Petition for Writ of Certiorari — Zantop International Airlines, Inc. v. Michigan Department of Treasury

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961030 DEC 2 6 19%

NO: _emae-aG WHE GLERK

In The

Supreme Court of the United States

October Term, 1996

&

ZANTOP INTERNATIONAL AIRLINES, INC.,

Petitioner,

REVENUE DIVISION, DEPARTMENT

OF TREASURY, STATE OF MICHIGAN,

Respondent.

+

Petition For Writ Of Certiorari

To The Court Of Appeals

Of The State Of Michigan

*

PETITION FOR WRIT OF CERTIORARI

4

Patrick R. VAN TIFLIN

Counsel of Record

MICHELE L. HALLORAN

Kim D. Crooks

Donna M. CLARKE

Howarp & Howarp Atrorneys, P.C.

The Phoenix Building, Suite 500

222 Washington Square, North

Lansing, Michigan 48933-1817

(517) 485-1483

December 26, 1996 Attorneys for Petitioner

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTION PRESENTED

Whether, under the Equal Protection Clauses of the

United States Constitution, the Michigan Court of

Appeals erred in upholding the constitutionality of the

preferential treatment of certain instrumentalities of

interstate commerce under the Michigan Use Tax Act?

LIST OF PARTIES

The parties to the proceedings below were the same as

those mentioned in the present caption.

iii

DISCLOSURE OF CORPORATE

AFFILIATIONS OF PETITIONER

Pursuant to Supreme Court Rule 29.6, Petitioner makes

the following disclosure:

Petitioner is not a subsidiary or affiliate of a

publicly-owned corporation.

iv

TABLE OF CONTENTS

Page

COEF EES FTIR to vs wk b is cee ie Ve bee ee eanes i

Lah SO RORROMEE WN 5 5U5 E559 v0 eke on aE ARES EEE ES ii

DISCLOSURE OF CORPORATE AFFILIATIONS OF

sy tee ty Pieri rar sa eee re ep pe rey

PETITION FOR WRIT OF CERTIORARI............

Fog 6 | URS. Se rr Dr arr eer ery

Pe NE ao nk FRRES AEWA SORA LSS Od oO ARES

CONSTITUTIONAL, STATUTORY AND REGULA-

pee 2 ys 8 BNR ee er Pema eer errr

DEAR EEE GR ROE SHOES £0 0045 ene hd Seas reehans

A. Petitioner and its Interstate Business

en, NRE RUN AR a By Sek Re emg SH OIE Pe aE ty

©. ‘Fee POCO TOMI ca woes ve ee pans bowers

SFO oan ko Reka eens Lees

2. Proceedings in the Michigan Court of

ig EG OPE Tey TEC ES Pee ry Oe ts

3. Proceedings in the Michigan Court of

PP eer ee eer TTT er ee Taare Tree

ah a teeta

Vv

TABLE OF CONTENTS - Continued

ee tn ae EE eR a ee ee ee

L.

THE DECISION OF THE MICHIGAN COURT OF

APPEALS WHICH UPHELD THE CONSTITU-

TIONALITY OF CERTAIN PORTIONS OF MICH-

IGAN’S USE TAX ACT AS WELL AS

RESPONDENT’S APPLICATION AND INTER-

PRETATION OF THE USE TAX PROVISIONS IN

THE FACE OF PETITIONER’S EQUAL PROTEC-

TION CHALLENGE IS IN CONFLICT WITH

PRIOR DECISIONS OF THIS COURT WHICH

Pl OHIBIT STATES FROM DISCRIMINATING

AMONG SIMILARLY-SITUATED TAXPAYERS,

AND WHICH REFLECT THIS COURT’S CRITI-

CISM OF ECONOMIC-PROTECTIONIST LEGIS-

LARS isc RUN EEL CVAS URC Ree IO eatin

SET F640 Fb ee TIE Cha ee CER s cae es

1. The Equal Protection Clause forbids arbi-

trary distinctions in state tax laws......

2. While a state legislature may classify, its

power to classify is not unfettered......

a. The rational basis test inquires as to

whether the offending legislation is

reasonably related to a lawful gov-

erntental PULPOSE.. 2... 6666s a ses

b. The peculiar facts of this case suggest

that a heightened scrutiny must be

undertaken in evaluating Petitioner’s

equal protection claims.............

10

10

10

11

11

vi

TABLE OF CONTENTS - Continued

Page

c. Modern constitutional jurisprudence

disapproves of the economic protec-

tionism fostered by the legislative and

administrative scheme in issue in this

COD ise iixedat Gor Vetek he eewekes 18

B. CONSTITUTIONAL DOCTRINE APPLIED IN

THE CONTEXT OF PETITIONER’S FACTS.. 20

1. The UTA provisions, considered together

with Respondent’s administrative posi-

tion, establish illegitimate and unreason-

able classifications, and evidence a

discrimination that violates equal protec-

OM GUALAMIOES . occ ceeveccssecessusy ous 20

2. A desire to encourage industry to locate

in the state cannot justify discriminatory

taxation among members of the same

COD 5 oc ritcandcquer ives hele ven eaveenens 22

COINCLUGEIS 6 ciscventaesaxwkienadiewsssueeenaeen 30

-

Vii

TABLE OF AUTHORITIES

Page

CAsEs:

Allegheny Pittsburgh Coal Co. v. County Comm. of

Webster County, 488 U.S. 336 (1989) ............ 16, 25

Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522

CRUE 4 ON eos COUN oe PND Cie den dananene 16, 23, 28, 29

American Trucking Associations, Inc. v. Scheiner, 483

SME COUT R be Kb sckhenncduncckhaasseaaeukacacn 19

Bacchus Imports Ltd. v. Dias, 468 U.S. 263 (1984)..... 18

Douglas v. California, 372 U.S. 353 (1963) ............. f

F S Royster Guano Co. v. Virginia, 253 U.S. 412

SOME Ch esas eee GedeeNoeeeKusaeWasuxedeteeseaces 11

FCC v. Beach Communications, Inc., 508 U.S. 307

SEER GA eur hs ken entehs Rh dbase tay ve Mess bedrest ska eee 15

Fulton Corp. v. Faulkner, 116 S. Ct. 848 (1996)........ 19

Kadrmas v. Dickinson Public Schools, 487 U.S. 450

IE ATE USESS oCd ua BELEN R ASS OES Oa SEE be ba R BeOS bO 14

Leathers v. Medlock, 499 U.S. 439 (1991)........... 17, 24

Louisville Gas & Elec. Co. v. Coleman, 277 U.S. 32

EE RUST Hi ae 6a enV aad bak pence a eae kanes bones 14

Madden v. Kentucky, 209 U.S. 83 (1940) .............. 16

Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869

SUSE GES sche CAG CeCksaTEpubbaweesase bees 27, 28, 29

National Bank of Detroit v. Dep't of Revenue, 334

NA. SUN SIRES & ob 60 64 whe dunk oO Adu had ce Sieae dss 21

New Energy Co. of Indiana v. Limbach, 486 U.S. 269

| Peer rer et ee Tee Tree rere eer errs 19

Vili ~

TABLE OF AUTHORITIES - Continued

Page

Nordlinger v. Hahn, 505 U.S. 1 (1992)............. 11, 22

Philadelphia v. New Jersey, 437 U.S. 617 (1978)........ 20

Raymond v. Chicago Union Traction Co., 207 U.S. 20

CAME Loc ccev cer bak cdunes because bakeeseonkes cageuetn 21

Regan v. Taxation With Representation of Washington,

SGT UWB. BOS CGR F as cin cesecvcacceuteventnks 17, 23

Romer v. Evans, 116 S. Ct. 1620 (1996)....... 11, 12, 14, 23

Shinner v. Oklahoma ex rel. Williamson, 316 U.S. 535

fos Se PD re ee Pree etree: Terie PS ere 14

Smith v. Cahoon, 283 U.S. 553 (1931)...........06: 26, 27

Speiser v. Randall, 357 U.S. 512 (1958) ...........4045. 17

Tyler Pipe Industries, Inc. v. Washington Dep't of

Roped, GES tiB.. Zee CAGE ii 4 viv cep ncddeiis seine 19

Western Electric C. v. Dep't of Revenue, 312 Mich 582

CRED hcccceserivecadieadunsdaee bo anbeereeeetewean 20

Williams v. Vermont, 472 U.S. 14 (1985)... 11, 15, 16, 24

FEDERAL STATUTES:

USE See ee 17

0 UE ni igs oe ee 1

OS 8 OS os ay eee 1

PEAT TE ey

i

i

ix

TABLE OF AUTHORITIES - Continued

Page

STATE STATUTES:

Mich. Comp. Laws Ann. § 205.91 et seq. (West 1986

et ROE 6 i Ken ah cite Gs oe bch be nnd atin canines 0.8 2

Mich. Comp. Laws Ann. §§ 205.94(k) West 1986 &

Supp. 1995) and 205.94(x)........... ay & 6, 7; 2, 24

CONSTITUTION:

Panis Te OE, PRET Ky WE Os ono tks caked vedaws 2,4

U.o. Comat. amend XIV, § 2...........00000. a 22 ae

ee a ME te Ue ME I od no nk a bedk oo Oa tenaped ck. 4

OTHER AUTHORITY:

Michigan Department of Treasury Letter Ruling

sien COLE ROLE CORE ELE POL COTTER passim

eee ee =

+e oe.

1

PETITION FOR WRIT OF CERTIORARI

TO: THE HONORABLE CHIEF JUSTICE AND THE

ASSOCIATE JUSTICES OF THE UNITED STATES

SUPREME COURT.

Petitioner, Zantop International Airlines, Inc. (“Peti-

tioner”), respectfully requests that this Court issue a writ

of certiorari to review the decision issued by the Michi-

gan Court of Appeals on May 26, 1995, which decision

the Michigan Supreme Court declined to review by order

dated September 27, 1996.

+

OPINIONS BELOW

The Michigan Court of Appeals entered its

unpublished opinion cn May 26, 1995. The Michigan

Supreme Court issued its unpublished order which did

not consider this case on the merits, and which denied

Petitioner’s application for leave to appeal, on September

27, 1996. Both the Michigan Supreme Court’s order and

Michigan Court of Appeals’ opinion are set forth in the

attached Appendix, see App. 7-16.

+

JURISDICTION

This petition is filed within 90 days of the entry date

of the Michigan Supreme Court order of September 27,

1996, which denied Petitioner’s application for leave to

appeal, 28 U.S.C. § 2101(c). This Court’s jurisdiction to

consider this petition from the decision of the Michigan

Court of Appeals after the Michigan Supreme Court

denied Petitioner’s application for leave to appeal is

invoked under 28 U.S.C. § 1257(a), see Douglas v. Califor-

nia, 372 U.S. 353 (1963).

2

CONSTITUTIONAL, STATUTORY AND

REGULATORY PROVISIONS

This case concerns the following constitutional, statu-

tory and administrative provisions: U.S. Const. amend.

XIV, § 1; Michigan Const. 1963 art. 1, § 2; Mich. Comp.

Laws Ann. §§ 205.94(k) (West 1986 & Supp. 1995) and

205.94(x); and Michigan Department of Treasury Letter

Ruling 89-48. Relevant portions of these provisions are

printed in the Appendix, see App. 17-20.

¢ :

STATEMENT OF THE CASE

Michigan’s Use Tax Act, 1937 P.A. 94, as amended,

Mich. Comp. Laws Ann. § 205.91 et seq. (West 1986 &

Supp. 1995) (the “UTA”), violates the Equal Protection

Clauses of the United States and Michigan Constitutions,

in that it discriminates against similarly-situated tax-

payers, all of whom engage in interstate commerce. Sev-

eral of the exemptions from payment of use tax set forth

in the UTA relieve certain instrumentalities of interstate

commerce — vessels used in the interstate transport of

cargo and aircraft used in the regularly scheduled com-

mercial transport of passengers -— from the obligation

others have to pay the tax. See App. 18. In addition,

Respondent in this case, the Michigan Department of

Treasury, has issued Letter Ruling 89-48, which exempts

rolling stock from application of the UTA. See App. 19.

While these instrumentalities of interstate commerce have

effectively received a state subsidy in recognition of the

favored status bestowed on interstate commerce, not all

similarly-situated entities operating in interstate com-

merce have been accorded the benefit of exemption from

payment of use tax. Petitioner, an air cargo carrier operat-

ing in interstate commerce, has been unlawfully made to

3

bear the burden of use tax from which its counterparts in

interstate commerce have been relieved.

A. Petitioner and its Interstate Business Activities

Petitioner is a Michigan corporation with its princi-

pal office at Willow Run Airport in Ypsilanti, Michigan.

During the tax period in controversy (October 1, 1986

through March 31, 1990), Petitioner operated a fleet of

aircraft engaged in the interstate and foreign air freight

delivery business it conducted between 45 to 50 airports

throughout the United States, including Willow Run Air-

port in Ypsilanti, Michigan. In its interstate freight deliv-

ery business, Petitioner is similarly-situated to other

forms of interstate business operations that are conducted

between Michigan and other states, including those oper-

ations that are conducted on the Great Lakes, those that

involve rolling stock, and those that entail the transport

of passengers and cargo by air carrier.

With respect to the aircraft Petitioner uses in its

interstate air freight operations, Petitioner installs parts,

identified as “rotable parts,” inclusive of engines, com-

pressors and propellers, engine components, compressors

and propellers. The rotable parts are not replaced pur-

suant to a schedule determined by Petitioner; instead, the

parts are installed as part of a replacement, repair, rebuild

or overhaul schedule mandated by the Federal Aviation

Administration (“FAA”). Once installed, the rotable parts

become an indistinguishable part of the aircraft Petitioner

uses in its interstate air freight operations.

4

B. The Proceedings Below

1. The Audit

Respondent audited Petitioner and determined that

Petitioner was liable for payment of additional Michigan

use tax computed with respect to airplane parts installed

on aircraft dedicated to service in interstate channels. As

a consequence of its audit determination, Respondent

issued Bill for Taxes Due (Final Assessment) E763576 for

Michigan use tax, penalty and interest totaling

$757,275.72.

2. Proceedings in the Michigan Court of Claims

Following Respondent’s issuance of the deficiency

assessment against Petitioner for the period in contro-

versy, Petitioner paid the assessment under protest, and

filed suit in which it requested a refund of unlawfully

paid taxes, penalty and interest in the Michigan Court of

Claims. Among the challenges Petitioner tendered in its

Court of Claims action were those addressed to the con-

stitutionality of Respondent’s taxation of Petitioner under

the Equal Protection Clauses of the United States and

Michigan Constitutions, U.S. Const., Amend. XIV, § 1;

Mich. Const. 1963, Art. 1, § 2, and the Commerce Clause

of the United States Constitution, Art. I, § 3, cl 8.

In the equal protection segment of its Court of Claims

complaint (count III), Petitioner alleged that, in creating

selective classifications of instrumentalities of interstate

commerce which are exempt from, or are otherwise not

subject to, the Michigan UTA, both the Michigan legisla-

ture and Respondent abridged Petitioner’s right to equal

protection of the laws, as guaranteed under both the

United States and Michigan Constitutions. The following

5

statutory and administrative provisions provide the foun-

dation for Petitioner’s count III assertions:

e Section 4(k) of the UTA, see App. 18, states

that Michigan use tax shall not apply to:

A vessel designed for commercial use of

registered tonnage of 500 tons or more,

when produced upon special order of the

purchaser, and bunker and galley fuel, pro-

visions, supplies, maintenance, and repairs

for the exclusive use of the vessel of 500

tons or more engaged in interstate com-

merce.

e Section 4(x) of the UTA, see App. 18, during

the taxable period in issue, provided that Michi-

gan use tax shall not apply to:

The storage, use, or consumption of any

aircraft owned or used by a domestic pas-

senger air carrier operating under certificate

issued by the civil aeronautics board pur-

suant to section 401 of title IV of the federal

aviation act of 1958, 49 U.S.C. 1371, if the

aircraft is used primarily in the regularly-

scheduled commercial transport of pas-

sengers.

e Department of Treasury Letter Ruling 89-48,

see App. 19, reflects Respondent's position that

the UTA does not apply to rolling stock pur-

chased outside of Michigan which is placed in

the stream of interstate commerce, until such

time as the rolling stock is converted to an intra-

state application.

In the Court of Claims action, Petitioner brought a

motion for partial summary disposition of count III of its

complaint, in which it alleged that there are no genuine

issues of material fact, and that it is entitled to judgment

as a matter of law on its equal protection claims. The

Michigan Court of Claims granted summary disposition

6

of count III in favor of Petitioner, and issued an opinion

and order and partial final judgment reflecting its deter-

mination, see App. 1-6. The Court of Claims found that

the exemption for vessels set forth in UTA § 4(k) parallels

Petitioner’s circumstances in that:

Both Plaintiff and businesses which fall under

this exemption are involved in interstate com-

merce and shipping freight. The main difference

between the two, not taking into account super-

ficial differences, is that one utilizes a ship while

the other utilizes aircraft. The Court is strained

to understand the differences afforded these two

modes of interstate commerce that warrant one

form to receive use tax relief with respect to

“provisions, supplies, maintenance, and

repairs” while the other is not. App. 5.

The trial court opined that the scheme adopted by Michi-

gan bespeaks “an arbitrary approach by Defendant as it

applies to the taxation of different instrumentalities of

interstate commerce in violation of equal protection.”

App. 6.

3. Proceedings in the Michigan Court of Appeals

Respondent appealed the trial court’s decision to the

Michigan Court of Appeals; that court, in an unpublished

opinion per curiam entered on May 26, 1995 subscribed to

by only two members of the three-judge panel, reversed

the Court of Claims’ determination.

The Michigan Court of Appeals applied the rational

basis test to Petitioner’s equal protection challenge, stat-

ing that “[a] rational basis for legislation exists when any

set of facts can be reasonably conceived to justify the

discrimination,” App. 8, and found no equal protection

violation in the manner in which Michigan accorded

instrumentalities in interstate commerce — other than

7

Petitioner - exemption under the UTA. According to the

Court of Appeals:

Plaintiff has failed to negate every conceivable

basis that might support the § 4(k) exemption.

The Legislature could rationally have decided to

exempt parts for vessels exceeding five hundred

tons from the use tax because of desire to pro-

mote that industry to locate in Michigan. App. 9.

In a strong dissent, Judge Batzer acknowledged the val-

idity of the reasoning offered by the trial court, stating

that he “too [was] strained to understand the difference”

between Petitioner’s aircraft engaged in the air transport

of freight and other forms of interstate commerce which

receive the benefit of Michigan’s use tax exemptions.

App. 11. As Judge Batzer explained:

Defendant at argument offered that perhaps air-

ports put a strain on state resources in terms of

connecting highways and such. I had thought

thet there were significant federal subsidies for

such highways to alleviate the burden on state

resources, but in any event, do not dock facili-

ties for the loading and unloading of water-

borne cargo and its accompanying land

transportation to its ultimate markets also place

such burdens on highways and other infrastruc-

tures? As to which places the greater burden

would likely, in my view, be measured in cargo

tonnage loaded and unloaded - a figure of

which this Court knows little — and, with all due

deference, was, I suspect, far from the legislative

mind.

In the view of the dissenting judge, no rational basis

exists for a scheme which fails to accord Petitioner the

use tax exemption allowed for similarly-situated opera-

tors in interstate commerce:

A legislative intent to foster the shipping indus-

try is propounded. Perhaps, but why was the

8

shipping industry entitled to such state foster-

ing over the interstate air freight industry? Self-

evident reasons do not jump out... . If there

were an explicit legislative finding on these

issues, I would defer to any such remotely ratio-

nal finding. In the absence of such, I can only

conclude that when it comes to equal protection

in this taxation scheme, the rational basis test

gives way to Orwellian analysis, wherein all of

the similarly situated are equal, but some of the

similarly situated are more equal than others. In

my view there is an equal protection violation

eae

In the absence of any legislative finding, the

proffered “rational basis” for the legislative

exemption for the maintenance and repair of

ships of 500 tons or more, but not for air freight

haulers, strike me not as genuine rational rea-

sons, but as mere pillows held up by defendant

to absorb the attack of plaintiff, until plaintiff, in

frustration and exhaustion, ultimately submits.

If there is a rational basis for the unequal use tax

treatment here, it wholly escapes me. App. 12.

Petitioner unsuccessfully sought a rehearing by the

Michigan Court of Appeals’ panel, App. 14, and then

filed an application for leave to appeal in the Michigan

Supreme Court, which that court denied by order dated

September 27, 1996, App. 15.

Petitioner submits that the Michigan Court of

Appeals majority erred in its derivation of a rational basis

for the legislative design in issue here: promotion of

businesses that ply their trade in interstate commerce at

the expense of this similarly-situated Petitioner, is not a

legitimate purpose justifiably advanced in support of dis-

criminatory tax treatment.

9

REASONS FOR GRANTING THE WRIT

This case presents a fundamental issue, one critical to

constitutional jurisprudence: To what extent may a state,

in its taxing enactments and pronouncements, disparately

tax similarly — situated taxpayers, all of whom conduct

business in interstate commerce, so as to purportedly

encourage a particular industry (or, more appropriately, a

segment of a particular industry) to locate in-state? The

decision of the Michigan Court of Appeals’ majority

endorses Michigan’s patently discriminatory taxing

scheme, in clear violation of equal protection guarantees

found in both the United States and Michigan Constitu-

tions. The statutory and administrative program in issue

here represents nothing other than this state’s effort to

subsidize certain segments of commerce to the express

detriment of other segments of the same industry. Plainly,

air freight carriers should not be made to bear the burden

of a tax that their vessel, rolling stock and passenger

aircraft counterparts need not shoulder. This unlawful

classification unlawfully places Petitioner and those

members of its class at a distinct competitive disadvan-

tage.

The core of this case is directed to the ability of a

state to tax some taxpayers within an industry which has

favored status in our constitutional tradition, while

exempting from taxation other taxpayers within the same

industry. While Michigan undoubtedly is equipped with

wide latitude in fashioning taxing legislation, it simply

does not have the discretion to subject taxpayers — sim-

ilarly-situated in that they are within the same industry

and compete for air freight business in the marketplace -

to different tax treatment, on the flimsy premise that a

particular industry sub-group should be induced to

locate in this state.

10

Disparate tax treatment of this nature flies in the face

of cherished equal protection guarantees set forth in the

federal and state constitutions, whether the rational basis

test or some intermediate level of scrutiny is invoked

under these facts. In many respects, this case is an exten-

sion of the numerous decisions issued by this Court

which condemn, under Commerce Clause principles, stat-

utory classifications which actually or effectively discrim-

inate among participants in interstate commerce. The

Michigan courts have endorsed a discriminatory taxation

scheme which must be declared unconstitutional by this

Court.

ARGUMENT

I. THE DECISION OF THE MICHIGAN COURT

OF APPEALS WHICH UPHELD THE CONSTITU-

TIONALITY OF CERTAIN PORTIONS OF

MICHIGAN’S USE TAX ACT AS WELL AS

RESPONDENT’S APPLICATION AND INTER-

PRETATION OF THE USE TAX PROVISIONS IN

THE FACE OF PETITIONER’S EQUAL PROTEC-

TION CHALLENGE IS IN CONFLICT WITH PRIOR

DECISIONS OF THIS COURT WHICH PROHIBIT

STATES FROM DISCRIMINATING AMONG SIM-

ILARLY-SITUATED TAXPAYERS, AND WHICH

REFLECT THIS COURT’S CRITICISM OF

ECONOMIC-PROTECTIONIST LEGISLATION.

A. APPLICABLE CONSTITUTIONAL DOCTRINE

1. The Equal Protection Clause forbids arbi-

trary distinctions in state tax laws.

In exercising their powers to tax, the states are obli-

gated to adhere to a number of federal constitutional

dictates. One of these requirements is that the tax, in its

i eeaintinnenieniiemediieiiiiiaiiiiaiiiiaiital

11

imposition or administration, must not offend the Equal

Protection Clause of U.S. Const. amend. XIV, § 1. App. 17.

The Equal Protection Clause guards against “arbitrary

distinctions” in state taxation schemes, Williams v. Ver-

mont, 472 U.S. 14, 22 (1985).

2. While a state legislature may classify, its

power to classify is not unfettered.

While the Equal Protection Clause “does not forbid

classifications” but instead is designed to keep “govern-

mental decision-makers from treating differently persons

who are in all relevant respects alike,” Nordlinger v. Hahn,

595 U.S. 1 (1992), citing F S$ Royster Guano Co. v. Virginia,

253 U.S. 412, 415 (1920), the constitutional requirement is

violated when classes are created arbitrarily and are

afforded different treatment without appropriate justi-

fication.

a. The rational basis test inquires as to

whether the offending legislation is rea-

sonably related to a lawful govern-

mental purpose.

As this Court recently had occasion to acknowledge

in Romer v. Evans, 116 S. Ct. 1620 (1996), the reality of

legislative classifications blends with the ideal of the

constitutional guarantee of equal protection through

application of the rational basis test. In Romer, 116 S. Ct.

at 1627, Justice Kennedy observed that:

[t]he Fourteenth Amendment’s promise that no

person shall be denied the equal protection of

the laws must co-exist with the practical neces-

sity that most legislation classifies for one pur-

pose or another, with resulting disadvantage to

various groups or persons. Personnel Administra-

tor of Mass. v. Feeney, 442 U.S. 256 (1979); F.S.

12

Royster Guano Co. v. Virginia, 253 U.S. 412, 415

(1920). We have attempted to reconcile the prin-

ciple with the reality by stating that, if a law

neither burdens a fundamental right nor targets

a suspect class, we will uphold the legislative

classification so long as it bears a rational rela-

tion to some legitimate end.

The rational basis test examines whether a rational

relationship exists between the classification and the

object of the legislation. In general, a statute will survive

an equal protection challenge if it sets forth a classifica-

tion rationally related to a legitimate and identifiable gov-

ernmental interest. In ascertaining whether a statute

arbitrarily or legitimately falls within the legislative

power to classify, however, the Court must consider the

object of the legislation. Even under the “rational basis”

test, the Equal Protection Clause is violated if a statute,

on its face, creates a “wholly arbitrary” distinction. Wil-

liams, supra. And while, under tenets of statutory inter-

pretation, statutes are presumed constitutional, the

presumption of constitutionality is rebuttable and must

give way to the preeminent dictates of this Court that

absolutely forbid discrimination among similarly-situated

taxpayers, and that denounce inequities created by arbi-

trary and unreasonable classifications which fail to fur-

ther any legitimate governmental purpose.

In Romer, 116 S. Ct. at 1627, this Court addressed the

rational basis test at length:

[E]ven in the ordinary equal protection case call-

ing for the most deferential of standards, we

insist on knowing the relation between the clas-

sification adopted and the object to be attained.

The search for the link between classification

and objective gives substance to the Equal Pro-

tection Clause; it provides guidance and disci-

pline for the legislature, which is entitled to

13

know what sorts of laws it can pass; and it

marks the limits of our own authority. In the

ordinary case, a law will be sustained if it can be

said to advance a legitimate government inter-

est, even if the law seems unwise or works to

the disadvantage of a particular group, or if the

rationale for it seems tenuous. See New Orleans

v. Dukes, 427 U.S. 297 (1976) (tourism benefits

justified classification favoring pushcart ven-

dors of certain longevity); Williamson v. Lee Opti-

cal of Okla., Inc., 348 U.S. 483 (1955) (assumed

health concerns justified law favoring optometr-

ists over opticians); Railway Express Agency, Inc.

v. New York, 336 U.S. 106 (1949) (potential traffic

hazards justified exemption of vehicles advertis-

ing the owner’s products from general advertis-

ing ban); Kotch v. Board of River Port Pilot

Comm'rs for Port of New Orleans, 330 U.S. 552

(1947) (licensing scheme that disfavored persons

un¢elated to current river boat pilots justified by

possible efficiency and safety benefits of a

closely knit pilotage system). The laws chal-

lenged in the cases just cited were narrow

enough in scope and grounded in sufficient fac-

tual context for us to ascertain that there existed

some relation between the classification and the

purpose it served. By requiring that the classi-

fication bear a rational relationship to an inde-

pendent and legitimate legislative end, we

ensure that classifications are not drawn for the

purpose of disadvantaging the group burdened

by the law. See United States Railroad Retirement

Bd. v. Fritz, 449 U.S. 166, 181 (1980) (Stevens, J.,

concurring) (“If the adverse impact on the dis-

favored class is an apparent aim of the legisla-

ture, its impartiality would be suspect.”).

Under what circumstances has legisiation been held

to lack a rational relationship to legitimate state interests?

14

In Romer, this Court held that the “sheer breadth” of a

Colorado constitutional amendment which prohibited

statutes, regulations, ordinances, rules and policies bar-

ring discrimination based on sexual orientation “is so

discontinuous with the reasons offered for it that the

amendment seems inexplicable by anything but animus

toward the class that it affects.” Romer, 116 S. Ct. at 1627.

In some settings, it is the unusual character of a discrimi-

natory scheme that draws the attention of the Court to

ascertain whether equal protection guarantees have been

abridged. For example, in Louisville Gas & Elec. Co. v.

Coleman, 277 U.S. 32, 37-38 (1928), this Court stated that

“{djiscriminations of an unusual character especially sug-

gest careful consideration to determine whether they are

obnoxious to the constitutional provision.” Accord,

Romer. Likewise, if a statute is perceived as being outside

“our constitutional tradition,” Romer, at 1628, it may be

that equal protection guarantees have been abridged. “A

law declaring that in general it shall be more difficult for

one group of citizens than for all others to seek aid from

the government is itself a denial of equal protection of the

laws in the most literal sense. The guaranty of equal

protection of the laws is a pledge of the protection of

equal laws.” Shinner v. Oklahoma ex rel. Williamson, 316

U.S. 535, 541 (1942) (quoting Yick Wo v. Hopkins, 118 U.S.

356, 369 (1886)). Romer, 116 S. Ct. 1628. Similarly, if a

review of the conventions that a provision offends dis-

closes that the conventions are venerable, the offending

law may not bear a rational relationship to a legitimate

governmental purpose. See Romer, 116 S. Ct. 1629;

Kadrmas v. Dickinson Public Schools, 487 U.S. 450, 462

(1988).

15

b. The peculiar facts of this case suggest

that a heightened scrutiny must be

undertaken in evaluating Petitioner’s

equal protection claims.

The state’s power to create classifications for taxation

purposes has been critically reviewed by this Court on a

number of occasions. While this Court, on the one hand,

has acknowledged that the rational basis test generally

applies to challenges to economic legislation which rest

on equal protection grounds, FCC v. Beach Communica-

tions, Inc., 508 U.S. 307 (1993), other of this Court’s deci-

sions strongly suggest that a more studied inquiry is

required in the context of discriminatory state taxing

models.

In this vein, Williams, supra, exemplifies this Court’s

determination to adopt a more restrictive standard of

review under the traditional “rational basis” test for clas-

sifications engendered by state tax legislation. In Wil-

liams, the Court considered an equal protection challenge

brought by persons who, formerly residents of other

states, moved to Verment and were required to pay a

special vehicle purchase and use tax to regis.er motor

vehicles purchased outside of Vermont for which a sales

tax already had been paid at the time of acquisition. The

Court found no legitimate purpose furthered by the

facially discriminatory exemption, based as it was upon

the state of residence of the owner of the motor vehicle at

the time of purchase. The Court rejected the analysis

offered by the state that the special use tax met the

“rational basis” standard because persons using the roads

should have the responsibility of paying for the privilege;

the Court observed that wholesale adoption of a “user-

pays” principle contravenes the merit of an exemption

given to persons who, as Vermont residents, purchase

16

vehicles in other states and pay sales taxes to the state of

purchase. Importantly, the Court observed: “To free one

group and not the other from the otherwise applicable tax

burden violates the Equal Protection Clause,” Williams,

472 U.S. at 27.

Similar evidence of this Court’s concerns with the

equal protection implications of discriminatory treatment

at the hands of officials charged with tax administration

is found in Allegheny Pittsburgh Coal Co. v. County Comm.

of Webster County, 488 U.S. 336 (1989), in which the Court

held that assessment practices which created a dichotomy

between assessments for real properties which had been

the subject of recent sales, and assessments for properties

which had not changed hands, violated the equal protec-

tion mandate that a tax be borne equally by persons

positioned within the same classification. Allegheny also

assumes particular importance in the context of this case

to the extent that it patently reaffirms the requirement,

one also identified in Allied Stores of Ohio, Inc. v. Bowers,

358 U.S. 522, 528-529 (1959), that the legislative or admin-

istrative body must disclose the existence of an identifiable

state interest to be served by the complained-of legisla-

tion, rule or administrative pronouncement.

Although a statute imposing a tax (or, as here, a

provision relieving a person from the obligation to pay a

tax) frequently is accorded deference by the courts, Mad-

den v. Kentucky, 209 U.S. 83 (1940), this deference does not

mean that all constitutional inquiry is foreclosed when

the controversy implicates a tax statute. Indeed, in

instances in which a tax enactment also invokes other

important constitutional considerations, this Court has

applied a more stringent level of scrutiny in evaluating

17

whether the statute offends equal protection consider-

ations. In Regan v. Taxation With Representation of Washing-

ton, 461 U.S. 540, 548 (1983), for example, the Court, in its

analysis of an entity’s challenge to the Internal Revenue

Service’s denial of tax-exempt status under 26 U.S.C.

§ 501(c)(3) on First Amendment and equal protection

grounds, stated that an analytical standard more strin-

gent than the rational basis test would apply if “Congress

were to discriminate invidiously in its subsidies in such a

way as to ’ “ai[m] at the suppression of dangerous ideas.

wer)enw

To be sure, discriminatory application of a tax

exemption can represent an infringement upon one or

more significant constitutional rights or directives. In

Speiser v. Randall, 357 U.S. 513, 518 (1958), this Court

observed:

It cannot be gainsaid that a discriminatory

denial of a tax exemption for engaging in speech

is a limitation on free speech. . . . It is settled

that speech can be effectively limited by the

exercise of the taxing power. Grosjean v. Ameri-

can Press Co, 297 U.S. 233. To deny an exemption

to claimants who engage in certain forms of

speech is in effect to penalize them for such

speech. Its deterrent effect is the same as if the

State were to fine them for this speech. The

appellees are plainly mistaken in their argument

that, because a tax exemption is a “privilege” or

“bounty,” its denial may not infringe speech.

This contention did not prevail before the Cali-

fornia courts, which recognized that conditions

imposed upon the granting of privileges or gra-

tuities must be “reasonable.”

In recognition of the need to undertake more diligent

inquiry in instances in which significant constitutional

guarantees or protections are interwoven with the chal-

lenged tax, this Court, in Leathers v. Medlock, 499 U.S. 439,

18

453 (1991), advocated use of a heightened standard of

scrutiny in examining the interplay of a tax enactment

“directed at, or [which] presents the danger of suppress-

ing, particular ideas” protected by the First Amendment

guarantees.

c. Modern constitutional jurisprudence

disapproves of the economic protection-

ism fostered by the legislative and

administrative scheme in issue in this

case.

Although not arising in the context of the Equal

Protection Clause of U.S. Const. amend. XIV, § 1, a

number of other modern decisions of the Court unmis-

takably disapprove of discriminatory tax provisions

which either facially or operatively mirror the state’s

protective posture toward identifiable segments of com-

merce: This Court’s stance, one which requires the elim-

ination of legislation according favored status to

functionally identical business entities, is readily applied

in the context of the even-handed treatment dictated by

traditional equal protection guarantees.

In one such case, Bacchus Imports Ltd. v. Dias, 468 U.S.

263 (1984), this Court, in analyzing a Commerce Clause

attack, confirmed that states may not enact tax provisions

that have the effect of favoring local businesses over

competing interstate entities. According to this Court,

just as discriminatory state statutes enacted for protec-

tionist purposes have been struck down as constitu-

tionally abhorrent, statutes disclosing a policy of favoring

isolated segments of business at the expense of others, so

as to effectively force certain components of interstate

business to subsidize a tax-free status enjoyed by others,

must be declared invalid. This dismemberment of the

19

concept of “economic protectionism” in essence means

that the state is precluded from creating palpably arbi-

trary tax-free zones within its borders which favor one

form of business operation over another. See also, Ameri-

can Trucking Associations, Inc. v. Scheiner, 483 U.S. 266

(1987); Tyler Pipe Industries, Inc. v. Washington Dep't of

Revenue, 483 U.S. 232 (1987); New Energy Co. of Indiana v.

Limbach, 486 U.S. 269, 273-274 (1988).

Recently, in Fulton Corp. v. Faulkner, 116 S. Ct. 848

(1996), this Court, in addressing a case involving discrim-

ination, albeit in the context of Commerce Clause juris-

prudence, invalidated a North Carolina intangibles tax on

shares of corporate stock computed in inverse proportion

to the corporation’s state income tax liability. In render-

ing its determination, this Court observed that “[i]n its

negative aspect, the Commerce Clause ‘prohibits eco-

nomic protectionism — that is, “regulatory measures

designed to benefit in-state economic interests by burden-

ing out-of-state competitors.” ’” Fulton, 116 S. Ct. at 853.

Although the challenge advanced in Fulton was founded

on the Commerce C‘ause - not presently in issue — Fulton

nevertheless has a direct bearing upon the fulcrum of this

case, 1.e., whether some rational basis can be advanced for

Michigan’s discriminatory taxing scheme. The point is

this: If, as Fulton confirms, a state is precluded under the

Commerce Clause from engaging in economic protection-

ism by enacting legislation or adopting regulations or

policies that discriminate against interstate commerce,

then the state, in response to an attack on the legislation

brought on equal protection grounds, should be hard-

pressed to offer that same economic protectionism in

satisfaction of the traditional rational basis test.

Finally, this Court, in the context of Commerce

Clause jurisprudence, has adopted a “virtually per se rule

20

of invalidity” to provisions that patently discriminate

against interstate trade. Philadelphia v. New Jersey, 437 U.S.

617, 624 (1978). This same rule should be applied in

instances where, as here, exemptive provisions set forth

in a state taxing enactment patently discriminate against

one form of interstate commerce in favor of others.

The circumstances of this case disclose that Michigan

has imposed a penalty in the form of a discriminatory

denial of a tax exemption to an actor in a protected zone,

interstate commerce, such that the result of the discrimi-

nation — the placement of a tax on Petitioner in instances

in which other instrumentalities of interstate commerce

escape payment of the tax —- works an impairment or

restraint on interstate commerce.

B. CONSTITUTIONAL DOCTRINE APPLIED IN

THE CONTEXT OF PETITIONER’S FACTS

Application of these constitutional precepts to the situa-

tion at hand amply discloses the propriety of the Court of

Claims’ ruling, and the invalidity of the analysis under-

taken by the two-judge majority of the Court of Appeals.

1. The UTA provisions, considered together

with Respondent’s administrative position,

establish illegitimate and unreasonable

classifications, and evidence a discrimina-

tion that violates equal protection guaran-

tees.

The legislative enactment in issue here imposes “an

excise tax on the use, storage or consumption of tangible

personal property brought into the state in interstate

commerce, after it has come to rest in this state.” Western

Electric Co. v. Dep’t of Revenue, 312 Mich. 582, 596 (1945).

The use tax generally is recognized as an enactment that

21

complements the Michigan sales tax in that it is designed

to extend to those purchases not encompassed by the

latter enactment. National Bank of Detroit v. Dep’t of Reve-

nue, 334 Mich. 132, 141 (1952).

The UTA creates classifications of entities operating

within interstate commerce which are subject to special

statutory exemption. The following exemptions are pro-

vided under the UTA and evidence the unconstitutional

tax scheme adopted by Michigan: (1) Aircraft owned by a

domestic passenger air carrier if used primarily in the

regularly scheduled commercial transport of passengers,

M.C.L. § 205.94(x); M.S.A. § 7.555(4)(x), App. 18; see also

information relating to the legislative history of this pro-

vision at App. 21-30; and (2) vessels designed for com-

mercial use of registered tonnage of 500 tons or more,

when produced upon special order of the purchaser, and

bunker and galley fuel, provisions, supplies, maintenance

and repairs for the exclusive use of a vessel of 500 tons or

more engaged in interstate commerce, M.C.L. § 205.94(k);

M.S.A. § 7.555(4)(k), App. 18; are expressly exempt from

payment of the tax. In addition, Respondent, by adminis-

trative action, has stated its determination that rolling

stock purchased out of state and placed into interstate

commerce is not subject to use tax, Department of Treas-

ury Letter Ruling 89-48, App. 19. The Equal Protection

Clause does not solely serve as a constitutional limitation

upon actions undertaken by legislative bodies, but also

exists as a restraint upon actions taken by administrative

officials in the exercise of their duties in collecting a tax.

Raymond v. Chicago Union Traction Co, 207 U.S. 20 (1907).

In the decision it issued in this case, the two-judge

majority of the Michigan Court of Appeals opined that

the Michigan legislature could rationally have decided to

exempt parts for vessels exceeding 500 tons from the use

22

tax in recognition of its desire to prompt that industry to

locate in Michigan, App. 9. The Court apparently viewed

rolling stock in the same manner. However, a reading of

the Court of Appeals’ majority opinion reveals that the

court incorrectly presupposed that Petitioner and other

cargo carriers were not members of the “same class.”

While the daily activities carried on by these taxpayers

may differ to the extent they are conducted in, or on,

different media (air v. water v. ground), an appropriate

and serious analysis of the question presented must

result in a conclusion that boats, aircraft and rolling stock

are intrinsically identical to the extent that all are

involved in cargo transportation activities within the

channels of interstate commerce. Viewed from this van-

tage, it is readily apparent that Petitioner has been

improperly targeted for discriminatory treatment by

being subjected to taxes not imposed upon identically-

situated members of the same class — here, air, water and

ground cargo transport businesses. Given its placement

within the same class as those industries which have been

selected for favorable tax treatment, Petitioner finds itself

at a distinct competitive disadvantage, as it is made to

pay use tax when others identically situated are exempt.

2. A desire to encourage industry to locate in

the state cannot justify discriminatory taxa-

tion among members of the same class.

As this Court noted in Nordlinger, 505 U.S. at 15,

appellate review of an equal protection challenge akin to

that advanced in this case requires consideration of

whether the discriminatory classification is supported by

a reasonable and identifiable governmental objective:

23

To be sure, the Equal Protection Clause does not

demand for purposes of rational basis review

that a legislature or governing decision maker

actually articulate at any time the purpose or

rationale supporting its classification . . . Never-

theless, this Court’s review does require that a

purpose may conceivably or ‘may reasonably

have been the purpose and policy’ of the rele-

vant governmental decision maker. Allied Stores

of Ohio, Inc v. Bowers, 358 U.S. 522, 528-529

(1959). See also, Schweiker v. Wilson, 450 U.S. 221,

235 (1981) (classification scheme must ‘ratio-

nally advance a reasonable and identifiable gov-

ernmental objective’) (emphasis added).

In Romer, this Court again stated that there must be a

“link” between the classification and the object of the

statute. Romer, 116 S. Ct. 1627.

The only justification offered by the Michigan Court

of Appeals for the discriminatory classification scheme

embodied in the UTA was that the Michigan legislature

could have decided to exempt parts for certain vessels

from use tax because of its “desire to promote that indus-

try to locate in Michigan.” The Michigan legislature chose

to further this object by imposing different tax burdens

upon members of the same industry, in effect subsidizing

those businesses eligible for exemption, see Regan v. Taxa-

tion With Representation, 461 U.S. at 544, in which this

Court observed that “[b]oth tax exemptions and tax

deductibility are a form of subsidy that is administered

through the tax system. A tax exemption has much the

same effect as a cash grant to the organization of the

amount of tax it would have to pay on its income.” This

governmental interest does not justify the discrimination

among members of the same industry, and clearly does

24

not provide a “rational basis” for the disputed classifica-

tion. Indeed, dissenting Court of Appeals Judge Batzer

would have ruled —- correctly —- “that when it comes to

equal protection in this taxation scheme, the rational

basis test gives way to Orwellian analysis, wherein all of

the similarly situated are equal, but some of the similarly

situated are more equal than others.” App. 12.

The motive behind the legislative and administrative

treatment in issue here represents nothing more than an

unveiled intent to bestow the favor of tax exemption

upon those isolated interest groups which have been able

to muster lobbying efforts sufficiently intensive and per-

suasive to carry the day. This is the very form of eco-

nomic protectionism to which this Court has heralded an

end. Michigan’s blatant discriminatory intent is con-

firmed by the legislative history of the exemption

extended to domestic passenger air carriers, M.C.L.

§ 205.94(x); M.S.A. § 7.555(4)(x), which discloses that the

enactment was expressly designed to benefit a single

(former) Michigan airline company, see House Legislative

Analysis Section, First Analysis to House Bill 5801

(11/20/94), App. 25-26. In specifically removing the bur-

den of the use tax from the shoulders of precisely identi-

fied entities operating within interstate commerce by

according them the privilege of exemption or exclusion,

while continuing to require Petitioner to bear the brunt of

the taxing scheme, the Micligan legislature and Respon-

dent have engaged in actions which have violated Peti-

tioner’s right to equal protection, Williams, supra. Quite

simply, the state cannot confer favored status to certain

areas it believes warrant attention to the exclusion of

others which are deserving of the same quantum of rec-

ognition, Leathers, supra. Moreover, the administrative

25

treatment disclosed in Letter Ruling 89-48 evidences

Respondent’s discrimination against aircraft cargo car-

riers such as Petitioner.

No natural distinguishing characteristics exist

between those classifications for which exemptions have

been provided and aircraft or their constituent parts used

by Petitioner to transport freight. The Court of Claims

accurately determined that the state can advance no legit-

imate purpose served by permitting a use tax exemption

for this highly-selective triad of instrumentalities of inter-

state commerce to the complete and unwarranted exclu-

sion of Petitioner, App. 1-6. This case does not concern a

situation in which the legislature or administrative offi-

cial has promulgated different taxing enactments applica-

ble to varied business activities, but instead evinces a

heinous division which requires one entity — Petitioner -

to bear the full brunt of a taxing enactment while others

who, from a factual premise are indistinguishable, are

permitted to wholly avoid application of the same tax.

Because “[t]he Equal Protection Clause . . . protects the

individual from state action which selects him out for

discriminatory treatment by subjecting him to taxes not

imposed on others of the same class” Allegheny, 488 U.S.

at 345, it is evident that the classification scheme here

cannot withstand constitutional scrutiny.

What is the effect, then, of Michigan use tax exemp-

tions which subsidize some forms of interstate commerce

to the detriment of others? Certainly, the lack of availabil-

ity of an exemption to Petitioner has the effect of discrim-

inating against, and of curbing, the extent and

effectiveness of Petitioner’s interstate operations. If not

now, eventually, other forms of interstate commerce will

assume a primary role, with the obvious result that some

26

instrumentalities of interstate commerce, to the extent

they are subsidized through Michigan’s offering of a use

tax exemption, will flourish, while others, like Peti-

tioner’s aircraft, will languish. The dormant Commerce

Clause reflects Congress’ absolute dictate that interstate

commerce be permitted to thrive unfettered by states’

taxing mechanisms. However, Michigan's exemptive

scheme under the UTA - while partially in step with

Congressional intent — significantly departs from that

intent in failing to accord a like exemption for Peti-

tioner’s aircraft for the years in issue in this case.

While nothing in the federal or state constitutions

requires that the Michigan legislature confer subsidies on

instrumentalities of interstate commerce, a determination

on the part of state government to subsidize one actor in

interstate commerce requires that the benefits of the same

subsidy be awarded to all who similarly operate in inter-

state channels. That principle of equality long ago was

established by this Court in its decision in Smith v.

Cahoon, 283 U.S. 553 (1931), in which a private carrier for

hire mounted an equal protection challenge to a regula-

tory enactment that exempted transportation carriers

engaged in hauling certain types of products from a

bonding requirement, but imposed the requirement on

other carriers. According to the Court:

[T]he constitutional guaranty of equal protection

of the laws is interposed against discriminations

that are entirely arbitrary. In determining what is

within the range of discretion and what is arbi-

trary, regard must be had to the particular subject

of the State’s action. In the present instance, the

regulation as to the giving of a bond or insur-

ance policy to protect the public generally, in

order to be sustained, must be deemed to relate

27

to the public safety. This is a matter of grave

concern as the highways become increasingly

crowded with motor vehicles, and we entertain

no doubt of the power of the State to insist upon

suitable protection for the public against injuries

through the operations on its highways of car-

riers for hire, whether they are common carriers

or private carriers. But in establishing such a

regulation, there does not appear to be the

slightest justification for making a distinction

between those who carry for hire farm products,

or milk or butter, or fish or oysters, and those

who carry for hire bread or sugar, or tea or

coffee, or groceries in general, or other useful

commodities. So far as the statute was designed

to safeguard the public with respect to the use

of the highways, we think that the discrimina-

tion it makes between the private carriers which

are relieved of the necessity of obtaining certifi-

cates and giving security, and a carrier such as

the appeliant, was wholly arbitrary and consti-

tuted a violation of the appellant’s constitu-

tional right. ‘Such a classification is not based on

anything having relation to the purpose for

which it is made.’ Cahoon, 283 U.S. at 566-567.

Our constitutional tradition ascribes great value to unre-

strained trade among the states. This tradition is sadly

| diminished when a state accords exemption from taxation

to some forms of interstate commerce, but not to others,

effectively making some interstate trade more free than

others.

The justification for the legislation proffered by the

Michigan Court of Appeals is an illegitimate govern-

mental objective and is in conflict with this Court's prece-

dent. While “a state’s goal of bringing in new business is

legitimate and often admirable,” Metropolitan Life Ins Co.

28

v. Ward, 470 U.S. 869, 879 (1985), this purpose cannot be

impermissibly discriminatory. In a different context, the

Court in Metropolitan Life recognized that “the fact that

promotion of local industry is a legitimate state interest

in the Commerce Clause context, says nothing about its

validity under equal protection analysis.” Metropolitan

Life, 470 U.S. at 876, fn 6. In Metropolitan Life, this Court

observed that its previous decision in Allied Stores, supra,

did not hold that promoting domestic business by dis-

criminating against foreign businesses is legitimate.

Instead, since the foreign and domestic companies

involved in that case were not competing to provide

warehousing services, granting the former an exemption

did not directly affect adversely domestic companies sub-

ject to the tax. The situation presented by this case is

precisely that about which this Court in Metropolitan Life

was concerned. Here, the various instrumentalities of

interstate commerce which have been granted exempt

status directly compete with air cargo transporters such

as Petitioner; thus, a legislative enactment and an admin-

istrative interpretation which accord exemptions to some

members of the class of interstate carriers to the exclusion

of one member of that class directly disadvantage the

excluded commercial participant.

Although Metropolitan Life and Allied Stores involved

the distinction between domestic and foreign companies,

the rationale employed in those cases is equally applica-

ble here. Petitioner is in the cargo transport business and,

as such, competes directly with other cargo transport

businesses -- be they transport by land, air or sea. The

“reasonable” basis for the exemption offered by the Mich-

igan Court of Appeals in its opinion does not justify the

discrimination. In Metropolitan Life, this Court recognized

29

that “acceptance of [the state’s] contention that promo-

tion of domestic industries is always a legitimate state

purpose under equal protection analysis would eviscerate

the Equal Protection Clause in this context.” 470 U.S. at

882. The state cannot confer favored status upon certain

segments of an industry that it believes warrant attention

to the exclusion of others in the same industry who are

then placed at a distinct competitive disadvantage.

Because no “state of facts reasonably can be con-

ceived that would sustain” the discriminatory tax classi-

fication evident in this case, Allied Stores, 358 U.S. at 528,

the classification in question impermissibly offends the

equal protection guarantees provided under federal and

state constitutional provisions and cannot be sustained.

Further, to the extent that an intermediate or heightened

scrutiny is invoked when examining equal protection

challenges to legislation or administrative pronounce-

ments that implicate other constitutional considerations -

such as the Commerce Clause - the Michigan scheme

most certainly fails.

30

CONCLUSION

For the foregoing reasons, this petition for a writ of

certiorari should be granted.

Respectfully submitted:

Howarp & Howarp Atrorneys, P.C.

Patrick R. VAN TIFLIN

MicHete L. HALLORAN

Kim D. Crooxs

Donna M. CLARKE

The Phoenix Building, Suite 500

222 Washington Square, North

Lansing, Michigan 48933-1817

Telephone: (517) 485-1483

App. i

STATE OF MICHIGAN

COURT OF CLAIMS

ZANTOP INTERNATIONAL

AIRLINES, INC.,

Plaintiff, File No. 91-13365-CM

Vv Hon. Thomas L. Brown

REVENUE DIVISION,

DEPARTMENT OF OPINION AND ORDER

TREASURY, STATE OF

MICHIGAN

Defendant.

Plaintiff in this action moves the Court for summary

disposition pursuant to MCR 2.116(C)(10) on Count III of

its complaint in that except as to the amount of damages,

there is no genuine issue as tc any material fact, and the

moving party is entitled to judgment as a matter of law.

Plaintiff, a Michigan corporation, operates a fleet of

aircraft in the conduct of an interstate and foreign air

freight delivery business. In the course of its business,

Plaintiff is required by the Federal Aviation Administra-

tion (FAA) to replace, repair or rebuild certain parts,

referred to as “rotable parts”. To comply with the FAA,

Plaintiff shipped these “rotable parts” to vendors outside

of Michigan for repair during the taxable period in ques-

tion. When these “rotable parts” were repaired the parts

were sent back to Plaintiff who reinstalled them on its

aircraft.

App. 2

In 1990, Defendant conducted a sales and use tax

audit on Plaintiff. As a result of this audit, Defendant

determined that Plaintiff owed use taxes on these “rota-

ble parts” in the amount of $757,275.72 including interest

and penalties.

In Count III of its complaint, Plaintiff alleges that the

Michigan Use Tax, 137 PA 94, as amended, MCL 205.91 et

seq; MSA 7.555(6) et seq; violates Plaintiff’s right to equal

protection of the law as guaranteed by the United States

Constitution under the Fourteenth Amendment and the

Michigan Constitution of 1963, Article 1, Section 2. Speci-

fically, Plaintiff contends that the legislature’s action of

creating classifications of modes of interstate commerce

which are exempt and Defendant's issuance of a Letter

Ruling concerning the exemption of rolling stock, are

evidence of its alleged equal protection claim.

The exemptions at issue cited by Plaintiff arise pur-

suant to MCL 205.94; (k) and (x); MSA 7.555, (4) (k) and

(x) which states in pertinent:

The tax levied shall not apply to:

(k) A vessel designed for commercial use of

registered tonnage of 500 tons or more, when

produced upon special order of the purchaser,

and bunker and galley fuel, provisions, sup-

plies, maintenance, and repairs for exclusive use

of a vessel of 500 tons or more engaged in

interstate commerce.

(x) The storage, use, or consumption of any

aircraft owned or used by a domestic passenger

air carrier operating under a certificate issued

by the civil aeronautics board pursuant to sec-

tion 401 of title IV of the federal aviation act of

a eT yen Se TST

App. 3

1958, 49 U.S.C. 1371, if the aircraft is used pri-

marily in the regularly scheduled commercial

transport of passengers.

Further, the Letter Ruling cited by Plaintiff in sup-

port of its position states in pertinent part:

89-48. Interstate versus Intrastate Rolling stock.

You inquire regarding the taxability of rolling

stock purchased out of state and placed into

interstate commerce outside of Michigan. The

vehicles subsequently are converted to use in

intrastate commerce in Michigan.

* * *

.. . [I]t is the Department's position that rolling

stock purchased and placed into interstate com-

merce in another state but subsequently con-

verted in Michigan is subject to use tax at the

time of conversion.

The Michigan Court of Appeals in American Amuse-

ment Company Inc. v Department of Treasury, 91 Mich App

573; 253 NW2d 800 (1979), addressed the issue of equal

protection violations with regards to a state’s taxation

scheme. The Michigan Court of Appeals quoting an ear-

lier case stated at 577:

[T]here is a point beyond which the State cannot

go without violating the Equal Protection

Clause. The state must proceed upon a rational

basis and may not resort to a classification that

is palpably arbitrary. The rule often has been

stated to be that the classification must rest

upon some ground of difference having a fair

and substantial relation to the object of the legis-

lation . .. That statute may discriminate in favor

of a certain class does not render it arbitrary if

App. 4

the discrimination is founded upon a reasonable

distinction, or difference in state policy.

In applying this rational basis test the Court must

determine whether there is a rational relationship

between the object of the legislation and the classifica-

tion. After review of the proofs in this case the Court is of

the opinion that there is no rational classification.

The Court agrees with the Defendant’s averment as

to the exemption applicable to aircraft owned by a

domestic airline as set forth by MCL 205.95(x); MSA

7.555(4)(x). Clearly, this exemption only pertains to the

storage, use, or consumption of aircraft owned and uti-

lized in the commercial transportation of passengers.

There is no mention, either expressly or impliedly, that

said exemption applies to parts of the aircraft. In fact,

according to the affidavit of Jesse Weaver, Defendant

does tax those parts. Moreover, Plaintiff’s own aircraft

are not subject to taxation under the Michigan Sales or

the Michigan Use Tax.

Furthermore, the Court concedes that the subject of

the Letter Ruling, that being rolling stock, is remotely

similar factually to Plaintiff’s situation. The Court takes

notice that Letter Rulings are issued by the Department in

response to specific questions and fact situations pre-

sented by a taxpayer and that they are not to be relied on

by other taxpayers. However, Letter Rulings do provide

some guidance regarding the Department's position in a

given situation. This point is important in the context of

this case.

However, the Court finds that the exemption applica-

ble to commercial vessels of 500 tons or more set forth in

App. 5

MCL 205.94(k); MSA 7.555(4)(k) more closely parallels

Plaintiff’s situation. Both Plaintiff and businesses which

fall under this exemption are involved in interstate com-

merce and shipping freight. The main difference between

the two, not taking into account superficial differences, is

that one utilizes a ship while the other utilizes aircraft.

The Court is strained to understand the differences

afforded these two modes of interstate commerce that

warrant one form to receive use tax relief with respect to

“provisions, supplies, maintenance, and repairs” while

the other is not.

The United States Supreme Court in Williams v Ver-

mont, 472 US 14; 105 S Ct 2465; 86 L Ed 2d 11 (1985),

quoting an earlier case held at page 19 that “the states

have large leeway in making classifications and drawing

lines which in their judgment produce reasonable sys-

tems of taxation”.

In determining whether a particular taxation scheme

is rationally based, the Michigan Court of Appeals in

American Amusement supra, quoting an earlier case dis-

cussed the application of the equal protection clause

within the context of a state’s taxation scheme. The Mich-

igan Court of Appeals held at 577 that the equal protec-

tion clause:

“impose no iron rule of equality, prohibiting the

flexibility and variety that are appropriate to

reasonable scheme of state taxation. The state

may impose different specific taxes upon differ-

ent trades and professions and may very [sic]

the rate of excise upon various products. It is

not required to resort to close distinctions or to

maintain a precise, scientific uniformity with

App. 6

reference to composition, use or value. [citation

omitted]

The Court finds that when read individually, Plain-

tiff’s averments as to the applicability of the exemptions

available under the Michigan Use Tax and the Letter

Ruling at issue are weakened by their differences to

Plaintiff’s situation.

However, it is the opinion of the Court that, when

read as a whole the exemptions to the Michigan Use Tax

evidence an arbitrary approach by Defendant as it applies

to the taxation of different instrumentalities of interstate

commerce in violation of equal protection.

Therefore, the Court finds that Plaintiff’s allegations

in Count III have merit. Thus, Plaintiff’s motion for sum-

mary disposition as to Count III is GRANTED.

Date: 2-26-92 /s/ Thomas L. Brown

Thomas L. Brown, Circuit Judge

App. 7

STATE OF MICHIGAN

COURT OF APPEALS

ZANTOP INTERNATIONAL a pone

AIRLINES INC., ay <0,

Plaintiff-Appellee, No. 152381

Vv L.C. No. 91-013365

DEPARTMENT OF TREASURY,

Defendant-Appellant.

Before: Fitzgerald, PJ., and Brennan, and Batzer,” JJ.

PER CURIAM.

Defendant appeals from an order of summary dispo-

sition in favor of plaintiff. We reverse and remand.

Defendant’s sole claim on appeal is that the trial

court erred in finding that the use tax exemption con-

tained in MCL 205.94(k); MSA 7.555(4)(k), was arbitrary

and violated the equal protection clauses of the United

States and Michigan Constitutions. We agree.

Equal protection of the law is guaranteed by both the

federal and the state constitutions. US Const, Am XIV;

Const 1963, art 1, § 2. Both guarantees afford similar

protection. Doe v Dep't of Social Services, 439 Mich 650,

* Circuit judge, sitting on the Court of Appeals by

assignment.

App. 8

670-671; 487 NW2d 166 (1992). The equal protection guar-

antee requires that all persons under similar circum-

stances be treated alike. El Souri v Dep’t of Social Services,

429 Mich 203, 207; 414 NW2d 679 (1987). Equal protection

does not require that persons in different circumstances

be treated the same. Thompson v Merritt (Amended Opin-

ion), 192 Mich App 412, 424; 481 NW2d 735 (1991). When

a legislative classification is challenged as violative of the

equal protection guarantee, the test to determine its val-

idity depends on the kind of classification and the nature

of the interest affected. Id. at 424-425.

Social and economic legislation is examined under

the traditional “rational basis” test. People v Perlos, 436

Mich 305, 331; 462 NW2d 310 (1990); Rouge Parkway Asso-

ciates v City of Wayne, 423 Mich 411, 421-422; 377 NW2d

748 (1985). Under the rational basis test, legislation is

presumed to be constitutional and must be sustained if

the classification is rationally related to a legitimate gov-

ernmental purpose or interest. Doe, supra at 662; Bissell v

Kommareddi, 202 Mich App 578, 580; 509 NW2d 542

(1993). The burden of proof is on the person attacking the

legislation to show that the state failure to tax similarly

situated enterprises uniformly was arbitrary, intentional,

and knowing rather than a mistake or the result of an

inadvertence. Kellogg Co v Dep't of Treasury, 204 Mich App

489, 496; 516 NW2d 108 (1994); Orion Twp v State Tax

Commission, 195 Mich App 13, 17; 489 NW2d 120 (1992). A

rational basis for legislation exists when any set of facts

can be reasonably conceived to justify the discrimination.

Kellogg, supra at 496; Wartella v East Detroit, 161 Mich App

522, 556; 411 NW2d 751 (1987).

App. 9

The Use Tax Act, MCL 205.91 et seq; MSA 7.555(1) et

seq, provides in pertinent part for the following exemp-

tions:

(k) A vessel designed for commercial use

of registered tonnage of 500 tons or more, if

produced upon special order of the purchaser,

and bunker and galley fuel, provisions, sup-

plies, maintenance, and repairs for the exclusive

use of a vessel of 500 tons or more engaged in

interstate commerce.

* * *

(x) The storage, use, or consumption of

any aircraft owned or used by a domestic pas-

senger air carrier operating under a certificate

issued by the United States department of trans-

portation pursuant to section 401 of title IV of

the federal aviation act of 1958, Public Law

85-726, 49 U.S.C. 1371, if the aircraft is used

primarily in the regularly scheduled commercial

transport of passengers. [MCL 205.94(k), (x);

MSA 7.555(4)(k), (x).]

Despite plaintiff's arguments to the contrary, we are

convinced that the legislature’s failure to exempt air

freight plane parts from the use tax, in a manner consis-

tent with commercial vessels of 500 tons or more, was not

a violation of equal protection. Plaintiff has failed to

negate every conceivable basis that might support the

§ 4(k) exemption. The Legislature could rationally have

decided to exempt parts for vessels exceeding five hun-

dred tons from the use tax because of desire to promote

that industry to locate in Michigan. We would add that

our conclusion is not affected by the exemption contained

App. 10

in § 4(x) because that exemption is limited to the storage,

use, or consumption of a domestic passenger aircraft.

Reversed and remanded.

/s/ E. Thomas Fitzgerald

/s/ Thomas J. Brennan

BATZER, J. (dissenting).

Plaintiff Michigan corporation is an interstate and

foreign carrier of air cargo. Plaintiff conducts its inter-

state and foreign air freight delivery business among and

between approximately forty-five to fifty airports includ-

ing Willow Run Airport in Ypsilanti. As an air carrier

subject to Federal Aviation Administration Rules and

Regulations, plaintiff is required to repair and replace on

a periodic basis and schedule specified by the FAA cer-

tain critical parts to its aircraft called “rotable parts.”

These “rotable parts” important to the context of this case

include engines, engine components, propellers, and

other critical operating parts.

The engines, propellers, and components are peri-

odically removed from plaintiff’s aircraft pursuant to

FAA maintenance schedules, and sent to repair facilities

outside the State of Michigan where they undergo routine

and specified repair, replacement, overhaul, and upgrad-

ing. When the repair and overhaul are completed, they

are returned to plaintiff, reinstalled on the aircraft, and

the aircraft are placed back into service hauling air

freight.

The State of Michigan imposes a use tax on plaintiff’s

costs incurred in the repair and replacement of these

—

App. 11

“rotable parts” on the theory that plaintiff is using, stor-

ing, Or consuming the parts in Michigan, separate and

apart from its operations in interstate commerce.

On the other hand, the maintenance and repair of

vessels of 500 tons or more engaged in interstate on the

Great Lakes is exempt from Michigan’s use tax to which

plaintiff is subject. Plaintiff claims that this different use

tax treatment violates its constitutional right to the equal

protection of the laws.

In 1990, defendant conducted a sales and use tax

audit on plaintiff. As a result of the audit, defendant

determined that plaintiff owed use taxes on these “rota-

ble parts” in the amount of $757,275.72, including interest

and penalties.

Both plaintiff and business with vessels of 500 tons or

more engaged in Great Lakes shipping are involved in

interstate commerce and shipping freight. As the trial

judge observed in his well-considered opinion below:

The main different between the two, not

taking into account superficial differences, is

that one utilizes a ship while the other aircraft.

The Court is strained to understand the differ-

ences afforded these two modes of interstate

commerce that warrant one form to receive use

tax relief with respect to “provisions, supplies,

maintenance and repairs” while the other is not.

I, too, am strained to understand the difference.

Defendant at argument offered that perhaps airports put

a strain on state resources in terms of connecting high-

ways and such. I had thought that there were significant

App. 12

federal subsidies for such highways to alleviate the bur-

den on state resources, but in any event, do not dock

facilities for the loading and unloading of waterborne

cargo and its accompanying land transportation to its

ultimate markets also place such burdens on highways

and other infrastructures? As to which places the greater

burden would likely, in my view, be measured in cargo

tonnage loaded and unloaded - a figure of which this

Court knows little — and, with all due deference, was, I

suspect, far from the legislative mind.

A legislative intent to foster the shipping industry is

propounded. Perhaps, but why was t ie shipping industry

entitled to such state fostering over the interstate air

freight industry? Self-evident reasons do not jump out.

And why is the interstate air freight industry now being

fostered through subsequent legislation which tempo-

rarily has abrogated the tax? If there were an explicit

legislative finding on these issues, I would defer to any

such remotely rational finding. In the absence of such, I

can only conclude that when it comes to equal protection

in this taxation scheme, the rational basis test gives way

to Orwellian analysis, wherein all of the similarly situ-

ated are equal, but some of the similarly situated are

more equal than others. In my view there is an equal

protection violation here. Williams v Vermont, 472 US 14,

22; 105 S Ct 2465; 86 L Ed 2d 11 (1865); Allegheny Pitts-

burgh Coal Co v Co Comm of Webster Co, 488 US 336; 109 S

Ct 633; 102 L Ed 2d 688 (1989); Racchus Imports Ltd v Dias,

468 US 263; 104 S Ct 3049; 82 L Ed 2d 200 (1984). See also

MCI Telecomm Corp v Dep't of Treasury, 136 Mich App 38;

355 NW2d 627 (1984).

App. 13

In the absence of any legislative finding, the prof-

fered “rational basis” for the legislative exemption for the

maintenance and repair of ships of 500 tons or more, but

not for air freight haulers, strike me not as genuine

rational reasons, but as mere pillows held up by defen-

dant to absorb the attack of plaintiff, until plaintiff, in

frustration and exhaustion, ultimately submits.

If there is a rational basis for the unequal use tax

treatment here, it wholly escapes me. I would affirm.

/s/ James M. Batzer

App. 14

Court of Appeals, State of Michigan

CRDER

ZANTOP E. Thomas Fitzgerald

INTERNATIONAL —

AIRLINES v Presiding Judge

DEPT OF TREASURY Thomas J. Brennan

Docket # 152381 James M. Batzer

L.C. # 91-13365-CM Judges

The Court orders that the motion for rehearing is

DENIED.

Judge Batzer would grant rehearing.

A true copy entered and certified by Ella Williams, Chief

Clerk, on

[SEALINOV 28 1995

Date /s/ Ella Williams

Chief Clerk

App. 15

APPENDIX

Michigan Supreme Court

Lansing, Michigan

ORDER

Entered: September 27, 1996

James H. Brickley

Chief Justice

Charles L. Levin

105137 Michael F. Cavanagh

Patricia J. Boyle

Dorothy Comstock Riley

Conrad L. Mallett, Jr.

Elizabeth A. Weaver

Justices

ZANTOP INTERNATIONAL

AIRLINES, INC.,

ae SC: 105137

Plaintiff-Appellant, COA: 152381

Vv CC: 91-013365

REVENUE DIVISION,

MICHIGAN DEPARTMENT OF

TREASURY,

Defendant-Appellee.

On order of the Court, the application for leave to

appeal is considered, and it is DENIED, because we are

not persuaded that the questions presented should be

reviewed by this Court.

App. 16

60924

[SEAL]

I, CORBIN R. DAVIS, Clerk of the Michigan Supreme

Court, certify that the foregoing is a true and complete

copy of the order entered at the direction of the Court.

September 27, 1996

/s/ Jacqueline B. MacKinnon

Deputy Clerk

App. 17

AMENDMENT XIV - CITIZENSHIP; PRIVILEGES

AND IMMUNITIES; DUE PROCESS; EQUAL PROTEC-

TION; APPORTIONMENT OF REPRESENTATION;

DISQUALIFICATION OF OFFICERS; PUBLIC DEBT:

ENFORCEMENT

Section 1. All persons born or naturalized in the

United States, and subject to the jurisdiction thereof, are

citizens of the United States and of the State wherein they

reside. No State shall make or enforce any law which

shall abridge the privileges or immunities of citizens of

the United States; nor shall any State deprive any person

of life, liberty, or property, without due process of law;

nor deny to any person within its jurisdiction the equal

protection of the laws.

ne

Art. 1, § 2 CONSTITUTION OF 1963

§ 2. Equal protection; discrimination

Sec. 2. No person shall be denied the equal protec-

tion of the laws; nor shall any person be denied the

enjoyment of his civil or political rights or be discrimi-

nated against in the exercise thereof because of religion,

race, color or national origin. The legislature shall imple-

ment this section by appropriate legislation.

App. 18

205.94. Exemptions

Sec. 4. The tax levied shall not apply to:

Commercial vessels of 500 tons or

more, supplies, repairs

(k) A vessel designed for commercial use of regis-

tered tonnage of 500 tons or more, when produced upon

special order of the purchaser, and bunker and galley

fuel, provisions, supplies, maintenance, and repairs for

the exclusive use of a vessel of 500 tons or more engaged

in interstate commerce.

205.94 Exemptions

Sec. 4. The tax levied shall not apply to:

* * *

Storage, use, or consumption of aircraft

(x) The storage, use, or consumption of any aircraft

owned or used by a domestic passenger air carrier oper-

ating under a certificate issued by the civil aeronautics

board pursuant to section 401 of title IV of the federal

aviation act of 1958, 49 U.S.C. 1371, if the aircraft is used

primarily in the regularly scheduled commercial trans-

port of passengers.

App. 19

89-48. Interstate Versus Intrastate Rolling Stock

You inquire regarding the taxability of rolling stock pur-

chased out of state and placed into interstate commerce

outside of Michigan. The vehicles subsequently are con-

verted to use in intrastate commerce in Michigan.

In Complete Auto Transit, Inc. v. Charles R. Brady, Jr., 430

US 274 (1977), the United States Supreme Court rejected

the view that the states cannot tax interstate commerce

but did impose limits on state taxation of interstate com-

merce. In Complete Auto Transit, the Court determined

that a state’s tax would be constitutionally valid provided

it meets the following four-prong test:

1. It applies to an activity with a substantial

nexus within the taxing state,

2. it is fairly apportioned,

3. it does not discriminate against interstate

commerce, and

4. itis fairly related to the services provided by

the state.

Using the four prong test, the following conciusions can

be made:

1. In the instant case, the taxpayer clearly has

substantial nexus with Michigan due to its

intrastate trucking activity.

2. The Michigan use tax is fairly apportioned.

No other state will tax the vehicles as the

use is entirely within Michigan.

3. The Michigan use tax does not discriminate

against interstate commerce because the

property has become a part of the mass of

property within this state.

App. 20

4. The taxpayer receives the benefits of ser-

vices such as police and fire protection, and

particularly use of the roads in this state.

It appears that all four prongs of the Complete Auto Transit

test are satisfied under the facts you present. Therefore, it

is the Department’s position that rolling stock purchased

and placed into interstate commerce in another state but

subsequently converted to intrastate commerce in Michi-

gan is subject to use tax at the time of conversion. See

MCL 205.91 et seq.

August 15, 1989 Louis W. Duncan

LR 89-48 Acting Commissioner of

Revenue

App. 21

LEGISLATIVE HISTORY OF MICHIGAN

USE TAX ACT (“UTA”) EXEMPTIONS FOR

INSTRUMENTALITIES OF INTERSTATE COMMERCE

The §4(k) exemption for certain water vessels was

adopted by the Michigan Legislature in 1949 [1949 Public

Act 273 (effective July 1, 1949)] and has undergone no

substantive change since its original adoption. The §4(x)

exemption is of more recent vintage. It was adopted by

the Michigan Legislature in 1984 [1984 Public Act 288

(effective 12/20/84)] and has undergone significant

recent revision.

Under the 1984 version of the UTA, the aircraft

exemption was limited to aircraft owned or used by a

domestic air carrier if the aircraft was used primarily in

the regularly scheduled commercial transport of pas-

sengers. The First Analysis to House Bill 5801, which was

prepared by the Michigan House of Representatives Leg-

islative Analysis Section shortly before the adoption of

Public Act 288 of 1984, reflects that the Michigan legisla-

ture recognized, at that time, that passenger air carriers

not domiciled in the state of Michigan could exercise

dominion over their aircraft within Michigan free of use

tax as long as they remained in the stream of commerce

or were placed in the stream of commerce prior to enter-

ing the state of Michigan. (See this App. 25) The 1984

legislation was introduced to accommodate one airline -

Simmons — which was a Michigan airline that was

required to take delivery of aircraft outside the state of

Michigan and employ them in the interstate transport of

commercial passengers prior to bringing the aircraft into

the state in order to avoid paying Michigan’s 4 percent

use tax on the entire acquisition price of the aircraft. So,

App. 22

since 1984, Michigan law has clearly recognized that the

storage, use or consumption of aircraft used in the com-

mercial transport of passengers is exempt from use tax.

Public Act 214 of 1994 then altered this exemption to:

(i) include aircraft used in the transport of “air cargo”

within its scope, and (ii) expand the scope of the pas-

senger aircraft exemption. After Public Act 214 of 1994,

the exemption read:

The storage, use, or consumption of any

aircraft owned or used by a domestic air carrier

operating under a certificate issued by the

United States Department of Transportation

pursuant to §401 of Title IV of the Federal Avia-

tion Act of 1958, Public Law 85-726, 49 U.S.C.

Appx. 1371-1376 and 1377-1389, if the aircraft is

used solely in the transport of air cargo or in the

commercial transport of passengers.

Public Act 214 of 1994 was ordered to take immediate

effect and was approved and filed June 23, 1994. The

exemption for air carriers provided for in the Act was

made retroactively effective to January 1, 1993. On

August 3, 1994, a Second Analysis to Enrolled House Bill

5451 was prepared by the House Legislative Analysis

Section. The analysis makes clear that the impetus for the

adoption of Public Act 214 was to encourage Michigan

airlines companies to use Michigan as a base from which

to maintain, repair, or refurbish aircraft. The analysis

notes that “[i]f planes that fly all over the world are taxed

because they are worked on in Michigan, companies will

base their planes elsewhere.” The expansive scope

intended by the Legislature in passage of Public Act 214

is further evidenced by the only argument identified

a iaiiiaeiaiiiilalaiiiaidlaiiaiadid

App. 23

against the legislation in the House Legislative Analysis.

there, it was said:

Currently, the exemption applies to certain

aircraft used in the “regularly scheduled com-

mercial transport of passengers.” The bill

extends the exemption not only to aid cargo

transports but also eliminates the expression

“regularly scheduled,” thus extending the

exemption to other kinds of commercial pas-

senger aircraft.

Thereafter, on December 13, 1994, Public Act 424 of

1994 was approved and made effective January 6, 1995.

Basically, Public Act 424 of 1994 continued the exemption

for storage, use or consumption by a domestic air carrier

of an aircraft purchased after December 31, 1992 for use

in the transport of air cargo. The legislation modified,

however, the longstanding exemption for aircraft used by

domestic air carriers in the transport of passengers.

Essentially, the legislation divided the passenger aircraft

exemption into two parts — one for aircraft used solely in

the “regularly scheduled transport of passengers” and

the other for aircraft having a maximum certified takeoff

weight of at least 12,500 pounds that is designed to have

a inaximum passenger seating configuration of more than

30 seats and is used to transport passengers. These two

parts were not, however, made immediately effective.

Rather, these exemptions apply to aircraft purchased after

June 30, 1994 and after December 31, 1994, respectively.

In 1992 the Michigan Legislature extended the air-

craft exemptions described above to certain parts and

materials affixed in the state of Michigan to an aircraft

owned or used by a domestic air carrier. 1992 Public Act 5

App. 24

(effective February 27, 1992). M.C.L. 205.94k. This section

was amended in 1995 and now reads:

Sec. 4k (1) The tax levied under this act does

not apply to parts and materials, excluding shop

equipment or fuel, affixed to or to be affixed in

this state to an aircraft owned or used by a

domestic air carrier that is any of the following:

(a) An aircraft purchased after December

31, 1992 for use solely in the transport of air

cargo that has a maximum certificated takeoff

weight of at least 12,500 pounds.

(b) An aircraft purchased after June 30,

1994 that is used solely in the regularly sched-

uled transport of passengers.

(2) For purposes of this section, “domestic

air carrier” is limited to entities engaged in the

commercial transport for hire of cargo or entities

engaged in the commercial transport of pas-

sengers as a business activity.

(3) This section does not apply after

December 31, 1996.

App. 25

[LOGO] House Legislative Analysis Section

650 Roosevelt Building

Phone: 517/373-6466

NO USE TAX ON SIMMONS AIRCRAFT

HOUSE BILL 5801 with committee amendments First

Analysis (11-20-84)

Sponsor: Rep. Dominic Jacobetti

Committee: Taxation

THE APPARENT PROBLEM:

Due to the vagaries of federal and state laws, an airline

must pay the Michigan use tax on its aircraft only if it

introduces the planes into service here. Simmons is the

only regularly scheduled interstate airline whose head-

quarters are in Michigan, and prepares its planes for

service in Marquette. In order to avoid being the only

airline in the country liable for the Michigan use tax,

Simmons must undergo the inconvenience and expense

of flying its new planes from company headquarters to an

airport outside the state for introduction into interstate

service. The company suggests that requiring it to pay the

tax when no other airline must is unfair to a Michigan

business, and discourages the establishment of other air-

lines here.

THE CONTENT OF THE BILL:

The bill would exempt from the use tax the storage, use,

or consumption of any aircraft owned or used by a

domestic passenger carrier operating under a certificate

issued by the Civil Aeronautics Board if the aircraft is

App. 26

used primarily in the regularly scheduled commercial

transportation of passengers.

FISCAL IMPLICATIONS:

According to the Department of Treasury, the bill would

cost the state nothing, since Simmons already avoids the

tax bv introducing its planes into service outside the

state.

ARGUMENTS:

For:

The bill would, be exempting aircraft used by regularly

scheduled airlines from the use tax, remove potential

liability and present inconvenience for Simmons Airlines

and encourage the establishing of other commercial car-

riers in Michigan.

POSITIONS:

Simmons Airlines supports the bill. (11-14-84)

The Department of Treasury does not oppose the bill.

(11-14-84)

scenes

PD Bae elv's Ae. een “ho 8

ERE 8S RIO WE Frere Css

App. 27

[LOGO] House Legislative Analysis Section

Olds Plaza Building, 10th Floor

Lansing, Michigan 48909

Phone: 517/373-6466

House Bill 5451 (8-3-94)

AIRCRAFT USE TAX EXEMPTION

P.A. 214 of 1994

House Bill 5451 as enrolled

Second Analysis (8-3-94)

Sponsor: Rep. Kirk A. Profit

House Committee: Taxation

Senate Committee: Not Referred

THE APPARENT PROBLEM:

The Use Tax Act currently provides an exemption for

certain commercial aircraft purchased elsewhere and

introduced into use in the state. The exemption applies to

aircraft owned or used by a domestic passenger air car-

rier and used in the regularly scheduled commercial

transport of passengers, if certain federal certificates are

obtained. (Tax specialists say the certificates are those

acquired for larger planes, holding 60 or more passengers

or 17,000 pounds or more of cargo, that are engaged in

interstate commerce.) Otherwise, aircraft purchased out-

side the state and brought into the state are subject to the

tax. Representatives of a rapidly growing Michigan cargo

(and charter passenger) carrier based at Willow Run,

American International Airways, has asked that the

exemption be extended to their aircraft. Testimony before

the House Taxation Committee indicated that the appli-

cability of the tax to the company’s aircraft which fly all

over the world but are maintained in this state, came to

App. 28

light as a result of a state tax audit. Representatives of the

company told the committee that the company, whose

customers include the overnight package industry, the

U.S. Postal Service, and the U.S. military, is expected to

have 2,000 employees by the end of the year, up from 500

in 1990. Company spokesman say they intend to purchase

in the near future over $90 million of aircraft that will be

converted from passenger to freight uses at a mainte-

nance facility in Oscoda. This will result in a $5.4 million

state use tax liability, a tax burden that could be avoided

if the company refurbished the planes in one of 25 other

states that exempt such aircraft.

THE CONTENT OF THE BILL:

The bill would amend the Use Tax Act (MCL 205.94) to

expand the aircraft exemption so that it applies to the

storage, use, or consumption of any aircraft owned or

used by a domestic air carrier operating under a certifi-

cate issued by the U.S. Department of Transportation, if

the aircraft was used solely in the transport of air cargo

or in the commercial transport of passengers. The exemp-

tion for air carriers would be effective beginning January

1, 1993.

FISCAL IMPLICATIONS:

There is no specific information at present. The Depart-

ment of Treasury testimony before the House Taxation

Committee (5-18-94) indicated that the state would lose

revenue as a result of the bill if its provisions remained

retroactive to 1989; some carriers not previously exempt

have paid use taxes to the state that would have to be

App. 29

refunded. As enacted, however, the exemption extends

back only to 1993.

ARGUMENTS:

For:

The bill would extend a current use tax exemption for

passenger aircraft to, among others, a Michigan-based

company that flies packages (and also passengers) all

over the world in planes maintained at Willow Run and

Oscoda. This is a company that is said to have added over

1,000 jobs in the past four years and expects continued

job growth this year. Without this bill, the company will

face a significant use tax bill from the state as a result of a

recent state audit. The company’s plan to refurbish some

$90 million worth of aircraft this summer will cost them

over $5 million in taxes. These taxes could be avoided by

moving the work to a state where such aircraft are

; exempt. This is not a tax that the company has been

paying to the state, so there would be no loss of antici-

pated state revenue as a result of the bill’s passage. As

the law stands now, it discourages companies from using

Michigan as a base from which to maintain, repair, or

refurbish aircraft. If planes that fly all over the world are

taxed because they are worked on in Michigan, com-

panies will base their planes elsewhere.

Response:

PS ee ee

It should be noted that an earlier version of the bill would

have made the exemption retroactive to 1989, which

would have provided greater benefit to the air transport

industry.

—

cer aie

App. 30

Against:

Currently, the exemption applies to certain aircraft used

in the “regularly scheduled commercial transport of pas-

sengers.” The bill extends the exemption not only to air

cargo transports but also eliminates the expression “regu-

larly scheduled,” thus extending the exemption to other

kinds of commercial passenger aircraft.