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

4

No. 95-591

eed

| —

In the Supreme Court of the United States

OcTOBER TERM, 1995

L'NITED STATES OF AMERICA, PETI1

INTERNATIONAL BUSINESS MACHINES e

ON WR] T OF «¢h 7 }

TO THE NITED STATES COURT

FOR THE FEDERAL CIR

REPLY BRIEF FOR THE UNITED STATES

TABLE OF AUTHORITIES

Cases: Page

Alabama v. King & Boozer, 314 U.S. 1 (1941)

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

CREE aR: SO et eR AE ee Ie 8. 12.

Burnet v. Coronado Oil & Gas Co., 285 U.S. 393

— A ⁰˙—ͤ late aaiathls .

City of Detroit v. Murray Corp, 355 U.S. 489

K 8 cc

Collector v. Day, 78 U.S. (11 Wall. 113 (1871)

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

274 (1977) ...... 6c PPP

Cornell v. Coyne, 192 U.S. 418 (1904) ..... 2. 4. 7-8,

Department of Revenue v. Association of Washing-

ton Stevedoring Cos, 435 U.S. 734 (1978) * 5.

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

Fox Film Corp. ». Doyal, 286 U.S. 123 (1932)

Gillespie v. Oklahoma, 257 U.S. 501 (1922)

Graves v. New York ex rel. O'Keefe, 306 U.S. 466

Helvering v. Mountain Producers Corp, 303 US

ff an a

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

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

(1984) ...... ;,

Long v. Rockwood, 277 U.S. 142 (1928)

Low v». Austin, 0 U.S. (13 Wall.) 29 (1872)

Michelin Tire Corp. Mages, 423 U.S. 276

(1976) 5, 7, 9, 10, 15,

New York ez rel. Rogers v. Graves, 299 US. 401

(1937)

Pace v. Burgess, 92 US. 372 (1876)

Panhandle Oil Co. v. Miasiasippi ex rel. Knog.

277 U.S. 218 (1928)

Peck & Co. v. Lowe. 247 U.S. 165 (1918) 2.4.

10

16

Cases—Continued: Page

Pollock v. Farmers Loan & Trust Co,, 157 US.

Z eliunseilinidaeinisieiaticeetedeecdnbisesesseecniesseédninneenianns 14

Robbins v. Shelby County Taxing District, 120 U.S.

ES ee — — 6

South Carolina v. Baker, 485 U.S. 505 (1988 14

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

e ü... 2

Turpin v. Burgess, 117 U.S. 504 (1886) 2, 3, 4, 10, 12

United States v. County of Allegheny, 322 U.S. 174

EAE RS SS 8 14

United States v. City of Detroit, 355 U.S. 466

WW FL7LF7F—r — — 14

United States v. Hvoslef, 237 U.S. 1 (1919) 2. 6

United States v. Township of Muskegon, 355 US.

/ . ̃ V 14

Willeuts v. Bunn, 282 U.S. 216 (1937 13

Constitution and statutes:

U.S. Const.:

Art. I, § 8, Cl. 3 (Commerce Clause) 6

Art. I, § 9, Cl. 5 (Export Clause) passim

Art. I, § 10, Cl. 2 (Import-Export Clause 7, &,

9, 10, 12

Internal Revenue Code, 26 U.S.C. 4717 1, 14, 15, 16

War Revenue Act of 1898, ch. 448, § 25 (Schedule A),

Miscellaneous:

Black's Law Dictionary (6th ed. 1990) ͤ — 11

Justice Storys Commentanes on the Constitution

(1833) (R. Rotunda and J. Nowak reprint, 1987,

Carolina Academic Press) 11

Webster's Third New International Dictionary

K* 11

In the Supreme Court of the United States

OcToBER TERM, 1995

- No. 95-591

UNITED STATES OF AMERICA, PETITIONER

.

INTERNATIONAL BUSINESS MACHINES CORPORATION

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

*

REPLY BRIEF FOR THE UNITED STATES

It is appropriate to emphasize at the outset the

precise nature of respondent’s claim in this case.

Respondent does not dispute that the tax imposed by

Section 4371 of the Internal Revenue Code may con-

stitutionally apply to insurance obtained in con-

nection with domestic shipments of goods. Instead,

respondent claims only that this tax may not apply to

insurance procured in connection with shipments of

goods to foreign countries. If, for example, respon-

dent ships cargo on a voyage from California to

Alaska, with an intermediate stop in British Colum-

bia, respondent asserts only that the insurance for

the shipment offloaded in British Columbia—not the

insurance for the shipment continuing on to Alaska

(1)

2

—is constitutionally exempt from the generally ap-

plicable federal tax.

Respondent's submission is thus grounded in the

proposition that the Export Clause requires prefer-

ential, rather than nondiscriminatory, treatment of

exports and the export process. No decision of this

Court prior to Hvoslef and Thames & Mersey sup-

ports respondent's submission, and decisions both

prior and subsequent to those cases contradict it.

I. a. Respondent errs in contending (Resp. Br. 9-26)

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

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

237 U.S. 19 (1915), are part of an unbroken line of

authority supporting the view that generally ap-

plicable, nondiscriminatory taxes are invalid as ap-

plied to goods for export and export transactions.

Decisions of this Court both before and after Hvos/ef

and Thames & Mersey hold that “a general tax, laid

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

of exportation, nor because of their intended expor-

tation, is not within the constitutional prohibition.”

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

Peck & Co. v. Lowe, 247 U.S. 165, 175 (1918); Cornel!

v. Coyne, 192 U.S. 418, 427-428 (1904).

' The first two decisions of this Court under the Export

Clause involved a federal tax on manufactured tobacco

products. Tobacco intended for export was exempt from this

tax, subject to the requirement that packages for export be

identified by an engraved stamp costing 25 cents. Pace v

Burgess, 92 U.S. 372 (1876); Turpin v. Burgess, 117 US. 54

(1886). In each case, the plaifitiffs sought a refund of amounts

paid for the identifying stamps. In Pace, the Court concluded

that the stamp requirement did not violate the Export Clause

because it was not itself a tax but merely a device to prevent

fraud and to deter untaxed tobacco products from entering the

Respondent claims that this passage from Turpin

v. Burgess supports the proposition that even a non-

discriminatory tax “laid on all property alike” (117

U.S. at 507) is constitutionally barred from applying

to “goods in course of exportation” (ibid.) gods that

have commenced what respondent refers to as the

“export process” (Resp. Br. 20). It is axiomatic, how-

ever, that a tax that is “laid on all property alike”

reaches, by definition, goods in the “export process.”

Goods in the export process are a subset of “all

property.” In the quoted passage from Turpin v.

Burgess, the Court was distinguishing between taxes

of general application, which the Export Clause does

not proscribe, and taxes that are laid specifically, or

discriminatorily, “on goods in course of exportation”

or “because of their intended exportation” (117 U.S.

at 507), which are unconstitutional. The Court made

this clear by emphasizing in Turpin that, if the

“same” tax applicable to domestic products had also

domestic economy. When Congress thereafter removed the

charge for the identifying stamp in a statute that referred to it

as an “export tax,” Turpin brought suit to recover amounts he

had paid. The Court rejected that claim, relying again on the

analysis set forth in Pace. The Court in Turpin went on to say

that, even if the charge for the stamp was a tax, it was “a

general tax, laid on all property alike,” rather than a specific

tax on or related to exports. The Court concluded (117 U.S. at

507

Had the same excise which was laid upon all other tobacco

manufactured by the plaintiffs been laid on the tobacco in

question, they could not have complained.

This conclusion is, of course, inconsistent with respondent's

contention that an unbroken line of authority supports the

holding in Hvoslef and Thames & Mersey that a nondiscrim-

inatory tax may not be applied to goods for export.

4

been applied to goods for export, the taxpayer “could

not have complained” (ibid.). See also Peck & Co. v.

Lowe, 247 U.S. at 175 (upholding a federal tax that

applied without “discrimination” and that affected

“exportation * * * only indirectly and remotely”);

note 1, supra.

The Court reached this same conclusion in Cornel!

v. Coyne, 192 U.S. 418 (1904), in upholding application

of a general excise tax on “filled cheese” even as ap-

plied to such cheese produced specifically for export.

Id. at 427. The Court explained that “(t]he constitu-

tional prohibition against taxing exports is substan-

tially the same when directed to the United States as

when directed to a State” and that “in both cases” it

refers to duties imposed “by reason or because of” the

exportation; it does not refer to “a general tax, laid on

all property alike” (ibid., quoting Turpin v. Burgess,

117 U.S. at 506). In so holding, the Court explained

that the Export Clause does not relieve exports “from

the prior ordinary burdens of taxation which rest

upon all property similarly situated” (192 U.S. at

427).

Respondent's suggestion that goods in the “export

process” are to be relieved “from the prior ordinary

burdens of taxation which rest upon all property

similarly situated” is, in substance, a claim that a

converse of the “original package” doctrine should

* The only other case decided under the Export Clause

prior to Hvoslef and Thames & Mersey was Fairbank v. United

States, 181 U.S. 283 (1901). In Fairbank, the Court held

unconstitutional a stamp tax on bills of lading “for any goods,

merchandise, or effects, to be exported from a port or place in

the United States” (ch. 448, § 25 (Schedule A), 30 Stat. 459).

By its terms, this tax was specifically on, and limited to, export

transactions.

5

apply under the Export Clause. Under respondent's

theory, when an article of commerce crosses an

imaginary line representing the beginning of what

respondent would view as the “export process,” an

absolute immunity from general taxes for that good

and for any handling of that good (and for any

insurance upon the handling of that good) arises

under the Export Clause. But this Court rejected

precisely that type of formalistic reasoning in

Michelin Tire Corp. v. Wages, 423 U.S. 276, 298

(1976), in concluding that a tax imposed on imported

articles in their “original package” is constitu-

tionally permissible if the tax does not treat “im-

ported goods * * * differently from the ‘common

mass of property in the country’ * * *.” See also

Department of Revenue v. Association of Wash-

ington Stevedoring Cos., 435 U.S. 734 (1978) (uphold-

ing application of a nondiscriminatory state tax to

revenues from stevedoring services rendered in the

“process” of importing and exporting goods). A

nondiscriminatory federal tax that does not treat

“[exported| goods * * differently from tl com-

mon mass of property in the country’” is similarly

constitutional. See Pet. Br. 32-37.

b. The 1915 decisions in Hvoslef and Thames &

Mersey involved stamp taxes imposed by the War

Revenue Act of 1898. Hvoslef involved a stamp tax on

any “contract or agreement for the charter of any

ship” without reference to the destination or area of

operation of the ship. Thames & Mersey involved a

stamp tax on policies of marine insurance “whether

covering peril by sea or on inland waters.” The

challenged taxes thus applied without discrimination

to both domestic and foreign commerce. Falling on all

property alike, the taxes were of the type that this

3 Ü———— — 1 ˙⁰ r AAA

6

Court had concluded should be sustained in Cornell

and Turpin.

In Hvoslef and Thames & Mersey, however, the

Court relied on the rationale of Robbins v. Shelby

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

proposition that even nondiscriminatory taxes may

not constitutionally be applied to exports or to export

transactions.’ See 237 U.S. at 18. In Robbins, the

Court had held that the Commerce Clause precludes

application of general, nondiscriminatory state taxes

to interstate commerce. In Hvoslef, the Court stated

that it knew “of no ground upon which” the treatment

afforded to nondiscriminatory state taxes under the

Commerce Clause should differ from the treatment to

be afforded to nondiscriminatory federal taxes under

the Export Clause. 237 U.S. at 18.

The reasoning that the Court applied in Robbins, of

course, was subsequently “repudiated” by this Court

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

(1977). See Limbach v. Hooven & Allison Co., 466

U.S. 353, 362 (1984); Pet. Br. 29-30. Aside from the

rationale of Robbins, which has now been repudiated,

there was and is no authority for the conclusion

reached by the Court in Hvoslef and Thames &

Mersey.

ce. Respondent suggests (Resp. Br. 23) that the

tenuous line of authority in which it asserts Hvoslef

In Hvoslef, the Court also relied on Fairbank v. United

States, supra, for the proposition that a tax on bills of lading is

equivalent to a tax on the article exported. 237 U.S. at 14-15.

But Fairbank involved a discriminatory tax that applied only

to exported goods (see note 2, supra) and Hvoslef did not. In

Hvoslef, the Court therefore relied exclusively on Robbins as

support for its holding that a nondiscriminatory tax may not

constitutionally be applied to goods for export. 237 U.S. at 18.

7

and Thames & Mersey are located extends to Peck &

Co. v. Lowe, 247 U.S. 165 (1918). In that case, the

Court, after reviewing each of the earlier cases

involving the Export Clause, upheld the application of

the federal income tax to income from export sales.

The Court noted that the income tax is on net income,

rather than on gross export sales. The more funda-

mental rationale for that decision, however, is found

in the Court’s observation that the income tax is a

general tax, “not laid on income from exportation

because of its source, or in a discriminatory way, but

just as it is laid on other income.” See Pet. Br. 25-26

& n. 9. The Court emphasized in Peck & Co. that the

tax involved “no discrimination” and that, “[a]t most,

exportation is affected only indirectly and remotely.”

247 U.S. at 175. That same rationale sustains the

nondiscriminatory tax challenged in this case.

d. Finally, the unbroken line of authority pro-

claimed by respondent assuredly does not include this

Court’s most recent decisions dealing with the

subject. In Michelin Tire Corp. v. Wages, the Court

noted that its decisions had made “crystal clear” that

the Import-Export Clause does not bar application of

nondiscriminatory state taxes to imports—whether

in the “original package” or not. 423 U.S. at 300.

And, in Washington Stevedoring, the Court applied

that same reasoning in upholding the application of

nondiscriminatory state taxes to the handling of

goods for export (an aspect of what respondent terms

the “export process” (Resp. Br. 20)). 435 U.S. at 757-

758.

This Court has often emphasized that At he con-

stitutional prohibition against taxing exports is

substantially the same when directed to the United

States as when directed to a State.” Cornell v.

8

Coyne, 192 U.S. at 427. Although there is “some

diversity in language” between the Export and

Import-Export Clauses, “none is perceivable in the

act which is prohibited.” Brown v. Maryland, 25

U.S. (12 Wheat.) 419, 445 (1827). As we explain in

detail in our opening brief (Pet. Br. 32-37), the same

reasons that led this Court to uphold the application

of nondiscriminatory state taxes to the “export

process” under the Import-Export Clause require

that similarly nondiscriminatory federal taxes be

upheld under the Export Clause. Indeed, it would be

decidedly contrary to the overall scheme of the

Constitution to hold that in this one area the States

have greater discretion than the federal government

to enact laws affecting foreign commerce. See Pet.

Br. 36.

2. Respondent seeks to minimize the significance

of Michelin Tire Corp. and Washington Stevedoring

by magnifying the difference in phrasing of the

Export Clause and the Import-Export Clause. The

former specifies that “No Tax or Duty shall be laid on

Articles Exported” (U.S. Const. Art. I, § 9, Cl. 5); the

latter provides that “No State shall * * * lay any

Imposts or Duties on Imports or Exports” (U.S.

Const. Art. I, § 10, Cl. 2). Respondent contends that

the analysis applied by this Court in Michelin Tire

Corp. and Washington Stevedoring is inapplicable to

cases involving the Export Clause because the

“absence of a prohibition on ‘taxes’ in the Im-

port/Export Clause was central to the” Court’s de-

cisions in those cases (Resp. Br. 32). There are two

answers to respondent’s contention: (i) it misde-

scribes the Court’s opinions and (ii) it is based on a

misunderstanding of the words employed in these

constitutional Clauses.

9

a. In Michelin Tire Corp., the Court held that a

“nondiscriminatory” tax on imported goods located

within a State is not unconstitutional and that the

Court had erred 100 years earlier when it ruled to the

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

(1872). The Court made that point at the outset of its

opinion (423 U.S. at 279), explained that nondiscrim-

inatory taxes of general application do not offend the

objectives of the Import-Export Clause (id. at 283-

290), noted that a nondiscriminatory general tax does

not clearly represent an “impost” or “duty” laid on

imports or exports (id. at 291-292), and “decline[d] to

presume [the Clause] was intended to embrace tax-

ation that does not create the evils the Clause was

specifically intended to eliminate” (id. at 293-294).

The Court explained that, as long ago as its 1847

opinion in the License Cases, 46 U.S. (5 How.) 504, the

Court had made “crystal clear” that nondiscrim-

inatory taxes do not offend the Constitution, which

proscribes only “exactions upon imports as imports”

(423 U.S. at 300). The Court’s decision in Low v.

Austin, which had held to the contrary, was therefore

overruled (id. at 279),

The “central” point of Michelin is thus twofold.

First, that the Import-Export Clause is designed to

proscribe only “exactions upon imports as imports”

(and upon “exports as exports”); and second, that the

text of that Clause should not be read to proscribe

exactions that do not offend that purpose.

That same analysis applies to the Export Clause.

The text of the Export Clause proscribes only taxes

“laid on Articles exported.” As we explain in detail in

our opening brief (Pet. Br. 32-37), the limited pur-

poses of the Export Clause, as well as its narrow text,

reflect that it is designed to proscribe only exactions

10

upon exports as exports. A nondiscriminatory tax

that falls on “all goods alike” is not an exaction upon

exports as exports and should therefore be sustained.

See, e.g., Cornell v. Coyne, 192 U.S. at 428; Turpin v.

Burgess, 117 U.S. at 507. See also Michelin Tire

Corp. v. Wages, 423 U.S. at 300.

Particularly at a time when export trade in-

creasingly represents a growing portion of our

Nation’s commerce, it is inappropriate to disregard

the limited purpose and narrow text of the Export

Clause to provide an absolute immunity for the

“export process,” as respondent urges. By providing

an immunity from taxation upon exports as exports,

the Constitution does not preclude generally applic-

able taxes that fall on all goods alike. As this Court

has emphasized, the Constitution does not shield

articles of export from the same “ordinary burdens of

taxation” that also apply to domestic commerce.

Cornell v. Coyne, 192 U.S. at 427.

b. Respondent’s contention that the Export Clause

prohibits application of nondiscriminatory taxes to

the “export process”—even though the Import-

Export Clause concededly does not—is grounded on

respondent’s assertion that the phrase “impost or

duty” in the Import-Export Clause is conceptually

distinct from the phrase “tax or duty” in the Export

Clause. That contention is not correct.

The English language is rich with synonyms. One

result of the Norman Conquest, and of the waves of

earlier and later commercial and political interaction

with the Continent, is that there are innumerable

examples in English usage of words that have differ-

ent origins but indistinct or overlapping meanings.

This is particularly so with respect to governmental

functions: a lawyer and an attorney, a sheriff and a

11

marshal, an earl and a duke, are examples. A more

relevant example is a tax“ and an impost.“ The

word “impost” comes from Middle French and is

derived from the Medieval Latin “impositum.” These

terms signify an “imposition.” See Webster’s Third

New International Dictionary (Unabridged) 1136

(1986). In usage, an “impost” is a governmental form

of imposition: it is “something imposed or levied: TAx,

TRIBUTE, DUTY.” Ibid.

As its derivation and usage reflects, there is no

fixed distinction between an “impost” and a “tax.”

These are words of separate origin that describe an

undifferentiated and overlapping concept. For exam-

ple, Black’s Law Dictionary 756 (6th ed. 1990) defines

the word “imposts” as “Taxes, duties, or impositions

levied for divers reasons. * Generic term

for taxes.” Authority more nearly contemporaneous

with the adoption of the Constitution also states (Jus-

tice Story’s Commentaries on the Constitution § 472,

at 337 (1833) (R. Rotunda and J. Nowak reprint,

Carolina Academic Press 1987)):

In a general sense, all contributions imposed by

the government upon individuals for service of the

state, are called taxes, by whatever name they

may be known, whether by the name of tribute,

tythe, talliage, impost, duty, gabel, custom, sub-

sidy, aid, supply, excise, or other name.

Justice Story observed that the word “imposts” is (id.

§ 474, at 339):

sometimes used in the large sense of taxes, or

duties, or impositions, and sometimes in the more

restrained sense of a duty on imported goods and

merchandise.

12

Brown v. Maryland, which was the Court’s first

decision under the Import-Export Clause, was a con-

test over this issue of usage or meaning. Chief

Justice Marshall announced near the outset of the

opinion that At he counsel for the state of Maryland

would confine this prohibition [of imposts and duties

on imports and exports] to laws imposing duties on

the act of importation or exportation. The counsel for

the plaintiffs in error give them a much wider scope.”

25 U.S. (12 Wheat.) at 437. The Court then con-

sidered, in a number of contexts, the results of each

view, and consistently found support for the broader

view. The Court concluded that the term “impost” is

not used in a narrow or fixed manner, but generally

signifies a “tax levied on articles brought into a

country” (ibid.). That explanation of the term, of

course, parallels the text of the Export Clause, which

prohibits any “Tax or Duty * * * laid on Articles

exported” (U.S. Const. Art. I, § 9, Cl. 5). It was in

that context that Chief Justice Marshall explained

that the terms of the Import-Export Clause and the

Export Clause are not distinguishable in meaning:

“There is some diversity in language, but none is

perceivable in the act which is prohibited.” 25 U.S.

(12 Wheat.) at 445. In Turpin v. Burgess, 117 U.S. at

506, the Court similarly concluded that “the constitu-

tional prohibition against taxing exports is substan-

tially the same when directed to the United States as

when directed to a State.”

As this Court has firmly concluded, there is no

toxtua' basis to differentiate “the constitutional pro-

hi*i@% against taxing exports” set out in these two

Clauses. And, as we have previously shown (Pet. Br.

32-37), the limited purposes of the Export and Import-

Export Clauses compel this same conclusion. For the

13

same reasons that a generally applicable, nondiscrim-

inatory state tax may constitutionally be applied to

goods for export and to the “export process,” the

generally applicable, nondiscriminatory federal tax

involved in this case should also be upheld.‘

* In addition to Michelin, Washington Stevedoring, and

Complete Auto, the Court has issued numerous decisions that

overruled older precedent that, in a variety of constitutional

contexts, had upheld claims for immunity from generally appli-

cable, nondiscriminatory taxes. As Chief Justice Hughes noted

in Helvering v. Mountain Producers Corp., 303 U.S. 376, 385

(1938), quoting Wilicuts v. Bunn, 282 U.S. 216, 225 (1931):

— In numerous decisions we have had occasion to declare

* * * that the power to tax should not be crippled “by

extending the constitutional exemption from taxation to

those subjects which fall within the general application of

non-discriminatory laws * * * .”

(a) In Fox Film Corp. v. Doyal, 286 U.S. 123 (1932), the

Court upheld a state business tax on gross receipts as applied to

royalties from copyrights. The Court “definitely overruled”

Long v. Rockwood, 277 U.S. 142 (1928), which had held that a

state income tax could not constitutionally be applied to

royalties paid for the use of patents issued by the United

States. 286 U.S. at 131.

(b) In Helvering v. Mountain Producers Corp., 303 U.S. at

385, the Court upheld application of the federal inconie tax to

income received by a private taxpayer from an oil lease of

state-owned land. In so holding, the Court overruled Gillespie

v. Oklahoma, 257 U.S. 501 (1922), which had held that Okla-

homa could not constitutionally apply its income tax to the

income of a lessee of restricted Indian lands, and overruled

Burnet v. Coronado Oil & Gas Co., 285 U.S. 393 (1932), which

had held that the federal income tax could not be applied to the

n by a State. See 303

S. at ;

(c) In Graves v. New York ex rel. O’Keefe, 306 U.S. 466, 486

(1939), the Court overruled New York ex rel. Rogers v. Graves,

299 U.S. 401 (1937), which had held that a state income tax

14

8. Accepting for purposes of argument that the

constitutional reasoning of Michelin Tire Corp. and

Washington Stevedoring is fully applicable under the

Export Clause, respondent asserts that the nondis-

criminatory tax imposed by Section 4371 is none-

theless unconstitutional as applied to insurance for

foreign shipments of export goods. Respondent

claims that factual differences make Michelin Tire

could not be applied to the salary of an employee of a federal

instrumentality, and also overruled Collector v. Day, 78 U.S.

(11 Wall.) 113 (1871), which had held the salary of state judges

to be immune from the federal income tax. 306 U.S. at 486.

(d) In Alabama v. King & Boozer, 314 U.S. 1, 9 (1941), the

Court held that the Constitution did not preclude application of

state sales taxes to purchases of building materials by a con-

tractor performing a cost-plus contract for the United States.

In so holding, the Court overruled Panhandle Oil Co. v. Mis-

sissippi ex rel. Knox, 277 U.S. 218 (1928), and Graves v. Texas

Co., 298 U.S. 393 (1936).

(e) In United States v. City of Detroit, 355 U.S. 466 (1958),

United States v. Township of Muskegon, 355 U.S. 484 (1958),

and City of Detroit v. Murray Corp, 355 U.S. 489 (1958), the

Court upheld the application of Michigan property and use

taxes against industrial taxpayers who leased and occupied real

property owned by the United States in the performance of

supply contracts with the United States. In each case, the

United States unsuccessfully invoked United States v. County

of Allegheny, 322 U.S. 174 (1944), which had held that a

government contractor could not constitutionally be liable for a

state property tax on machinery owned by the United States.

(f) In South Carolina v. Baker, 485 U.S. 505, 524 (1988), the

Court held that interest on bonds issued by States and their

political subdivisions is exempt from the federal income tax

only by virtue of the statutory provisions of the Internal Rev-

enue Code and not because of any constitutional requirement.

In so holding, the Court overruled Pollock v. Farmers Loan &

Trust Co., 157 U.S. 429 (1895).

15

Corp. and Washington Stevedoring “distinguishable”

from the present case (Resp. Br. 42).

a. Respondent claims that Washington Stevedor-

ing is inapposite because the cost of stevedoring

services, unlike the cost of insurance, has no econom-

ic relation to the value of the exported goods (Resp.

Br. 43). That alleged distinction, however, totally

ignores the facts and holding of Michelin Tire Corp.

The nondiscriminatory ad valorem property tax that

the Court upheld in Michelin was, of course, directly

related to the value of the imported goods. It is the

very nature of an ad valorem tax for the amount of

the tax to be related to the value of the property. The

relationship between the value of the goods and the

challenged tax in Michelin was thus unquestionably

more direct than in the present case, for the cost of

the casualty insurance taxed under Section 4371 of

the Internal Revenue Code varies not only with the

value of the goods but also with the nature, duration

and destination of the shipment.

b. Respondent claims that Michelin Tire Corp. is

inapposite because the imported goods taxed in that

case “were no longer in transit” (Resp. Br. 42). In

making that contention, respondent ignores what is

perhaps the most essential feature of the Court’s

decision in that case. As the Court emphasized in

Michelin, the fact that goods remain in transit and

have not yet been “so mingle(d) * with the

common property within the State as to ‘lose their

distinctive character as imports’ * did not mean

that * * * no exaction could be imposed on the

goods.” 423 U.S. at 298, paraphrasing Brown v.

Maryland, 25 U.S. (12 Wheat.) at 441-442. The Court

held that a State does not violate the Constitution by

taxing property, whether imported or domestic, “in a

sit.“ The essential task of stevedoring, of course, is

to assist the “transit” of goods.

ec. The purported factual distinctions on which

respondent relies in its effort to distinguish this case

to the Export Clause, and because the nondiscrim-

inatory tax imposed by Section 4371 is not imposed

directly or specifically on exports as exports, the fed-

eral tax challenged in this case should be sustained.

For the foregoing reasons and those set forth in

our opening brief, the judgment of the court of appeals

should be reversed.

Respectfully submitted.

Drew S. Days, III

Solicitor General

MARCH 1996