Xerox Corporation v. County of Harris

PETITIONER:Xerox Corporation
RESPONDENT:County of Harris
LOCATION:Minnesota State Legislature

DOCKET NO.: 81-1489
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: State appellate court

CITATION: 459 US 145 (1982)
ARGUED: Nov 10, 1982
DECIDED: Dec 13, 1982

ADVOCATES:
Alfred H. Hoddinott, Jr. – on behalf of the Appellant
Cheryl Helena Chapman – on behalf of the Appellee

Facts of the case

Question

Audio Transcription for Oral Argument – November 10, 1982 in Xerox Corporation v. County of Harris

Warren E. Burger:

We will hear arguments next in Xerox Corporation against Harris County, Texas, and Houston.

Mr. Hoddinott, I think you may proceed whenever you are ready.

Alfred H. Hoddinott, Jr.:

Chief Justice, may it please the Court, this case concerns Xerox copiers that were always in foreign commerce, never in domestic commerce or part of the common mass of property in the state of Texas, paused only temporarily in Texas, and were stored in a Customs bonded warehouse, always under the custody and control of the United States Customs Service.

The issue is whether Texas can assert property taxes without violating the commerce clause and the import export clause on goods in that warehouse.

The Texas Court of Civil Appeals said that it could.

It was wrong.

The facts are essentially undisputed.

Xerox manufactures copiers domestically and assembles them abroad.

The Latin American Free Trade Association requires the assembly of goods in member countries.

As a result, Xerox decided to build copiers in Mexico to compete in Latin America.

Initially, it stored those copiers in the Panama Canal Zone, but because of anti-American feeling there, it sought to store them elsewhere.

It decided to switch to a Customs bonded warehouse in Houston.

Physically, these copiers were assembled in Mexico, trucked by a bonded carrier to Houston, stored in a Customs bonded warehouse in Houston, anywhere from a few days to three years, but always less than the time permitted by the Customs statutes.

As orders were received, the copiers were trucked by a bonded carrier to the ship, and then to Latin America.

Because of the way the copiers were packaged and built, they could not be used domestically.

William H. Rehnquist:

Mr. Hoddinott, you used the term “Customs bonded warehouse in Houston”, and I know the Court of Civil Appeals opinion certainly speaks in those terms, too.

Is there any generic description you can give of a Customs bonded warehouse?

Alfred H. Hoddinott, Jr.:

It is a warehouse that is maintained by a warehouseman.

He supplies bonds to the Customs Service that goods that are retained in there will not go out into domestic commerce, and they are… the goods are under the custody and control of a Customs employee.

William H. Rehnquist:

Is the warehouseman generally a private individual?

Alfred H. Hoddinott, Jr.:

Yes.

William H. Rehnquist:

And how about the building in which it is stored?

Is that generally a privately owned building?

Alfred H. Hoddinott, Jr.:

Generally, I believe it is, Your Honor.

This one certainly was.

Harry A. Blackmun:

And what is the distinction between the numbers?

I notice in these cases they speak of Number 3, Number 7, and this kind of thing.

Alfred H. Hoddinott, Jr.:

There are, I believe, eight Customs bonded warehouses, Your Honor, and they are for varying purposes.

Some are just straight storage.

Some are manufacturing warehouses.

Alfred H. Hoddinott, Jr.:

I believe there are smelting warehouses.

They are broken up by their purpose, Your Honor.

William J. Brennan, Jr.:

What is the nature of the bond?

Alfred H. Hoddinott, Jr.:

Money, I believe, Your Honor.

William J. Brennan, Jr.:

Is it?

And to whom… for the benefit of whom?

The United States?

Alfred H. Hoddinott, Jr.:

It’s for the benefit of the United States.

They were to guarantee the payment of the duties.

Thurgood Marshall:

I take it if you break that bond, you commit a federal offense.

Am I right?

Alfred H. Hoddinott, Jr.:

Your Honor, I don’t know.

Harry A. Blackmun:

Why didn’t Xerox store this property in Mexico?

Alfred H. Hoddinott, Jr.:

The record is silent on that, Your Honor.

I don’t know that either.

Your Honor, it is conceded that not one of these copiers ever entered domestic markets.

William J. Brennan, Jr.:

That is your basic point, I gather, is it?

Alfred H. Hoddinott, Jr.:

It is, Your Honor.

William J. Brennan, Jr.:

Under the import and export clause, that is unlike Michelin Tires, for example, which were… I gather, from the domestic market.

Alfred H. Hoddinott, Jr.:

That’s correct, Your Honor.

William J. Brennan, Jr.:

These are not.

Alfred H. Hoddinott, Jr.:

These were not.

It is conceded that not one entered domestic markets, not one was sold for domestic use–

William J. Brennan, Jr.:

Now, why do you say that makes a difference?

Alfred H. Hoddinott, Jr.:

–Because they are totally in foreign commerce, and all of the interstate commerce cases that have been cited by the Appellees, I submit, are inapplicable, and this Court has said in Japan Line, your honor, that the constitutional analysis will be more extensive when it is foreign commerce.

Warren E. Burger:

Now were there instructions… printed instructions with these things, as there are so often, that accompanied the machine?

Yes your honor.

And they were in–

They were in Spanish and Portuguese.

And the copiers also were electrically different than copiers that are manufactured from the United States.

Warren E. Burger:

How about the symbols?

Are there any difference in the symbols on the board or are the letters the same?

Since Xerox copiers generally use little figures of people, I would imagine that they would be the same, but the descriptions in the manuals would all different.

It is conceded, your honor, that these copiers were always segregated from domestic goods and they were always in the complete custody and control of the U.S. Customs Service.

We contend they were therefore always in foreign commerce.

Parenthetically, the Appellees paid approximately $2 million on copiers that were sold domestically.

Alfred H. Hoddinott, Jr.:

They are not at issue in this case.

In 1976 and… For 1976 and 1977, the Appellees taxed Xerox with respect to these copiers approximately $280,000 on the full value of the goods.

Xerox sought a declaratory judgment and injunctive relief in 1977, alleging that the taxes violated the commerce clause and the import export clauses of the Constitution because the goods were in transit.

The trial court agreed.

It said,

“Given the peculiar status of the copiers in the factual context of foreign commerce, they are not taxable because they do not have a substantial nexus with Houston and have not left the palpable flow of foreign commerce. “

“In short, they were still in transit and in foreign commerce. “

That finding is controlling under Texas law unless it is manifestly erroneous.

William J. Brennan, Jr.:

Does the record show how long some of these machines remained in the warehouse?

Alfred H. Hoddinott, Jr.:

Yes, Your Honor.

The record shows that they were there anywheres from eight days to approximately three years, as was permitted by the Customs statute.

The Texas Court of Civil Appeals reversed on appeal, and decided that taxes were constitutional, and entered a judgment against Xerox on the Appellee’s counterclaims, and the Supreme Court of Texas found no reversible error.

Two key facts permeate this case, we submit.

First, under the commerce clause, only Congress regulates foreign commerce, and this is foreign commerce.

We can… There is no serious dispute that factually the goods are in foreign commerce.

They start in Mexico.

They pass through Texas, and they went on to Latin America on a continuous journey.

They were never legally imported.

William H. Rehnquist:

Well, how about the ones that were there in three years?

Is it really accurate to talk about them as being on a continuous journey if they spent three years in Houston?

Alfred H. Hoddinott, Jr.:

I submit they are, Your Honor, because the law is that until they pass the barrier of paying the customs duty, it is as, as this Court said, it is as they… as if they never came into the country, they were detained at the border, Your Honor.

William H. Rehnquist:

During that time, I presume that the Houston Fire Department and the Houston Police Department would have to come to the aid of the owner of the private warehouse in the event there was a break-in and Xerox’s goods were going to be stolen, or in the event there was a fire that would have destroyed Xerox’s goods.

Alfred H. Hoddinott, Jr.:

There is no doubt about that, Your Honor, but the owner of that warehouse is also taxed, and we submit that Houston’s services are supported by the common carrier that was used, by the warehouseman, by the stevedores, all of whom, we submit, are undoubtedly taxed by Houston.

William H. Rehnquist:

But you say that this is different even though Xerox’s stuff, if it had been destined for domestic use, you have paid taxes on it and it would be taxable.

Alfred H. Hoddinott, Jr.:

I am sorry, I didn’t follow the question, Your Honor.

William H. Rehnquist:

If the same amount of Xerox computers had been stored in exactly the same warehouse but destined for domestic use, you, of course, have paid taxes on them.

Alfred H. Hoddinott, Jr.:

When you say destined, Your Honor, if they had already passed the Customs barrier, and the duties had been paid, then I would agree, but until the Customs duties are paid, I submit they are not taxable.

William H. Rehnquist:

But it makes no difference to your case even if they were in the Houston warehouse for 20 years, I take it.

Alfred H. Hoddinott, Jr.:

No.

But it… the Customs statutes permit storage for three years, and it makes a difference as long as they were there for the three years permitted by Congress.

Warren E. Burger:

Are you suggesting that in terms of the local protection, the local tax problem that Justice Rehnquist referred to, that all of that cost of protection, fire and police and others, are reflected in the rent that you’re paying and is passed on to Xerox?

Alfred H. Hoddinott, Jr.:

I submit that is so, Your Honor, and I also submit that as this Court said in Japan Line where you are talking about foreign commerce, where there is a need for federal uniformity, that Texas’s remedy is with Congress, because we are talking about foreign commerce.

Warren E. Burger:

From your point of view, I take your argument to be that this is just legally and constitutionally the same as though these machines were in a big cargo airplane and happened to fly over the lower part of Florida.

Alfred H. Hoddinott, Jr.:

Precisely, Your Honor.

As far as I am concerned, they might as well be on a ship in the middle of the ocean, and that’s what the cases have held, that until–

Warren E. Burger:

Well, in the middle of the ocean it wouldn’t have much contact with the continental United States, but in an airplane they would at least have some semblance of contact by flying over Key West.

Alfred H. Hoddinott, Jr.:

–Absolutely, Your Honor.

Absolutely.

Sandra Day O’Connor:

Mr. Hoddinott, in Japan Lines, the Court said that California’s tax on cargo containers that were only in the state less than three weeks would pass muster under the commerce clause, and were not in transit.

How can you argue that absent the regulatory scheme here, these things would be in transit under the commerce clause?

Alfred H. Hoddinott, Jr.:

Because I submit, Your Honor, that pursuant to the Warehousing Act of 1846, Congress has said, we want to encourage foreign commerce, and in order to encourage that foreign commerce, we want to have transshipment of goods through our ports, and to encourage that transshipment, they said, you may keep those goods there for three years.

Sandra Day O’Connor:

You are resting your argument on the possible interference with national foreign policy then?

Alfred H. Hoddinott, Jr.:

That is certainly one of our arguments, Your Honor.

The second important point besides the fact that this is foreign commerce is the very nature of the Customs bonded warehouse, some of which we have referred to.

As the Court is aware, there are detailed statutes and regulations concerning Customs.

The Court has held in Board of Trustees versus United States and in McGoldrick that Customs is a subject of complete federal regulation, and it seems to me it’s hard to imagine more complete regulation than when the United States government has physical custody and control of your goods.

The legislative history establishes that Customs bonded warehouses have a unique place in foreign commerce and are part of the total regulation of Customs.

The warehouses were established by the 1846 Warehousing Act to, as Congress said, unfetter commerce.

It had several purposes.

One, is was to alleviate the burden of the then current requirement that all duties on shipments be paid at one time, but second, as I referred to, Justice O’Connor, it was to encourage the use of U.S. ports and ships, and that was to be accomplished by permitting storage of cargoes in warehouses for up to three years, and then transshipment of the goods without the imposition of any duty.

William H. Rehnquist:

Mr. Hoddinott, I see in a footnote to your brief on Page 12 you mention that in 1978 Congress extended the period from three years to five years.

Alfred H. Hoddinott, Jr.:

That’s correct, Your Honor.

William H. Rehnquist:

Would that cover your case if it had been in effect when this situation arose?

Alfred H. Hoddinott, Jr.:

I believe it would, sir.

William H. Rehnquist:

So that you could then store goods in Houston for five years, at least five years under your theory.

Alfred H. Hoddinott, Jr.:

Yes, sir.

William J. Brennan, Jr.:

Well, I gather, Mr. Hoddinott, you would regard that as simply a regulation by Congress to that extent of foreign commerce.

Alfred H. Hoddinott, Jr.:

Yes, I would, sir.

The cases are clear–

Sandra Day O’Connor:

Mr. Hoddinott, is there any risk of foreign retaliation against the United States for a tax policy of local government like this if there are American goods stored in some foreign country?

Alfred H. Hoddinott, Jr.:

–I think there is a risk, Your Honor, perhaps not with respect to Xerox, because Xerox is a domestic corporation.

Had Xerox been a Japanese corporation, I submit there would be substantial risks of multiple taxation that would be applicable.

The Warehousing Act and all of its subsequent legislation delegated to the Secretary of the Treasury the duty to formulate regulations to carry out Congress’s intent.

Starting in 1915, the Treasury regulations prohibited state taxation of goods in Customs bonded warehouses.

Your Honor, last Friday it came to my attention that on a week ago Monday, November 1st, the relevant Customs statutes… regulations were amended.

That appears at 19 CFR… 47 Federal Register, Page 49,370.

In that amendment, the footnote to 19 CFR 19.6, which granted a state tax immunity, was deleted.

The background information about the amendment published by the Treasury Department is silent as to why the footnote is no longer there.

We believe–

William H. Rehnquist:

It shows what a big state Texas is.

0 [Generallaughter.]

Alfred H. Hoddinott, Jr.:

–We believe that for the reasons set forth in our brief, however, the regulation was still controlling during the relevant time period, and as this Court said in McGoldrick, there is no doubt that the Treasury regulation merely reflects Congress’s intent to free the warehouses from state tax.

In 1940, this Court examined the entire structure of Customs bonded warehouses in the McGoldrick case.

John Paul Stevens:

Mr. Hoddinott, may I interrupt you?

What was the date of the deletion of that footnote?

I missed it as you explained it.

Alfred H. Hoddinott, Jr.:

The date was November 1st, Your Honor.

The citation is 47 Federal Register 49,370.

John Paul Stevens:

November 1st of this year?

Alfred H. Hoddinott, Jr.:

Of this year.

It becomes effective December 1.

John Paul Stevens:

I see.

Thank you.

Oh, so the footnote is still in effect today.

Alfred H. Hoddinott, Jr.:

Yes, it is, sir.

We just felt it was our duty to call this to the Court’s attention.

Byron R. White:

You just thought it was surplusage anyway.

Alfred H. Hoddinott, Jr.:

Pardon me, sir?

Byron R. White:

You thought the footnote was surplusage anyway.

It just was a reflection of what the regulation would effect.

Alfred H. Hoddinott, Jr.:

We believe at the least it is that, Your Honor.

I think it could be controlling in its own… in its… by its own force, but I don’t think its deletion is in any way fatal to our case.

Harry A. Blackmun:

Do you think it is in any way related to the case?

Alfred H. Hoddinott, Jr.:

Since the Treasury Department did not say why they were deleting it, it may be an oversight for all I know, so I can’t say that it is relevant, Your Honor.

Harry A. Blackmun:

Counsel, I take it we have only one year’s taxes involved here, do we not?

Alfred H. Hoddinott, Jr.:

No.

As to one appellee, it was one year; as to the other appellee, it was two years.

Harry A. Blackmun:

Two.

And they have driven the Xerox out of Texas.

Alfred H. Hoddinott, Jr.:

They have, sir.

Harry A. Blackmun:

Are you still using Buffalo, New York?

Alfred H. Hoddinott, Jr.:

I don’t believe so.

I don’t know where they have gone now, sir.

The record is silent on that.

They or we?

0 [Generallaughter.]

Alfred H. Hoddinott, Jr.:

I’d rather not answer that one, sir.

We believe that Congress’s intent in 1977 was no different than it was in the McGoldrick case in 1940.

As in 1940, Congress intended that goods in foreign commerce and in these warehouses should be free from state taxation.

We believe McGoldrick should be adhered to not just because it’s there, but because it’s reasonable and it’s right.

Congress can hardly administer the Customs laws where it is obviously regulating foreign commerce if every state can have its say, have its tax along the way.

The Customs law are a national concern requiring national administration.

The system cannot survive with unilateral state interference.

Therefore, these taxes violate the commerce clause.

Alfred H. Hoddinott, Jr.:

But if the taxes somehow pass muster under the commerce clause, they still violate the import export clause where the Constitution prohibits imposts or duties on imports or exports.

The Court has recently examined state property taxes under this provision, and in Michelin it said state taxes would be prohibited if goods are in transit, and in Japan Line it said, state taxes are prohibited where it destroys the federal government’s one voice on foreign commerce.

The first issue under this clause has been conceded.

The city concedes that state taxes on goods in transit violate the commerce and import export clauses at its brief, Page 14, and that just makes sense.

The goods do not have a substantial nexus with the state for taxation, and it would hinder the free flow of foreign commerce.

Sandra Day O’Connor:

Mr. Hoddinott, if we adopted your view of the meaning of in transit under the import export clause, wouldn’t we be resurrecting Low against Austin?

Alfred H. Hoddinott, Jr.:

I don’t believe so, Your Honor.

Sandra Day O’Connor:

Why not?

Alfred H. Hoddinott, Jr.:

As applicable to this case, these goods are in foreign commerce, and irrespective of what the Court said in Michelin, always there is some nexus.

There is always some connection with the state, and we submit that goods in a bonded warehouse don’t have that connection.

We submit that Xerox’s copiers are in transit for the purposes of this case.

The trial court so held, but the Texas Court of Civil Appeals held to the contrary without finding the trial court’s findings manifestly erroneous.

It seems clear to us that by operation of law, goods in a bonded warehouse have no taxable nexus.

They are still in foreign commerce.

John Paul Stevens:

Mr. Hoddinott, may I ask one other question about what happened when… after you found you had to pay this tax, or at least they were assessing it?

You emptied the warehouses, and does the record tell us where the material went when it came out of the warehouses?

Alfred H. Hoddinott, Jr.:

They went to a free trade zone in Buffalo, New York.

John Paul Stevens:

What do you mean by a free trade zone?

Alfred H. Hoddinott, Jr.:

A free trade zone is a creature of the United States Congress that were set up by an Act of Congress in 1934.

They are set aside… it’s an area of land set aside, fenced off, that–

William J. Brennan, Jr.:

Federally owned?

Alfred H. Hoddinott, Jr.:

–No, not necessarily, Your Honor.

Quite often they are owned by cities and counties and that sort.

As we point out in the footnote in our reply brief, the legislative history reveals that they are substantially the same as Customs bonded warehouses.

John Paul Stevens:

Do you have to put up any kind of a bond when they are in a free trade zone?

Alfred H. Hoddinott, Jr.:

I don’t know, Your Honor.

I assume that a person who operates the free trade zone may have to do so, but I don’t know.

John Paul Stevens:

Justice Brennan touched on this earlier, but I want to be clear in my own mind.

What is the condition of the bond when it is put up when it is in a bonded warehouse?

What does the bond in effect say?

Alfred H. Hoddinott, Jr.:

The bond in effect says I will pay the Customs duties if these goods are brought into the United States.

John Paul Stevens:

Not if they are removed from the warehouse.

It is just if they are brought into the United States.

Alfred H. Hoddinott, Jr.:

That’s right.

If they are removed from the warehouse back into foreign commerce, there is no duty payable.

John Paul Stevens:

I see.

And there is no mention of any possible state tax liability in the–

Alfred H. Hoddinott, Jr.:

In the bond?

John Paul Stevens:

–in the bond or the warehousing documents?

There wouldn’t be, would there?

Alfred H. Hoddinott, Jr.:

Not that I’m aware of, sir.

John Paul Stevens:

No.

Alfred H. Hoddinott, Jr.:

We believe that Xerox’s copiers were in transit.

The courts have consistently held that when they are in a Customs bonded warehouse, it is as if they were detained at the border.

The cases cited by appellees and by the court below all related to interstate commerce, where the goods fell into some state when the journey ended or where it was… or it was there before the journey started.

Those cases would be applicable to Xerox only if the goods cleared Customs and entered interstate commerce.

The state can stand at the warehouse door, and the moment the goods pass through, it can assert its tax, but those cases involving interstate commerce are not applicable until then, and our goods were still passing in foreign commerce.

The county reads the Michelin case to permit virtually all property taxes.

We submit it is just not that broad.

It holds taxes not per se illegal, but it doesn’t say they are per se legal either.

Therefore, whether Xerox’s copiers were in transit or not, the taxes must pass the Michelin three-part test, especially the one concerning one voice.

The Court said a tax is unconstitutional if it obstructs the federal government from speaking with one voice on foreign commercial affairs.

These taxes fail that test.

Since 1846 in its control of foreign commerce Congress promoted that commerce by encouraging transshipment of goods through our ports, with the goods being stored temporarily in the Customs bonded warehouses.

In essence, it said to the world, come use our ports, we will not tax you, we will not charge you customs duties if you will.

But now Texas wants to assert a tax, Y percent, California perhaps Z percent, New York perhaps no tax.

Each state wants to have its own say.

But how can the nation speak with one voice under these circumstances?

That clamor is not one voice.

In Japan Line, this Court held that the states cannot frustrate federal uniformity, but if every state can make its own unilateral decision, it would obviously make speaking with one voice impossible.

Alfred H. Hoddinott, Jr.:

That just can’t be.

These taxes fall on that ground alone.

Finally, the appellees complain they are being forced to offer services without revenue, that they just want Xerox to pay its fair share.

Well, again, the appellees are confusing interstate commerce and foreign commerce, and as the Court pointed out in Japan Line, the fair share cases involved interstate commerce, not foreign commerce.

While the burdens of state government are a concern, this Court specifically rejected those arguments when they were asserted in Japan Line, and the Court concluded that where foreign commerce and the national interests are burdened, Congress and not the individual states must control.

This is just such a case.

The state’s remedy is in Congress, and not through unilateral self-help.

We submit, Your Honor, that when you look at this case and boil it all down, certain principles control its disposition.

One, Congress intended goods in a Customs bonded warehouse to be free from state taxation.

Two, the McGoldrick case is both right and applicable.

Three, state taxation of goods in transit is prohibited, and Xerox’s copiers were in transit.

And four, these taxes prevent Congress from speaking with one voice.

To prevail, the appellees must convince you that every one of those principles is wrong.

If they fail as to even one, the case should be reversed.

We submit they fail as to them all.

Warren E. Burger:

Ms. Chapman?

Cheryl Helena Chapman:

Mr. Chief Justice, and may it please the Courts the crucial question for consideration is, does the State of Texas have the power to tax goods in Customs bonded warehouses.

We submit that the power to tax resides in and is reserved to the State of Texas unless Congress has acted to pre-empt the taxation of goods in Customs bonded warehouses.

Warren E. Burger:

If that is so, Ms. Chapman, then what is the purpose of the bonded warehouse in relation to the operation of the Customs Service?

Cheryl Helena Chapman:

The purpose of the bonded warehouse is to ensure that the government will collect its revenue duties.

The bond is–

Warren E. Burger:

The federal government.

Cheryl Helena Chapman:

–The federal government.

Warren E. Burger:

The federal government will.

Cheryl Helena Chapman:

The importer posts the bond as liquidated damages if it should fail to pay Customs duties or if the imports for some reason enter into domestic commerce.

Warren E. Burger:

Could Texas have levied a duty, assessed a duty on this property when it came in from Mexico?

Cheryl Helena Chapman:

The State of Texas has no power under the Constitution to assess a duty.

The state has the power to tax–

Harry A. Blackmun:

Ms. Chapman, somewhere would you touch upon the issuance of the exemption letter by the county?

I realize you represent the city, but in a sense you are representing both here.

Cheryl Helena Chapman:

–Yes.

Harry A. Blackmun:

Somewhere, would you touch on that?

Why it was issued, and why now the county’s position has so drastically changed?

Cheryl Helena Chapman:

The county’s position did not… the county in 1976, prior to this Court’s ruling in the Michelin decision, initially determined through a tax agent, initially determined that those goods were subject to tax immunity under Michelin… under Low v. Austin doctrine of governmental–

William J. Brennan, Jr.:

You mean original package, Ms. Chapman?

Cheryl Helena Chapman:

–Yes, As a result of this Court’s holding in Michelin, the county re-examined the taxability of those goods, and back assessed those goods for the year 1976.

Xerox admits that those goods had been operating in Texas since… had been stored in Texas since 1974, and the goods continued to remain in Texas until the end of 1977.

As a matter of fact, I believe Xerox removed their copiers to the State of New York in December of 1977.

Warren E. Burger:

What would you say if these copiers had been taken on board ships out of some eastern port of Mexico, placed on the ships, destined for either this enclave in New York or for Argentina, but stopped for repairs or fuel in one of the Texas ports?

While it was in the Texas port, could it be taxed?

Cheryl Helena Chapman:

We do not believe it can be taxed.

Those goods are in fact in transit, and are not here by any reason but for any purposes of the owner or the convenience of the owner.

Harry A. Blackmun:

Do you have a free trade enclave in Texas?

Cheryl Helena Chapman:

We have two, I believe, one in Galveston and one somewhere else.

Harry A. Blackmun:

And your brief concedes that if these goods had been in such an enclave, that they would not be taxable.

Cheryl Helena Chapman:

No, we have re-examined the Foreign Trade Zone Act, and we do not know whether or not those goods would be subject to tax.

We do distinguish the Foreign Trade Zone Act from the Customs bonded regulatory scheme by virtue of the fact that the taxing jurisdiction may opt for the presence of that free trade zone, foreign trade zone.

We have no… We had no choice about who utilizes the services of Houston, Texas, in storing goods in Customs bonded warehouses.

Warren E. Burger:

What is the purpose of the free trade zone?

Cheryl Helena Chapman:

The purpose of the free trade zone is to ameliorate or to compensate for the problems that we’re having now.

Many countries… many companies such as Xerox are taking a lot of their businesses outside of the United States, producing a lot of their goods outside of the United States, and the purpose of the free trade zone is to attract business back into the United States.

We have lost a considerable amount of business.

Assembly, for example, is taking place in Mexico because of the cheaper cost of labor.

The very reason–

John Paul Stevens:

Well, what concessions does Texas give those who use the free trade zones in Texas?

Cheryl Helena Chapman:

–The concessions are determined by the federal government, and we will… they are determined by the federal government.

Sandra Day O’Connor:

Yes.

But you are not sure whether that… your policy today would be to tax goods in the free trade zone or not.

Is that right?

Cheryl Helena Chapman:

No, we are not.

Cheryl Helena Chapman:

The legislation does not prohibit state taxation of goods in a free trade zone.

Byron R. White:

Could you tell me, if you know, why the federal government provides for free trade zones in addition to bonded warehouses?

Was there some reason for providing free trade zones?

Why wouldn’t the bonded warehouse serve the purpose?

Cheryl Helena Chapman:

Under the bonded warehouse… under our Customs bonded scheme, manufacturers cannot, under the… the word is manipulate.

Cannot affect those bonded goods in any ways, except under–

Byron R. White:

I see.

Cheryl Helena Chapman:

–And in a free trade zone–

Byron R. White:

So they can’t really work on them.

Cheryl Helena Chapman:

–Yes.

Byron R. White:

I see.

I gather they even build factories, perhaps, in free trade zones, do they?

Cheryl Helena Chapman:

Yes, they do.

Harry A. Blackmun:

I see.

I get from your remarks with the free trade zones you are hoping to attract business to Texas, and yet I suppose the imposition of your tax here has driven business away.

The goods are now out of Texas.

They went to New York, and your opposition said he didn’t know whether they were still there or not.

It seems to me that you are meeting yourself coming back.

You are not entirely consistent in that respect.

Cheryl Helena Chapman:

The Texas Constitution mandates that all property be taxed in a uniform and equal manner.

The City of Houston is under that constitutional mandate when it assesses property.

We cannot make a decision as to what property gets taxed.

That is a matter for our state legislature to decide.

We submit that the power to tax resides in and is reserved to the State of Texas unless Congress has acted to pre-empt the taxation of Customs bonded property, or two, unless the tax is prohibited by the provisions of the United States Constitution, or three, unless the tax interferes with the federal government’s exclusive power to regulate foreign commerce or prevents it from speaking with one voice.

In this case, Congress has enacted no law to prohibit state taxation of Customs bonded goods.

This tax–

Sandra Day O’Connor:

In the McGoldrick case, it seemed to me that the Court relied on the footnote to the regulation that Mr. Hoddinott indicated is now being dropped, in saying that there was in effect pre-emption.

How do you deal with that, and how is this different?

Cheryl Helena Chapman:

–McGoldrick in our opinion is an entirely different case.

It involves an entirely different regulatory scheme.

Sandra Day O’Connor:

How has the regulation changed the footnote to the regulation since McGoldrick other than the numbering?

Cheryl Helena Chapman:

The Secretary–

Sandra Day O’Connor:

Is there any language change whatever since McGoldrick?

Cheryl Helena Chapman:

–Yes, the Secretary of Treasury deleted the provision from the Customs regulations some time after the McGoldrick decision, and it is now an appendage to the regulations in the form of a footnote.

Sandra Day O’Connor:

But it’s the same language.

Cheryl Helena Chapman:

It’s the same language, and we–

Sandra Day O’Connor:

It has been renumbered, in effect, relocated.

Cheryl Helena Chapman:

–Yes.

It is our opinion that that Customs regulation in the McGoldrick case amounted to nothing more than a restatement of the law at that time, a restatement of the Low v. Austin doctrine that imports are immune from state taxation.

This is the same conclusion that the Court in American Smelting, a decision out of California, arrived at.

But the McGoldrick decision does not express a rule of law for all property in all Customs bonded warehouses.

The Court was careful to limit its holding to the particular facts before it and the particular regulatory scheme.

McGoldrick does not control this case because it involved an entirely different regulatory scheme, and was affected by an entirely different tax.

We have before us the laws governing Customs bonded warehouses, which is an intricate part of the tariff laws.

In McGoldrick, the Court addressed the problems of a specific industry and in that case the Court had before it the Revenue Act of 1932.

Congress had amended that Revenue Act for the reason that it wanted to restore to American fuel oil manufacturers their competitive footing in foreign markets which had been lost when the original tax had been imposed under the Revenue Act.

Congress did this by exempting imported oil sold into foreign commerce from the revenue tax, and by the operation of that particular regulatory scheme, that tax was in effect a duty.

It was imposed on the importation of oil.

The New York tax in the McGoldrick case in its practical effect and as applied to the oil that was in bond was nothing more than a tax on the privilege of exporting oil out of the State of New York.

The tax fell on the purchaser at the time the oil was being transferred to the vessels which were destined, bound for foreign commerce.

By operation of the regulatory scheme, the Customs regulatory scheme at that time, the oil… and that same scheme exists today… the oil was irrevocably committed to the export stream.

The tax asserted in McGoldrick was in direct contravention of Congress’s expressed intent to relieve imported oil destined for foreign commerce from import duties.

Moreover, the tax in McGoldrick constituted a prohibited regulation of commerce.

Sandra Day O’Connor:

If Gulf Oil had withdrawn some of that oil for domestic consumption on payment of duties, just like Xerox could have done theoretically–

Cheryl Helena Chapman:

In that case, it could not have.

It was bound once it entered that oil into the manufacturing warehouse to export the oil.

So it was legally unable to do so, as is not the case here.

There is no law before this Court which is designed to give Xerox or any copier manufacturing industry a special competitive advantage.

There has been no commitment to the export stream of commerce here.

Xerox has at all times… had at all times full powers to dispose of its copiers, and it in fact did so in a limited instance when it sold some copiers to an agency of the United States government.

Cheryl Helena Chapman:

Xerox maintains that its copiers are designed for foreign use only.

That they are… there is no doubt that those copiers were intended for distribution in foreign markets.

However, the record reflects that those copiers could have been converted for domestic use by the additional cost of $100 plus the payment of Customs duties.

Harry A. Blackmun:

–You say the record is what?

Cheryl Helena Chapman:

The record reflects… Xerox admits in its deposition, the deposition of its witness Ricarlo Perez, as well as in their answers to interrogatories, that the copiers could have been converted for domestic–

Harry A. Blackmun:

I will be interested in what your opponent says about that, because as I read the briefs, I thought there was a flat dispute on this one.

Cheryl Helena Chapman:

–No, this is in the… It is contained in the deposition of Ricarlo Perez and–

Harry A. Blackmun:

Well, he can answer.

Don’t waste any time on that.

Cheryl Helena Chapman:

–Okay.

Harry A. Blackmun:

But in any event, none were converted.

Cheryl Helena Chapman:

No.

Warren E. Burger:

Well, suppose you had automobiles manufactured in the same setting as this, destined for England or Sweden or some other country where they have the right-hand drive.

They could be sold in the United States, too, because a great many people, or at least some people use a right-hand drive car in this country, but because it was adaptable, if they had been in bonded warehouses, would that adaptability have any impact on the legal issues in this case?

Cheryl Helena Chapman:

Yes.

The adaptability has no impact on the legal issues.

Our position is that as long as those goods are stored in Houston for the business convenience of Xerox, and there is no question about that, and the State of Texas has acquired a taxable situs, then we are entitled to tax those copiers.

Warren E. Burger:

But that would be independent of whether they could be modified for domestic use or not, in your view.

Cheryl Helena Chapman:

Yes, and this Court has addressed that issue in the case of Kosydar versus… National Cash Register versus Kosydar, where the goods were only designed for foreign use.

Byron R. White:

Well, a bonded warehouse isn’t available, is it, for an importer who simply wants to store his goods in a bonded warehouse pending domestic distribution?

Cheryl Helena Chapman:

Yes, it is.

Byron R. White:

So you can bring your goods in and delay the payment of duty until you get a market for it in the United States?

Cheryl Helena Chapman:

And that was the original purpose of the Customs bonded warehousing scheme.

Warren E. Burger:

Does that have any other consequence than deferring the payment of the duty?

Cheryl Helena Chapman:

No.

Warren E. Burger:

When it enters the country, instead of paying the duty immediately on entry if it goes into a bonded warehouse, the duty is deferred until it is taken out of the bonded warehouse for sale in the United States.

Is that not so?

Cheryl Helena Chapman:

That’s correct.

Byron R. White:

So a company can just get cheaper warehousing by using a bonded warehouse.

It just depends on what the cost of the bond is as compared to the domestic taxes.

Cheryl Helena Chapman:

That’s correct, and that is the likely result if Xerox obtains immunity under the Customs bond theory.

Byron R. White:

So it really doesn’t make any difference in this case as to whether they were destined for a foreign market.

Cheryl Helena Chapman:

Absolutely not.

John Paul Stevens:

Except do you contend that the state could levy the tax, though, before the federal government could collect the duty?

Cheryl Helena Chapman:

No, we do not, and this particular regulatory… the laws governing goods detained under revenue laws prevent us from affecting the federal government’s rights to Customs duties.

John Paul Stevens:

Well, if you say you’d have to wait until the federal government collected a duty, supposing the goods were still under a bond, within the three year period.

When would you collect the tax?

Cheryl Helena Chapman:

In a–

John Paul Stevens:

I thought all the copiers were still in Texas at the time you levied the tax.

Cheryl Helena Chapman:

–That’s correct.

John Paul Stevens:

Well, then, you did seek to collect the tax before the federal government was free to collect any duty.

Assuming these goods were going to go for domestic distribution.

We assessed those goods for taxation.

We have not… We did not attempt to enforce our lien for taxes, and we do not believe under federal law we can unless the federal government’s right to revenues are assured, are protected, and unless… as a matter of fact, in one of the cases cited–

–Assume they had no other property in Texas.

Now, I understand in fact they did keep other property there, but would you in effect have a second mortgage on all the goods while they were being stored in Texas?

Cheryl Helena Chapman:

We would have a lien, as does the warehouseman have a lien, as does the carrier have a lien.

John Paul Stevens:

And this would be true even if these were goods… if it were not an American company, but a Japanese company, for example, that shipped in some product which it then intended to transship to Mexico, and it was… you would say you could impose a lien on those shipments.

Cheryl Helena Chapman:

If that property had acquired a taxable situs under the… if they had been there under the same circumstances, yes, as Xerox.

John Paul Stevens:

How long, in your view, would it take for the goods to acquire a taxable situs?

Cheryl Helena Chapman:

Well, those are not… the facts of this case, Xerox at all times had maintained an average inventory on a daily basis of over 4,000 copiers, which we did assess.

We believe that under the decision of this Court in Brown versus Houston, that once property is put on the market for sale, it has been… it has become a part of a general mass of property and is subject to state taxation.

We also believe that the Complete Auto Transit case, the test enunciated in that would permit a tax in those circumstances.

We don’t know, and we haven’t considered… we… our state would not… our state presently has a provision that would require that the property be stored for 175 days before the presumption… before there is a presumption that they are not in interstate commerce.

However, without that statutory provision, we would require that the property be here indefinitely.

William J. Brennan, Jr.:

Ms. Chapman, for what year… I gather… Is it the city’s tax or the county’s that is for one year?

Which is it?

Cheryl Helena Chapman:

The city’s tax is for one year.

William J. Brennan, Jr.:

And what year is that?

Cheryl Helena Chapman:

Seventy-seven.

William J. Brennan, Jr.:

Seventy-seven.

Cheryl Helena Chapman:

Yes.

William J. Brennan, Jr.:

And these are copiers that were there from ’74 until ’77?

Cheryl Helena Chapman:

Yes.

William J. Brennan, Jr.:

And what happened in ’77 that caused you to impose the tax that year and not in ’76 or ’75?

Cheryl Helena Chapman:

In ’76, this Court decided that goods in Customs bonded… I mean, that imports were not immune from taxation.

William J. Brennan, Jr.:

Oh, that’s Michelin.

Cheryl Helena Chapman:

Michelin.

William J. Brennan, Jr.:

I see.

Cheryl Helena Chapman:

Yes.

William J. Brennan, Jr.:

That decision that year.

Now, in ’77, as of what date did you impose the tax?

Cheryl Helena Chapman:

January 1, 1977.

William J. Brennan, Jr.:

1977.

And the copiers were still there on that date.

Cheryl Helena Chapman:

The copiers… Xerox… during each of the taxing years at issue, Xerox maintained an average daily inventory–

William J. Brennan, Jr.:

Of 4,000.

Cheryl Helena Chapman:

–Yes.

William J. Brennan, Jr.:

Now, you imposed the tax then as of January 1, 1977.

What did you do about trying to collect the tax assessed?

Cheryl Helena Chapman:

We did nothing.

Xerox sued for declaratory relief.

William J. Brennan, Jr.:

Oh, and so you have never actually tried to collect.

Cheryl Helena Chapman:

No, we have not.

William J. Brennan, Jr.:

I see.

Well, presumably you have levied the tax.

The tax levy was made on January 1.

Is that right?

Cheryl Helena Chapman:

That’s correct.

Sandra Day O’Connor:

And you sent out a paper notice that this is the amount of the tax?

Cheryl Helena Chapman:

Yes.

Sandra Day O’Connor:

You simply didn’t try to enforce it–

Cheryl Helena Chapman:

No, we did not.

Sandra Day O’Connor:

–because there was an intervening suit for declaratory judgment.

Cheryl Helena Chapman:

Yes.

Sandra Day O’Connor:

And also because you wouldn’t try to enforce if someone didn’t pay until the federal government permitted you to do so.

Cheryl Helena Chapman:

That’s correct.

We believe we are… We are bound by–

Sandra Day O’Connor:

Yes.

Ms. Chapman, do you in effect agree that your right to assess the tax and ultimately collect it may be different under the Customs Act than your right to enforce a lien and to sell that property for defaulted taxes while it is still within the Customs warehouse?

Cheryl Helena Chapman:

–We agree that our… We cannot exercise summary seizure and… summary sale and seizure of that property.

We cannot affect the federal government’s custody to that property.

Title 28 of the United States Code, Section 2463, provides that goods in Customs’ custody or goods detained under Customs law are considered in the custody of law.

They are not recoverable, and they are subject only to the orders of United States federal courts.

William J. Brennan, Jr.:

Ms. Chapman, maybe this isn’t relevant and I shouldn’t take your time with it, but suppose then Xerox, come December 31, 1977, you have not yet tried to enforce payment of the tax, and they move the copiers up to New York, as I gather they did.

How do you collect your tax?

You sue them.

Cheryl Helena Chapman:

Sue them for–

William J. Brennan, Jr.:

Well, suppose you can’t get them in the state.

Cheryl Helena Chapman:

–We would–

Byron R. White:

You could sue them in another state.

You could chase them down.

Cheryl Helena Chapman:

–Yes, we could.

Warren E. Burger:

Xerox is pretty much everywhere.

Cheryl Helena Chapman:

Yes.

0 [Generallaughter.]

Harry A. Blackmun:

They have other property in the state.

Cheryl Helena Chapman:

They did have other property in the state.

William J. Brennan, Jr.:

Well, what I have been thinking about, Ms. Chapman, Justice Stevens mentioned, suppose it was a Japanese company that had done this?

Cheryl Helena Chapman:

That’s a problem that we face on a continuing basis.

Cheryl Helena Chapman:

If it is a foreign–

Byron R. White:

Yes.

Is the county tax separate, a different tax?

Cheryl Helena Chapman:

–Yes.

Byron R. White:

And does the state impose a tax, too?

Cheryl Helena Chapman:

Yes.

Byron R. White:

So there are three taxes involved.

Cheryl Helena Chapman:

No, there is a–

Byron R. White:

Just one?

Cheryl Helena Chapman:

–No, there are several taxes involved here for several taxing jurisdictions, including for the State of Texas.

Byron R. White:

I see.

So there are at least three.

Cheryl Helena Chapman:

Yes.

The regulatory scheme involved here are the laws governing Customs bonded warehouses, Title 19 of the United States Code, Section 1555, 1556, and 1557.

These statutes and authorized regulations operate to defer import duties.

They serve merely as a convenience to the importer by relieving the importer of immediate cash payment of Customs duties.

Congress under these provisions has enacted no law to exempt state taxation of goods in bonded warehouses, nor can the intent be inferred from this particular legislative scheme without an explicit declaration by Congress.

It cannot… We cannot infer that Congress intended to give these copiers… these imports a discriminatory tax advantage against domestic commerce.

These copiers were not in transit on tax day.

As we know from Michelin, no… a non-discriminatory tax on imports not in transit is not prohibited.

These goods were on the market for sale.

They had come to rest within the jurisdiction, and by all applicable traditional principles, these goods are subject to state and local taxation.

To avoid… Xerox cannot avoid the inevitable conclusion that these copiers have acquired a situs in Texas.

By the use or the employment of a fiction, Xerox argues that its goods are not in the State of Texas, but in a state of transiency.

It has provided this Court with no authority for that proposition.

The… cases that Xerox has cited involve straight regulatory powers.

The… cases cited by Xerox involve construction of a tariff… they involve neither state regulatory powers nor state taxing powers.

To the contrary, where courts have examined the right of the state to tax goods in Customs bonded warehouses, they have determined that Customs bonded status in and of itself does not confer in transit immunity.

The Court held this in State versus Hopper out of Texas, American Smelting, and in the Trace Retailers Ranch case out of New Mexico.

Even in the National Distillers case, which Xerox relies so heavily on, the Court expressly rejected the argument that bonded storage conferred in transit immunity.

Sandra Day O’Connor:

Ms. Chapman, you haven’t mentioned your jurisdictional arguments.

Are you still asserting those?

Cheryl Helena Chapman:

We have raised those points in our brief, Your Honor.

We have nothing new to add.

We think that if the Court decides to assume cert, that these… the same issues are going to be controlling.

We think the tax is neither prohibitive under the import export clause nor the commerce clause, and the tax does not interfere with domestic… with flow in commerce.

There is no… Unlike Japan Lines, there are no treaties involved in this case, no conventions or trade agreements.

There is no genuine conflict of law problem as existed in Japan Lines, which resulted in a multiple taxation of property on an international level.

We know of no rule of law which would permit another sovereignty to tax property… to tax Xerox’s copiers, impose a property tax on Xerox’s copiers while under the exclusive protection of the State of Texas.

The tax has no effect on the government’s need to speak with one voice, which is an import export concern, and speaking with one voice under the import export clause is assured when the federal government and the federal government alone imposes Customs duties.

Xerox is well aware of the benefits, and can well appreciate the benefits provided by the State of Texas.

The reason that Xerox removed its distribution operation from Panama to Houston was that riot-threatened Panama could no longer protect its copiers.

We submit that since Congress has enacted no law, and with regard to Footnote 11, Footnote 11 fails for the reason that the Secretary of Treasury has no power, the Secretary of Treasury has no power to regulate… to legislate, excuse me, the limits of state taxing powers.

Only Congress has that power, and Congress has not addressed this issue, and Congress has not spoken in this case.

Warren E. Burger:

Your time has expired.

Cheryl Helena Chapman:

All right.

Thank you.

Warren E. Burger:

Do you have anything further, Mr. Hoddinott?

Alfred H. Hoddinott, Jr.:

I would be happy to try and answer Justice Blackmun’s question.

The copiers could be worked over at a cost of over $100.

It is not impossible for them to be used domestically, but it would be somewhat like Justice Berger’s automobile.

Presumably there is some way to switch the steering wheel from the right hand to the left hand.

Warren E. Burger:

Or you can use it just the way it is.

Alfred H. Hoddinott, Jr.:

You couldn’t use the Xerox copier just the way it was–

Warren E. Burger:

No, but the automobile.

Alfred H. Hoddinott, Jr.:

–because of the electricity.

Byron R. White:

Isn’t it true that… Is it true that the bonded warehouse can be used by an importer who wants to distribute domestically?

Can he use the bonding warehouse just to postpone the payment of his duties until he gets a domestic market?

Alfred H. Hoddinott, Jr.:

Goods that come from abroad coming into the United States may be held for up to three years and then brought in.

Indeed, that is–

Byron R. White:

No matter where they are destined.

Alfred H. Hoddinott, Jr.:

–No matter where they are destined.

That is indeed the legislative purpose that is set forth in the Warehousing Act, Your Honor.

Byron R. White:

Now, would you say that Texas could levy its tax on the importer who is… who intends to take these goods into the United States?

Alfred H. Hoddinott, Jr.:

The minute it passes through the warehouse door, Your Honor.

Once they are into… pass through the warehouse door–

Byron R. White:

You mean to be stored?

Alfred H. Hoddinott, Jr.:

–No.

While they are stored–

Byron R. White:

Well, is an importer who says, yes, these are going to be sold in the United States, and he puts them in a bonded warehouse, and holds them for two years, may Texas levy a tax while they are in the warehouse?

Alfred H. Hoddinott, Jr.:

–No, sir, that is directly opposed to the legislative purpose of the Warehousing Act.

Warren E. Burger:

Thank you, counsel.

The case is submitted.