Sinking the Island of Constitutional Tax Immunity: a Uniform Approach to State Taxes on Goods in Transit Under the Import-export Clause

• Publication year: 2019

Sinking the Island of Constitutional Tax Immunity: A Uniform Approach to State Taxes on Goods in Transit Under the Import-Export Clause

Warren F. Smith
University of Georgia School of Law

SINKING THE ISLAND OF CONSTITUTIONAL TAX IMMUNITY: A UNIFORM APPROACH TO STATE TAXES ON GOODS IN TRANSIT UNDER THE IMPORT-EXPORT CLAUSE

Warren Furman Smith^*

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The Framers of the U.S. Constitution adopted the Import-Export Clause to prohibit the states from interfering in international relations, to preserve import revenue for the federal government, and to ensure harmony between the states. The purposive inquiry established by Michelin and Washington Stevedoring is applied for all imports and exports except one category: export goods in transit. The pre-Michelin decision, Richfield Oil, provides complete constitutional tax immunity for export goods in transit. This island of constitutional tax immunity forces local taxpayers to subsidize exporters and foreign consumers and unfairly burdens coastal states with the regulatory, administrative, and environmental costs of shipping exports with no means to tax the beneficiaries of these services. This Note urges the Supreme Court to overturn Richfield Oil and apply the Michelin approach uniformly to import and export goods, in accordance with the text and purpose of the Import-Export Clause.

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Table of Contents

I. Introduction..........................................................................701

II. Background..........................................................................703

A. THE IMPORT-EXPORT CLAUSE.........................................703
B. THE MICHELIN REVOLUTION...........................................706
C. THE MICHELIN RESERVATION.........................................710

III. Analysis...............................................................................713

A. THE TEXT OF THE IMPORT-EXPORT CLAUSE....................713

1. The Import-Export Clause Applies Uniformly to Imports and Exports..............................................713
2. The Import-Export Clause Focuses on the Nature of the Tax, Not the Goods ................................................ 715
3. There is No Textual Support for the "In Transit" Distinction ............................................................. 716

B. THE INTENT OF THE IMPORT-EXPORT CLAUSE................718

1. Richfield Oil Risks Distorting the Framers' Intent. 718
2. Richfield oil Risks Subsidizing Exporters at the Expense of Local Taxpayers...................................719
3. Richfield Oil Prohibits Otherwise Valid, Non-Discriminatory Taxation.......................................721

IV. Conclusion..........................................................................723

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I. Introduction

When the United States Supreme Court's Import-Export Clause jurisprudence veered in a new direction in Michelin Tire Corp. v. Wages,¹ the issue of whether to apply this new analysis to export goods in transit fell by the wayside. The Michelin Court no longer assumed that the Import-Export Clause provided absolute tax immunity to all imports and exports but instead developed an analysis based on the history and intent of the Import-Export Clause itself.² However, the Michelin Court qualified its holding by noting that the property tax in question applied to goods "no longer in transit" rather than to goods that were in transit.³ The Court did not address whether the Michelin approach applied to goods in transit,⁴ leaving lower courts to wrestle with how Richfield Oil Corp. v. State Board of Equalization,⁵ the pre-Michelin decision on export goods in transit, applies in the wake of the Michelin reasoning and resulting in a non-uniform application of the Import-Export Clause.⁶

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The Import-Export Clause was adopted to prohibit seaboard states from exploiting their inland neighbors,⁷ but the lingering exception to the Michelin approach has contorted it into a means of subsidizing exporters at the expense of local taxpayers. Richfield Oil provides a "bright-line immunity for goods in the stream of export" even when exporters benefit from local police, fire protection, and other government services.⁸ The expansion of this sphere of absolute tax immunity is welcomed by exporters.⁹ Richfield Oil subverts the Import-Export Clause's purpose because the Framers of the Constitution "did not expect residents of the ports to subsidize commerce headed inland."¹⁰ Richfield Oil's grant of tax immunity for export goods in transit has become what Justice Black feared at the time: "an island of constitutional tax immunity."¹¹ This Note will discuss how the application of the Michelin approach to export goods in transit is more consistent with the Import-Export Clause.

Part II of this Note will examine the origin and purpose of the Import-Export Clause and how Michelin began an important shift in Import-Export Clause jurisprudence by applying a policy-based approach more compatible with the text and original intent of the Import-Export Clause. Part II will explain how Michelin's reservation for "in transit" goods has resulted in inconsistent application of the Import-Export Clause to export goods in transit.

Part III of this Note will argue that the Supreme Court should overturn Richfield Oil and apply the Michelin approach to both import and export goods. Because Michelin adopted a test that

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analyzes whether a tax is consistent with the policies of the Import-Export Clause, the potential exception under Richfield Oil implies that a tax may be prohibited by the Constitution despite being fully consistent with the Constitution's underlying policies. This Note will conclude that the Michelin approach should be applied uniformly to imports and exports in analyzing the constitutionality of state taxes under the Import-Export Clause.

II. Background

The Import-Export Clause was included in the U.S. Constitution to achieve three primary purposes: first, to allow the Federal Government to conduct foreign policy without interference from the states; second, to reserve imports as an exclusive source of federal revenue; and third, to promote interstate harmony.¹² In 1976, the Supreme Court established an approach to evaluating duties in Michelin that ensured only those exactions that impinge the purposes of the Import-Export Clause would be constitutionally prohibited.¹³ However, Richfield Oil has never been overturned and stands as a possible exception to the Michelin approach.¹⁴

A. THE IMPORT-EXPORT CLAUSE

The Michelin revolution had its basis in the origin of the Import-Export Clause itself. As the Michelin Court noted, "a compelling reason for the calling of the Constitutional Convention of 1787 was the fact that the Articles essentially left the individual states free to burden commerce among themselves and with foreign countries very much as they pleased."¹⁵ For example, New York City instituted a tariff on goods from Connecticut and New Jersey to

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prevent commerce from "carr[ying] thousands of dollars out of the city and into the pockets of detested Yankees and despised Jerseymen."¹⁶ Because of this tariff and other tariffs protecting Pennsylvania, James Madison described New Jersey's commerce as a "[c]ask tapped at both ends."¹⁷ The New Jersey legislature retaliated,¹⁸ and one New Jersey newspaper decried this abuse as "a tribute to those states which even Great Britain would have disdained to exact."¹⁹ These discriminatory tariffs, permitted by the Articles of Confederation, worked to undermine the unity of the fledgling nation, which called for a solution.

To prevent this commercial warfare between the states, the Framers proposed a solution: the Import-Export Clause.²⁰ This sparked a heated debate,²¹ producing a rather detailed and comprehensive Import-Export Clause:

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it's [sic] inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Control of the Congress.²²

While the Import-Export Clause was adopted primarily to put an end to the economic rivalries of the states, the Framers had other purposes for the constitutional provision. The Import-Export Clause

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was intended to reserve import duties as a primary source of revenue for the Federal Government.²³ Without reserving the exclusive power to the Federal Government to levy duties on imports and exports, the United States could not speak with one voice when regulating commercial relations.²⁴

The Supreme Court had recognized these three underlying purposes of the Import-Export Clause before the Michelin court shifted Import-Export Clause jurisprudence. In Youngstown Sheet & Tube Co. v. Bowers, the Court listed the "forces which led to the inclusion of Art. I, s 10, cl. 2, the Import-Export Clause in the Constitution."²⁵ First in importance was ensuring the government's ability to "speak with one voice when regulating commercial intercourse," followed by "secur[ing] to the National Government an important source of revenue" and "prevent[ing] the seaboard States, possessed of important ports of entry, from levying taxes on goods flowing through their ports to inland States."²⁶ However, the Supreme Court in Youngstown did not apply these purposes directly to that case, instead making "essentially a determination of the physical status of the foreign goods."²⁷ This was typical of the Import-Export Clause approach prior to Michelin.

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B. THE MICHELIN REVOLUTION

Before Michelin, determinations of the constitutionality of taxes on imports and exports rested on whether the physical good being taxed was an import or export.²⁸ In Brown v. Maryland, the court held that imports received...