ITEL CONTAINERS INTERNATIONAL CORP. v. HUDDLESTON, COMMISSIONER OF REVENUE OF TENNESSEE
Legal provision: Article 1, Section 8, Paragraph 3: Interstate Commerce Clause
ORAL ARGUMENT OF PHILIP W. COLLIER ON BEHALF OF THE PETITIONER
Chief Justice Rehnquist: We'll hear argument next in No. 91-321, Itel Containers International Corporation v. Joe Huddleston.
Mr. Collier, you may proceed whenever you are ready.
Mr. Collier: Mr. Chief Justice, may it please the Court:
The issue in this case is whether Tennessee's sales tax imposed on Itel's Federally bonded containers dedicated exclusively to use in foreign commerce is prohibited by the 1956 and 1972 treaties on containers, as well as the body of Federal implementing regulation, and the foreign commerce and import-export clauses of the Constitution.
At the time Tennessee imposed its tax, Itel was one of the largest container leasing companies in the world.
Itel delivered its containers at 98 locations across the United States and an additional 129 locations around the globe; but only one government in the world imposed a tax on Itel's containers, Tennessee.
As the United Kingdom and other nations have noted, none of the 59 nations which have signed the two container treaties impose any form of sales or use taxation on containers.
But it is not the language here of Tennessee's taxing statute which is unique.
Instead, it is the application of that statute to tax container leases.
Indeed, 44 of Tennessee's sister States and many of the signatory nations to the container treaties impose some form of sales or use taxation on lease transactions.
But it not mere coincidence that no other government in the world imposes sales or use tax equivalents on containers.
The reason that Tennessee acts alone here is that the imposition of its tax is prohibited by the container treaties, runs counter to the custom of nations, and is at odds with this Court's logic in the Japan Line decision.
There are three related, but independent grounds for reversal here.
Each ground shares in common the special transitory nature of Federally bonded containers dedicated exclusively to use in foreign commerce.
First, both the terms and the policies of the container treaties and the implementing Federal regulation prohibit the tax, and the application of the tax by Tennessee offends the principles of the foreign commerce clause by creating a substantial and genuine threat of foreign retaliation and because of the risk of multiple taxation.
Finally, Tennessee's tax is a prohibited tax on goods in transit under the logic of the import-export clause of the Constitution.
Now, the issue of whether the terms of the container treaties prohibit Tennessee's tax presents a direct confrontation between the United States and 14 nations, including three of the United States' largest five trading partners, Japan, Germany, and the United Kingdom.
The United Kingdom, a primary drafter of the 1956 treaty, and the other protesting nations concur with Itel's reading of the express terms of the convention that Tennessee's tax is prohibited because it is imposed in connection with or by reason of the containers' importation.
These protesting nations point out that they have withheld the application of their taxes in reliance upon these treaties' obligations.
Now, the position taken by the United States today, that the treaties prohibit only the imposition of customs duties and not State taxes, is at odds and is a complete reversal of its position taken in 1978 before this Court in Japan Line.
So, certainly the reading given today of the treaties' language must be viewed and consider... must be viewed and considered in light of that interpretation.
Mr. Kneedler: How do you interpret this tax to be imposed to be chargeable by reason of importation?
That's the language of the conventions that we're dealing with.
Mr. Collier: Yes, Justice Scalia.
The concept of importation, as described in the convention, not only connotes a temporal event, such as the crossing of a border, but indeed, the status of the containers as they remain within the borders of a signatory nation.
Mr. Kneedler: You cannot tax anything that has been imported?
Mr. Collier: You cannot tax a container once it has been temporarily imported and remains subject to the protection of the treaties.
Mr. Kneedler: It doesn't say by reason of temporary importation.
It says by reason of importation, chargeable by reason of importation.
Now, there are two ways to read it, it seems to me.
One is, the tax is upon the act of importing.
It is upon the importing.
And the other way to read it is it... importing is a but-for cause of the tax.
You wouldn't have been hit with the tax if you hadn't imported.
But if you read it the latter way, my goodness, all imported goods are free from property taxes, sales taxes, all sorts of taxes.
You can't read it that way, can you?
Mr. Collier: First of all, I would agree with you, Justice Scalia, that there are two readings which might be given to this tax.
You've identified each of them, but both meanings are incorporated into the treaty provisions.
First, the treaty does not prohibit the imposition of all taxes on imported goods, but addresses containers which are crossing borders and moving into the interior of a nation.
Mr. Kneedler: Where does it address those?
Does it mention them?
Mr. Collier: Yes.
The 1956 treaty tax prohibition covers... and I quote... not only customs duties, but also all duties and taxes whatsoever chargeable by reason of importation.
And the definition of temporary admission given in the 1956 treaty applies to containers and the importation of those containers into the interior pass... crossing the border of a nation.
Mr. Kneedler: Well, that just proves that they're imported.
A lot of other things are imported as well.
Mr. Collier: A number of other things are imported, but the treaties on containers cover taxes on containers, not merely the goods imported in containers.
And so, the treaties' application is limited to those containers and a tax on those containers.
The definition of temporary admission, set forth in article 1(b) of the treaty of '72, describes temporary admission to mean temporary importation subject to reexportation.
Mr. Kneedler: Is a general property tax permissible if the container happens to be there on the lien date?
Mr. Collier: If the tax is imposed by reason of importation--
Mr. Kneedler: Well, I'm... that's what I'm trying to test.
Suppose the State says that all personal property here on March the 15th shall be taxed.
Mr. Collier: --Yes.
Mr. Kneedler: And the container is assessed a tax.
Mr. Collier: Yes, Justice Kennedy, I do believe that under the treaties a property tax based upon presence would be by reason of importation to that jurisdiction.
Mr. Kneedler: And that's because the container couldn't have been there but for the importation and, therefore, this tax must be by reason of importation.
Is that your train of logic?
Mr. Collier: Yes, Justice Kennedy.
I think that's a fair summary.
And, indeed, the United States in 1978 in its brief pointed out to this Court that containers which have crossed the international border and entered the domestic commerce of a nation are considered to be absent.
They're not subject to State taxation once they're in the interior of a nation.
Mr. Kneedler: Well, the Government is certainly taking a different position today, and it's saying that the convention means that Tennessee's tax is collected in connection with and chargeable by reason of sales, not by reason of importation.
Now, do we owe any deference to the Government's interpretation of this treaty?
Mr. Collier: I think it has been recognized many times by this Court that the interpretation of an international treaty by the executive branch is due deference.
My only point, Justice O'Connor, is simply that they have expressed one interpretation in 1978 and the other at this time, and I would point out that this Court ruled in Nielsen v. Johnson that where a treaty fairly admits two interpretations, the one restricting and the other enlarging rights provided for in that treaty, then the liberal interpretation is to be preferred.
And certainly the United States cannot disagree that the interpretation placed on this treaty by eight of the original 12 drafters and in harmony with its interpretation in 1978 is unreasonable.
Mr. Kneedler: Mr. Collier, let me try to put my earlier question more precisely.
What kind of a tax upon these containers would not be a tax chargeable by reason of importation?
I mean, I am pressed with the fact that these treaties do not say containers may not be taxed.
It doesn't say that.
It says that there may not be imposed upon them any taxes chargeable by reason of importation.
Now, why that narrowing?
What has been excluded by saying only those taxes chargeable by reason of importation?
Mr. Collier: The 1972 treaty clarified that issue when it provided a limited exception to the type of taxes that could be imposed on containers, and that exception is set forth in article 1(a) of the container treaty of 1972 where the treaty excluded fees and charges limited in amount to the approximate cost of services rendered.
Now, I might point out that an exception which is provided to a prohibition of taxes in a treaty need not have been provided unless that was prohibited by the general prohibition in the first place.
So, there is an exception.
If Tennessee, for instance, operates a container terminal where it provides a crane and services to a container, it may then tax or charge a fee on the containers in that setting.
Mr. Kneedler: What... so, you say... and it meant that even before that provision was added in the later treaty?
Mr. Collier: It did.
In fact, there is legislative history to the 1956 convention which discusses the permissibility of user fees of this kind.
Mr. Kneedler: Isn't the Tennessee tax... what do they call it?
A use tax or--
Mr. Collier: --A sales tax.
Mr. Kneedler: --a sales tax?
Well, don't they measure it by the number of days in Tennessee and the cost of services rendered?
Mr. Collier: They do not.
Tennessee's tax bears no relationship to the length of the lease, the number of days that the container is on lease.
It is based simply on the transfer of possession within the jurisdiction.
Indeed, Itel's leases, as is noted in the record, are 6 months or more.
They're per diem leases, and these containers during the lease term are in Tennessee for only a fraction, a very small fraction, of the lease term.
So it is not charged on that basis.
Mr. Kneedler: But are they not in Tennessee at the time of the transaction?
Mr. Collier: It is true that the containers are present and have been imported into Tennessee at the time of the tax.
Mr. Kneedler: How is this different from a case in which, say, the containers were manufactured in Tennessee, and then sold to the person who was going to use them?
Could you then put a sales tax on it?
Mr. Collier: In the limited situation that you have posed, Justice Stevens, yes, there is some argument that could be made that a purely domestic transaction, the sale of a container--
Mr. Kneedler: For use in foreign commerce and after that they never do anything but travel the world.
Mr. Collier: --As long as--
Mr. Kneedler: What if they're warehoused in Tennessee and then they're leased, and then you tax the consideration for the lease at the time of the lease transaction?
Mr. Collier: --In the event that they were warehoused in Tennessee, as long as they were continuously dedicated to the use in foreign commerce, they would still be exempted under the tax treaty prohibition.
Mr. Kneedler: Well, let me just be... say I'm talking about a new container now, to keep it simple.
If I have a new container and I sell it to the user of the container, that's taxable, but if I have the same used... new container and I lease it to them for a period of time that it takes to ship it to Japan and back to San Francisco, that's not taxable.
Mr. Collier: I'm not sure I understand your hypothetical.
Mr. Kneedler: The hypothetical is I have a brand-new container, and I have a customer who wants to lease it, take some merchandise to the Japan, and bring that merchandise back to San Francisco.
And it will take 9 months to do it, so that the charge will be X dollars and the sales tax is 2 percent of X dollars.
Is that... could you... would that transaction be taxable?
Mr. Collier: That transaction would not be taxable, Your Honor.
Mr. Kneedler: Now, what's the difference between the sale and the lease?
Mr. Collier: The sale is the container as an article of trade as opposed to an instrument of international traffic.
Mr. Kneedler: Well, but as far as the leasing company is concerned, it's still an article of trade.
He's only interested in getting paid for the container.
Mr. Collier: In the situation of the sale of the goods purely in domestic commerce, if it has not been bonded and if it's not exclusively used in foreign commerce, then it is not entitled to the protections.
Mr. Kneedler: No.
It becomes bonded as soon as he buys it because the purchaser is going to use it exclusively in commerce.
He's going lose it... use it for the life of the container in one case, and the other he's going to use it for a tenth of the life of the container.
Mr. Collier: I'm sorry I misunderstood your question earlier.
If it, in fact, was in the stream of foreign commerce and was sold as an--
Mr. Kneedler: It goes into the stream of commerce.
Immediately upon the consummation of the transaction, they seek to tax.
Mr. Collier: --In that situation, Justice Stevens, I would say that the treaty does prohibit the imposition of such a tax.
Mr. Kneedler: Even a sales tax.
Mr. Collier: Yes, Your Honor.
And in this case, we--
Mr. Kneedler: How could the language of the treaty possibly cover the sales tax?
Because it isn't there by reason of importation.
It's there by reason of having been manufactured there and sold.
Mr. Collier: --I think that's a good point, Justice Stevens, and I suppose I simply haven't considered it well enough.
Indeed, in this case, all of Itel's containers... and it's stipulated... were all manufactured abroad and brought in as instruments of international traffic.
So, that situation would not obtain in this situation.
In any event, putting aside for a moment the precise language and terms of the container treaties, this Court has consistently invalidated the imposition of State taxes on goods dedicated to use in foreign commerce where the imposition of that State tax removes the benefit from the imposition from the waiver of Federal customs duties.
In Xerox Corporation v. Harris County, Texas, and McGoldrick v. Gulf Oil Corporation, the Court considered the preemptive effect of Federal statutes which merely excepted goods from customs duty.
In the first case, it was copiers transshipped to Houston, Texas.
In the second case, it was fuel oil which had been refined after importation from Venezuela and was on its way out to be sold to ship stores in New York Harbor.
In each case, despite the fact the congressional statute did not address the imposition of State taxes, this Court invalidated the State tax because it posed the same obstacle that was posed by the imposition of a customs duty.
In McGoldrick, it was the New York City sales tax on fuel oil to be exported as ship stores in vessels that were laid in New York Harbor, and in the Xerox case, it was copiers, which were manufactured in Mexico, were brought into Houston, and were intended to be sold outside of the Nation.
This case is essentially a replica of that situation.
First, the objectives of the container treaties are three-fold.
Mr. Kneedler: What position had the United States taken in those cases, do you know?
Mr. Collier: I'm sorry.
In Japan Line or in--
Mr. Kneedler: In the two cases you've just described.
Did the United States favor the State taxes or disfavor them?
Mr. Collier: --I simply don't know the answer to that.
In the situation in our case, the United States reasoned that McGoldrick did apply to containers under the treaty and under the Federal regulation, and indeed, the United States in Japan Line pointed out to this Court that not only the treaties, but the implementing Federal regulation created a circumstance where the containers were simply not present for purposes of State taxation, and that the tax on containers should be invalidated under the reasoning of McGoldrick.
There are three objectives to the treaties here.
The first is the overarching objective of the treaties to encourage the selection of containers for carrying goods in foreign commerce.
The reason behind the treaty was that this would simply reduce the unit transport cost of goods as they travel in an increasing international market.
Now, there were two other purposes, though, to this treaty adopted and articulated by the United States.
First, President Johnson in 1966, in recommending the adoption of the 1956 treaty, noted that the purpose of the conventions were to aid the American export drive by reducing the cost of carrying American goods by container to foreign markets.
And finally, the U.S. Senate Committee on Foreign Relations, in recommending the adoption of the 1972 treaty, pointed out that the purpose of the treaty was to benefit United States owned and operated containers.
Mr. Kneedler: Do all of those things if it eliminates them from customs duties and import taxes, but it's... it does benefit them that way.
And that's an additional tax that these containers would constantly and repetitively be subjected to.
It achieves that objective, but it doesn't have to in addition eliminate sales taxes on leases, which are not repetitive and which all property is subject to whether it's property that's constantly used in commerce or not.
It seems quite reasonable to me.
Mr. Collier: Certainly the same arguments were made in both McGoldrick and Xerox, and in McGoldrick, in particular, the tax imposed was a sales tax.
It was a sales tax on fuel oil sold to ship stores which could have been taxed in other jurisdictions under consumption taxes.
In addition, in this particular situation, both McGoldrick and Xerox pointed out that, of course, the State sales tax and the State property tax were not customs duties, but nevertheless, the same objectives are stricken by the tax.
First, there really is little difference in the impact of a State sales tax on container leases from a customs duty on the goods moving across the borders.
Mr. Kneedler: What was the language in those cases?
Was it language that even approached chargeable by reason of importation?
Mr. Collier: Neither of those cases involved international treaties.
They were simply involving Federal statutes.
Mr. Kneedler: I understand.
Did the statute say anything about chargeable by reason of importation?
Mr. Collier: The statutes I don't think had language of that kind in them.
They excepted the fuel oil and the transshipped goods from customs duties.
Mr. Kneedler: But, I mean... but then why are they relevant?
I mean, we're talking about a text here, chargeable by reason of importation.
Mr. Collier: Well, we're not only talking about the treaties.
We're talking about the implementing Federal regulation which excepts them from customs duties and the amendment to 19 U.S.C. 1202, the harmonized tariff schedules of the United States.
So, we're talking about not only the language of two treaties, but the Federal implementing regulation.
Mr. Kneedler: Well, if you're talking about a Federal regulation, surely there you also give deference to the executive branch in construing the regulation, do you not?
Mr. Collier: I think the same deference is applied to the interpretation of a regulation, as long as that regulation is not at odds with the delegated power from Congress.
And again, I would point out that the opposite position was taken by the United States in 1978.
The Tennessee tax--
Mr. Kneedler: Can you help me a little more with the facts?
All these containers are manufactured abroad, and they're shipped to different places in the United States, including Tennessee.
When they arrive in Tennessee, is there any duty to get them out of Tennessee within a limited period of time?
Mr. Collier: --The treaty provides that the containers should be reexported within 3 months.
That's to provide the benefit of temporary admission.
Mr. Kneedler: Well, does the record show that all the containers at issue here were in Tennessee for less than 3 months?
Mr. Collier: I believe that the record indicates that, though I would also point out to this Court that the Federal Customs Bureau has waived that particular requirement and no longer requires 3 months as a matter of regulation.
That's what the treaty sets forth, but the U.S. Customs regulations allow the containers to remain for a longer period of time.
Mr. Kneedler: When these containers come into the United States, are some of them empty or are they all full?
Mr. Collier: Some can come in empty, and some can arrive full.
Mr. Kneedler: Do some come empty to Tennessee and sit in a warehouse for a while before they're leased to a entity who used them to ship goods?
Mr. Collier: There's no question, Justice Stevens, that some of the containers were present at one of the terminals either in Memphis or Chattanooga or Knoxville for some time in a yard.
These containers are stackable and are set out in a container yard.
Mr. Kneedler: And they're empty at that time.
Mr. Collier: Yes, while they'll be staying there--
Mr. Kneedler: And there is no time limit.
There's no legal requirement that they be shipped out of Tennessee within a fixed period of time.
Mr. Collier: --That's regulated by the Customs Service.
I'm not certain whether the current regulation is on that.
The treaties talk about 3 months, but allow them--
Mr. Kneedler: See, if you acknowledge that, I'm not quite clear on why the fact they're manufactured abroad makes this a different case from if they had been... a case in which they had been manufactured in Tennessee empty and then sold.
That's what's troubling me.
Maybe you're right, but I have some difficulty factually seeing the difference.
Mr. Collier: --It has been stipulated in this case that all of Itel's containers during the audit period were continuously bonded and in the stream of foreign commerce whether or not they were temporarily stored.
Mr. Kneedler: Yes, but I don't know what that means.
That's my problem.
Mr. Collier: What that means is, of course, there is going to be the necessary interruption of the movement of an instrument of international traffic as it is moved around the world and engages in a series of leases and multiple import-export moves.
What Congress sought through the waiver of customs duties in this case was to allow the free movement of containers without reducing their cost, either due to the crossing of a border or the imposition of tax, and certainly in this case, Congress has waived the benefit of quite a bit of customs duties: $178,000 approximately in this case.
And Tennessee's tax of $158,000 nearly completely offsets that tax.
Mr. Kneedler: Well, I suppose that Tennessee could impose some sort of a tax if it had a reasonable formula for determining what services the State of Tennessee were... was rendering.
Mr. Collier: In the event... yes, yes, that's true.
In the event that Tennessee measured a particular service provided to a container, both under the treaties and under this Court's constitutional law--
Mr. Kneedler: Well, the State generally provides services for almost any kind of property that's within the State: fire and police protection, things like that.
Mr. Collier: --This Court has consistently held, in considering whether or not a particular tax is a user fee or whether it's a general tax, whether or not that tax is measured by the particular benefits that are allocated to that individual.
The Keokuk Packett case, some of the other cases of this Court decided in the last century, indicate that a user fee has to be collected in regard to particular services, not police or fire protection.
Mr. Kneedler: Well, how was the tax... sales tax measured in this case?
Mr. Collier: The sales tax in this case was measured by 100 percent of the gross lease proceeds under the lease, and since these containers were charged on a... lease was charged on a per diem basis, the total amount under the lease wasn't known until the journey was ended.
So it would be billed on a monthly basis.
Mr. Kneedler: It was... I thought it was by the average.
Mr. Collier: That was in estimating.
What you're referring to, Justice White, is the estimation of the number of containers that were, in fact, leased within the jurisdiction.
There was a projection done calculating the average container days leased in the audit.
Mr. Kneedler: --But it wasn't measured by any... anything related to the time the container was in Tennessee.
Mr. Collier: Tennessee has made no effort to apportion its tax.
Mr. Kneedler: Is there anything in the record from which it can be determined the average amount of time these containers were in Tennessee?
Mr. Collier: I'm trying to think back, Chief Justice Rehnquist, whether or not there is something in that regard.
Perhaps I can provide that on rebuttal.
Mr. Kneedler: Very well.
Could you tell us how the operation of foreign tax systems becomes relevant to your case?
There is a submission that the European Community does not impose this kind of tax.
Why is that relevant?
Because it shows an interpretation of the convention or because it shows the danger of multiple taxations if we rule against you, or both?
Mr. Collier: Both, Justice Kennedy.
The fact that there are, in fact, taxes which could be imposed on these containers and the fact that there is an international custom which respects these treaties and their meaning, as set forth in the protest of nations and in the brief of the United Kingdom.
At this point, if I can--
Mr. Kneedler: We look on that fact as evidence of how to interpret the treaty?
Mr. Collier: --Yes, Justice Kennedy.
That's evidence like in the Franklin Mint case.
The consistent interpretation of treaties by signatory nations is certainly compelling evidence.
Mr. Kneedler: So, you reject this statement in the Government's brief: There is no uniform international custom or practice of exempting container leases from the effect of generally applicable tax laws.
Mr. Collier: Yes.
We certainly dispute and have indicated in our reply brief the reasons for that dispute.
The only tax identified by the Solicitor General as being supposedly the same is a tax on the goods imported in a container which is paid only by a person who buys the goods as a consumer in the European communities.
At this time, I'd like to reserve the rest of my time for rebuttal.
Mr. Kneedler: Very well, Mr. Collier.
General Burson, we'll hear from you.
ORAL ARGUMENT OF CHARLES W. BURSON, ESQ. ON BEHALF OF THE RESPONDENT
Mr. Burson: Mr. Chief Justice, and may it please the Court:
Petitioner raises three challenges to Tennessee's sales tax as applied to leases of intermodal containers delivered to lessees in the State.
The tax is preempted by the terms of the 1956 and 1972 customs conventions.
The tax impermissibly impinges upon the foreign commerce clause, and the tax frustrates the purposes of the export-import clause.
It's the State's contention that the following two propositions dispose of these arguments.
One, the tax is a generally applicable, nondiscriminatory sales tax.
It's, thus, beyond the scope of the customs conventions' prescriptions of duties and taxes imposed by reason of or in connection with importation.
Two, the tax as applied isn't at variance with any doctrine or principle of international taxation accepted by the United States.
This principle disposes of foreign commerce concerns, for if the tax doesn't conflict with international principles recognized by the United States, there can be no State interference with the Federal Government's regulation of foreign commerce.
The two principles together establish that the tax doesn't frustrate the purposes of the export-import clause, as articulated in Michelin.
The tax at issue is not a duty imposed by reason of or in connection with importation.
It's a garden variety sales tax.
It's a source of general revenue for Tennessee.
As virtually all generally applicable sales taxes, it applies to the sale of goods and to leases of personal property wherein delivery occurs within the State.
Mr. Kneedler: Suppose we were to find as a definitive matter that no country in Europe under its interpretation of the treaty could levy the tax that was being levied here, that this was their interpretation.
It's not our interpretation, but it's theirs... and that were definitive.
I know that's in dispute.
Would you then lose this case?
Mr. Burson: No, sir.
What we say is essential is what this Nation recognizes.
That's the voice with which... the voices with which the United States speak as the principles that we have to be in compliance with.
The foreign commerce clause doesn't tell Tennessee it has to comply with the dictates of foreign nations and their practices.
What it tells us is we have to comply with and be uniform with expression of our national policies in regard to international trade.
Mr. Kneedler: Well, suppose we were to find that a ruling in your favor would cause the levies of multiple taxes in other countries, particularly Europe, and that this would be burdensome on foreign commerce.
Would you then lose the case?
Mr. Burson: If you were to find that it would be burdensome on foreign commerce and this Court recognized some uniform doctrine that was recognized by this Nation, yes, but in a vacuum, Your Honor--
Mr. Kneedler: Well, but that's quite liable to happen.
If we rule in your favor... and that's a definitive interpretation of the treaty... I take it European countries could look upon that as very persuasive evidence of what the convention means, and they could all begin to levy this precise kind of tax.
Mr. Burson: --Specific--
Mr. Kneedler: And there would then be multiple taxation on Itel, would there not?
Mr. Burson: --Specifically there would be similar... perhaps similar taxation, not necessarily multiple taxation, and we would suggest that's not the type of impediment that the conventions addressed it to.
That's not the type of concern that the United States has expressed.
So, even with that finding, we would say there's no principle which would say Tennessee's tax should fail--
Mr. Kneedler: Well, General Burson, I suppose the hardest question presented here is the meaning of the conventions dealing with these containers, which clearly were entered into for the very purpose of encouraging the use of them and keeping the cost down of the users of those containers.
Now, you do agree, do you, that the interpretation of the conventions by other nations who are signatories to it is relevant in our interpretation of the meaning of the convention?
Mr. Burson: --Justice O'Connor, it's our contention that you don't need to get to the practice for interpretation, that the textual--
Mr. Kneedler: Well, suppose we do.
Is it relevant?
Mr. Burson: --If you do, it is relevant, but we would contend that what is more relevant is the position of the United States in its interpretation of the treaty to determine whether Tennessee is violative of the foreign commerce clause.
That's what we're looking at.
Mr. Kneedler: Well, suppose what we're looking at is the meaning of the convention itself.
We have to look at the language, and I suppose consider the interpretation of all parties to the convention--
Mr. Burson: Yes, and we would suggest--
Mr. Kneedler: --not just the United States.
Mr. Burson: --Yes.
We would suggest, though, that great deference... this Court would give great deference to the interpretation of that treaty by the United States.
This is in this instance a voice that we're looking to be consistent with.
Mr. Kneedler: Well, certainly Tennessee's tax here does have an effect very similar to a customs duty, as it's imposed on these containers that apparently are in Tennessee only a very short time.
Mr. Burson: Now, we would disagree with that proposition, Justice O'Connor.
If you look at the purposes of what they're trying to free these containers from, it's more than just the economic... the incidence of a tax in the form of a customs duty.
What they're trying to free these containers up for... and it's in their brief, footnote 3.
One of the main things is to enable these containers to flow across national boundaries without having to get unloaded, without having to comply with customs.
In the United States, we have, in effect, given effect to this treaty and the interpretation, our interpretation by our Federal statutes, and by our Federal regulations, is that they are only relieved in the statute from the customs laws, that in our Federal regulations they are only relieved from duties and from complying with the necessary paperwork when they cross the territorial boundaries.
So, the United States is not only here before this Court asserting that the conventions don't mean what petitioner contends, but in our very enactments, in our statutory enactments and regulations, it's reflected that we're only talking about matters of a customs nature and customs laws.
Mr. Kneedler: Well, I suppose your State puts an income tax on Intel... is that the name?
Mr. Burson: Itel.
Mr. Kneedler: Itel?
Mr. Burson: Yes, sir.
Mr. Kneedler: Measured by the income it gets in Arkansas.
Mr. Burson: Well, I think we would have an apportioned income tax... excise tax on Itel's business, yes, sir.
Let me mention one thing.
Justice Kennedy raised the question about property taxes, and in testing this theory, in fact, really the premise in Japan Line was that Japan, who is a... I think a party to these treaties... the premise was they could impose the property tax.
That's the reason California couldn't, because Japan was imposing a personal property tax on those articles.
In that case, California was trying to do it on a foreign corporation, but here we have a domestic corporation.
Now, if the principle is and if this Court has recognized the principle that personal property tax... taxes are assessable on these containers, it flies right in the face of the contention that this treaty means that no taxes can be imposed on these containers by virtue of their mere presence.
Mr. Kneedler: Well, suppose Itel has a 2-year lease and this container is going to go first to England and then to India and then to Japan, but it's not... the destination is not fixed for certain as of the time it goes to England.
It goes first to England.
In England, Itel then does some telephone calls and soliciting and it's determined that the direction of that container will be diverted and it will go back to Canada.
Can England tax the transaction that resulted in that container being diverted and assigned to a new destination?
Mr. Burson: It would be our position that there is nothing in the treaty or in international principle that would say it couldn't.
Mr. Kneedler: That would be a multiple tax on the same transaction, though, would it not?
Because your tax extends for the whole 2-year period, and England has taxed it once again, that portion of the transaction which was the reassignment of the container.
Mr. Burson: Yes.
Mr. Kneedler: General Burson, as I understand it, the incidence of your tax is upon the lease.
It's not upon the containers themselves.
It's not even a property tax on the containers.
Mr. Burson: That's correct.
Mr. Kneedler: And as I understand it, the foreign countries also have some exactions that affect the containers, as your tax does.
It's your contention that the VAT tax amounts to that, doesn't it?
Mr. Burson: Yes.
Mr. Kneedler: Because the VAT tax is upon the contents of the containers, but the value of those contents is increased for purposes of the VAT by the leasing cost that's attributable to them.
So that, in effect, the lease is being taxed through the VAT anyway.
Mr. Burson: Yes.
The... they're using the same economic measure of the tax.
Tennessee uses, as its measure for its tax, the consideration.
The VAT tax, when it taxes the goods, uses at least a portion of the cost of the lease as a measure of its VAT tax.
Mr. Kneedler: And do you know whether foreign countries, other signatories to the treaty, would be tempted to impose the same kind of a tax as Tennessee?
I mean, that is, do they generally have sales taxes?
Mr. Burson: This is one of the difficulties with trying to... even looking at the multiple taxation situation in the absence of a uniform principle, we're talking about nations with entirely different tax structures.
Europe doesn't have a sales tax structure.
They have a VAT tax.
Mr. Kneedler: What would they do if an empty container were shipped to England?
There would be no VAT tax then.
Mr. Burson: --Well, there would be no goods.
So, there would be no VAT tax I assume on that.
Mr. Kneedler: And empty containers are shipped in the course of Itel's regular business, are they not?
Mr. Burson: Yes, sir.
The foreign commerce clause precludes States from engaging in practices which are at variance with the regulation of foreign commerce by the Federal Government.
Mr. Kneedler: General Burson, before you get off the last point, you would not... empty containers can be shipped out of Tennessee as much as Itel wants so long as they don't lease it to somebody.
Isn't that right?
Mr. Burson: That's exactly right, Justice--
Mr. Kneedler: And they can ship those empty containers all around the world so long as they don't enter a lease in Tennessee.
Mr. Burson: --That's exactly right, Justice Scalia.
In fact, that was the case on this record, that there are containers that they interchange and don't enter into leases that come in and out of Tennessee that are not... that no tax applies to.
Mr. Kneedler: Some... are any leases executed abroad, or are they all made in Tennessee?
Mr. Burson: The... all the... the taxes here are where delivery has occurred in Tennessee.
Mr. Kneedler: Oh, I understand, but does Itel, in fact, conclude some leases abroad?
Mr. Burson: It's my understanding that all leases are concluded in San Francisco or are executed in San Francisco.
There are cases where they deliver, yes, where delivery occurs in other jurisdictions.
Mr. Kneedler: So that you don't reach... you don't even reach the value of the leases at all.
Mr. Burson: No.
Mr. Kneedler: But you tax based on the delivery, not the execution of the lease.
Mr. Burson: That's correct.
Tennessee's whole sales tax scheme... in fact, in most jurisdictions in this country, the sales tax is based upon delivery.
And let make a point.
These containers come into Tennessee and then they are competing for transport business within Tennessee with other commercial activity in that State, and it's this commercial activity that Tennessee is taxing, not the mere presence or even the mere transit through the State of these container leases.
Quite frankly, it's much less of a tax, say, on importation than is the VAT tax, which is... really taxes the goods because they're imported and gets, within the economic measure of that tax, the cost of the lease.
We would contend that controlling... let me go back to the textual aspect of the treaty one second, and that is, if everything is... our statutes, our regulations, the language of the treaty itself... says this is intended to apply to customs duties.
Under the protocol of signatures, they... which is a part of the treaty, they specifically say: The terms of the present convention shall not preclude the application of national provisions or of international agreements not of a Customs nature, regulating the use of these containers.
We would just contend that's further evidence that what the treaties are getting at are actually the customs... a customs type of a tax.
Mr. Kneedler: Where was that language you just read from?
Mr. Burson: That's under the protocol of signature, which is a part... incorporates a part of the convention, and--
Mr. Kneedler: Where do we find that in the materials before us?
Mr. Burson: --Well, I think that... supposedly the convention language is in the joint appendix, but it is represented in the joint appendix to be the entire convention, but I'm not sure that it is.
I could furnish the Court a copy of that.
It's the United Nations treaty series dealing with the 1972 container convention.
Mr. Kneedler: Why don't you furnish the Court a copy if you--
Mr. Burson: What the concern of the foreign commerce clause is, it's our contention, is the uniformity between the States and the Federal Government, our actions in regard to policies recognized by the Federal Government.
This Court's jurisprudence instructs us that in identifying those principles, the Court looks to treaties or conventions, as we're doing here, to Federal statutes, to the manner in which national laws are applied, to this Court's recognition of established doctrine of international law, and to the positions taken by the United States in proceedings before this Court.
In Japan Line, there was a custom of nations against which you could measure the deviation of the California tax.
In this case, we have no such recognized custom of nations.
The only thing that petitioners point to, one way or another, either as a policy or as preemption doctrine, is the treaty.
We would suggest that the plain language--
Mr. Kneedler: --And the practice, which may consist of nothing more than that other countries don't have a sales tax, period, on containers or anything else.
Mr. Burson: --Yes, yes.
And it seems they're making the argument that the practice informs us about the meaning of the treaty, but they also seem to be suggesting that the practice in some way establishes a recognized uniform principle of international taxation, and we would contend that is just not the case.
There is no such principle in relation to this form of taxation that would... in which Tennessee's... or to which Tennessee's tax is asymmetrical.
Mr. Kneedler: But apparently... is it also true that Tennessee is the only one of the 50 States in the United States that does this?
Mr. Burson: Well, you know, the record is... not necessarily.
The record is very skimpy on this.
In fact, it's based upon one statement by a director of marketing that says, to your knowledge has any State other than Tennessee stopped to impose a sales tax on the proceeds of international cargo containers.
And the director of marketing said, not to my knowledge.
Their statement that no other State imposes is based upon that.
In fact, there is a letter ruling from Massachusetts back in '79 after Japan Line in which that very question was posed to them, and they said their tax did apply to leases and sales of containers, and again, we'd be happy to furnish that to the Court upon request.
Mr. Kneedler: We didn't get any amicus briefs from any other States, I don't think, did we?
Mr. Burson: No, but I don't... Your Honor, we would contend, Justice Stevens, that nothing should be read into that.
We have plenty of experience either of getting... hustling up amicus briefs or not, and again, we think that the position of Tennessee supported by the United States amply addresses the questions raised by petitioner in this case.
Again, it's a generally applicable sales tax, nondiscriminatory, and there is no recognized principle of international law in which our actions are deviated.
Mr. Kneedler: Thank you, General Burson.
Mr. Kneedler, we'll hear now from you.
ORAL ARGUMENT OF EDWIN S. KNEEDLER ON BEHALF OF THE UNITED STATES AS AMICUS CURIAE, SUPPORTING THE RESPONDENT
Mr. Kneedler: Thank you, Mr. Chief Justice, and may it please the Court:
The United States agrees with Tennessee that application of that State's sales tax to the lease transactions taking place entirely within its borders is not barred by either the customs conventions on containers or the foreign commerce and import-export clauses of the Constitution.
A holding by this Court to that effect would be consistent with both of the national interests that are implicated in a case such as this.
First, it would serve the important national interest, the interest of the Nation as a whole, of protecting the rights of the individual sovereign States to impose taxes on matters within their borders, and thereby to ensure that those engaged in foreign commerce, no less than those engaged in interstate and domestic commerce, bear their fair share of the burden of supporting State and local governments.
Secondly, in the view of the United States, a holding by this Court to that effect would be consistent with the United States' interests in international relations and in foreign commerce.
Our position rests on two principal points.
First, the conventions on containers, the implementing statutes and regulations, as construed by the executive branch, do not bar generally applicable sales taxes of this nature.
Secondly, independent of the convention, unlike in Japan Lines, there is no rule or principle of international taxation that has been accepted and recognized by the United States that bars taxes.
Mr. Kneedler: Mr. Kneedler, Mr. Collier says that the Government has changed its position in one aspect of this case since its appearance in Japan Line in 1978.
Do you agree with that contention?
Mr. Kneedler: In... to some extent, yes.
In Japan Line, the thrust of the Government's argument, though, was not primarily on the convention, but on the implementing statutes and regulations, which I can address in a moment.
But basically the bonded warehouse-statutes involved in McGoldrick and Xerox... there was a suggestion in our brief that those same rationales would apply under the particular statute, 1322(a), that is at issue in this case.
On further reflection, we think it's clear that the... that there really is not an analogy between those two provisions.
Mr. Kneedler: Well, would Japan Lines have... come out the other way?
Or do you think that Japan Lines should have come out the other way under your current view?
Mr. Kneedler: Not at all, and we think pointedly the Court in Japan Line did not rely either on the convention or on the statutes that petitioner relies on here to invalidate the tax.
The Court went beyond that.
Logically they would have been antecedent to reaching the constitutional question of whether the taxes violated the commerce clause.
The Court instead resolved it on that ground and, therefore, must have concluded... and did not accept the invitation of Japan Lines that the taxes violated the principle of McGoldrick or the conventions.
Mr. Kneedler: And how about McGoldrick itself?
Under your present view, would it still have come out the same?
Mr. Kneedler: Yes, it would.
That... the statutes involved in McGoldrick and Xerox are quite different.
Those statutes involved bonded warehouses in which goods come and are essentially held at the border and are under the custody of the Customs Service, along with the warehouse person, and while they're in that custody, they are accepted... subject to extensive regulation.
The statute at issue here is really quite different.
It allows the goods to pierce through the border to be admitted for the delivery and pickup of goods within the United States, and they are manifestly not within the custody of the Customs Service.
It's logical, just under a straightforward sense of the supremacy clause, that a State could not tax goods that are under the custody at the border of the Customs Service, but that--
Mr. Kneedler: We certainly have briefs in this case from amici who think that the convention should be interpreted differently.
Mr. Kneedler: --Right, and at the moment I was just interpreting or... excuse me... addressing McGoldrick and the Xerox--
Mr. Kneedler: Yes.
Mr. Kneedler: --and the Xerox cases.
One last point I would like to make about the statutory point before I move on to the conventions.
The statute at issue is quoted at page 10 of our brief, and it reads... it provides that instruments of international traffic, which includes containers, are exempt from the application of the customs laws to such extent and subject to such terms and conditions as may be prescribed in regulations or instructions of the Secretary.
The statute itself contains no exemption even from the customs laws.
You're referred to the regulations of the Secretary to determine what exemptions there are.
The regulations of the Secretary in this case exempt containers from the customs laws and duties, both the entry and the duties requirements, but they do not... there's nothing in the regulations to which this Court should defer that would exempt the containers from State taxes.
Turning to the convention now, if I may, this Court has described the conventions as designed to remove impediments to the use of containers.
That's what the Court said in Japan Lines.
And the conventions themselves make clear what sort of impediments were being spoken of, and those impediments are ones of a customs nature.
These are, after all, conventions called customs conventions on containers, and the central obligation of the parties under the conventions is to allow temporary admission, which is admission defined in both conventions free of import duties and taxes, free of import prohibitions and restrictions.
And the phrase import duties and taxes is, in turn, defined as custom duties or other taxes chargeable by reason of importation under the '56 convention or in connection with importation of goods.
At every turn, there is a specific reference to importation, and the impediments to be removed are customs.
The protocol of signatures reinforces that point.
The protocol, by the way, is reproduced at footnote 8 of our brief.
It specifically reserves to the parties the right to impose restrictions not of a customs nature.
Mr. Kneedler: So, your submission is that this State tax is not by reason of or in connection with--
Mr. Kneedler: Precisely.
The petitioner argues that because the containers may be present in the country by reason of importation that that's enough, but the convention refers to the premise for the tax.
Is the tax chargeable by reason of importation or imposed?
It looks at it from the perspective of government levying the tax, not the reason why the container may be within the country.
Mr. Kneedler: --So, a property tax should also be valid under your view.
Mr. Kneedler: Yes, and in fact, presumably the Court... I think the Court implicitly so concluded in Japan Line itself.
Mr. Kneedler: Do I understand that the British Government disagrees with that proposition?
Mr. Kneedler: Yes.
As I understand the UK's position, it is that a tax... any tax... and they simply pick up the same point that petitioner does, that because the containers are present by reason of importation, that that's sufficient.
They also rely on the purposes of the convention.
But the purposes are implemented according to the specific terms of the convention.
If the purposes were to be given the full scope that petitioner argues, income taxes on these would be prohibited.
The tax on the repairs of the containers that petitioner doesn't even challenge would be prohibited.
Mr. Kneedler: It says there's another provision in the later convention that allows taxes on the basis of services provided.
Mr. Kneedler: Right, but that is something that would focus largely on the moment of importation, wharfage fees and something like that, as the goods were being entered into.
That's something different from the sales tax within the United States.
There's another reason why the conventions are inapplicable, and that is that they do not apply at all to the actions of the parties of the contracting State, which we've set that forth... that in our brief.
And also to the extent the negotiating history of the conventions are relevant on this point, petitioners cite in their reply brief some excerpts from the negotiating history.
Fairly read as a whole, those... the negotiating history cuts precisely the other way, and I would refer the Court to that if the Court addresses that question.
Turning to the UK's position on the VAT tax, our point there is that the VAT tax does... the VAT does tax the value of the lease.
That's our simple point.
And so, if the conventions are to be given the broad scope that the UK would argue for to serve their policies, then taxing the value of the lease as included in the value of the goods should be equally preempted.
Mr. Kneedler: And I suppose that would be true even if, as often happens, the lessee ships an empty container.
Mr. Kneedler: Well, right.
Mr. Kneedler: Because ultimately it would be in the cost of the goods.
Mr. Kneedler: Precisely so.
And you mentioned, Justice Kennedy, earlier the question that the UK might respond by imposing a tax on lease transactions there.
Our position is that that's not the sort of retaliation that the commerce clause is referring to, because just as it is our position that the United States or a State may impose a tax on a discrete transaction, so may... when delivery occurs in the United States, so may a foreign country.
That's not multiple taxation.
It's just the UK saying we might do what Tennessee is doing, and our position on that is fine because as in Wardair, the transaction being taxed, in that case sale of fuels... fuel, takes place entirely within the taxing jurisdiction.
So that is not a threat of multiple taxation.
Mr. Kneedler: Thank you, Mr. Kneedler.
Mr. Collier, you have 3 minutes remaining.
REBUTTAL ARGUMENT OF PHILIP W. COLLIER ON BEHALF OF THE PETITIONER
Mr. Collier: As pointed out by the United Kingdom in its brief, the signatory nations to this convention have followed the uniform practice of failing to impose taxes like Tennessee's for 36 years.
The position of the United Kingdom and the other protesting nations, which include 8 of the original 12 nations which drafted the 1956 treaty, have posed the interpretation of the convention that is followed by Itel.
So the deference that would be ordinarily given the executive branch in interpreting international law is informed by the interpretations of those nations.
Mr. Kneedler: I'm not aware of... is it a principle of contract law, for example, that if eight out of nine parties to the contract interpret it a certain way, that's what it must mean?
I'm not sure I agree with you.
Mr. Collier: Certainly, Justice Scalia, it's not simply a head count.
The United States was not even a participant in the drafting of the language to this convention.
They acceded 13 years later.
We're not contending that it's just a principle of contract law.
Mr. Kneedler: But surely we're bound by what it means, and if our understanding is the correct one, that ought to be it.
Are there cases in which they have held, in effect, that by reason of means just being present in the jurisdiction?
Mr. Collier: There are no cases construing that language.
Mr. Kneedler: It's just they take this position in this litigation.
Mr. Collier: They take that position in this litigation, and they have prevented containers from being taxed by their own statutes.
There is a uniform practice in this case, and I would point out that the only example given by the United States wasn't even alluded to by Tennessee in their brief, is the imposition of a tax on goods imported in a container.
And I would like to make this for an example.
If a British steamship line leases a container which is delivered in Tennessee to export a case or cases of Jack Daniels whiskey to London, certainly the taxes imposed on the container lessee by Tennessee has to be by the lessor and paid by the lessee.
But the import VAT that the United States has raised in Britain only means that when a customer at a pub purchases a fifth of Jack Daniels, he has to pay an import VAT on the base price as determined under cost, insurance, and freight.
There is simply no connection in that tax.
There is no disincentive in that tax to the use of containers.
It simply doesn't strike at the container or the container selection decision.
I would also like to respond--
Mr. Kneedler: Excuse me.
Isn't the... doesn't the cost include the cost of leasing the containers to get the beer there?
Mr. Collier: --The cost under the CIF method of valuation, which is adopted, does include the fraction--
Mr. Kneedler: Right.
Mr. Collier: --of the lease which is involved from the travel from Tennessee to the United Kingdom, but that has never been... that is not a tax in connection with the importation of containers.
It doesn't fall on the choice.
It doesn't affect the use of containers.
Mr. Kneedler: There is a sales tax technically, but the question is you say it is in effect, and so is the VAT in effect.
Now, it's divvied up among all of the States that use the container over time, but in effect it reaches the leases just as the Tennessee sales tax does.
Mr. Collier: It does not fall on the container lessors or lessees.
Thank you, Justice Scalia.
Chief Justice Rehnquist: Thank you, Mr. Collier.
The case is submitted.
Argument of Speaker
Mr. Kneedler: The opinions of the Court in two cases will be announced by Justice Kennedy.
Argument of Justice Kennedy
Mr. Kennedy: The first case I have to announce is Itel Containers versus Huddleston, No. 91-321.
The case comes to us on writ of certiorari to the Supreme Court of the State of Tennessee.
It is a tax case involving the standard large steel containers that are used in the international shipping industry for transporting the goods by truck and rail and oceangoing carrier.
In 1990, a cargo container ships 60% of United States in marine imports and 52% of our marine exports.
Petitioner Itel Containers is an American corporation and its principal business is leasing these containers.
The petitioner’s leases are solicited and negotiated in six different states and the leased containers are delivered to lessees or their agents in many of the 50 states including Tennessee.
The Tennessee deliveries occur either at the petitioner’s Memphis terminal or at several designated third party terminals.
In December 1986, the Tennessee Department of Revenue assessed $392,000.00 in sales tax penalties and interest on the proceeds petitioner earned from leased containers delivered in Tennessee between January 1983 and November 1986.
The petitioner paid under protest and filed an action for refund challenging the constitutionality of the Tennessee tax under the Commerce Clause, the Import-Export Clause, and the Supremacy Clause.
The State Court reduced the tax assessed on a state low grounds but it rejected the petitioner’s constitutional claims and essentially ordered all of the tax paid.
The Supreme Court of Tennessee affirmed.
The court concluded that Congress had not acted to bar state sales taxes on cargo container leases and the State Supreme Court further concluded that the state tax does not violate the Commerce Clause because it does impose only upon a discreet transaction, the transferred possession of cargo containers in Tennessee.
Finally, the Court held that the Tennessee Tax does not offend the Import-Export Clause because it does not prevent the Federal Government from speaking with one voice on Foreign Affairs and it is not a direct tax on the value of goods destined for export.
In an opinion filed with the Clerk today we affirm the Supreme Court of Tennessee.
Petitioner’s primary challenge is that the Tennessee sales tax is proscribed by two International Conventions, the 1972 and 1956 customs convention on containers.
The text of the conventions, however, makes it clear that it is the reason the State imposes a tax that determines whether it violates the container conventions.
The conventions disallow only those taxes imposed based on the act of importation itself.
The Tennessee sales tax in contrast is a sales tax of general application that does not discriminate against imported products either in its purpose or effect.
The petitioner also argues that Tennessee sales taxes preempted because it would frustrate the federal objectives underlying the Container Conventions and the federal laws and regulations granting favored status for the international containers, but the Federal regulatory scheme for containers discloses no congressional intent to exempt those containers from all or most domestic taxation.
The precise Federal policy regarding promotion of container used is satisfied by a prescription against taxes or imposed upon or discriminated against the importation of containers.
We find that Tennessee’s general sales tax, which applies to domestic and foreign goods without differentiation does not impede the federal objectives expressed in the 1972 and 1956 Container Conventions and related federal statutes and regulations.
Petitioner also challenges the Tennessee’s tax has violated the Foreign Commerce Clause and of the provision in the Constitution prohibiting states from taxing imports or exports and for the reasons given in our opinion, we reject these contentions as well.
Justice Scalia has filed a concurring opinion; Justice Blackmun has filed a dissenting opinion.