No. 95-591 In the Supreme Court of the United States OCTOBER TERM, 1995 UNITED STATES OF AMERICA, PETITIONER v. INTERNATIONAL BUSINESS MACHINES CORPORATION PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT DREW S. DAYS, III Solicitor General LORETTA C. ARGRETT Assistant Attorney General LAWRENCE G. WALLACE Deputy Solicitor General KENT L. JONES Assistant to the Solicitor General GARY R. ALLEN ERNEST J. BROWN Attorneys Department of Justice Washington, D.C. 20530 (202) 514-2217 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Section 4371 of the Internal Revenue Code, 26 U.S.C. 4371, imposes a tax of four cents per dollar on casualty insurance premiums paid to a foreign in- surer for the risks of a domestic insured that are "wholly or partly within the United States" (26 U.S.C. 4372(d)(1)). The question presented in this case is: Whether, as applied to casualty insurance for losses incurred during the shipment of goods from locations within the United States to purchasers abroad, the tax imposed by Section 4371 of the Internal Revenue Code violates the Export Clause of the Constitution of the United States (U.S. Const. Art. I, 9, Cl. 5). (I) ---------------------------------------- Page Break ---------------------------------------- TABLE OF CONTENTS Page Opinions below . . . . 1 Jurisdiction . . . . 1 Constitutional and statutory provisions involved . . . . 2 Statement . . . . 4 Reasons for granting the petition . . . . 12 Conclusion . . . . 31 Appendix A . . . . 1a Appendix B . . . . 12a Appendix C . . . . 31a Appendix D . . . . 32a Appendix E . . . . 34a TABLE OF AUTHORITIES Cases: A.G. Spalding & Bros. v. Edwards, 262 U.S. 66 (1923) . . . . 21-22 Almy v. California, 65 U.S. (24 How.) 169 (1861) . . . . 19 Anglo-Chilean Nitrate Sales Corp. v. Alabama, 288 U.S. 218 (1933) . . . . 18 Board of Trustees v. United States, 289 U.S. 48 (1933) . . . . 30 Brown v. Maryland, 25 U.S. (12 Wheat.) 419 (1827) . . . . 15, 16, 17 Canton R.R. v. Rogan, 340 U.S. 511 (1951) . . . . 22 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) . . . . 21, 22, 24, 25 Cook v. Pennsylvania, 97 U.S. 566 (1878) . . . . 18 Cornell v. Coyne, 192 U.S. 418 (1904) . . . . 16, 19 Crew Levick Co. v. Pennsylvania, 245 U.S. 292 (1917) . . . . 22 Crutcher v. Kentucky, 141 U.S. 47 (1891) . . . . 20 Department of Revenue of Washington v. Associa- tion of Washington Stevedoring Cos., 435 U.S. 734 (1978) . . . . 9, 15, 22, 25, 26, 27, 28 (III) ---------------------------------------- Page Break ---------------------------------------- IV Cases-Continued: Page DiSanto v. Pennsylvania, 273 U.S. 34 (1927) . . . . 20-21 Fairbank v. United States, 181 U.S. 283 (1901) . . . . . 19 Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824) . . . . 29-30 Hooven & Allison Co. v. Evatt, 324 U.S. 652 (1945) . . . . 18 Joseph v. Carter & Weekes Stevedoring Co., 330 U.S. 422 (1947) . . . . 22 Kosydar v. National Cash Register Co., 417 U.S. 62 (1974) . . . . 16 License Cases, 46 U.S. (5 How.) 504 (1847) . . . . 17 Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984) . . . . 27 Low v. Austin, 80 U.S. (13 Wall.) 29 (1872) . . . . 17, 18 May v. New Orleans, 178 U.S. 496 (1900) . . . . 18 Memphis Steam Laundry Cleaner, Inc. v. Stone, 342 U.S. 389 (1952) . . . . 20 Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976) . . . . 9, 16, 22, 23, 24, 27 Nippert v. City of Richmond, 327 U.S. 416 (1946) . . . . 21 Pace v. Burgess, 92 U.S. 372 (1876) . . . . 18 Puget Sound Stevedoring Co. v. State Tax Comm'n, 302 U.S. 90 (1937) . . . . 22 Robbins v. Shelby County Taxing District, 120 U.S. 489 (1887) . . . . 20 Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989) . . . . 9, 10, 13 Spector Motor Service, Inc. v. O'Connor, 340 U.S. 602 (1951) . . . . 21, 25 Thames & Mersey Marine Ins. Co. v. United States, 237 Us. 19 (1915) . . . . 9, 13, 20, 21 Turpin v. Burgess, 117 U.S. 504 (1886) . . . . 16, 19 United States v. American Bar Endowment, 477 U.S. 105 (1986) . . . . 14 United States v. Goodyear Tire & Rubber Co., 493 U.S. 132 (1989) . . . . 14 ---------------------------------------- Page Break ---------------------------------------- V Cases-Continued Page United States v. Hill, 113 S. Ct. 941 (1993) . . . . 14 United States v. Hvoslef 237 U.S. 1 (1915) . . . . 16, 20 United States v. Marigold, 50 U.S. (9 How.) 560 (1850) . . . . 30 United States v. The William, 28 Fed. Cas. 614 (D. Mass. 1808) (No. 16,700) . . . . 30 Western Live Stock v. Bureau of Revenue, 303 U.S. 250 (1938) . . . . 22 Youngstown Sheet & Tube Co. v. Bowers, 358 U.S. 534 (1959) . . . . 18 Constitution, statutes and regulation: U.S. Const.: Art. I: 8, Cl. 3 (Commerce Clause) . . . . 2, 20, 21, 24, 25, 29 9, Cl. 5 (Export Clause) . . . . passim 10, Cl. 2 (Import-Export Clause) . . . . passim Act of Aug. 8, 1882, ch. 468, 22 Stat. 372 . . . . 18 Internal Revenue Code (26 U.S.C.): 864(c) . . . . 4 882(a)(1) . . . . 4 4371 . . . . passim 4372 . . . . 3 4372(a) . . . . 3, 5 4372(d)(1) . . . . 3, 5, 12, 14-15 4373 (l982) . . . . 4 4373(1) (1982) . . . . 4, 5 4374 . . . . 4, 5, 8 4461 (1988 & Supp. V 1993) . . . . 13, 14 4461(a) . . . . 13 4461(b) (Supp. V 1993) . . . . 13 4462(a)(1) . . . . 13 4462(f)(2) . . . . 14 ---------------------------------------- Page Break ---------------------------------------- VI Statutes and regulation-Continued: Page War Revenue Act of 1898, ch. 448, 30 Stat. 448 . . . . 19, 20 26: 30 Stat. 459 . . . . 19 30 Stat. 460 . . . . 20 30 Stat. 461 . . . . 20 War Revenue Act of 1917, ch. 63, 600(f) 40 Stat. 316-317 . . . . 21 28 U.S.C. 1295(a)(5) . . . . 14 28 U.S.C. 1581(a) . . . . 14 26 C.F.R. 46.4371-2(a) . . . . 5 Miscellaneous: 2 M. Farrand, The Records of the Federal Convention of 1787 (1966) . . . . 29 H.R. Rep. No. 2333, 77th Cong., 2d Sess. (1942) . . . . 5, 15, 30 C. Warren, The Making of the Constitution (reprint 1993) (1928) . . . . 28 ---------------------------------------- Page Break ---------------------------------------- In the Supreme Court of the United States OCTOBER TERM, 1995 No. UNITED STATES OF AMERICA, PETITIONER v. INTERNATIONAL BUSINESS MACHINES CORPORATION PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT The Solicitor General, on behalf of the United States of America, petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Federal Circuit in this case. OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a- 11a) is reported at 59 F.3d 1234. The opinion of the Court of Federal Claims (App., infra, 12a-30a) is reported at 31 Fed. Cl. 500. JURISDICTION The judgment of the court of appeals (App., infra, 31a) was entered on July 10, 1995. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). (1) ---------------------------------------- Page Break ---------------------------------------- 2 CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED 1. The Constitution of the United States provides, in relevant part: a. Art. I, 8, Cl. 3: The Congress shall have Power * * * To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes. b. Art. I, 9, Cl. 5: No Tax or Duty shall be laid on Articles exported from any State. c. Art. I, 10, Cl. 2: 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 in- spection Laws * * *. 2. The Internal Revenue Code provides, in relevant part: a. 26 U.S.C. 4371: There is hereby imposed, on each policy of insurance, indemnity bond, annuity contract, or policy of reinsurance issued by any foreign insurer or reinsurer, a tax at the following rates: (1) 4 cents on each dollar, or fractional part thereof, of the premium paid on the policy of casualty insurance or the indem- ---------------------------------------- Page Break ---------------------------------------- 3 nity bond, if issued to or for, or in the name of, an insured as defined in section 4372(d); * * * * * b. 26 U.S.C. 4372: (a) For purposes of section. 4371, the term "foreign insurer or reinsurer" means an insurer or reinsurer who is a nonresident alien individual, or a foreign partnership, or a foreign corporation. * * * (b) For purposes of section 4371(1), the term "policy of casualty insurance" means any policy (other than life) or other in- strument by whatever name called whereby a contract of insurance is made, continued, or renewed. * * * * * (d) For purposes of section 4371(1), the term "insured" means- (1) a domestic corporation or part- nership, or an individual resident of the United States, against, or with respect to, hazards, risks, losses, or liabilities wholly or partly within the United States, * * * * * * * * ---------------------------------------- Page Break ---------------------------------------- 4 c. 26 U. S. C. 4373(1982): 1. The tax imposed by section 4371 shall not apply to- (1) Any policy, indemnity bond, or annuity contract signed or countersigned by an officer or agent of the insurer in a State, or in the District. of Columbia, within which such insurer is authorized to do business; * * * * * * * * d. 26 U.S.C. 4374: The tax imposed by this chapter shall be paid, on the basis of a return, by any person who makes, signs, issues, or sells any of the docu- ments and instruments subject to the tax, or for whose use or benefit the same are made, signed, issued, or sold. * * * STATEMENT 1. Respondent International Business Machines Corporation brought this suit in the Court of Federal Claims to obtain a refund of $1.5 million in taxes assessed under Section 4371 of the Internal Revenue ___________________(footnotes) 1 This provision was amended in 1988 to conform its language to terminology elsewhere employed by Congress to describe activities that are "effectively connected" to activities within the United States and are therefore subject to the federal income tax. See 26 U.S.C. 864(c), 882(a)(1). The amendment does not alter the application of the statute in the context of this case. ---------------------------------------- Page Break ---------------------------------------- 5 Code. IBM does not dispute that the taxes were correctly assessed under the statute. Instead, IBM contends that the statute is unconstitutional as applied to the facts of this case. a. Section 4371 of the Internal Revenue Code, 26 U.S.C. 4371, imposes a tax of four cents per dollar on casualty insurance premiums paid to a foreign in- surer for the risks of a domestic insured that are "wholly or partly within the United States" (26 U.S.C. 4372(d)(1)). 2. The tax is to be paid by "any person * * * for whose use or benefit" the policy is "made, signed, issued, or sold." 26 U.S.C. 4374. Section 4371 was enacted in 1942 to "eliminate an unwarranted competitive advantage now favoring foreign insurers" who are not subject to the federal income tax. H.R. Rep. No. 2333, 77th Cong., 2d Sess. 61 (1942). The tax therefore does not apply if the insurance policy issued by the foreign insurer is "signed or countersigned by an officer or agent of the insurer in a State, or in the District of Columbia, within which such insurer is authorized to do business." 26 U.S.C. 4373(1) (1982). See also note 1, supra; 26 C.F.R. 46.4371-2(a). b. IBM manufactures a variety of business prod- ucts that it sells throughout the world. During the period involved in this case, IBM shipped prod- ucts for international sales from its manufacturing facilities in Arizona, California, Colorado, Florida, Minnesota, New York, North Carolina, Virginia and Texas (App., infra, 13a-14a). IBM made its inter- ___________________(footnotes) 2 The term "foreign insurer " is defined to mean an insurer "who is a nonresident alien individual, or a foreign partnership, or a foreign corporation" (26 U.S.C. 4372(a)). ---------------------------------------- Page Break ---------------------------------------- 6 national sales through a network of more than one hundred wholly owned subsidiaries (id. at 14a-15a): Sales outside the United States of IBM prod- ucts manufactured within the United States were accomplished by a purchase order to IBM from its foreign subsidiary, under which IBM billed the subsidiary and generally shipped the goods directly to the subsidiary's customer. Lower priced goods might be shipped to a consolidation center in the foreign country, and maintained as inventory by the foreign subsidiary to fill future orders. * * * Shipment of products from the United States to the foreign customer began by truck on a com- mon carrier (from the manufacturing plant or warehouse). The goods generally were destined for a United States airport (typically, John F. Kennedy in New York for shipments to Europe and the Middle East, Miami International for shipments to Latin America, and San Francisco International for shipments to the Far East), but some shipments were by sea. While traveling within the United States, the products would typically be unloaded at one or more intermediate freight forwarder locations, where , they would typically remain for two to five days, but could remain * * * as long as thirty days. The prod- ucts would be reloaded at the freight forwarders' facilities and continue ultimately to the point of embarkation, where they were loaded onto an airplane or a ship. Once the products reached the air or sea port in the foreign country, they were ---------------------------------------- Page Break ---------------------------------------- 7 unloaded, cleared customs, and loaded on trucks for shipment to their final destination. The terms of sale specified that title to the goods, and risk of loss, passed from IBM to its foreign sub- sidiaries only when the. goods cleared customs in the foreign country. The foreign subsidiaries were nonetheless required to bear the cost of insuring the products against damage or loss during the entire shipment (App., infra, 15a). The insurance obtained for these shipments was "point to point": it covered the risk of damage or loss during transportation of the goods from the IBM facility in the United States to the point of foreign delivery. When IBM made the arrangements, the insurance was placed with a domestic insurer and the cost was billed to the foreign subsidiary. When the foreign subsidiary made the arrangements, the insurance was often placed with a foreign carrier, which the subsidiary paid directly. In both situations, IBM and its foreign subsidiary were listed as joint beneficiaries on the policies of insurance (App., infra, 15a-16a). If damage occurred before the goods cleared customs-while IBM retained title to the goods and risk of loss-IBM received the insurance proceeds directly under these policies. If the loss occurred after the goods cleared customs-when title and risk of loss had passed to the importing foreign subsidiary -the insurance proceeds were paid to the subsidiary. In the latter event, the proceeds were used by the subsidiary to pay the full purchase price of the damaged products to IBM or, if IBM had already been paid, to reimburse the subsidiary for its loss (App., infra, 16a). ---------------------------------------- Page Break ---------------------------------------- 8 e. IBM filed federal excise tax returns for 1975 through 1984 but did not report any liability under Section 4371 of the Internal Revenue Code. On audit, the Internal Revenue Service determined that the premiums paid to foreign insurers were subject to the tax imposed by Section 4371 and that, pursuant to Section 4374, IBM was liable for the tax as a named beneficiary of the insurance policies. The foreign subsidiaries reported to IBM that, during 1980, they had paid premiums of $2,065,137 to foreign insurers for "point to point" insurance for shipments of products that IBM manufactured in the United States. The tax applicable to those premiums under Section 4371 of the Code-calculated by mul- tiplying the premiums by four percent-is $82,605. The parties stipulated that the foreign insurance premiums attributable to shipments of IBM products in each of the years 1975-1979 and 1981-1984 were the same as in 1980. The IRS therefore assessed the same amount of tax for each of those years under Section 4371 (App., infra, 18a). 2. IBM paid the resulting assessments and fried claims for refund. When those claims were denied, IBM commenced this refund suit in the Court of Federal Claims. a. IBM contended that the tax imposed by Section 4371 of the Internal Revenue Code-as applied to insurance premiums for losses occurring during the shipment of goods from locations within the United States to purchasers abroad-violates the Export Clause of the Constitution, which provides that "[n]o Tax or Duty shall be laid on Articles exported from any State." U.S. Const. Art. I, 9, Cl. 5. IBM contended that the tax on insurance for export ---------------------------------------- Page Break ---------------------------------------- 9 shipments is a "Tax or Duty * * * laid on Articles exported" and is invalid under the specific holding of this Court in Thames & Mersey Marine Ins. Co. v. United States, 237 U.S. 19 (1915). In Thames & Mersey, the Court held a federal stamp tax on policies insuring marine risks unconstitutional as applied to shipments for export. The United States contended that the analysis of Thames & Mersey is no longer valid. The govern- ment reasoned that subsequent decisions of the Court, such as Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976), and Department of Revenue of Washington v. Association of Washington Steve- doring Cos., 435 U.S. 734 (1978), require the con- clusion that the Export Clause does not invalidate a generally applicable, nondiscriminatory tax that does not fall uniquely and discretely on articles of export or export transactions. b. The Court of Federal Claims held that ap- plication of the tax imposed by Section 4371 to insurance premiums for goods in export transit violates the Export Clause because it "amounts to a tax on exports" (App., infra, 26a). The court reasoned that this conclusion follows from the precise holding of this Court's 1915 decision in Thames & Mersey, which stated (237 U.S. at 26): It cannot be doubted that insurance during the voyage is by virtue of the demands of commerce an integral part of the exportation. The Court of Federal Claims emphasized that, under Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 484 (19-89), lower courts "must adhere to the accepted practice of following Supreme Court precedent unless the Supreme Court ---------------------------------------- Page Break ---------------------------------------- 10 clearly states that it is overruling earlier cases and explains why it is doing so" (App., infra, 28a). The court found no clear evidence that Thames & Mersey has been overruled or that its analysis has been discarded by this Court. The court held that Thames & Mersey therefore remains authoritative and that it compels the conclusion that the tax imposed by Section 4371 is unconstitutional as applied in this case (id. at 29a). The court acknowledged that this Court's more recent decisions under the Import-Export Clause in Michelin Tire and Washington Stevedoring have upheld application of nondiscriminatory state taxes to goods and services involved in importation and exportation. The court concluded, however, that those decisions could be distinguished on their facts. The court explained that Washington Stevedoring- which upheld application of a state gross receipts tax to a stevedoring company that handled export and import shipments-concerned "stevedoring" rather than "insurance" and that "stevedoring is a service whose value is not necessarily tied to the value of the goods it serves" (App., infra, 29a). The court further stated that Michelin Tire-which upheld application of a state property tax to imported goods located within the borders of the State-is inapposite because "in Michelin the (imported goods] had left the import stream and were * * * thus outside the scope of the Import-Export Clause" (ibid.). 3. The court of appeals affirmed (App., infra, 1a- 11a). The court noted (id. at 11a) that this Court has admonished the lower courts that (Rodriguez de Quijas v. Shearson/American Express Co., 490 U.S. at 484) ---------------------------------------- Page Break ---------------------------------------- 11 [i]f a precedent of this Court has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the Court of Appeals should follow the case which directly controls, leaving to this Court the prerogative of overruling its own decisions. The court of appeals stated that it was therefore bound to follow Thames & Mersey, and hold the tax imposed by Section 4371 unconstitutional as applied in this case, unless subsequent decisions of this Court "clearly signaled" an intent to, overrule that earlier decision (App., infra, 8a). The court of appeals concluded that it was "not so sure" (App., infra, 8a) that Washington Stevedoring and Michelin Tire signaled the requisite clear intent of this Court to abandon the analysis of Thames & Mersey. The court of appeals did not dispute that, if an analysis "similar" to that applied un- der the Import-Export Clause in Michelin Tire and Washington Stevedoring were applied under the Export Clause, the holding and reasoning of Thames & Mersey would be discredited (App., infra, 7a-8a). Instead, the court stated that it was not certain that a similar analysis would be applied because there is a difference in the language of the two Clauses that could require a different result: the Import-Export Clause bars States from laying "Imposts or Duties on Imports or Exports"; the Export Clause bars the United States from laying any "Tax or Duty * * * on Articles exported from any State." The court of appeals stated (id. at 9a-10a): Although the [Supreme] Court at first expressed the view that the "diversity in language" between the two clauses did not reflect any difference in ---------------------------------------- Page Break ---------------------------------------- 12 "the act which is prohibited," Brown v. Mary- land, 25 U.S. (12 Wheat.) 419, 425 (1827), in both Michelin and Washington Stevedoring the Court has noted and attached significance to the dif- ference between the narrow term "Imposts and Duties" * * * and the broader term "Tax" * * *. See Michelin, 423 U.S. at 290; Washington Steve- doring, 435 U.S. at 759. Reasoning that a "tax" that might be permitted under the "narrow" Language of the Import-Export Clause might nonetheless be invalid under the "broader" language of the Export Clause (App., infra, 10a), the court concluded that the recent Import- Export Clause decisions fail to provide the requisite clear guidance that would permit a lower court to "disregard[] a higher court decision that all agree is binding precedent if it is still valid" (id. at 10a-11a). 3. The court therefore held "that [its] duty is to follow Thames & Mersey and hold Section 4371 invalid as applied" (id. at 1 la). REASONS FOR GRANTING THE PETITION The decision in this case holds a federal statute unconstitutional as applied to a significant, recurring set of commercial transactions. The court of appeals concluded that the federal tax on insurance premiums paid to a foreign insurer for risks that are "wholly or partly within the United States" (26 U.S.C. 4372(d)(1))-as applied to casualty insurance for shipments from within the United States to foreign countries-represents a "Tax or Duty * * * laid on ___________________(footnotes) 3 The court of appeals noted that the United States had conceded that, "if Thames & Mersey is still good law, the assessments at issue in this case are invalid" (App., infra, 6a). ---------------------------------------- Page Break ---------------------------------------- 13 Articles exported" (U.S. Const. Art. I, 9, Cl. 5) and therefore violates the Export Clause of the Con- stitution. The court stated, in reaching that con- clusion, that it was compelled to follow this Court's 1915 decision in Thames & Mersey Marine Ins. Co. v. United States, supra, even though the analysis of that decision has been placed in question by more recent decisions of this Court. Only this Court has "the prerogative of overruling its own decisions." Rodriguez de Quijas v. Shearson/ American Express Co., 490 U.S. at 484. The Court has directed lower courts to "follow the case which directly controls" even when that case "appears to rest on reasons rejected in some other line of decisions" (ibid.). As the result, only this Court can determine whether the considerations that led it to uphold generally applicable, nondiscriminatory state taxes under the Import-Export Clause-in Michelin Tire and Washington Stevedoring-also require that the generally applicable, nondiscriminatory federal statute involved in this case be upheld under the Export Clause of the Constitution. The question presented in this case is of substantial recurring importance. The proper scope of the Export Clause has significance not only for the tax imposed under Section 4371 but also for other nondiscriminatory federal taxes of general appli- cation. For example, Section 4461 imposes on all ship- pers a "tax on any port use" of 0.125 percent of the value of all commercial cargo loaded or unloaded in United States ports. See 26 U.S.C. 4461(a), (b) (Supp. V 1993), 4462(a)(1). Approximately 700 cases are currently pending in the United States Court of International Trade challenging the constitutionality ---------------------------------------- Page Break ---------------------------------------- 14 of that statute under the Export Clause. See United States Shoe Corp. v. United States, No. 94-11-00668 (Ct. Int. Trade). 4. The Federal Circuit has exclusive jurisdiction over any appeal from the decision in those cases. 28 U.S.C. 1295(a)(5). The Federal Circuit is a court of nationwide juris- diction. Since all taxpayers are entitled to pay a challenged tax and sue for a refund within the Federal Circuit, it is unlikely that other courts of appeals will have an opportunity to review this issue under Sec- tion 4371 or other affected statutes. In similar cir- cumstances, this Court has recognized the need for plenary review of Federal Circuit decisions that present issues of substantial importance. See, e.g., United States v. Hill, 113 S. Ct. 941, 945 (1993); United States v. Goodyear Tire & Rubber Co., 493 U.S. 132, 138 (1989); United States v. American Bar Endowment, 477 U.S. 105, 109 (1986). Review by this Court of a decision of the Federal Circuit holding a statute of Congress unconstitutional is fully warranted. 1. The tax imposed by Section 4371 of the Internal Revenue Code is not specifically directed to nor directly "laid on Articles exported" (U.S. Const. Art. I, 9, Cl. 5). Instead, it applies to insurance premiums paid to foreign insurers for any casualty risk that is "wholly or partly within the United States" (26 ___________________(footnotes) 4 Similar litigation is also pending in the federal district court in Maryland. See American Ass'n of Exporters and Importers, Inc. v. Bentsen, No. L94-1839 (D. Md.). The United States has moved to dismiss that case on the grounds that exclusive jurisdiction over cases under Section 4461 lies in the Court of International Trade. See 28 U.S.C. 1581(a); 26 U.S.C. 4462(f)(2). ---------------------------------------- Page Break ---------------------------------------- 15 U.S.C. 4372(d)(1)). It thus applies without discrim- ination to "wholly" domestic transactions as well as to risks that are only "partly" within the United States. As the House Ways and Means Committee observed when the statute was enacted in 1942, Section 4371 is designed to "eliminate an unwar- ranted competitive advantage now favoring foreign insurers" who are not subject to the federal income tax. H.R. Rep. No. 2333, supra, at 61. As a generally applicable, nondiscriminatory tax that is not discretely and exclusively imposed on "Articles exported," the tax imposed under Section 4371 is constitutional. It violates neither the text nor the object of the Export Clause and is validated by the recent decisions of this Court. In particular, in Michelin Tire, the Court "initiated a different ap- proach to Import-Export Clause cases" that upholds generally applicable taxes that reach "services provided * * * to imports, exports, and other goods') without discrimination. Department of Revenue of Washington v. Association of Washington Steve- doring Cos., 435 U.S. at 752, 761. The analysis of Michelin Tire and Washington Stevedoring applies equally to challenges to federal taxes under the Export Clause and, under that analysis, the tax imposed by Section 4371 should be sustained. 2. a. The Export and Import-Export Clauses Are Complementary in Scope. In this Court's first case under either the Import-Export or the Export Clause, Chief Justice Marshall observed of-the two Clauses that "[t]here is some diversity in language, but none is perceived in the act which is prohibited." Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 445 (1827). That observation has been repeated by this ---------------------------------------- Page Break ---------------------------------------- 16 Court on numerous occasions. 5. In the more nu- merous cases under the Import-Export Clause and the less numerous cases under the Export Clause, the Court has routinely cited cases under the two Clauses without differentiation. Moreover, the anal- ysis applied in opinions under the two Clauses has not varied. 6 b. The "Original Package" Doctrine Under the Import-Export Clause. In Brown v. Maryland, a Maryland statute required that importers or whole- salers of foreign articles or commodities purchase a license costing $50 to sell such goods. 25 U.S. (12 Wheat.) at 436. Brown was convicted of having im- ported and sold a package of foreign dry goods without having obtained a license. In holding that the statute violated the Import-Export Clause, the Court ex- plained that a tax on the privilege of sale was, in sub- ___________________(footnotes) 5 See, e.g., Turpin v. Burgess, 117 U.S. 504, 506-507 (1886); Cornell v. Coyne, 192 U.S. 418, 427 (1904); United States v. Hvoslef, 237 U.S. 1, 14 91915); Kosydar v. National Cash Register Co., 417 U.S. 62, 67 n.5 (1974). 6 The suggestion of the court of appeals that the language of the Export Clause may be "broader" in its prohibitive scope than the language of the Import-Export Clause (App., infra, 10a) does not withstand analysis. The entire text of the two Clauses must be considered. The Import-Export Clause pre- cludes States from imposing "Imposts or Duties on Imports or Exports"; the Export Clause specifies that no federal "Tax or Duty shall be laid on Articles exported." U.S. Const. Art. I, 10, Cl. 2; Art. I, 9, Cl. 5. An "impost" on an "export" is a "tax" on an "Article exported."; a "tax" on an "Article exported" is an "impost." Under the text of the two Clauses, it is the charge collected on the item exported that is at issue. A "tax" that is not "laid on" "Articles exported" does not fall within the scope of the Export Clause. See Michelin Tire Corp. v. Wages, 423 U.S. at 293-294; pages 23-24, infra. ---------------------------------------- Page Break ---------------------------------------- 17 stance, a duty upon things imported for sale. Id. at 439. Rejecting the suggestion that this would mean that imported goods would be perpetually immune from taxation, the Court stated that an import retains its "distinctive character" only while in the "original form or package in which it was imported" (id. at 442). In the License Cases, 46 U.S. (5 How.) 504 (1847), Chief Justice Taney acknowledged that a tax directed at imports would be invalid and did not question the validity of the "original package" doctrine. But he concluded that a generally applicable, nondiscrimina- tory state property tax would be unconstitutional merely because it also applied to imported goods (id. at 576): Undoubtedly a State may impose a tax upon its citizens in proportion to the amount they are respectively worth; and the importing merchant is liable to this assessment like any other citizen, and is chargeable according to the amount of his property, whether it consists of money engaged in trade, or of imported goods which he proposes to sell, or any other property of which he is the owner. But a tax of this description stands upon a very different footing from a tax on the thing imported, while it remains a part of foreign commerce, and is not introduced into the general mass of property in the State. In Low v. Austin, 80 U.S. (13 Wall.) 29 (1872), how- ever, the Court reached a different conclusion, holding that a generally applicable California prop- erty tax could not be imposed upon a shipment of French champagne held in an importer's warehouse in the "original package" in which shipped. Id. at 35. In doing so, the Court neglected to consider the con- ---------------------------------------- Page Break ---------------------------------------- 18 trary conclusion of Chief Justice Taney in the License Cases, although his approval of the "original package" doctrine was cited by the Court. Id. at 33- 34. 7 c. The Early Export Clause Cases. The Export Clause was invoked in Pace v. Burgess, 92 U.S. 372 (1876), by a tobacco manufacturer who, in 1868, was subject to a federal excise tax on tobacco products. Although tobacco intended for export was exempt from the tax, the exemption was subject to the requirement that packages for export be identified by an affixed engraved stamp costing 25 cents. The manufacturer brought suit to recover the price of the exemption stamps, claiming that they constitut- ed a prohibited tax on exports. The Court denied recovery, explaining that the exemption stamps were designed to prevent fraud and did not represent a tax. Id. at 375. In 1882, however, Congress discontinued the charge for the exemption stamp in a statute that referred to the stamp as an "export tax." Act of Aug. 8, 1882, ch. 468, 22 Stat. 372. On that basis, another tobacco manufacturer sued to recover the amounts he had paid for exemption stamps before the charge was discontinued. The Court adhered to its decision in Pace v. Burgess, but with a somewhat different rationale. In describing the Export and Import- ___________________(footnotes) 7 The so-called "original package" rule was also followed in Cook v. Pennsylvania, 97 U.S. 566 (1878), Anglo-Chilean Nitrate Sales Corp. v. Alabama, 288 U.S. 218 (1933), and Hooven & Allison Co. v. Evatt, 324 U.S. 652 (1945). See also May v. New Orleans, 178 U.S. 496 (1900), and Youngstown Sheet & Tube Co. v. Bowers, 358 U.S. 534 (1959). ---------------------------------------- Page Break ---------------------------------------- 19 Export Clauses, the Court stated (Turpin v. Burgess, 117 U.S. 504, 507 (1886) (emphasis added)): The prohibition in both cases has reference to the imposition of duties on goods by reason or because of their exportation or intended exportation, or whilst they are being exported. * * * But a general tax, laid on all property alike, and not levied on goods in course of exportation, nor because of their intended exportation, is not within the constitutional prohibition. Relying upon the above passage, the Court subsequently held that a manufacturer of cheese for export could not-merely from the fact that the cheese was intended for export-escape liability for the federal tax of one cent per pound upon that product. Cornell v. Coyne, 192 U.S. 418, 428 (1904). The Court explained that the Export Clause "does not mean that articles exported are relieved from the prior ordinary burdens of taxation which rest upon all property similarly situated" (id. at 427). d. The Decision in Thames & Mersey. The direct ancestor of Thames & Mersey was Fair bank v. United States, 181 U.S. 283 (1901). That case involved a provision of the War Revenue Act of 1898 that imposed a variety of stamp taxes on written in- struments, including "bills of lading * * * for any goods, merchandise, or effects, to be exported from a port or place in the United States to any foreign port or place" (ch. 448, 26, 30 Stat. 459). In Fairbank, the Court held that the stamp tax on bills of lading for exported goods violated the Export Clause. Invoking a prior, similar holding under the Import-Export Clause (Almy v. California, 65 U.S. (24 How.) 169 (1861)), the Court held that the tax upon the bill of ---------------------------------------- Page Break ---------------------------------------- 20 lading was invalid because it was equivalent to a tax upon the exported articles themselves. Two cases argued on the same day are the cases upon which IBM relies. Like Fairbank, they involved taxes imposed by the War Revenue Act of 1898. Unlike Fairbank, however, neither tax was imposed expressly or directly on export transactions. United States v. Hvoslef, 237 U.S. 1 (1915), involved a federal stamp tax upon any "Contract or agreement for the charter of any ship" (26, 30 Stat. 460). Thames & Mersey, on which IBM most directly relies, involved a federal stamp tax on policies of marine insurance "whether against peril by sea or on inland waters" (26, 30 Stat. 461). Since these statutes did not dif- ferentiate between domestic voyages and shipments to foreign ports, it might have been supposed that they would be sustained as general taxes of neutral application under the reasoning of Turpin v. Burgess and Cornell v. Coyne. See page 19, supra. In Hvoslef, however, the Court instead invoked Fairbank without acknowledging that the stamp tax challenged in Hvoslef, unlike the tax challenged in Fairbank, was of general, not limited, application. In support of its decision in Hvoslef, the Court also invoked Robbins v. Shelby County Taxing District, 120 U.S. 489 (1887). Robbins was the first of "a long line of 'drummer' cases" under the Commerce Clause, in which the Court held that a State could not impose a licensing fee on a person who solicited orders for goods to be shipped from another State. 8. The Court stated in Robbins (id. at 497): ___________________(footnotes) 8 See Memphis Steam Laundry Cleaner, Inc. v. Stone, 342 U.S. 389, 392 (1952). Robbins had a numerous progeny. See, e.g., Crutcher v. Kentucky, 141 U.S. 47 (1891); DiSanto ---------------------------------------- Page Break ---------------------------------------- 21 It is strongly urged, as if it were a material point in the case, that no discrimination is made between domestic and foreign drummers-those of Tennessee and those of other states; that all are taxed alike. But that does not meet the difficulty. Interstate commerce cannot be taxed at all, even though the same amount of tax should be laid on domestic commerce, or that which is carried on solely within the state. Having applied Fairbanks and Robbins to immunize export transactions from broadly applicable taxing provisions in Hvoslef the Court entered its decision in Thames & Mersey two weeks later on the author- ity of Hvoslef. 237 U.S. at 27. The decisions in Hvoslef and Thames & Mersey established a pattern that this Court subsequently followed of immunizing export transactions from generally applicable federal taxes. For example, when Congress imposed a general tax on various sporting goods under the War Revenue Act of 1917, ch. 63, 600(f), 40 Stat. 316-317, the Court invoked Hvoslef and Thames & Mersey to hold that the Export Clause prohibited imposition of the tax to a shipment of baseballs and bats to a purchaser in Venezuela. A.G. ___________________(footnotes) v. Pennsylvania, 273 U.S. 34 (1927); Nippert v. City of Richmond, 327 U.S. 416 (1946). Among the more recent was Spector Motor Service, Inc. v. O'Connor, 340 U.S. 602 (1951), which this Court overruled in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). See page 25, infra. These deci- sions concerning the negative implications of the Commerce Clause are not logically relevant to analysis under the Export Clause. Although the Commerce Clause is a limitation on the powers of the States, it confers powers on the United States. See page 29, infra. ---------------------------------------- Page Break ---------------------------------------- 22 Spalding & Bros. v. Edwards, 262 U.S. 66 (1923). See also Crew Levick Co. v. Pennsylvania, 245 U.S. 292 (1917) (same under Import-Export Clause). Similarly, in Puget Sound Stevedoring Co. v. State Tax Commission, 302 U.S. 90 (1937), and Joseph v. Carter & Weekes Stevedoring CO., 330 U.S. 422 (1947), the Court held that gross receipts or sales taxes could not be imposed upon payments for loading or unloading ship cargoes transported in interstate or foreign commerce. e. The Modern Doctrine. Toward the end of this period of decisions, there were indications of recon- sideration. For example, in Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254-255 (1938), the Court heavily qualified, if it did not contradict, the broad rationale of Robbins on which Hvoslef was based. And, in Canton R.R. v. Rogan, 340 US. 511 (1951), the Court indicated a revised view of the proper treatment of taxes upon transactions related or collateral to importation and exportation when it wrote (id. at 514-515): The difference [between this case and cases such as Spalding] is that in the present case the tax is not on the goods but on the handling of them at the port. * * * [W]hen the tax is on activities connected with the export or import the range of immunity cannot be so wide. Full reconsideration finally came in Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976), Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), and De- partment of Revenue of Washington v. Association of Washington Stevedoring Cos., 435 U.S. 734 (1978). See also Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984). Those decisions expressly overruled many ---------------------------------------- Page Break ---------------------------------------- 23 of the decisions previously discussed and, without cataloging them in detail, rejected other decisions that had disposed of the same issues in the same fashion. (i) Michelin Tire involved the constitutionality of a state property tax as applied to imported tires held in the importer's warehouse in Georgia. Invoking the "original package" doctrine applied in Low v. Austin, the importer maintained that its imported tires were exempt from state tax, The Court rejected that claim, holding that (423 U.S. at 279) Georgia's assessment of a nondiscriminatory ad valorem property tax against the imported tires is not within the constitutional prohibition against laying "any Imposts or Duties on Imports * * *", and * * * insofar as Low v. Austin, 13 Wall. 29 (1872) is to the contrary, that decision is over- ruled. In reaching that decision, the Court reviewed the text and object of the Import-Export Clause, as well as its historical origin, 423 U.S. at 283-284. The Court noted that the considerations that gave rise to the Clause were that: (i) the federal government must speak with one voice in regulating commercial relations with foreign governments, and state tariffs on exports and imports could conflict with that requirement; (ii) import revenues were to be- the major source of revenue to the federal government and should not be diverted to the States; and (iii) harmony among the States would be disrupted if the seaboard States could tax goods passing through their harbors to or from their inland neighbors. Id. at 285. The Court observed that nondiscriminatory property taxes interfere with none of the constitu- ---------------------------------------- Page Break ---------------------------------------- 24 tional concerns of the Import-Export Clause. Id. at 286-290. Addressing the specific text of the Import-Export Clause in Michelin Tire, the Court "decline[d] to presume it was intended to embrace taxation that does not create the evils the Clause was specifically intended to eliminate" (423 US. at 293-294). The Court explained that the "original package" language of Brown v. Maryland had been misunderstood (id. at 298): [I]t is clear that the Court's view in Brown [v. Maryland] was that merely because certain actions taken by the importer on his imported goods would so mingle them with the common property within the State as to "lose their distinctive character as imports" and render them subject to the taxing power of the State, did not mean that in the absence of such action, no exaction could be imposed on the goods. Rather, the Court clearly implied that the prohibition would not apply to a state tax that treated imported goods in their original packages no differently from the "common mass of property in the country"; that is, treated it in a manner that did not depend on the foreign origins of the goods. The Court further noted that the opinion in Low v. Austin had misread Chief Justice Taney's opinion in the License Cases which "makes crystal clear that the prohibition applied only to state exactions upon imports as imports and did not apply to nondiscri- minatory ad valorem property taxes." 423 U.S. at 300. See pages 16-17, supra. (ii) In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Court held that the Commerce ---------------------------------------- Page Break ---------------------------------------- 25 Clause does not bar application of a generally appli- cable state tax to the gross revenues of a company engaged exclusively in the transportation of motor vehicles in interstate commerce. The Court recon- sidered and overruled its decision in Spector Motor Service, Inc. v. O'Connor, 340 U.S. 602 (1951), which, following Robbins, had held that Connecticut could not impose a tax for the privilege of engaging in interstate commerce. See page 20 & note 8, supra. The Court noted in Complete Auto that it was unquestioned that the activity engaged in by the taxpayer was sufficiently connected to the State to justify a tax, that the tax was fairly related to the benefit provided to the taxpayer, that the tax did not discriminate against interstate commerce, and that the tax was not unfairly apportioned. 430 U.S. at 287. Under those circumstances, the Court concluded that "the Spector rule does not address the problems with which the Commerce Clause is concerned" and over- ruled that decision. Id. at 288. The Court's holding in Complete Auto necessarily, albeit implicitly, over- ruled Robbins and the "long line of 'drummer' cases" that that decision had spawned. See note 8, supra. (iii) In Department of Revenue of Washington v. Association of Washington Stevedoring Cos., 435 U.S. 734 (1978), the Court considered the State of Washington's renewed attempt to apply its gross receipts tax to the proceeds generated from loading and unloading ocean-going vessels. In the earlier decisions in Puget Sound and Carter & Weekes, the Court had invoked the Commerce Clause to hold unconstitutional the application of the State's tax to the proceeds of stevedoring cargoes in inter- state and foreign commerce. See page 22, supra. In ---------------------------------------- Page Break ---------------------------------------- 26 Washington Stevedoring, however, the Court had little difficulty, after. Complete Auto, in overruling those decisions insofar as the Commerce Clause was involved. 435 U.S. at 743-751. The Import-Export Clause required separate con- sideration. Michelin Tire had inquired whether a generally applicable tax that does not favor or disfavor imports or exports conflicts with any of the policies leading to the adoption of the Import-Export Clause and had upheld the application of the property tax to imported goods, whether or not in the original package, when it found no friction or inconsistency. A similar inquiry led the Court to conclude in Washington Stevedoring that the generally appli- cable Washington tax on gross receipts from stevedoring offended none of the policies of the Import-Export Clause. 435 U.S. at 754-755. The Court specifically rejected the suggestion that the fact that Michelin Tire dealt only with goods no longer in transit required that the cases be differentiated. Id. at 755-757. The Court noted that Canton Railroad demonstrated that the analysis that prevailed in Michelin Tire was not to be discarded simply because the goods were in transit. Ibid. Moreover, the fact that Michelin Tire involved only imports while the Washington tax related to proceeds from stevedoring exports as well did not call for a different conclusion. Id. at 757-758. The Court con- cluded that the considerations that led to the deci- sion in Michelin Tire were equally applicable to the Washington tax. Ibid. 9. ___________________(footnotes) 9 Justice Powell concurred separately in Washington Stevedoring. He concluded that the controlling factor in that case, as in Michelin Tire, is that local taxpayers should not be ---------------------------------------- Page Break ---------------------------------------- 27 (iv) In Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984), the Court made clear that more than just a few named decisions had been overruled by Michelin Tire and Washington Stevedoring. Instead, in over- ruling an earlier decision that had invalidated the application of a "nondiscriminatory ad valorem per- sonal property tax to imported fibers still in their original packages" (id. at 354), the Court emphasized that the reasoning that underlay those earlier de- cisions had been "repudiated" (id. at 362). The fact that the Court in Michelin Tire did not explicitly name all of the cases whose reasoning had been re- jected does not indicate that those older decisions retain "current validity." Id. at 361. f. Application of the Modern Doctrine to the Export Clause. There is no reason why the more recent decisions of this Court should not be auth- oritative with respect to the Export Clause, and every reason why they should be. As we have noted, beginning with Brown v. Maryland and periodically since then, the Court has stated that the two Clauses have the same scope. Moreover, cases under the two Clauses have been cited by the Court without differentiation. Most recently, in Washington Steve- doring, the Court cited Spalding (an Export Clause case) along with cases involving state taxes and the Import-Export Clause to illustrate reasoning that was no longer approved. 435 U.S. at 752. As this Court explained in Washington Steve- doring, the Court in Michelin Tire "surveyed the ___________________(footnotes) required to subsidize the services used and enjoyed by importers and exporters; instead, the consumers of such goods should pay for the services rendered by government just as they paid transportation costs. 435 U.S. at 761-764. ---------------------------------------- Page Break ---------------------------------------- 28 history and purposes of the Import-Export Clause to determine, for the first time, which taxes fell within the absolute ban on 'Imposts and Duties'" (435 U.S. at 751). The Court concluded from this examination that a generally applicable tax that merely falls, with- out discrimination, on imports and exports as well as other goods, does not violate the Import-Export Clause. 423 U.S. at 302. An examination of the history and objectives of the Export Clause similarly demonstrates that the generally applicable, nondiscriminatory tax imposed by Section 4371 of the Internal Revenue Code does not violate that Clause. As the court of appeals noted (App., infra, 4a), the Export Clause reflected the fear of the agricultural and exporting southern States that the more populous and numerous northern States would impose discriminatory taxes on the export of their products. The debate is well described in Charles Warren's classic The Making of the Constitution 570-574, (reprint 1993) (1928). 10. See also ___________________(footnotes) 10 The central portion of Warren's description is as follows (at 571-572) (footnote omitted): The question of a prohibition of taxes and duties on exports now brought these sectional differences into an outbreak in the Convention. It is to be noted, as a preliminary to consideration of this clash, that the Committee's proposal to forbid export duties was a very radical departure from the theory and practice theretofore prevailing in governmental taxation. As has been well said: "To attempt to organize a Govern- ment without the power to tax exports was an innovation. From time immemorial, every nation had taxed whatever productions of its soil its inhabitants might presume to export. In the old economy, its maxim was to tax exports but to admit imports free." The prohibition of export duty ---------------------------------------- Page Break ---------------------------------------- 29 App., infra, 4a; Madison's Notes of Debates in the Federal Convention, reproduced in 2 M. Farrand, The Records of the Federal Convention of 1787, at 305-308, 359-363, 441-442 (1966) (proceedings of August 16, 21, 28, 1787). It is beyond question that the tax imposed by Section 4371 is generally applicable and discriminates against no region or product. It applies equally to fire, storm, flood, and earthquake insurance, and to insurance against damage or loss for shipments from, for. example, San Francisco to Alaska, Hawaii, or Guam, or from New York to Miami or Galveston, as it does to insurance covering IBM's shipments to its foreign subsidiaries or their customers. Moreover, the United States-like the States-assists and protects IBM's shipments over highways within the United States (financed in substantial part by the federal government) as well as in the movement of such goods by sea or air beyond our borders. It must also be recognized that the Commerce Clause gives Congress comprehensive authority over exports and imports. It was established early that Congress had the power to embargo or otherwise control the export of such goods or materials as it chose. Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 191-192 ___________________(footnotes) now inserted in the new Constitution was not based, however, on any change in economic theory but on purely political and sectional conditions. The South, being agri- cultural and having three great crops which grew nowhere else,-tobacco, rice, and indigo,-feared that the possession of this power by Congress would enable the North to discriminate against it, by a tax which would operate only on the peculiarly Southern articles of export. This fear had been expressed early in the Convention. ---------------------------------------- Page Break ---------------------------------------- 30 (1824); United States v. Marigold, 50 U.S. (9 How.) 560, 566-567 (1850); United States v. The William, 28 Fed. Cas. 614, 620-623 (D. Mass. 1808) (No. 16,700). It is, of course, well established that the taxing poser may be employed in the regulation of foreign com- merce. Board of Trustees v. United States, 289 U.S. 48, 57, 58 (1993). The Export Clause removes only a small and narrowly defined area from this far-ranging authority. Considering the origins of the Export Clause, and this Court's more recent decisions, the prohibitions of that Clause should be confined to taxes directly and exclusively assessed upon, and discriminating against, "Articles exported." The federal statute that the court of appeals held unconstitutional in this case does not violate that standard. 3. The statute that the court of appeals invalidated cannot effectively be enforced without this Court's further review. Under the decision in this case, any taxpayer who obtains foreign insurance for export shipments may pay an assessment under Section 4371 and obtain a refund by bringing suit within the Federal Circuit. See page 14, supra. Congress en- acted the tax imposed by Section 4371 to raise "an appreciable amount of revenue" and to "eliminate an unwarranted competitive advantage" for foreign insurers who do not pay federal income taxes. H.R. Rep. No. 2333, supra, at 61. Absent review by this Court, these statutory objectives will plainly be defeated. And, as the court of appeals recognized (App., infra, 11a), it is uniquely the responsibility of this Court to complete the task of eliminating in- consistency in its own jurisprudence in this area. ---------------------------------------- Page Break ---------------------------------------- 31 CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. DREW S. DAYS, III Solicitor General LORETTA C. ARGRETT Assistant Attorney General LAWRENCE G. WALLACE Deputy Solicitor General KENT L. JONES Assistant to the Solicitor General GARY R. ALLEN ERNEST J. BROWN Attorneys OCTOBER 1995 ---------------------------------------- Page Break ---------------------------------------- APPENDIX A UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT No. 94-5164 INTERNATIONAL BUSINESS MACHINES CORPORATION, PLAINTIFF-APPELLEE v. THE UNITED STATES, DEFENDANT-APPELLANT Appealed from : U.S. Court of Federal Claims DECIDED: July 10, 1995 Before: ARCHER, Chief Judge, PLAGER and BRYSON, Circuit Judges. BRYSON, Circuit Judge. This case raises a question concerning the constitutionality of a federal statute. The govern- ment, as appellant, acknowledges that a 1915 Supreme Court decision is directly on point and that, if the decision is still good law, the statute at issue must be held unconstitutional as applied. The government argues, however, that the 1915 decision has been undermined by subsequent Supreme Court authority, and it asks us to regard that case as no longer binding. We do not regard it as clear that the ---------------------------------------- Page Break ---------------------------------------- 2a Supreme Court's more recent decisions have re- pudiated the 1915 decision. We therefore affirm the decision of the Court of Federal Claims invalidating the taxes at issue in this case. I During the pertinent tax years, 1975 through 1984, International Business Machines Corporation (IBM) sold information processing systems and related products to domestic and foreign customers. With respect to many of its foreign sales, IBM manu- factured products in the United States, sold them to its foreign subsidiaries, and shipped them either directly to the foreign customers or to consolidation centers in the customers' countries. The products were shipped by common carrier from IBM's domestic manufacturing plants to domestic ports or airports, where they were loaded onto ships or airplanes. Upon arrival in the foreign country, the products were cleared through customs and shipped to the foreign customers or consolidation centers. Title to the products passed from IBM to its foreign subsidiaries when the goods cleared customs in the foreign countries. In some cases, IBM's foreign subsidiaries purchased insurance from foreign insurers for the products during their shipment; in those cases, both IBM and the foreign subsidiaries were listed as insured beneficiaries. The Internal Revenue Service audited IBM's federal excise tax returns for 1975 through 1984 and determined that, as a beneficiary, IBM was subject to a four percent excise tax on the premiums paid to foreign insurers. The excise tax was assessed under the authority of 26 U.S.C. 4371, which imposes a four percent tax on each policy of casualty insurance issued by a foreign insurer to a domestic entity for risks or liabilities wholly or partly within the United States, Section 4371 applies only to insurance ob- tained from foreign insurers who are not subject to ---------------------------------------- Page Break ---------------------------------------- 3a federal income tax; it was designed to offset the advantage that such insurers would otherwise have over domestic insurance companies that are subject to domestic income taxes. See H.R. Rep. No. 2333, 77th Cong., 2d Sess. 61 (1942). IBM paid the assessed excise taxes and filed suit in the Court of Federal Claims, seeking a full refund of the taxes paid. In a thorough opinion on which we rely, the Court of Federal Claims held that the excise tax on premiums charged by foreign insurers, as applied to casualty insurance on goods in the export stream, was in effect a tax upon the exported products themselves and thus ran afoul of the Export Clause of the Constitution, Article I, Section 9, Clause 5. International Business Machines Corp. v. United States, 31 Fed. Cl. 500 (1994). In so holding, the court relied on the Supreme Court's decision in Thames & Mersey Marine Insurance Co. v. United States, 237 U.S. 19 (1915), which struck down a similar tax on marine insurance policies. The Court of Federal Claims rejected the govern- ment's argument that the analysis in the Thames & Mersey case has been repudiated in subsequent Supreme Court decisions, and that the excise tax imposed on foreign insurance policies should be upheld as a permissible tax of general application that does not discriminate against exports. Instead, the court concluded that casualty insurance is an integral part of commercial exportation, that the value of exported goods bears a close relationship to the value of insurance policies on those goods, and that the tax imposed in this case therefore amounted to a tax on exports, prohibited by the Export Clause. II This case presents the question whether the Supreme Court analysis of the Export Clause in the Thames & Mersey case retains its vitality in the wake of subsequent Supreme Court decisions ---------------------------------------- Page Break ---------------------------------------- 4a involving the Import-Export Clause, Article I, Section 10, Clause 2, in which the Court has modified its approach to issues arising under that. Clause. A The Export Clause provides, in one sentence: "No Tax or Duty shall be laid on Articles exported from any State." Along with the Import-Export Clause, which prohibits any State, without the consent of Congress, from laying "any Imposts or Duties on Imports or Exports," the Export Clause was "one of the compromises which entered into and made possible the adoption of the Constitution." Fairbank v. United States, 181 U.S. 283 (1901). At the Constitutional Convention, strong senti- ments were voiced on the subject of export taxes. Representatives of the Southern States expressed concern that a Congress controlled by the more numerous and populous Northern States would impose burdensome levies on Southern exports. Charles Pinckney of South Carolina insisted that security against taxes on exports be included in the Constitution, on a par with security against the emancipation of the slaves. 2 The Records of the Federal Convention of 1787 95 (Max Farrand cd. 1927). According to Madison's notes, George Mason of Virginia likewise "urged the necessity of connecting with the power of levying taxes duties &c, . . . that no tax should be laid on exports. . . . He hoped the [Northern] States did not mean to deny the Southern this security." Id. at 305. Concern over the risk of abuse of the power to tax exports was expressed even by a Northern delegate, Elbridge Gerry of Massachusetts, who stated his view that "the legislature could not be trusted with such a power. It might ruin the Country. It might be exercised partially, raising one and depressing another part of it." Id. at 307. ---------------------------------------- Page Break ---------------------------------------- 5a Acknowledging the importance of the Export Clause and its flat prohibitory language, the Supreme Court has consistently given the Clause a broad construction. In one of the first major decisions applying the Export Clause, the Court struck down a stamp tax imposed on bills of lading relating to goods designated for foreign export. Such a tax, the Court explained, "is in substance and effect equivalent to a tax on the articles included in that bill of lading, and, therefore, a tax or duty on exports, and in conflict with the constitutional prohibition." Fairbanks v. United States, 181 U.S. at 312. In applying that test, the Court distinguished between taxes imposed on property prior to its entering the export stream and taxes imposed, directly or indirectly, on property during the export process. For example, in Cornell v. Coyne, 192 U.S. 418 (1904), the Court upheld a tax on filled cheese that was imposed prior to its exportation, holding that a nondiscriminatory tax on manufactured cheese was not unconstitutional simply because the manu- facturer intended from the outset to export the cheese. By contrast, in United States v. Hvoslef, 237 U.S. 1 (1915), the Court struck down a tax imposed on charter parties for the carriage of cargo to foreign ports. As applied to the charter parties for export at issue in the case before it, the Court held that the tax was "nothing else than a tax on exportation" and thus prohibited by the Export Clause. Id. at 18. It did not matter, the Court held, that the statute in question was not limited to charter parties for exports, but applied to charter parties generally; even if the statute in question created a nondiscriminatory tax or general application, it was unconstitutional to the extent that it was applied to charter parties for export, because in so doing, it had the prohibited effect of imposing a tax on exports. Id. Two weeks after Hvoslef, the Supreme Court in the Thames & Mersey case struck down a stamp tax ---------------------------------------- Page Break ---------------------------------------- 6a on policies of marine insurance to the extent that it applied to policies insuring exports. The Court put the question as whether "the tax upon such policies [is] so directly and closely related to the 'process of exporting' that the tax is in substance a tax upon the exportation and hence within the constitutional prohibition." 237 U.S. at 25. Finding that marine insurance "is by virtue of the demands of commerce an integral part of the exportation," id. at 26, the Court concluded that the tax at issue, as a practical matter, fell upon the exporting process and therefore was invalid under the Export Clause. B The government concedes that if Thames & Mersey is still good law, the assessments at issue in this case are invalid. In the government's view, however, subsequent decisions construing the Import-Export Clause have rendered Thames & Mersey analytically unsound. The government con- tends that the Export Clause should be interpreted not to outlaw taxes of general application, as long as they do not discriminate against exported goods or services relating to exports. The government there- fore invites this court to disregard the Supreme Court's contrary analysis of the Export Clause in Thames & Mersey. In pressing its case against Thames & Mersey, the government relies particularly on two decisions construing the Import-Export Clause, Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976), and Department of Revenue v. Association of Washington Steve- doring Companies, 435 U.S. 734 (1978). Prior to the Michelin decision, the Supreme Court viewed the Import-Export Clause as erecting a general pro- hibition against state taxation of imports and exports. The focus of inquiry was on whether the impact of the tax fell on goods that were in foreign commerce; if it did, the tax was forbidden (except in the limited ---------------------------------------- Page Break ---------------------------------------- 7a circumstances permitted by the Clause itself). See Almy v. California, 65 U.S. (24 How.) 169 (1861); Low v. Austin, 80 U.S. (13 Wall.) 29 (1872). In the Michelin case, the Court jettisoned that mode of analysis and adopted a new approach based on the text and purposes of the Import-Export Clause. Overruling its prior decision in Low v. Austin, the Court held that a nondiscriminatory ad valorem property tax does not run afoul of the Import-Export Clause simply because it is applied to goods that have recently been imported. The Court noted that the Import-Export Clause bans only "Imports or Duties"; it "is not written in terms of a broad prohibition of every 'tax.'" Michelin, 423 U.S. at 290. Moreover, the Court explained that the Framers adopted the Import-Export Clause to ensure that the federal government would speak with one voice in regulating commerce with foreign nations, to preserve import revenues for the federal government, and to protect states without port facilities from exploitation by those directly engaged in foreign commerce. None of those concerns, the Court stated, is triggered by a nondiscriminatory ad valorem tax "which is also imposed on goods that are no longer in import transit." 423 U.S. at 286. The Supreme Court used similar reasoning to reach a similar result two years later in the Washington Stevedoring case. In that case, which involved an Import-Export Clause challenge to a state tax on stevedoring services, the Court rejected an argument that the tax was impermissible when applied to stevedoring services relating to foreign imports and exports. A nondiscriminatory tax on stevedoring services was not an "import or duty" on imports or exports, the Court concluded, but simply a local tax on services that happened to facilitate the importation and exportation of goods. Relying on Michelin and Washington Steve- doring, the government argues that Section 4371 ---------------------------------------- Page Break ---------------------------------------- 8a should be upheld as a nondiscriminatory tax that does not specifically target exports and therefore is not an invalid "tax or duty" laid "on articles exported from any State." Although Michelin and Washington Stevedoring arose under the Import-Export Clause, rather than the Export Clause, the government argues that the Supreme Court is likely to follow a similar analysis under the Export Clause when the occasion arises. The government finds additional support for its position in cases decided under the Commerce Clause. As under the Import-Export Clause, early Commerce Clause cases struck down even nondiscriminatory taxes on the privilege of doing business in a state when applied to an activity that was part of interstate commerce. See, e.g., Spector Motor Service v. O'Connor, 340 U.S. 602 (1951); Robbins v. Shelby County Taxing Dist., 120 U.S. 489 (1987). That line of cases, however, was overturned in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), in which the Court held that the Commerce Clause is not violated by the application of a fairly apportioned and nondiscriminatory tax on the privilege of doing business in a state, even if the tax is applied to an interstate activity. The government points out that in Hvoslef (and by extension in Thames & Mersey, which relied on Hvoslef) the Court. invoked the line of Commerce Clause authority that was disapproved in Complete Auto. The government also points out that the Court's analysis of the Export Clause in Thames & Mersey paralleled the Court's then-governing approach to the Import-Export Clause, which has also been disapproved. Accordingly, the government submits, the analytical foundations of Thames & Mersey have been removed, and its demise is a foregone conclusion. We are not so sure. While the Supreme Court may at some point reconsider Thames & Mersey, it has ---------------------------------------- Page Break ---------------------------------------- 9a not clearly signaled that it is ready to do so. Support for the continuing vitality of Thames & Mersey can be found both in the Court's Import-Export Clause decisions and in the distinctions in language and policy between the Import-Export Clause and the Export Clause. In Canton Railroad Co. v. Rogan, 340 U.S. 511 (1951), a predecessor of the Washington Stevedoring case, the Supreme Court upheld state taxes cm transportation services as applied to goods being imported or exported. The Court was careful to distinguish Thames & Mersey, noting that the tax on marine insurance policies addressed in Thames & Mersey was "the equivalent of a direct tax on the articles." 340 U.S. at 513-14. And in Washington Stevedoring, the Court recognized that the tax on insurance policies in Thames & Mersey was on an "activity so connected with the goods that the levy amounted to a tax on the goods themselves." 435 U.S. at 756 n.21. Although the Washington Stevedoring Court acknowledged that "the basis for distin- guishing Thames & Mersey is less clear" than for other similar cases (because marine insurance policies arguably have a value apart from the value of the insured goods), the Court noneless noted that "the value of goods bears a much closer relation to the value of insurance policies on them than to the value of loading and unloading ships." Id. Thus, while the Court's treatment of Thames & Mersey may reflect less than a ringing endorsement of that decision, the Court's characterization of Thames & Mersey as distinguishable from, rather than in tension with, the Canton Railroad and Washington Stevedoring cases significantly undermines the government's contention that Thames & Mersey must be regarded as a dead letter. The Supreme Court has also pointed to the difference in language between the Import-Export Clause and the Export Clause. Although the Court at ---------------------------------------- Page Break ---------------------------------------- 10a first expressed the view that the "diversity in language" between the two clauses did not reflect any difference in "the act which is prohibited," Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 425 (1827), in both Michelin and Washington Stevedoring the Court has noted and attached significance to the difference between the narrow term "Imposts and Duties" (the language of the Import-Export Clause) and the broader term "Tax" (the language of the Export Clause). See Michelin, 423 U.S. at 290; Washington Stevedoring, 435 U.S. at 759. The Court has suggested that a difference in policy underlies the difference in language. While the Import-Export Clause was intended to prohibit States from imposing a "transit fee" on goods moving in foreign commerce, Washington Stevedoring, 435 U.S. at 764 (Powell, J., concurring in part and concurring in the result), the Export Clause served the broader purpose of "forbid[ding] federal taxation of exports." Washington Stevedoring, 435 U.S. at 758. The Supreme Court's current narrower view of the prohibition in the Import-Export Clause thus does not dictate that the Export Clause be given a similarly narrow construction. III Urging us to anticipate the overruling of Thames & Mersey, able counsel for appellant has called our attention to the opinion of Judge Learned Hand, dissenting in Spector Motor Service, Inc. v. Walsh, 139 F.2d 809, 823 (2d Cir. 1943). In his opinion in that case, Judge Hand explained that a lower court should not feel obliged to follow a higher court decision "in the face of changes plainly foreshadowed," simply because the higher court decision has not yet been explicitly overruled. While that proposition may be sound in extreme cases, we do not agree with counsel that it applies to this case. Here, unlike in the case ---------------------------------------- Page Break ---------------------------------------- 11a Judge Hand put, we do not believe the change the government anticipates is "plainly foreshadowed." Although the Supreme Court may yet reconsider the Thames & Mersey decision, and with it the Court's traditional analysis of the Export Clause, we do not feel free in this case to take the extraordinary step of disregarding a higher court decision that all agree is binding precedent if it is still valid. Thus, the precedent that seems to us most pertinent is not Judge Hand's dissent in the Spector Motor case, but the Supreme Court's own more recent directive to inferior courts, in Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 484 (1989): If a precedent of this Court has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the Court of Appeals should follow the case which directly controls, leaving to this Court the prerogative of overruling its own decisions. In light of that instruction, and the undisputed applicability of Thames & Mersey to the tax imposed in this case, we conclude that our duty is to follow Thames & Mersey and hold Section 4371 invalid as applied. AFFIRMED. ---------------------------------------- Page Break ---------------------------------------- 12a APPENDIX B IN THE UNITED STATES COURT OF FEDERAL CLAIMS No. 388-89T (Filed June 23, 1994) INTERNATIONAL BUSINESS MACHINES CORPORATION, PLAINTIFF v. The UNITED STATES, DEFENDANT Taxation: Excise Tax on Foreign Insurers; Export Clause (Art. I, 9, cl. 5) OPINION LYDON, Senior Judge: In this litigation, International Business Machines Corporation (IBM) seeks to recover de- ficiencies assessed by the Internal Revenue Service after the Service determined that IBM failed to pay a four percent excise tax on premiums paid to foreign insurers that issued policies covering products IBM sold to its foreign subsidiaries. No facts are in dispute, and each party has moved for summary judgment. The issue presented in the summary judgment motions is whether the excise tax on foreign insurance premiums violates the con- stitutional prohibition against taxing exports. Be- cause the court agrees with IBM that the tax at issue ---------------------------------------- Page Break ---------------------------------------- 13a in this case is prohibited by the Constitution, the court grants summary judgment in favor of IBM. I Sales of IBM Products Outside the United States The following facts have been stipulated by the parties or are otherwise undisputed. IBM is a do- mestic corporation incorporated under the laws of the State of New York, whose principal place of business is in Armonk, New York. IBM is a developer and manufacturer of sophisticated information processing systems and related products, sold throughout the world. During the tax years at issue in this case, 1975-84, sales of IBM products outside the United States were made through a worldwide network of more than one hundred wholly owned foreign subsidiary corporations. IBM products sold by for- eign subsidiaries were manufactured either in their own overseas plants (or in the plants of other IBM foreign subsidiaries) or by IBM at manufacturing plants in the United States. During the tax years in issue, IBM products manufactured in the United States and sold outside the United States through foreign subsidiaries included (but were not limited to) the following items, manufactured at the locations indicated: Product: Manufacturing Locations: Mainframe computers Poughkeepsie, NY Tape drivers, large printers, magnetic tape Tucson, AZ Disc drives San Jose, CA Copiers, toner, supplies Boulder, CO Intermediate computers Rochester, MN, Austin, TX ---------------------------------------- Page Break ---------------------------------------- 14a Personal computers, keyboards Austin, TX, Boca Raton, FL Point of sale banking machines, circuit cards Charlotte, NC Communication devices, cathode ray terminals Raleigh, NC Semiconductors Manassas, VA, East Peekskill, NY, Burlington, NY Large circuit boards, specialized intermediate computers Endicott, NY Sales outside the United States of IBM products manufactured within the United States were ac- complished by a purchase order to IBM from its foreign subsidiary, under which IBM billed the subsidiary and generally shipped the goods directly to the subsidiary's customer. Lower priced goods might be shipped to a consolidation center in the foreign country, and maintained as inventory by the foreign subsidiary to fill future orders. Depending upon the particular product, IBM would fill a subsidiary's order either by (1) building the product to particular specifications contained in a purchase order ("built to order"), or (2) utilizing, ongoing production at a factory or inventory warehouse ("built to plan"). Shipment of products from the United States to the foreign customer began by truck on a common carrier (from the manufacturing plant or warehouse). The goods generally were destined for a United States airport (typically, John F. Kennedy in New York for shipments to Europe and the Middle East, Miami International for shipments to Latin America, and San Francisco International for shipments to the ---------------------------------------- Page Break ---------------------------------------- 15a Far East), but some shipments were by sea. While traveling within the United States, the products would typically be unloaded at one or more inter- mediate freight forwarder locations, where they would typically remain for two to five days, but could remain while awaiting space on an airliner for as long as thirty days. The products would be reloaded at the freight forwarders' facilities and continue ultimately to the point of embarkation, where they were loaded onto an airplane or a ship. Once the products reached the air or sea port in the foreign country, they were unloaded, cleared customs, and loaded on trucks for shipment to their final destination. When foreign subsidiaries purchased IBM products from IBM during the years in issue, the terms of sale called for title to the products (and the risk of loss) to pass from IBM to the subsidiary when the goods cleared customs in the foreign country. The terms of sale also called for the purchasing subsidiary to bear the cost of insuring the products against damage or destruction during shipment. Insurance Covering the Shipment of IBM Products Sold to Foreign Subsidiaries All U.S.- manufactured products IBM sold to foreign subsidiaries were covered by casualty insurance against damage or destruction during shipment. Insurance was "point to point," that is, it covered the risk of loss to goods during trans- portation by surface or air transportation from the IBM facility in the United States until delivered to the foreign customer or a foreign consolidation center. In some cases, IBM arranged for the insurance; when it did so, insurance was placed with a U.S. insurance carrier, and the cost was billed to the foreign subsidiary. In other instances, the foreign subsidiary placed the insurance; when it did so, the insurance often was "with a foreign carrier, which the subsidiary paid for directly. In all cases, both IBM ---------------------------------------- Page Break ---------------------------------------- 16a and its foreign subsidiary were listed as insured beneficiaries. When a foreign subsidiary obtained its own insurance coverage with a foreign insurer, the policy covered not only shipments to it by IBM from the United States, but shipments of goods purchased from foreign affiliates in other countries as well. The insurer would charge a separate premium to cover each shipment, the amount of which was determined by multiplying the declared value of the particular shipment by the premium rate applicable to that shipment. The premium rate depended on such underwriting factors as the place of origin and destination of the goods, the type of goods involved and how they were packaged, the time and distance of the trip, the route and mode of transportation, and the amount of material handling expected during the trip. If damage to an IBM product being shipped to a foreign country occurred while IBM had title to the goods (and the risk of loss), then IBM would be entitled to the insurance proceeds under the insurance policy (whether issued by a U.S. company or a foreign insurer). If the loss occurred, however, after the importing foreign subsidiary acquired title to the products, the insurance proceeds would be payable to the subsidiary. In the latter case, the subsidiary would use the proceeds to pay IBM the full purchase price of the damaged products, or to reimburse itself for the purchase price if IBM had already been paid. Since most IBM products shipped to foreign subsidiaries were packaged in containers, damage was frequently not discovered until after the products arrived at their destination. As a practical matter, it was often impossible to determine when a loss occurred and therefore who was legally entitled to receive the policy proceeds. In most cases involving foreign insurance carriers, therefore, the insurance company simply paid the insurance ---------------------------------------- Page Break ---------------------------------------- 17a proceeds to the foreign subsidiary which used the proceeds to pay IBM for the goods. The Service's Position During the Audits For the tax periods at issue in this litigation, each quarter during the years 1975 through 1984, IBM filed federal excise returns that did not report any liability under 4371 of the Internal Revenue Code of 1954, a four percent excise tax on premiums paid for certain policies of insurance issued by foreign insurers. On audit, the Service determined that IBM was liable for the 4371 tax as a result of the policies purchased from foreign insurance companies insofar as those policies applied to IBM products being exported from the United States. As part of the audit process, IBM requested the Service's District Director to seek technical advice from the Service's National Office on whether the 4371 tax as applied to IBM's exports was in violation of Article I, 9, clause 5 of the United States Consti- tution, which will be referred to throughout this opinion as the Export Clause. In a Technical Advice Memorandum dated May 12, 1982, the National Office rejected IBM's constitutional argument on the grounds that the 4371 tax was not a "tax" within the meaning of the Export Clause because the primary object of the tax statute was regulatory as opposed to revenue-raising. On reconsideration, the Service issued a second Technical Advice Memorandum, dated November 6, 1984, reaffirming its earlier position and adding. a second argument, that the Export Clause did not restrict application of the 4371 tax because the incurred risks included some transportation within the United States. The Service found that the Export Clause had no application at all to an export voyage if some portion of the total voyage included an intra-U.S. transportation leg. Because the insurance policies in question here covered not just the ---------------------------------------- Page Break ---------------------------------------- 18a overseas portion of the export shipments but also the inland leg from the IBM manufacturing facilities to the U.S. air or sea port, the Service concluded that the Export Clause had no application to any of the shipments. Presently, the government is not relying on the positions advanced by the Service described above. The Assessments The Service determined that the premiums paid to foreign insurers with respect to U.S. manufactured IBM products sold to its foreign subsidiaries were subject to the tax imposed by 4371. During the audit, IBM sent questionnaires to its foreign sub- sidiaries and determined that the premiums paid by them to foreign insurers during the year 1980, allocable to U.S manufactured IBM products sold outside the United States, totaled $2,065,137. For expediency in making assessments under 4371, IBM and the Service agreed that the foreign insurance premiums attributable to such products in each of the years 1975-79 and 1981-84 were the same as the premiums paid in 1980. Accordingly, the Service assessed 4371 taxes of $82,605 per year (a figure calculated by multiplying the annual premiums by four percent), along with interest and delinquency penalties for each quarter in issue. IBM paid its assessments in full, and timely filed claims for refund. The Service denied these claims on December 23, 1988. IBM timely filed its action in this court on July 11, 1989. Since then, the government has since abated the penalty assessments and refunded the amounts so assessed to IBM, with interest. The assessments for tax and interest, which are still in dispute, total $1,532,235.87. ---------------------------------------- Page Break ---------------------------------------- 19a The Present Motions The sole question presented by the motions far summary judgment is whether 4371 is constitu- tionally impermissible, given the facts agreed to by the parties. Article I, section 9, clause 5 of the United States Constitution, the Export Clause, provides: "No Tax or Duty shall be laid on Articles exported from any State." This provision was in- tended to free all exportations from the burdens of national taxation. Section 4371 provides: There is hereby imposed, on each policy of insurance, indemnity bond, annuity contract, or policy of reinsurance issued by a foreign insurer or reinsurer, a tax at the following rates: (1) Casualty insurance and indemnity bonds 4 cents on each dollar, or fractional part thereof, of the premium paid on the policy of casualty insurance or the indemnity bond, if issued to or for, or in the name of, an insured as defined in section 4372(d); The parties appear to agree that as the terms "foreign insurer," "policy of casualty insurance," and "insured" are defined in 4372, the premiums on casualty insurance that IBM purchased are facially subject to the tax imposed by 4371. II A. IBM's Argument IBM directs the court's attention to Thames & Mersey Marine Insurance, Co. v. United States, 237 U.S. 19, 35 S. Ct. 496, 59 L.Ed. 821 (1915), cited for the holding that the Export Clause prohibits the levying of taxes on policies of marine insurance on exports. ---------------------------------------- Page Break ---------------------------------------- 20a In Thames & Mersey, the taxpayer sought to recover amounts it paid in stamp taxes on policies insuring exports against marine risks. In its analysis, the Court turned quickly to United States v. Hvoslef, 237 U.S. 1, 35 S. Ct. 459, 59 L.Ed. 813 (1915), a case decided two weeks before Thames & Mersey. In Hvoslef, the Court invalidated a, tax levied on charter parties which were exclusively for the carriage of cargo from state ports to foreign ports because the tax was essentially a tax on exports. The Thames & Mersey court said that its issue followed directly, for the question presented by both Hvoslef and Thames & Mersey was: "Is the tax upon such policies so directly and closely related to the 'process of exporting' that the tax is in substance a tax upon the exportation and hence within the constitutional prohibition?" Thames & Mersey, 237 U.S. at 25, 35 S. Ct. at 498. Put another way by the Court, the constitutionality of this tax depended on "whether policies of insurance against marine risks during the voyage to foreign ports are not so vitally connected with exporting that the tax on such policies is essentially a tax upon the exportation itself." Id. at 26, 35 S. Ct. at 498. An- swering this question by examining "the exigencies of trade [to] determine what is essential to the process of exporting," the Court held that marine insurance policies are so vitally connected to the export process that a tax on the policies amounts to a tax on the exports themselves, in contravention of the Export Clause. Cf. Fairbank v. United Slates, 181 US. 283, 21 S. Ct. 648, 45 L.Ed. 862 (1901) (stamp tax on bill of lading for exported goods is in effect a tax on the articles included in the bill of lading, and is therefore a tax on exports). The second prong of IBM's contention is that as far as certain taxes are proscribed by the Export Clause of the Constitution, 4371 is such a tax. IBM states that the predecessor of 4371 was a stamp tax enacted as part of a comprehensive wartime revenue ---------------------------------------- Page Break ---------------------------------------- 21a bill, the Revenue Act of 1918. Ch. 18, 1107, 40 Stat. 1057, 1138. The excise tax on foreign insurers was re-enacted as part of a World War II revenue bill, the Revenue Act of 1942. Ch. 619, 502, 56 Stat. 798, 955. A House report discussing this revenue measure, cited by IBM, stated "It is believed that the revised provision till yield an appreciable amount of revenue, and at the same time eliminate an unwarranted competitive advantage now favoring foreign insurers [who are not subject to income tax]." H.R.Rep. No, 2333, 77th Cong., 2d Sess. 61 (1942). Finally, IBM argues that export protection begins as soon as goods enter the "export stream," and accordingly the prohibition against taxation that burdens exports extends to the payment of taxes on premiums by IBM in this case. The "export stream" is the final, continuous journey out of the country, and tax immunity attaches as soon as the journey begins. Dep't of Revenue v. Ass'n of Washington Stevedoring Cos., 435 U.S. 734, 752, 98 S. Ct. 1388, 1400, 55 L.Ed.2d 682 (1978). Referring again to Thames & Mersey, IBM argues that the payment of these taxes is so directly and closely related to the process of exporting that the tax is in substance a tax upon the exportation, and thus constitutionally prohibited. Section 4371, argues IBM, falls outside the spirit of the Supreme Court's thoughts in Fairbank v. United States, 181 U.S. 283, 21 S. Ct. 648, 45 L.Ed. 862 (1901). There, the court stated [T]he purpose of the restriction is that exportation, all exportation, shall be free from national burden . . . . [I]t is clear that the framers of the Constitution intended not merely that exports should not be made a source of revenue to the National Government, but that the National Government should put nothing in the way of burden upon such exports. Id. at 292-93,21 S. Ct. at 652. ---------------------------------------- Page Break ---------------------------------------- 22a B. The Government's Argument As mentioned previously, the government is not presently advancing the two positions defended by the Service's National Office that it took on 4371 during the audit process, namely, that 4371 does not impose a tax that has any constitutional ramifications because its primary purpose is regulatory instead of revenue-raising, and that Thames & Mersey is distinguishable because these shipments were not pure exportation in that they included an inland leg from a plant inside the United States to a port. In its cross-motion, the government does not disagree with the admonition in Fairbank that ex- ports cannot be burdened by taxation that interferes with the export process. Where IBM goes astray, argues the government, is in its argument that Thames & Mersey controls this case. The govern- ment says that Thames & Mersey is silent on the question of whether the excise tax imposed by 4371 targeted exports in a discriminatory fashion or whether the tax was facially neutral in this regard. The thrust of the government's motion for summary judgment is that Thames & Mersey has been superseded by Supreme Court decisions that have shifted the critical "Export Clause" question to whether a tax discriminates against exports in their capacity as exports. The government's argument is premised on its interpretation of two related Supreme Court de- cisions. In Michelin Tire Corp. v. Wages, 423 U.S. 276, 96 S.Ct. 535, 46 L.Ed.2d 495 (1976), the State of Georgia assessed ad valorem property taxes against Michelin's inventory of imported tires and tubes. Michelin argued that the ad valorem tax was prohibited by the "Import-Export Clause" of the Constitution, Article I, 10, clause 2, which provides: "No State shall, without the Consent of the Con- gress, lay any Imposts or Duties on Imports and Exports, except what maybe absolutely necessary for ---------------------------------------- Page Break ---------------------------------------- 23a executing its own inspection Laws. . . ," The Court rejected Michelin's proposition, stating: "Nothing in the history of the Import-Export Clause even re- motely suggests that a nondiscriminatory ad valorem property which is also imposed on imported goods that are no longer in transit was the type of exaction that was regarded as objectionable by the Framers of the Constitution." Id. at 286, 96 S. Ct. at 541. Critical to the Court's holding in Michelin was its discussion of Low v. Austin, 80 U.S. (13 Wall.) 29, 20 L. Ed. 517 (1872). The Court characterized Low as "the leading decision of this Court holding that the States are prohibited by the Import-Export Clause from imposing a nondiscriminatory ad valorem property tax on imported goods until they lose their character as imports and become incorporated into the mass of property in the State." Michelin, 423 U.S. at 282, 96 S.Ct. at 539. Low, the Court con- tinued, improperly expanded the prohibition of the Import-Export Clause, rejecting the more reasoned views expressed by Justice Marshall in Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 6 L.Ed. 678 (1827), and Justice Taney in the License Cases, 46 U.S. (5 How.) 504, 12 L.Ed. 256 (1847), that an examination of the origins of the Clause "makes crystal clear that the prohibition applied only to state exactions upon imports as imports and did not apply to nondiscriminatory ad valorem property taxes." Michelin, 423 U.S. at 300, 96 S.Ct. at 547. Accord- ingly, the Court found that Low was wrongly decided and explicitly overruled it. Id. at 301, 96 S. Ct. at 548. What in Michelin the Supreme Court said about the taxation of imports qua imports, it extended to the taxation of exports qua exports in Washington Stevedoring. There, the Court resumed a discus- sion it began in Michelin. The Court noted that "Michelin initiated a different approach to Import- Export Clause cases. It ignored the simple question whether the tires and tubes were imports. Instead, it ---------------------------------------- Page Break ---------------------------------------- 24a analyzed the nature of the tax to determine whether it was an 'Impost or Duty.'" Washington Steve- doring, 435 U.S. at 752, 98 S.Ct. at 1400. The import tax in Michelin was upheld because it did not offend the three main concerns of the Framers of the Import-Export Clause: the government speaking with one voice when regulating commercial relations with foreign governments; preventing federal sources of import revenues from being diverted to the states; and preventing states from levying taxes on citizens of other states by taxing goods merely flowing through their ports to other states. Although the Court in Washington Stevedoring recognized that there were some formal factual distinctions between it and Michelin, it extended the Michelin "three concerns" analysis to taxation involving exports. The Court pointed out that an export tax need only be measured against the first and third concerns: the export-tax ban of the Import- Export Clause does not serve the second concern, protection of federal revenues, because that objective is satisfied by the Export Clause of Article I, 9. In sum, the Court decided that an export tax should be tested for its conformance with the first and third policies of the Import-Export Clause, and if the constitutional interests are not disturbed, the tax should not be considered an "Impost or Duty" pro- hibited by the Constitutional ban. Among the distinctions drawn by the Washington Stevedoring Court between its facts and those in Michelin was that in Michelin the tax fell on the goods themselves, whereas in Washington Stevedoring the tax fell on stevedoring, the business of loading and unloading ships. The Court noted that a tax on stevedoring does not relate to the value of the goods being transported, and therefore cannot be considered a tax on the goods themselves. Id. at 757, 98 S.Ct. at 1402. To reach this conclusion, Washing- ton Stevedoring turned briefly to Canton Railroad ---------------------------------------- Page Break ---------------------------------------- 25a Co. v. Rogan, 340 U.S. 511, 71 S.Ct. 447, 95 L.Ed, 488 (1951), in which the Court upheld a gross-receipts tax on a railroad that engaged in a variety of services relating to importing and exporting on the grounds that the immunity of services incidental to exporting and exporting was not as broad as the immunity of the goods themselves, a distinction described in Canton Railroad that found favor in Washington Steve- doring. Of course, no bright-line test for distinguishing between goods and related services emerged from Canton Railroad, but as the Court in Washington Stevedoring noted, Canton Railroad did distinguish the tax it upheld from other taxes which the Court had previously invalidated. Among the cases distin- guished was Thames & Mersey. In the words of the Washington Stevedoring Court: In [the cases in which the Court had previously struck down taxes,] the State had taxed either the goods or activity so connected with the goods that the levy amounted to a tax on the goods themselves. . . . [T]he stamp tax on bills of lading in Fairbank effectively taxed the goods because the bills represented the goods. The basis for distinguishing Thames & Mersey is less clear because there the tax fell upon marine insurance policies. Arguably, the policies had a value apart from the value of the goods. In distinguishing that case from the taxation of stevedoring activities, however, one might note that the value of goods bears a much closer relation to the value of insurance policies on them than to the value of loading and unloading ships. Washington Stevedoring, 435 U.S. at 756 n. 21, 98 S.Ct. at 1402 n. 21. In its motion, the government suggests that a reading of Washington Stevedoring and the cases ---------------------------------------- Page Break ---------------------------------------- 26a leading up to it indicates that there has been a fundamental revision in the way the Supreme Court approaches cases that invoke both the Import-Export Clause and the Export Clause. It argues that there is no meaningful difference between a tax on the proceeds of stevedoring services and a tax on premiums paid for policies of casualty insurance, a transaction the government describes as being incidental to the process of exporting. Taking its cue from Michelin, the government says that as ap- plied to IBM in this case the 4371 tax is "non- discriminatory" because it doesn't "discriminate" against exports, i.e., the tax doesn't target exports as exports but instead is a generally applicable tax on insurance policies written by foreign insurers that applies regardless of whether the insured goods are in the export stream, and because the tax as such is "non-discriminatory" it does not run afoul of the Export Clause. III Having carefully considered the parties' briefs and the cases relied on therein, the court cannot agree with the government that Michelin and Washington Stevedoring control the facts of this case. Plainly enough, the parties agree that 4371 imposes a "tax," as that term is generally used and understood. And, the court agrees with IBM that the tax imposed by 4371 is a tax that amounts to a tax on exports. That the imposition of an excise tax on insurance that must be purchased to secure against the risks amounts to a tax on the goods themselves was recognized years ago by the Supreme Court, which wrote that "[i]t cannot be doubted that insurance during the voyage is by virtue of the demands of commerce an integral part of the exportation the business of the world is conducted upon this basis." Thames & Mersey, 237 U.S. at 26, 35 S. Ct. at 498. ---------------------------------------- Page Break ---------------------------------------- 27a Thus, because the 4371 tax is essentially a burden on the exportation process under the rule of Thames & Mersey, to avoid application of the rule and prevail on its motion the government must dem- onstrate either that Thames & Mersey has been explicitly overruled, or if it has not been, that later precedent more properly controls. The court does not think that the government has successfully demon- strated either of these propositions. The government argues that Thames & Mersey has been overruled because Washington Stevedoring overruled its decisions in Puget Sound Stevedoring Co. v. State Tax Comm'n, 302 U.S. 90, 58 S. Ct. 72, 82 L.Ed. 68 (1937) and Joseph v. Carter & Weekes Stevedoring Co., 330 U.S. 422, 67 S. Ct. 815, 91 L.Ed. 993 (1947), two cases in which the Court invalidated state taxes on the proceeds from stevedoring interstate and international cargoes because they violated the Import-Export Clause. A partial dissent and partial concurrence in Carter & Weekes held that the Import-Export Clause prevented the stevedoring tax from applying to cargoes to and from foreign ports, invoking Thames and Mersey as grounds for its conclusions regarding exports. The government maintains that because Washington Stevedoring overruled Carter & Weekes, then Thames & Mersey must also have been overruled. The court rejects this argument. Carter & Weekes was explicitly overruled in Washington Stevedoring. The Court in Michelin wrote many pages to explain in detail why it was overruling the long-standing rule of Low v. Austin. Washington Stevedoring does specifically overrule two cases and endorses a new way of examining cases that involve the Import-Export Clause, but the court does not read Washington Stevedoring as stating that the Court has "abandoned the rule it expanded in Thames & Mersey in an analysis of the Export Clause. The court must adhere to the accepted practice of ---------------------------------------- Page Break ---------------------------------------- 28a following Supreme Court precedent unless the Supreme Court clearly states that it is overrul- ing earlier eases and explains why it is doing so. Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 484, 109 S.Ct. 1917, 1921, 104 L.Ed.2d 526 (1989) ("If a precedent of this Court has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the Court of Appeals should follow the case which directly controls, leaving to this Court the pre- rogative of overruling its own decisions.") Washing- ton Stevedoring overruled two prior decisions that relied on the Import-Export Clause to invalidate taxes on stevedoring. In the absence of explicit instruction from the Supreme Court that its long- standing approach to evaluating challenges under the Export Clause should be disregarded, the court declines to presume that such an instruction has been implicitly given. Furthermore, the court is not inclined to read Washington Stevedoring as overruling Thames & Mersey when the Court in Washington Stevedoring cites Thames & Mersey as a precedential case that in the present context had to be distinguished. In its discussion of Canton Railroad, the Court in Wash- ington Stevedoring drew parallels to that earlier case, noting that: [t]axation in neither [stevedoring nor railroad services] relates to the value of goods, and therefore in neither can it be considered taxation on the goods themselves. The force of Canton R. Co. therefore prompts the conclusion that the Michelin policy analysis should not be discarded merely because the goods are in transit, at least where the taxation falls upon a service distinct from the goods and their value. ---------------------------------------- Page Break ---------------------------------------- 29a Washington Stevedoring, 435 U.S. at 757, 98 S.Ct. at 1403. Clearly, the Court no longer considers a tax on stevedoring to be a tax on exports because stevedoring is a service whose value is not nec- essarily tied to the value of the goods it serves. In that same discussion, however, the Court distin- guished a tax on stevedoring from the tax on the marine insurance policies invalidated in Thames & Mersey, stating that "the value of goods bears a much closer relation to the value of insurance policies on them than to the value of loading and unloading ships." Id. at 756 n. 21, 98 S. Ct. at 1402 n. 21. Thus, even if the government is correct in its assertion that all taxes that involve exports, whether considered in light of the Export Clause or the Import-Export Clause, should be examined to see if they discriminate against exports qua exports, it appears that in the Court's view a tax such as that imposed by 4371 could indeed be considered a tax on exports in their capacity as exports. The present case is distinguishable from Michelin and Washing- ton Stevedoring: in Michelin the tires had left the import stream and were held to be beyond the import stream and thus outside the scope of the Import- Export Clause, and in Washington Stevedoring the Court said that the Import-Export Clause was not violated because stevedoring bore no significant relationship to the goods transported. In the present case, the casualty insurance policies were at all times within the export stream and were significantly related to the exportation process. Whether the 4371 tax would be impermissible even without the support of Thames & Mersey is, we realize, not stated dispositively by the Court, but there is nothing in Washington Stevedoring that indicates that Thames & Mersey and the connection drawn in that case between insurance policies and the value of goods have been banished into irrelevance. ---------------------------------------- Page Break ---------------------------------------- 30a IV For the reasons discussed above, the court finds that the 4371 tax imposed on IBM violates the terms of the Export Clause. Plaintiff's motion for summary judgment is granted, and defendant's motion for summary judgment is denied. The parties are directed to confer and agree on the judgment award that should be entered in favor of the plaintiff. The parties shall advise the court in this regard within thirty days. /s/ Thomas J. Lydon THOMAS J. Lydon Senior Judge ---------------------------------------- Page Break ---------------------------------------- 31a APPENDIX C UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT No. 94-5164 INTERNATIONAL BUSINESS MACHINES CORPORATION, PLAINTIFF-APPELLEE v. THE UNITED STATES, DEFENDANT-APPELLANT JUDGMENT ON APPEAL from the United States Court of Federal Claims in CASE NO(S). 388-89T This CAUSE having been heard and considered, it is ORDERED and ADJUDGED: AFFIRMED ENTERED BY ORDER OF THE COURT DATED: July 10, 1995 /s/ Francis X. Gindhart FRANCIS X. GINDHART Clerk ISSUED AS A MANDATE: August 31, 1995 ---------------------------------------- Page Break ---------------------------------------- 32a APPENDIX D IN THE UNITED STATES COURT OF FEDERAL CLAIMS No. 388-89T INTERNATIONAL BUSINESS MACHINES CORPORATION v. THE UNITED STATES [Filed Aug. 31, 1994] AMENDED JUDGMENT Pursuant to the court's opinion of July 28, 1994, granting plaintiff's motion for summary judgment, IT IS ORDERED AND ADJUDGED this date, pursuant to Rule 58, that plaintiff recover of and from the United States the sum of $1,532,235.87 which covers the assessed taxes and interest, covering tax years 1975-1984 in the manner set forth in the attached exhibit which is incorporated and made part of the judgment herein, plus statutory interest on such assessed taxes and interest as provided by law. No costs. David A. Lampen Clerk of Court August 31, 1994 By: /s/ Jack L. Wilson Deputy Clerk NOTE: As to appeal, 60 days from this date, see RCFC 72, re number of copies listing of all plaintiffs. Filing fee is $105.00. ---------------------------------------- Page Break ---------------------------------------- 33a JOINT EXHIBIT l-ASSESSED TAXES AND INTEREST [TABLE/CHART OMITTED] ---------------------------------------- Page Break ---------------------------------------- 34a APPENDIX E IN THE UNITED STATES COURT OF FEDERAL CLAIMS No. 388-89T (Senior Judge Thomas J. Lydon) INTERNATIONAL BUSINESS MACHINES CORPORATION, PLAINTIFF v. THE UNITED STATES, DEFENDANT STIMULATION OF FACTS The parties hereby stipulate that the following facts, including the attached Joint Exhibit 1, may be accepted as true for purposes of this case. The parties believe that this stipulation of facts is comprehensive, that no genuine issues of material fact exist, and that the case may be resolved on cross motions for summary judgment. Nevertheless, the parties reserve the right to introduce other evidence that is not inconsistent with the facts stipulated. The parties also reserve the right to object to the relevance, materiality, and admissibility of any of the stipulations or the attached exhibit. PROCEDURAL BACKGROUND 1. Plaintiff, International Business Machines Corporation (IBM), is a domestic corporation incorporated under the laws of the State of New York. IBM's principal place of business is in Armonk, New York. 2. This case involves the four percent federal excise tax imposed by Section 4371(1) of the ---------------------------------------- Page Break ---------------------------------------- 35a Internal Revenue Code (26 U.S. C.) on pre- miums paid for certain policies of insurance issued by foreign insurers. 3. The periods involved are each of the quarters during the years 1975 through 1984, inclusive (the "quarters in issue"). 4. IBM filed federal excise returns for the quarters in issue that did not report any lia- bility under Section 4371. 5. On audit of IBM's federal excise tax returns for the quarters in issue, the Internal Revenue Service ("IRS") determined that IBM was liable for the tax imposed by Section 4371 as a result of certain foreign insurance trans- actions hereafter described. The IRS assessed IBM for Section 4371 taxes, interest, and "delinquency" or "failure to pay" penalties for each of the quarters in issue (the "assess- ments"). 6. IBM paid the assessments in full, and timely filed claims for refund with the IRS for all amounts paid in satisfaction of the assess- ments. The IRS denied" IBM's claims for refund on December 23, 1988, This tax refund action was timely filed by IBM on July 11, 1989. The parties believe that this Court has jurisdiction of the action under 28 U.S.C. Section 1491(a)(1) and Section 7422 of the Internal Revenue Code (the "Code") (26 U.S.C. Section 7422). 7. Defendant has abated the IRS' penalty assess- ments and refunded the amounts so assessed to IBM, with interest. SALE OF IBM PRODUCTS OUTSIDE THE UNITED STATES 8. IBM is a developer and manufacturer of sophisticated information processing systems and related products, sold throughout the ---------------------------------------- Page Break ---------------------------------------- 36a world. During the quarters in issue, sales of IBM products outside the United States were made through a worldwide network of more than 100 wholly owned foreign subsidiary corporations. For example, IBM products were sold using the quarters in issue by cor- porations organized and operating in Abu Dhabi, Argentina, Belgium, Brazil, Canada, Egypt, Germany, Haiti, India, Japan, Kuwait, Malaysia, Norway, Peru, South Africa, Switzerland, Thailand, the former U. S. S. R., Vietnam, and Zambia. 9. IBM products sold by foreign subsidiaries were manufactured either in their own overseas plants (or in the plants of other IBM foreign subsidiaries) or by IBM at manufacturing plants in the United States. 10. During the quarters in issue, IBM products manufactured in the United States and sold outside the United States through foreign subsidiaries included (but were not limited to) the following items, manufactured at the locations indicated: Product: Manufacturing Locations: Mainframe computers Poughkeepsie, NY Tape drivers, large printers, magnetic tape Tucson, AZ Disc drives San Jose, CA Copiers, toner, supplies Boulder, CO Intermediate computers Rochester, MN, Austin, TX ---------------------------------------- Page Break ---------------------------------------- 37a Personal computers, keyboards Austin, TX, Boca Raton, FL Point of sale banking machines, circuit cards Charlotte, NC Communication devices, cathode ray terminals Raleigh, NC Semiconductors Manassas, VA, East Peekskill, NY, Burlington, NY Large circuit boards, specialized intermediate computers Endicott, NY 11. Sales outside the United States of IBM pro- ducts manufactured within the United States were accomplished by a purchase order to IBM from its foreign subsidiary, under which IBM billed the subsidiary and generally shipped the goods directly to the subsidiary's customer. Lower priced goods might be shipped to a con- solidation center in the foreign country, and maintained as inventory by the foreign sub- sidiary to fill future orders. 12. Depending upon the particular product, IBM would fill a subsidiary's order either by (1) building the product to the particular specifi- cations contained in a purchase order ('(build to order"), or (2) utilizing ongoing production at a factory or inventory at a warehouse ("built to plan"). 13. Shipment of products from the United States to the foreign customer began by truck on a common carrier (from the manufacturing plant or warehouse). The goods generally were ---------------------------------------- Page Break ---------------------------------------- 38a destined for a United States airport (typically, John F'. Kennedy in New York for shipments to Europe and the Middle East, Miami Inter- national for shipments to Latin America, and San Francisco International for shipments to the Far East), but some shipments also were by sea. While traveling within the United States, the products would typically be un- loaded at one or more intermediate freight forwarder locations, where they would typi- cally remain for 2-5 days, but could remain while awaiting space on an airliner for as long as 30 days. The products would be reloaded at the freight forwarders' facilities and continue ultimately to the point of embarkation, where they were loaded onto an airplane or a ship. Once the products reached the air or sea port in the foreign country, there were unloaded, cleared customs, and loaded on trucks for shipment to their final destination. For pur- poses of the parties) cross motions for summary judgment, the parties agree that any variations from these typical fact patterns were not significant and are not relevant to the resolution of the motions. 14. When foreign subsidiaries purchased IBM products from IBM during the years in issue, in terms of sale called for title to the products (and the risk of loss) to pass from IBM to the subsidiary when the goods cleared customs in the foreign country. The terms of sale also called for the purchasing subsidiary to bear the cost of insuring the products against damage or destruction during shipment. INSURANCE COVERING THE SHIPMENT OF IBM PRODUCTS SOLD TO FOREIGN SUB- SIDIARIES ---------------------------------------- Page Break ---------------------------------------- 39a 15. All U.S manufactured products IBM sold to foreign subsidiaries were covered by casualty insurance against damage or destruction during shipment. Insurance was "point to point'', that is, covered the risk of loss to goods during transportation by surface or air `transportation from the IBM facility in the United States until delivered to the foreign customer or a foreign consolidation center. In some eases, IBM arranged for the insurance; when it did so, insurance was placed with a U.S. insurance carrier, and the cost was billed to the foreign subsidiary. In other instances, the foreign subsidiary placed the insurance; when it did so, the insurance often was with a foreign carrier, which the subsidiary paid for directly. In all cases, both IBM and its foreign subsidiary were listed as insured beneficiaries. 16. When a foreign subsidiary obtained its own insurance coverage with a foreign insurer, the policy covered not only shipments to it by IBM from the United States, but shipments of goods purchased from foreign affiliates in other countries as well. The insurer would charge a separate premium to cover each shipment, the amount of which was determined by the declared value of the particular shipment, multiplied by the premium rate applicable to that shipment. The premium rate depended on such underwriting factors as the place of origin and destination of the goods, the type of goods involved and how they were packaged, the time and distance of the trip, the route and mode(s) of transportation, and the amount of material handling expected during the trip. 17. If damage to an IBM product being shipped to a foreign country occurred while IBM had title to the goods (and the risk of loss), then IBM ---------------------------------------- Page Break ---------------------------------------- 40a would be entitled to the insurance proceeds under the insurance policy (whether issued by a US. company or a foreign insurer). If the loss occurred, however, after the importing foreign subsidiary acquired title to the products, the insurance proceeds would be payable to the subsidiary. In the latter case, the subsidiary would use the proceeds to pay IBM the full purchase price of the damaged products, or to reimburse itself for the purchase price, if IBM had already been paid. 18. Since most IBM products shipped to foreign subsidiaries were packaged in containers, damage was frequently not discovered until after the products arrived at their designation. As a practical matter, it was often impossible to determine when a loss occurred and therefore who was legally entitled to receive the policy proceeds. In most cases involving foreign insurance carriers, therefore, the insurance company simply paid the insurance proceeds to the foreign subsidiary which used the proceeds to pay IBM for the goods. THE ASSESSMENTS 19. The Internal Revenue Service determined that the premiums paid to foreign insurers with respect to U.S. manufactured IBM products sold to its foreign subsidiaries were subject to the four percent excise tax imposed by Section 4371 of the Internal Revenue Code (26 U-S-C.). 20. During the audit, IBM sent questionnaires to its foreign subsidiaries and determined that premiums paid by them to foreign insurers during the year 1980, allocable to U. S manufactured IBM products sold outside the United States, totaled $2,065,137. For expedi- ency in making assessments under Section 4371, IBM and the IRS agreed that the foreign ---------------------------------------- Page Break ---------------------------------------- 41a insurance premiums attributable to such products in each of the years 1975-1979 and 1981-1984 were the same as in 1980. Accord- ingly, the Internal Revenue Service assessed Section 4371 taxes of $82,605 per year, cal- culated by multiplying the annual premiums by four percent. 21. The Internal Revenue Service's assessments of Section 4371 tax and interest for each of the quarters in issue, which are the amounts in this case, are set forth in Joint Exhibit 1. ---------------------------------------- Page Break ---------------------------------------- No. 95-591 In the Supreme Court of the United States OCTOBER TERM, 1995 UNITED STATES OF AMERICA, PETITIONER v. INTERNATIONAL BUSINESS MACHINES CORPORATION ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT REPLY BRIEF FOR THE UNITED STATES DREW S. DAYS, III Solicitor General Department of Justice Washington, D.C. 20530 (202) 514-2217 ---------------------------------------- Page Break ---------------------------------------- TABLE OF AUTHORITIES Cases: Page Brown v. Maryland, 25 U.S. (12 Wheat.) 419 (1927) . . . . 4, 5 Cornell v. Coyne, 192 U.S. 418 (1904) . . . . 7 Department of Revenue of Washington v. Association of Washington Stevedoring Cos., 435 U.S. 734 (1978) . . . . 5 Low v. Austin, 80 U.S. (13 Wall.) 29 (1872) . . . . 4 Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976) . . . . 4 Rodrigues de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989) . . . . 3 Thames & Mersey Marine Ins. Co. v. United States, 237 U.S. 19 (1915) . . . . 3 United States v. Gainey, 380 U.S. 63 (1965) . . . . 2 United States v. Goodyear Tire & Rubber Co., 493 U.S. 132 (1989) . . . . 2-3 United States Shoe Corp. v. United States, No. 95-173 (Ct. Int'l Trade Oct. 25, 1995) . . . . 2 Constitution and statutes: U.S. Const. Art. I: 9, Cl. 5 (Export Clause) . . . . 2, 3, 5, 6, 7, 8 10, Cl. 2 (Import-Export Clause) . . . . 3, 4, 5 26 U.S.C. 4371(1) . . . . 6 26 U.S.C. 4371(2) . . . . 6 26 U.S.C. 4372(d)(1) . . . . 7 26 U.S.C. 4372(d)(2) . . . . 7 26 U.S.C. 4461(a) . . . . 2 Miscellaneous: Madison's Notes of Debates in the Federal Convention . . . . 6 Warren, The Making of the Constitution (1928) . . . . 6 (I) ---------------------------------------- Page Break ---------------------------------------- In the Supreme Court of the United States OCTOBER TERM, 1995 No. 95-591 UNITED STATES OF AMERICA, PETITIONER v. INTERNATIONAL BUSINESS MACHINES CORPORATION ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT REPLY BRIEF FOR THE UNITED STATES 1. Respondent errs in contending that the ques- tion presented lacks substantial continuing impor- tance. The Federal Circuit held a federal tax to be unconstitutional in this case. That decision, if valid, would require the return of millions of dollars of federal revenues that have been collected from a large number of affected taxpayers. It would also directly undermine the congressional policy of placing foreign and domestic insurers on a more equal competitive footing. See Pet. 14-15. Review by this Court of the Federal Circuit's exercise of the Judiciary's most "grave power of annulling an Act of Congress" is (1) ---------------------------------------- Page Break ---------------------------------------- 2 fully warranted. United States v. Gainey, 380 U.S. 63, 65 (1965). Respondent mistakenly contends that the decision below implicates "no broad principle applicable to other revenue measures" (Br. in Opp. 6). Only four weeks ago, citing and relying on the decision entered in this case, the United States Court of International Trade held the federal "tax on any port use" (26 U.S.C. 4461(a)) to be unconstitutional as applied to transactions involving goods for export. United States Shoe Corp. v. United States, Slip op. 95-173, at 23 (Oct. 25, 1995). That decision, which involves more than $500,000,000 in revenues that have already been collected from the plaintiffs (id. at 8), is appealable only to the Federal Circuit. 1. See Pet. 13-14. Since all taxpayers are entitled to pay a challenged tax and sue for a refund within the Federal Circuit, it is unlikely that other courts of appeals will have an opportunity to review the constitutional question presented in this case. This Court has long noted that plenary review is appropriate for decisions of the Federal Circuit that present issues of such sub- stantial and recurring importance. See, e.g., United ___________________(footnotes) 1 As respondent notes (Br. in- Opp. 14-15), the United States Shoe Corp. case presents the additional question whether the "tax on port use" is a fee for services, rather than a `tax." That question is relevant, however, only if a generally applicable federal tax that applies without discrimination to both domestic and international transactions would violate the Export Clause. In determining that such a generally applicable tax would violate the Export Clause, the Court of International Trade cited as authoritative, and applied the reasoning of, the decision of the Federal Circuit in this case. United States Shoe Corp. v. United States, slip op. 95-173, at 17-24. ---------------------------------------- Page Break ---------------------------------------- 3 States v. Goodyear Tire & Rubber Co., 493 U.S. 132, 138 (1989); Pet. 14. Moreover, as the court of appeals emphasized (Pet, App. 11a), only this Court has "the prerogative of overruling its own decisions." Rodrigues de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 484 (1989). Only this Court can determine whether the considerations that led it to uphold generally applicable, nondiscriminatory state taxes under the Import-Export Clause-and to overrule numerous inconsistent decisions in the process-apply equally to challenges to federal taxes under the Export Clause. In the absence of further review in this case, the Federal Circuit will be compelled to follow Thames & Mersey Marine Ins. Co. v. United States, 237 U.S. 19 (1915), even though, as the petition explains in detail (Pet. 15-30), the reasoning of that early decision has been repudiated by subsequent decisions of this Court. 2. a. Respondent contends that textual distinctions between the language of the Import-Export Clause and the Export Clause require that significantly dif- ferent analyses be applied to constitutional chal- lenges under those Clauses (Br. in Opp. 7-12). In particular, respondent suggests that an "impost or duty" under the Import-Export Clause is something different from-and narrower than-a "tax or duty" under the Export Clause (id. at 8-9). In making that contention, respondent ignores the balance of the text of these Clauses. The Import- Export Clause precludes States from imposing "Im- posts or Duties on Imports or Exports"; the Export Clause specifies that no federal "Tax or Duty shall be laid on Articles Exported." U.S. Const. Art I, 10, Cl. 2; Art. I, 9, Cl. 5. A "tax" that is "laid on" an ---------------------------------------- Page Break ---------------------------------------- 4 "article exported" is an "impost" on an "export." An "impost" on an "export" is a "tax" that is "laid on" an "article exported." These constitutional phrases have an identical meaning, as this Court has con- sistently held. Giving effect to the entire text of both Clauses, the Court stated as long ago as Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 445 (1827), that "[t]here is some diversity in language, but none is perceived in the act which is prohibited." b. Respondent also errs in contending that the slight difference in phrasing of these two Clauses was "central to the Michelin and Washington Steve- doring holdings" (Br. in Opp. 9). In Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976), the Court first explained the origin of the "original package" doc- trine in Low v. Austin, 80 U.S. (13 Wall.) 29 (1872), and that Low's reliance on Brown v. Maryland for that doctrine was misplaced. 423 U.S. at 281-283. See Pet. 16-18, 22-24. The Court then concluded, based upon a historical analysis of the origins and purposes of the Import-Export Clause, that "a nondiscrimina- tory ad valorem property tax is not the type of state exaction which the Framers of the Constitution or the Court in Brown had in mind as being an 'impost' or 'duty.'" 423 U.S. at 283. The Court explained that the history of the Import-Export Clause revealed that it was not designed to bring into question the con- stitutionality of a generally applicable state tax that applies to imported and domestic goods without discrimination. Id. at 286-290. See Pet. 23-24. The Court concluded that, consistent with its limited purpose, the Clause must be understood to permit general exactions that do not apply exclusively, or discriminatorily, to import or export transactions (423 U.S. at 293-291): ---------------------------------------- Page Break ---------------------------------------- 5 [S]ince prohibition of nondiscriminatory ad va- lorem property taxation would not further the objectives of the Import-Export Clause, only the clearest constitutional mandate should lead us to condemn such taxation. The terminology em- ployed in the Clause-"Imposts or Duties''-is sufficiently ambiguous that we decline to presume it was intended to embrace taxation that does not create the evils the Clause was specifically in- tended to eliminate. In Department of Revenue of Washington v. Asso- ciation of Washington Stevedoring Cos., 435 U.S. 734 (1978), the Court again relied on the purposes of the Import-Export Clause-and not on the long-rejected contention that its text varies in substance from the Export Clause-in concluding that a nondiscrimina- tory, generally applicable state tax is not uncon- stitutional as applied to transactions involving imports or exports. The Court noted that the chal- lenged tax "violates none of the constitutional policies identified in Michelin" and concluded that "[i]t is, therefore, not among the 'Imposts or Duties' within the prohibition of the Import-Export Clause." Id. at 761 (emphasis added). That holding makes clear that the decisions in Michelin and Washington Stevedoring were based upon the "constitutional poli- cies identified in Michelin" (ibid.) and were not pre- mised upon the inconsequential "diversity in lan- guage" of the two Clauses (Brown v. Maryland, 25 U.S. (12 Wheat.) at 445). 3. The reasoning of the Court in Michelin and Washington Stevedoring applies equally to nondis- criminatory federal taxes under the Export Clause. Those decisions demonstrate that, when a generally ---------------------------------------- Page Break ---------------------------------------- 6 applicable, nondiscriminatory tax is at issue, the mere fact that the tax applies also to goods that are in the export or import process does not provide a constitutional immunity from taxation. See Pet. 27- 30. As the court of appeals acknowledged in this case (Pet. App. 4a), and as Madison's Notes of Debates and Warren's Making of the Constitution demonstrate, the Export Clause resulted from one of the sectional divisions that marked the Constitutional Convention (Pet. 28-29). In particular, it stemmed from the "con- cern that a Congress controlled by the more numer- ous and populous Northern States would impose burdensome levies on Southern exports" (Pet. App. 4a), including the "three great crops which grew nowhere else-tobacco, rice, and indigo" (Pet. 28 n.10). This narrow historical purpose of the Export Clause is complemented by the narrow language employed in the Clause, which proscribes only federal taxes "laid on" an "article exported," There is obviously no basis for respondent to contend that the generally applicable tax on insur- ance imposed by Section 4371 of the Internal Revenue Code conflicts with the policies that the Export Clause embodies. This federal tax applies to many forms of insurance that have no relation whatever to exports or the export process (such as life insurance, sickness and accident policies, indemnity bonds and annuity contracts). See 26 U.S.C. 4371(1), (2). Even as applied to casualty insurance, the tax obviously has only an incidental and remote relationship to exports and the export process-and it applies equally to ---------------------------------------- Page Break ---------------------------------------- 7 wholly domestic commerce as well. 2. That the statute does not discriminate against exports is clear from its text, for it applies to insurance for any risk that arises either "wholly or partly within the United States" (26 U.S.C. 4372(d)(1),(2)). In view of the limited purpose and narrow language of the Export Clause, there is no adequate rationale for sifting through all possible applications of a generally applicable, nondiscriminatory federal tax to proscribe its application in remote contexts involving exported goods. Consider, for example, a hypothetical transaction that is not unrelated to the facts of this case. A ship sets out from California with a cargo produced in Arizona. Part of the cargo will be off- loaded in British Columbia to a buyer doing business there, The remainder of the cargo will be delivered to a buyer in Alaska. The cargo has been insured by a foreign insurer against damage or loss for its entire journey-beginning with its loading on trucks in. Arizona and until delivery at the places of business of the buyers in British Columbia and Alaska. The nondiscrimination policies embodied in the Export Clause plainly do not require that the insurance covering the part of the cargo delivered in British Columbia be made exempt from the federal tax on insurance while the Alaska portion of the cargo is not. That would turn the constitutional shield against discrimination in the Export Clause into a sword requiring discrimination. As this Court noted in Cornell v. Coyne, 192 U.S. 418, 427 (1904), the ___________________(footnotes) 2 Even within the specific category of casualty insurance, the statute applies to risks that have little or no connection with exports and exportation-such as fire, flood and earth- quake. ---------------------------------------- Page Break ---------------------------------------- 8 Export Clause "does not mean that articles exported are relieved from the prior ordinary burdens of taxation which rest upon all property similarly situated." See Pet. 19-20. A federal tax on insurance for risks that occur "wholly or partly within the United States''-and that applies without discrimination to both domestic and international commerce-is not a tax "laid on" an "article exported" within the meaning of the Export Clause. The contrary conclusion of the Federal Cir- cuit in this ease, and that court's annulment of an Act of Congress, warrants review by this Court. For the reasons stated above and in the petition, the petition for a writ of certiorari should be granted. Respectfully submitted. DREW S. DAYS, III Solicitor General NOVEMBER 1995 ---------------------------------------- Page Break ---------------------------------------- No. 95-591 In the Supreme Court of the United States OCTOBER TERM, 1995 UNITED STATES OF AMERICA, PETITIONER v. INTERNATIONAL BUSINESS MACHINES CORPORATION ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT BRIEF FOR THE UNITED STATES DREW S. DAYS, III Solicitor General LORETTA C. ARGRETT Assistant Attorney General LAWRENCE G. WALLACE Deputy Solicitor General KENT L. JONES Assistant to the Solicitor General GARY R. ALLEN ERNEST J. BROWN Attorneys Department of Justice Washington, D.C. 20530 (202) 514-2217 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Section 4371 of the Internal Revenue Code, 26 U.S.C. 4371, imposes a tax of four cents per dollar on casualty insurance premiums paid to a foreign insurer for the risks of a domestic insured that are "wholly or partly within the United States" (26 U.S.C. 4372(d)(1)). The question presented in this case is: Whether, as applied to casualty insurance for losses incurred during the shipment of goods from locations within the United States to purchasers abroad, the tax imposed by Section 4371 of the Internal Revenue Code violates the Export Clause of the Constitution of the United States (U.S. Const. Art. I, 9, Cl. 5). (I) ---------------------------------------- Page Break ---------------------------------------- TABLE OF CONTENTS Page Opinions below . . . . 1 Jurisdiction . . . . 1 Constitutional and statutory provisions involved . . . . 2 Statement . . . . 2 Summary of argument . . . . 12 Argument: Section 4371 of the Internal Revenue Code imposes a generally applicable, nondiscriminatory tax that does not fall specifically upon articles of export or export transactions and does not violate the Export Clause of the Constitution . . . . 14 Conclusion . . . . 37 TABLE OF AUTHORITIES Cases: Almy v. California, 65 U.S.(24 How.) 169 (1861) . . . . 21 Anglo-Chilean Nitrate Sales Corp. v. Alabama, 288 U.S. 218 (1933) . . . . 19 Board of Trustees v. United States, 289 U.S. 48 (1933) . . . . 36 Brown v. Maryland, 25 U.S. (12 Wheat.) 419 (1827) . . . . 17, 18 Canton R.R. v. Rogan, 340 U.S. 511 (1951) . . . . 27 Colonial Pipeline Co. v. Traigle, 421 U.S. 100 (1975) . . . . 26 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) . . . . 22, 27, 29, 30 Cook v. Pennsylvania, 97 U.S. 566 (1878) . . . . 19 Cornell v. Coyne, 192 U.S. 418 (1904) . . . . 13, 17, 20, 21, 35 Crew Levick Co. v. Pennsylvania, 245 U.S. 292 (1917) . . . . 24 Crutcher v. Kentucky, 141 U.S. 47 (1891) . . . . 22 Department of Revenue of Washington Q. Associa- tion of Washington Stevedoring Cos., 435 U.S. 734 (1978) . . . . 9, 27, 30, 31 (III) ---------------------------------------- Page Break ---------------------------------------- Cases-Continued: Page DiSanto v. Pennsylvania, 273 U.S. 34 (1927) . . . . 22 Fairbank v. United States, 181 U.S. 283 (1901) . . . . 21 General Motors Corporation v. Washington, 377 U.S. 436 (1964) . . . . . 26 Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824) . . . . 36 Hooven & Allison Co. v. Evatt, 324 U.S. 652 (1945) . . . . 19 Joseph v. Carter & Weekes, 330 U.S. 422 (1947) . . . . 24 Kosydar v. National Cash Register Co., 417 U.S. 62 (1974) . . . . 17 License Cases, 46 U.S. (5 How.) 504 (1847) . . . . 18 Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984) . . . . 27, 31, 32 Low v. Austin, 80 U.S. (13 Wall.) 29 (1872) . . . . 19 May v. New Orleans, 178 U.S. 496 (1900) . . . . 19 Memphis Steam Laundry Cleaner, Inc. v. Stone, 342 Us. 389 (1952) . . . . 22 Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976) . . . . 9, 14, 27, 28, 29, 35 Moller-Butcher v. United States Department of Commerce, 12 F.3d 249 (D.C. Cir. 1994) . . . . 36 Nippert v. Richmond, 327 U.S. 416 (1946) . . . . 22 Pace v. Burgess, 92 U.S. 372 (1876) . . . . 19, 20 Peck & Co. v. Lowe, 247 U.S. 165 (1918) . . . . 13, 24 25, 34, 36 Postal Telegraph-Cable Co. v. City of Richmond. 249 U.S. 252 (1919) . . . . 26 Puget Sound Stevedoring Co. v. State Tax Commis- sion, 302 U.S. 90 (1937) . . . . 24 Robbins v. Shelby County Taxing District, 120 U.S. 489 (1887) . . . . 22 Rodriquez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989) . . . . 10, 11 A. G. Spalding & Bros. v. Edwards, 262 U.S. 66 (1923) . . . . 24 ---------------------------------------- Page Break ---------------------------------------- V Cases-Continued: Page Spector Motor Service, Inc. v. O'Connor, 340 U.S. 602 (1951) . . . . 22, 30 Thames & Mersey Marine Ins. Co. v. United States, 237 U.S. 19 (1915) . . . . 9, 21, 23 Turpin v. Burgess, 117 US. 504 (1886) . . . . 17, 20, 23 United States v. Bozarov, 974 F.2d 1037 (9th Cir. 1992), cert. denied, 113 S. Ct. 1273 (1993) . . . . 36 United States v. Hvoslef, 237 U.S. 1 (1915) . . . . 21 United States v. Marigold, 50 U.S. (9 How.) 560 (1850) . . . . 36 United States Shoe Corp. v. United States, Slip Op. 95-173 (Oct. 25, 1995) . . . . 15 United States v. The William. 28 Fed. Cas. 614 (D. Mass. 1808) . . . . 36 Western Live Stock v. Bureau of Revenue, 303 U.S. 250 (1938) . . . . 26 Woodruff v. Parham, 75 U.S. (8 Wall.) 123 (1869) . . . . 16 Youngstown Sheet & Tube Co. v. Bowers. 358 U.S. 534 (1959) . . . . 19 U.S. Const. Art. I: 8, Cl. 3 (Commerce Clause) . . . . 2, 22 23, 26, 29, 30, 36 9, Cl. 5 (Export Clause) . . . . passim 10, Cl. 2 (Import-Export Clause) . . . . passim Act of Aug. 8, 1882, ch. 468, 22 Stat. 372 . . . . 20 Export Administration Act of 1979, 50 U.S.C. App. 2401-2420 . . . . 36 Internal Revenue Code (26 U. S.C.): 864(c) . . . . 4 882(a)(1) . . . . 4 4371 . . . . passim 4371(1) . . . . 8, 34 4371(2) . . . . 34 4372 . . . . 3 4372(a) . . . . 5 4372(d)(1) . . . . 5, 12, 14, 15, 34 ---------------------------------------- Page Break ---------------------------------------- Statutes and regulation-Continued: Page 4373 . . . . 4 4373(1) (1982) . . . . 5 4374 . . . . 4, 5 4461 . . . . 15 4461(a) (Supp. V 1993) . . . . 15 4461(b) (Supp. V 1993) . . . . 15 28 U.S.C. 1295(a)(5) . . . . 15 War Revenue Act of 1898, ch. 448,30 Stat. 448 . . . . 21 25, 30 Stat. 457 . . . . 21 Schedule A, 30 Stat. 458 30 Stat. 459 . . . . 21 30 Stat. 461 . . . . 21 War Revenue Act of 1917, ch. 63, 40 Stat. 300 . . . . 23 26 C.F.R. 46.4371-2(a) . . . . 5 Miscellaneous: H.R. Rep. No. 2333, 77th Cong., 2d Sess. (1942) . . . . 5, 16 Madison's Notes of Debates in the Federal Convention, reproduced in 2 M. Farrand, The Records of the Federal Convention of 1787 (1966) . . . . 33 L. Tribe, American Constitutional Law (2d ed. (1988) . . . . 24-25 Miscellaneous-Continued: Page C. Warren, The Making of the Constitution (reprint 1993) (1928) . . . . 33 ---------------------------------------- Page Break ---------------------------------------- In the Supreme Court of the United States OCTOBER TERM, 1995 No. 95-591 UNITED STATES OF AMERICA, PETITIONER v. INTERNATIONAL BUSINESS MACHINES CORPORATION ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT BRIEF FOR THE UNITED STATES OPINIONS BELOW The opinion of the court of appeals (Pet. App. 1a- 11a) is reported at 59 F.3d 1234. The opinion of the Court of Federal Claims (Pet. App. 12a-30a) is reported at 31 Fed. Cl. 500. JURISDICTION The judgment of the court of appeals (Pet. App. 31a) was entered on July 10, 1995. The petition for a writ of certiorari was filed on October 10, 1995 (a Tuesday following a Monday holiday), and was granted on December 8, 1995. The jurisdiction of this Court rests upon 28 U.S.C. 1254(1). (1) ---------------------------------------- Page Break ---------------------------------------- 2 CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED 1. The Constitution of the United States provides, in relevant part: a. Art. I, 8, Cl. 3: The Congress shall have Power * * * To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes. b. Art. I, 9, Cl. 5: No Tax or Duty shall be laid on Articles exported from any State. c. Art. I, 10, Cl 2: 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 inspection Laws * * *. 2. The Internal Revenue Code provides, in relevant part: a. 26 U.S.C. 4371: There is hereby imposed, on each policy of insurance, indemnity bond, annuity con- tract, or policy of reinsurance issued by any foreign insurer or reinsurer, a tax at the following rates: (1) 4 cents on each dollar, or fractional part thereof, of the premium paid on the ---------------------------------------- Page Break ---------------------------------------- 3 policy of casualty insurance or the in- demnity bond, if issued to or for, or in the name of, an insured as defined in section 4372(d); (2) 1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of life, sickness, or accident insurance, or annuity contract, unless the insurer is subject to tax under section 819, and (3) 1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of reinsurance covering any of the contracts taxable under paragraph (1) or (2). b. 26 U.S.C. 4372: (a) For purposes of section 4371, the term "foreign insurer or reinsurer" means an insurer or reinsurer who is a nonresident alien individual, or a foreign partnership, or a foreign corporation. * * * (b) For purposes of section 4371(1), the term "policy of casualty insurance" means any policy (other than life) or other instrument by whatever name called, where- by a contract of insurance is made, con- tinued, or renewed. * * * * * (d) For purposes of section 4371(1), the term "insured" means-(1) a domestic ---------------------------------------- Page Break ---------------------------------------- 4 corporation or partnership, or an individual resident of the United States, against, or with respect to, hazards, risks, losses, or liabilities wholly or partly within the United States, * * *. * * * * * c. 26 U.S.C. 4373 (1982): 1. The tax imposed by section 4371 shall not apply to- (1) any policy, indemnity bond, or annuity contract signed or countersigned by an officer or agent of the insurer in a State, or in the District of Columbia, within which such insurer is authorized to do business; * * * * * * * * d. 26 U.S.C. 4374: The tax imposed by this chapter shall be paid, on the basis of a return, by any person who makes, signs, issues, or sells any of the documents. and instruments subject to the tax, or for whose use or benefit the same are made, signed, issued or sold. * * * ___________________(footnotes) 1 This provision was amended in 1988 to conform to terminology elsewhere employed by Congress to describe activities that are "effectively connected" to activities within the United States and are therefore subject to the federal income tax. See 26 U.S.C. 864(c), 882(a)(1). The amendment does not alter the application of the statute in the context of this case. ---------------------------------------- Page Break ---------------------------------------- 5 STATEMENT 1. Respondent International Business Machines Corporation brought this suit in the Court of Federal Claims to obtain a refund of $1.5. million in taxes assessed under Section 4371 of the Internal Revenue Code. IBM does not dispute that the taxes were correctly assessed under the statute. Instead, IBM contends that the statute is unconstitutional as applied to the facts of this case. a. Section 4371 of the Internal Revenue Code, 26 U.S.C. 4371, imposes a tax of four cents per dollar on casualty insurance premiums paid to a foreign insurer for the risks of a domestic insured that are "wholly or partly within the United States" (26 U.S.C. 4372(d)(1)). 2. The tax is to be paid by "any person * * * for whose use or benefit" the policy is "made, signed, issued, or sold." 26 U.S.C. 4374. Section 4371 was enacted in 1942 to "eliminate an. unwarranted competitive advantage now favoring foreign insurers" who are not subject to the federal income tax. H.R. Rep. No. 2333, 77th Cong., 2d Sess. 61 (1942). The tax therefore does not apply if the policy issued by the foreign insurer is "signed or countersigned by an officer or agent of the insurer in a State, or in the District of Columbia, within which such insurer is authorized to do business," 26 U.S.C. 4373(1) (1982). See also note 1, supra; 26 C.F.R. 46.4371-2(a). b. IBM manufactures a variety of business pro- ducts that it sells throughout the world. During the ___________________(footnotes) 2 The term "foreign insurer" is defined to mean an insurer "who is a nonresident alien individual, or a foreign partnership, or a foreign corporation" (26 U.S.C. 4372(a)). ---------------------------------------- Page Break ---------------------------------------- 6 period involved in this case, IBM shipped products for international sales from its manufacturing facilities or warehouses in Arizona, California, Colorado, Florida, Minnesota, New York, North Carolina, Texas, and Virginia (Pet. App. 13a-14a). IBM made its international sales through a network of more than one hundred wholly owned subsidiaries (Pet. App. 14a- 15a): Sales outside the United States of IBM pro- ducts manufactured within the United States were accomplished by a purchase order to IBM from its foreign subsidiary, under which IBM billed the subsidiary and generally shipped the goods directly to the subsidiary's customer. Lower priced goods might be shipped to a con- solidation center in the foreign country, and maintained as inventory by the foreign subsidiary to fill future orders. * * * Shipment of products from the United States to the foreign customer began by truck on a common carrier (from the manufacturing plant or warehouse). The goods generally were destined for a United States airport (typically John F. Kennedy in New York for shipments to Europe and the Middle East, Miami International for shipments to Latin America, and San Francisco International for shipments to the Far East), but some shipments were by sea. While traveling within the United States, the products would typically be unloaded at one or more intermediate freight forwarder locations, where they would typically remain for two to five days, but could remain * * * as long as thirty days. The products would be reloaded at the freight for- ---------------------------------------- Page Break ---------------------------------------- 7 warders' facilities and continue ultimately to the point of embarkation, where they were loaded onto an airplane or a ship. Once the products reached the air or sea port in the foreign country, they were unloaded, cleared customs, and loaded on trucks for shipment to their final destination. The terms of sale specified that title to the goods, and risk of loss, passed from IBM to its foreign subsidiary only when the goods cleared customs in the foreign country. The foreign subsidiaries were nonetheless required to bear the cost of insuring the products against damage or loss during the entire shipment (Pet. App. 15a). The insurance obtained for these shipments was "point to point": it covered the risk of damage or loss during transportation of the goods from the IBM facility in the United States to the point of foreign delivery. When IBM made the arrangements, the insurance was placed with a domestic insurer and the cost was billed to the foreign subsidiary. When the foreign subsidiary made the arrangements, the insurance was often placed with a foreign carrier, which the subsidiary paid directly. In both situations, IBM and its foreign subsidiary were listed as joint beneficiaries on the policies of insurance (Pet. App. 15a-16a). If damage or loss occurred before the goods cleared customs -while IBM retained title to the goods and risk of loss-IBM received the insurance proceeds directly under these policies. If the loss occurred after the goods cleared customs-when title and risk of loss had passed to the importing foreign subsidiary -the insurance proceeds were paid to the subsidiary. In the latter event, the proceeds were used by the ---------------------------------------- Page Break ---------------------------------------- 8 subsidiary to pay the full purchase price of the damaged or lost goods to IBM or, if IBM had already been paid, to reimburse the subsidiary for its loss (Pet. App. 16a). c. IBM filed federal excise tax returns for 1975 through 1984 but did not report any liability under Section 4371 of the Internal Revenue Code. On audit, the Internal Revenue Service determined that the premiums paid to foreign insurers were subject to the tax imposed by Section 4371 and that, pursuant to Section 4374, IBM was liable for the tax as a named beneficiary of the insurance policies. The foreign subsidiaries reported to IBM that, during 1980, they had paid premiums of $2,065,137 to foreign insurers for "point to point" insurance covering shipments of products that IBM had manu- factured in the United States. The tax applicable to those premiums under Section 4371(1) of the Code- calculated by multiplying the premiums by four percent-is $82,605. The parties stipulated that the foreign insurance premiums attributable to ship- ments of IBM products in each of the years 1975-1979 and 1981-1984 were the same as in 1980. The IRS therefore assessed the same amount of tax for each of those years under Section 4371 (Pet. App. 18a). 2. IBM paid the resulting assessments and filed claims for refund. When those claims were denied, IBM commenced this refund suit in the Court of Federal Claims. The relevant facts were stipulated by the parties (Pet. App. 34a-41a). a. IBM contended that the tax imposed by Section 4371 of the Internal Revenue Code-as applied to insurance premiums on policies covering the ship- ment of goods from locations within the United States to purchasers abroad-violates the Export ---------------------------------------- Page Break ---------------------------------------- 9 Clause of the Constitution, which provides that "[n]o Tax or Duty shall be laid on Articles exported from any State." U.S. Const. Art. I, 9, Cl. 5. IBM contended that the tax on insurance for export shipments is a "Tax or Duty * * * laid on Articles exported" and is invalid under the specific. holding of this Court in Thames & Mersey Marine Ins. Co. v. United States, 237 U.S. 19 (1915). In Thames & Mersey, the Court held a federal stamp tax on policies insuring marine risks unconstitutional as applied to policies covering shipments for export. The United States contended that the analysis of Thames & Mersey is no longer valid. The govern- ment reasoned that subsequent decisions of this Court, such as Michelin Tire Corp. v. Wages, 423 U.S. 276 (1978), and Department of Revenue of Wash- ington v. Association of Washington Stevedoring Cos., 435 U.S. 734 (1978), require the conclusion that the Export Clause does not invalidate a generally applicable, nondiscriminatory tax that does not fall specifically on articles of export or export trans- actions. b. The Court of Federal Claims held that application of the tax imposed by Section 4371 to insurance premiums for goods in export transit violates the Export Clause because it "amounts to a tax on exports" (Pet. App. 26a). The court reasoned that this conclusion follows from the precise holding of this Court's 1915 decision in Thames & Mersey, which stated (237 U.S. at 26): It cannot be doubted that insurance during the voyage is by virtue of the demands of commerce an integral part of the exportation. ---------------------------------------- Page Break ---------------------------------------- 10 The Court of Federal Claims emphasized that, under Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 484 (1989), lower courts "must adhere to the accepted practice of following Supreme Court precedent unless the Supreme Court clearly states that it is overruling earlier cases and explains why it is doing so" (Pet. App. 28a). The court found no clear evidence that Thames & Mersey had been overruled or that its analysis has been discarded by this Court. The court held that Thames & Mersey therefore remains authoritative and that it compels the conclusion that the tax imposed by Section 4371 is unconstitutional as applied in this case (Pet. App. 29a). The court acknowledged that this Court's more recent decisions under the Import-Export Clause in Michelin Tire and Washington Stevedoring have upheld application of nondiscriminatory state taxes to goods and services: involved in importation and ex- portation. The court concluded, however, that those decisions could be distinguished on their facts. The court explained that Washington Stevedoring- which upheld application of a state gross receipts tax to a stevedoring company that handled export and import shipments-concerned "stevedoring" rather than "insurance" and that "stevedoring is a service whose value is not necessarily tied to the value of the goods it serves" (Pet. App. 29a). The court further stated that Michelin Tire-which upheld application of a state property tax to imported goods located within the borders of the State-is inapposite because "in Michelin the [imported goods] had left the import stream and were * * * thus outside the scope of the Import-Export Clause" (Pet. App. 29a). ---------------------------------------- Page Break ---------------------------------------- 11 3. The court of appeals affirmed (Pet. App. 1a-11a). The court noted (id. at ha) that this Court has admonished the lower courts that (Rodriguez de Quijas v. Shearson/American Express Co., 490 U.S. at 484) [i]f a precedent of this Court has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the Court of Appeals should follow the case which directly controls, leaving to this Court the prerogative of overruling its own decisions. The court of appeals stated that it was therefore bound to follow Thames & Mersey, and hold the tax imposed by Section 4371 unconstitutional as applied in this case, unless subsequent decisions of this Court "clearly signaled" an intent to overrule that earlier decision (Pet. App. 8a). The court of appeals concluded that it was "not so sure" (Pet. App. 8a) that Washington Stevedoring and Michelin Tire signaled the requisite clear intent of this Court to abandon the analysis of Thames & Mersey. The court of appeals did not dispute that, if an analysis "similar" to that applied under the Import-Export Clause in Michelin Tire and Wash- ington Stevedoring were applied under the Export Clause, the holding and reasoning of Thames & Mersey would be discredited (Pet. App. 7a-8a). Instead, the court stated that it was not certain that a similar analysis would be applied because there is a difference in the language of the two Clauses that could require a different result: the Import-Export Clause bars States from laying "Imposts or Duties on Imports or Exports"; the Export Clause bars the United States from laying any "Tax or Duty * * * ---------------------------------------- Page Break ---------------------------------------- 12 on Articles exported from any State." The court of appeals stated (id. at 9a-10a): Although the [Supreme] Court at first expressed the view that the "diversity in language" between the two clauses did not reflect any difference in "the act which is prohibited," Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 425 (1627), in both Michelin and Washington Stevedoring the Court has noted and attached significance to the difference between the narrow term "Imposts and Duties" * * * and the broader term "Tax" * * * See Michelin, 423 U.S. at 290; Washington. Stevedoring, 435 U.S. at 759. Reasoning that a "tax" that might be permitted under the "narrow" language of the Import-Export Clause might nonetheless be invalid under the "broader" language of the Export Clause (Pet. App. 10a), the court concluded that the recent Import- Export Clause decisions fail to provide the requisite clear guidance that would permit a lower court to "disregard] a higher court decision that all agree is binding precedent if it is still valid" (id. at 10a-11a). 3 The court therefore held "that [its] duty is to follow Thames & Mersey and hold Section 4371 invalid as applied" (id. at 11a). SUMMARY OF ARGUMENT The federal tax on insurance premiums paid to a foreign insurer for risks that are "wholly or partly within the United States" (26 U.S.C. 4372(d)(1)) is a nondiscriminatory" tax of general application. It does ___________________(footnotes) 3 The court of appeals noted that the United States had conceded that, "if Thames & Mersey is still good law, the assessments at issue in this case are invalid" (Pet. App. 6a). ---------------------------------------- Page Break ---------------------------------------- 13 not apply specifically to export transactions; to the contrary, it applies only to insurance risks that are either "wholly" or "partly" domestic. The tax was enacted to diminish the competitive advantage that existed for foreign insurers who were otherwise not subject to the federal income tax. The court of appeals erred in concluding that application of this tax to casualty insurance for shipments from within the United States to foreign countries violates the Export Clause of the Con- stitution. In particular, the court erred in relying on this Court's 1915 decision in Thames & Mersey Marine Ins. Co. v. United States for this conclusion. This Court's more recent decisions have repudiated the reasoning of Thames & Mersey. Under the analysis of these modern decisions, the tax imposed by Section 4371 does not violate the Export Clause because it is a generally applicable, nondiscrimina- tory tax that does not fall specifically on articles of export or export transactions. As this Court stated in upholding a similarly nondiscriminatory federal tax against an Export Clause challenge in Peck & Co. v. Lowe, 247 U.S. 165, 175 (1918): "There is no discrimination. At most, exportation is affected only indirectly and remotely." As this Court has noted, the Export Clause "does not mean that articles exported are relieved from the prior ordinary burdens of taxation which rest upon all property similarly situated." Cornell v. Coyne, 192 U.S. 418, 427 (1904). The history of the Export Clause reflects that it was designed to protect the exports of individual States from repressive discrimination by other States acting through their representatives in the National government. That nondiscrimination policy does not require that exports be relieved "from ---------------------------------------- Page Break ---------------------------------------- 14 uniform taxes" applicable to all commerce generally or that Congress give "preferential treatment" to exports by exempting them from generally applicable taxes (Michelin Tire Corp. v. Wages, 423 U.S. at 293- 294). The nondiscriminatory, generally applicable tax imposed by Section 4371 is therefore constitutional and should be upheld. ARGUMENT SECTION 4371 OF THE INTERNAL REVENUE CODE IMPOSES A GENERALLY APPLICABLE, NONDISCRIMINATORY TAX THAT DOES NOT FALL SPECIFICALLY UPON ARTICLES OF EX- PORT OR EXPORT TRANSACTIONS AND DOES NOT VIOLATE THE EXPORT CLAUSE OF THE CONSTITUTION The court of appeals concluded that the federal tax on insurance premiums paid to a foreign insurer for risks that are "wholly or partly within the United States" (26 U.S.C. 4372(d)(1))-as applied to casualty insurance for shipments from the United States to foreign countries-represents a "Tax or Duty * * * laid on Articles exported" (U.S. Const. Art. I, 9, Cl. 5) and therefore violates the Export Clause of the Constitution. The court stated that it was compelled to follow this Court's 1915 decision in Thames & Mersey Marine Ins. Co. v. United States in reaching that conclusion. This Court's more recent decisions, however, have repudiated the reasoning of Thames & Mersey. Under the analysis of these modern decisions, the tax imposed by Section 4371 does not violate the Export Clause because it is a generally applicable, nondis- ---------------------------------------- Page Break ---------------------------------------- 15 criminatory tax that does not fall specifically on articles of export or export transactions. 4 1. The Tax Imposed By Section 4371 Is A Generally Applicable, Nondiscriminatory Tax. The tax imposed by Section 4371 of the Internal Revenue Code is not specifically directed to nor directly "laid on Articles exported" (U.S. Const. Art. I, 9, Cl. 5). Instead, it applies to insurance premiums paid to foreign insurers for many forms of insurance, including any casualty risk that is "wholly or partly within the United States" (26 U.S.C. 4372(d)(1)). It thus applies without discrimination to "wholly" domestic transactions as well as to risks that are only "partly" within the United States. As the House Ways and Means Committee observed when the statute was first enacted in 1942, Section 4371 is ___________________(footnotes) 4 The proper scope of the Export Clause has significance not only for the tax imposed under Section 4371 but also for other nondiscriminatory federal taxes of general application. For example, Section 4461 of the Internal Revenue Code imposes on all shippers a "tax on any port use" of 0.125 percent of the value of all commercial cargo loaded or unloaded in United States ports. See 26 U.S.C. 4461(a), (b) (Supp. V 1993), 4462(a)(1). In cases brought by over 700 shippers involving more than $500,000,000 in revenues that have already been collected, the United States Court of International Trade recently held Section 4461 to be unconstitutional as applied to transactions involving goods for export. United States Shoe Corp. v. United States, Slip op. 95-173, at 8, 23 (Oct. 25, 1995). In determining that such a generally applicable, nondiscrimina- tory tax would violate the Export Clause, the Court of International Trade cited se authoritative, and applied the reasoning of, the decision of the Federal Circuit in this case (id. at 17-24). The Federal Circuit has exclusive jurisdiction over appeals from decisions of the Court of International Trade. 28 U.S.C. 1295(a)(5). ---------------------------------------- Page Break ---------------------------------------- 16 designed to "eliminate an unwarranted competitive advantage now favoring foreign insurers" who are not subject to the federal income tax. H.R. Rep. No. 2333, supra, at 61. It is unquestioned that the tax imposed under Section 4371 could and would be applied to a policy of casualty insurance issued by a foreign insurer covering risks that are "wholly" within the United States-for example, insurance for the transit of goods from Minnesota to Hawaii. As long ago as Woodruff v. Parham, 75 U.S. (8 Wall.) 123 (1869), it was established that goods moving from one State to another are not "exports" from the shipping State or "imports" in the receiving State within the meaning of the Constitution. The question addressed in this case is thus limited to whether the tax imposed by Section 4371 on premiums for casualty insurance for shipments "partly" outside of the United States is unconstitutional even though application of that tax to shipments "wholly" within the United States is unquestionably valid. 2. The Export And Import-Export Clauses Are Complementary In Scope. The proper resolution of this narrow question requires consideration of the text and history of, and the rulings of this Court under, both the Export Clause and the Import-Export Clause. The court of appeals suggested, however, that the language of the Export Clause may be "broader" in its prohibitive scope than the language of the Import-Export Clause (Pet. App. 10a) and that decisions under the latter Clause therefore may not be relevant in interpretation of the former. That suggestion, however, does not withstand analysis. The entire text of the two Clauses must be considered. The Import-Export Clause precludes ---------------------------------------- Page Break ---------------------------------------- 17 States from imposing "Imposts or Duties on Imports or Exports"; the Export Clause specifies that no federal "Tax or Duty shall be laid on Articles ex- ported." U.S. Const. Art. I, 10, Cl. 2; Art. I, 9, Cl. 5. An "impost" or "duty" on an "export" is a "tax" on an "Article exported"; a "tax" on an "Article ex- ported" is an "impost" or "duty." 5. Giving effect to the entire text of both Clauses, Chief Justice Mar- shall stated in this Court's first decision under either the Import-Export Clause or the Export Clause (Brown v. Maryland, 25 U.S. (12 Wheat.) at 445): The States are forbidden to lay a duty on exports, and the United States are forbidden to lay a tax or duty on articles exported from any State. There is some diversity in language, but none is perceivable in the act which is prohibited. That observation has been repeated by this Court on numerous occasions. 6. In the more numerous cases under the Import-Export Clause and the less numer- ous cases under the Export Clause, the Court has routinely cited cases under the two Clauses without differentiation. Moreover, as we shall discuss, the analysis applied in opinions under the two Clauses has not varied. 3. The "Original Package" Doctrine and Early Decisions Addressing Generally Applicable, Non- ___________________(footnotes) 5 In Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 437 (1827), Chief Justice Marshall explained that an "impost" is a "duty on imports" and represents "a tax levied on articles brought into a country * * *." 6 See, e.g., Turpin v. Burgess, 117 U.S. 504, 506-507 (1886); Cornell v. Coyne, 192 U.S. 418, 427 (1904); United States v. Hvoslef, 237 US. 1, 14 (1915); Kosydar v. National Cash Register Co., 417 U.S. 62, 67 n.5 (1974). ---------------------------------------- Page Break ---------------------------------------- 18 discriminatory Taxes Under the Import-Export Clause. In Brown v. Maryland, a Maryland statute required that importers or wholesalers of foreign goods purchase a license costing $50 before selling such goods. Brown was convicted of having imported and sold a package of foreign goods without having obtained the license. In holding that the statute violated the Import-Export Clause, the Court ex- plained that a tax on the privilege of selling foreign goods was, in substance, a duty upon things imported for sale. 25 U.S. (12 Wheat.) at 439. Rejecting the suggestion that this would mean that imported goods would be permanently immune from taxation by the States, the Court stated that an import retained its "distinctive character" only while in the "original form or package in which it was imparted" (id. at 442). The statute involved in Brown v. Maryland dis- criminated against imported goods because it imposed no comparable licensing requirement for the sale of domestic goods. See 25 U.S. (12 Wheat.) at 436. In the License Cases, 46 U.S. (5 How.) 504 (1847), the Court upheld a similar licensing requirement that applied to the sales of both imported and domestic goods. Chief Justice Taney, who had argued the case of Brown v. Maryland for the State, did not question the validity of the "original package" doctrine and acknowledged that a tax directed uniquely at imports would be invalid. Id. at 574-575. He explained, however, that a generally applicable, nondiscriminatory state tax would not be unconstitutional merely because the tax also applies to imported goods (id. at 576): Undoubtedly a State may impose a tax upon its citizens in proportion to the amount they are respectively worth; and the importing merchant is ---------------------------------------- Page Break ---------------------------------------- 19 liable to this assessment like any other citizen, and is chargeable accordingly to the amount of his property, whether it consists of money engaged in trade, or of imported goods which he proposes to sell, or any other property of which he is owner. But a tax of this description stands upon a very different footing from a tax on the thing imported, while it remains a part of foreign commerce, and is not introduced into the general mass of property in the State. Twenty-five years after the License Cases, however, the Court reached a different conclusion in Low v. Austin, 80 U.S. (13 Wall.) 29 (1872). In Low, the Court held that a nondiscriminatory, generally applicable California property tax could not be imposed upon a shipment of French champagne held in an importer's warehouse in the "original package" in which shipped. Id. at 35. In so ruling, the Court neglected to consider the contrary conclusion of Chief Justice Taney in the License Cases, although his approval of the "original package" doctrine was cited by the Court. Id. at 33-34. 7. 4. The Early Export Clause Cases. The Export Clause was invoked in Pace v. Burgess, 92 U.S. 372 (1876), by a tobacco manufacturer who, in 1868, was subject to a federal excise tax on tobacco products. Although tobacco intended for export was exempt from the tax, the exemption was subject to the ___________________(footnotes) 7 The "original package" rule was also followed in Cook v. Pennsylvania, 97 U.S. 566 (1878), Anglo-Chilean Nitrate Sales Corp. v. Alabama, 288 U.S. 218 (1933), and Hooven & Allison Co. v. Evatt, 324 U.S. 652 (1945). See also May v. New Orleans, 178 U.S. 496 (1900); Youngstown Sheet & Tube Co. v. Bowers, 358 U.S. 534 (1959). ---------------------------------------- Page Break ---------------------------------------- 20 requirement that packages for export be identified by an engraved stamp costing 25 cents. The manufac- turer brought suit to recover the price of the stamps, claiming that they constituted a prohibited tax on exports. The Court denied recovery, explaining that the stamps were designed to prevent fraud and did not represent a tax. Id. at 375. In 1882, however, Congress discontinued the charge for the exemption stamp in a statute that referred to the stamp as an "export tax." Act of Aug. 8, 1882, ch. 468, 22 Stat. 372. On that basis, another tobacco manufacturer sued to recover the amounts he had paid for these stamps before the charge was discontinued. The Court adhered to its decision in Pace v. Burgess, but with a somewhat different rationale. In describ- ing the Export and Import-Export Clauses, the Court stated (Turpin v. Burgess, 117 U.S. 504, .507 (1886) (emphasis added)): The prohibition in both cases has reference to the imposition of duties on goods by reason or because of their exportation or intended exportation, or whilst they are being exported. * * * But a general tax, laid on all property alike, and not levied on goods in course of exportation, nor because of this intended exportation, is not within the constitutional prohibition. Quoting and relying upon the above passage, the Court subsequently held in Cornell v. Coyne, 192 U.S. 418, 427-428 (1904), that a manufacturer who produced filled cheese under a contract for export sale could not-merely because the cheese was designated for export-escape liability for the federal tax of one cent per pound on that product. The Court explained that the Export Clause "does not mean that articles ---------------------------------------- Page Break ---------------------------------------- 21 exported are relieved from the prior ordinary burdens of taxation which rest upon all property similarly situated" (id. at 427). 5. The Decisions Leading to Thames & Mersey. The direct predecessor of Thames & Mersey was Fairbank v. United States, 181 U.S. 283 (1901). That case involved a provision of the War Revenue Act of 1898 that imposed a variety of stamp taxes on written instruments, including "[b]ills of lading * * * for any goods, merchandise, or effects, to be exported from a port or place in the United States to any foreign port or place" (ch. 448, 25 (Schedule A), 30 Stat. 459). In Fairbank, the Court held that this stamp tax on bills of lading, which applied only to exported goods, violated the Export Clause. Invoking a prior, similar holding under the. Import-Export Clause (Almy v. California, 65 U.S. (24 How.) 169 (1861)), the Court held that the tax upon a bill of lading was invalid because it was equivalent to a tax upon the exported goods themselves. Two later cases, argued on the same day, are the cases upon which respondent relies. Like Fairbank, they involved stamp taxes imposed by the War Revenue Act of 1898. Unlike Fairbank, however, neither tax was imposed expressly or uniquely on export transactions. United States v. Hvoslef, 237 U.S. 1 (1915), involved a federal stamp tax upon any "Contract or agreement for the charter of any ship" without reference to the intended destination of the ship or its cargo (30 Stat. 460). Thames & Mersey Marine ins. Co. v. United States, 237 U.S. 19 (1915), upon which respondent most directly relies, involved a federal stamp tax on policies of marine insurance "whether covering peril by sea or on inland waters" (25, 30 Stat. 461). Since these statutory provisions ---------------------------------------- Page Break ---------------------------------------- 22 did not differentiate between domestic voyages and shipments to foreign ports, it might have been supposed that they would be sustained as nondiscriminatory taxes of general applicability under the reasoning of the 1886 decision in Turpin v. Burgess and the 1904 decision in Cornell v. Coyne. See pages 20-21, supra. In Hvoslef, however, the Court invoked its decision in Fairbank without acknowledging that the stamp tax challenged in Hvoslef-unlike the tax challenged in Fairbank - was of general applicability and was not limited to voyages involving exports. In support of its conclusion in Hvoslef that a tax of general applicability would violate the Export Clause if it applied to export trade, the Court invoked Robbins v. Shelby County Taxing District, 120 U.S. 489 (1887). Robbins was the first of "a long line of 'drummer' eases" in which the Court held, under the Commerce Clause, that a State could not impose a licensing fee on a person who solicited orders for goods to be shipped from another State. 8. The Court stated in Robbins (id. at 497): ___________________(footnotes) 8 See Memphis Steam Laundry Cleaner, Inc. v. Stone, 342 U.S. 389, 392 (1952). Robbins had a numerous progeny. See, e.g., Crutcher v. Kentucky, 141 U.S. 47 (1891); DiSanto v. Pennsylvania, 273 U.S. 34 (1927); Nippert v. Richmond, 327 U.S. 416 (1946). Among the more recent was Spector Motor Service, Inc. v. O'Connor, 340 U.S. 602 (1951), which this Court overruled in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). In Complete Auto Transit, Inc., the Court held, contrary to Robbins and Spector, that generally applicable state licensing statutes could be applied according to their terms, without granting exemption to those whose business was solely interstate. See 430 U.S. at 279-289; pages 29-30, infra. These decisions concerning the negative implications of the Commerce Clause are not logically relevant to analysis under ---------------------------------------- Page Break ---------------------------------------- 23 It is strongly urged, as if it were a material point in the case, that no discrimination is made between domestic and foreign drummers-those of Tennessee and those of other states; that all are taxed alike. But that does not meet the difficulty. Interstate Commerce cannot be taxed at all, even though the same amount of tax should be laid on domestic commerce, or that which is carried on solely within the state. Having applied Fairbank and Robbins to exempt export transactions from broadly applicable, nondis- criminatory taxing provisions in Hvoslef, the Court entered its decision in Thames & Mersey two weeks later on the authority of Hvoslef. 237 U.S. at 27. In neither Hvoslef nor Thames & Mersey did the Court discuss the reasoning of prior decisions (such as Cornell v. Coyne, supra) that had upheld application of nondiscriminatory taxes that apply generally "to all property alike" and are not levied upon or because of the "exportation" or "intended exportation" of the goods (Turpin v. Burgess, 117 U.S. at 507). The decisions in Hvoslef and Thames & Mersey established a pattern that this Court subsequently followed of immunizing export transactions from generally applicable federal taxes. For example, when Congress imposed a general tax on various sporting goods under the War Revenue Act of 1917, ch. 63, 40 Stat. 300, 317, the Court invoked not Cornell v. Coyne but Hvoslef and Thames & Mersey to hold that the Export Clause prohibited imposition of that tax upon a shipment of baseballs and bats to a purchaser in ___________________(footnotes) the Export Clause. Although the Commerce Clause operates as a limitation on the powers of the States, it confers powers on the United States. See page 36, supra. ---------------------------------------- Page Break ---------------------------------------- 24 Venezuela. A.G. Spalding & Bros. v. Edwards, 262 U.S. 66 (1923). See also Crew Levick Co. v. Pennsylvania, 245 U.S. 292 (1917) (same under the Import-Export Clause). Similarly, in Puget Sound Stevedoring Co. v. State Tax Commission, '302 U.S. 90 (1937), and Joseph v. Carter & Weekes, 330 U.S. 422 (1947), the Court held that state sales or gross re- ceipts taxes could not be imposed upon payments for loading and unloading ship cargoes transported in interstate or foreign commerce. 6. The Modern. Decisions Upholding Application of General, Nondiscriminatory Taxes to Export Transactions. a. Three years after the Court's decisions in Hvoslef and Thames & Mersey, the Court returned to an interpretation of the Export Clause that focused on whether the challenged tax applied without dis- crimination to both domestic and foreign trans- actions. In Peck & Co. v. Lowe, 247 U.S. 165 (1918), the Court rejected the contention that the Export Clause precludes the United States from taxing the income that a taxpayer derives from export trans- actions. In Peck & Co., more than two thirds of the taxpayer's income had been derived from export sales. Id. at 172. The taxpayer paid the federal income tax on its entire income and brought suit to recover the part of the tax paid on the income from export sales. In a relatively brief opinion by Justice Van Devanter, the Court denied recovery. The decision is often stated to rest upon the fact that the tax was upon net, rather than gross, income. See L. Tribe, ---------------------------------------- Page Break ---------------------------------------- 25 American Constitutional Law 56-19, at 463 n.18 (2d ed. 1988). 9. Indeed, the opinion states (247 U.S. at 175): At most, exportation is affected only indirectly and remotely. The tax is levied after exportation is completed, after all expenses are paid and losses adjusted, and after the recipient of the income is free to use it as he chooses. Thus what is taxed- the net income-is, as far removed from exportation as are articles intended for export before the exportation begins. But the Court did not rest its decision in Peck & Co. wholly upon that explanation. Instead, the Court further stated (247 U.S. at 174-175 (emphasis added)): The tax in question is unlike any of those heretofore condemned. * * * On the contrary, it is an income tax laid generally on net incomes. And while it cannot be applied to any income which Congress has no power to tax (see Stanton v. Baltic Mining Co., supra, pp. 113), it is both nominally and actually a general tax. It is not laid on income from exportation because of its source, or in a discriminative way, but just as it is laid on other income. The words of the act are "net income arising or occurring from all sources". There is no discrimination. At most, exportation is affected only indirectly and remotely. ___________________(footnotes) 9 That explanation, however, suggests as many questions as it purports to answer. What if the income tax were imposed only on net income from export sales? Or what if net income from export sales were taxed at a rate higher than net income from domestic transactions? Would either such "net" income tax survive a challenge under the Export Clause? ---------------------------------------- Page Break ---------------------------------------- 26 The fact that the federal income tax is a "general tax" that applies to all sources of income without "discrimination" is the more persuasive basis for the Court's decision in Peck & Co. That reasoning is a more complete explanation of the Court's conclusion (see note 9, supra) and it builds directly upon the analysis applied by the Court in Turpin v. Burgess and Cornell v. Coyne. That reasoning also antici- pates the recent decisions of this Court under the Import-Export and Commerce Clauses. b. During the following decades, there were further indications that the Court was reconsidering whether the Constitution immunizes interstate and foreign transactions from generally applicable, non- discriminatory taxes. For example, in Western Live Stock v. Bureau of Revenue, 303 U.S. 250 (1938), in upholding application of a nondiscriminatory, generally applicable state tax to a taxpayer engaged in interstate commerce, the Court heavily qualified the broad Commerce Clause rationale of Robbins on which Hvoslef relied (303 U.S. at 254, quoting Postal Telegraph-Cable Co. v. City of Richmond, 249 U.S. 252, 259 (1919)): 10 It was not the purpose of the commerce clause to relieve those engaged in interstate commerce from their fair share of state tax burden even though it increases the cost of doing the business. "Even interstate business must pay its way" * * * . ___________________(footnotes) 10 See also General Motors corporation V. Washington, 377 U.S. 436 (1964); Colonial Pipeline Co. v. Traigle, 421 U.S. 100 (1975). ---------------------------------------- Page Break ---------------------------------------- 27 And, in Canton R.R. v. Rogan, 340 U.S. 511 (1951), the Court indicated a revised view of the proper treatment of taxes upon transactions related or collateral to importation and exportation when it wrote (id. at 514-515): The difference [between this case and cases such as Spalding] is that in the present case the tax is not on the goods but on the handling of them at the port. * * * [W]hen the tax is on activities connected with the export or import the range of immunity cannot be so wide. c. Full reconsideration of these issues ultimately came in Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976), Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), and Department of Revenue of Washington v. Association of Washington Stevedor- ing Cos., 435 U.S. 734 (1978). See also Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984). Those decisions expressly overruled several of the decisions previously discussed and, without cataloging them in detail, rejected other decisions that had disposed of the same issues in the same fashion. (i) Michelin Tire involved the constitutionality of a state property tax as applied to imported tires held in the importer's warehouse in Georgia. Invoking the "original package" doctrine applied in Low v, Austin, the importer maintained that its imported tires were exempt from state tax. The Court rejected that claim, holding that (423 U.S. at 279): Georgia's assessment of a nondiscriminatory ad valorem property tax against the imported tires is not within the constitutional prohibition against laying "any Imposts or Duties on Imports" * * * and * * * insofar as Low v. Austin, 13 Wall. 29 ---------------------------------------- Page Break ---------------------------------------- 28 (1872) is to the contrary, that decision is over- ruled. In reaching that decision, the Court reviewed the text and objectives of the Import-Export Clause, as well as its historical origin. 423 U.S. at 283-286. The Court noted that the considerations that gave rise to the Clause were that: (i) the federal government must speak with one voice in regulating commercial relations with foreign governments, and state tariffs on exports and imports could conflict with that requirement; (ii) import revenues were to be the major source of revenue to the federal government and should not be diverted to the States; and (iii) harmony among the States would be disrupted if the seaboard states with good harbors could tax goods passing through their harbors to or from their neigh- bors. Id. at 285. The Court concluded that nondiscriminatory prop- erty taxes would interfere with none of the objectives of the Import-Export Clause. 423 U.S. at 286-290. Noting that the- text of the Import-Export Clause- proscribing imposts and duties on imports and exports-did not clearly encompass general property taxes, the Court "decline[d] to presume it was intended to embrace taxation that does not create the evils the Clause was specifically intended to eliminate" (423 U.S. at 293-294). The Court empha- sized that (id. at 287): The Import-Export Clause clearly prohibits state taxation based on the foreign origin of the imported goods, but it cannot be read to accord imported goods preferential treatment that permits escape from uniform taxes imposed ---------------------------------------- Page Break ---------------------------------------- 29 without regard to foreign origin for services which the State supplies. The Court further explained that the "original package" language of Brown v. Maryland had been misunderstood (423 U.S. at 298): [I]t is clear that the Court's view in Brown [v. Maryland] was that merely because certain actions taken by the importer on his imported goods would so mingle them with the common property within the State as to "lose their distinctive character as imports" and render them subject to the taxing power of the State, did not mean that in the absence of such action, no exaction could be imposed on the goods. Rather, the Court clearly implied that the prohibition would not apply to a state tax that treated imported goods in their original packages no differently from the "common mass of property in the country"; that is, treated it in a manner that did not depend on the foreign origins of the goods. The Court noted that the opinion in Low v. Austin had misread Chief Justice Taney's opinion in the License Cases, which "makes crystal clear that the prohibition applied only to state exactions upon imports as imports and did not apply to nondis- criminatory ad valorem property taxes." 423 U.S. at 300. See pages 18-19, supra. (ii) In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Court held that the Commerce Clause does not bar application of a generally applica- ble state tax to the gross revenues of a company engaged exclusively in the transportation of motor vehicles in interstate commerce. The Court recon- sidered and overruled its decision in Spector Motor ---------------------------------------- Page Break ---------------------------------------- 30 Service, Inc. v. O'Connor, 340 U.S. 602 (1951), which, following Robbins. had held that a State could not impose a generally applicable licensing fee on persons engaged in interstate commerce. See page 22 & note 8, supra. The Court noted in Complete Auto that it was unquestioned. that the activity engaged in was sufficiently connected to the State to justify a tax, that the tax was fairly related to the benefit provided to the taxpayer, that the tax did not discriminate against interstate commerce, and that it was not unfairly apportioned. 430 U.S. at 287. Under those circumstances, the Court concluded that "the Spector rule does not address the problems with which the Commerce Clause is concerned" and overruled that decision. Id. at 288. The Court's holding in Complete Auto necessarily, albeit implicitly, overruled Robbins and the "long line of 'drummer cases'" that that decision had spawned. See note 8, supra. (iii) In Department of Revenue of Washington v. Association of Washington Stevedoring Companies, 435 U.S. 734 (1978), the Court considered the State of Washington's renewed attempt to apply its gross receipts tax to the proceeds from loading and un- loading ocean-going vessels. In the earlier decisions in Puget Sound and Joseph v. Carter & Weekes, the Court had invoked the Commerce Clause to hold unconstitutional the application of state gross re- ceipts taxes to the proceeds of stevedoring cargoes in interstate and foreign commerce. See page 24, supra. In Washington Stevedoring, however, the Court had little difficulty, after Complete Auto, in overruling those decisions insofar as the Commerce Clause was involved. 435 U.S. at 743-751. The Import-Export Clause required separate con- sideration. Michelin Tire had inquired whether a ---------------------------------------- Page Break ---------------------------------------- 31 generally applicable tax that did not favor or disfavor imports or exports conflicted with any of the policies leading to the adoption of the Import-Export Clause and had upheld the application of the property tax to imported goods, whether or not in the original package, when it found no friction or inconsistency. A similar inquiry led the Court to conclude in Washington Stevedoring that the generally applica- ble Washington tax on gross receipts from stevedor- ing offended none of the policies of the Import-Export Clause. 435 U.S. at 754-755. The Court specifically rejected the suggestion that the fact that Michelin Tire dealt only with goods no longer in transit required that the cases be differentiated. Id. at 755- 757. The Court explained that Canton Railroad demonstrated that the analysis applied in Michelin Tire was not to be discarded simply because the goods were in transit. Ibid. Moreover, the fact that Michelin Tire involved only imports while the tax involved in Washington Stevedoring related to pro- ceeds from services for both imports and exports did not call for a different conclusion. Id. at 757-758. The Court held that the considerations that led to the decision in Michelin Tire were equally applicable to the Washington tax. Ibid. 11. (iv) The Court's decision in Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984), serves as a supple- ment to these three significant modern decisions. In ___________________(footnotes) 11 Justice Powell concurred separately in Washington Steve- doring. He concluded that the controlling factor in that case, as in Michelin Tire, was that local taxpayers should not be required to subsidize the services used and enjoyed by im- porters and exporters; instead, the consumer of such goods should pay for the services rendered by government just as they paid transportation costs. 435 U.S. at 761-764. ---------------------------------------- Page Break ---------------------------------------- 32 Limbach, the Court made clear that more than a few named decisions had been overruled by Michelin Tire, Complete Auto, and Washington Stevedoring. In overruling an earlier decision that had invalidated the application of a "nondiscriminatory ad valorem per- sonal property tax to imported fibers still in their original packages" (466 U.S. at 354), the Court emphasized that the reasoning that underlay such decisions had been "repudiated" (id. at 362). The fact that the Court had not explicitly named and cataloged all of the cases whose reasoning had been rejected in its more recent decisions did not mean that those earlier decisions retained "current validity." Id. at 361. 7. Application of The Modern Doctrine to the Export Clause. The reasoning of the Court in Michelin Tire and Washington Stevedoring applies equally to nondiscriminatory federal taxes under the Export Clause. Those decisions demonstrate that, when a generally applicable, nondiscriminatory tax is at issue, the mere fact that the tax applies also to goods that are in the export or import process does not provide a constitutional immunity from taxation. See pages 27-29, supra. And, as the Court has repeatedly emphasized since Brown v. Maryland, the Export and Import-Export Clauses are comple- mentary in scope. See pages 16-17, supra. 12. As the court of appeals acknowledged in this ease (Pet. App. 4a), and as Madison's Notes of Debates and Warren's The Making of the Constitution demon- ___________________(footnotes) 12 Most recently, in Washington Stevedoring, the Court cited Spalding (an Export Clause case) along with cases involving state taxes and the Import-Export Clause to illustrate rea- soning that was no longer approved. 435 U.S. at 752. ---------------------------------------- Page Break ---------------------------------------- 33 strate, the Export Clause resulted from one of the sectional divisions that marked the Constitutional Convention. 13. In particular, it stemmed from the "concern that a Congress controlled by the more numerous and populous Northern States would impose burdensome levies on Southern exports" (Pet. App. 4a), including the "three great crops which grew nowhere else,-tobacco, rice, and indigo" (note 13, ___________________(footnotes) 13 See Madison's Notes of Debates in the Federal Convention, reproduced in 2 M. Farrand, The Records of the Federal Con- vention of 1787, at 305-308, 359-363, 441-442 (1966) (proceedings of August 16, 21, 28, 1787); C. Warren, The Making of the Constitution 570-574 (reprint 1993) (1928). The central portion of Warren's description is as follows (at 571-572) (footnote omitted): The question of a prohibition of taxes and duties on exports now brought these sectional differences into an outbreak in the Convention. It is to be noted, as a preliminary to consideration of this clash, that the Committee's proposal to forbid export duties was a very radical departure from the theory and practice theretofore prevailing in government taxation. As has been well said: "To attempt to organize a Government without the power to tax exports was a innovation. From time immemorial, every nation had taxed whatever pro- ductions of its soil its inhabitants might presume to export. In the old economy, its maxim was to tax exports but to admit imports free." The prohibition of export duty now inserted in the new Constitution was not based, however, on any change in economic theory but on purely political and sectional conditions. The South, being agricultural and having three great crops which grew nowhere else, tobacco, rice, and indigo-feared that the possession of this power by Congress could enable the North to discriminate against it, by a tax which would operate only on the peculiarly Southern articles of export. This fear had been expressed early in the Convention. ---------------------------------------- Page Break ---------------------------------------- 34 supra). This narrow historical purpose of the Export Clause is complemented by the narrow language employed in the Clause, which proscribes only federal taxes "laid on Articles exported" (U.S. Const. Art. I, 9, Cl. 5). There is obviously no basis for respondent to contend that the generally applicable tax on insur- ance imposed by Section 4371 of the Internal Revenue Code conflicts with the policies that the Export Clause embodies. This federal tax applies to many forms of insurance that have no relation whatever to exports or the export process (such as life insurance, sickness and accident policies, indemnity bonds and annuity contracts). See 26 U.S.C. 4371(1), (2). Even as applied to casualty insurance, the tax unquestiona- bly has only an incidental and remote relationship to exports and the export process-and it applies equally to wholly domestic commerce as well. 14. That the statute does not discriminate against exports is clear from its text, for it applies to insurance for any risk that arises either ''wholly or partly within the United States" (26 U.S.C. 4372(d)(1)). As this Court stated in upholding the constitutionality of the federal tax challenged in Peck & Co. v. Lowe, 247 U.S. at 175, "There is no discrimination. At most, exportation is affected only indirectly and remotely." In view of the limited purpose and narrow language of the Export Clause, there is no adequate rationale for sifting through all possible applications of a generally applicable, nondiscriminatory federal tax to ___________________(footnotes) 14 Even within the specific category of casualty insurance, the statute applies to risks that have little or no connection with exports and exportation such as fire, flood and earth- quake. ---------------------------------------- Page Break ---------------------------------------- 35 proscribe its application in remote contexts involving exported goods. Consider, for example, a hypothetical transaction that is not unrelated to the facts of this case. A ship sets out from California with a cargo produced in Arizona. Part of the cargo will be offloaded in British Columbia to a buyer doing business there. The remainder of the cargo will be delivered to a buyer in Alaska. The cargo has been insured by a foreign insurer against damage or loss for its entire journey-beginning with its loading on trucks in Arizona and until delivery at the places of business of the buyers in British Columbia and Alaska. The nondiscrimination policies embodied in the Export Clause plainly do not require that the insurance covering the part of the cargo delivered in British Columbia be made exempt from the federal tax on insurance while the Alaska portion of cargo is not. That would turn the constitutional shield against discrimination in the Export Clause into a sword requiring "preferential treatment" for exports and "that permits escape from uniform taxes" imposed without discrimination (Michelin Tire Corp. v. Wages, 423 U.S. at 287). As this Court noted in Cornell v. Coyne, 192 U.S. at 427, the Export Clause "does not mean that articles exported are relieved from the prior ordinary burdens of taxation which rest upon all property similarly situated." The United States-like the States- assists and protects respondent's shipments over highways within the United States (financed in substantial part by the federal government) as well as in the movement of such goods by sea or air beyond our borders. As a nondiscriminatory, generally appli- cable tax designed to raise revenues for the perform- ance of government services, the tax imposed by ---------------------------------------- Page Break ---------------------------------------- 36 Section 4371 is not unconstitutional. Here, as in Peck & Co. v. Lowe, the tax should be upheld because it is "not laid on" exports or the export process uniquely "or in a discriminative way" (247 U.S. at 174). It should be emphasized that the Commerce Clause provides Congress with comprehensive authority over exports as well as imports. It was established early that Congress has the power to embargo or otherwise control the export of such goods or materials as the national interest indicates, Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 191-192 (1824); United States v. Marigold, 50 U.S. (9 How.) 560, 566-567 (1850); United States v. The William, 28 Fed. Cas. 614, 620-623 (D. Mass. 1808) (No. 16,700). 15. It is also clear that Congress may take into account-both in regulating commerce with foreign nations and in laying and collecting taxes-the competitive advan- tages enjoyed by foreign nationals and foreign corporations, Board of Trustees v. United States, 289 U.S. 48,58 (1933). The Export Clause removes only a small and narrowly defined area from the wide- ranging authority provided to the Congress by the Constitution. Considering the origin, text and narrow objectives of the Export Clause, the role of that Clause within the broader structure of the Constitution, and this Court's recent decisions, the prohibitions of that Clause should be confined to discriminatory taxes ___________________(footnotes) 15 That authority has recently been exercised in the enactment of the Export Administration Act of 1979, 50 U.S.C. App. 2401-2420. See Moller-Butcher v. United States Depart- ment of Commerce, 12 F.3d 249 (D.C. Cir. 1994); United States v. Bozarov, 974 F.2d 1037 (9th Cir. 1992), cert. denied, 113 S. Ct. 1273 (1993). ---------------------------------------- Page Break ---------------------------------------- 37 imposed specifically upon "Articles exported." The generally applicable, nondiscriminatory tax on in- surance imposed by Section 4371 of the Internal Revenue Code does not violate that standard. CONCLUSION The judgment of the court of appeals should be reversed. Respectfully submitted. DREW S. DAYS, III Solicitor General LORETTA C. ARGRETT Assistant Attorney General LAWRENCE G. WALLACE Deputy Solicitor General KENT L. JONES Assistant to the Solicitor General GARY R. ALLEN ERNEST J. BROWN Attorneys JANUARY 1996 ---------------------------------------- Page Break ---------------------------------------- No. 95-591 In the Supreme Court of the United States OCTOBER TERM, 1995 UNITED STATES OF AMERICA, PETITIONER v. INTERNATIONAL BUSINESS MACHINES CORPORATION ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT REPLY BRIEF FOR THE UNITED STATES DREW S. DAYS, III Solicitor General Department of Justice Washington, D.C. 20530 (202) 514-2217 ---------------------------------------- Page Break ---------------------------------------- TABLE OF AUTHORITIES Cases: Page Alabama v. King & Boozer, 314 U.S. 1 (1941) . . . . 14 Brown v. Maryland, 25 U.S. (12 Wheat.) 419 (1827) . . . . 8, 12, 15 Burnet v. Coronado Oil & Gus Co., 285 U.S. 393 (1932) . . . . 13 City of Detroit v. Murray Corp., 355 U.S. 489 (1958) . . . . 14 Collector v. Day, 78 U.S. (11 Wall.) 113(1871) . . . . 14 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) . . . . 6 Cornell v. Coyne, 192 U.S. 418 (1904) . . . . 2, 4, 7-8, 10 Department of Revenue v. Association of Washing- ton Stevedoring Cos., 435 U.S. 734 (1978) . . . . 5, 7 Fairbank v. United States, 181 U.S. 283 (1901) . . . . 4 Fox Film Corp. v. Doyal, 286 U.S. 123 (1932) . . . . 13 Gillespie v. Oklahoma, 257 U.S. 501 (1922) . . . . 13 Graves v. New York ex rel. O'Keefe, 306 U.S. 466 (1939) . . . . 13, 14 Graves v. Texas Co., 298 U.S. 393 (1936) . . . . 14 Helvering v. Mountain Producers Corp., 303 U.S. 376 (1938) . . . . 13 License Cases, 46 U.S. (5 How.) 504 (1847) . . . . 9 Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984) . . . . 6 Long v. Rockwood, 277 U. S. 142 (1928) . . . . 13 Low v. Austin, 80 U.S. (13 Wall.) 29 (1872) . . . . 9 Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976) . . . . 5, 7, 9, 10, 15, 16 New York ex rel. Rogers v. Graves, 299 U.S. 401 (1937) . . . . 13 Pace v. Burgess, 92 U.S. 372 (1876) . . . . 2 Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U.S. 218(1928) . . . . 14 Peck & Co. v. Lowe, 247 U.S. 165 (1918) . . . . 2, 4, 7 (I) ---------------------------------------- Page Break ---------------------------------------- II Cases-Continued: Page Pollock v. Farmers Loan & Trust Co., 157 U.S. 429 (1895) . . . . 14 Robbins v. Shelby County Taxing District, 120 U.S. 489 (1887) . . . . 6 South Carolina v. Baker, 485 U.S. 505 (1988) . . . . 14 Thames & Mersey Marine Ins. Co. v. United States, 237 U.S. 19 (1915) . . . . 2 Turpin v. Burgess, 117 U.S. 504 (1886) . . . . 2, 3, 4, 10, 12 United States v. County of Allegheny, 322 U.S. 174 (1944) . . . . 14 United States v. City of Detroit, 355 U.S. 466 (1958) . . . . 14 United States v. Hvoslef 237 U.S. 1 (1915) . . . . 2, 6 United States v. Township of Muskegon, 355 U.S. 484 (1958) . . . . 14 Willcuts v. Burro, 282 U.S. 216 (1931) . . . . 13 Constitution and statutes: U.S. Const.: Art. I, 8, Cl. 3 (Commerce Clause) . . . . 6 Art. I, 9, Cl. 5 (Export Clause) . . . . passim Art. I, 10, Cl. 2 (Import-Export Clause) . . . . 7, 8, 9, 10, 12 Internal Revenue Code, 26 U.S.C. 4371 . . . . 1, 14, 16, 16 War Revenue Act of 1898, ch. 448, 25 (Schedule A), 30 Stat. 459 . . . . 4, 5 Miscellaneous: Black's Law Dictionary (6th ed. 1990) . . . . 11 Justice Story's Commentaries on the Constitution (1833) (R. Rotunda and J. Nowak reprint, 1987, Carolina Academic Press) . . . . 11 Webster's Third New International Dictionary (Unabridged) (1986) . . . . 11 ---------------------------------------- Page Break ---------------------------------------- In the Supreme Court of the United States OCTOBER TERM, 1995 No. 95-591 UNITED STATES OF AMERICA, PETITIONER v. INTERNATIONAL BUSINESS Machines CORPORATION ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT REPLY BRIEF FOR THE UNITED STATES It is appropriate to emphasize at the outset the precise nature of respondent's claim in this case. Respondent does not dispute that the tax imposed by Section 4371 of the Internal Revenue Code may con- stitutionally apply to insurance obtained in con- nection with domestic shipments of goods. Instead, respondent claims only that this tax may not apply to insurance procured in connection with shipments of goods to foreign countries. If, for example, respon- dent ships cargo on a voyage from California to Alaska, with an intermediate stop in British Colum- bia, respondent asserts only that the insurance for the shipment offloaded in British Columbia-not the insurance for the shipment continuing on to Alaska (1) ---------------------------------------- Page Break ---------------------------------------- 2 -is constitutionally exempt from the generally ap- plicable federal tax. Respondent's submission is thus grounded in the proposition that the Export Clause requires prefer- ential, rather than nondiscriminatory, treatment of exports and the export process. No decision of this Court prior to Hvoslef and Thames & Mersey sup- ports respondent's submission, and decisions both prior and subsequent to those cases contradict it. 1. a. Respondent errs in contending (Resp. Br. 9-26) that United States v. Hvoslef, 237 U.S. 1 (1915), and Thames & Mersey Marine Ins. Co. v. United States, 237 U.S. 19 (1915), are part of an unbroken line of authority supporting the view that generally ap- plicable, nondiscriminatory taxes are invalid as ap- plied to goods for export and export transactions. Decisions of this Court both before and after Hvoslef and Thames & Mersey hold that "a general tax, laid on all property alike, and not levied on goods in course of exportation, nor because of their intended expor- tation, is not within. the constitutional prohibition." Turpin v. Burgess, 117 U.S. 504, 507 (1886). See also Peck & Co. v. Lowe, 247 U.S. 165, 175 (1918); Cornell v. Coyne, 192 U.S. 418,427-428 (1904). 1. ___________________(footnotes) 1 The first two decisions of this Court under the Export Clause involved a federal tax on manufactured tobacco products. Tobacco intended for export was exempt from this tax, subject to the requirement that packages for export be identified by an engraved stamp costing 25 cents. Pace v. Burgess, 92 U.S. 372 (1876); Turpin v. Burgess, 117 U.S. 504 (1886). In each case, the plaintiffs sought a refund of amounts paid for the identifying stamps. In Pace, the Court concluded that the stamp requirement did not violate the Export Clause because it was not itself a tax but merely a device to prevent fraud and to deter untaxed tobacco products from entering the ---------------------------------------- Page Break ---------------------------------------- 3 Respondent claims that this passage from Turpin v. Burgess supports the proposition that even a non- discriminatory tax `laid on all property alike" (117 U.S. at 507) is constitutionally barred from applying to "goods in course of exportation" (ibid.)-goods that have commenced what respondent refers to as the "export process" (Resp. Br. 20). It is axiomatic, how- ever, that a tax that is "laid on all property alike" reaches, by definition, goods in the "export process." Goods in the export process are a subset of "all property." In the quoted passage from Turpin v. Burgess, the Court was distinguishing between taxes of general application, which the Export Clause does not proscribe, and taxes that are laid specifically, or discriminatorily, "on goods in course of exportation" or "because of their intended exportation" (117 U.S. at 507), which are unconstitutional. The Court made this clear by emphasizing in Turpin that, if the "same" tax applicable to domestic products had also ___________________(footnotes) domestic economy. When Congress thereafter removed the charge for the identifying stamp in a statute that referred to it as an "export tax," Turpin brought suit to recover amounts he had paid. The Court rejected that claim, relying again on the analysis set forth in Pace. The Court in Turpin went on to say that, even if the charge for the stamp was a tax, it was "a general tax, laid on all property alike," rather than a specific tax on or related to exports. The Court concluded (117 U.S. at 507): Had the same excise which was laid upon all other tobacco manufactured by the plaintiffs been laid on the tobacco in question, they could not have complained. This conclusion is, of course, inconsistent with respondent's contention that an unbroken line of authority supports the holding in Hvoslef and Thames & Mersey that a nondiscrim- inatory tax may not be applied to goods for export. ---------------------------------------- Page Break ---------------------------------------- 4 been applied to goods for export, the taxpayer "could not have complained" (ibid.). See also Peck & Co. v. Lowe, 247 U.S. at 175 (upholding a federal tax that applied without "discrimination" and that affected "exportation * * * only indirectly and remotely"); note 1, supra. The Court reached this same conclusion in Cornell v. Coyne, 192 U.S. 418 (1904), in upholding application of a general excise tax on "filled cheese" even as ap- plied to such cheese produced specifically for export. Id. at 427. The Court explained that "[t]he constitu- tional prohibition against taxing exports is substan- tially the same when directed to the United States as when directed to a State" and that "in both cases" it refers to duties imposed "by reason or because of" the exportation; it does not refer to "a general tax, laid on all property alike" (ibid., quoting Turpin v. Burgess, 117 U.S. at 506). In so holding, the Court explained that the Export Clause does not relieve exports "from the prior ordinary burdens of taxation which rest upon all property similarly situated" (192 U.S. at 427). 2. Respondent's suggestion that goods in the "export process" are to be relieved "from the prior ordinary burdens of taxation which rest upon all property similarly situated" is, in substance, a claim that a converse of the "original package" doctrine should ___________________(footnotes) 2 The only other case decided under the Export Clause prior to Hvoslef and Thames & Mersey was Fairbank v. United States, 181 U.S. 283 (1901). In Fairbank, the Court held unconstitutional a stamp tax on bills of lading "for any goods, merchandise, or effects, to be exported from a port or place in the United States" (ch. 448, 25 (Schedule A), 30 Stat. 459). By its terms, this tax was specifically on, and limited to, export transactions. ---------------------------------------- Page Break ---------------------------------------- 5 apply under the Export Clause. Under respondent's theory, when an article of commerce crosses an imaginary line representing the beginning of what respondent would view as the "export process," an absolute immunity from general taxes for that good and for any handling of that good (and for any insurance upon the handling of that good) arises under the Export Clause. But this Court rejected precisely that type of formalistic reasoning in Michelin Tire Corp. v. Wages, 423 U.S. 276, 298 (1976), in concluding that a tax imposed on imported articles in their "original package" is constitu- tionally permissible if the tax does not treat "im- ported goods * * * differently from the 'common mass of property in the country' * * *." See also Department of Revenue v. Association of Wash- ington Stevedoring Cos., 435 U.S. 734 (1978) (uphold- ing application of a nondiscriminatory state tax to revenues from stevedoring services rendered in the "process" of importing and exporting goods). A nondiscriminatory federal tax that does not treat "[exported] goods * * * differently from the `com- mon mass of property in the country'" is similarly constitutional. See Pet. Br. 32-37. b. The 1915 decisions in Hvoslef and Thames & Mersey involved stamp taxes imposed by the War Revenue Act of 1898. Hvoslef involved a stamp tax on any "contract or agreement for the charter of any ship" without reference to the destination or area of operation of the ship. Thames & Mersey involved a stamp tax on policies of marine insurance "whether covering peril by sea or on inland waters." The challenged taxes thus applied without discrimination to both domestic and foreign commerce. Falling on all property alike, the taxes were of the type that this ---------------------------------------- Page Break ---------------------------------------- 6 Court had concluded should be sustained in Cornell and Turpin. In Hvoslef and Thames & Mersey, however, the Court relied on the rationale of Robbins v. Shelby County Taxing District, 120 U.S. 489 (1887), for the proposition that even nondiscriminatory taxes may not constitutionally be applied to exports or to export transactions. 3. See 237 U.S. at 18. In Robbins, the Court had held that the Commerce Clause precludes application of general, nondiscriminatory state taxes to interstate commerce. In Hvoslef, the Court stated that it knew "of no ground upon which" the treatment afforded to nondiscriminatory state taxes under the Commerce Clause should differ from the treatment to be afforded to nondiscriminatory federal taxes under the Export Clause. 237 U.S. at 18. The reasoning that the Court applied in Robbins, of course, was subsequently "repudiated" by this Court in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). See Limbach v. Hooven & Allison Co., 466 U.S. 353, 362 (1984); Pet. Br. 29-30. Aside from the rationale of Rob bins, which has now been repudiated, there was and is no authority for the conclusion reached by the Court in Hvoslef and Thames & Mersey. c. Respondent suggests (Resp. Br. 23) that the tenuous line of authority in which it asserts Hvoslef ___________________(footnotes) 3 In Hvoslef, the Court also relied on Fairbank v. United States, supra, for the proposition that a tax on bills of lading is equivalent to a tax on the article exported. 237 U.S. at 14-15. But Fairbank involved a discriminatory tax that applied only to exported goods (see note 2, supra) and Hvoslef did not. In Hvoslef, the Court therefore relied exclusively on Robbins as support for its holding that a nondiscriminatory tax may not constitutionally be applied to goods for export. 237 U.S. at 18. ---------------------------------------- Page Break ---------------------------------------- 7 and Thames & Mersey are located extends to Peck & Co. v. Lowe, 247 U.S. 165 (1918). In that case, the Court, after reviewing each of the earlier cases involving the Export Clause, upheld the application of the federal income tax to income from export sales. The Court noted that the income tax is on net income, rather than on gross export sales. The more funda- mental rationale for that decision, however, is found in the Court's observation that the income tax is a general tax, "not laid on income from exportation because of its source, or in a discriminatory way, but just as it is laid on other income." See Pet. Br. 25-26 &n. 9. The Court emphasized in Peck & Co. that the tax involved "no discrimination" and that, "[a]t most, exportation is affected only indirectly and remotely." 247 U.S. at 175. That same rationale sustains the nondiscriminatory tax challenged in this case. d. Finally, the unbroken line of authority pro- claimed by respondent assuredly does not include this Court's most recent decisions dealing with the subject. In Michelin Tire Corp. v. Wages, the Court noted that its decisions had made "crystal clear" that the Import-Export Clause does not bar application of nondiscriminatory state taxes to imports-whether in the "original package" or not. 423 U.S. at 300. And, in Washington Stevedoring, the Court applied that same reasoning in upholding the application of nondiscriminatory state taxes to the handling of goods for export (an aspect of what respondent terms the "export process" (Resp. Br. 20)). 435 U.S. at 757- 758. This Court has often emphasized that "[t]he con- stitutional prohibition against taxing exports is substantially the same when directed to the United States as when directed to a State." Cornell v. ---------------------------------------- Page Break ---------------------------------------- 8 Coyne, 192 U.S. at 427. Although there is "some diversity in language" between the Export and Import-Export Clauses, "none is perceivable in the act which is prohibited." Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 445 (1827). As we explain in detail in our opening brief (Pet. Br. 32-37), the same reasons that led this Court to uphold the application of nondiscriminatory state taxes to the "export process" under the Import-Export Clause require that similarly nondiscriminatory federal taxes be upheld under the Export Clause. Indeed, it would be decidedly contrary to the overall scheme of the Constitution to hold that in this one area the States have greater discretion than the federal government to enact laws affecting foreign commerce. See Pet. Br. 36. 2. Respondent seeks to minimize the significance of Michelin Tire Corp. and Washington Stevedoring by magnifying the difference in phrasing of the Export Clause and the Import-Export Clause. The former specifies that "No Tax or Duty shall be laid on Articles Exported" (U.S. Const. Art. I, 9, CL 5); the latter provides that "No State shall * * * lay any Imposts or Duties on Imports or Exports" (U.S. Const. Art. I, 10, Cl. 2). Respondent contends that the analysis applied by this Court in Michelin Tire Corp. and Washington Stevedoring is inapplicable to cases involving the Export Clause because the "absence of a prohibition on `taxes' in the Im- port/Export Clause was central to the" Court's de- cisions in those cases (Resp. Br. 32). There are two answers to respondent's contention; (i) it misde- scribes the Court's opinions and (ii) it is based on a misunderstanding of the words employed in these constitutional Clauses. ---------------------------------------- Page Break ---------------------------------------- 9 a. In Michelin Tire Corp., the Court held that a "nondiscriminatory" tax on imported goods located within a State is not unconstitutional and that the Court had erred 100 years earlier when it ruled to the contrary in Low v. Austin, 80 U.S. (13 Wall.) 29 (187.2). The Court made that point at the outset of its opinion (423 U.S. at 279), explained that nondiscrim- inatory taxes of general application do not offend the objectives of the Import-Export Clause (id. at 283- 290), noted that a nondiscriminatory general tax does not clearly represent an "impost" or "duty" laid on imports or exports (id. at 291-292), and "decline[d] to presume [the Clause] was intended to embrace tax- ation that does not create the evils the Clause was specifically intended to eliminate" (id. at 293-294). The "Court explained that, as long ago as its 1847 opinion in the License Cases, 46 U.S. (5 How.) 504, the Court had made "crystal clear" that nondiscrim- inatory taxes do not offend the Constitution, which proscribes only "exactions upon imports as imports" (423 U.S. at 300). The Court's decision in Low v. Austin, which had held to the contrary, was therefore overruled (id. at 279). The "central" point of Michelin is thus twofold. First, that the Import-Export Clause is designed to proscribe only "exactions upon imports as imports" (and upon "exports as exports"); and second, that the text of that Clause should not be read to proscribe exactions that do not offend that purpose. That same analysis applies to the Export Clause. The text of the Export Clause proscribes only taxes "laid on Articles exported." As we explain in detail in our opening brief (Pet. Br. 32-37), the limited pur- poses of the Export Clause, as well as its narrow text, reflect that it is designed to proscribe only exactions ---------------------------------------- Page Break ---------------------------------------- 10 upon exports as exports. A nondiscriminatory tax that falls on "all goods alike" is not an exaction upon exports as exports and should therefore be sustained. See, e.g., Cornell v. Coyne, 192 U.S. at 428; Turpin v. Burgess, 117 US. at 507. See also Michelin Tire Corp. v. Wages, 423 U.S. at 300. Particularly at a time when export trade in- creasingly represents a growing portion of our Nation's commerce, it is inappropriate to disregard the limited purpose and narrow text of the Export Clause to provide an absolute immunity for the "export process," as respondent urges. By providing an immunity from taxation upon exports as exports, the Constitution does not preclude generally applic- able taxes that fall on all goods alike. As this Court has emphasized, the Constitution does not shield articles of export from the same "ordinary burdens of taxation" that also apply to domestic commerce. Cornell v. Coyne, 192 U.S. at 427. b. Respondent's contention that the Export Clause prohibits application of nondiscriminatory taxes to the "export process''-even though the Import- Export Clause concealedly does not-is grounded on respondent's assertion that the phrase "impost or duty" in the Import-Export Clause is conceptually distinct from the phrase "tax or duty" in the Export Clause. That contention is not correct. The English language is rich with synonyms. One result of the Norman Conquest, and of the waves of earlier and later commercial and political interaction with the Continent, is that there are innumerable examples in English usage of words that have differ- ent origins but indistinct or overlapping meanings. This is particularly so with respect to governmental functions: a lawyer and an attorney, a sheriff and a ---------------------------------------- Page Break ---------------------------------------- 11 marshal, an earl and a duke, are examples. A more relevant example is a "tax" and an "impost." The word "impost" comes from Middle French "and is derived from the Medieval Latin "impositum." These terms signify an "imposition." See Webster's Third New International Dictionary (Unabridged) 1136 (1986). In usage, an "impost" is a governmental form of imposition: it is "something imposed or levied: TAX, TRIBUTE, DUTY." Ibid. As its derivation and usage reflects, there is no freed distinction between an "impost" and a "tax." These are words of separate origin that describe an undifferentiated and overlapping concept. For exam- ple, Black's Law Dictionary 756 (6th ed. 1990) defines the word "imposts" as "Taxes, duties, or impositions levied for divers reasons. * * * Generic term for taxes." Authority more nearly contemporaneous with the adoption of the Constitution also states (Jus- tice Story's Commentaries on the Constitution 472, at 337 (1833) (R. Rotunda and J. Nowak reprint, Carolina Academic Press 1987)): In a general sense, all contributions imposed by the government upon individuals for service of the state, are called taxes, by whatever name they may be known, whether by the name of tribute, tythe, talliage, impost, duty, gabel, custom, sub- sidy, aid, supply, excise, or other name. Justice Story observed that the word "imposts" is (id. 474, at 339): sometimes used in the large sense of taxes, or duties, or impositions, and sometimes in the more restrained sense of a duty on imported goods and merchandise. ---------------------------------------- Page Break ---------------------------------------- 12 Brown v. Maryland, which was the Court's first decision under the Import-Export Clause, was a con- test over this issue of usage or meaning. Chief Justice Marshall announced near the outset of the opinion that "[t]he counsel for the state of Maryland would confine this prohibition [of imposts and duties on imports and exports] to laws imposing duties on the act of importation or exportation. The counsel for the plaintiffs in error give them a much wider scope," 25 U.S. (12 Wheat.) at 437. The Court then con- sidered, in a number of contexts, the results of each view, and consistently found support for the broader view. The Court concluded that the term "impost" is not used in a narrow or fixed manner, but generally signifies a "tax levied on articles brought into a country" (ibid.). That explanation of the term, of course, parallels the text of the Export Clause, which prohibits any "Tax or Duty * * * laid on Articles exported" (U.S. Const. Art. I, 9, Cl. 5). It was in that context that Chief Justice Marshall explained that the terms of the Import-Export Clause and the Export Clause are not distinguishable in meaning: "There is some diversity in language, but none is perceivable in the act which is prohibited." 25 U.S. (12 Wheat.) at 445. In Turpin v. Burgess, 117 U.S. at 506, the Court similarly concluded that "the constitu- tional prohibition against taxing exports is substan- tially the same when directed to the United States as when directed to a State." As this Court has firmly concluded, there is no textual basis to differentiate "the constitutional pro- hibition against taxing exports" set out in these two Clauses. And, as we have previously shown (Pet. Br. 32-37), the limited purposes of the Export and Import- Export Clauses compel this same conclusion. For the ---------------------------------------- Page Break ---------------------------------------- 13 same reasons that a generally applicable, nondiscrim- inatory state tax may constitutionally be applied to goods for export and to the "export process," the generally applicable, nondiscriminatory federal tax involved in this case should also be upheld. 4. ___________________(footnotes) 4 In addition to Michelin, Washington Stevedoring, and Complete Auto, the Court has issued numerous decisions that overruled older precedent that, in a variety of constitutional contexts, had upheld claims for immunity from generally appli- cable, nondiscriminatory taxes. As Chief Justice Hughes noted in Helvering v. Mountain Producers Corp., 303 U.S. 376, 385 (1938), quoting Willcuts v. Bunn, 282 U.S. 216, 225 (1931): In numerous decisions we have had occasion to declare * * * that the power to tax should not be crippled "by extending the constitutional exemption from taxation to those subjects which fall within the general application of non-discriminatory laws * * * ." (a) In Fox Film Corp. v. Doyal, 286 U.S. 123 (1932), the Court upheld a state business tax on gross receipts as applied to royalties from copyrights. The Court "definitely overruled" Long v. Rockwood, 277 U.S. 142(1928), which had held that a state income tax could not constitutionally be applied to royalties paid for the use of patents issued by the United States. 286 U.S. at 131. (b) In Helvering v. Mountain Producers Corp., 303 U.S. at 385, the Court upheld application of the federal income tax to income received by a private taxpayer from an oil lease of state-owned land. In so holding, the Court overruled Gillespie v. Oklahoma, 257 U.S. 501 (1922), which had held that Okla- homa could not constitutionally apply its income tax to the income of a lessee of restricted Indian lands, and overruled Burnet v. Coronado Oil & Gas Co., 285 U.S. 393 (1932), which had held that the federal income tax could not be applied to the income derived by a lessee of lands owned by a State. See 303 U.S. at 387. (c) In Graves v. New York ex rel. O'Keefe, 306 U.S. 466,486 (1939), the Court overruled New York ex rel. Rogers v. Graves, 299 U.S. 401 (1937), which had held that a state income tax ---------------------------------------- Page Break ---------------------------------------- 14 3. Accepting for purposes of argument that the constitutional reasoning of Michelin Tire Corp. and Washington Stevedoring is fully applicable under the Export Clause, respondent asserts that the nondis- criminatory tax imposed by Section 4371 is none- theless unconstitutional as applied to insurance for foreign shipments of export goods. Respondent claims that factual differences make Michelin Tire ___________________(footnotes) could not be applied to the salary of an employee of a federal instrumentality, and also overruled Collector v. Day, 78 U.S. (11 Wall.) 113 (1871), which had held the salary of state judges to be immune from the federal income tax. 306 U.S. at 486. (d) In Alabama v. King & Boozer, 314 U.S. 1, 9 (1941), the Court held that the Constitution did not preclude application of state sales taxes to purchases of building materials by a con- tractor performing a cost-plus contract for the United States. In so holding, the Court overruled Panhandle Oil Co. v. Mis- sissippi et rel. Knox, 277 U.S. 218 (1928), and Graves v. Texas Co., 298 U.S. 393 (1936). (e) In United States v. City of Detroit, 355 U.S. 466 (1958), United States v. Township of Muskegon, 355 U.S. 484 (1958), and City of Detroit v. Murray Corp, 355 U.S. 489 (1958), the Court upheld the application of Michigan property and use taxes against industrial taxpayers who leased and occupied real property owned by the United States in the performance of supply contracts with the United States. In each case, the United States unsuccessfully invoked United States v. County of Allegheny, 322 U.S. 174 (1944), which had held that a government contractor could not constitutionally be liable for a state property tax on machinery owned by the United States. (f) In South Carolina v. Baker, 485 U.S. 505, 524 (1988), the Court held that interest on bonds issued by States and their political subdivisions is exempt from the federal income tax only by virtue of the statutory provisions of the Internal Rev- enue Code and not because of any constitutional requirement. In so holding, the Court overruled Pollock v. Farmers Loan & Trust Co., 157 U.S. 429 (1895). ---------------------------------------- Page Break ---------------------------------------- 15 Corp. and Washington Stevedoring "distinguishable" from the present case" (Resp. Br. 42). a. Respondent claims that Washington Stevedor- ing is inapposite because the cost of stevedoring services, unlike the cost of insurance, has no econom- ic relation to the value of the exported goods (Resp. Br. 43). That alleged distinction, however, totally ignores the facts and holding of Michelin Tire Corp.. The nondiscriminatory ad valorem property tax that the Court upheld in Michelin was, of course, directly related to the value of the imported goods. It is the very nature of an ad valorem tax for the amount of the tax to be related to the value of the property. The relationship between the value of the goods and the challenged tax in Michelin was thus unquestionably more direct than in the present case, for the cost of the casualty insurance taxed under Section 4371 of the Internal Revenue Code varies not only with the value of the goods but also with the nature, duration and destination of the shipment. b. Respondent claims that Michelin Tire Corp. is inapposite because the imported goods taxed in that case "were no longer in transit" (Resp. Br. 42). In making that contention, respondent ignores what is perhaps the most essential feature of the Court's decision in that case. As the Court emphasized in Michelin, the fact that goods remain in transit and have not yet been "so mingle[d] * * * with the common property within the State as to `lose their distinctive character as imports' * * * did not mean that * * * no exaction could be imposed on the goods." 423 U.S. at 298, paraphrasing Brown v. Maryland, 25 U.S. (12 Wheat.) at 441-442. The Court held that a State does not violate the Constitution by taxing property, whether imported or domestic, "in a ---------------------------------------- Page Break ---------------------------------------- 16 manner that [does] not depend on the foreign origins of the goods." 423 U.S. at 298. Respondent's claim of a factual distinction based upon the fact that the goods in this case are "in transit" also ignores that the imported and exported goods for which steve- doring services were provided-and taxed-in Wash - ington Stevedoring were unquestionably "in tran- sit." The essential task of stevedoring, of course, is to assist the "transit" of goods. c. The purported factual distinctions on which respondent relies in its effort to distinguish this case from Michelin and Washington Stevedoring thus simply do not exist. Because the reasoning of Miche- lin and Washington Stevedoring is equally applicable to the Export Clause, and because the nondiscrim- inatory tax imposed by Section 4371 is not imposed directly or specifically on exports as exports, the fed- eral tax challenged in this case should be sustained. For the foregoing reasons and those set forth in our opening brief, the judgment of the court of appeals should be reversed. Respectfully submitted. DREW S. DAYS, III Solicitor General MARCH 1996 ---------------------------------------- Page Break ----------------------------------------