Amicus Curiae Brief — Barclays Bank PLC v. Franchise Tax Board of California

No. 92-212 ; Ave 31 1992

\ Skee ) ict OS che CLERK

In the Supreme Court of the United States

OCTOBER TERM, 1992

BARCLAYS BANK PLC, PETITIONER

Vv.

FRANCHISE TAX BOARD, AN AGENCY OF THE

| STATE OF CALIFORNIA

ON PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF THE STATE OF CALIFORNIA

BRIEF FOR THE UNITED STATES AS AMICUS CURIAB

IN SUPPORT OF PETITIONER

KENNETH W. STARR

Solicitor General

JAMES A. BRUTON

Acting Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

KENT L. JONES

Assistant to the Solicitor General

DAVID ENGLISH CARMACK

JOHN J. MCCARTHY

Attorneys

Department of Justice

Washington, D.C. 20580

(202) 514-2217

BEST AVAILABLE COPY

QUESTION PRESENTED

Whether, as applied (i) to a domestic corporation

that has a foreign parent or (il) to a foreign cor-

poration that has a foreign parent or foreign sub-

sidiaries, California’s use of the worldwide formula

apportionment method to allocate income for tax

purposes violates the Commerce Clause of the Con-

stitution.

(1)

TABLE OF CONTENTS

Page

Interest of the United States —.......0022002..222-ee eee. 1

Statement . ; OG Ear Ona 2

ADD a0 oisl santanbio dd basen aradaiadenssahsgianh 9

I asa 16

TABLE OF AUTHORITIES

Cases:

Allied-Signal Inc. Vv. Director, Division of Taxation,

I i, ee I 0 BPUIOE Do oisiesics s- nscnnnaweanccesenunsisbansivnananns 9-10

Container Corp. V. Franchise Tax Board, 463 U.S.

159 (1983) canes PS ee eR

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

I IIE cs nes cacdcanatnsinshaneonnnasntbiasbahens 9,10

Michelin Tire Corp. V. Wages, 423 U.S. 276 (1976)... 2

Mobil Oil Corp. v. Commissioner, 445 U.S. 425

, irciickasuhatckiaitaasiaaedine dans 15

Wardair Canada Inc. Vv. Florida Department of

Revenue, 477 U.S. 1 (1986) - eee Se

Constitution, treaties and statutes:

U.S. Const. :

Art. I, § 8, Cl. 3 (Commerce Clause) ea AS |.

11, 12, 15

CT I ciated ananehinentnnnminasis Senueteicaen: 1,9

Convention Between United States and United

Kingdom for Avoidance of Double Taxation,

Dec. 31, 1975, 31 U.S.T. 5670, T.I.A.S. No. 9682.. 14

Art. 9(4), 31 U.S.T. 5677 14

OECD Model Double Taxation Convention on In-

come and on Capital, Art. 7 (1977) 3

United Nations Model Double Taxation Convention

Between Developed and Developing Countries,

U.N. Pub. No. ST/ESA/102, Art. 7 (1980)... 3

Finance Act 1985, Pt. II. ch. I (Eng.):

Sch. 13," 5 Se eer en Gas " soe 5

IV

Treaty and statutes—Continued : Page

Income and Corporation Taxes Act 1988, Pt.

XVIII, ch. III (Eng.) :

5 BE hate RMR ERAN aN ts ABER A NOTY LOIRE he Maes 5

Sch. 30:

UN Ah ac lcace 5 sladaauacsemadionstoniaemacaeredamkene 5

cei ekieeutacsod alata tina adedomanrecdmakdyacacha Aes 5

Miscellaneous:

124 Cong. Rec. (1978) :

aes ee RS Ty Ieee: 14

DP. 18,669-18,670 .......-.-..neennseocccs-- aS. eee 14

Sf ES ERT Mtoe ee 14

Development Committee on Fiscal Affairs, Trans-

fer Pricing and Multinational Enterprises

¢\ . ) cechckd de duataala gaa Macenaccbaktaeltentacea tanioncd 3

Joint Report by Inland Revenue and U.S. Treasury,

Unitary Tax: Review of Progress Towards Re-

solving the Problems (Dec. 1991) .............-.........

G. Maisto, General Report, in 77a International

Fiscal Ass’n, Cahiers de droit fiscal international

(Transfer Pricing in the Absence of Compara-

Die BEGrhet Pveeea) CLGTE) nvcnwcciciccccnsccisccsccscssscncsnee 3

Organization for Economic Cooperation and De-

velopment Committee on Fiscal Affairs, Transfer

or

Pricing and Multinational Enterprises (1979).. 3

Parliamentary Debates (Hansard) 1014-1018 (10

BIN ED scenes ccnwcsessaecetetesdnacs tacoues Ea MEST La 5

xo

“J

In the Supreme Court of the United States

OCTOBER TERM, 1992

No. 92-212

BARCLAYS BANK PLC, PETITIONER

v.

FRANCHISE TAX BOARD, AN AGENCY OF THE

STATE OF CALIFORNIA

ON PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF THE STATE OF CALIFORNIA

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

IN SUPPORT OF PETITIONER

INTEREST OF THE UNITED STATES

The Constitution confers upon Congress the power

to “regulate Commerce with foreign Nations” (Art.

I, $8, Cl. 3) and authorizes the President, “by and

with the Advice and Consent of the Senate, to make

Treaties” (Art. II, § 2, Cl. 2). The United States

has a substantial interest in cases that address the

constitutional allocation of authority over matters

affecting foreign commerce and foreign relations.

This case presents such an issue.

As this Court recognized in Container Corp. v.

Franchise Tax Board, 463 U.S. 159, 184-193 (1983),

the United States employs the arm’s length method

(1)

Z

for allocating income among commonly controlled

corporations. This method, which reflects the con-

sistent practice of all major trading Nations, is also

required, for federal taxation, by numerous tax

treaties to which the United States is a party. Cali-

fornia’s use of the worldwide combined reporting

method for allocating income among a unitary group

of multinational corporations conflicts with this uni-

form international practice and has_created an irri-

tant in the commercial relations of the United States

and its major trading partners. The Departments of

State and Treasury inform us that foreign govern-

ments have objected to California’s departure from

accepted international tax practice and have threat-

ened (or enacted) retaliatory legislation against

United States corporations as a result of California’s

unilateral actions. The State’s tax has thus seriously

undermined the federal government’s ability to

“speak with one voice when regulating commercial .

relations with foreign governments.” Michelin Tire

Corp. v. Wages, 423 U.S. 276, 285 (1976).

STATEMENT

1. Two different methods have been used to iden-

tify and allocate among taxing jurisdictions the in-

come received by multinational corporations. The

method employed by the United States is known as

the “separate accounting” or “arm’s length” method.

This method generally treats each corporation as a

cistinet tax unit, doing business with every other

corporation (including its parent, subsidiaries or

affiliates) on an arm’s length basis. The separate

accounting method of taxation is employed in the

Internal Revenue Code and is a central feature of

3

the many bilateral tax treaties to which the United

States is a party (Pet. App. F44). The separate

accounting method is also the accepted international

standard.’ It is almost universally applied by foreign

tax systems and has been incorporated in the model

tax treaties adopted by the United Nations and the

Organization for Economic Cooperation and Develop-

ment (ibid.).*

The other method of allocating corporate income

among taxing jurisdictions is the “worldwide com-

bined reporting”? method used by California and two

other States. For corporations engaged in a unitary

business, California ignores the separate corporate

existence of parents, subsidiaries and affiliates, pools

their income together, and allocates a portion of that

1 The international practice is described in the letter to

Governor Deukmejian of California, dated January 30, 1986,

from Secretary of State George P. Shultz (Pet. App. F44-

F46). See also G. Maisto, General Report, in 77a International

Fiscal Ass’n, Cahiers de droit fiscal international (Transfer

Pricing in the Absence of Comparable Market Prices) 19-75

(1992). Maisto notes that the arm’s-length method is the

primary method for ailocating income internationally and

that the OECD considers the combined reporting and formula

apportionment method of allocating income to be arbitrary.

Id. at 50-51. Other than in a few States of the United States,

the worldwide combined reporting method is not used at the

national or sub-national level by the United States or any

of its major trading partners or in any of the countries sur-

veyed. Ibid.

2 See OECD Model Double Taxation Convention on Income

and on Capital, Art. 7 (1977); Organization for Economic

Cooperation and Development Committee on Fiscal Affairs,

Transfer Pricing and Multinational Enterprises (1979);

United Nations Model Double Taxation Convention Between

Developed and Developing Countries, U.N. Pub. No. ST/ESA,

102, Art. 7 (1980).

4

combined income to California based upon a multi-

factor apportionment formula.’ See Container Corp.

v. Franchise Tax Board, 463 U.S. 159, 162-163

(1983). California applies its worldwide combined

reporting method not only to domestic parent corpo-

rations that have foreign subsidiaries (see ibid.) but

also to domestic subsidiaries (conducting business in

California) that have foreign parents and to foreign

parents (conducting business in California) that

have foreign subsidiaries.

California’s application of the worldwide com-

bined reporting method of taxation to corporations

doing business in California that have foreign par-

ents or foreign affiliates conflicts with the “separate

accounting’? method applied under federal law and

under established international practice. In letters

addressed to the governors of the six States that then

employed the worldwide combined reporting method

of taxation (Alaska, California, Idaho, Montana,

New Hampshire and North Dakota), the Secretary

of State expressed the concern of the United States

that state use of worldwide combined reporting “is

at odds with the position of the United States and

has become a source of conflict with foreign states’

(Pet. App. F45). The Ambassadors of Australia,

Belgium, Canada, Denmark, France, the Federal

3 Under the three-factor apportionment formula used by

California, the in-state corporation’s income is calculated as

a percentage of the total income of the group of related cor-

porations. After the unitary business group is identified, the

in-state corporation’s sales, property, and payroll are ex-

pressed as a fraction of the total sales, property, and payroll

of the unitary group. These three fractions are arithmetically

averaged. This average is then multiplied against worldwide

group income to yield the taxable income of the in-state cor-

poration (Pet. App. A5).

[=<

0

Republic of Germany, the United Kingdom, Greece,

Ireland, Italy, Japan, Luxembourg, the Netherlands

and Switzerland have advised the United States that

the worldwide combined reporting method of taxa-

tion constitutes ‘‘a serious obstacle to the further

development of our trade and investment relation-

ships” (Pet. App. F45). In particular, the United

Kingdom enacted legislation in 1985 that provides

for retaliatory tax treatment of United States cor-

porations that operate in the States that apply the

worldwide combined reporting method.‘ While the

United Kingdom has not yet invoked this legislation,”

its enactment provides clear indication of the ad-

verse impact that California’s method of taxation

has on the conduct of foreign economic relations by

the United States.

2. The taxpayers involved in this case are Bar-

clays Bank International Limited (BBI) and Bar-

clays Bank of California (Bareal). During 1977,

Barcal (a United States corporation conducting bank-

ing activities in California) was a wholly owned

4 The United Kingdom legislation denies tax credits on the

taxes owed by such corporations for dividends they receive

from their United Kingdom subsidiaries. See Finance Act

1985, Pt. II, ch. I, §54, and Sch. 13, "5 (Eng.), reenacted

without substantial change in Income and Corporation Taxes

Act 1988, Pt. XVIII, ch. III, § 812 and Sch. 20, ‘© 20 and

21 (Eng.). See also Parliamentary Debates (Hansard) 1014-

1018 (10 July 1985); Secretary of State Shultz’s letter to

Governor Deukmejian (Pet. App. F46).

5 The United Kingdom has stated that the legislation will

not apply to dividends paid on or before December 31, 1989.

See Joint Report by Inland Revenue and U.S. Treasury, Uni-

tary Tax: Review ef Progress Towards Resolving the Prob-

lems, para. 6.2 (Dec. 1991).

6

subsidiary of BBI (a United Kingdom corporation

conducting an international banking business)." Both

BBI and Bareal did business in California and were

therefore subject to tax in that State (Pet. 3, 4;

Pet. App. C36-C38).

In computing its California income tax for 1977,

Barcal used the separate accounting method and re-

ported only the income it earned from California

sources. In computing its California income tax for

1977, BBI reported not only the income it earned

from California sources but also included (i) in-

come BBI earned from operating bank agencies and

branches in the United Kingdom and approximately

33 nations or territories outside of the United King-

dom and (ii) the income earned by 70 subsidiaries

(including Bareal) of BBI operating in 34 nations

or territories outside of the United Kingdom. BBI

did not, however, include the income of BBI’s parent

(see note 6, supra) or of the parent’s subsidiaries.

Thus, neither Barcal nor BI submitted its California

tax return under the worldwide combined reporting

method required by California (Pet. 7-8; Pet. App.

C38-C41).

The California Franchise Tax Board determined

that Barcal and BBI were members of a worldwide

unitary business conducted by all members of the

Barclays Group. That Group included (i) Bareal, a

wholly owned subsidiary of BBI doing business only

® BBI was a wholly owned subsidiary of Barclays Bank

Limited, a United Kingdom corporation. In 1982, Barclays

Bank Limited changed its name to Barclays Bank PLC, which

is named as the petitioner in this case (Pet. 2-3).

7

in California; (ii) BBI, a United Kingdom Corpo-

ration doing general retail and commercial banking

in the United Kingdom and 34 other nations or terri-

tories outside the United Kingdom, including Cali-

fornia; (iii) the subsidiaries of BBI in which BBI

has more than a 50‘. interest; (iv) Barclays Bank

Limited, a United Kingdom corporation which con-

ducts no business in California and which owns 100%

of the stock of BBI; and (v) the subsidiaries of

Barclays Bank Limited in which that corporation

holds more than a 50‘, interest. The California

Franchise Tax Board calculated the tax owed by

BBI and Barcal by allocating a portion of the total -

income of the above unitary group to these two tax-

payers utilizing a three-factor apportionment for-

mula. The State’s calculation indicated a tax de-

ficiency, which the Board then assessed (Pet. 7-8:

Pet. App. C38-C40).

3. Bareal and BBI challenged the State’s assess-

ment because it was based not only on the income

that they had separately earned but also on the in-

come of their foreign parent and other related for-

eign subsidiaries which do no business in California

or elsewhere in the United States. After paying the

assessments, the taxpayers sued for a refund in Cali-

fornia superior court (Pet. App. C38-C41).

The trial court entered judgment in favor of the

taxpayers (Pet. App. C1-C34). The court concluded

that California’s computation of taxes by use of

worldwide combined reporting improperly included

income earned by foreign parents and affiliates of

the taxpayers. The court held that this violated the

Commerce Clause of the United States Constitution

because it impeded the federal government’s ability

to speak with one voice in the conduct of foreign

8

affairs (id. at C23-C26), impermissibly discrimi-

nated against foreign commerce (id. at C26-C28)

and violated due process (id. at C29-C30).'

The California court of appeal affirmed (Pet. App.

B1-B37). The appellate court held that California’s

application of worldwide combined reporting to the

income received by foreign parents and affiliates of

the taxpayers violated the Commerce Clause because

it frustrated the United States’ ability to speak with

one voice in an area of foreign affairs where federal

uniformity is necessary (7d. at B35).

The California Supreme Court reversed, upholding

the constitutionality of the tax under the Commerce

Clause as applied in this case. The court relied ex-

tensively on the fact that, while Congress has been

given many opportunities, it has not enacted legis-

lation to prohibit the States from employing the

worldwide combined reporting method to multina-

tional corporations (Pet. App. A28-A381). Conclud-

ing from “the din” of this legislative “silence” that

Congress “has decided not to prohibit state use” of

worldwide combined reporting ‘tin cases of this kind”

(id. at A26), the court declined to apply the Com-

merce Clause to prohibit the State from enforcing a

tax that Congress has not acted affirmatively to pro-

hibit (7d. at A24-A38).

Since the court of appeal had resolved the case solely

under the Commerce Clause, and had not reached pe-

titioner’s separate due process challenge to the State’s

7 The trial court concluded that procedures adopted to im-

plement the State’s worldwide combined reporting method

violate due process because, “with customarily and currently

available acounting data, literal compliance with [their] re-

quirements is impossible for foreign multi-nationals” (Pet.

App. C29).

9

tax (see note 7, supra), the California Supreme Court

remanded the case to the court of appeal for further

proceedings on that issue (id. at A39-A40),

ARGUMENT

In Container Corp. v. Franchise Tax Board, 463

U.S. 159 (1983), the Court held that California’s use

of the worldwide combined reporting method for al-

locating the income of a unitary business did not vio-

late the Commerce Clause. /d. at 184-197. That case,

however, concerned application of the worldwide com-

bined reporting method to a domestic parent corpora-

tion doing business in California. Recognizing the

potentially different and additional considerations in-

volved when the incidence of a state tax falls on a

foreign corporation, the Court expressly reserved the

question whether the California method would be con-

stitutional ‘with respect to state taxation of domestic

corporations with foreign parents or foreign corpora-

tions with either foreign parents or foreign subsidi-

aries.”’ Jd. at 189 n.26.

This case presents the question that was expressly

reserved in Container Corp. This Court’s resolution

of this important question is necessary to avoid con-

tinued state action that conflicts with accepted inter-

national commercial practice and prevents the United

States “from speaking with one voice when regulat-

ing commercial relations with foreign governments”

(Japan Line, Ltd. vy. County of Los Angeles, 441 U.S.

434, 451 (1979) ).

1. Under the Commerce and Due Process Clauses

of the United States Constitution, a State, when im-

posing an income-based tax, may not tax value earned

outside its borders. Allied-Signal Inc. y. Director.

Division of Taxation, 112 S. Ct. 2251, 2255, 2258

10

(1992). The State may, however, constitutionally tax

on an apportioned basis the income earned by a cor-

poration in multiple taxing jurisdictions. Container

Corp. v. Franchise Tax Board, 463 U.S. at 164-165.

The income to be apportioned must, however, be re-

lated to the business carried on in that State. Allied

Signal, Ine. y. Director, Division of Taxation, 112

S. Ct. at 2263. For a tax imposed cn an apportioned

basis to satisfy the basic requirements of the Com-

merce Clause, (i) there must be a substantial nexus

between the State and the activity or property taxed,

(ji) the activity or property must be fairly appor-

tioned to the taxing State, (iii) the tax must not dis-

criminate against interstate commerce, and (iv) the

tax must be fairly related to the services provided by

the State. Wardair Canada Inc. vy. Florida Depart-

ment of Revenue, 477 U.S. 1, 8 (1986); Container

Corp. v. Franchise Tax Board, 463 U.S. at 165-171.

When the state tax affects foreign commerce, two ad-

ditional questions must be addressed: ‘first, whether

the tax, notwithstanding apportionment, creates a

substantial risk of international multiple taxation,

and, second, whether the tax prevents the Federal

Government from speaking with one voice when regu-

lating commercial relations with foreign govern-

ments.” Wardair Canada Inc. v. Flornda Department

of Revenue, 477 U.S. at 8 (quoting Japan Line, Ltd.

v. County of Los Angeles, 441 U.S. 434, 451 (1979) ).

See also Container Corp. v. Franchise Tax Board, 463

U.S. at 185-187. “If a state tax contravenes either

of these [two additional] precepts, it is unconstitu-

tional under the Commerce Clause.” Japan Line, Ltd.

v. County of Los Angeles, 441 U.S. at 451.

The Court observed in Container Corp. ‘hat “a

state tax at variance with federal policy will violate

11

the ‘one voice’ standard if it either implicates foreign

policy issues which must be left to the Federal Gov-

ernment or violates a clear federal directive.” 463

U.S. at 194. The “most obvious foreign policy im-

plication of a state tax is the threat it might pose of

offending our foreign trading partners and leading

them to retaliate against the Nation as a whole.”

[bid.

In Container Corp., this Court considered the con-

stitutionality of California’s application of the world-

wide combined reporting method to determine the in-

come of members of-a unitary corporate group con-

trolled by a domestic parent corporation. Noting that

the United States had not filed a brief in that case

(463 U.S. 195-196 and n.33)* and that there was

no suggestion that foreign retaliatory acts would stem

from California’s taxation of domestic parent corpo-

rations (id. at 195), the Court concluded that Cali-

fornia’s tax as applied to members of domestic multi-

national corporations did not seriously threaten the

foreign policy of the United States and thus did not

violate the Commerce Clause. The Court, however,

8 At the time Container Corp. was considered by the Court,

there was another case (Chicago Bridge & Iron Co. v. Cater-

pillar Tractor Co., No. 81-349) before the Court that pre-

sented virtually the same issue. The United States had sub-

mitted an amicus brief and participated in the oral argument

in Chicago Bridge, taking the position that a similar Illinois

tax involving a domestic corporation with foreign subsidiaries

violated the Commerce Clause. After argument, the Court

ordered Chicago Bridge carried over to the next Term, but

did not schedule that case for reargument. Instead, it sched-

uled and heard argument in Container Corp. The Members

of the Court disagreed as to what position the United States

took with respect to Container Corp. See 463 U.S. at 195-

196 & n.33; id. at 204 (Powell, J., dissenting).

12

recognized that the result may be different when the

‘incidence of the tax’? (ibid.) falls on a foreign-con-

trolled corporation. See jd. at 188. The Court there-

fore expressly reserved judgment as to whether the

tax would be constitutional as applied to members of

a foreign-controlled corporate group. /d. at 189 n.26.

When, as in the present case, the State applies its

worldwide combined reporting method to compute the

state income tax of members of a foreign unitary

corporate group, application of the tax creates an

impediment.in the relations of the United States with

its trading partners and implicates foreign commerce

concerns that are the exclusive province of the fed-

eral government. As this Court recognized in Con-

tainer Corp., 463 U.S. at 184-193, the arm’s-length

standard is the international norm for allocating

income among controlled corporations across inter-

national boundaries and the method used by the

United States for allocating income for federal in-

come tax purposes. The method used by California

is at odds with this accepted international practice.

California’s use of its inconsistent method of tax-

ation has created serious tensions in the federal

government’s conduct of commercial relations with

its tradine partners and led to the enactment of

retaliatory legislation (Pet. App. F44-F47). See p.

5, supra. California’s application of its worldwide

combined reporting method of taxation to compute

the income tax of members of foreign-controlled uni-

tary corporate groups violates the Commerce Clause

under this Court’s analysis in Container Corp. be-

cause California’s unilateral action departs from

an accepted international practice to which the United

States adheres and prevents the United States from

speaking with one voice on this sensitive and im-

13

portant matter of foreign commercial relations. See

463 U.S. at 185-189, 193-196.

2. The California Supreme Court did not test

California’s method of apportioning income in this

case under the analysis set forth in Container Corp.

because the court concluded (Pet. App. A39) that

Wardair Canada Inc. v. Florida Department of Rev-

enue imposed a new, preliminary hurdle to the tax-

payer’s argument. Wardair involved a challenge by

a Canadian-based international air carrier to a state

sales tax on fuel purchased in Florida for flights

operating between Florida and Canada. The Court

found “no threat of multiple international taxation

* * * since the tax [was] imposed only upon * * *

a discrete transaction which occurs within one na-

tional jurisdiction only” (477 U.S. at 9). Nor did

the Court find any evidence that imposition of the

sales tax in that case violated any international norm.

Id. at 10. To the contrary, the Court concluded that

numerous bilateral agreements to which the United

States was a party were “understood * * * to permit

this sort of taxation” and therefore “show that the

Federal Government has affirmatively decided to per-

mit the States to impose these sales taxes on aviation

fuel.” Jd. at 12. Finding such “affirmative[]” ap-

proval of the state tax, the Court found “no need

* * = to consider * * * whether, in the absence of

these international agreements, the Foreign Com-

merce Clause would invalidate Florida’s tax.” Id.

at 13.

California claims that this case is like Wardair

because the United States is a party to numerous

bilateral tax treaties that set forth agreements with

respect to national-level taxation but do not address

state or sub-national taxation (Pet. App. A34). Cali-

oO

14

fornia relies specifically on the history of the 1975

tax convention between the United States and the

United Kingdom (id. at A30-A31). As originally

presented to the Senate for advice and consent to

ratification, that treaty contained a provision (Arti-

cle 9(4)) that required sub-national taxation to be

consistent with the arm’s length standard. See Con-

vention Between United States and United Kingdom

for Avoidance of Double Taxation, Dec. 31, 1975,

31 U.S.T. 5670, 5677, T.LA.S. No. 9682. Although

a majority of the Senate voted in favor of the treaty,

less than the required two-thirds of the votes were

obtained for ratification. 124 Cong. Rec. 18,669-

18,670 (1978). In a subsequent vote, however, the

treaty was approved subject to a reservation that

Article 9(4)) would not apply “to any political sub-

division or local authority of the United States” (id.

at 18,416). See id. at 19,076. The California Su-

preme Court concluded from this history (Pet. App.

A29-A30) that the Senate’s action represents “affirm-

ative” approval of the California tax under the analy-

sis of this Court in Wardair.

The contrasts between this case and Wardair are

striking. In Wardair, the Court found that numer-

ous treaties had been made that were “understood”

by the participants “to permit” state sales taxation

to proceed. 477 U.S. at 12. That “understanding”

was supported by the fact that there was no inter-

national norm precluding that type of state taxation.

Id. at 10-11. In this case, by contrast, there is a

well-established international practice precluding the

State’s contrary tax system,- a practice that the

Executive has steadfastly honored and that a ma-

jority of the Senate voted to implement. Far from

representing acquiescence through silence, this his-

15

tory of Executive and Senate action reflects the thor-

oughly national character of this issue and the need

for federal-level, rather than state-level, disposition

of the matter.

Unless this Court concludes that a minority of the

Senate can determine the “affirmative” policy of the

federal government, it cannot conclude that Senate

action on federal tax treaties exhausts the scope of

the national power to regulate foreign commerce.

The Commerce Clause recognizes that there are mat-

ters affecting our foreign commercial relations that

inherently require a national solution so that the

United States may speak with one voice in its deal-

ings with other Nations. That Congress has not yet

crafted a solution to the problem does not mean that

the choice of solutions has been left to the separate

action of the several States. See Container Corp. v.

Franchise Tax Board, 463 U.S. at 194.°

This Court’s resolution of the question presented

in this case is of great importance because the analy-

® In Container Corp., the Court reviewed much of the same

treaty history and legislative proposals considered by the

California Supreme Court in this case. See 463 U.S. at 196-

197. The Court noted that Congress has “long debated, but

has not enacted, legislation designed to regulate state taxation

of income.” /d. at 197 (quoting Mobil Oil Corp. v. Commis-

sioner, 445 U.S. 425, 448 (1980)). Asa result, the Court con-

cluded that there was no “explicit directive” (463 U.S. at

197) limiting the State’s ability to assess the tax at issue in

Container Corp. That conclusion, however, did not remove

the necessity of also considering whether the State’s tax was

unconstitutional because it would interfere with the conduct

of foreign relations and prevent the federal government from

speaking with one voice in the regulation of foreign com-

merce. See id. at 194-196. To the contrary, the Court made

clear that both inquiries were necessary. See ibid.

16

Sis applied by the California Supreme Court threat-

ens broad impact on the constitutional allocation of

authority to the federal government to regulate for-

eign commerce. Treaties often may stop short of

addressing all aspects of commercial relations. Con-

gress may also decline to enact legislative proposals

disposing of similar problems. The fact that treaties

and legislation have not provided a binding solution

does not mean that the States are empowered in-

dependently to resolve politically sensitive matters

affecting our international commercial relations.

CONCLUSION

If the Court concludes that it has jurisdiction (see

Pet. 26-28), the petition for a writ of certiorari

should be granted.

Respectfully submitted.

KENNETH W. STARR

Solicitor General

JAMES A. BRUTON

Acting Assistant Attorney General

LAWRENCE G. WALLACE

. Deputy Solicitor General

KENT L. JONES

Assistant to the Solicitor General

DAVID ENGLISH CARMACK

JOHN J. MCCARTHY

Attorneys

AUGUST 1992

wv U. 8. GOVERNMENT PRINTING OFFice, 1992 312324 6002!