UNITED AIR LINES v. MAHIN
Legal provision: Article 1, Section 8, Paragraph 3: Interstate Commerce Clause
Argument of Mark H. Berens
Chief Justice Warren E. Burger: We'll hear arguments in 71-862, United Air Lines against Mahin.
Mr. Berens, you can proceed whenever you are ready.
Mr. Mark H. Berens: Mr. Chief Justice and may it please the Court.
This is a Commerce Clause case.
The question presented is whether Illinois in conformance with that clause, may impose its Used Tax on all fuel loaded by United Air Lines, aboard its aircraft about to leave the Chicago airports on interstate and foreign flights.
As found by the trial court and confirmed by the Illinois Supreme Court, the facts can be stated very briefly.
All of the fuel is purchased by United from Shell Oil Company at Shell Oil’s terminal in Northern Indiana at which point, delivery occurs and title and risk of loss transfers from Shell to United.
From there, United arranges transportation by common carriers, principally a pipeline to O’Hare and Midway airports in Chicago.
The fuel is stored at those airports on the average from two to six-and-a-half days of which about two days is required to remove impurities secreted during the transportation.
The fuel is then loaded into United’s aircraft.
Justice Potter Stewart: Is it brought from Indiana to the Chicago airports by truck?
Mr. Mark H. Berens: Mainly by pipeline for Jet fuel.
There are trucking operations to Midway because the volume is much less there.
Now, the truck as well as pipeline is common carrier and the contracts are between those carriers and United.
The fuel is loaded into United's --
Justice William J. Brennan: How long did you say, it remained at the airport before it was loaded aboard --
Mr. Mark H. Berens: A minimum of two, a maximum of 12 days, the average is two to six-and-a-half.
Justice William J. Brennan: And this is to clean the impurities and substance?
Mr. Mark H. Berens: Approximately two days are required to settle the fuel and filter it.
The remainder of the time is really coordinating transfers of the fuel -- the scheduling of the transfer with the flight operations.
Justice William J. Brennan: Meaning that there maybe quantity is more than aircraft probably need?
Mr. Mark H. Berens: Yes.
There are several days on hand.
They pump a large amounts, the jet fuel is pumped three times a month to O’Hare, the other fuel to Midway is carried by a truck on almost a daily basis.
Justice William J. Brennan: And the quantity loaded on a particular aircraft differs, does it depending on how much --.
Mr. Mark H. Berens: A great amount.
There is variation depending on its destination and depending on how much fuel it came in with.
It can range from, and it's in poundage rather gallons in the air industry from a couple thousand to 60-70,000 lbs of fuel.
This fuel is loaded, almost always immediately just prior to the departure of the aircraft.
None other fuel involved in this litigation is used locally or in interstate flights.
Now, these arrangements have been followed by United continuously since 1953 two years prior to the enactment of the Illinois Use Tax Act.
And they are part of a nationwide contractual arrangement between Shell and United which covers delivery at 43 different points.
For example, United takes delivery at Shell’s Northern Indiana terminal not only for the Chicago airports but for other airports in the Midwestern states.
All of the fuel loaded is as I said earlier consumed on interstate and foreign flights and almost all of it outside Illinois.
The reason for this is that under the Federal Aviation Regulations, commercial carriers are required to carry large amounts of reserve fuel and the land with this reserve fuel at Chicago.
Now according to the record, 99.9% of the time and it's this fuel that is principally first consumed as the plane leaves the state and keep in mind where Chicago is in Illinois, up at the upper corner of the state so that the distance traversed on many flights, particularly East and North bound over Illinois is 60 or less miles.
Chief Justice Warren E. Burger: Well, within (Inaudible)
Mr. Mark H. Berens: Westbound, it's about, it varies from 130-216 miles Your Honor.
Chief Justice Warren E. Burger: Depending I suppose if they are going due West or Southwest.
Mr. Mark H. Berens: Well these are all due West on United’s pattern.
They have only one Southwest route that is only used in 3/10ths of 1% of the time.
Justice William H. Rehnquist: The situation might be different I think for Grande for someone is flying South out of Chicago to New Orleans.
Mr. Mark H. Berens: Although not in the record, that's our understanding and also airlines have served St. Louis and the Southwest covering a great deal of mileage (Inaudible)
Justice William J. Brennan: But surely the issue here, doesn't depend on whether a particular airline crosses few more miles of Illinois than United does?
Mr. Mark H. Berens: We submit that in part, it does, based on the very premise of the Use Tax Act and in particular the Illinois statute that I will attempt to develop.
Justice William J. Brennan: So, this would be a decision for United only?
Mr. Mark H. Berens: No, I believe it will apply, Your Honor to other airlines, but conceivably on a factual basis.
Chief Justice Warren E. Burger: Well, I take it, what you are saying is that if they use all the gasoline up or whatever fuel this is and make another stop in Illinois, you might have quite a different case?
Mr. Mark H. Berens: In that case, the Illinois has asserted tax and the airlines are paying the tax already when that occurs.
The United for one has a flight from Moline to Chicago where they pay the Use Tax on the amount loaded aboard these flights.
Chief Justice Warren E. Burger: It's only amount loaded not the amount consumed.
Mr. Mark H. Berens: It is identical in that particular situation.
Chief Justice Warren E. Burger: Well, I suppose normally they hope it's quite closed.
Mr. Mark H. Berens: And again, Mr. Chief Justice, it varies according to the destinations and the --.
Chief Justice Warren E. Burger: They don't want to carry excess fuel but they certainly want to carry enough.
Mr. Mark H. Berens: Well, under the FAA Regulations, they are required to carry what you might and I might think is a great deal of excess.
Tens of thousands of --
Chief Justice Warren E. Burger: This is just meet weather problems --
Mr. Mark H. Berens: This is to make any contingency that can be conceived of, even when there is weather problems for example.
And they may have to land in another alternate airport.
They schedule the fuel so that if they do land at the other airport, they have the same reserve, that they would have had if they landed on the originally scheduled airport.
Chief Justice Warren E. Burger: And I take it your argue that this is necessary incident to the Interstate Commerce Act?
Mr. Mark H. Berens: This is compelled by common sense, as well as, the FAA and the CAB.
Not only is the fuel consumed outside of Illinois except the minibus amounts but depending on the type of the aircraft, from 35%-60% of the fuel loaded in Chicago is actually consumed after the plane has landed in another state and is proceeding on the next leg of it's interstate journey.
The Illinois Use Tax is a privileged tax imposed on the use of tangible property in Illinois.
It is a general Revenue Tax and its proceeds are not allocated to airport construction or maintenance.
The act defines use in the usual broad way to include the exercise of any right of ownership over property.
But the Illinois act then limits this definition by several exceptions intended according to the explicit terms of the act to prevent and I am quoting, “actual or likely multi state taxation.”
One of these exceptions is the so-called temporary storage provision, which excludes from the concept of a taxable use, the storage in Illinois or property purchased outside the state brought in by the owner and then used outside the state.
The construction placed on this provision by the Illinois Supreme Court in the decision below raises the serious Commerce Clause issue that is appealed to this Court.
From 1955 when the act was first enacted until 1963, Illinois sought only to tax that portion of the Chicago laden fuel that was actually burned over Illinois by the departing flights.
This was known as the “burn off” rule.
And United did not contest the constitutionality of the tax during that period because it considered it not unfair.
In 1963, the Illinois Department of Revenue issued a bulletin which took the position that this stored fuel becomes taxable and I will quote the words of the bulletin, “When it is placed into the tank of an airplane, railroad engine or truck, at this point, the fuel is converted into its ultimate use and therefore a taxable use occurs in Illinois.”
The bulletin contrasted this with the situation where the fuel is hauled, as it called it by a separate facilities, by which it meant a tank truck or a railroad tanker or a pipeline, in which case, the storage, the withdrawal nor the transportation was taxable.
In a 4 to 3 decision below, the Illinois Supreme Court upheld the position taken by the bulletin and I want to point out that the majority below is composed of two judge opinions, a Per curiam of two judges and a two-judge concurring opinion.
There was a three-judge dissent.
The concurring opinion was specific regarding the taxable incident.
It's said and I am quoting again, “Illinois may constitutionally collect the tax imposed on all of the fuel loaded on United’s planes at the airports.”
The per curiam opinion was much more complex.
Chief Justice Warren E. Burger: Is there any evidence that the fuel is ever used for any other purpose than for these planes?
Mr. Mark H. Berens: Not on this fuel before in this litigation.
There is no diversion of it whatsoever.
Chief Justice Warren E. Burger: Well, then.
And I will ask your friend to indicate what is the distinction in terms of its dedication for ultimate use, why that doesn't occur as soon as it gets in the storage tanks at the airport and I think that's for him rather than you.
I can anticipate your answer to that --
Mr. Mark H. Berens: I will not answer that then.
The per curiam opinion was much more complex.
First of all, as a preliminary conclusion, it held that the “burn off’ rule was unconstitutional under the Commerce Clause citing Helson and Randolph v. Kentucky volume 279 of this Court’s reports and this place, the per curiam judges in the anonymous position that holding a tax on that part of the fuel loaded at Chicago, that was actually consumed in Illinois was a burden on the Commerce, but that if the state taxed all of the fuel loaded, even though it was burned outside the state, it was not a burn-off thereby, making a tax on part more of a burden than tax on all.
But returning to the construction of the temporary storage provision, the court discussed three events that applied to all the fuel, the storage, the withdrawal and the loading it aboard the aircraft and it spelled out a distinction.
It said that if the fuel were removed from the storage and taken by again, separate facilities, or as it is expressed it, in a vehicle which does not consume the fuel, to another state, neither the storage nor the withdrawal nor the loading onto that vehicle, nor the transportation from the state would be subject to tax.
It contrasted this with the situation where the fuel is stored the same way, withdrawn in the same way, but loaded on a vehicle which consumes it.
Justice William H. Rehnquist: They were construing the state law.
Mr. Mark H. Berens: They were construing the state law, which I am taking time, Your Honor to do because it's the foundation of our argument.
And in that situation which was identical in all respects to the other except onto what it was loaded, it found that a taxable use occurred.
Now it attempted to relate the taxable use back to the storage, but we submit that's a non sequitur because the storage in both instances is the same, so is the withdrawal.
What is decisive and is the taxable event, we submit, is the loading onto the vehicle which consumes it.
And thus the per curiam, the concurring opinions and the bulletin of the Illinois Department of Revenue, all arrived in different language at the same point that the taxable event is the loading of the fuel onto the aircraft.
Now this, we believe takes us squarely into the authority of Michigan-Wisconsin Pipe Line Co. v. Calvert, volume 357 and a number of other cases.
That case which was an unanimous decision held that Texas could not impose a severance tax on natural gas being transferred from our refinery pipeline in Texas to an interstate pipeline and the Court said in part that the tax that I am quoting “was only taking off in appellant’s carrier into Commerce,” and in continuing “in reality, the tax therefore is on the exit of the gas from the state.”
This economic process is inherently un-susceptible to the division into distinct local activity capable of forming a basis for the tax imposed on one hand and a separate movement in Commerce on the other, on the board from (Inaudible)
Chief Justice Warren E. Burger: What's the title of that case again?
Mr. Mark H. Berens: That is Michigan-Wisconsin Pipe Line Co. v. Calvert, volume 347.
Justice William H. Rehnquist: Mr. Berens, what if the Supreme Court of Illinois had said, instead of, as you say at least by implication of the taxable event was the loading, that the taxable event was the storage in an immobile storage container for whatever period of time, would your case be any different?
Mr. Mark H. Berens: We don't believe the Illinois Supreme Court could have said that in light of the statutory provisions they were construing which exempted the story.
But taking your question one step further, if that temporary storage provision did not exist in the Illinois statute, we would concede that the storage and the withdrawal could have been taxable under the Commerce Clause, under Edelman and Nashville v. Wallace.
It is a statutory situation that makes the constitutional issue what it is.
Justice Harry A. Blackmun: Now you have mentioned Edelman, you are going to distinguish that case somewhere?
Mr. Mark H. Berens: I hope to.
Justice Harry A. Blackmun: Alright.
Mr. Mark H. Berens: In Michigan-Wisconsin, the Court cited, Joseph v. Carter & Weekes which some years earlier had invalidated a New York City gross receipts tax on the income of a Stevedoring Company loading ships in New York Harbor and unloading.
And that case stated, the Carter & Weekes and I quote from page 427, “Transportation in Commerce at the least begins with loading and ends with unloading.
Loading and unloading has effect on transportation outside the taxing state because those activities are not only preliminary to, but are essential part of the transportation itself.”
To the same effect are numerous cases cited in our brief and we have found no authority in the regulatory area or the tax area there holds that loading is not an integral part of interstate transportation.
At least in its brief the state bases and justifies this tax primarily on Nashville v. Wallace, 288 U.S. and Edelman v. Boeing Air Transport.
In both of those cases, I should add, which respectively involved the taxation by Tennessee and Wyoming of fuel that was eventually used in an interstate rail system and an interstate air carrier.
In both of those cases, this Court accepted the construction of the lower courts that the state tax involved was on the storage or at the withdrawal from the storage.
And based on that, this Court concluded that the taxable event was prior to the commencement of the interstate movement, prior to the loading.
And I emphasize that in both of those states at the time of the litigation, there was nothing resembling a temporary storage provision as exists in Illinois, making the statutory situation fundamentally different in our opinion.
Justice Harry A. Blackmun: Yet the Edelman had an exemption for gasoline exported or sold for exportation from the state?
Mr. Mark H. Berens: It certainly did, Your Honor, and looking at the briefs and the record in the library here, there was no evidence that counsel for either side eluded to that to this Court.
Justice Harry A. Blackmun: Well, do I imply from that, that's meaningless in the Edelman statute then?
Mr. Mark H. Berens: I don't know if it's meaningless, Your Honor, but I do submit that it had not been pressed to this Court as a provision that was relevant in the statute.
Or if it had been, I think it's conceivable that the Court in Edelman may have distinguished the case a year earlier that is the Wallace case.
But the Court in this case specifically said that the statute here construed is identical to that construed in the Wallace case.
Justice Harry A. Blackmun: We don't relate it to the temporary storage exemption in your Illinois structure.
We don't relate the Edelman exemption.
Mr. Mark H. Berens: Unfortunately, we are confronted with that exemption in the Edelman situation.
It did not seem to be considered in -- by the Court in its consideration.
If it had, I would have thought Edelman would have come up the same way we are urging the Court to come out in this situation.
That because of the export provision, there couldn't be any tax, but also I may add in the Edelman, that seems to have been a mistake in applying the statute rather than a constitutional issue.
The state also relies on Southern Pacific Co. v. Gallagher which together with the other two cases I just mentioned, is specifically distinguished by Carter & Weekes at 330 U.S. 432 (Inaudible).
In both Michigan-Wisconsin and Carter & Weekes, this Court has stated that where the tax is an integral part of the transportation, it's not necessary to show multi-state taxation, but that the mere possibility is sufficient.
Here we have actual multi-state taxation.
The fuel purchased from Shell is subject to Indiana gross income tax measured by the sale price to United.
A few days later, Illinois would subject the same fuel to its Use Tax, based on the same sales price.
In addition, as pointed out in our reply brief, there is a potentiality of states down stream taxing the same fuel in situations where a flight lands, let us say in Dayton, Ohio and then proceeds to Columbus where there is a segment within the state.
This applies to roughly one out of five of United’s departures.
We don't want to rely entirely on authority, but we like to relate to the fundamental purpose of the Commerce Clause and I think this was well stated in the Carter & Weekes case at the very end.
Not only do these precedents outlaw taxes, but it has reason to support such outlawing in the likelihood that legislation will flourish more luxuriantly, where most revenue will come from foreign and interstate commerce, thus in Port cities and transportation or handling centers, without discrimination against out of state as compared with local business, larger proportions of necessary revenue could be obtained from the flow of commerce.
The avoidance of such a toll on the passage of Commerce through a locality was one of the reasons for the adoption of the Commerce Clause.
Now, we view this as a toll, not in a classical sense, but if you look at the Use Tax as the privilege of enjoined property, the enjoinment of consumable goods such as fuel is in its consumption, not on its storage, but only a very small fraction of this fuel is actually consumed in Illinois and that only in about less than 4% of the departing flights of United.
The rest is burned outside Illinois and much of it in other states.
If you strip this, it's formalism, Illinois then seeks to impose a toll on fuel purchased outside of the state temporarily stored here only in the words of the Illinois Supreme Court to facilitate United's interstate operations from Chicago.
Justice Harry A. Blackmun: Well now there let me interrupt, when you said only to facilitate United interstate operations, you are inserting in the word “interstate” from the quotation of the Illinois court, are you not?
Mr. Mark H. Berens: Yes, and I that was --
Justice Harry A. Blackmun: On what authority are you doing that?
Mr. Mark H. Berens: It was inadvertent.
Justice Harry A. Blackmun: You have done it more than once, I think in your brief.
I thought you built an argument on this inadvertent insertion, but it is inadvertent?
Mr. Mark H. Berens: The quote of the court was, on its operations from the Chicago airports, the word interstate was not in there.
I think in the brief we have frequently said, built on its interstate operations but I don't believe we have quoted it if that was the import of your comment, Your Honor.
Justice Harry A. Blackmun: You also store this fuel in relation to your intrastate flights, do you not?
Mr. Mark H. Berens: I am sorry.
I didn't hear your question.
Justice Harry A. Blackmun: I said you also store this fuel and pay tax in relation to your intrastate flights?
Mr. Mark H. Berens: Yes, we always have.
That is not part of this assessment or part of this case.
Justice Harry A. Blackmun: I realize that, but your insertion of the word interstate in the quotation, I think, is confusing in view of that fact.
I can leave it to counsel to comment on that and see what they have to say by way of elimination.
Justice William H. Rehnquist: Do you say you want to get away from formalism in insight, a very authoritative precedence to that effect and yet if you concede that Illinois could have reached the same result had it just picked the right incident to tax, i.e. the storage itself, your own position has a certain formalism to it, doesn't it?
Mr. Mark H. Berens: Well, I think the formalism supported by considerable line of authority in this Court such as the Spector case, the Dilworth versus McCloud and many others which set the means by which the state and Freeman v. Hewitt imposes its taxes decisive.
Justice William H. Rehnquist: You really cannot reconcile all of the cases from this Court on the subject, can you?
Mr. Mark H. Berens: I don't think we can reconcile all of them.
We can certainly reconcile most.
Justice William J. Brennan: Let us see, I think, what have we got in this, 80 or more decisions?
Mr. Mark H. Berens: I understood it was 300 but –
Justice William J. Brennan: Alright, then 300, you reconcile even 80, I think you have done quite a job.
Mr. Mark H. Berens: Well, unfortunately, I do not think I have to reconcile that many.
Justice William J. Brennan: Well getting back to Mr. Justice Blackmun’s question to you.
I notice you have bracketed it at least page 31 where you quote, on Supreme Court, you have bracketed the word interstate.
But isn't there something like the Evans will approach to the Supreme Court as Illinois taken, drafting out your interstate, speaking about these operations to facilitate?
Mr. Mark H. Berens: We would distinguish Evansville on the basis that --
Justice William J. Brennan: No, no, my question was, do you not think that the approach of the Illinois Supreme Court was taking?
Mr. Mark H. Berens: I do not think so.
Justice William J. Brennan: Well, I gather the storage, I take it whether it is used an intra or interstate flights, it is all stored in the same tanks, isn't it?
Mr. Mark H. Berens: Yes.
Justice William J. Brennan: And you say for 12 days and I expect in that period there is considerable quantity withdrawn and loaded to board intrastate.
Mr. Mark H. Berens: Well, I have to make one clarification Mr. Justice Brennan.
None of the flights departing Chicago are intrastate flights of United.
While they do stop at Moline, they are continuing flights to points outside the state.
That is in the states --
Justice William J. Brennan: Well, that might be so, but nevertheless, I think you have already agreed, have you not, that what is burned between Chicago and Moline is taxable?
Mr. Mark H. Berens: We pay the tax on it, but we have done it as a volunteer for many years.
We do not think those are interstate flights.
Justice William J. Brennan: But you do not think the Illinois Supreme Court was -- of course Evansville was decided after this case was decided.
Mr. Mark H. Berens: With the lower court cases in Evansville was also after that.
We distinguish Evansville very briefly on the fact that the landing fees and other fees that United pays and the other airlines pay at the Chicago airports are fully compensatory not only for the maintenance of the airports and operations, but also it repays the financial --
Justice William J. Brennan: Well, that was true in Evansville too.
They also paid the landing fees.
Mr. Mark H. Berens: But the airport is operating apparently at a deficit as I read the opinion and this --
Justice William J. Brennan: That is why we had the companion New Hampshire case, I have forgotten the name of it where they had all kinds of additional fees besides the departure and airport tax?
Mr. Mark H. Berens: As I read those cases or at least your opinion of those cases not the lower courts, they still were not fully compensatory, that additional funds were needed and this contributed to them, and in fact as I recall your opinion, you pointed out that as long as the amounts for the head taxes do not exceed by gross margin, the deficit that would be treated as a service that the state was providing was being paid by these head taxes.
I would like to also mention very briefly the cases -- and line of cases cited by the Amicus Brief, so called stream of Commerce cases which points out that the fuel here is committed from the time not just when it is stored in Illinois but at at the time it is brought up as jet fuel to Northern Indiana to interstate Commerce and that it is brought from Indiana through Illinois, stored there temporarily only for the exigencies of United interstate operation, and then it is taken from the -- most of it is taken -- almost all of it has taken from the state and consumed elsewhere.
Justice Harry A. Blackmun: They are waiting on the result here.
American has (inaudible)
Mr. Mark H. Berens: If the stream of Commerce cases preclude the property taxes on goods moving in Commerce which are assessed only once a year, it seems even more essential that they can be construed liberally as this Court has indicated on several occasions including Richfield Oil to preclude a tax on the flow everyday of the year which would be the situation here.
One possible approach of course is “Burn off” and while we believe the situation is controlled by Michigan Wisconsin and if the loading is exempted it cannot be taxed.
Examples in recent years such as Northwestern Portland Cement and General Motors versus Washington have approved a portion taxes on net and gross income from interstate transactions.
Chief Justice Warren E. Burger: But are you suggesting that we construe the statute that way or save it by saying it can exceed the “Burn off” rate?
Mr. Mark H. Berens: I do not think Mr. Chief Justice, you have to construe the statute that way.
As a constitutional matter, you can say that this is permissible, and we have the situation where the lower court seem to construe the statute the way it did or at least two of the four judge majority did because they thought “Burn off’ was constitutionally impermissible, and so they had to go for the decision which yielded the full text or none at all.
Chief Justice Warren E. Burger: Mr. O’Rourke.
Argument of Robert J. O'rourke
Mr. Robert J. O'rourke: Mr. Chief Justice, may it please the Court.
The question presented before this court is whether United Airlines exercise such a right or power over tangible property, in this case, it is aviation fuel.
Incident of the ownership of that property in Illinois, so as to subject United to the provisions of the Illinois Use Tax.
Whether or not the imposition of this tax is violative of the Commerce Clause set forth in Article I, Section 8, Clause 3 of the Constitution, and the Due Process Clause of the Fourteenth Amendment.
The Illinois Use Tax which went into effect in August of 1955, imposes a tax on the privilege of using in the state of Illinois tangible personal property that was purchased elsewhere and was designed to compliment the retailer's occupational tax under which a tax is imposed upon person’s engaged in the business of selling tangible personal property to purchasers for use and consumption.
Now both of these statues, the Illinois Use Tax and the Illinois Retailer's Occupation Tax have both been found to be constitutional.
The Use Tax Act of Illinois was enacted for the valid purposes of preventing evasion of the Retailer's Occupational Tax by persons making out of state purchases of tangible personal property for use in the Illinois, and also the additional purpose of protecting Illinois merchants against diversion of businesses.
Shell Oil Company in this case refines its Turbine fuel and its refineries in Wood River, Illinois, then transfers it via pipelines 250 miles to storage facilities in Hammond and East Chicago, Indiana for storage.
Both Hammond and East Chicago, Indiana are South suburbs of the City of Chicago and no further processing occurs at Shell’s facilities, merely the filtering necessitated by the pipeline transfer.
United Air Lines purchase this aviation from Fuel.
United sends its orders into Shell's office in East Chicago, Indiana, takes delivery in Indiana, and transfers the aviation fuel via a common carrier pipeline, to the storage tanks in Des Plaines, Illinois which is a Northwest suburb of the City of Chicago just adjacent to O’Hare airport.
The storage tanks in Des Plaines are owned by Shell Oil Company, but are leased to United and to American, where gas owned by both companies is commingled.
The aviation fuel is allowed to settle in storage tanks in Des Plaines, Illinois before it is transferred again by pipeline owned by Shell but leased to United, United’s O’Hare airport underground facilities.
These underground tank service the jet aircraft, before they embark from O’Hare.
The delivery of the gasoline to Chicago’s Midway airport is via common carrier tanks, trucks from Shell’s Indiana facilities to the Midway airport.
Now, all aviation fuel that is ultimately pumped into United's aircraft at either O’Hare or at Midway and that is subject to the present litigation is either refined and/or stored by Shell at Wood River, Illinois facilities prior to its transfer to Hammond and East Chicago.
Now Shell claims that it pays an income tax based on one half of one percent of its gross sales in Indiana, but Shell pays no sales tax or retail occupation tax to the state of Indiana, or to the state of Illinois.
United does not pay any sales tax or use tax in any state other than the Illinois on the purchase of the fuel involved in this controversy.
From August, 1955 until June 3rd, 1963, United paid to the state of Illinois without protest a use tax on this fuel purchase, delivery and storage on that portion of the fuel deemed to have been used or consumed within the borders of Illinois on flights departing from Midway and O’Hare to points outside of Illinois.
The advantage of this “Burn off” theory is that in many instances it would make United subject only to a use tax on the 10-15 mile trip from O’Hare to Lake Michigan.
Then as now, Illinois's use tax was imposed upon the privilege of using in Illinois, tangible personal property which is purchased at retail.
Now use as is defined in the Illinois statute, is defined “exercise by any person of any right or power over tangible personal property incident to the ownership of that property.”
Now, Section 3 of the Illinois Use Tax from its inception in 1955 has provided for exemptions from the payment of that tax and we recite these in our brief.
There are quite a number, but I would like to call the court’s attention just to two provisions.
Section 3 (c) states the Illinois Use Tax has provided the exemption from the tax “To prevent actual or likely multi-state taxation.”
The tax here imposed shall not apply for the use of tangible personal property in this state under the following circumstances.
Circumstances (C) is the use in the state of tangible personal property which is acquired outside of the state and cause to be brought into the state by a person who has already paid a tax in another state in respect to the sale, purchase or use of such property to the extent of the amount of such tax so paid in the other state.
Now the exemption D which counsel alluded to the temporary storage one.
Temporary storage in the state of tangible personal property which is acquired outside of the state in which subsequent to being brought into the state and stored here temporarily is used solely outside the state or physically attached to or incorporated with a tangible personal property that is used solely outside of the state.
Now, on June 3rd, 1963, the Department of Revenue of the State of Illinois issued a bulletin which provided the impertinent part.
I quote again, “Temporary storage ends and a taxable use occurs when the fuel is taken out of storage and placed into tanks of airplanes, railroad engines or trucks.
At this point, the fuel is converted into its ultimate use and therefore a taxable use occurs in the Illinois.
If a common carrier does not have separate facilities for the transferring of the fuel out of the state of Illinois, but always puts it into the tank of the airplane, railroad engine or truck for final consumption, then they no longer will be able to give a certificate to the vendor stating that the fuel is purchased within the temporary storage provisions of the Use Tax Act, but must pay the use tax to their supplier.”
Justice Thurgood Marshall: Mr. O’Rourke, suppose the United plane has two tanks.
Mr. Robert J. O'rourke: Yes sir.
Justice Thurgood Marshall: One is the fuel that is leftover, when they land and other the fuel they pick up and when they land, they turn on the tank of the fuel that is leftover, and they turn on the other tank when they cross Lake Michigan. What happens?
Mr. Robert J. O'rourke: Mr. Justice Marshall, I would like to make it clear that none of the gas that is brought into the State of Illinois in this respect is ever taxed.
The placing, however, of the fuel into the instrumentality of consumption, the airplane, then would cause the tax on the fuel placed into the tank.
The very fact that it would be connected through the lines and would be capable of being consumed within that vehicle would subject it to the tax.
Justice Thurgood Marshall: Well, suppose they put on second tank a sign which says, “Storage Tank”?
Mr. Robert J. O'rourke: Well, I do not think that the court or anyone else in the state particularly would be subjected to the provisions --
Justice Thurgood Marshall: It wouldn't be taxed if it were put on the plane in the cargo department or something --?
Mr. Robert J. O'rourke: No sir, it would not.
If it were loaded onto a storage tank for the purpose of taking it out of the state to be sold it out of the state and that qualifies it as a storage tank, as a tank truck or a tank car on the railroad or tank car in the airplane and not in the --.
Justice Thurgood Marshall: I was just thinking in the good old days when we first put liquor on the plane, they used to have things on there that locked it up until after they got --
Mr. Robert J. O'rourke: Take off, yes sir.
Justice Thurgood Marshall: Right?
Mr. Robert J. O'rourke: I recall it.
Justice Thurgood Marshall: Well, suppose, they put like that on this tank, then what would you do?
Mr. Robert J. O'rourke: If it was still connected to the instrumentality for consumption, it would be an evasion of the retailer’s occupational tax of the State of Illinois, would not qualify for the exemption.
Justice Potter Stewart: And that means Mr. O’Rourke as I understand it, your answers to Mr. Justice Marshall mean that you are not -- your argument is not depends at all on the premise that any of this fuel is actually burned within the boundaries of Illinois?
Mr. Robert J. O'rourke: No sir, we do not. In fact that they exercise dominants or ownership over that particular fuel in the state of Illinois subjection to that tax.
Justice Potter Stewart: That is when they put it into the tax.
Mr. Robert J. O'rourke: That is one of the events that we claim, shows ownership of that particular fuel.
From the date of June 3rd, 1963, the date of the bulletin, all fuel are loaded aboard United's planes at the two airports was deemed to measure the tax and the exemption contained in the temporary storage provision in question was construed as having application only if the temporary storage fuel is transferred out of the state for use elsewhere by means other than placing it in the equipment which would consume it.
The first in priority that we should make it becomes whether upon the facts stated, there is an event upon which Illinois may impose the use tax without violating the Commerce Clause, and we submit that the first of these events, is the storage and withdrawal from storage at Des Plaines, Illinois tank.
We quote in our briefs and also counsel for the opposition, the Nashville, Chattanooga Tennessee Railroad case versus Wallace which is cited in 288 U.S. 249.
In this case, Tennessee levied a privilege tax upon the storage of gasoline within the state and its withdrawal from storage for use or sale.
The tax payer was an interstate rail carrier purchasing large quantities of gasoline outside of Tennessee, and transporting it into the state in tank cars from which it unloaded it and placed this gasoline in storage tanks.
All of the fuel that was withdrawn and used by it as a source of motor power in interstate railway operations was taxed.
The taxpayer challenged the imposition of the tax on the basis that was imposed on the gasoline which was still a subject of interstate commerce and also on the basis that in effect that the tax was upon the use of gasoline in appellant’s interstate business.
In this particular case, the Court held that the power to tax property, the sum of all the rights and powers, incident ownership means that the state can tax the successive exercise of two of the powers incident to ownership, storage and withdrawal of the storage, both completed before interstate commerce began.
Now in the case of Edelman versus Boeing Air Transport which was discussed, Wyoming imposed a license tax upon the use of gasoline within the state.
The taxpayer maintain an air service for transportation of passengers, mail, and express in interstate commerce.
It purchased gasoline from both within and without the state which it intermingled and stored in tanks at two airports.
The taxpayer contended that the state could not validly apply the use tax to gasoline imported from outside the state, stored in tanks at the airport and use for filling the interstate planes in which it was eventually consumed.
The tax was applied to stored gasoline as it was withdrawn from storage tanks at the airport and placed in planes.
In this particular case, the Edelman case, the Court upheld the tax upon the theory that a state may validly tax the use to which gasoline is put and then withdrawing it from storage within the state and placing it in tanks or planes notwithstanding that the ultimate function was to generate motive power for carrying on interstate commerce.
Now, United stores and withdraws at least twice.
Once at Des Plaines, Illinois where it allows the fuel to become commingled with that of other airlines, and then at O’Hare where United again withdraws the fuel from storage preparatory to loading it aboard its aircraft and thus committed taxable events or uses not violative of the Commerce Clause.
Justice Potter Stewart: I, you tell me if I am wrong that the taxable incident in the Edelman case was the storage of the gasoline, is that right?
Mr. Robert J. O'rourke: A withdrawal from storage.
Mr. Justice Blackmun had pointed out, they also had a temporary storage provision there.
It was the withdrawal from storage that was the incident of ownership.
Justice Harry A. Blackmun: Is it your position that Edelman controls this case, your case?
Mr. Robert J. O'rourke: I would say so, both Edelman and the Nashville, Chattanooga & St. Louis Railroad.
It appears equally certain that United's acts constitute events within the meaning of the Illinois Use Tax as well. If we recall the language of the acts, and I quote “Use means the exercise by any person of any right or power over tangible personal property, incident of the ownership of that property.
Now any right or power includes United’s loading, the fuel aboard its planes and the storing and withdrawal from the storage of the fuel.
When the fuel is loaded on the aircraft, it is irrevocably committed to its ultimate use.
Now, both in the Nashville case and the Edelman case, the courts have held that storage and withdrawal from storage of gasoline was complete before interstate commerce began.
It was further held that the burden of tax was too indirect and remote from the function of the interstate commerce to transgress constitutional limitations.”
Now both the per curiam and the dissenting opinions of the Illinois Supreme Court agree that the events of storing fuel in Illinois or the taking of fuel from storage in Illinois are constitutionally taxable under the Illinois Use Tax because these events are complete before interstate commerce begins.
Indeed, the United this morning or this afternoon conceded that if temporary storage provisions of the Illinois Use Tax did not apply to the incidents in question, then it is subject to the Illinois Use Tax.
United however, asserts that all fuel placed in tanks of its planes continues to be exempt under the Temporary Storage Provision of the Illinois Use Tax Act, and that the exemption is lost and the fuel is subject to the tax only to the extent of the fuel released from the tanks consumption over Illinois.
Now the statute in question refers to “Temporary storage in this state” of tangible personal property and to such property “Stored here temporarily.”
The meaning of the term stored or storage has been defined as a deposit in a store or a warehouse for safekeeping.
Here, the fuel is not placed in the tanks of the airplane for safekeeping, but for consumption and it cannot be said, the fuel will be solely used outside of the State of the Illinois.
To accept the United’s argument that the placing of fuel in departing planes is going to continuation of temporary storage and that the burning of fuel in and over Illinois is the termination of the temporary storage and the fuels released as the plane operates is a local event or used this properly taxable would completely run us afoul of Helson versus Kentucky, and if United's theory is correct, then each state could pay the “Burn off’ as the plane or charged the 'Burn off” rather as the plane crossed over state borders and this would then be chargeable burden to interstate state commerce.
Chief Justice Warren E. Burger: Whether it is stocked or not, are you suggesting it could charge a “Burn off” tax for just to fly over --
Mr. Robert J. O'rourke: That is how far the theory I believe could be carried Mr. Chief Justice.
Chief Justice Warren E. Burger: Any case gone that far, do you know?
Mr. Robert J. O'rourke: No, it has not.
As a matter of fact Helson versus Kentucky which I just cited and we have cited in our case was a case where a ferry boat was operated between the State of Illinois and the State of Kentucky, went up the Ohio River, the gas was brought aboard the ferry boat in Illinois and as it traversed up the Ohio River, 75% of the fuel was burned off in the Kentucky border side of the Ohio River.
Kentucky attempted to tax the consumption of that gas and the Court found that the gasoline in this instance was an instrumentality of interstate commerce and the tax was actually a price on the privilege of using interstate commerce and therefore according to the Helson, the “Burn off” theory as you cross the border could not be carried forth.
It's our contention further that the "Burn off" theory would equally be imposition on interstate commerce.
Chief Justice Warren E. Burger: But you say that putting an inland tank committing any-- it does commit it to the use in that airplane, but that is not a commitment to carry interstate commerce?
Mr. Robert J. O'rourke: That's before interstate commerce has begun.
We also say that the taxing event could occur when they commingle their fuel both at Des Plaines and storage of tanks and also at O’Hare airport where they place it in storage.
Chief Justice Warren E. Burger: Well, tell me again --
Mr. Robert J. O'rourke: These are exercises of ownership according to the use, a definition of the statute.
Chief Justice Warren E. Burger: You said that this was -- that some event was before interstate commerce had begun in the loading event?
Mr. Robert J. O'rourke: Yes sir.
Chief Justice Warren E. Burger: But the aircraft is -- according to interstate commerce then is --
Mr. Robert J. O'rourke: But, according to the Edston case, the loading of the airplane or the withdrawal of it from the tanks and the loading of the airplane was done before interstate commerce began.
Justice Thurgood Marshall: Mr. O’Rourke, why don't you tax the storage tank?
Mr. Robert J. O'rourke: We could do that very well, Mr. Justice Marshall, but we do not do that because of the temporary storage provisions, of the possibility that this gas maybe taken out of the state and into another state and therefore, impose a multi tax burden upon the user of gas.
Once it has been committed to its final use or the exercise of ownership, then we maintain that --
Justice Thurgood Marshall: There is no question if this gas is always used in United plane?
Mr. Robert J. O'rourke: No, it could possibly be taken in the – I know of no evidence that was presented but the argument was used both in the lower court, the trial court and the Supreme Court that the gas could be taken out of the storage tanks in O’Hare and transported to Wisconsin for example, therefore, there would not be a tax imposed upon it.
Justice Thurgood Marshall: So it's just --
Mr. Robert J. O'rourke: We want to consider that a temporary storage.
Justice Thurgood Marshall: It's just upon as caution, you knew you could do it, but you want to be sure?
Mr. Robert J. O'rourke: Yes sir.
Justice Thurgood Marshall: I take it your reference to the impropriety of the "Burn off" theory concedes the unconstitutionality of a tax collected in earlier years under the old system?
Mr. Robert J. O'rourke: Yes sir.
Again we wish to emphasize that the Illinois Supreme Court so held in Turner versus Wright which is an Illinois case, 11 Illinois, 2nd, 161 that the Illinois Use Tax is a tax imposed on the privilege of use, not on the extent of the use of that privilege.
The definition of use extends beyond the actual consumption of tangible personal property and once you get into the question of consumption in the Use Tax, it is then that you arrive at the ridiculous situations in the undue burdens.
We feel that many parts of the transaction between Shell and United are of sufficient local major that we would invite the imposition of a retail occupation tax on the transaction.
Justice William H. Rehnquist: Mr. O’Rourke, your opposing counsel cites Justice Rutledge's opinion in Nippert case in their brief where as I understand it he said that it isn't enough to just say I am thinking of the state as they picking out a local incident that occurs or it still could be a burden under interstate commerce.
You have got to go further than just say an event however small in the statute took place?
Mr. Robert J. O'rourke: Well, our statute does point out that any exercise of ownership would permit us to impose the tax upon that property, provided it does not qualify for an exemption, provided that there has not been tax paid on the property to avoid the multiple tax situation.
Justice William H. Rehnquist: You think that would be constitutional however applied?
Mr. Robert J. O'rourke: I believe that there could be situations where it could be unconstitutional.
Now We recognize the right of Shell and United to enter in any contractual arrangement that they may want to.
But such contractual arrangements cannot serve to defeat the right of the state to tax parties or events taking place within the state.
Otherwise, an unfair advantage would inure to those having out of state storage tanks in that it would relieve the parties of the obligation of the retail occupation tax and the Use Taxes by the terms of their contract.
This would be discriminatory to those who do business in the Illinois and would destroy the accepted purpose of the Use Tax Act which was designed in part to negate an unfair advantage over local business who are obligated to pay the retail occupation tax on fuel.
And we have examples of this occurring at O’Hare airport where other airlines come in to the airport and they buy or purchase the gasoline directly at the airport and they are charged or responsible for paying a retail occupation tax.
Now the Illinois Use Tax was designed to compliment the Retail Occupation Tax Act and in the decision of Turner versus Wright, it was held not to be discriminatory in that the Use Tax is imposed at the same rate as the tax under the Retail Occupation Tax Act.
It does not apply to out-of-state transactions that would not measure a tax under the Retail Occupation Tax if that had occurred in Illinois.
Nor is it applicable to the use of property purchased outside of Illinois on which a sale or Use Tax has been paid in another state to the the extent of the tax so paid.
Justice William H. Rehnquist: If Shell’s facilities were in Chicago Heights instead of Ham, you wouldn't have this problem because you simply directly tax the sale?
Mr. Robert J. O'rourke: We would directly tax under the Retail Occupation Tax Act.
Justice Potter Stewart: The Retail Occupation Tax as you call it is what is generally known as the Sales Tax, is it not?
Mr. Robert J. O'rourke: In other states.
We don't like to refer it to as a Sales Tax.
Justice Potter Stewart: For a various reasons.
Mr. Robert J. O'rourke: I would say yes.
Justice Potter Stewart: But it is, what's in other states known as the Sales Tax.
It is 4% of the --
Mr. Robert J. O'rourke: 4% and if it occurs in Municipality and for example other airlines coming into Chicago actually pay a 5% tax because they are responsible for the Municipal Retailer’s Occupational Tax as well.
Justice Potter Stewart: It's along second one --
Mr. Robert J. O'rourke: Mr. Berens, yes sir, Mr. Berens pointed out that the Use Tax act came into effect in 1955.
Two years after, this type of operation had started with Shell Oil.
I would like to respectfully point out though that the Retail Occupation Tax Act was passed in the State of Illinois in 1933, many, many more years prior to the contractual arrangements between Shell.
We maintain if the Court please that in position of the Illinois Use Tax on United’s exercise of its right or power over tangible personal property and this is the fuel, incident to its ownership of that property in Illinois, does not discriminate it against interstate commerce since it neither imposes the tax solely on interstate commerce nor imposes a higher rate of tax upon interstate commerce nor subjects interstate commerce to the multiple tax burden.
And it is upon this argument, the arguments which we have submitted in our brief that we respectfully urge this Court to affirm the judgment of the Illinois Supreme Court.
Chief Justice Warren E. Burger: Thank you Mr. O’Rourke.
I think you used all your time, Mr. Berens.
The case is submitted.