BACCHUS IMPORTS LTD. v. DIAS
The Hawaii Liquor Tax, enacted in 1939, imposed a twenty percent excise tax on wholesale liquor sales. Certain locally produced alcohol products, such as okolehao brandy and fruit wine, were exempt from the tax. Bacchus Imports, a liquor wholesaler, challenged the law's validity and sought a refund of $45 million from the state of Hawaii.
Did Hawaii law violate the Import-Export Clause and the Commerce Clause of the Constitution?
Legal provision: Article 1, Section 8, Paragraph 3: Interstate Commerce Clause
The Court found that the Hawaii Liquor Tax violated the Constitution. Justice White reaffirmed what he called a "cardinal rule of Commerce Clause jurisprudence" in arguing that states are prohibited from imposing taxes which discriminate in the traffic of interstate commerce. Since the law was originally enacted to support local industries in Hawaii, and the alcoholic products which the law exempted competed with different beverages produced outside the state, Justice White concluded that there were clear constitutional violations in this case.
ORAL ARGUMENT OF FRANK H. EASTERBROOK, ESQ., ON BEHALF OF THE APPELLANTS
Chief Justice Warren E. Burger: We'll hear arguments next in Bacchus Imports.
Mr. Easterbrook, I think you may proceed whenever you're ready now.
Frank H. Easterbrook: Mr. Chief Justice, and may it please the Court:
The statute at issue in this case requires wholesalers of liquor to pay a tax of 20 percent on their wholesale price.
The statute defines liquor to include all alcoholic beverages, but it exempts, at least from 1971 to 1981, fruit wine, okolehao, made in Hawaii.
Thus, all products from out of state are taxed at a 20 percent rate, while most liquor made in Hawaii was not taxed.
The difference can be many dollars per bottle.
The challenge we press here is based on the Commerce Clause, the Import-Export Clause, and the Equal Protection Clause, because the principles underlying those clauses are very similar as applied to differential taxation of interstate transactions.
I will focus on the Commerce Claus at oral argument.
Unidentified Justice: Mr. Easterbrook, would your client have had any complaint if the exceptions for the Hawaiian drink and the pineapple wine were not included in the statute?
Frank H. Easterbrook: You mean if they were administrative exceptions, Your Honor?
Unidentified Justice: No.
Simply if... if the statute had just been across the board.
Frank H. Easterbrook: An argument was raised in the state court that a tax of 20 percent levied on a base which includes all transportation charges and earlier taxes operates in practice as a discrimination under the principles of Pike against Bruce Church, but that argument is not being pursued in this Court.
The argument on the Commerce Clause that we make here is rather straightforward.
Since 1875 this Court has held that a state may not levy different taxes on products produced in state and products brought in from out of state.
Such a differential taxation creates the very multiplicity of preferential trade zones that the Commerce Clause was designed to eliminate.
In response to that fairly simple argument, the State Supreme Court gave three answers.
One is that this tax is not designed to discriminate against out-of-state products, but instead to help local Hawaiian industry, and that therefore it has a legitimate purpose.
The second argument is that it's permissible to discriminate against out-of-state products so long as you permit all wholesalers to sell both the taxed product and the untaxed product.
And third, the Supreme Court of Hawaii argued that the tax is fairly apportioned.
Unidentified Justice: Mr. Easterbrook, Paradise and McKesson did not appeal or did not come here, as they, except as Respondents?
Frank H. Easterbrook: They did not appeal.
They are Appellees appearing in support of Appellant.
Unidentified Justice: Is there a reason for not joining you and your client?
Frank H. Easterbrook: I can't speak for them, Your Honor, but McKesson has sent a letter to the Clerk saying that they relied on the Supreme Court's rule that one appeal is enough from a single judgment.
There was only one judgment entered by the Supreme Court of Hawaii.
And their view was that one appeal having been filed, they did not need to file additional notices of appeal to bring their case here.
Unidentified Justice: Get a free ride, hmm?
Frank H. Easterbrook: Yes.
Unidentified Justice: Saves money.
It saves money.
Frank H. Easterbrook: Yes.
Unidentified Justice: Unless your fee award is allocated.
Frank H. Easterbrook: I'm going to try hard not to talk about fee awards here.
Unidentified Justice: But they have filed a brief and hired attorneys.
Frank H. Easterbrook: They have.
McKesson has filed a brief, but I assume that McKesson is willing to bear its own attorney fees as are the other Appellants in this case.
Unidentified Justice: The only thing they've saved are the filing fees.
Frank H. Easterbrook: Hmmm-hmm.
Unidentified Justice: Mr. Easterbrook, before you get into the three points of the Hawaiian Supreme Court's reasoning, those footnotes that point out that the two products that are exempted are apparently not widely produced throughout the world, o what extent do you contend that all alcoholic beverages are fungible?
Frank H. Easterbrook: We... we say two things about that, Your Honor.
The first is that the Hawaiian statute itself defines the pertinent category as all alcoholic beverages; and in fact, a Hawaii statute... it's Hawaii revised statute 281-1... defines okolehao to be an alcoholic beverage.
And the second part of our argument is that alcoholic beverages are reasonably substitutable in use; that someone who drinks okolehao is doing that in preference to tequila or benedictine, someone who drinks the wine that was made in Hawaii is doing that in preference to someone else's wine, and that that form of substitution is all that's necessary.
And indeed, that's why they passed this statute.
The legislative history suggests that one reason for exempting okolehao was to enable the producers to advertise nationwide and to boost it, as the legislative history said, to a position of tequila.
Unidentified Justice: Would your argument be the same if... on behalf of a wholesaler who stocked some of the exempted products?
Frank H. Easterbrook: Yes, it would, Your Honor.
Unidentified Justice: You'd say even if you carried these products, that you'd still have the same--
Frank H. Easterbrook: Yes.
That the prohibited discrimination is between products and that as a matter of Commerce Clause jurisprudence, the highest tax that can be levied on the product that comes in from out of state is the tax that's levied on the product from in state, and that taxation here is on the product directly.
Two of the three arguments I would like to dismiss very quickly, largely because the state has abandoned them.
One argument, which is that it is permissible to tax the products at different rates as long as you allow the wholesaler to sell the untaxed product, is inconsistent with the entire line of this Court's cases, and the State of Hawaii has properly abandoned it in Note 23 of its brief in this Court.
The other argument, that so long as the tax is fairly apportioned to transactions in Hawaii, the discrimination is all right, is not even mentioned in this Court by the State of Hawaii.
None of the apportionment cases has to do with express discrimination.
Well, that leaves the argument that it's permissible to discriminate because it's beneficial to Hawaiian industry to do so; and that argument must fail, we submit, because it's nothing other than a frontal assault on the Commerce Clause.
This Court has implemented the Commerce Clause through a rule that no state may enact expressly protectionist laws.
No state may, at its own say-so, exalt its products at the expense of those from outside.
Now, we don't doubt that protectionism is often in fact in the interest of local industry, as the Supreme Court of Hawaii said it was.
We're not accusing the State of Hawaii of acting against its own interest in passing this statute.
But the Supreme Court of Hawaii seemed to say that because this statute is in the interest of Hawaii that it's not an irrational law; therefore, it's a constitutional law.
But quite the contrary.
It's precisely because protectionism is so often in the interest of local prosperity at the expense of those elsewhere that the Commerce Clause prohibits those kinds of discriminations.
That's why the national government must step in; a beggar thy neighbor policy is not a constitutional policy.
Discrimination may be practiced only if Congress, on behalf of Hawaii's many affected neighbors, permits it.
Now, that antidiscrimination principle is almost universally applicable, and it's been applied by this Court even when the state has advanced a legitimate reason in support of its discrimination.
In Philadelphia against New Jersey, for example, where the State of New Jersey attempted to prohibit the import of garbage from out of state, the State of New Jersey adopted and advanced in this Court a rational justification: that is, protection of the quality of its environment.
And the Court said that even a rational, well-supported justification cannot excuse blatant discrimination against interstate commerce.
Unidentified Justice: --Let me interrupt you.
What relief are you seeking here?
Frank H. Easterbrook: --We are seeking a refund of taxes paid and a declaratory order against such discrimination.
Unidentified Justice: If you get the refund, what happens to it?
This tax has been passed on, hasn't it?
Frank H. Easterbrook: The... it is passed on, Your Honor, in the sense that every person in business who wants to stay in business must recover all of his costs.
To what extent the tax is actually borne, the economic incidence of the tax is borne by retailers, consumers or producers... the other possible people... we simply don't know.
The state... you may be referring, Your Honor, to an argument that the state has made in this Court, that the tax was passed on.
That argument was not made in the Supreme Court of Hawaii, and we take it as foreclosed here by not having been made there.
Unidentified Justice: Would you be content with just the declaratory judgment in prospective relief?
Frank H. Easterbrook: No, Your Honor, we would not, because the declaratory judgment in prospective relief only allows the state to keep the proceeds of the discrimination.
Unidentified Justice: Well, then it's their... it's their windfall rather than yours, to use the expressions thrown around in the preceding case.
Frank H. Easterbrook: --I... I hate to talk about this as windfalls, just as my friend in the preceding case hated to talk about windfalls.
But, you know, if it is permitted to collect and keep the discriminatory tax, then every state's incentive is to levy a discriminatory tax and see how long they can get away with it until someone finally gets a declaratory order to stop it.
The Tax Injunction Act requires as a condition of litigation that taxes be paid in to the claiming state, and that means effectively that a rule that the Appellants here could not get refunds would be a rule inviting states to pass and maintain discriminatory taxes.
Unidentified Justice: Mr. Easterbrook, if your complaint here were an equal protection claim rather than a Commerce Clause claim and the Court were to agree with your equal protection analysis, that your client was denied equal protection of the law because of these exemptions in the law, typically a mandate from this Court and an opinion of this Court upholding your contention would say, in effect, to the Supreme Court of Hawaii you either don't tax Mr. Easterbrook's clients or you tax the Hawaiian drink and the pineapple wine people.
Why wouldn't the same sort of an opinion and mandate be appropriate in a Commerce Clause case?
Frank H. Easterbrook: There are two principal reasons for that, Justice Behnquist.
One is, as I said in response to Justice Blackmun's question, the argument that refunds are inappropriate was never made in the State of Hawaii.
It's a brand-new argument which we take it is foreclosed to the state.
This was brought as a suit for refund of taxes.
The state was entitled to defend on the ground that--
Unidentified Justice: Well, but I don't think the equal... the equal protection analysis, as I understand it, doesn't depend on any claim that refunds are inappropriate.
The equal protection approach depends on saying that the exemptions are no good, so you either don't tax anybody or you tax everybody.
You can't tax them with the exemptions.
And so the state can go back and say okay, we'll tax nobody over that period, or we'll tax everybody over that period.
Frank H. Easterbrook: --Your Honor, we have no doubt... we are expressing no doubt today that for the future it is perfectly adequate for Hawaii to eliminate the exemption and to tax everyone at 20 percent.
We have no doubt about that.
The question is what happens to transactions with respect to which the tax has already been levied and collected and the state does not propose to go out and tax the other people at 20 percent.
The whole series of Commerce Clause decisions that this Court has had since 1875 and on which we're relying were almost to a case either suits for refund of taxes or suits to avoid the state's claim for penalty.
Unidentified Justice: Well, the state might be able to, for the future, as you say, to either tax everybody or not, but it is... this is a past transaction.
Frank H. Easterbrook: It is, Your Honor.
Unidentified Justice: That's what you're saying.
Frank H. Easterbrook: Yes.
Unidentified Justice: You're out of pocket.
Frank H. Easterbrook: --The transactions we're concerned about here are past transactions.
The tax has been collected; it is in the state's treasury.
And the exemptions which give rise to this particular case expired in 1981.
There's a new exemption passed which is now in effect for rum, and a declaratory order of the sort Justice Rehnquist described might be most appropriate for the rum exemption for the future.
But these transactions are transactions from 1974 to 1981 with respect to the other exemption.
Unidentified Justice: Mr. Easterbrook--
--Oh, excuse me.
I was just going to ask you to tell me what case you think provides the strongest support you can find for your position, if you had to name one case?
Frank H. Easterbrook: For the position about the refund of taxes?
Unidentified Justice: Yes.
Frank H. Easterbrook: Your Honor, we have--
Unidentified Justice: And these... closest to these facts.
Frank H. Easterbrook: --Yes.
Our reply brief collects quite a series of them at Footnote 9, I believe.
The very first case in the series was a case to avoid criminal prosecution for refusal to pay the tax.
The James B. Beam case, on which we have heavily relied, is a suit for refund of tax.
The I.M. Darnell case is a suit for refund of the tax.
I think those three are substantial support for our position.
Unidentified Justice: Well, Mr. Easterbrook, I suppose that if the Court were to agree with you that this particular scheme violates the Commerce Clause and therefore reverse, that on remand it would be open at least for Hawaii to make its argument as to what defenses it might have on the remedy, would it not?
Frank H. Easterbrook: We... we believe it will be open for the future.
The state is not under--
Unidentified Justice: Well, possibly even for the past in this case.
Frank H. Easterbrook: --As we understand Hawaii practice, it follows the federal rule that new arguments cannot be injected into a case so late as this one.
But our view, Your Honor, is that for the past transactions, the transactions from 1974 to '81 for which a refund is claimed, no remedy would be sufficient unless it restored those transactions to equal status.
The state has not offered to go out and collect the 20 percent tax on okolehao.
In fact, a case called--
Unidentified Justice: Well, it might be cheaper for the state to go back and produce tax revenues to pay it for the wine than to pay your clients the ten point some million dollars that you're claiming.
Frank H. Easterbrook: --It might be cheaper for the state, Your Honor, but it would not have avoided the harm in this case.
In a case called Ward against Love County back in 1920, the state made, as I recall, almost an identical argument in a discriminatory taxation case.
And the argument was that there was in fact absolutely no state authority for the refund of taxes, and therefore, the only permissible relief was prospective relief.
This Court rejected the argument in Ward on the ground that retrospective relief was necessary to assure the equal treatment, and the lack of state authority for the refund could not stand in the way.
Unidentified Justice: Mr. Easterbrook, a moment ago you said that mere prospective application couldn't remedy the harm that your clients had suffered.
Are you speaking now of actual proven harm?
Frank H. Easterbrook: The stipulations in this case recite the taxes made the liquors brought in from out of state relatively less attractive compared to other liquors.
When your price rises relative to the price of other liquors, you will sell less, you will have to sell on a lower margin.
Unidentified Justice: Well, you know, I've taken Economics 1, too, but I was wondering if is there something more in the record indicating that your client's products were handicapped because the Hawaiian beverage the pineapple wine were not taxed?
Frank H. Easterbrook: There is nothing in the record other than the stipulation which appears at page 10 of the Joint Appendix about competitive disadvantage.
Unidentified Justice: Is there a statute of limitations on collecting tax on past transactions?
Frank H. Easterbrook: The Hawaiian statute of limitations is five years, and the claim here was made in 1979 back to 1974 consistent with the Hawaiian statute.
We're not doubting that statute.
Unidentified Justice: Pursuing Justice Rehnquist's thought that the stipulation indicates the harm caused by the tax, but it doesn't indicate that the harm is any different than it would be if these exotic products had also been taxed.
Frank H. Easterbrook: I understand that.
The stipulation is, I am afraid, ambiguous.
I would like to mention just briefly an argument that Hawaii now makes in this Court.
In the state court the issue was joined rather squarely on the meaning of the Commerce Clause, and in fact, at page 29 of its brief in the Supreme Court of Hawaii, the state expressly repudiated any reliance on the 21st Amendment.
In this Court the state now relies on the 21st Amendment.
Needless to say, our first response to that is that the claim is not preserved, it is not properly within the jurisdiction of this Court, and that an effort by the state to invoke a new source of federal authority, which is has never invoked in the state court, is not appropriate at this late stage.
In fact, Illinois against Gates is perhaps our strongest support for that position.
Nevertheless, the distinction between a new ground and an elaboration of the Commerce Clause ground is a rather fine one; and I would like to say a few words about the 21st Amendment argument, just in the event the Court should disagree with our contention that it's not properly preserved.
We have made two principal points about the 21st Amendment.
One is that the Court has consistently held that state liquor laws must yield when they conflict with actual federal statutes enacted pursuant to federal authority.
The Idlewild-Bon Voyage Liquor case is such a case involving federal customs statute, and the Mid-Cal case on antitrust laws.
There are many other federal statutes in this field.
The Alcohol Administration Act, which was passed at the same time as the 21st Amendment, is a rather detailed regulatory scheme.
There is such a statute in this case.
The Wilson Act, enacted in 1890, expressly provides that states must be evenhanded between in-state and out-of-state products in their regulation of alcohol.
In fact, it says that states have to proceed... and I quote...
"to the same extent and in the same manner as though such liquids or liquors had been produced in such state. "
And Scott against Donald in 1897 held that that means exactly what it says.
Unidentified Justice: What did the Court below say about that?
Frank H. Easterbrook: --Since the state had refused to rely on the 21st Amendment, the court below said nothing about any of this, Your Honor.
Unidentified Justice: I see.
Frank H. Easterbrook: It was just not an issue.
It has become an issue only because of the state's new contention.
Unidentified Justice: Does this argument mean that Hawaii could... could not prohibit the sale of all beverages, all alcoholic beverages except these two products?
Frank H. Easterbrook: The statute, the state statute, the South Carolina statute, which this Court considered in Scott against Donald, was a statute that did exactly that, Your Honor.
It prohibited the import into South Carolina of alcoholic beverages, but allowed people in South Carolina to brew their own and sell it to their hearts' content.
This Court held that the Wilson Act absolutely prohibited that state statute, and we think the same would be the case today under the Wilson Act.
The... more generally, the purpose of the 21st Amendment as this Court has construed it, especially in cases like Mid-Cal, has been to preserve a sphere within which the state may regulate in the name of temperance free of the meandering path of Commerce Clause cases, which in the past, especially the original package doctrine cases and the decision in Leisy against Hardin, it made it difficult, even impossible, for a state that desired to adopt temperance rules to adopt and enforce those rules.
The 21st Amendment made it sure that a state that wanted temperance could get it despite the original package line of cases.
It established concurrent powers.
But this is not a case in which the state advocates that it has a temperance interest at heart.
Quite the contrary.
The interest the state advocates is in getting more okolehao sold and more Hawaiian fruit wine sold to the extent it can possibly do that through this statute.
So since the kind of interest involved in this case is not even assumed... not even asserted to be a temperance interest, the state's argument on the 21st Amendment ultimately is unsuccessful.
In all events, it seems to me important that as it survives now, it is at best a very attenuated argument.
It's an argument that you can think about the Commerce Clause through the lens of the 21st Amendment.
And given that attentuation, the state's argument is very weak.
On the other hand, we invoke on our behalf the James Beam case in which the Court held that the Foreign Commerce Clause makes it impossible for a state to levy discriminatory taxes on liquor when they would otherwise be prohibited by the Foreign Commerce Clause.
Our argument is very simple.
It's that the Interstate Commerce Clause has the same force in liquor cases as the Foreign Commerce Clause does under the doctrine of Beam.
Finally, the state has made a number of arguments which can be described only as fairness arguments.
The arguments have to do with retroactivity, with the passing on argument and so on.
As I said earlier in response to Justice Blackmun's question, those arguments were not raised below; but we think it important to the extent they are here at all simply to point out that this is not a case like the Chevron Oil case where there has been a sudden, elusive change in the law which the state could not have anticipated.
Since 1875 taxes of this sort have been plainly unlawful.
Since 1897 when this Court construed the Wilson Act, they have been unlawful as applied to liquor.
And a whole lot of that line of cases has been cases for the refund of taxes.
So ultimately, what the state is arguing in its fairness argument is that its tax is so large that the discrimination between the in-state and the out-of-state products is so great that it really ought to be allowed to keep it.
And that's kind of like the argument of someone who's murdered both of his parents and gets called before the bar that he shouldn't get punished because he's an orphan; that he's made the stakes so big that he is entitled, therefore, to immunity.
Well, the argument doesn't fly for the orphan, I don't think it flies for the State of Hawaii, and this judgment should be reversed.
Thanks very much.
Chief Justice Warren E. Burger: Mr. Dexter.
ORAL ARGUMENT OF WILLIAM DAVID DEXTER, ESQ., ON BEHALF OF RESPONDENTS
William David Dexter: Mr. Chief Justice, and may it please the Court:
The Appellants argue that because for a five-year period Hawaii exempted okolehao and pineapple wine, which are made only in Hawaii, and which amounted to less than one percent of the total sales of alcoholic beverages in Hawaii, because of these circumstances they are entitled to a refund of all the taxes Hawaii imposed on all alcoholic beverages, amounting to approximately 10 percent of the annual budget of Hawaii.
Now, as indicated by their argument, Appellants can only get to this point by arguing that all alcoholic beverages compete with one another, and that the exemption, therefore, creates some kind of a per se discrimination.
This is contrary to a long line of decisions of this Court starting with Tiernan v. Rinker.
In Tiernan this Court held that the exemption of beer and wine produced in Texas did not invalidate a general liquor tax imposed on all sales of all liquor products.
It recognized there that the exemption of beer and wine produced in Texas could only be discriminatory as to imported beer and wine.
So contrary to Appellants' universal argument, we believe that this case should be examined in light of the particular facts and circumstances here before the Court.
We are here dealing with two unique Hawaiian products.
Okolehao is a traditional Hawaiian beverage distilled from the ti plant.
Originally it was drunk as a fermented mash.
In 1970 explorers taught the natives how to distill the mash.
In fact, the term okolehao is the Hawaiian term for the iron caldron and the gun barrel used for this purpose.
So we are dealing with a very unique, indigenous Hawaiian product, and it was so found by the Supreme Court of Hawaii.
Also, I think it's important to realize that the Appellants here do not represent the manufacture of any out-state products.
They are solely in-state wholesalers, and so they have to limit any claim of discrimination based on product discrimination and not because of their particular circumstance.
They as wholesalers have in no way been damaged here.
Now, as found by the Supreme Court of Hawaii, also no okolehao or pineapple wine is produced anywhere else in the world.
And the Hawaii Supreme Court, because of this fact and because of the uniqueness of these products, specifically found that these exemptions had no effect whatsoever on interstate or foreign commerce.
And that is why the Hawaiian Supreme Court really analyzed the issue as one involving equal protection and not Commerce Clause considerations per se, including that of the 21st Amendment.
And also, it's important to note there's no allegation or proof in the record in these... this case that the exemptions adversely affected Appellants' business of importing beer and wine or had any effect on interstate or foreign commerce.
Before you get to any product discrimination case, you have to find that okolehao and a peculiar, distinct wine produced in Hawaii, pineapple wine, is competitive with the importation of beer and wine.
Now, when the exemptions were enacted--
Unidentified Justice: Why did they need the exemption?
William David Dexter: --What?
Unidentified Justice: Why did they need the exemption?
What was the motive for the exemption?
William David Dexter: The motive for the exemptions, Your Honor, were to... as far as okolehao was concerned, it was in financial difficulty.
This is a traditional cultural drink product of Hawaii, a tourist attraction.
The Hawaiian legislature was trying to get that fledgling industry off of its feet.
When they granted the pineapple wine or the fruit wine exemption, there was absolutely no production in Hawaii, and apparently one person wanted to try to produce some kind of wine in one of the Hawaiian Islands.
And so the exemptions were simply to try to promote either a traditional local industry, the production of okolehao, or the production of pineapple wine that was not in existence in 1976.
In fact, in 1976, the first year of the wine exemption, there was no sales of wine at all in Hawaii.
In 1977 the sales were--
Unidentified Justice: You mean it wasn't... the exemptions didn't permit the company to sell its wine at a lower price?
William David Dexter: --Well, the exemptions, in our judgment, operated in the nature of a subsidy; that what the Hawaiian legislature was trying to do was to try to help these... this okolehao manufacturer and somebody that wanted to get into the pineapple wine business or other wine business to get started.
Unidentified Justice: So they were... they... they were competing for the tourist trade.
William David Dexter: Basically they're tourist items, and they're not items that are generally competitive in the--
Unidentified Justice: In spite of their--
William David Dexter: --Liquor market or... in Hawaii.
Unidentified Justice: --In spite of their indigenous quality, the Hawaiians don't like them.
William David Dexter: Well, Your Honor, they--
Unidentified Justice: And they're competing for the tourist trade.
William David Dexter: --Well, one of the difficulties, for example, indicating the nature of okolehao, one of the parties, McKensson... these are liquor people who ought to know what they're talking... says it's something like a whiskey.
Now, I think Bacchus says well, it's something like a brandy.
And the fact of it is it's a peculiar product made by this traditional ti root in Hawaii, and I don't think it's comparable to anything else, and I don't think a good brandy drinker would think this an appropriate substitute.
Unidentified Justice: You mean they're... you mean they're trying to develop some new customers who never drink anything in their life?
William David Dexter: Well, primarily it was a... it's a novelty item.
It comes in a fancy... the okolehao comes in a fancy bottle and sometimes with some lava rock around the outside.
It's... it's... it's a tourist item, and this is what they were trying to promote.
Unidentified Justice: Mr. Dexter, at the beginning of your argument you cited, I think, a Texas case where they gave an exemption on beer and... beer and wine, and that did not invalidate the basic tax statute.
William David Dexter: Right.
Unidentified Justice: Would you tell me the cite... the name of that case again?
I didn't remember it.
William David Dexter: That's Tiernan versus Rinker.
Unidentified Justice: Oh, yeah.
William David Dexter: 102 U.S. 123--
Unidentified Justice: Thank you.
William David Dexter: --1880.
And we'll have a little bit more to say about that case later, hopefully.
Against this... this factual background... well, I might turn to one other fact.
I suggested no pineapple wine in production in 1976, very little in 1977.
Now, in 1976 when the exemption was enacted for pineapple wine in okolehao, this product, okolehao, amounted to two-tenths of one percent of the total liquor sales in Hawaii.
It amounted to only 3.7 percent of the total liquor produced in Hawaii and sold in Hawaii.
It was a very minor exemption, and the exemptions, as I indicated, were for a very limited period of time for this express purpose of trying to create a market.
Now, against this factual background I would like to have the Court consider the following points.
First, the exemptions in question in our judgment are not distinguishable from direct subsidies to preserve Hawaii's cultural heritage, the production of okolehao, and to promote a new industry such as pineapple wine.
Secondly, I would like to address the question of the complete absence of any discrimination as a matter of fact in this case.
And I believe, Your Honors, that if there is no discrimination as a matter of fact as to these Appellants or interstate or foreign commerce, there cannot be any discrimination as a matter of constitutional law.
I think this is rather fundamental by examination of the decisions of this Court.
And the third point I would like to make, that any decision on the merits in favor of Appellant should be given only prospective application, because contrary to the argument of the Appellants in this case, we believe that the 21st Amendment rules would be changed substantially if these small, innocuous exemptions in the Hawaiian liquor law were construed by this Court to invalidate the entire Hawaiian liquor law under the Commerce Clause.
Unidentified Justice: Well, if the 21st Amendment has that thrust, why shouldn't it prevent prospective relief?
William David Dexter: Why... the... why should it?
Unidentified Justice: Why shouldn't it prevent prospective relief as well as retrospective?
William David Dexter: We're asking only for... for... to limit the case to prospective relief, Maybe I misstated myself.
Unidentified Justice: Well, I know, but why... why... why... and you're saying the 21st Amendment should protect the statute.
William David Dexter: No.
What I'm... I'm... I'm saying, Your Honor, that if this Court on the merits would decide that this indeed amounts to unconstitutional discrimination, we're saying that this changes the... the thrust of the prior 21st Amendment decisions of this Court significantly enough--
Unidentified Justice: Okay.
William David Dexter: --To require the Court to make a... make that rule prospective rather than retroactive.
Unidentified Justice: How much money's involved?
William David Dexter: There is... there's around $100... between $100 and $120.
The Appellants in this case, as well as the other wholesalers, pass the tax on, they collect it from their dealers, and it's put into some kind of a fund awaiting the outcome of this suit.
But it's about 10 percent of the total Hawaii budget.
And the last point that I would like to make is that regardless of these other issues, the Appellants are not entitled to any refunds because they have not borne the economic burden of the tax, and therefore, they would be unjustly enriched by any refund.
The stipulation of facts, for instance, indicates that these taxes are added on to the normal selling price or the marked up selling price of these Appellants, and those taxes are passed on directly as part of that pricing to their retail customers.
I don't think there's any real issue about that.
It's clearly in the stipulation of fact, and I think the stipulated fact provisions are quoted in the amicus brief of the Multi-State Tax Commission.
Unidentified Justice: Mr. Dexter, has that been a requirement of our past tax decisions, that a party not only have paid the tax in question, but that he have, as you put it, borne the economic burden of it?
William David Dexter: Well, Your Honor, that has been... that has been a... certainly the general pattern of the... most of the tax decisions, state and federal, in the United States.
I would refer you to two cases in this category that we have not cited in our brief that are federal cases: Travel Industries of Kansas, Inc. v. United States, 425 Federal Second 1297, Tenth Circuit 1970; McGowan v. United States, 297 Federal Second 252, Fifth Circuit 1961.
Unidentified Justice: Do any cases that you know of from this Court support the propositions which you're stating?
William David Dexter: I don't know as that any... but these... there's a multitude of federal cases under federal excise taxes, but I don't... I haven't found any that have gotten to this Court.
Unidentified Justice: Which deny refunds because the person apply for them has already passed the tax on?
William David Dexter: Right, right.
In these... and in these cases the court said... the courts... one was the Fifth Circuit, the Tenth Circuit... they said even though there wasn't any limit on the refund statutes that as a general common law principle... and it's been on our judicial system for a number of years... a person who does not bear the economic burden of the tax... I mean where you're talking about a direct pass-on tax now.
I'm not talking about--
Unidentified Justice: Well, I know.
Some laws require the guy who pays it to pass it on.
William David Dexter: --Right.
Unidentified Justice: But nobody... nobody required a pass-on in this case.
William David Dexter: Well, this--
Unidentified Justice: And are these cases required pass-ons or--
William David Dexter: --No.
Unidentified Justice: --Optional pass-ons?
William David Dexter: Those are optional pass-ons.
In fact, a series of cases... I think the McGowan case was a... one of the more recent of a series of cases--
Unidentified Justice: But those cases didn't deny prospective relief.
William David Dexter: --What?
Unidentified Justice: Those cases did not deny prospective relief.
William David Dexter: No, no.
Simply they said okay, if you've borne the economic burden of the tax, you can get it back.
But the McGowan case involved a series of problems that came up with the federal transportation excise tax.
So the question is whether you added this tax to your price and passed it on to the persons getting the transportation.
If you did, you didn't get it back.
The... turning back to the first point, that the exemptions in question are much more in the nature of direct... of subsidiaries to promote two Hawaiian products rather than a form of market regulation, I would like to indicate the following.
It's the substance of financial aid rather than it's form that controls for constitutional purposes in regard to the subsidy issue.
I believe this was pointed out by Justice Stevens in his concurring opinion in Alexander Scrap.
In fact, the form of subsidy here is above board.
Its impact on commerce can readily be evaluated and judged by this Court.
This is not only true... this is not true with other forms of subsidies such as industrial development bonds or even some indirect subsidy.
Unidentified Justice: But Alexandria Scrap and Reeves and cases like that did think they were speaking about the market participation rather than regulation.
Here you have something that is by its terms a tax.
Don't you think we would really create chaos if we expanded the market participant notion to things that were just frankly admitted to be taxes?
William David Dexter: Well, Your Honor, in the first place we're not saying that this is... necessarily should be treated by this Court as a subsidy per se.
We're saying that the nature of the exemption here and its effect on interstate or foreign commerce or Appellants' business is identical as if Hawaii had included the okolehao and pineapple wine sales as taxable sales and granted these parties a dollar amount subsidy in the exact amount of a tax.
The effect on commerce would have been identical.
And certainly I think there is... is... is a problem, as you suggest, in that area.
We're saying the intent and purpose here, the operative effect of what was done is analogous to a subsidy, because... and Appellants in this case admit that if these were... these were direct payments, there wouldn't be any problem.
We're simply saying here that... that... that form and substance should control in this area.
And I think that in terms of looking at this, whether it is a... intended to discriminate or burden commerce rather than as a subsidy that we have to realize again that the exemptions were enacted to preserve Hawaii's cultural heritage and to promote a new industry.
They were not enacted as trade barriers.
They did not operate as trade barriers.
And the fact that in 1976 when the exemptions were enacted 96.7 percent of locally-produced Hawaiian liquor products was taxed indicates the limited and peculiar nature of... of these exemptions.
We believe that these facts establish that the exemptions were in the nature of subsidies as intended by the Hawaiian legislature.
And we also believe that they were intended to promote a business or a market and not intended in any way to regulate.
Now, turning to point two, I would just simply like to emphasize again there's nothing in the record to establish that the exempt products here were competitive with beer and wine of the Appellant or impeded any interstate or foreign commerce.
This is a basic factual issue the Appellants have not tried to prove in any way or tried to meet.
Now, since the exempted products were not produced anywhere else, there can be no discrimination.
That is a matter of fact.
As here indicated, Appellants assume, as they must, that all alcoholic beverages compete with each other in commerce; therefore, the exemption of a single type of liquor discriminates against all other liquor.
However, the Court should exercise, in our judgment, great care in determining what constitutes product discrimination or state constitutional purposes, particularly liquor products which are covered by the 21st Amendment--
Now, as I've indicated, this Court in the Tiernan case has already indicated that the exemption of beer and wine by... locally-produced beer and wine by Texas did not invalidate a Texas liquor law except to the extent of competing beer and wine coming in from out of state.
The Texas law in terms of its imposition is not distinguishable from that of Hawaii.
Unidentified Justice: Well, I'm not so sure I would agree with you on that.
Does... don't importers bring, say, strawberry wine or other kinds of fruit wine into Hawaii?
William David Dexter: --Well, there may... the... I don't know.
The record in this case is not clear.
I do know that when you look at a lot of the liquor laws that they have indicated, put in... in the appendix here of the liquor industry that's filed in this case, the classification of wines are very different.
There could be grape wines, fruit wines, specialty wines.
Unidentified Justice: Well, I guess grapes are fruit.
William David Dexter: --And... right.
But here we had only pineapple wine.
But we're suggesting if there... if there was any... any product competition here, it's not proven, and we don't know what it is.
But what they're saying is that this... that... that, for instance, the exemption of okolehao, which has nothing to do with beer and wine, knocks out the whole liquor law, and wine could have nothing to do at all in competition with beer again knocks out the whole liquor law.
Unidentified Justice: Well, you're still trying to get people... some people who are drinking X and Y to drink these products instead.
William David Dexter: Yes, but--
Unidentified Justice: You are competing with something.
William David Dexter: --Yeah.
Unidentified Justice: What are you competing with?
William David Dexter: Well, I submit--
Unidentified Justice: Nothing?
William David Dexter: --Okolehao... we may be in one sense competing with--
Unidentified Justice: Beer.
William David Dexter: --No.
Unidentified Justice: Wine.
William David Dexter: --Brandy.
They say brandy and whiskey.
Unidentified Justice: Well, you're competing with something, some product--
William David Dexter: Well--
Unidentified Justice: --Or you wouldn't have... wouldn't--
William David Dexter: --And then this gets to a very interesting--
Unidentified Justice: --Or you're just developing a whole new class of drinkers.
William David Dexter: --Well, but... but... but it... it comes to the point, though, how much, for instance, does the fact that liquor is subject to a 20 percent tax in Hawaii and soft drinks aren't, how much is this liquor then discriminating against soft drinks.
Your... your problem is the area of product classification here, and we believe--
Unidentified Justice: But if this stuff is like brandy, you can't call it a soft drink.
William David Dexter: --No.
I mean they're all alcoholic beverages.
We're saying... but I'm simply saying that... that each product ostensibly competes with every other product in the marketplace.
So what... what... the problem is how do you classify the products, what do you classify the kind of competition.
We think that the classification that this Court has used in equal protection and due process areas is equally applicable here.
We also believe that the... the cases of this Court dealing with defining the market and market product in the antitrust cases under Section 7 of the Clayton Act are equally applicable here.
But on the record, we don't know what's competing with what, except we know that there's no alcohol, there's no pineapple wine, and there's no okolehao imported into Hawaii, and we know there's absolutely no proof offered or suggested or relied upon by the Appellants as to product competition.
They simply see the class to be compared is all liquor, and we know that is much, much too broad and unreasonable.
To illustrate this, can you really imagine a Redskin fan sitting down in front of the TV viewing the TV, too, and really debating whether to go get another beer from the six-pack or to take a drink of okolehao from the--
Unidentified Justice: How would you answer that?
William David Dexter: --I would... they're... they're... in my judgment they're completely uncomparable.
In fact, you'd have a hard time finding them in most places.
Unidentified Justice: Then what is the market for this okolehao?
They must sell it to somebody?
William David Dexter: It's primarily--
It's... it's... it's primarily a traditional drink.
It was a drink--
Unidentified Justice: But you say... you... you say it's a traditional drink, and yet you say the Hawaiians don't like it.
William David Dexter: --Well, all I can tell you, Your Honor, is that I have tasted it.
We tried to buy it generally just as part of the preparation of this case in an ordinary restaurant, at bars, and it's not available.
We did find it in a tourist attraction place.
Now, that's as far as I can go with... but obviously, you know, it is a liquor, and we're not denying that.
Unidentified Justice: I've been over to Hawaii several times.
I've never seen or heard of it.
William David Dexter: Okay.
Unidentified Justice: And I've never seen anybody that has seen or heard of it.
William David Dexter: And the record indicates in this--
Unidentified Justice: Until today.
William David Dexter: --Yeah.
But the record indicates in this case that in our appendix that it's declined 275 percent from the time the exemption's gone, so it may be on the way out.
So I... I... but our position is... these are unique products, and there's no competition shown.
Now, as to the third reason... that is, the problem of damages, which I think is extremely important here... there is obviously a potential for this Court saying that these two unique, peculiar products, even though they are of limited value and significance, and even though there's no proof of it, somehow discriminate against interstate commerce, even though there is these 21st Amendment restraints.
But in no event are these Appellants entitled to the money that they're asking for.
This money was passed on.
This money has been absorbed by the general public of Hawaii, and when the refunds are denied them, it simply means that the money goes back to be used for the general public of Hawaii rather than particular Appellants that are trying to get significant and substantial windfalls.
This is the law in this country.
It's a general equitable principle in regard to unjust enrichment.
And I know of no case comparable to any facts of this case except possibly some old New York cases representing a minority view that would not deny the Appellants the taxes they are claiming to get here.
And in any event, the only taxes they could possibly be entitled to were taxes in regard to products that they purchased that were competitive in the marketplace with these two unique products, and they have not proved their case there.
So we... we submit they really are not entitled to any relief whatsoever.
I thank you very much for your kindness and patience, and I will sit down.
Chief Justice Warren E. Burger: Do you have anything further, Mr. Easterbrook?
ORAL ARGUMENT OF FRANK H. EASTERBROOK, ESQ., ON BEHALF OF THE APPELLANTS -- REBUTTAL
Frank H. Easterbrook: I do, Your Honor.
A few brief words about the argument about the extent of competition.
I'm perfectly delighted to concede that was not tried as an antitrust case.
We don't have a Section 7 Clayton Act market definition in this case.
There were some good reasons why that's true.
One is that the stipulation wasn't addressed to this because the state never asserted this in the initial court, and it's very difficult as a practical matter for litigants to cover in stipulations things that their opponents aren't denying.
The statute in this case defines the pertinent category as all liquor, and it seemed plausible to me that the plaintiffs were entitled to take the state at its word, at least until the state should deny it.
The argument, by the way, that because okolehao is produced only in Hawaii it doesn't compete with Grand Marnier, which is produced only in France, for example, is very strange as a market definition.
Ordinarily, one assumes that in most of these Commerce Clause cases things are coming from different places, and they're made in different places and moved.
In any event, this whole extent of effect point is I think a point that is important only in the event that you are dealing with a statute which is neutral on its face, and there's a dispute about whether it has a discriminatory impact, the kind of dispute that's involved in a case like Pike against Bruce Church.
This is not a statute that's neutral on its face and we're disputing discriminatory impact.
This statute is discriminatory on its face.
When the statute is discriminatory on its face, one stops.
We've cited in Note 4 of our brief a number of cases of this Court that hold that... of our reply brief, sorry... and the Baldwin against GAF-Sealey case says that, too, and that's at page 19 of our opening brief.
Unidentified Justice: Mr.... may I ask this question?
Supposing the statute defined alcoholic beverages in a way that simply excluded these products, would you have the same argument, do you think?
Frank H. Easterbrook: I think in that event the argument would be much more difficult.
The argument would look more like Tiernan against Rinker where there was such a statute.
In that event we might well have to come in and supply proof of competition in... and that might prove to be a very difficult thing to do.
The Clayton Act market definitions are not the easiest thing to do on the back of an envelope.
Unidentified Justice: I suppose the other side of the coin is if the tax were on all bottled beverages, all beverages sold in a glass bottle or something like that, and then they had an exemption for these two, then everybody who sold Coca-Cola and everything else would get the refund, too.
Frank H. Easterbrook: We think it would probably be open to the state if it wanted to contradict the category of competition established in the state's own statute to offer and make this kind of proof.
We suggest in our reply brief, in fact, that if Hawaii had levied a 20 percent tax on all things with alcohol in them and then exempted aftershave lotion, in a suit by sellers of whiskey the state would be entitled to defend by saying that aftershave lotion just doesn't compete with whiskey, so why are we here.
But given that these are all alcoholic beverages, it's an--
Unidentified Justice: And they drink them, and they are drunk because they are alcoholic.
Frank H. Easterbrook: --Right.
Aftershave lotion is sometimes drunk for that purpose, Your Honor, but not generally.
Unidentified Justice: Not regularly.
Frank H. Easterbrook: Not regularly.
My last word is on Tiernan against Rinker, and that is that I think the Court was drawing a distinction license tax, which applied to everyone who sold any alcoholic beverages... there was adequate ground for levying that tax on people who sold the in-state beverage... and tax by the bottle or by the drink.
In fact, the Tiernan Court says
"A tax cannot be exacted for the sale of beer and wines when of foreign manufacture if not exacted when of home manufacture. "
We are perfectly delighted to rely on that language in Tiernan against Rinker.
Thank you very much.
Chief Justice Warren E. Burger: Thank you, gentlemen.
The case is submitted.
Unidentified Justice: The Honorable Court is now adjourned until Monday next at 10:00.