United States v. International Business Machines Corporation

PETITIONER:United States
RESPONDENT:International Business Machines Corporation
LOCATION:North Carolina General Assembly

DOCKET NO.: 95-591
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Federal Circuit

CITATION: 517 US 843 (1996)
ARGUED: Mar 18, 1996
DECIDED: Jun 10, 1996

ADVOCATES:
James R. Atwood – Argued the cause for the respondent
Jeffrey P. Minear – Argued the cause for the petitioner

Facts of the case

Pursuant to the Internal Revenue Code, International Business Machines Corporation (IBM) paid a tax on insurance premiums it paid to foreign insurers to insure exports from the U.S. to foreign countries. IBM sought a refund on the tax and filed suit in the Court of Federal Claims when its refund claim was denied by the IRS. IBM contended the tax violated the Export Clause of the U.S. Constitution, which states that “[n]o Tax or Duty shall be laid on Articles exported from any State.” The court agreed. The Court of Appeals affirmed.

Question

May the federal government impose a tax on premiums that U.S. businesses pay foreign insurers for risks that could arise in this country?

William H. Rehnquist:

We’ll hear argument now in Number 95-591, the United States v. International Business Machines Corporation.

Mr. Minear.

Jeffrey P. Minear:

Thank you, Mr. Chief Justice, and may it please the Court:

The issue in this case is whether section 4371 of the Internal Revenue Code runs afoul of the Export Clause of the Constitution.

Section 4371 imposes a generally applicable tax not limited to exports on premiums paid by foreign insurers for risks that occur wholly or partly within the United States.

It eliminates a competitive advantage that foreign insurers would otherwise enjoy by virtue of their exemption from the Federal income tax.

The Federal Circuit ruled that the Export Clause prohibits the application of that tax to insurance associated with exports.

They concluded that this Court’s decision in Thames & Mersey v. United States compelled that result.

We submit that this Court’s ruling in Thames & Mersey is no longer viable.

That decision was a departure from precedent when it was decided 80 years ago, and it rested on a Commerce-Clause rationale this Court has since repudiated.

But perhaps most important, Thames cannot be reconciled with this Court’s modern tax decisions, which have worked a basic change in the law.

Those decisions, Michelin Tire and Washington Stevedoring, have, in the words of the Court, abandoned the past practice of examining when goods lose their character as imports or exports, and has refocused the inquiry on the nature of the tax at issue.

Using that approach, the Court has concluded that the Import-Export Clause does not prohibit the application of generally applicable taxes, but rather prohibits–

Sandra Day O’Connor:

Well, Mr. Minear, we’re dealing here with the Export Clause, not the Import-Export Clause, isn’t that right?

Jeffrey P. Minear:

–That is correct, Your Honor.

Sandra Day O’Connor:

And it certainly is possible that the Export Clause has different purposes than the Import-Export Clause.

Jeffrey P. Minear:

That is possible, but we do not think it is borne out by either the language or the content of the clause itself.

Sandra Day O’Connor:

You do concede that if we do not overrule the Thames case that you lose?

Jeffrey P. Minear:

That is correct.

We have made that concession in the briefs.

Sandra Day O’Connor:

And it obviously would require ultimately overruling more than just Thames & Mersey.

There are some other cases that are of the same genre, are they not?

Jeffrey P. Minear:

But relatively few, Your Honor.

In fact, there were four cases that were decided before Thames and Mersey–

Sandra Day O’Connor:

Well, why should we do that at all?

Why not leave them in place?

What harm does it do?

Jeffrey P. Minear:

–The harm that it does is, it results in a lack of coherence in this Court’s overall approach to the problem in this area.

Sandra Day O’Connor:

Well, occasionally one has that.

We certainly have the precedents out there, and I just… you’re going to have to persuade me that there are some very important reasons for overturning these longstanding precedents.

Sandra Day O’Connor:

And this is a separate provisions, too.

It’s not as if it’s based on the Commerce Clause.

It’s based on a separate prohibition against taxes on imports, on exports, which is… the language is different even in the Export-Import Clause.

Jeffrey P. Minear:

Your Honor, I’d like to answer both of the questions, both of the points that you made there.

First, this Court has consistently interpreted the Export Clause and the Import-Export Clause as imposing a parallel limitation on the Federal and State Governments with respect to exports.

If there’s one element of consistency that has run through this Court’s cases in the past 175 years, it is that those two clauses should be interpreted consistently.

And secondly, there is a question of the language difference.

Respondent asserts that the Export Clause should be read as a more extensive prohibition because it uses the term, tax or duty, rather than the term, impost or duty, but the terms tax and impost are synonymous, and the operative phrase in this context is functionally identical.

William H. Rehnquist:

Well, why are they synonymous?

Why did the Framers use different language, then?

Jeffrey P. Minear:

The Framers frequently used synonymous terms to express the same idea.

For example, the Framers stated that Congress would have the power to raise and support armies, but also to provide and maintain a Navy.

It said that Congress would have the power to establish post offices, but to constitute tribunals.

The very nature of a synonym is, frequently it can be used interchangeably with no change in meaning.

William H. Rehnquist:

Well, I don’t think that carries you very… to provide and maintain a Navy, you’re providing ships, whereas to raise and support armies, you’re conscripting troops.

Jeffrey P. Minear:

But this… the overall content of those phrases, they convey the same general meaning, and that’s the point that Chief Justice Marshall made in 1827 in the case of Brown v. Maryland.

As he stated, there is some diversity in language, but the act that is prohibited is the same, and that provision, that statement has been followed by this Court, as I say, in numerous cases.

William H. Rehnquist:

Yes, even though the case itself hasn’t been followed.

Jeffrey P. Minear:

The case itself has been followed in significant part.

It’s true that the aspect of the case originally… relating to the original package doctrine has not been followed.

At least it has not been seen as a restriction, but one of the ironies of this case is that what the respondent’s position would do is actually reintroduce the very notion of the original package doctrine, or at least the converse of it in the sense of taxes on exports.

Anthony M. Kennedy:

Are you concerned that the original package doctrine has to be introduced, or something like it, if we attempt some halfway solution where we rule in your favor saying there cannot be a tax on the export, but that if there is an indirect tax, then the discrimination rule applies?

Jeffrey P. Minear:

Yes.

That is a problem, that we believe that one of the basic points in this Court’s decision in Michelin Tire and Washington Stevedoring was to abandon that type of inquiry, this inquiry–

Ruth Bader Ginsburg:

Mr. Minear, you mentioned Washington Stevedoring, which involved the cost of loading, and–

Jeffrey P. Minear:

–Yes.

The tax was applied to loading and unloading the ships.

Ruth Bader Ginsburg:

–And I thought that the whole idea of that is that that was a discrete item, that you could separate the stevedoring, the loading of the vessel from the goods, and I was struck by your brief that you don’t make any lesser argument.

You don’t say, this tax is okay because it’s on the insurance and not on the goods.

You seem to concede that the tax should be treated as though it were on the goods.

Jeffrey P. Minear:

Well, we believe that that’s a separate problem with Thames & Mersey.

It’s another problem that was introduced by that case.

Antonin Scalia:

But you’ve conceded that.

You’ve conceded–

–You’ve conceded that.

Jeffrey P. Minear:

But that is–

Antonin Scalia:

So that problem’s over the falls, right?

We don’t have to worry about that.

Jeffrey P. Minear:

–The bigger problem is the one that we’re concerned with, and that was the application… yes.

David H. Souter:

Excuse me.

It seems to me that you could, in this case, say this is not a tax on the goods themselves, and then invoke your antidiscrimination principle, leaving a tax on the goods themselves for another day.

Jeffrey P. Minear:

That’s correct.

David H. Souter:

The Spalding case, et cetera.

Jeffrey P. Minear:

And the problem, the reason why we chose not to do that is because it is… it requires us to fall back onto an analysis similar to the original package doctrine.

What is an export, and what is not an export?

David H. Souter:

But is it so hard in this case to do that?

Can’t we reserve the difficult question for a later case?

Jeffrey P. Minear:

Well, of course you could do that, but it seems to me that the issue ought to be addressed now, that this is a problem that has continued to plague this area–

Antonin Scalia:

Well, how does your theory not require us to figure out what are imports and what aren’t imports?

Even to decide whether a tax is discriminatorily placed on imports you have to decide the same question.

Let’s assume you have a task that is only placed upon insurance of exports.

Wouldn’t you still have to decide whether that’s, in effect, a tax upon exports?

Jeffrey P. Minear:

–Then you might well have to face that question, but the test–

Antonin Scalia:

Of course.

I don’t see how that question is eliminated by adopting the theory that you’re pressing upon us.

Jeffrey P. Minear:

–The test that we propose will eliminate that inquiry in most every case, because the initial question will be, is this tax discriminatory, and that’s a question that can usually be answered quite easily.

David H. Souter:

Oh, but you’ve got to say discriminatory against what, and to determine the what, you’ve got to decide whether the subject of the tax should be treated as an export.

I don’t see how you can get away from it.

Jeffrey P. Minear:

Well, on the other hand, Your Honor, if a tax applies across the board to all types of transactions, it is not discriminatory, so you do not need to get into the question of what is an export and what isn’t, as long as–

Stephen G. Breyer:

So if the South, in other words, exports 100 percent of its indigo crop… no, let’s say only 99.99 percent, and Congress were to pass a tax saying all shipments of indigo pay a 10 percent tax, in your view that’s nondiscriminatory and, therefore, at the time this Constitution was enacted, the court should have upheld it?

Jeffrey P. Minear:

–I think that the question of whether any particular tax is going to be discriminatory may require a further analysis.

Stephen G. Breyer:

What about the case I put?

Jeffrey P. Minear:

At the moment that that tax is imposed, perhaps it is a tax on exports, but you must remember that markets constantly change.

Stephen G. Breyer:

The question I think that was being asked is, isn’t… don’t you have to figure out whether the tax is on an export or not even under your analysis?

Jeffrey P. Minear:

You do, but you can… the analysis we propose simplifies this area in the same way that it has simplified the area in the Import-Export Clause cases by focusing on the nature of the tax.

If the tax is a general tax, if it applies across the board to all of the products, then it would not fall within the purview of the Export Clause.

Ruth Bader Ginsburg:

Mr. Minear–

–No, but that’s–

–would you explain to me why you don’t make the argument, the simple argument that what Congress had in mind was evening out the situation for domestic insurers, because this would apply to the… suppose there were a foreign company that was insuring entirely domestic transport, the tax would apply, right?

Jeffrey P. Minear:

Yes.

Ruth Bader Ginsburg:

And yet that seems such a simple argument that you avoid, and I’m not clear on why you’re doing that.

Jeffrey P. Minear:

We do not mean to avoid that argument.

That’s part of our argument of why this is a tax of general application.

In this particular context, in fact, the tax appears to be more an import tax than an export tax.

Remember, this is a tax that is being imposed on the basis of foreign insurers selling insurance in this country on the basis… to protect against risks that occur wholly or partly in the United States, but our argument is addressed to the broader problem here, and that’s why we think that you need to reconsider Thames & Mersey.

The… our concerns here are not limited to just this case, but rather to add incoherence to the overall body of law here.

Antonin Scalia:

Mr. Minear, I’m just skeptical that the canny southerners who got this provision included in the Constitution were resigned to the notion that if a tax were placed upon indigo, it would be up to the courts as to whether that was a discriminatory… you know, upon shipments of indigo.

It would depend upon what percentage was being exported, and that’s your analysis, right, that if, in fact, almost all indigo was being exported, that would be a discriminatory tax.

Jeffrey P. Minear:

It could be.

I’m not saying that it would be.

Antonin Scalia:

I–

Jeffrey P. Minear:

Your Honor–

Antonin Scalia:

–I’m skeptical that that’s all the protection the southerners thought they got when they got the Export Clause included in the Constitution.

Jeffrey P. Minear:

–Well, if we’re looking to what the Framers were concerned about, I think that the Convention debates indicate they were concerned about export taxes.

At that period, they were familiar with the types of taxes that were commonly imposed on trade and, during that era, it was very common to impose a tax on exports.

In fact, the Convention debates make specific reference to the tax that France imposed upon her wines and brandies that were exported and the tax that England imposed on its woollen products as well.

That is what they saw as the danger… a tax that would be imposed upon exports that would fall disproportionately on the southern States which had developed an export economy.

David H. Souter:

Well, it isn’t just disproportionality, is it?

Weren’t they concerned with the fact that, if there was a tax on the exports, they would go broke one way or the other?

Either they wouldn’t be able to make any money on their exports or… because the Government would take their profit, or they couldn’t, conversely, sell on the world market because the price would be too high, and it wouldn’t have been any consolation to them whatsoever to find that, in fact, they were not being discriminated against within sort of the general field of taxation in the United States.

David H. Souter:

They… if they couldn’t do business, they couldn’t do business, and as a region that was a… basically a net exporter of raw materials, it was the ultimate economic effect that they were worried about, not discrimination, isn’t that fair to say?

Jeffrey P. Minear:

I think that they were… they realized that their ultimate protection from taxation in the southern States, as well in the North, lie in the establishment of a Congress composed of two Houses that would provide the representation that would give weight to their concerns.

David H. Souter:

Well, if that’s all they were concerned about, then they didn’t need the clause in the first place.

I mean, they wanted that clause.

They were not taking this on faith, and the reason they wanted that clause ultimately turned on the economic effect of the tax, and I suppose the economic effect of the tax is going to be exactly the same, or was expected to be exactly the same whether you or I called it discriminatory or not.

I mean, isn’t that a fair objection?

Jeffrey P. Minear:

I think that their objection was actually more pointed.

It was to the notion of the export tax, the export tax that they were familiar with that they saw posing a serious threat to their economies as they existed–

Antonin Scalia:

You’re… well, then you’re being inconsistent in your analysis.

Then you shouldn’t say that if 99 percent of indigo is exported, a tax generally on the sale of indigo would be a discriminatory tax.

Jeffrey P. Minear:

–My view on that is–

Antonin Scalia:

Which is it?

If they’re concerned only with taxes on exports, then that hypothetical should not be a dis… should not come within the Export Clause.

Jeffrey P. Minear:

–I’d like to clarify my answer on that, and that is that the tax on an object that is 100 percent exported might very well be a discriminatory tax if it’s a pretext for imposing a tax on exports.

But there are other types of taxes that would, in fact, fall exclusively on an exported product, yet we would hesitate to call them an export tax, and let me give you the example of a medicine, for instance, that is not approved for use in the United States but is approved for use elsewhere, and as a result it is… tends to be exported.

Congress could impose a tax on that, I believe, without violating the Export Clause to cover the specific cost that the Government incurs in going through the FDA approval process, and that’s why I say you need to look to the actual purpose of the tax–

William H. Rehnquist:

Well–

Jeffrey P. Minear:

–that’s being rendered in any particular case.

William H. Rehnquist:

–what leads you to that conclusion, that the Government can levy a tax on medicine being exported if it has gone to some expense to test it in this country?

Jeffrey P. Minear:

By… the reason for that is because, even now, the Congress can levy that type of tax if it’s a tax on the manufacturer rather than at some later point.

William H. Rehnquist:

Well, but you say it can levy a tax on the medicine itself being exported?

Jeffrey P. Minear:

It can levy a tax on the medicine, not on the medicine… what I’m saying… my point here, Your Honor, is that you have to focus on the specific tax that’s at issue.

William H. Rehnquist:

Well, of course, the constitutional language says no tax or duty.

Now, presumably that includes more than just a tax.

Jeffrey P. Minear:

Yes.

I… oh, I think that it can… it embraces the same types of imposts and duties as are included within the Import-Export Clause.

Our view is that there was no difference in meaning in the tax and duty in the Export Clause and the impost and duty in the Import-Export Clause.

Anthony M. Kennedy:

But it seems to me your answer to the Chief Justice betrays what is the… betrays your argument and what’s of concern to the Court.

You say, well, that’s a tax on manufacturing.

We’re right back into asking the difference between a tax on an export and the tax on manufacturing.

Anthony M. Kennedy:

Your discrimination rationale does not save us that inquiry.

Jeffrey P. Minear:

It eliminates the inquiry in most cases, is my point here.

In virtually all cases it will eliminate that inquiry.

We look to whether… excuse me, Your Honor.

You look to whether the tax is, in fact, nondiscriminatory, and if the tax is nondiscriminatory, then it will not run afoul of those concerns that are indicated by the Export Clause.

Stephen G. Breyer:

And nondiscriminatory means what?

Jeffrey P. Minear:

It’s a tax of general application that’s applied to goods across the board.

Stephen G. Breyer:

Well, do we have to, then, look at the percentage of the thing that’s exported as opposed to the percentage that isn’t?

Jeffrey P. Minear:

No.

I think that in the usual case you’ll be able, as in this case, simply to look to the character of the tax.

Stephen G. Breyer:

The character of the tax?

You always phrase… you know, all… nondiscriminatory, rich and poor can sleep under the bridges of Paris.

Nondiscriminatory.

All indigo is taxed, even though it happens to be the case that 99.999 percent is exported.

Is that… how do you avoid looking at the percentages?

I–

Jeffrey P. Minear:

My point to you on the indigo example is, we would not say that you are… that a party is precluded from challenging even a nondiscriminatory, a tax that on it’s face is nondiscriminatory–

Stephen G. Breyer:

–All right, let me ask you a different–

Jeffrey P. Minear:

–on the basis–

Stephen G. Breyer:

–Can I ask you a different question–

Jeffrey P. Minear:

–Yes.

Stephen G. Breyer:

–because this is what is actually worrying me, but I can’t… if, it seems to me, if… if, and it’s a very big if, a tax on premiums paid to foreign insurers who have no U.S. offices for casualty insurance is in fact a tax on the item that is insured, then we are to look to this as a tax on the item insured.

Then I would guess it is relevant as to how many, what the percent of items is that buys this kind of insurance that is exported, and I would imagine it’s very, very high, and therefore we’re back to the 99.9 percent indigo.

What’s wrong with the reasoning I just said, and I said it’s a very big if, because it sounds to me as if your brief has assumed the if, and if we’re supposed to go into the if, or not go into the if, how do we go into it, given the arguments in front of us and our lack of knowledge of the empirical facts that underlie them?

Jeffrey P. Minear:

My view on how you approach the question is as follows.

You look at the tax, and how the tax is phrased.

The tax in this case is phrased to cover all casualty insurance that’s issued by a foreign insurer that involves a risk–

Stephen G. Breyer:

No.

I take it, foreign insurer who has no U.S. office, is that right?

Jeffrey P. Minear:

–Yes.

Jeffrey P. Minear:

It applies to an insurer that has no U.S. office.

Stephen G. Breyer:

So that must not be very normal that an American buys insurance casualty from an insurer who has no U.S. office but does not intend to ship the goods so insured abroad.

I mean, I don’t know.

Jeffrey P. Minear:

This tax applies not simply to export insurance but across the board to all types of casualty insurance, but again, to get back to the problem that you’re postulating here, the approach is to look at the tax and determine whether or not it discriminates against exports.

If it does not discriminate against exports, then the tax is valid.

I would not rule out the possibility that a party could say that, even though the tax on its face is nondiscriminatory and therefore valid, that in fact it has a pretext or a different motive that requires a further analysis.

Ruth Bader Ginsburg:

Mr. Minear, do we have any–

Jeffrey P. Minear:

But that’s a very small number of cases.

Ruth Bader Ginsburg:

–Do we have any idea whether there is any business of insuring domestic transport by foreign insurance companies that have no office in the U.S.?

Jeffrey P. Minear:

I believe that there is.

The total amount of tax revenue that is collected each year from section 4371 is about $100 million, and we don’t know what proportion of that tax relates to export insurance and which portion relates to flood insurance, fire insurance, or any other type of casualty insurance that might be imposed under this tax.

Sandra Day O’Connor:

Well, I suppose the tax covers reinsurance so that things like insurance carried by Lloyd’s would be covered by this tax–

Jeffrey P. Minear:

Yes.

Sandra Day O’Connor:

–is that right?

Jeffrey P. Minear:

It does cover reinsurance at a different rate.

It does provide for a 1-cent rather a 4-cent–

Sandra Day O’Connor:

But that could explain the large revenues.

Jeffrey P. Minear:

–That might explain it, that’s true.

We simply don’t know the answer to that.

Sandra Day O’Connor:

Let me ask you this.

I thought that under cases like this stevedoring case we wouldn’t say that a tax is nondiscriminatory unless it bears a reasonable relationship with the privilege of doing business within the taxing jurisdiction.

I’m not certain that a tax imposed on insurance on goods traveling overseas bears a reasonable relationship to the United States under that test.

Jeffrey P. Minear:

Oh, I believe that the tax here is designed to eliminate the competitive advantage that foreign insurers enjoy in this market by their exemption from the Federal income tax, and this Court has recognized that that type of tax is permissible.

It’s very similar to a tariff tax for, as I say, a service that’s being provided in this country.

I think overall it’s… viewed from the Framers’ perspective the Thames decision would be viewed as an anomaly, and–

Antonin Scalia:

Mr. Minear, to come back to the Framers’ perspective, I note in your reply brief even Justice Story’s description of the word impost… I’m coming back to the difference between the… in the phrasing of the two clauses.

Story’s… observes that it is sometimes used in the large sense of taxes, and sometimes in the more restrained sense of a duty on imported goods and merchandise.

That’s what he says–

Jeffrey P. Minear:

–Yes.

Antonin Scalia:

–in 1833.

Antonin Scalia:

Merriam Webster’s 1828 dictionary says the same thing, that it could be used… well, I’ll read it.

Any tax or tribute imposed by authority, particularly a duty or a tax laid by a Covernment on goods imported.

Imposts are also called customs.

I think, given the difference in the language, why… wouldn’t it be normal to give… that is, between taxes in one clause and imports and exports in the other, duties in the other.

Wouldn’t it be normal for us to give it its more limited meaning here?

It can bear a more limited meaning.

Jeffrey P. Minear:

No, I don’t believe that it is appropriate, first of all because it has a more general meaning, second, because even Justice–

Antonin Scalia:

Well, I–

Jeffrey P. Minear:

–Story recognizes–

Antonin Scalia:

–No, of course it has a more general–

Jeffrey P. Minear:

–Yes, and Justice–

Antonin Scalia:

–But as between giving it the more general or giving it the narrower, giving it the narrower meaning makes it different.

Jeffrey P. Minear:

–But you’ve already given it a broader meaning than that in Justice Marshall’s, Chief Justice Marshall’s first opinion, where he felt that impost reached a licensing fee, which would never have been viewed as an impost in the normal, limited meaning of that term.

I think these terms have really become, in a sense, terms of art that are tied to the objectives that the Framers sought to convey through the Constitution.

I would also point out that this Court has used the term tax and impost interchangeably.

In a 1906 decision called New Jersey v. Anderson, this Court described a tax as an impost for the support of the Government.

That appears at 203 U.S. at 492.

So I don’t think that a word search will really provide us the answer here.

Instead, I think we have to take a look at the broader perspective and make sure that the Export-Clause jurisprudence is consistent with the Import-Export-Clause jurisprudence.

William H. Rehnquist:

Well, why should we do that, when they’re two different clauses and different language?

Jeffrey P. Minear:

Because that is the one source of consistency in this area of law in the past 170 years, and even in Washington Stevedores, this Court cited Export Clause cases… the Spalding case in particular, as a case that it viewed as taking the wrong approach in this area of law.

I’d like to reserve the remainder of my time for rebuttal.

William H. Rehnquist:

Very well, Mr. Minear.

Mr. Atwood, we’ll hear from you.

James R. Atwood:

Mr. Chief Justice, and may it please the Court:

The holding of Michelin and Washington Stevedoring which the Government is relying on so heavily in this case is that impost did not mean tax.

The key holding in Michelin was that impost referred to a subcategory of taxes, those taxes which are of a customs nature.

Those are the cases the Government’s relying upon, and now they’re turning the rationale of that case inside-out.

Impost and tax in some instances are used synonymously, but rarely, and certainly the jurisprudence under these clauses has been absolutely to the contrary.

Even Chief–

Antonin Scalia:

Absolutely… I mean, you have John Marshall, for starters, as saying that the two clauses mean the same thing.

James R. Atwood:

–Not on this point, Justice Scalia, and I think this is very important.

I think the Government has put together in a way that ends up being misleading two different things that John Marshall said, Chief Justice Marshall.

In the… where he said the clauses are similar, he was addressing the issue of whether a tax imposed on an occupation is a tax on an import, and it was in that context that he drew an analogy to the Export Clause and said both clauses are similar in that they use similar language as to what’s prohibited, what act is prohibited the laying on of a tax.

That’s where he said the clauses were similar.

Separately, eight pages earlier, he addressed the difference between tax and imports.

Justice Thompson… you may remember the Senate in that case saying the Maryland tax was a tax, not an impost, and therefore was outside the scope of the Import-Export Clause.

Marshall rejected that argument and concluded there, to quote the Government’s reply brief on page 12, 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 the country, so we agree with Marshall’s statement.

I think his statement is consistent with Michelin that in the context of these clauses, impost had a rather specific meaning.

Thames & Mersey was not a departure from existing law at the time.

The Court’s decisions on the Export Clause have been perfectly consistent.

They have said from the beginning that Federal taxes may not be applied to the export process itself.

They’ve also said that if the export journey has not begun, such as in a manufacturing tax, then the issue of discrimination is important.

But all of the cases, starting with Turpin v. Burgess, have said that you can… the Federal Government cannot tax the export process itself, and Thames & Mersey is squarely within that line of authority.

Now, concerning the questions, I guess Justice Kennedy raised and perhaps Justice Ginsburg, as to whether this is sufficiently indirect that it’s not a tax on exports, the record doesn’t reveal the sort of statistical information Justice Breyer was suggesting might be relevant because the Government has conceded throughout that they are not disputing that this tax, if discriminatory, is in violation of the Constitution.

They are not challenging that aspect of Thames & Mersey.

They haven’t challenged it throughout.

To do so, they would have to challenge not just Thames & Mersey, they’d have to go back and challenge Chief Justice Marshall’s holding in Brown v. Maryland that a tax on occupation is a tax on an import, they’d have to challenge the Fairbank decision, which they’ve embraced throughout their briefs, which involved a indirect tax, they’d have to challenge Hvoslef, they’d have to challenge Thames & Mersey.

And the reality is that a tax on insurance is very… is about as close as you can come to an ad valorem tax on the property.

Stephen G. Breyer:

Why?

Just satisfy my curiosity.

James R. Atwood:

There is a separate premium–

Stephen G. Breyer:

My particular question would be, why is a tax on a premium–

James R. Atwood:

–Right.

Stephen G. Breyer:

–It’s a tax on a premium that paid for an insurance policy of a sort that exporters might buy and also people who are not exporters might buy.

James R. Atwood:

Well–

Stephen G. Breyer:

And so why is a tax that is applied to an item that both exporters and nonexporters might buy, in some proportion we know not what, why is that a tax on the good that is exported?

James R. Atwood:

–Because when it is purchased for a shipment of goods, as in the case here, there is a separate premium charged for every shipment.

Every box, every computer that’s boxed up, a separate premium is charged for that shipment from the time it leaves IBM’s plant to the time it’s delivered abroad.

That premium varies directly with the value of that product, because if it’s an expensive machine it has a higher premium than if it’s an inexpensive–

Anthony M. Kennedy:

But that’s not the only variable.

If you ship from Chicago to Toronto I’m sure that the value of the good is the predominant part of the premium, but if you ship from an IBM headquarters to India by steamship, I’m sure those other factors are much more significant in calculating the premium than the value of the goods.

James R. Atwood:

–The extent to which the value of the good determines the premium will vary with the length of shipment, but you know, the longer shipments, longer exports are taxed more than shorter shipments.

That seems to us, again, to get back to a direct tax on the export process… separate premium for each product, it varies with the value, it varies with the distance.

That’s a tax on the export process.

It’s slightly different–

Anthony M. Kennedy:

Well, that’s the way you characterize it.

You might also say that that’s a tax on the insurance aspect, which brings us back to what we’re arguing about.

I suppose that’s an interesting philosophical question, whether you continue to export until you reach India, or has your export stopped at least when you reach the territorial waters of the United States?

I’m not sure where the exporting stops.

James R. Atwood:

–I guess the way this tax has been administered is, it goes from one… from where the good takes off from where the good lands, and in terms of the Court’s jurisprudence under the Export Clause and under the Import Clause, I think they treat that entire journey as an integrated whole.

The Spalding case says the export process starts when you turn over the goods to a common carrier.

Marshall, you recall, in Brown v. Maryland, addressed the question, does the import and export only occur when the goods cross the border?

He said, no, it’s a longer process than that.

You can’t apply and prohibit an import tax even though the goods are now in the United States, and you can’t apply… this was his hypothetical under the Export Clause.

You can’t apply the Export clause to a later point once the goods have left.

The trip is an integrated journey.

Anthony M. Kennedy:

Is a tax on diesel fuel exempt if that’s a major portion of the cost of exporting the item, say bulk goods such as wheat or corn?

James R. Atwood:

I think that would be a very good argument that that tax would be unconstitutional.

This, I think, is a stronger case, because you’re taxing the shipper, and clearly the premium does vary–

Anthony M. Kennedy:

Well, that’s a very good reason for me to worry about your rationale.

James R. Atwood:

–It’s not my rationale, Your Honor.

This is what the Court held in Thames & Mersey.

This has been the Court’s consistent theory of how the Export Clause applies, and it has not proven to be a problem.

We’re not suggesting some novel theory that’s going to disrupt the Republic.

The Export Clause has been consistently interpreted for more than 200 years, and the Republic has survived quite well.

I don’t think this is going to create enormous problems of administration for the courts.

It hasn’t so far.

Ruth Bader Ginsburg:

Mr. Atwood, the concern of Congress was with domestic insurers, and I take it from your argument that there couldn’t be this tax as to exports, but to the extent that they are insuring or reinsuring risks in the United States, the premiums could be taxed.

That’s certainly inconsistent with what Congress was trying to regulate in the interest of domestic insurers.

James R. Atwood:

Well, we understand Congress’ objective.

It was twofold.

It was to raise revenue and it was to plug what was perceived as a loophole.

Ruth Bader Ginsburg:

But your response has got to be that Congress can’t… it’s just too bad for these domestic insurers.

They’ll fall by the wayside and business will go to the foreign companies.

James R. Atwood:

We don’t think the perceived problem in effect authorizes a tax in violation of the Constitution, that’s right.

There are–

Antonin Scalia:

Your response is that it’s the fault of the Constitution.

The Constitution favors exports, doesn’t it?

James R. Atwood:

–It does, and there are a lot of tax exemptions in our laws.

You can make arguments for or against almost any tax exemption.

The one thing that’s different about this tax exemption–

Antonin Scalia:

But–

James R. Atwood:

–is it’s in the Constitution–

Antonin Scalia:

–Can Congress–

James R. Atwood:

–and it’s in the Constitution because the Framers thought it was important.

Ruth Bader Ginsburg:

–Why is it inevitable that this must be classed as a tax on the goods rather than a tax on the service of providing insurance?

James R. Atwood:

Well, I… it seems to me the Court’s decision on that aspect in Thames & Mersey is correct and has been conceded by the Government, that this is… this bears so closely to the export process that it is a tax on goods.

Now, Congress had other means of addressing this perceived inequality.

David H. Souter:

Could it say, “Buy American”?

James R. Atwood:

Yes, it probably could say, “Buy American”.

It could also provide tax relief for American insurers.

It could also… I mean, this tax was passed many years ago.

They could rethink their jurisdiction over foreign insurers and whether or not they could apply the income tax to foreign insurers, which, of course, would be constitutional under Peck v. Lowe, so Congress’ hands aren’t completely tied, but they… it seems to us they’re not entitled to adopt a provision contrary to the Constitution to try to solve that particular problem.

The Court has, as the Government said, construed the Import-Export Clause and the Export Clause consistently for many years.

Going back to Chief Justice Marshall’s point, I think there the consistency is not one that’s at odds here.

The whole point of the Export-Import Clause cases, though, was to break that link between the two clauses.

One applies to taxes, the other only applies to imports and duties, and that was the holding of the cases, that under the Import-Export Clause we will look at whether the tax is of a customs nature, and you cannot apply that analysis to the Export Clause and come to the Government’s conclusion here.

And at the Constitution, there was… there were strong, compelling reasons advanced and fought over very hard as to whether or not exports should be exempt.

It was one of the closest votes at the Constitutional Convention, and there were several reasons to coalesce behind this tax exemption.

James R. Atwood:

One was the concern of the southern States that were dependent upon the export economy.

There were also those from New England that thought an export exemption would benefit domestic industries, would encourage the development of domestic industries, and there were others that were simply concerned about the scope of taxing authority being given to the United States, which, of course, was happening now the first time at the convention.

That came together to result in a tax exemption, which is clearly written and was intended by the Framers to be very broad, and there’s no contemporary evidence from that Constitutional Convention that impost was intended to be synonymous with tax.

Antonin Scalia:

Well, we could make it very broad and still adopt the manner of analysis that we’ve used for the Import-Export Clause.

That is to say, there’s no necessary connection between insisting upon discrimination on the one hand and applying it only to customslike impositions on the other hand.

It seems to me that distinction doesn’t come from the text of the two clauses, does it?

I mean, I can apply it broadly to all sorts of taxes, but still insist, as we do under the Import-Export Clause, that it discriminate.

James R. Atwood:

Well, I think the… at least under this Court’s holding in Michelin and Washington Stevedoring, the concept of discrimination is in the Import-Export clause, and it’s in it because of the words duty and impost.

The Court read those terms to mean taxes that tax imports and exports, qua imports and exports that are focused on, that discriminated against them as opposed to general taxes, so that’s how there is a respectable, indeed, perhaps strong constitutional basis to limit the Import-Export Clause to discriminatory taxes.

That same analysis just doesn’t carry forward when the Framers used the generic term, tax, in the Export Clause.

And you go back to Franklin’s testimony, Ben Franklin’s testimony to the House of Commons when he went over as part of the delegation to protest the Stamp Act, and he reminded Members of the House of Commons that in the United States tax and duty very often had different meanings, that while the colonists recognized the authority of Parliament to impose duties, now for the first time they were imposing internal taxes, and that, Franklin said, crossed the line and, of course, Franklin was there at the convention–

Antonin Scalia:

I must say, I just don’t see that.

It seems to me if… we’re getting the discriminatory notion not from the words imports or imposts or duties but from the discrimination, articles exported.

Is it a tax on articles exported from any State if it’s a general tax?

If the answer to that is no, it’s not because of the use of the word tax, it’s because of the phrase, laid-on articles exported.

That’s where you get the discriminatory content, not from the word tax versus impost.

James R. Atwood:

–That was not the analysis the Court applied in Michelin and Washington Stevedoring.

They did not focus on the laid-on language that’s in the Import-Export Clause as well.

They said, that clause is narrower and different because… and this is cited on page xx of our brief.

It’s from 423 U.S. at 287.

Imposts or duties mean essentially taxes on the commercial privilege of bringing goods into a country, and then they applied the same analysis to exports in Washington Stevedoring.

That’s the textual basis the Court relied upon, and they spent a good deal of time analyzing Marshall’s opinion in Brown v. Maryland to reach that specific, narrower definition of impost, and that’s why one clause… and again, the background as well, if you look back at the Constitutional Convention, clearly the Import-Export Clause was intended to prevent discrimination.

The Export Clause was intended to provide a broad tax immunity.

The Framers simply did not think it proper that the Federal Government burden the export process.

That’s what this tax does.

If there are no further questions, Mr. Chief Justice, that concludes.

William H. Rehnquist:

Very well, Mr. Atwood.

Mr. Minear, you have 5 minutes remaining.

Jeffrey P. Minear:

Thank you, Mr. Chief Justice.

I would like to point out, first, that what respondent is arguing for here is something that is truly peculiar.

Jeffrey P. Minear:

In this one area under the Constitution the States would have broader authority than the Federal Government on a matter respecting foreign commerce.

That is the result of their interpretation, their differing interpretations of the Export Clause and the Import-Export Clause.

I think that strikes one as surprising.

William H. Rehnquist:

Well, but that’s certainly the result of the cases decided under the Export Clause.

It’s true in Fairbank, is it not, and certainly in Mersey?

Jeffrey P. Minear:

No, I think if we look at the actual cases… now, Fairbanks was the only… the first case in which this Court struck down a Federal tax on an Export Clause theory, and that was a discriminatory tax, and that tax would have been viewed as violative of the Import-Export Clause as well at that time.

What we’re arguing is the same prohibition basically applies with respect to exports whether the taxes are Federal or State taxes.

William H. Rehnquist:

But certainly it was true in Thames & Mersey.

Jeffrey P. Minear:

The tax there, I think that under the Import-Export Clause, until this Court’s reasoning, new reasoning in Michelin Tires and Washington Stevedores, a State tax on insurance related to exports would have also been struck down.

So in other words, the tax… the extent of the prohibition would have been the same under either clause.

Now that the prohibition has… this Court has recognized that the Import-Export Clause involves a narrower prohibition, it’s time to reconsider whether the Export Clause ought to be read as a broader prohibition itself.

Respondent–

Stephen G. Breyer:

Even if that weren’t so, I take it that the tax in Washington Stevedoring was a tax that wasn’t related directly to the value of the goods.

It was on–

Jeffrey P. Minear:

–It was on–

Stephen G. Breyer:

–services and, moreover, the tax in Michelin, I guess, was a tax on goods that weren’t in transit.

Jeffrey P. Minear:

–Yes, that’s correct.

Stephen G. Breyer:

And so I’m not certain that those cases really are contrary to Thames & Mersey if you look at Thames & Mersey as a case where the incidence of the tax fell directly on the export.

Jeffrey P. Minear:

I think that they are, though, if you look at the cases in combination.

To be sure, the goods in Michelin involve goods not in transit, but the tax in Washington Stevedores did, and the tax in Michelin–

Stephen G. Breyer:

Yes, but the tax in Washington Stevedores was on the service, and thus wasn’t directly related to the value of the good, and it’s therefore a tax on the service, not on the good, and here the “big if” clause that I said before means we have to assume it’s a tax on the good.

Jeffrey P. Minear:

–And I believe it’s… excuse me, Your Honor.

I would say I think it’s problematic to describe a tax on insurance as a tax on the good.

I think that’s a problem, as I said, in Thames & Mersey–

Stephen G. Breyer:

Yes, I agree that we’re foreclosed on that, because you conceded it, according to your opponents.

Jeffrey P. Minear:

–In don’t believe you’re foreclosed from… by our concession from addressing that issue as you see fit.

But I think that there’s another problem I’d like to turn to, too, and that is this whole notion of trying to determine when a tax is laid upon the export process.

This has been a problem that bedeviled the Court for many years under the Import-Export Clause, and you look at the line of cases that came through here, and there is no consistency here.

Spalding said that the tax applied when the product was handed to a common carrier, but Joy Petroleum said that if a product stops along the way and is put in storage, then it is subject to a local tax.

William H. Rehnquist:

Well, Thames & Mersey was decided in 1915, and I don’t see any great trouble having resulted between then and now in applying the Export Clause.

Jeffrey P. Minear:

Well, there have been very few cases since Spalding simply because the effect of the Export Clause is so draconian, and it is this case that we have chosen to ask the Court to review its thinking in this area, and to bring it in line with the Import-Export Clause.

Antonin Scalia:

Well, once again, Mr. Minear, as I think we established earlier, you will enable us to avoid that question usually, at most, because we can decide the question simply on the basis that the tax is not discriminatory, but where it is discriminatory we are going to have to address this same question anyway.

You are not eliminating that difficulty from our jurisprudence.

Jeffrey P. Minear:

But that’s not an unusual problem, that the taxpayer will bear the burden of showing that a tax that appears to be fair on its face is discriminatory in a particular context, and–

Antonin Scalia:

No, but once you decide it’s discriminatory, you are then going to have to decide whether it is laid upon the process of export, so that, you know, that difficulty that you’re now addressing, it isn’t eliminated from our jurisprudence entirely.

All you can say is you won’t have to face it as often as you now do.

Jeffrey P. Minear:

–That’s right, but the same thing was true with regard to the Import-Export Clause.

For instance, there is still the question of what happens if a State imposes a property tax on property that is in transit through the State without stopping, on the property that’s being transported on the rail cars as it moves through the State?

Can they tax that?

That question is still one of the questions that has been left open in Michelin Tire, and likewise there will be some issues that will be left open here.

Thank you, Your Honor.

William H. Rehnquist:

Thank you, Mr. Minear.

The case is submitted.

The honorable court is now adjourned until tomorrow at ten o’clock.