R. J. REYNOLDS TOBACCO CO. v. DURHAM COUNTY
Legal provision: 28 U.S.C. 1257
Argument of Erwin N. Griswold
Chief Justice Rehnquist: We will hear arguments next in No. 85-1021, R.J. Reynolds Tobacco Company versus Durham County, North Carolina, et al.--
Mr. Griswold, you may proceed when you are ready.
Mr. Griswold: Mr. Chief Justice, and may it please the Court, this case presents the question whether North Carolina may consistently with the supremacy clause and the due process and import-export clauses of the constitution impose an ad valorem property tax on tobacco stored in a United States Customs bonded warehouse.
The appellant is in the business of manufacturing finished tobacco products which, quoting from the opinion of the North Carolina Court of Appeals, it sells to wholesale distributors and other authorized purchasers in the United States and abroad.
In its manufacturing process Reynolds uses both foreign and domestic tobacco.
The foreign tobacco in this case is placed under Customs bond when it enters the country.
It is then shipped by Customs bonded carriers and is placed in Customs bonded warehouses in Durham or Forsyth Counties, North Carolina.
Under the applicable Federal statutes Reynolds does not pay the Customs duties until the tobacco is withdrawn from the warehouses.
In listing its personal property for 1983, Reynolds claimed that the imported tobacco in the Customs bonded warehouses was immune from state taxation on Federal constitutional grounds, relying on this Court's decision in the Xerox case in 459 U.S., decided less than four years ago in 1982.
The claims for immunity were denied by the administrative officers, and an appeal to the North Carolina Court of Appeals on constitutional grounds was unsuccessful.
Reynolds then appealed to the Supreme Court of North Carolina.
That appeal was dismissed without opinion for lack of a substantial Constitutional question.
This Court postponed the jurisdictional question to the hearing on the merits, so I will address that first.
There are two aspects to the jurisdictional question.
One is whether the appeal should be taken to the North Carolina Court of Appeals or to the North Carolina Supreme Court.
Out of abundance of caution we filed two jurisdictional statements representing appeals to both of the courts.
We don't care which one is sustained, but we have examined the North Carolina statute in our brief and suggest that the decision of the North Carolina Supreme Court dismissing the appeal there for want of a substantial Constitutional question was on the merits, so that the appeal to that Court is well taken.
This is a bootless kind of question which ought to be resolved one way or another, and it would be helpful to practitioners and would save the time of the Court in later cases if the question could be cleared up in this decision.
The appellants, however, raise another Constitutional question in their brief on the merits, another jurisdictional question.
This is a question which was not presented in the motion to dismiss.
They say that the validity of no state statute was drawn into question in the courts below.
We think that they are wrong in that, and we have answered them in our reply brief.
I would only point out that the North Carolina Court of Appeals referred specifically to a North Carolina statute, the Machinery Act.
This appears in the opinion on Page 17A of the jurisdictional statement appendix, and the North Carolina Court of Appeals then concluded that the tax imposed by that statute is, and I quote, U.S. Constitution> ["], and that appears on Page 18A of the appendix to the jurisdictional statement.
This brings the situation squarely within the decision of the Court finding jurisdiction in the Japan Lines case in 441 US and in a case which I have already referred to, the Xerox case, which is virtually identical to this one.
In Xerox this Court said an indispensable predicate to an award of judgment to the appellees on their counterclaim was a determination that the taxes at issue were permissible under the United States Constitution.
The Texas Court of Civil Appeals so held.
We therefore have jurisdiction to review that judgment, and that would seem to be dispositive of the jurisdictional question here.
Unknown Speaker: Of course, we could grant cert anyway, I suppose, couldn't we?
Mr. Griswold: Sorry, Your Honor?
Unknown Speaker: We could grant certiorari anyway.
Mr. Griswold: You could grant certiorari and I would point out that in three or four of the cases which have been cited by the appellees in their briefs, in their brief where the Court found there was no jurisdiction in all of them certiorari was granted.
Unknown Speaker: Of course, Mr. Griswold, in the Xerox case the jurisdictional argument was that the decision rested on an adequate state ground.
It wasn't the claim that there was no statute drawn in question.
Isn't that right?
Mr. Griswold: No, I do not so understand.
The decision there was that the Texas statute was unconstitutional, and that's what the Court said in that passage,
"An indispensable predicate was that the taxes at issue were permissible under the United States Constitution. "
and that is not a--
Unknown Speaker: Well, the immediately preceding sentence was,
"Appellees argue that this Court lacks jurisdiction since the decision of the Texas court reversing the grant of an injunction rested on an independent and adequate state ground. "
and then what follows is in response to that argument.
Mr. Griswold: --And the court held this Court did have jurisdiction.
Unknown Speaker: But in this case, as I understand it, their argument is that there is no challenge to a statute within the meaning of the code.
Well, perhaps I should--
Mr. Griswold: Well, here there was a challenge to the statute expressly recognized by the only court which rendered an opinion in North Carolina, and that court held that the statute was constitutional.
The basic question in this case turns in large part on what this Court held in the Xerox case.
Reynolds submits that the holding there was carefully expressed in the explicit statement on Page 154 of the opinion where the court said,
"Accordingly we hold that state property taxes on goods stored under bond in a Customs bonded warehouse are preempted by Congress's comprehensive regulation of Customs duties. "
Unknown Speaker: --Well, Mr. Griswold, true, the court said "we hold" there, but was that actually a holding?
Isn't that language a little broader than was necessary to decide the case?
Mr. Griswold: I think not, Your Honor, because this gets back almost to law school analysis of what is the ratio decidendi of the case.
I think the holding in that case was that there was preemption, and there was preemption because of Congress's comprehensive regulation of Customs duties, and that comprehensive regulation of Customs duties applies to all property in the Customs bonded warehouse regardless of its eventual destination.
It is subject to Customs custody, it is subject to bond, and the duties are not payable until it is released from Customs custody, and that is equally applicable to all kinds of property.
Unknown Speaker: Well, Mr. Griswold, is it possible, then, that the state could levy its tax and just defer the collection until the goods leave the warehouse?
Mr. Griswold: Justice O'Connor--
Unknown Speaker: Consistent with the Federal scheme?
Mr. Griswold: --I think that would put the state very close to a violation of the import-export clause.
That state tax would not be due until the property was imported.
At that point the state tax would be levied, and that, it seems to me, is hard to distinguish.
Unknown Speaker: Well, maybe the tax could be levied but it just... the collection would be deferred until the goods leave the warehouse, if they are intended for domestic use.
Mr. Griswold: One problem is that in a great many situations you don't know what property is going to be imported and what property is going to be exported.
You would have to estimate or guesstimate.
If that decision is only made when the property is actually released from Customs and used domestically, then it seems to me to be very close to if not identical to a tax on imports.
Moreover, there would be tied up with this state tax, I suppose, a lien for the state taxes, and a lien for state taxes on property held in a Customs bonded warehouse certainly involves not necessarily conflicts but a little bit like the church-state situation, intermingling between the Federal government and the state governments.
We think it would be very difficult to administer, but beyond that the basis for the decision in Xerox, first, the supremacy clause, second, the legislative history, which was reviewed by the Court, and which I will endeavor to show in a moment, was fairly clear that this, the Customs-bonded warehouse was designed to facilitate both transshipment and importation, and finally the fact that Congress has, we say, ratified this Court's decision in the Xerox case together with the fact that there are other passages in the Xerox opinion which make it plain that the Court was aware of this distinction between importation and eventual exportation and specifically clearly decided that that was not relevant.
That was brought out expressly in the oral argument of the Xerox case.
The transcript appears in Appendix G of the appendix to the jurisdictional statement.
A member of the court addressed the question to counsel for the taxing authorities,
"So it really does not make any difference in this case as to whether they are destined for a foreign market. "
to which counsel replied, "Absolutely not", and then when counsel for Xerox was at this podium the following question was asked,
"well, is an importer who says, yes, these are going to be sold in the United States, and he puts them in a bonded warehouse and holds them for two years, may Texas levy a tax while they are in the warehouse. "
to which Mr. Hoddinott, counsel for Xerox, replied,
"No, sir, that is entirely opposed to the legislative purpose of the Warehousing Act. "
Now, there are, as I have said, there are passages in the Xerox opinion which make it clear that the Court was aware of the distinction between property held primarily for import and property held for export.
Unknown Speaker: Mr. Griswold, supposing we would agree that you are correct entirely about the construction of the Xerox opinion.
Is that opinion a constitutional opinion such as it would come under Justice Brandeis's observation in Burnett that stare decisis is less important in constitutional cases than statutory cases.
Mr. Griswold: That is an interesting question because I suppose it was a constitutional decision under the supremacy clause, but decisions under the supremacy clause are rather different than decisions under the due process clause or the equal protection clause because it is a decision which remains entirely in the control of Congress.
If Congress doesn't like the result of this Court's decision in the Xerox case, Congress is constitutionally free to change it.
In such a situation, in the absence of further action by Congress, there is every reason to apply the Xerox decision here.
Indeed, there has been further action by Congress, which is to accept and approve the Xerox decision, which we think is irrelevant to any question as to whether the Xerox decision should be narrowed or qualified or overruled.
The basic purpose of stare decisis is to provide rules on which the lower courts, government officers, private practitioners may rely with a measure of confidence, and a failure to apply stare decisis in a situation like this simply invites relitigation of decided questions, thus contributing to the uncertainty of the law and to the burden of litigation.
Now, I have already referred to the legislative history.
It is perhaps a little odd to be dealing with legislative history that is 140 years old.
But I think the fact that this statute is 140 years old is highly relevant.
These Customs bonded warehouses have been in active operation for 140 years, and it is perfectly plain that Congress likes them.
Indeed, it likes them so much that in the statute of two years ago it extended this Court's Xerox decision to foreign trade zones, which are a new development going back, I think to about 1930, expanding since World War Two, where broader operations are allowed, goods can be put on display, they can be manufactured, packed, various other things, and people can come in and look at them and decide whether to buy them or not, and following the Xerox decision counties in Texas, the same as in Xerox, threatened taxes on goods in foreign trade zones, and Senator Tower and a Congressman from Texas introduced bills, the Committee reports both refer explicitly to the Xerox decision, and Congress enacted a statutory provision which extended the Xerox decision to foreign trade zones.
The full text of the statute is on the bottom of Page 27 of our brief.
Incidentally, although the statute was passed late in 1983, the last line on Page 27 shows that the amendment shall take effect on January 1, 1983, which was 18 days after this Court's Xerox decision on December 13th, 1982, and the statute provides that tangible personal property imported from outside the United States and held in a zone for the purpose of storage, sale, exhibition, repackaging, assembly, distribution, sorting, grading, cleaning, mixing, display, manufacturing, or processing, shall be exempt from state and local ad valorem tax.
But I also call the Court's attention to the fact that the statute went beyond this Court's decision in Xerox because it also provides that tangible personal property produced in the United States and held in a zone for exportation either in its original form or as altered by any of the above processes shall be exempt from state and local ad valorem taxation.
Now, there is nothing in the Xerox case that applies to goods produced in the United States and taken into a Customs bonded warehouse because the Customs bonded warehouses aren't available for such goods.
They are under Customs control, and that is only applicable to goods which are brought into the United States, but Congress so liked the idea of tax exemption in these foreign trade situations that in this statute of 1984... incidentally, enacted after this case was first started in the North Carolina courts... Congress has not only completely ratified the Xerox decision, but has extended it beyond anything this Court old or needed to do or could do.
Unknown Speaker: Well, Mr. Griswold, how should that affect our interpretation of what Congress intended so many years ago when it passed the Act that we are asked to apply here?
Mr. Griswold: I think this is in part connected with my answer to the Chief Justice's question whether this is a constitutional decision.
I said, yes, it was, but it is a constitutional decision which Congress can change, and this statute shows that Congress not only didn't want to change it, they relied on it as a basis for extending the result of that case in a closely related area, namely, foreign trade zones.
So I think we have two strings to our bow there, the legislative history of 1846 plus the fact that Congress has very recently expressed its complete concurrence with and approval of the decision which this Court reached in the Xerox case.
Unknown Speaker: That extension which you say is an extension of Griswold, by the terms of that statute it applies only as to goods held for exportation, which is the very issue here, whether--
Mr. Griswold: No, no, not at all.
This statute refers to the Xerox decision which we say is in comprehensive terms, and provides that property imported from outside the United States and held for all these reasons--
Unknown Speaker: --No, the last provision that you read, which you suggested was an expansion of Xerox--
Mr. Griswold: --No... I agree--
Unknown Speaker: --that only applies to domestic goods put into those trade zones for exportation.
Mr. Griswold: --I agree with that entirely.
I was relying on it only to say that Congress not only liked what the Xerox decision said, but it said, give us more, and that is a long way from disapproving, which Congress has power to do, Congress can tomorrow if it could get it through before adjournment pass a statute saying that we disapprove of the Xerox decision and all goods in Customs bonded warehouses shall be subject to state property taxes.
Congress has never done that for 140 years.
I think it is rather unlikely that Congress will.
And in large measure this goes back to the legislative history.
That is covered quite fully in our brief and in Appendices B and C to our brief.
Appendix B is the committee report of the House, and Appendix C is two speeches by Mr. Dix, a Senator from New York.
Our opponents in their brief say that what the legislative history shows is that Congress was interested in encouraging import of goods for transshipment so that they could be assembled here and then sent on elsewhere, but we point out that of the first seven pages of the committee report it was related to goods which would be imported, and after that they said, besides, or the second reason why it is useful is for the transshipment.
But I would like to call particularly to the speech of Senator Dix in the Senate on July 9th where he was replying to a contention that the British system of Customs warehouses on which this legislation was based, that it required that goods be designated when they went into the warehouse as to whether they were for import or whether they were for eventual transshipment.
And he says that his studies show that this applied only to goods which could not be legally imported into Great Britain.
They will be allowed to be taken into the warehouse, but they had to be designated as for export.
He points out in his Paragraph 4,
"No goods which have been warehoused can be taken out except upon due entry for exportation or upon due entry and payment of the full duties payable thereto for home use. "
This shows that the election is made on withdrawing the goods from warehouses and not on warehousing them.
And then in his Paragraph 3 on Page 25A he says,
"All other goods excepting those comprehended in the two foregoing classes may be imported and warehoused either for home consumption or exportation without any declaration at the time of the entry whether they are intended for one or the other, thus making it quite clear that the Congress intended and understood that warehousing to apply to all imports regardless of their eventual destination. "
I would like to reserve my remaining time.
Argument of Rex E. Lee
Chief Justice Rehnquist: Thank you, Mr. Griswold.
We will hear from you, Mr. Lee.
Mr. Lee: Thank you, Mr. Chief Justice, and may it please the Court, the basic question in this preemption case is whether the petitioner has met its heavy burden of showing that Congress really intended to take away the power of state and local governments to impose a non-discriminatory property tax under the facts of this case.
This case simply is not Xerox.
The holding doesn't apply and the rationale squarely supports the holding of the North Carolina courts.
There is one factual feature of the case that distinguishes Xerox and controls its outcome.
The Xerox Corporation had an option in between the time that those machines were manufactured in Mexico and sold in some country other than the United States, Spanish-speaking or Portuguese-speaking, to warehouse those machines either in an American warehouse or some warehouse other than in the United States.
In the event that it elected to warehouse here, then some American port will get the business.
In this case there is no corresponding option available to Reynolds.
These goods, unlike the goods in Xerox, as Mr. Griswold has pointed out, are not for sale.
They are for manufacture.
The only reason that Reynolds buys tobacco is to make it into cigarettes, and the only place in the world that it manufactures cigarettes is in Winston-Salem, North Carolina, and as a consequence that means that its foreign leaf tobacco must come in through an American port.
There is no other option.
It will come in through an American port.
And the only competition affected by this case is not American ports versus foreign ports, it is American tobacco growers versus foreign tobacco growers.
Reynolds does not challenge and could not challenge the finding, and I am quoting it, that
"none of the imported tobacco in bonded storage was being held for export by Reynolds. "
and in fact none of it ever has.
In light of that unequivocal finding, the issue comes down to this.
Can Congress be assumed to have intended to exempt more than a half billion dollars worth of foreign tobacco that has come permanently to rest in this country from the same property tax that American grown tobacco must pay when the two impose identical demands on county and city resources and are used for identical purposes, namely, they are the manufacturing inventory for the owner's American plant.
Unknown Speaker: Mr. Lee, the Xerox opinion contains rather broad language, although on its facts we have there a situation of goods intended for export.
But the Xerox opinion relied in part on a D.C. Circuit opinion called District of Columbia versus International Distributing Corporation, and that opinion in turn seemed to suggest to me that the state lacked jurisdiction to tax property in these bonded warehouses because they have not yet been in fact imported.
Mr. Lee: Yes, there is that notion... excuse me.
Unknown Speaker: Yes.
So it seemed to me that perhaps to that extent there is a problem in your argument about the meaning of the Xerox opinion.
Mr. Lee: Well, let me answer it.
The Xerox opinion, first of all, let me say, there is the one, there is the sentence at the end, but the sentence at the beginning says,
"We noted probable jurisdiction to decide whether a state may impose non-discriminatory ad valorem and personal property taxes on imported goods stored under bond in a Customs warehouse and destined for foreign markets. "
Now, the petitioner, to be sure, does have this argument that up until the time that the goods are actually taken out of Customs bond, that they are not within the jurisdiction and therefore not within the power, and there is the dictum that is relied on from the District of Columbia case and also from an older case from Bree versus Murphy of some time ago.
Neither of those... two points.
One is that neither of those cases involved the problem that is involved here, but Bree versus Murphy did not even involve state taxes at all.
It involved only the Customs, only the Customs duty itself.
It would make, Justice O'Connor, the state's constitutional rights to exercise their most important governmental function, the power to tax, which is the power on which all other governmental powers depend, turn on a wooden formalism, and that is, it would turn on which side of a yellow line in a Class II Customs bonded warehouse those goods happened to be on, and I simply submit that it is--
Unknown Speaker: I think there may be some practical difficulties, too.
Although in this case apparently it is conceded that the tobacco will be for domestic use, there may be a variety of products put in these warehouses where the importers aren't certain yet whether they will be reexported or not.
Mr. Lee: --Let me address that question, and I will do so in two steps.
The first is to observe that... three steps.
The first is to observe that, as you correctly state, that is not this case, and therefore does not have to be decided in this case.
All that you have to decide in this case is that where there is--
Unknown Speaker: Well, but you would certainly have to have in mind what you were going to do.
Mr. Lee: --The next step down the road.
But so long as we are... we recognize, first of all, that we are really deciding the next case and not this one.
My second point is that I don't think it is terribly... it is not either necessary nor even helpful to speculate on what that circumstance would be because history teaches that in the context of this particular Warehousing Act that by the time the case has reached this Court that question will have been decided.
In Xerox, for example, it was very clear by the time... on the record by the time the case got here that all of those machines were destined for transshipment.
In McGoldrick it was very clear on the record that all of that fuel was to be used on vessels in foreign commerce.
And in this case it is undisputed that all of these goods are going to be manufactured into tobacco.
It would seem that whatever the circumstance might have been in 1846, when there might be this uncertainty, that with the improved telecommunications of today's modern world, that that will not be a serious problem, and as a consequence I would say that the only thing you really have to decide is today's case and that you don't have to anticipate that.
Now, the final and my third point is that in the event that you do, as I would urge you not to, I think the fair way to handle it if the exporter, if the taxpayer doesn't know whether he is going to ship it or not, pay the tax, and then in the event that he does transship it, the laws of the state of North Carolina give him a remedy to sue in the event that he... that that should eventually be the holding, that he is entitled to it, to get the tax back.
And this brings me back to the standard by which to determine what was Congress's real intent here.
Did Congress really intend to take away the power to tax under these circumstances?
And a helpful starting point is a brief review of the threshold of proof that must be made in order to establish that proposition.
Congressional intent to preempt state law will never be lightly inferred, as this Court has made very clear, particularly in the last three or four years, and that is especially true, we submit, when the power to tax is involved.
The power to tax is not only a core governmental function, it is the function on which all others depend, and because under Garcia Congress is the principal protector of the state's constitutional rights of self-governance, we submit that it follows that Congress should not be assumed to have taken that responsibility lightly, and that Congress should be assumed to have intruded into the state's taxing power only if Congress itself makes that intent very clear, and this case simply doesn't arise to that standard.
Unknown Speaker: Is it possible that Congress intended at least that state and local taxes on goods for domestic use be deferred?
Mr. Lee: Might be deferred.
I think that is the most.
I think that is the most that can be inferred, and of course that is a result that would not be totally unwelcome to us.
It would not be our preferred result, but at least there would be... I think it is easier to read that kind of result into a Federal duties deferral scheme than it is to read an exemption result into a Federal duties deferral scheme.
But I would point out that Reynolds can point to no language, no Congressional language either in the statute or the legislative history that even mentions exemption from state taxes.
I think it is also important to note in that respect the rule for which Reynolds is asking and the rule--
Unknown Speaker: It is the same as Xerox, isn't it?
Mr. Lee: --That is correct.
That is correct.
But then I am sure that you already--
Unknown Speaker: Same as Xerox.
Mr. Lee: --understand what the distinction is between this case and Xerox, and here is where you can't distinguish this case from Xerox.
Reynolds attempts to take Xerox and say that from that it is not just a case that is applicable where the goods, where the presence of the goods in this country is simply in a way station, in a foreign journey that neither began here nor will end here but is a per se rule that any time the goods get into a Customs bonded warehouse, that ipso facto, per se, makes them exempt from all state taxes.
And my point, Justice Scalia, is that while you may have been able... no, excuse me, while you can properly infer an intent from the general Congressional purpose or you do have the clean facts of a completely international journey, it is an entirely different matter under facts such as these.
Unknown Speaker: Why wouldn't it be an entirely different matter for purposes of assessment of the Federal import tax as well?
And yet it is clear that that is not assessed immediately on those goods that are held in that warehouse but will later be used domestically rather than reexported.
Mr. Lee: My answer to that is that that is better a question to be addressed to Congress because what we are dealing with here is how much mileage can you get out of what Congress said and what was their purpose in passing the Warehousing Act.
Unknown Speaker: But surely that indicates that Congress had in mind a system under which everything that is in the warehouse is in the warehouse, period, because it makes no more sense to defer the Federal import tax until the point where it is taken out for domestic consumption than it does, as you have described, to prevent the imposition of state property taxes until it is taken out.
Mr. Lee: Two points.
The first is that that is an argument that would support Justice O'Connor's point of view, that you defer the state tax until such time as the Federal tax is imposed, but let me tell you why that... they really weren't talking about that kind of ribbon matching between Federal Customs duties on the one hand and tax exemption on the other.
It will take me just about 30 seconds to give you that answer.
The first is, and I want to emphasize this, that is not what the statute says.
It says nothing, neither the language nor the legislative history says one word about exemption from state taxes.
Now, in addition, there is a regulation, and this goes directly to your point, Justice Scalia, there is a regulation that is cited at Footnote 24 of our brief, and I quote it.
It requires the private bonded warehouse owner, this is the warehouse owner, and I am quoting now,
"to provide an estimate of the maximum duties and taxes. "
duties and taxes, Footnote 24,
"which will be due on all merchandise in the bonded warehouse. "
Now, the significance of that regulation is this.
The rule for which Reynolds is contending is a per se xx that once it is in the warehouse it is exempt from taxing.
There is no way you can square that with a regulation that refers to taxes which will be due, and that was not the Customs duties they were talking about because it refers to duties and taxes.
That leaves you with the only argument that Reynolds has, one which I would like to concentrate on now, that a blanket exemption can nevertheless be inferred from the more general purposes of the statute, and it is true that the two primary purposes of the Federal tariff laws as developed by our brief are, first, to gather revenue, and second, to protect American businesses.
And in Xerox the Court inferred an intent to exempt where the goods were destined for foreign transshipment, and it is very clear and, I think, very proper that the reason is because of the favorable competitive effect on American ports, and as I believe it was you pointed out, Justice Scalia, that distinction between... good, yes, it was you... that are to be transshipped and that are not to be transshipped is recognized in the Warehousing Act, which imposes no Customs duty on imported goods destined for foreign markets.
Now, if you take that Xerox rationale and apply it to the facts of this case, you will affirm, because the only American industries whose competitive standing is at stake in this case are the American tobacco producers.
And like... in Xerox, Reynolds does not need any Federal incentive to bring its foreign grown leaf tobacco into this country for manufacture here rather than manufacturing some place else.
The only place it can manufacture is in Winston-Salem, and it did so long before it challenged this case.
In the most elementary sense, in the most elementary sense, the result for which Reynolds is contending here is a subsidy.
The Court in American Smelting called it a bounty.
Enacted into law by an American Congress available only to foreign businesses and working to the competitive disadvantage of American businesses, Reynolds manufactures from a blend, a certain percentage of foreign and a certain percentage of domestic.
If my clients lose this case the comparative costs of the two components of that blend are going to change, and it will be to Reynolds' economic advantage to increase the percentage of foreign tax-exempt tobacco, and I return to the question, why would Congress want to do that?
Unknown Speaker: What is the amount of tax at stake in this case, Mr. Lee?
Mr. Lee: In this particular... this is for 1983, and for the two counties and three cities, it is on the order of $7 to $8 million.
Unknown Speaker: How much?
Mr. Lee: Seven to eight million dollars.
Unknown Speaker: Seven to eight million dollars?
Mr. Lee: For the one year.
We realistically have about seven years that are at stake because of the other suits that are backed up and waiting in the North Carolina courts.
In Xerox, then, inferring Congressional intent to exempt where the warehouse storage was really only a way station on a foreign journey, so that the only competition possibly affected involved not American producers but American ports made some sense, here it made no sense at all.
This is a non-discriminatory tax.
It is not a new tax.
It has been in existence at least since Michelin versus Wages as applicable to this particular transaction.
All that these counties and cities are attempting to do is to continue to apply to tobacco that is grown in Bulgaria, Syria, Lebanon, Turkey, and a few other places the same tax that must be paid and will be paid on account of tobacco grown in North Carolina, Virginia, Kentucky, Maryland, Tennessee, and a few other states.
The foreign tobacco constitutes, Mr. Chief Justice, about 40 percent... excuse me, 42 percent of Reynolds' total taxable property, at least in Forsyth County, and the record is silent as to what it is in Durham.
Both the foreign and the domestic are stored in identical warehouses.
There is no physical difference between them.
In both cases the warehouses are in fact owned by Reynolds and used exclusively by them, and both kinds of tobacco pose identical demands on these counties and cities for fire and police protection as well as for a broad range of services for Reynolds employees who work with tobacco.
Unknown Speaker: You would think it would be easy, if this is what Congress intended, to get a statute through.
I mean, if indeed they intended to have the tax applied, what you say makes it a wonderment that a statute hasn't been enacted.
Mr. Lee: Two points.
The first is that it is not our burden to get that statute through.
Under this Court's well established precedence, the tilt is toward the taxing power and not against it.
Now, the second point is the more telling one.
Let's just put it directly.
Let's just face the question directly, and let's say then that Reynolds did go to Congress and performed its obligation that it has to get the statute through, and it proposed a bill that would exempt tobacco grown in Bulgaria and Syria from property taxes that have to be paid by tobacco grown in Maryland and Virginia.
Now, your first reaction to that is that is going to quickly find some legislative black hole from which it will never emerge.
Is there any reason to assume that any Congress from 1846 to the present would have taken any different position, and that is what shows the mischief that would be worked by a per se rule in a case like this.
In Reynolds... excuse me, in Xerox, drawing the inference at least had some basis, and here it does not.
Unknown Speaker: But not much, you don't think.
Mr. Lee: Excuse me?
Unknown Speaker: But not much, you don't think?
Mr. Lee: Barely enough--
Unknown Speaker: Your argument... your argument... your argument would really lead to just saying that Xerox was just wrong and should be overruled.
Mr. Lee: --We think Xerox represents, Justice White, the outer limits of what should be good law.
We certainly do not have to ask that it be overruled here.
And I think that most of what I said--
Unknown Speaker: Well, eight Justices joined that opinion and that language in it.
Mr. Lee: --That is correct, and eight Justices who are... very good judgment, and we are not asking... we are not asking that the case be overruled because there is this factual distinction, and it doesn't do a lot of good to parse the Xerox opinion as though it were a statute, and we are not asking the Court to do it.
Unknown Speaker: But you agree it was in effect a statutory construction.
Mr. Lee: It was in effect a statutory construction question.
That's exactly right.
Let me say just a word about the Foreign Trade Zones Act.
To the extent that that is relevant at all it supports our position.
Foreign trade zones are very different from warehouses.
It is a separate part of the statute.
And to the extent that it shows anything at all, that legislative history simply shows that Congress has treated one statute different from another simply because of the fact that the activity is different.
Unknown Speaker: How are they different?
Mr. Lee: Several ways.
The most important way, Justice O'Connor, is that they are in effect... not in effect, the statute says they are public utilities.
And that means that any secrets that Reynolds has in connection with the blend and its manufacturing process would have to be sacrificed.
They are open to the public, to all comers, whereas the bonded warehouses, these two kinds that are used here, are private, and there is a great variety of activities that goes on within these foreign trade zones.
Most important for our purposes, they are subject to two different kinds of statutes, and they are subject to different statutory provisions.
They are not identical.
As my colleague, Mr. Griswold, has pointed out in the case of foreign trade zones, domestic goods that come in for foreign transshipment are exempt from property taxes, and Congress has not done that with respect to the Warehousing Act.
Now, the statements by Senator Tower and Congressman Wright, the most that you can get out of those is that they may have read, may have read the Xerox decision the same as Mr. Griswold does.
I don't think they were even focusing on the problem in this case at all.
I think the most that the legislative history shows is what Senator Bentsen says, that, and I am quoting, that we are dealing with a very narrow problem dealing with foreign trade zones in the state of Texas.
They were simply concentrated... it was easier to get a Congressional statute passed than it was to amend the constitution of the state of Texas.
But even if you read those statements as favorably as possible to Reynolds, they cannot possibly qualify as any kind of legislative history of the Warehousing Act.
Unknown Speaker: Mr. Lee, there was an old Treasury Department regulation, was there not--
Mr. Lee: Yes.
Unknown Speaker: --that used to say that these state and local taxes were preempted?
Mr. Lee: It at least would support that notion, and that was repealed.
We think the repealer supports us, but I hadn't planned to mention it because in Xerox the Court said, we won't speculate on it.
Since the Court has given that advice, I will follow it.
But there is the remaining regulation, and this one, I think, is a powerful one.
The remaining regulation says that it is the obligation of the private bonded warehouse owner to provide a list of all duties and taxes that will be due.
That is on, as I say, Footnote 24 of our brief.
There is no way you can reconcile that with the position that Reynolds is taking in this case.
Two final points.
One is that there is only one case in which this Court has squarely decided this issue on the merits, and that is the summary dismissal of the appeal in American Smelting.
That is the only case that involved the precise facts of this case, namely, where you had raw materials, manufacturing inventory in a bonded warehouse awaiting manufacture in this country.
And while we recognize that a summary disposition does not carry as much precedential weight as does a decision following full briefing and argument, it does carry precedential weight, and this fact remains, and this is very clear.
If you look at holdings, affirmance of the North Carolina courts will not require overruling any merits decision of this Court.
Now, finally, let me say just a word about the constitutional arguments.
We think that they follow a fortiori from the statutory interpretation issue, particularly in light of this Court's decisions in Michelin versus Wages and Wisconsin versus J.C. Penney, and that the overarching principle that governs both of those is the principle well embedded in this Court's jurisprudence that foreign commerce must pay its fair share.
The Court said in Wisconsin versus J.C. Penney that the simple but controlling question is whether the state has given anything for which it can ask in turn.
It is that simple but controlling question, we submit, which governs this case.
These two counties and these three cities have given something, the full range of governmental services from fire to police to education to streets and parks directly attributable to the presence of Reynolds tobacco in these warehouses in this country.
All that they ask in return is that the foreign tobacco pay its fair share, the same as the share that is paid by tobacco grown in North Carolina and other neighboring states.
Unless the Court has questions, Mr. Chief Justice, I have nothing further.
Rebuttal of Erwin N. Griswold
Chief Justice Rehnquist: Thank you.
Do you have something further, Mr. Griswold?
You have two minutes.
Mr. Griswold: Yes, Mr. Chief Justice.
With respect to Justice O'Connor's question about deferral, it seems to me that that is an argument, as much of Mr. Lee's argument is, which ought to be addressed to Congress and not to this Court.
It was already indicated, Mr. Lee indicated that if there wasn't... that deferral might require payment now and then North Carolina would somehow or other provide a refund if it wasn't eventually imported.
I suggest that that is a fairly complicated legislative process which ought to be left to the legislative branch of the government.
Unknown Speaker: Getting a refund of state property taxes is not the easiest task in the world.
It is very different from income taxes.
Mr. Griswold: It often presents very serious difficulties.
Mr. Lee referred to a provision in the regulations which said that the importer must make an estimate of duty and taxes.
That, I think, quite obviously is a reference to Federal excise taxes, which are applicable to liquor, to many other things which from time to time are subject to excise tax.
I remember back in World War One when candy was subject to an excise tax.
If candy was imported from France or England would be subject both to duty and to pay the excise tax.
Unknown Speaker: Are you clear that those excise taxes are payable when the goods are in the bonded--
Mr. Griswold: --Yes.
Otherwise there would be a discrimination against domestic manufacturers who would have to pay the excise tax, but it could be made in Canada and brought in and not pay the excise tax, so the excise tax is applicable both to goods manufactured in the United States and goods imported into the United States.
Unknown Speaker: --Is that the same kind of discrimination that Mr. Lee is telling us about in this case?
Mr. Griswold: Yes, it would be a discrimination on that ground.
I would point out in this connection that North Carolina itself exempts tobacco from property tax during its first year as long as it is owned by the producer, so that North Carolina recognizes a discrimination.
Let me say just one further thing.
Mr. Lee referred to--
Chief Justice Rehnquist: Your time has expired, Mr. Griswold.
The case is submitted.
We will resume there at 1:00 o'clock.
Argument of Speaker
Mr. Lee: The opinions of the court in No. 85-1021, R. J. Reynolds Tobacco Company versus Durham County and related cases will be announced by Justice Blackmun.