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Two U.S. Supreme Court approaches to examining state tax issues involving the Constitution’s Import-Export Clause have caused a divide among multiple U.S. jurisdictions. In this article, Reed Smith LLP’s Michael Lurie, DeAndré Morrow, and Jeremy Abrams discuss these Supreme Court cases, and whether the Court should take up a recent Virginia case to help clarify the Court’s earlier rulings.
By Michael Lurie, DeAndré Morrow, and Jeremy Abrams
Michael Lurie is an attorney in Reed Smith LLP’s Philadelphia office. DeAndré Morrow and Jeremy Abrams are attorneys in Reed Smith LLP’s Washington office.
If you are facing Wayfair-fatigue, we have some good news for you: another state tax case may be on its way to the U.S. Supreme Court. Dulles Duty Free, LLC v. County of Loudon, [ Dulles Duty Free, LLC v. County of Loudoun, 803 S.E.2d 54 (Va. 2017), petition for cert filed (U.S. Dec. 19, 2017) (No. 17-A408)] provides the Court an opportunity to reexamine its precedent under the Import-Export Clause of the United States Constitution, as it relates to state taxation. Specifically, the Supreme Court has been asked to determine whether the validity of a non-discriminatory local business license tax calculated on the basis of gross receipts should be evaluated under the Court’s approach in Richfield Oil Corp. v. State Board of Equalization or under the Court’s more recent holding in Michelin Tire Corp. v. Wages [423 U.S. 276 (1976); 329 U.S. 69 (1946)].
We begin this article by discussing the constitutional limits on state taxation of exports, as interpreted by modern era Supreme Court precedent. We then detail and examine the certiorari worthiness of Dulles Duty Free. Finally, this article posits that the Court should eliminate the uncertainty resulting from the potential conflict between the Richfield Oil and Michelin Tire decisions by granting certiorari.
As a refresher, the Import-Export Clause of the Constitution of the United States provides, in relevant part, that “[n]o State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws.” [U.S. Const. art. I, §10 cl. 2.] Two Supreme Court decisions have dominated the discussion of the Import-Export Clause in the modern era, and there is significant tension between the rationales underlying these decisions. The Court could grant certiorari in Dulles Duty Free as a way to resolve this tension.
In its 1946 decision in Richfield Oil, the Supreme Court held that California’s application of a retail sales tax to the sale of oil to foreign purchasers for export abroad was unconstitutional. [329 U.S. 69 (1946).] The Richfield Oil Corporation sold oil to the government of New Zealand. The Court held that the relevant constitutional question was “whether at the time the tax accrued the oil was an export.” [ Richfield Oil at 78.] The title to the oil was transferred upon its delivery into the hold of a ship that would later transport the oil overseas, so the Court determined that the tax was an unconstitutional impost upon an export because the “delivery marked the commencement of the movement of the oil abroad.” [ Richfield Oil at 83.] The Court’s holding – that the Import-Export Clause prohibits the direct taxation of imports and exports that are in transit – has come to be known as the “in transit rule.” [ See e.g., Itel Containers Intern. Corp. v. Huddleston, 507 U.S. 60, 77 (1993).]
In its 1976 decision in Michelin Tire, the Supreme Court upheld a Georgia ad valorem property tax on goods that had been imported into a warehouse that were destined for distribution throughout the United States. [423 U.S. 276 (1976).] The Court explained that the property tax was consistent with the Import-Export Clause because it did not: (1) interfere with the Federal Government’s regulation of foreign commerce; (2) deprive the Federal Government of its exclusive right to revenues from imposts and duties on imports; or (3) interfere with the free flow of goods between the states. Interestingly, the Court did not cite to Richfield Oil at any point in its Michelin Tire decision.
Subsequent Supreme Court cases have left open the question of whether the approach taken in Michelin Tire applies when a state directly taxes exports in transit. In its 1978 decision in Department of Revenue v. Association of Washington Stevedoring Companies, the Supreme Court upheld Washington’s imposition of its business and occupancy tax (a gross receipts tax) on the activities of stevedoring (e.g., loading and unloading vessels). [435 U.S. 734 (1978).] The Court applied the three-prong test from Michelin Tire, and found that the tax was constitutional because it did not run afoul of any of the test’s considerations. [ Id. at 754 - 55.] The court expressly declined to overrule Richfield Oil [ Id. at 757 n.23], and instead distinguished the facts of the case from those of Richfield Oil. In a footnote, the Court suggested that the tax on stevedoring was acceptable because it was a tax on an activity that was one step removed from the goods in transit, in contrast to the sales tax at issue in Richfield Oil that was imposed directly on the goods in transit. [ Id. at 756 n.21.]
To further complicate the matter, the Supreme Court signaled in a 1993 decision, Itel Containers Intern. Corp. v. Huddleston, that Michelin Tire somehow modified Richfield Oil, but refused to expound. [507 U.S. 60 (1993).] In Itel Containers, the state of Tennessee levied a sales tax on leases transferring temporary possession of shipping containers to third parties in Tennessee. The Supreme Court rejected the taxpayer’s arguments that the tax was: (1) inconsistent with the second component of the test articulated in Michelin Tire and (2) a tax on exports that was per se impermissible under Richfield Oil. In rejecting the taxpayer’s second argument, the Court stated, “[e]ven assuming that [the in transit] rule has not been altered by the approach we adopted in Michelin, it is inapplicable here.” [ Itel Containers at 77.]
Dulles Duty Free involves the imposition of a Business, Professional, and Occupational License (“BPOL”) tax by Loudon County, Virginia on the gross receipts of a business that operates a duty free store at Dulles International Airport. [Loudon County Ordinances §840.01 et seq.; see also Va. Code §58.1-3703.1 (setting uniform standards for BPOL ordinances).]
The store sells to both domestic and international travelers, with different procedure for each type of traveler. [ Dulles Duty Free at 55.] When the store sells goods to a traveler to a domestic destination, the traveler receives the goods immediately. [ Id.] However, when the store sells goods to a traveler to an international destination (i.e., an export sale) the goods are handled differently. A traveler to an international destination who purchases goods in the store must show their passport and boarding pass to the cashier. [ Id.] The cashier then accepts payment and hands the traveler a receipt. Once the traveler has been cleared to board the plane and reaches the departure gate, she is met by a store employee who transfers the goods to the traveler as she boards her flight. [ Id.]
The store paid the BPOL tax on its receipts from both types of transactions. However, it separately tracked the receipts attributable to sales to international and domestic travelers. [ Id.] The store filed a refund claim, taking the position that its sales to international travelers (which represented over 90% of its sales) were exempt from the BPOL tax under the Import-Export Clause of the United States Constitution. [ Id.]
The Virginia Supreme Court found that the Import-Export Clause prevented Loudon County from imposing the BPOL tax on the store’s sales to international travelers. [ Dulles Duty Free at 62.] The court held that the county’s application of the BPOL tax to the store’s gross receipts from sales to international travelers was indistinguishable from the sales tax imposed on goods for export that was found to violate to Import-Export Clause in Richfield Oil. [ Id.] Loudon County filed a petition for a writ of certiorari to the Supreme Court on December 19, 2017. This case was distributed for conference on March 29, 2018, which means that the Court could grant or deny certiorari as soon as April 2, 2018.
The answer to this question is “yes”. One of the main considerations governing certiorari is whether there is a conflict of authority between different jurisdictions. [ See Supreme Court Rule 10(a).] Loudon County argues that courts are divided on whether Richfield Oil or Michelin Tire is the proper test for evaluating if a tax imposed directly on goods in transit violates the Import-Export Clause, and that this case presents an appropriate vehicle for the Court to resolve that split. Indeed, there is a conflict of authority. An amicus brief in support of Loudon County’s petition filed on behalf of nineteen tax law professors notes that the Eleventh Circuit and the courts of at least eight states have concluded that the test set forth in Michelin Tire replaced the in transit rule of Richfield Oil, while the Fifth Circuit and at least the courts of five states have held that Richfield Oil’s in transit rule is still the proper test. [Brief amici curiae of Tax Law Professors at 10 - 11.]
In fact, one of the cases cited by the tax law professors in their amicus brief, P.J. Lumber Co. v. City of Prichard, was decided almost a month after Dulles Duty Free, LLC v. County of Loudon. On September 27, 2017, the Alabama Court of Appeal followed Michelin Tire and upheld a gross receipts tax on exports. [ P.J. Lumber Co. v. City of Prichard, No. 2160627 at 9 (Al. Civ. App. Sept. 22, 2017).] In addressing the tension between the Supreme Court’s approaches in Richfield Oil and Michelin Tire, the Alabama Court of Appeal stated that, “[w]ith the change in approach announced in Michelin, the authority [, Richfield Oil,] that P.J. Lumber relies on to support its contentions are no longer valid.” [ Id.]
Additionally, Dulles Duty Free presents an interesting question of law. The amicus briefs filed thus far in Dulles Duty Free have assailed Richfield Oil as an outdated relic of the early 1900s. For example, the tax law professors argue in their amicus brief that nondiscriminatory taxes on exports should be permitted under modern constitutional law principles. [Brief amici curiae of Tax Law Professors at 16.] However, these briefs ignore the harms that could result from allowing nondiscriminatory taxes on exports. If Michelin Tire provides the rule rather than Richfield Oil, a government could design its tax system in a way that is facially nondiscriminatory, but nonetheless is designed to impose a heavier burden on export goods in transit than on other business sectors. To extend the example of duty free stores, a municipality with an international airport could impose a gross receipts tax at a high rate on gross receipts from sales of perfume, alcohol and tobacco (which are frequent purchases at duty free stores) while imposing the same tax at a low rate on gross receipts from sales of other goods. Unlike Richfield Oil, Michelin Tire would seem to allow this type of gamesmanship.
The rationale underlying the decision in Dulles Duty Free could support a challenge to taxes imposed on gross receipts from sales of goods destined for export at a duty-free store in any jurisdiction. For example, such taxes exist in Ohio, Washington, and certain Pennsylvania municipalities. Admittedly, duty free stores are a small part of the national economy; however, a decision by the Supreme Court to review Dulles Duty Free could have broader-reaching implications. Definitive guidance on the scope of the Import-Export Clause upholding the Richfield Oil rationale could have far-reaching financial implications on both business or state and local governments. According to the U.S. Census Bureau and the U.S. Bureau of Economic Analysis, revenue from the export of goods from the United States in the past year exceeded $1.5 trillion. [U.S. International Trade in Goods and Services (FT900), Exhibit 1 (March 5, 2018), available at https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf.]
Dulles Duty Free presents the Supreme Court with an ideal opportunity to end the uncertainty of whether Richfield Oil or Michelin Tire applies to taxes directly on goods in transit. Over the past few decades, the Court has hinted that it may reevaluate the rule governing these types of taxes, but has asserted that prior cases did not provide it with a clear opportunity to do so. Washington Stevedoring and Itel Containers involved taxes that fell indirectly on goods in transit, so Richfield Oil did not apply. However, Dulles Duty Free involves a tax imposed directly on goods for export while in transit. Therefore, the Court has its chance to address this uncertainty by overruling Richfield Oil, if necessary.
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