the Export

Clause Precludes the Imposition of Federal Taxes on

the Export Process, Whether or Not the Tax Is One

of General Applicability. Thames & Mersey, Which

Controls on the Facts in This Case, Is Part of that

Unbroken Line of Authority. .............. 9

A. The Court's Consistent Reading of

. o> bas edwe Reecees 10

ili

2. Taxes not specifically directed at

the export process ...... 2... . ees 17

B. The Controlling Force of Thames & Mersey .. 25

Il. The Government's Request that the Court

Overrule Thames & Mersey Should Be Rejected. .. 26

A. The "Modern Decisions" Under the

Export and Commerce Clauses .......... 28

B. Newer Decisions under the

Import/Export Clause... ........ sees 29

C. The Relevance of Michelin and Washington

Stevedoring to the Export Clause ......... 32

D. The Compelling Text of the Constitution .... 40

Ill. Even if the Import/Export Clause Analysis Were

Relevant to This Case, the § 4371 Tax Is Still

Unconstitutional as Applied. .........-..-.. 42

TABLE OF AUTHORITIES

Cases: Page

A.G. Spalding & Bros. v. Edwards, 262 U.S.

EE bees» 6as Ceeetee ooehts 24-25, 28

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

ees oe 12-14, 37, 38-39, 40

Canton R.R. v. Rogan, 340 U.S. 511 (1951) .... . 29-30

Cornell v. Coyne, 192 U.S. 418 (1904) ... 20-21, 22, 23

Department of Revenue v. Association of

Washington Stevedoring Cos., 435 U.S. 734

Ree ee lewiwems. 5, 8-9, 29-33, 38, 41, 42-43

Fairbank v. United States, 181 U.S. 283

ne 7, 8, 14-15, 17, 23, 27-28, 34, 40, 42

Head Money Cases (Edye v. Robertson), 112 U.S.

PE ORES 06 Shee E eWEES OS ee Ces 19

Itel Containers International Corp. v.

Huddleston, 507 U.S. 60, 113 S. Ct. 1095

Dns «sae bive< keh bein deeenée 31, 43-44

License Tax Cases, 72 U.S. (5 Wall.) 462

Pri. 8 Can AW obese kd@enteccewsee 18

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

th ch dewae bd dwlek see weees 30, 32, 41

Louisiana Land & Exploration Co. v. Pilot

Petroleum Corp. , 900 F.2d 816 (Sth Cir.),

cert. denied, 498 U.S. 897(1990) .......... 44

Mayo v. United States, 319 U.S. 441 (1943) ...... 41

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

a 5, 8-9, 29-33, 37, 41, 42-43

Missouri v. Jenkins, 495 U.S. 33 (1990) ......... 40

Moon v. Freeman, 379 F.2d 382 (9th Cir. 1967) .... 19

New York v. United States, 326 U.S. 572 (1946) .... 41

Pace v. Burgess, 92 U.S. 372 (1876) ......... 18-19

Pacific Insurance Co. v. Soule, 74 U.S. 433 (1868) .. 38

Peck & Co. v. Lowe, 247 U.S. 165 (1918) . . . . 22-24, 28

Pollock v. Farmers’ Loan & Trust Co., 158 U.S.

ee Oe re ee 38

Richfield Oil Corp. v. State Board of

Equalization, 329 U.S. 69 (1946) ........... 44

Thames & Mersey Marine Insurance Co. v.

United States, 237 U.S. 19 (1915) ........ passim

Turpin v. Burgess, 117 U.S. 504 (1886) 19-20, 21, 22, 23

United States v. Hvoslef, 237 U.S. 1

a Parr 4, 7, 10, 15-16, 17, 21-24, 31, 33

United States v. New York & Cuba Mail S.S.

Co., 200 U.S. 488 (1906) ...........446. 16

Virginia Indonesia Co. v. Harris County

Appraisal District, 910 S.W.2d 905

Gee, TD 6c de 6b es Uw SNS ONS CSRS TO 44

Western Live Stock v. Bureau of Revenue, 303

Se Se gw eaeeuk 06-6 ud o Se UH 28

Willcuts v. Bunn, 282 U.S. 216 (1931) .......... 17

U.S. Const. art. 1, §8,cl. 1 .... 1, 11, 18, 32, 39, 41

OS. Gem. a0. £ GR GD occccccscess 2, 28-29

U.S. Comm. ant. 1, 99,66. 49 2... cc ccccees 2, 12, 18

F@. @ BS |S | BPP passim

OS. Comet. 0. ERG GS .. cc ccsccscs 2, 12, 18

U.S. Comm. amt. 1, § 00,6. 2... ecco passim

Revenue Act of 1921, ch. 136, 42 Stat. 227 ........ 4

Stamp Act (Mar. 22, 1765), in Documents

of American History 53 (Henry Steele

Commager ed., 6th ed. 1958) ........... 37, 40

War Revenue Act of June 13, 1898, ch. 448, 30

Mh CGA od ws & See Sb FSCS eh ed os 02 28

er ek I er ee al passim

Ce Ne sg Bin 3-4

Reg. 55, art. 110(a) (CCH Fed. Tax Serv.

ee 4-5

Rev. Rul. 57-256, 1957-1C.B. 416 ............. 4

Miscellaneous:

Peter V. Bergstrom, Markets and Merchants:

Economic Diversification in Colonial

Virginia, 1700-1775 (1980) ............... 34

The Compact Edition of the Oxford English

EL See 38

The Documentary History of the Ratification

of the Constitution (John P. Kaminski &

Gaspare J. Saladino ed. 1988) ............. 36

Max Farrand, The Records of the Federal

Convention of 1787 (rev. ed. 1966) . . . . 11-12, 34-39

The Federalist (Clinton Rossiter ed. 1961) ...... 12, 41

13 The Papers of Benjamin Franklin

(Leonard W. Labaree ed. 1969) .......... 37-38

Emory R. Johnson, T.W. Van Metre, G.G.

Huebner & D.S. Hanchett, History of

Domestic and Foreign Commerce of the United

a RR Ee a 34

Samuel Johnson, Dictionary of the

English Language (1755) ................ 38

(Norton ed. 1987) .. 0... 6 ee ee ee ee es

Thomas P. Slaughter, The Whiskey Rebellion

Pyar 2) eee. eee eee

Joseph Story, Commentaries on the

Constitution of the United States (1833) .......

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1995

No. 95-591

UNITED STATES OF AMERICA, Petitioner,

Vv.

INTERNATIONAL BUSINESS MACHINES CORPORATION,

Respondent.

BRIEF FOR RESPONDENT

INTERNATIONAL BUSINESS MACHINES CORPORATION

CONSTITUTIONAL PROVISIONS INVOLVED

The Government’s brief adequately sets out the statutory

provisions relevant to this case (U.S. Br. 2-4). A fuller presentation

of the relevant provisions of the Constitution of the United States is

as follows:

a. Art. I, § 8, cl. 1:

"The Congress shall have Power To lay and collect Taxes,

Duties, Imposts and Excises, to pay the Debts and provide

for the common Defense and general Welfare of the

United States; but all Duties, Imposts and Excises shall be

uniform throughout the United States."

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. 4:

"No Capitation, or other direct, Tax shall be laid, unless

in Proportion to the Census or Enumeration herein before

directed to be taken.”

Art. I, § 9, cl. 5:

“No Tax or Duty shall be laid on Articles exported from

any State.”

Art. I, § 9, cl. 6:

"No Preference shall be given by any Regulation of

Commerce or Revenue to thé Ports of one State over those

of another: nor shall Vessels bound to, or from, one State

be obliged to enter, clear, or pay Duties in another.”

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 its inspection

Laws: and the net Produce of all Duties and Imposts, laid

by any State on Imports or Exports, shall be for the Use

of the Treasury of the United States; and all such Laws

shall be subject to the Revision and Controul of the

Congress.”

STATEMENT OF THE CASE

Respondent International Business Machines Corporation

(IBM) brought this suit in the United States Court of Federal

Claims to obtain a refund of $826,054.55 in taxes assessed

under § 4371 of the Internal Revenue Code.' Section 4371

(26 U.S.C. § 4371) imposes a tax of four cents per dollar on

insurance premiums paid to a foreign insurer for insurance

against risks or losses wholly or partly within the United

States. See 26 U.S.C. §§ 4371 & 4372. As an exporter of

computers and other business products, IBM purchased —

either directly or through its foreign subsidiaries — casualty

insurance to protect against the risk of loss or damage to its

products during the export process. The insurance was “point

to point"; that is, it applied to each shipment from the time it

left IBM’s facility in the United States until arrival at the

foreign destination. A separate premium was charged for each

shipment, with the amount determined by the value of the

shipment and underwriting factors such as the time and

distance of the trip.’

When the insurance was purchased by IBM’s foreign

subsidiary, a foreign insurance company would typically issue

: The amount of $1.5 million referenced in the Government's brief

(U.S. Br. 5) includes both taxes and interest. See Pet. App. 33a.

>‘ Pet. App. 39a. IBM exported products to diverse countries around

South Africa, Switzerland, Thailand, the former U.S.S.R., Vietnam, and

the overseas portion of the journey, and the inland segment within the

foreign country, but in all cases insurance coverage did not commence until

the shipment had been tendered in the United States to a common carrier

the policy. The statutory language of § 4371 would thus be

triggered, even though only a small portion of the voyage

occurred within the United States. The tax applies where a

domestic company is insured by a foreign insurer against risks

“wholly or partly" within the United States (26 U.S.C.

§ 4372(d)), and the Government has construed this to mean

that the tax applies to the entire premium for insurance on an

international shipment, without apportionment, if more than a

“trifling” portion of the shipment is within the United States.

See Rev. Rul. 57-256, 1957-1 C.B. 416.

Eighty years ago, this Court held in Thames & Mersey

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

similar federal tax levied against premiums paid for marine

casualty insurance was unconstitutional as applied to export

shipments. The reason was the Export Clause of the

Constitution: "No Tax or Duty shall be laid on Articles

exported from any State." U.S. Const. art. 1, § 9, cl. 5. The

Court in Thames & Mersey concluded that a tax upon

insurance policies covering export shipments was “so directly

and closely related to the ‘process of exporting’ that the tax is

in substance a tax upon the exportation and hence within the

constitutional prohibition .. . ." 237 U.S. at 25, quoting

United States v. Hvoslef, 237 U.S. 1, 13 (1915). Based on

the authority of Thames & Mersey, IBM took the position that

the Internal Revenue Service could not constitutionally apply

§ 4371 to casualty insurance premiums for its export ship-

ments.’

> An earlier version of § 4371 (Revenue Act of 1921, ch. 136,

§§ 1107, 42 Stat. 227, 306) was -- presumably in deference to Thames &

Mersey -- accompanied by a regulation that admunistratively excluded

insurance on exports from the scope of the tax:

(continued...)

After audit of IBM’s tax returns for the years 1975

through 1984, the Internal Revenue Service maintained that

IBM was liable for the § 4371 tax insofar as the policies

purchased from foreign insurers applied to IBM’s exports

from the United States. (Pet. App. 17a) IBM paid the tax

under protest and filed suit for refund. In the lower courts

and in its briefing to this Court, the Government has conceded

that — if the Export Clause was correctly interpreted and

applied in Thames & Mersey — then the tax here is also

unconstitutional as applied and that IBM is entitled to a full

refund. (Pet. App. la & 22a; U.S. Br. 12 n.3)

On stipulated facts, the Court of Federal Claims (Senior

Judge Thomas J. Lydon) granted IBM’s motion for summary

judgment and denied the Government's cross-motion. The

court held that, on the facts presented, "the tax imposed by

§ 4371 is a tax that amounts to a tax on exports” (Pet. App.

26a); that Thames & Mersey was controlling (id. 27a); and

that recent Court decisions under the Import/Export Clause‘

could not be read as rejecting this Court’s established rulings

under the Export Clause (id. 27a). As an alternative ground,

Judge Lydon also ruled that the federal tax here and in

Thames & Mersey were distinguishable from the state taxes

*(...continued)

“No tax is imposed upon the premium charged for insurance

issued to cover commodities which are in the actual process of

exportation and which have begun their voyage or preparation for the

voyage from the United States.”

Reg. 55, art. 110(a) (CCH Fed. Tax Serv. 1926 ed.). The regulation

lapsed without explanation.

* Principally Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976), and

Department of Revenue v . Association of Washington Stevedoring Cos. , 435

U.S. 734 (1978).

upheld in recent Import-Export Clause rulings:

"Thus, even if the government is correct in its

assertion that all taxes that involve exports, whether

considered in light of the Export Clause or the

Import-Export Clause, should be examined to see if

they discriminate against exports qua exports, it

appears that in the Court’s view a tax such as that

imposed by § 4371 could indeed be considered a tax

on exports in their capacity as exports”

and thus was unconstitutional as applied. (Pet. App. 29a)

This was because § 4371 amounted to an ad valorem tax on

export goods in transit,’ a type of tax that this Court’s recent

Import/Export Clause rulings indicated was distinguishable

from the state taxes that were there upheld. (/d. 29a)

The Federal Circuit Court of Appeals affirmed in a

unanimous decision by Judge William C. Bryson (Chief Judge

Archer and Judge Plager joining). After reviewing the history

of the Export Clause, the court of appeals observed:

"Acknowledging the importance of the Export Clause and its

flat prohibitory language, the Supreme Court has consistently

given the Clause a broad construction.” (/d. Sa) While this

Court has in recent years narrowed its construction of the

Import/Export Clause applicable to state taxation,

"{s]upport for the continuing vitality of Thames &

Mersey can be found both in the Court’s Import-

Export Clause decisions and in the distinctions in

language and policy between the Import-Export

Clause and the Export Clause." (/d. 9a)

5 ‘The tax imposed by § 4371 varies directly with the declared value of

the export shipment. Pet. App. 39a.

Hence, on the basis of established precedents and the

"undisputed applicability of Thames & Mersey" (id. 11a), the

court of appeals held that the § 4371 tax as applied to IBM’s

export shipments was unconstitutional.

SUMMARY OF ARGUMENT

I. Thames & Mersey correctly applied the Export Clause

in prohibiting the imposition of a federal excise tax on premi-

ums for casualty insurance that covers export shipments.

Although the federal government generally has broad authority

to levy taxes, the Export Clause is an express and unequivocal

restriction on that power: “No Tax or Duty shall be laid on

Articles exported from any State." This is not simply a

prohibition of taxes that discriminate against exports -- i.¢.,

taxes that are levied on exports qua exports. E.g., Fairbank

v. United States, 181 U.S. 283, 292 (1901); United States v.

Hvoslef, 237 U.S. 1 (1915). Instead, the Export Clause has

consistently been read as an exemption from all federal taxes

as applied to the export process. “The requirement of the

Constitution is that exports should be free from any govern-

mental burden. The language is ‘no tax or duty.’" Fairbank

v. United States, 181 U.S. at 290. Insurance is an integral

part of the export process, and the premiums paid vary

directly with the value of the product. As Thames & Mersey

concluded, a federal excise tax as applied to such insurance is

an impermissible tax on the export process.

II. The Government argues that the Court should now

adopt the “modern doctrine” developed under the Import/-

Export Clause to overrule Thames & Mersey and, indeed, to

repudiate this Court’s analysis in a half-dozen other Export

Clause cases. The argument that the Export Clause should

now be reinterpreted to fit the new Import/Export Clause mold

has no justification -- historical or modern. The proposed

interpretation distorts the plain meaning of a constitutional

provision that was an important compromise at the 1787

Constitutional Convention, and one that has been consistently

understood as exempting the export process from federal

taxation, discriminatory or not. The § 4371 tax at issue here

fits squarely within the scope of the Export Clause as con-

strued and applied in a long line of Court decisions.

Moreover, the Government’s argument would require the

Court to disregard -- indeed, to repudiate -- the analysis in the

same "modern" cases on which the Government relies. This

is because the Court, when it recently reinterpreted the Im-

port/Export Clause to permit greater freedom for State

taxation, applied an analysis that supports rather than under-

mines the historically broad scope of the Export Clause. The

Court stressed that the Import/Export Clause prohibits only

State "imposts” and “duties,” and "just as clearly, the Clause

is not written in terms of a broad prohibition of every ‘tax.’”

Michelin Tire Corp. v. Wages, 423 U.S. 276, 290 (1976)

(emphasis in original). See also Department of Revenue v.

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

759 (1978). By comparison, the Export Clause does say "No

Tax.” Moreover, the modern Import/Export Clause cases

turned on the Court’s understanding of the specific and narrow

purposes that underlay that constitutional provision, purposes

that were not frustrated by non-discriminatory state taxation.

The Export Clause, by contrast, was designed to serve broader

purposes and was intended by the Framers to be absolute and

unqualified in scope. The Framers intended that “exports

should not be made a source of revenue to the National

Government” (Fairbank v. United States, 181 U.S. at 292),

and nothing in the newer cases cited by the Government

supports a different conclusion.

III. Even if the Government were right that the Export

Clause and Import/Export Clause should be construed in

identical fashion, the result in this case is still unchanged. As

the Claims Court below ruled in its alternative holding, the

§ 4371 tax at issue here -- like the tax in Thames & Mersey --

applies to goods during the international journey and bears a

direct relation to the value of those goods. This is unlike the

state taxes upheld in Michelin and Washington Stevedoring,

where in one case the goods were not in transit and in the

other the tax was unrelated to value. Indeed, Washington

Stevedoring distinguished Thames & Mersey on the ground

that a tax on insurance premiums varies directly with the value

of the goods. Thus, even under the Import/Export Clause

analysis set forth in the Court's recent decisions, the federal

excise tax here is still unconstitutional as applied.

ARGUMENT

I. This Court Has Consistently Held that the Export

Clause Precludes the Imposition of Federal Taxes

on the Export Process, Whether or Not the Tax Is

One of General Applicability. Thames & Mersey,

Which Controls on the Facts in This Case, Is Part

of that Unbroken Line of Authority.

The Govergment’s brief (U.S. Br. 19-26) may leave the

impression that the Court has vacillated in its interpretation of

the Export Clause, sometimes viewing the issue of discrimi-

nation against exports as important and other times not. That

is not so. The Court's reading of the Export Clause has been

entirely consistent: the process of exportation is immune from

federal taxation, period. This includes the articles of export

themselves, as well as the documents and transactions in-

volved in the export process. The issue of discrimination has

been relevant only when the tax at issue did not apply during

or fo the export process. But if the tax applies during or to

whether or not the tax is specifically directed at exports qua

exports.

Thames & Mersey is square’: within this unbroken line of

precedent. It holds that even 4 me a-discriminatory excise tax

may not be applied to casualty insurance purchased for export

shipments because such a tax is "so directly and closely

related to the ‘process of exporting’ that the tax is in substance

a tax upon the exportation and hence within the constitutional

prohibition... ." 237 U.S. at 25, quoting United States v.

Hvoslef, 237 U.S. at 13. Thames & Mersey controls on the

facts of this case.

A. The Court’s Consistent Reading of

the Export Clause

The Export Clause has not needed frequent judicial

consideration, presumably because its text is clear enough:

"No Tax or Duty shall be laid on Articles exported from any

State." The clause was inserted during the Constitutional

Convention at the insistence primarily of the southern States,

whose economies were dependent on exports of regional crops

such as tobacco, rice, and indigo. Whereas under the Articles

of Confederation Congress could raise revenue only by

requisitioning funds from the States, the Constitution was to

give the federal government the unaccustomed power to

impose its own taxes. The South, fearing that the Northern

and Mid-Atlantic States would dominate Congress, insisted

that exports be excepted from the taxing power.° Certain

* When in July 1787 the Convention's Committee of the Whole was to

adjourn and to refer drafting matters to the Committee of Detail, General

Pinckney of South Carolina

(continued...)

Northern delegates also supported the clause because they

believed a tax exemption would encourage development of

domestic industries’ and because they feared the federal

government might become too powerful and use its control

over exports to extract concessions from the States.*

The Constitution that emerged from the 1787 Convention

gave Congress general power to lay and collect taxes (art. I,

§ 8, cl. 1), but that power was subject to express limitations.

Taxes and duties against exports were prohibited outright.

Art. I, § 9, cl. 5. In addition, duties, imposts, and excises

had to be uniform throughout the United States (art. I, § 8, cl.

1) and could not discriminate against the ports of one State

*(.. continued)

“reminded the Convention that if the Committee should fail to insert

some security to the Southern States agst. an emancipation of slaves,

and taxes on exports, he shd. be bound by duty to his State to vote

agst. their Report.”

Madison's Notes of Debates in the Federal Convention, reproduced in 2

Max Farrand, The Records of the Federal Convention of 1787 95 (rev. ed.

1966) (“Records”). See also id. at 362-63 (statement of George Mason of

Virginia). The August 6 report of the Committee of Detail did then

include a provision that “No tax or duty shall be laid by the Legislature on

articles exported from any State... .” jd. at 359n.15. It was comment-

ed that “It seems to be feared that the Northern States will oppress the

trade of the Southn.” Jd. at 359 (statement of John Langdon of New

Hampshire). Various proposals to weaken the provision were considered

but rejected (id. at 359-63), and the provision emerged from the Conven-

tion essentially unchanged. See generally Clinton Rossiter, /787 -- The

Grand Convention 200, 209 & 217 (Norton ed. 1987).

” 2 Records at 360 (statement of Oliver Elisworth of Connecticut).

* — E.g., id. at 362 (statement of Elbridge Gerry of Massachusetts).

over those of another (art. 1, § 9, cl. 6). Direct taxes could

only be laid in proportion to the census. Art. I, § 9, cl. 4.

Taking these provisions as a whole, and given that the appor-

tionment requirement was seen as a significant limitation on

direct federal taxes, it was expected that taxation of imports

would be the principal source of revenue for the federal

government.” As for exports, however, “the hands of the

Legislature were absolutely tied. . . -- exports could not be

taxed."'°

In light of this strong intent and the Export Clause’s clear

language, it is not surprising that the Court has given the

Clause a broad and consistent interpretation.

1. Taxes "laid on Articles exported

from any State"

One early issue of interpretation was whether the constitu-

tional prohibition of taxes "laid on Articles exported” literally

required that the tax apply directly to the exported product, or

whether the Export Clause would also prohibit a tax that was

levied on the export process in some other manner. In Brown

v. Maryland, 25 U.S. (12 Wheat.) 419 (1827), the Court

addressed this issue, albeit in dictum because the case in-

volved a state rather than federal tax and thus was decided

% See, e.g., The Federalist No. 12, at 93 (Alexander Hamilton), No.

36, at 222 (Hamilton), No. 41, at 262 (James Madison) (Clinton Rossiter

ed. 1961).

also 2 Joseph Story, Commentaries on the Constitution of the United States

§ 1011, at 470 (1833) (by virtue of the Export Clause, "(t]he power is,

therefore, wholly taken away to intermeddle with the subject of exports”).

under the Import/Export Clause applicable to the States. "!

Maryland required all import traders to pay a license fee, and

the issue was whether that levy was "on Imports or Exports”

within the meaning of the Import/Export Clause. In conclud-

ing that it was, Chief Justice Marshall referred by analogy to

a hypothetical federal tax on the occupation of exporting.

Such a tax, he suggested, would clearly violate the Export

Clause even though not laid directly on the articles of ex-

port.? It was in this context -- on the issue whether a tax

might be "laid on Articles exported” even though not imposed

directly on the articles themselves -- that Chief Justice

Marshall made the statement that is enthusiastically embraced

in the Government's brief (U.S. Br. 17): “There is some

diversity in language [between the Export Clause and the

Import/Export Clause], but none is perceivable in the act

"Art. I, § 10, el. 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 its inspection Laws: and the net Produce of

all Duties and Imposts, laid by any State on Imports or Exports, shall

be for the Use of the Treasury of the United States: and all such

Laws shall be subject to the Revision and Controul of the Congress.”

* "The United States have the same right to tax occupations which is

possessed by the states. Now, suppose the United States should

require every exporter to take out a license, for which he should pay

such tax as congress might think proper to impose; would government

be permitted to shield itself from the just censure to which this

attempt to evade the prohibitions of the constitution would expose it,

by saying, that this was a tax on the person, not on the article, and

that the legislature had a right to tax occupations?”

25 U.S. at 445.

which is prohibited."

In accord with Chief Justice Marshall’s dictum, the Court

has consistently held that the Export Clause cannot be avoided

by the expediency of applying a federal revenue measure to a

transaction that is a part of the export process rather than to

the exported products themselves. The issue was addressed

most directly in Fairbank v. United States, 181 U.S. 283

(1901), which struck down a federal stamp tax on bills of

lading for export shipments. The Government argued that the

Export Clause did not apply because the tax applied to bills of

lading and not to articles of export. The Court concluded that

an express constitutional prohibition on federal powers could

not be construed so narrowly.'* An important purpose of the

Constitution was to ensure "free exportation,” a principle that

would be violated by federal taxation of the export process:

"The requirement of the Constitution is that

exports should be free from any governmental

burden. The language is ‘no tax or duty.” Whether

') 25 U.S. at 445. The Export Clause provides that "No Tax or Duty

shall be laid on Articles exported,” whereas the Import/Export Clause

provides that a State may not “lay any Imposts or Duties on Imports or

Exports” (emphasis added). Obviously, the diversity of language between

"laid on” and “lay . . . on” does not suggest a substantive difference.

Chief Justice Marshall was not, however, addressing a different and more

significant variance between the two clauses -- the use of “Tax or Duty”

in the Export Clause and “Impost or Duty” in the Import/Export Clause.

See pages 30-31, 37-39 infra.

‘* —_ *{I}f the Constitution in its grant of powers is to be so construed that

Congress shall be able to carry into full effect the powers granted, it

is equally imperative that where prohibition or limitation is placed

upon the power of Congress that prohibition or limitation should be

enforced in its spirit and to its entirety.” 181 U.S. at 289.

such provision is or is not wise is a question of

policy with which the courts have nothing to do. We

know historically that it was one of the compromises

which entered into and made possible the adoption of

the Constitution. It is a restriction on the power of

Congress; and . . . no legislation can be tolerated

which, although it may not conflict with the letter,

destroys the spirit and purpose of the restriction

imposed. If, for instance, Congress may place a

stamp duty of ten cents on bills of lading on goods to

be exported it is because it has power to do so, and

if it has power to impose this amount of stamp duty

it has like power to impose any sum in the way of

stamp duty which it sees fit. And it needs but a

moment’s reflection to show that thereby it can as

effectually place a burden upon exports as though it

placed a tax directly upon the articles exported. It

can, for the purposes of revenue, receive just as

much as though it placed a duty directly upon the

articles, and it can just as fully restrict the free

exportation which was one of the purposes of the

Constitution. "

181 U.S. at 290-91. Thus:

"(T]he freedom of exportation being guaranteed by

the Constitution it cannot be disturbed by any form of

legislation which burdens that exportation. The form

in which the burden is imposed cannot vary the

substance.”

Id. at 295.

The Court reaffirmed this principle in United States v.

Hvoslef, 237 U.S. 1 (1915), and Thames & Mersey Marine

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

struck down a federal tax on charter parties to the extent that

the tax was applied to charters for export shipments. Reject-

ing the Government’s argument that the tax "only incidentally

and remotely affected articles exported" and "was not a tax on

articles exported" (237 U.S. at 4), the Court held that the

Export Clause "is designed to give immunity from taxation to

property that is in the actual course of exportation" and "[t}his

constitutional freedom . . . plainly involves more than mere

exemption from taxes or duties which are laid specifically

upon the goods themselves." Jd. at 13. Under the facts of

the case,

"(t}he charters were for the exportation; they related

to it exclusively; they serve no other purpose. A tax

on these charter parties was in substance a tax on the

exportation; and a tax on the exportation is a tax on

the exports."

Id. at 17. Similarly in Thames & Mersey (about which more

later, pp. 25-26), the Court struck down a federal excise tax

on insurance premiums as applied to marine insurance for

export shipments: “proper insurance during the voyage is one

of the necessities of exportation,” and thus the excise tax on

premiums “falls on the exporting process" and hence is

"within the constitutional prohibition." 237 U.S. at 27."

'S See also United States v. New York & Cuba Mail S.S. Co., 200 U.S.

488 (1906), which involved a federal stamp tax on cargo manifests for

ships bound for foreign ports. The United States conceded that the tax was

unconstitutional under the authority of Fairbank but nonetheless prevailed

on the ground that the taxpayer had failed to protest the tax at the time of

payment.

This line of Export Clause cases was aptly summarized in

Willcuts v. Bunn, 282 U.S. 216, 228 (1931):

"(With respect to federal taxation of articles export-

ed from any State, the constitutional inhibition gives

immunity to the process of exportation and to the

transactions and documents embraced in that process.

[Citing Fairbank, Hvoslef, and Thames & Mersey.|

Only on that construction can the constitutional

safeguard be maintained."

2. Taxes not specifically directed at

the export process

1 Although characterizing the § 4371 tax as having “only an

incidental and remote relationship to exports and the export

process" (U.S. Br. 34), the Government does not challenge

the principle just discussed that the Export Clause applies to

taxes on the export process as well as to taxes on articles of

export. Indeed, the Government endorses Fairbank v. United

States as a correct interpretation of the Export Clause (see

U.S. Br. 21-23), and Fairbank addresses most fully the

principle that a tax on the export process is a tax "on Articles

exported." Instead, the Government argues that the Export

Clause should be confined to discriminatory taxes that are

imposed specifically upon exports, and that a generally

applicable tax should be allowed even to the extent it applies

to exports.

On this point too, the Court’s decisions have been

consistent and unwavering. If a federal tax is applied to or

during the export process, it violates the Export Clause even

if non-discriminatory. If, however, the tax applies prior to or

after the export journey, the tax is unconstitutional if it

discriminates against exports but constitutional if it does not.

As for the Government’s argument that non-discriminatory

taxes may be applied to the export process itself, this Court

has consistently rejected that position. While the Constitution

contains other provisions designed to prohibit discriminatory

federal taxation,’ the Export Clause is an unqualified excep-

tion from the power to tax.

Our discussion on this point begins with the first case in

which the Court was asked to consider an Export Clause

challenge to a federal revenue measure. In 1868, Congress

had enacted an excise tax on the manufacturing of tobacco but

exempted all tobacco intended for export. The same statute

required, however, that exempted tobacco be packaged with

an identifying stamp for which the government charged a fee

of 25 cents. That fee was challenged as violative of the

Export Clause in Pace v. Burgess, 92 U.S. 372 (1876), but

the Court rejected the claim on the ground that the fee was not

a "tax" or “duty” within the meaning of the Clause. The

stamp was intended only to separate and identify tobacco that

was exempt from the standard tax, and the fee bore no

relationship to the quantity or value of the export package and

was intended only to cover the costs of administering the tax

uniform throughout the United States); at. I, § 9, cl. 6 (no discrimina-

tion between ports in terms of regulation or revenue). In the License

Tax Cases, 72 U.S. (5 Wall.) 462, 471 (1867), the Court compared

“qualifications” on the federal taxing power with the “exception” grant-

ed for export commerce:

"(T)he power of Congress to tax is a very extensive power. It is

given in the Constitution, with only one exception and only two

qualifications. Congress cannot tax exports, and it must impose

direct taxes by the rule of apportionment [art. |, § 9, cl. 4) and

indirect taxes by the rule of uniformity fart. I, § 8, cl. 1].”

exemption. Thus, the fee was not a “tax" or "duty" subject

to the constitutional prohibition. '’

The same statute returned to the Court in Turpin v.

Burgess, 117 U.S. 504 (1886). In 1882, Congress repealed

the exemption stamp fee but in so doing described the fee as

an "export tax.” Seizing on that terminology, another tobacco

manufacturer sought to recover past payments. The Court

rejected the claim, reaffirming its holding in Pace v. Burgess

that the stamp fee did not amount to a "tax." The Court was

unimpressed by the subsequent congressional characterization

of the fee, suggesting that Congress may have unwittingly

adopted a term proposed by industry lobbyists. /d. at 505-06.

The Court went on, though, to state an alternative

rationale -- one that laid the groundwork for all subsequent

decisions under the Export Clause. In discussing both the

Export Clause and the Import/Export Clause, the Court stated:

"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. That would be laying a tax

or duty on exports, or on articles exported, within

the meaning of the Constitution. But a general tax,

laid on all property alike, and not levied on goods in

Consistent with Pace v. Burgess, the rule has developed that the

Export Clause does not prohibit user fees or other similar charges that

are not general revenue measures but instead are regulatory in nature or

designed only to defray governmental expenses specifically associated

with export of the products in question. E.g., Head Money Cases (Edye

v. Robertson), 112 U.S. 580, 595-96 (1884); Moon v. Freeman, 379

F.2d 382, 391-92 (9th Cir. 1967). Here, the Government has conceded

that § 4371 is a “tax” in the constitutional sense and does not qualify for

this regulatory exception. E.g., Pet. App. 6a, 17a-18a, 22a.

course of exportation, nor because of their intended

exportation, is not within the constitutional prohi-

bition.”

117 U.S. at 507 (emphasis added).

Thus, the Export Clause would prohibit any tax -- even a

"general tax" -- if it is levied on goods "whilst they are being

exported" (or, "in course of exportation"). On the other hand,

if the tax is imposed prior to commencement of the export

process, the validity of the tax will depend on whether it is

specifically directed at exports (i.e., on whether the goods are

taxed “because of their intended exportation"). This issue of

discrimination is not relevant, though, if the tax applies during

or to the export process. Based on this standard, the Turpin

Court concluded that the tobacco stamp levy was not objec-

tionable because “the tax (if it was a tax) was laid upon the

goods before they had left the factory” and thus “were not in

course of exportation.” /d. at 507. Nor, in the circumstances

of the case, did the stamp fee discriminate against exports.

Id. at 507-08."

The Court applied this identical standard in Cornell v.

Coyne, 192 U.S. 418 (1904), which considered the consti-

tutionality of a federal excise tax on the manufacturing of

* — This latter point was true because the stamp fee permitted exports to

be charged at a lower rate than domestic goods:

“A special indulgence was granted to [plaintiffs] (in common with

others), in reference to the particular tobacco which they declared it

to be their intention to export... . In this view of the case, the

plaintiffs not only had no ground of complaint, but they were really

the objects of favorable treatment on the part of the government,

which, on the slight and easy conditions referred to, accepted their

declared intention to export the tobacco in question, before it was

commenced to be exported, or put in the way of exportation.”

filled cheese. The tax was non-discriminatory as to cheese

manufactured for domestic and export markets, but the

taxpayer argued that the Export Clause nevertheless precluded

application of the tax to cheese that was manufactured under

contract for export and that was then in fact exported. The

Court rejected the taxpayer’s argument, but not simply

because the tax was non-discriminatory. Rather, the tax was

constitutional because it was both non-discriminatory and

applied to the manufacturing process prior to the commence-

ment of the export journey:

"A farmer may raise cattle with the purpose of

exportation, and in fact export them. Can it be that

he is entitled to a return of all property taxes which

have been cast upon those cattle? The true construc-

tion of the constitutional provision is that no burden

by way of tax or duty can be cast upon the exporta-

tion of articles, and does not mean that articles

exported are relieved from the prior ordinary burdens

of taxation which rest upon all property similarly

situated. The exemption attaches to the export and

not to the article before its exportation."

192 U.S. at 427 (emphasis added).

Under the Government’s proposed theory of the Export

Clause, the Court in Cornell reached the right result for the

wrong reason; because the tax was non-discriminatory, that

should have been the end of the analysis. However, the Court

did not apply the Government's proposed analysis but instead

applied the analysis of Turpin v. Burgess: the tax was

constitutional only because it was both non-discriminatory and

was not applicable to the export process. And, in so ruling,

the Court reaffirmed that the export process itself was exempt

from any taxation, whether discriminatory or not.

Hvoslef and Thames & Mersey, both decided eleven years

after Cornell, were therefore not aberrations or unwitting

missteps, as the Government suggests, but instead represented

consistent applications of the standard already announced in

Turpin v. Burgess and Cornell. Hvoslef involved a non-

discriminatory federal tax on contracts for ship charters, and

the Court held that the tax violated the Export Clause to the

extent it was applied to charters for export shipments: "the

tax as applied to the [export] charter parties here in question

was nothing else than a tax on exportation and to this extent

was in any event invalid." 237 U.S. at 17-18. The tax on

insurance premiums in Thames & Mersey, while again not

discriminating against exports, met the same fate to the extent

the tax was applied to export shipments. In both cases, the

tax applied to the export process itself and thus, as applied,

violated the Export Clause even though non-discriminatory .

The Court’s next Export Clause decision was Peck & Co.

v. Lowe, 247 U.S. 165 (1918), which held that the new

federal income tax made possible by the Sixteenth Amendment

could be applied to all income of a domestic corporation,

including income derived from exports. The Government

suggests (U.S. Br. 24-26) that Peck & Co. was in tension with

Hvoslef and Thames & Mersey, decided just three years

earlier, and supports the "modern" theory of the Export

Clause it urges in this case. In support of that suggestion, the

Government states that Peck & Co. stressed the non-dis-

criminatory aspect of the tax in question (with citations to

Turpin and Cornell), whereas non-discrimination had not

saved the taxes that had been struck down in Hvoslef and

Thames & Mersey.

There is no tension, however, because Peck & Co.

applied precisely the same standard that has been applied in al!

the Court’s decisions under the Export Clause. Citing both

Hvoslef and Thames & Mersey and quoting with approval from

the latter, the Court in Peck reiterated that the Export Clause

excepts from the federal taxation power

“articles in the course of exportation, the act or

occupation of exporting, bills of lading for articles

being exported, charter parties for the carriage of

cargoes from state to foreign ports, United States v.

Hvoslef, 237 U.S. 1; and policies of marine insurance

on articles being exported, -- such insurance being

uniformly regarded as ‘an integral part of the ex-

portation’ and the policy as ‘one of the ordinary

shipping documents,’ Thames and Mersey Insurance

Co. v. United States, 237 U.S. 19. In short, the

court has interpreted the clause as meaning that

exportation must be free from taxation, and therefore

as requiring ‘not simply an omission of a tax upon

the articles exported, but also a freedom from any tax

which directly burdens the exportation.’ Fairbank v.

United States, {181 U.S.] at 292-293."

247 U.S. at 173 (emphasis in original; other citations omit-

ted).

Applying this standard, the Court upheld the income tax

in Peck & Co. because the tax was “not laid on articles in

course of exportation or om anything which inherently or by

the usages of commerce is embraced in exportation or any of

its processes.” Jd. at 174. The tax applied only to net

income, based on all the company’s revenues and costs and

calculated well after the exportation process was finished.

The tax was thus analogous to the manufacturing taxes in

Turpin v. Burgess and Cornell, which were applied prior to

the start of the export journey. It was in this context -- a tax

not applied to the export process itself -- that the issue of

discrimination was relevant.

The fact that Peck & Co. did not signal a revised con-

struction of the Export Clause is proven by A.G. Spalding &

Bros. v. Edwards, 262 U.S. 66 (1923), where five years after

Peck the Government made and lost precisely the same

argument that it advances today. Spalding involved a federal

excise tax on the sale of sporting equipment. Although the tax

was non-discriminatory, the Spalding company challenged its

application to sales made in export commerce. The Solicitor

General, in seeking to defend the tax, argued that discrimina-

tion was the sole issue:

"From the history of the Export Clause in the

Constitution, it will appear that the framers had in

mind a tax levied directly and deliberately upon the

act of exportation. They were not considering the

application of general taxing laws, which might fall

in individual cases upon merchandise, which might

thereafter be exported.”

Id. at 66. The Court, in a unanimous decision by Justice

Holmes, flatly rejected the Government's argument:

"The fact that the law under which the tax was

imposed was a general law touching all sales of the

class, and not aimed specially at exports, would not

help the defendant if in this case the tax was ‘laid on

articles exported from any State’, because that is

forbidden in terms by the Constitution. Article lI,

§ 9. United States v. Hvoslef, 237 U.S. 1, 18... .

Articles in course of transportation cannot be taxed.

William E. Peck & Co. v. Lowe, 247 U.S. [at] 173."

262 U.S. at 69. The tax in question was applied at the ume

the goods were delivered to the common carrier for shipment

abroad, and thus the tax was imposed on the export process in

violation of the Constitution:

"To put [the taxable event] at any later point would

fail to give to exports the liberal protection that

hitherto they have received; of which an example

may be seen in Thames & Mersey Marine Ins. Co. v.

United States, 237 U.S. 19." 262 U.S. at 70.

B. The Controlling Force of Thames & Mersey

We see, then, that Thames & Mersey fits squarely within

the Court’s consistent interpretation of the Export Clause and

has been frequently relied upon and cited with approval, even

in cases which the Government suggests are supportive of its

position. Thames & Mersey involved a non-discriminatory

federal tax -- an excise tax on casualty marine insurance,

whether for domestic or export shipments. But, as applied to

exports, it was held unconstitutional. Insurance “is essential

to the process of exporting” (Thames & Mersey, 237 U.S. at

26), “one of the necessities of exportation” (id. at 27).

poe neg a federal excise tax to such insurance placed an

impermissible burden on the exportation process:

"The rise in rates for insurance as immediately

affects exporting as an increase in freight rates, and

the taxation of policies insuring cargoes during their

transit to foreign ports is as much a burden on

exporting as if it were laid on the charter parties, the

bills of lading, or the goods themselves. Such

taxation does not deal with preliminaries, or with

distinct or separable subjects; the tax falls upon the

exporting process.” /d. at 27.

The Government thus concedes, as it must, that Thames

& Mersey is indistinguishable from this case and -- unless

overruled -- compels affirmance of the judgment below. The

§ 4371 tax has been applied to insurance policies that cover

IBM’s export shipments from the time the products are

delivered to a common carrier for shipment abroad, to the

tume the products arrive at their foreign destination. The tax

varies directly with the value of the exports, because the tax

is a fixed percentage of the premiums and the premiums in

turn vary directly with the cargo’s value. In practical effect

the tax is an ad valorem tax on the cargo’s value and applies

directly to and throughout the export process. It is therefore

unconstitutional under Thames & Mersey, even if it does not

discriminate against exports.

Il. The Government’s Request that the Court

Overrule Thames & Mersey Should Be Rejected.

The Government's argument for overruling Thames &

Mersey boils down to this: For many years, the Export

Clause and Import/Export Clause were construed in tandem

(which is true). Then, in the 1970s, the Court changed its

interpretation of the Import/Export Clause to permit non-

discriminatory State taxation of imports and exports (also true,

to a degree’”). Thus (in the Government's view), this

“modern doctrine” should now be applied to the Export

Clause.

What this argument lacks is analysis of why the Court

changed its interpretation of the Import/Export Clause, and

* As discussed in Part Il below (pp. 42-44), the Government's

reading of the holdings of the new Import/Export Clause cases is

somewhat more expansive than is merited

commonly thought that porpoises and tuna were both fish.

Then, scientists discovered that the porpoise was actually a

mammal. Therefore, we now know that tuna are mammals as

well. Obviously, one should not jump to this second conclu-

sion without first examining the reasons why scientists

changed their minds about porpoises (warm- rather than cold-

blooded, etc.) and then considering whether or not those

reasons apply to tuna. For all practical purposes, the Govern-

ment’s argument omits consideration of those critical ques-

tions.

The explanation for the omission is evident: The reasons

the Court changed its analysis of the Import/Export Clause are

not applicable to the Export Clause. To the contrary, those

reasons confirm rather than refute the Court's long-standing

conclusion that the Export Clause precludes federal taxation of

the export process, discriminatory or not.”

* It is worth noting that the line the Government seeks to draw

between discriminatory and non-discriminatory taxes will often be hazy

A facially non-discriminatory tax may be imposed only against products

that are predominantly exported (¢.g.. mght-hand-drive automobiles), or

a tax im practical effect may weigh more heavily on exports than domes-

tic goods. The § 4371 tax is itself an example, because insurance

premiums (and therefore the tax) will typically be higher for long

international shipments than for domestic shipments, even when the

intra-U.S. transportation legs of the two shipments are of the same

length.

Similarly, a tax that on its face is specifically directed at exports

may not seem so discriminatory when viewed in the broader context

For example, the tax provision in Fairbank applied only to export

(continued...)

A. The "Modern Decisions" Under the

Export and Commerce Clauses _

Before turning to the Import/Export Clause cases, we first

address briefly two other categories of "modern decisions"

(U.S. Br. 24) which the Government claims support a new

reading of the Export Clause. The first is itself an Export

Clause case -- Peck & Co. v. Lowe, 247 U.S. 165 (1918)

(U.S. Br. 24-26). But, as already discussed (pages 22-24

supra), Peck & Co. is entirely consistent with the Court's

historical reading of the Export Clause, and it quotes and cites

Thames & Mersey with approval. And, in the subsequent

Spalding decision, the Court flatly rejected the very argument

for reinterpretation of the Export Clause that the Government

makes here today. See page 24 supra. Hence, neither Peck

nor Spalding supports the Government's position.

The Government's second category of cases is even more

Startling -- cases under the Commerce Clause in which the

Court held that the negative implications of that Clause did not

preclude non-discriminatory State taxation of businesses

engaged in interstate commerce. E.g.. Western Live Stock v.

Bureau of Revenue, 303 U.S. 250 (1938); U.S. Br. 26. Quite

the reverse of the Export Clause, the Commerce Clause is a

federal grant of power fo the federal government, and -- for

reasons well known to the Court - that clause has been

construed by implication to restrict State powers in only

limited circumstances. The negative implications of the

Commerce Clause are hardly a valuable guide in construing an

continued)

transactions, but it was part of a far broader tax bill that separately

taxed comparable domestic transactions, albeit in different ways or at

different rates. See War Revenue Act of June 13, 1898, ch. 448, 30

Stat. 448.

express and categorical constitutional limitation on federal

powers. As the Government elsewhere in its brief concedes,

"decisions concerning the negative implications of the Com-

merce Clause are not logically relevant to analysis under the

Export Clause.” U.S. Br. 22 n.8.

B. Newer Decisions under the

Import/Export Clause

The Government's principal argument for overruling

Thames & Mersey rests on recent cases under the Import -

Export Clause, in particular Michelin Tire Corp. v. Wages,

423 U.S. 276 (1976), and Department of Revenue vy. Associa-

tion of Washington Stevedoring Cos., 435 U.S. 734 (1978).

Michelin and Washington Stevedoring held that the Import -

Export Clause did not prohibit the application of certain non-

discriminatory State taxes to import and export commerce, and

the Government now argues that the same analysis should

govern the Export Clause. But Michelin and Washington

Stevedoring provide no support for a revised reading of the

Export Clause. Indeed, the analysis that the Court invoked to

narrow the protections of the Import/Export Clause with

respect to State taxation is consistent with and actually

supports the Court’s long-standing rule of broader protection

under the Export Clause .*'

The Government also cites two other Import/Export Clause cases,

but they can be disposed of quickly. Canton R.R. v. Rogan, 340 US

S11 (1951) (U.S. Br. 27), upheld a Maryland franchise tax imposed on

railroads and measured by the carner’s gross receipts apportioned by the

length of its lines within the State. The taxpayer claimed that the tax

could not be applied to the extent its lines were used to carry imports

and exports in the Baltimore harbor. Because the transportation services

(continued...)

In Michelin, the Court held that Georgia’s ad valorem

property tax could be applied to imported goods no longer in

transit in the same manner that the tax applied to domestic

goods. The Court reasoned that the Import/Export Clause was

intended by the Framers to serve three purposes: (1) that the

federal government speak with one voice in regulating foreign

commerce; (2) that federal import revenues not be diverted to

the States; and (3) that State imposts and duties not disrupt

harmony among the States, particularly between seaboard and

inland States. 423 U.S. at 285-86. A non-discriminatory

State property tax, applied equally to domestic and imported

goods, did not clash with those objectives.

The Michelin Court then observed that, consistent with its

limited objectives, the Import/Export Clause was phrased in

terms of a prohibition only of State "imposts" and "duties,"

and “just as clearly, the Clause is not written in terms of a

broad prohibition of every ‘tax’." Jd. at 290 (emphasis

added). Relying on historical sources, the Court found the

omission from the Import/Export Clause of the term "tax" to

be important and to signify that the clause should apply only

(.. .continued)

in question were provided wholly within the State and the taxpayer was

not itself engaged in the import/export business (id. at 514), the Court

found no infringement of the Import/Export Clause. Fairbank, Hvoslef

and Thames & Mersey were distinguished as more directly involving the

exportation process, and the Court also noted that those federal tax cases

had been decided under the Export Clause rather than the Import/Export

Clause. Id. & n.2.

Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984) (U.S. Br.

31-32), was also decided under the Import/Export Clause and applied

the new construction of that provision adopted in Michelin and Washing-

ton Stevedoring. Neither the Export Clause nor any of its precedents

were discussed.

ee ee ee a ee ee

to revenue measures that were targeted at goods produced

abroad. Jd. at 287, 291-93. That is, generally applicable

State taxes are "“[uJjnlike imposts and duties, which are

essentially taxes on the commercial privilege of bringing

goods into a country... ." Id. at 287.”

This line of reasoning was extended to State taxation of

exports in Washington Stevedoring. That case involved Wash-

ington’s business and occupation tax as applied to stevedoring

activities conducted within the State. The Court reviewed the

limited purposes of the Import/Export Clause that had been

identified in Michelin and found here too that the State tax did

not offend those objectives. As the tax did not discriminate

between export and domestic commerce and applied only to

services conducted within the State, the tax caused neither

disharmony among the States nor disruption of federal foreign

affairs. Moreover (and a point the Government’s brief in this

case wholly ignores), a State tax affecting exports would not

interfere with federal tax revenues because the federal

government was itself precluded by the Export Clause from

taxing exports.” The Court then reiterated the “central

holding" of Michelin: that the Import/Export Clause by its

terms was a prohibition "only of ‘Imposts or Duties’ and not

of all taxes." 435 U.S. at 759. A non-discriminatory State

2 Thus, the Court construed “imposts and duties” in the Import/-

Export Clause as analogous to the treaty language at issue in /fel Con-

tainers Int'l Corp. v. Huddleston, 507 U.S. 60, 113 S. Ct. 1095 (1993),

which applied only to revenue measures “collected on, or in connexion

[sic] with, the importation of goods" or “chargeable by reason of

importation,” but not to taxes generally. 113 S. Ct. at 1099.

*% The Import/Export Clause as applied to exports “does not serve to

protect federal revenues . . ., because the Constitution forbids federal

taxation of exports. U.S. Const., Art. I, § 9, cl. 5; see United States v.

Hvoslef, 237 U.S. 1 (1915)." 435 U.S. at 758 (emphasis added).

levy on services performed within the taxing state was thus

held not to be an impost or duty within the meaning of the

Import/Export Clause. /d. at 761.

C. The Relevance of Michelin and Washington

Stevedoring to the Export Clause

Plainly, Michelin and Washington Stevedoring cannot be

read as supporting the Government's proposed reinterpretation

of the Export Clause. Both rulings were based on a textual

examination of the Import/Export Clause (dealing with imposts

and duties but "not written in terms of a broad prohibition of

every ‘tax’"; Michelin, 423 U.S. at 290) and on the limited

purposes which the Framers intended that clause to serve.

Both decisions stressed the omission of the word “tax” from

the Import/Export Clause prohibition and both contrasted that

language with the Article I, § 8, cl. 1 grant to Congress of the

"Power To lay and collect Taxes, Duties, Imposts and

Excises." Michelin, 423 U.S. at 290; Washington Stevedor-

ing, 435 U.S. at 759 (emphasis added). The language of the

Export Clause similarly contrasts with the Import/Export

Clause, for the Export Clause provides: “No Tax or Duty

shall be laid on Articles exported from any State." (Emphasis

added). The absence of a prohibition on “taxes” in the

Import/Export Clause was central to the Michelin and Wash-

ington Stevedoring holdings, and belies the notion that those

decisions are guidance to interpreting the Export Clause,

which explicitly does prohibit any federai “tax.” See also

Limbach v. Hooven & Allison Co. , 466 U.S. 353, 360 (1984)

("The new focus [under the Import/Export Clause is] on

whether the tax sought to be imposed is an ‘Impost or

Duty.’").

But the defect in the Government's position is deeper than

linguistic. Michelin and Washington Stevedoring concluded

that the objectives of the Import/Export Clause were to ensure

that the States not intrude on specified federal prerogatives

(foreign affairs and import revenues) and that maritime states

not exploit their geographic position against inland states.

Michelin, 423 U.S. at 285-86; Washington Stevedoring, 435

U.S. at 752-53. Quite obviously, these were not the objec-

tives of the Export Clause, which imposes restrictions on the

federal government (not on the States) and does not deal with

relations among the State governments. Indeed, the discussion

in Washington Stevedoring of the Import/Export Clause

objectives cannot be reconciled with the Government's

position here. There, the Court noted that one purpose of the

Import/Export Clause was to ensure that the States did not

impair federal taxation of imports, which were expected to be

a major source of revenue for the national government. In

addressing the relevance of that objective in the export

context, the Court observed that giving the States greater

taxing leeway would not impair federal revenues because the

federal government itself could not tax exports. 435 U.S. at

758, citing the Export Clause and United States v. Hvoslef.**

It defies logic for the Government to argue that Washington

Stevedoring supports new, broader taxing authority for the

federal government, when the Court’s holding that the States

could tax exports relied directly on the proposition that the

federal government could not.

A sharp distinction between the scope of the Export

Clause and Import/Export Clause is also compelled by the

historical record. The principal (although not exclusive)

purpose behind the Export Clause was to deny Congress the

power to burden Southern exports of regional crops that were

* — See note 23 supra.

not grown in other States (tobacco, indigo, etc.).~ Obvious-

ly, even a “non-discriminatory” tax on tobacco shipments (for

example) would have precisely that effect.” So important

was this issue that the Export Clause was among the most

actively debated compromises at the 1787 Convention.”’ The

question whether the federal government could tax exports

was interwoven with other fundamental issues, including the

apportionment of direct taxes by population and the status of

slavery. Some delegates declared emphatically that the Export

Clause exemption was necessary for their support for any

federal taxation power,” or indeed for the entire Constitu-

tion.”

= Delegates also supported the Export Clause because it would

encourage export industries and limit the federal government's overall

taxing power. See pp. 10-11 supra. Fairbank v. United States explicit-

ly reyected the argument that the Export Clause should be narrowly con-

strued to apply only in the situation where a tax or duty implicates the

issue of inter-regional discrimination. 181 U.S. at 292.

* The vast bulk of the South's Colonial-era tobacco production was

exported. See Peter V. Bergstrom, Markets and Merchants: Economic

Diversification in Colonial Virginia, 1700-1775 129-52 (1980); 1 Emory

R. Johnson, T.W. Van Metre, G.G. Huebner & D.S. Hanchett, History

of Domestic and Foreign Commerce of the United States 59-60 (1915).

See, ¢.g., Fairbank v. United States, 181 U.S. 283, 290 (1901)

(the Export Clause “was one of the compromises which entered into and

made possible the adoption of the Constitution”).

* 2 Records, supra note 6, at 305-06 (statement of George Mason of

Virginia)

*% Id. at 9S (statement of General Pinckney of South Carolina), 360

(statement of Hugh Williamson of North Carolina), 360 (statement of

(continued...)

The Export Clause was opposed by other delegates,

however, who wanted a strong federal government and who

argued that export industries -- which would require a navy

for their protection -- should be compelled to contribute to

federal revenues.” The Government's policy argument here

that exports should pay their fair share of federal revenues

(U.S. Br. 35-36) was thus considered and rejected by the

Convention. In the course of that debate, the delegates

considered but rejected proposals for less than a total ban on

export taxation, including a requirement of a two-thirds vote

for such taxes, a proposal that the ban apply only to some

products, a suggestion that the ban expire after a period of

years, and a proposal that export taxes be prohibited only if

imposed "for the purposes of revenue."*' James Madison,

a Virginian but nevertheless a strong federalist, urged a more

qualified clause -- some “lesser evil than a total prohibi-

tion." But a majority rejected all efforts to weaken the

Clause because many delegates feared that Congress would

inevitably exercise its taxing power to burden unfairly the

exports of one region or another.’ The delegates thus

(continued)

Pierce Butler of South Carolina: “strenuously opposed to a power over

exports; as unjust and alarming to the staple States”).

of James Madison).

* 2 id. at 359-63

2 lid. a 363

* Elbridge Gerry stated that “the legislature could not be trusted with

such a power. It might ruin the Country. It might be exercised partial-

(continued...)

adopted a bright-line approach that removed exports entirely

from the federal government's powers of taxation.

The Import/Export Clause was less controversial and

more qualified. That Clause was designed principally to

prevent the "commercial states" (those with major ports) from

imposing oppressive imposts and duties upon the trade of their

neighboring non-commercial states.“ This conduct by the

commercial states was a species of the interstate discrimination

that gave rise to the Commerce Clause and, accordingly, the

two provisions were seen as interrelated. Indeed, some

wondered whether the Import/Export Clause added significant-

ly to the protections that would be available under the Com-

(continued)

ly, raising one and depressing another part of it." 2 id. at 307. As

Roger Sherman of Connecticut ultimately concluded, “it is best to

prohibit the National legislature in all cases.” /d. at 361.

Advocates and opponents alike characterized the Clause as adopted

as having very broad effect. E.g., id. at 220 (Rufus King: “the hands

of the legislature were absolutely tied. .. . exports could not be

taxed"), 361 VJiohn Dickinson of Delaware: the proposed clause “must

be of dangerous consequence” for it would prohibit export taxation

“with respect to all articles and for ever"); George Mason, “An Old

Planter,” Virginia Independent Chronicle, Feb. 20, 1788, reprinted in 8

The Documentary History of the Ratification of the Constitution 397

(1988) ("Our tobacco, our com, our grain, and al] the productions of

the earth, are forever exempted from al! taxes or al] duties on exporta-

ra |

“ See, ¢.g., 2 Records 306 (statement of James Madison); 3 id 542

One indication of the differing purposes and background of the Export

Clause and Import/Export Clause is that Madison was an opponent of

the former but a supporter of the latter. /d.

merce Clause.’ There also was ready agreement that the

Import/Export Clause should not be phrased in sweeping

terms. For example, States were permitted to impose duties

or imposts provided that Congress consented and the net reve-

nues were provided to the federal treasury. Also, the States

were allowed to impose duties and imposts to cover their costs

of port inspection. Although the southern States had insisted

on an unqualified Export Clause, it was the South that urged

a narrowing of the lmport/Export Clause to allow inspection

duties.

Additionally, the Import/Export Clause prohibited only

"Imposts or Duties,” as compared to the Export Clause’s

prohibition of "Tax or Duty.” The reason for the different

treatment of “imposts” is obvious; that term was commonly

used as meaning a customs fee on imports,”’ and the Im-

por/Export Clause but not the Export Clause implicated

imports. “Duty” had a less precise meaning; sometimes it

was used broadly so as to be virtually synonymous with “tax,”

whereas it was also often used in the narrower sense of a

customs levy. For example, in testimony to the British House

of Commons explaining American opposition to the Stamp Act

of 1765, Benjamin Franklin observed that the term “duty” had

a marrower meaning in America than in Britain: “the same

" 2 id 441 (statement of Gouverneur Morris)

» 2 id. 588-89

"Based on historical evidence, the Court in Michelin concluded that,

as used in the Constitution, “'[i)mposts’ were like customs duties, that

is, Charges levied on imports at the me and place of importation.” 423

U.S. at 291. See, ¢.g., 3 Records 203 (“the word imposts extended to

duties on goods imported”) (emphasis in original), quoted af 423 US at

291 0.12. See also Brown vy. Marviand, 25 U.S. a 437

words have not always the same meaning here and in the

Colonies. By taxes they [the Americans] mean internal taxes;

by duties they mean customs... ."™ Similarly, in discuss-

ing the Import/Export Clause during the 1787 Convention,

Gouverneur Morris used “duty” in the same narrower sense:

"Mr. Govr Morris . . . did not consider the

dollar per Hhd laid on Tobo in Virga. as a duty on

exportation, as no drawback would be allowed on

Tobo. taken out of the Warehouse for internal

consumption. "””

Thus, a state tax that was applied equally to exports and

domestic products ("no drawback [rebate] would be allowed

_.") was not a “duty” as that term was used in the Import/-

Export Clause. This, of course, is consistent with the Court's

reading of that clause in Washington Stevedoring.“

* 13 The Papers of Benjamin Franklin \56 (Leonard W. Labaree ed.

1969), quoted in | The Compact Edition of the Oxford English Dictio-

nary 730 (1971). Johnson's Dictionary indicates that “duty” was used in

England in both the broad and narrow sense: “[t]ax; impost; custom;

toll.” 1 Samuel Johnson, Dictionary of the English Language (1755)

Franklin highlighted the distinction between “tax” and “duty” because he

acknowledged that Parliament had the power impose to external taxes on

the Colonies ("duties"), but he argued that it had no right to impose

more generally applicable “internal” taxes. See Thomas P. Slaughter.

The Whiskey Rebellion 17-18 (1986).

* 2 Records 589.

“ For other discussions of the distinction between the term “duty”

and “tax,” see Pollock v. Farmers’ Loan & Trust Co., 158 U.S. @1,

622 (1895); Pacific Ins. Co. v. Soule, 74 U.S. 433, 445 (1868). Justice

Thompson, in dissenting in Brown v. Maryland, drew a distinction

(continued...)

Significance must be given, then, to the fact that the

Framers used both “tax” and “duty” in the Export Clause (as

they did when giving general taxing power to Congress in Art

I, § 8, cl. 1), but only “duty” in the Import/Export Clause *'

To use Benjamin Franklin's phrase, the Framers intended that

even “internal taxes” could not be applied by the federal

government to the export process. This broader reading of the

Export Clause is compelled by the text and structure of the

read as a whole. As James Madison aptly wrote in summariz-

ing the Convention's extensive debate over the scope of the

Export Clause: “The result is seen in the Constitution."“

Indeed it is: “No Tax or Duty shall be laid on Articles

exported from any State.”

“(__ continued)

between “tax” and “duty,” arguing that the State licensing fee in that

case was a “tax” and therefore outside the scope of the Import/Export

Clause. 25 U.S. a 455-56. Clearly, “tax” was almost always used in

the broader sense and “duty” often -- but not always - in the narrower,

customs sense

“See also the notes of the Committee of Detail, which in adjoining

paragraphs state “No Taxes on exports” by the federal government but

“no Duty on exports” by the States. 2 Records 142-43.

“ ‘Letter of James Madison to Thomas Jefferson (Oct. 24, 1787). 3

Records at 135

“Some contended for an unlimited power over trade including

exports as well as imports, and over slaves as wel! as other im-

ports; some for such a power, provided the concurrence of two

thirds of both Houses were required, Some for such a qualification

of the power, with an exemption of exports and slaves, others for

an exemption of exports only. The result is seen in the Constitu-

ton.”

D. The Compelling Text of the Constitution

The most fundamental defect in the Government's argu-

ment is that it can offer no plausible basis for its interpretation

of this constitutional language: “No Tax or Duty shall be laid

on Articles exported from any State.” It admits that a "Tax"

is involved. Also, unquestionably there are “Articles” being

“exported” from the States. Nor does the Government

challenge Chief Justice John Marshall's statement in Brown v.

Maryland or the Court's holding in Fairbank and other cases

that imposition of a tax on the export process is the same as

imposition of a tax on “Articles exported.” Accordingly, the

only textual argument left to the Government is that "laid on"

means something like “specifically directed at” or “discrimi-

nate against." See U.S. Br. 34 & 36.

This position is not supportable. “Laid on” is simply a

now somewhat archaic way of saying “imposed on” or

“applied to.” Gouverneur Morris, in the statement quoted on

page 38 above, thus referred to a tax “laid on Tobo in Virga.”

in precisely that sense. Likewise, during the Stamp Act crisis,

a Virginia delegation protested to the British Crown in these

terms:

“Your Memorialists conceive it to be a fundamental

Principle .. . without which Freedom can no Where

exist, that the People are not subject to any Taxes but

such as are laid on them by their own Consent

°43

“ —_- Virgimia Petitions to King and Parliament (Dec. 18, 1764), quoted

in Missourt v. Jendans, 495 US. 33, 68 (1990) (opimon of Kennedy.

J.)

They were referring to a tax on stamps that imposed burdens

on the citizenry, irrespective of any element of discrimination.

More recently, in considering whether a non-discriminatory

tax could be applied constitutionally to particular persons or

et asaeaanieniieen ota stanton

could be "laid on” such persons or property. , New York

v. United States, 326 U.S. 572, cab ciee Pus tte an

prepared to say that the national government may constitution-

ally lay a non-discriminatory tax on every class of property

and activities of States and individuals alike") (Stone, C.J);

Mayo v. United States, 319 U.S. 441, 447 (1943) (a non-

discriminatory Florida inspection fee violated the Supremacy

Clause to the extent the fee was “laid” on activities of a U.S.

government agency). Article I, § 8, cl. 1 gave Congress the

power “To lay and collect Taxes,” with the verb “to lay”

meaning simply “to impose” or “to enact.”“

Finally, the Import/Export Clause also uses the verb “to

lay,” and yet the Court's analysis in Michelin and Washington

Stevedoring gave no special significance to that phrase.

Instead, the Court focused on what forms of revenue measures

were laid by the States -- were they “taxes” or were they

“imposts or duties"? The Government's argument here

necessarily implies that the Court was looking at the wrong

issue and that the distinction it drew between “tax,” “duty,”

and “impost” was of no significance. So, here again, the very

“ See also The Federalist No. 36, at 220 (Alexander Hamilton)

("The method of laying and collecting ._. . taxes in each State can, in al!

its parts, be adopted and employed by the federal government.“).

“ See also Limbach v. Hooven & Allison Co., 466 U.S. 353, 360

(1984) (“The new focus [under the Import/Export Clause is) on whether

the tax sought to be imposed is an ‘Impost or Duty.’”)

cases upon which the Government relies are contrary to its

proposed analysis.

As the Court said in Fairbank v. United States, 181 U.S.

283, 290 (1901): “The requirement of the Constitution is that

exports should be free from any governmental burden. The

language is ‘no tax or duty.’" This constitutional command

cannot be swept aside by arguing that a tax that burdens

exports is not “laid on" exports. The Framers intended that

exports “not be made a source of revenue to the National

Government” and, indeed, that the federal government "should

put nothing in the way of burden upon such exports.” /d. at

292-93. Thames & Mersey thus correctly construed and

applied the Export Clause, and should be reaffirmed.

Il. Even if the Import/Export Clause Analysis

Were Relevant to This Case, the § 4371

Tax Is Still Unconstitutional as Applied.

For the reasons just discussed, the Export Clause analysis

should be unaffected by recent decisions under the Import -

Export Clause. But even if that were not so, the result in this

case is unchanged. As the Court of Federal Claims ruled in

its alternative holding, Thames & Mersey and the present case

are readily distinguishable on their facts from Michelin and

Washington Stevedoring. Michelin involved a state tax on

imported goods that were no longer in transit (423 U.S. at

302), and the stevedoring levy in Washington Stevedoring

involved a tax “upon a service distinct from the goods and

their value.” 435 U.S. at 757 (emphasis added). On this

point, the Court in Washington Stevedoring footnoted Thames

& Mersey and observed: “In distinguishing that case from the

taxation of stevedoring activities .. ., one might note that the

value of goods bears a much closer relation to the value of

insurance policies on them than to the value of loading and

unloading ships.” /d. at 756 n.21.

The § 4371 tax in question here, like the tax in Thames

& Mersey, applies to the goods while in transit and bears a

direct relation to the value of the goods. The tax is a percent-

age of the premium paid, and the premium in turn varies with

the declared value of the shipment. (Pet. App. 39a) Thus. as

the lower court held:

"In the present case, the casualty insurance policies

were at all times within the export stream and were

significantly related to the exportation process

Whether the § 4371 tax would be impermissible even

without the support of Thames & Mersey is, we real-

ize, not stated dispositively by the Court [in Washing-

ton Stevedoring|, but there is nothing in Washington

Stevedoring that indicates that Thames & Mersey and

the connection drawn in that case between insurance

policies and the value of goods have been banished

into irrelevance.” (Pet. App. 29a)

On this alternative ground, then, the § 4371 tax as applied

to IBM's exports is still invalid under the Export Clause, even

assuming that Michelin and Washington Stevedoring are

relevant precedents for the Export Clause. For example, in

Itel Containers International Corp. v. Huddleston, 113 S. Ct

1095 (1993), the Court rejected an Import/Export Clause

attack on Tennessee's sales tax applied at the time the empty

containers were delivered to shippers within the State. Some

of those containers, in turn, were then used in import and

export commerce. The Court found no constitutional infringe-

ment because the tax was “on a business transaction occurring

within the taxing State” and “does not draw revenue from the

importation process..." 113 S. Ct. at 1106. Here, by

contrast, the § 4371 tax varied with the value of IBM’s goods

and -- by its very nature -- was applied to the exportation

process.

Accordingly, the § 4371 tax is unconstitutional even under

the mode of analysis applied under the Import/Export Clause.

See Louisiana Land & Exploration Co. v. Pilot Petroleum

Corp., 900 F.2d 816 (Sth Cir.), cert. denied, 498 U.S. 897

(1990) (non-discriminatory state tax as applied to jet fuel sold

for export violated Import/Export Clause); Virginia Indonesia

Co. v. Harris County Appraisal Dist., 910 S.W.2d 905 (Tex.

1995) (non-discriminatory local ad valorem property tax as

applied to exports in transit violated Import/Export Clause).

within this constitutional exemption [the Import/Export Clause], . . . the

taxed good must be either an import or an export ‘at the time that the

tax accrued.’") (quoting Richfield Oil Corp. v. State Bd. of Equaliza-

tion, 329 U.S. 69, 78 (1946)).

lat all

CONCLUSION

The judgment below should be affirmed.

Respectfully submitted,

February 1996

Andrew W. Singer

James R. Atwood

Matthew S. Yeo

COVINGTON & BURLING

1201 Pennsylvania Ave., N.W.

P.O. Box 7566

Washington, D.C. 20044-7566

(202) 662-6000

Attorneys for Respondent

International Business

Machines Corporation

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