Cases by Issue - State Tax

Missouri Director of Revenue v. CoBank ACB - Oral Argument

Fri, 09 Jan 2009 14:50:30 +0000

Case:

Missouri Director of Revenue v. CoBank ACB

Media File:

99-1792_20001128-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of James R. Layton

Chief Justice Rehnquist: We'll hear argument next in Number 99-1792, the Director of Revenue of Missouri v. CoBank ACB.

Mr. Layton.

Mr. Layton: Mr. Chief Justice and may it please the Court:

In 1933, when Congress authorized the organization of banks for cooperatives, it implicitly authorized the States to tax them.

That authority became effective for each bank when it retired the Government shares.

The National Bank for Cooperatives paid taxes to Missouri until 1995, but according to the Missouri supreme court the bank's tax liability ended in 1985.

That court failed to recognize the bank's exemption from taxes is and always has been provided by statute, and that statute, now 12 U.S.C. 2134, exempts from taxation only the bank's notes, debentures, and other obligations, not its income.

In deciding what section 2134 means, the Missouri supreme court erred in three respects.

It transformed a technical and conforming amendment into a significant change in the Farm Credit Act, it made that transformation by adding to the plain language of the statute, and it turned the statute into something that is incongruous to the rest of the Farm Credit Act.

Before 1985, the statute provided that CoBank and its predecessors would always pay taxes on real and tangible personal property and, at any time when the Government did not own shares, they would pay other taxes to State and local governments and perhaps even to the Federal Government.

The question arises here as to what happened in 1985, and the position being taken by CoBank is that in 1985 suddenly they were freed from all taxes, and yet that is not what the statute said in 1985.

There was a technical and conforming amendment that appeared in title 2 of the 1984... 5 act.

Title 2 was the part of the act that was dedicated to making the Farm Credit Administration an arm's length regulator for the farm credit system, something more akin to what we see at the FDIC and other bank regulators in the Federal system.

Title 1 of that act also included conforming amendments.

Title 1 dealt with the credit corporation which CoBank cites here as a new vehicle for investment into the farm credit system.

The second point that the Missouri court erred on is transforming the plain language by adding to it.

The plain language of the statute is simply that this entity is exempt from taxation as to its notes, debentures and other obligations.

Ever since 1933, the entire scope of the exemption given to the banks for cooperatives has been contained in statutes.

The only thing that anyone can point to in the statute today that goes beyond notes, debentures, and obligations is the reference to this entity as a Federal instrumentality, but this Court has at various times suggested or, in fact, held that Federal instrumentality does not have the kind of meaning that CoBank ascribes to it.

Justice Souter: It has, I take it, been described as such by statute from the very beginning.

Mr. Layton: From the very beginning, Your Honor, and that's significant, because even in 1933, what rights or abilities a Federal instrumentality had was unclear.

Certainly--

Justice Breyer: But don't we have... isn't the statute... as I understand the statute, it used to say, your bonds are exempt and your income is exempt as long as the stock's being held by the Board of Governors.

Mr. Layton: --That's right.

Justice Breyer: All right.

Now, they get rid of the second part because nobody holds the stock any more.

Mr. Layton: That's right.

Justice Breyer: All right.

So we're left with the first part.

Mr. Layton: That's right.

Justice Breyer: And what you rather brilliantly say is, ha ha, that means McCulloch clicks in.

Mr. Layton: Well--

Justice Breyer: And since McCulloch clicks in, since it doesn't say it doesn't, they're exempt anyway as a Federal instrumentality.

Mr. Layton: --Well, I think that's what they say.

That isn't what we would say.

Justice Breyer: Right.

Right.

That's what they say.

Mr. Layton: We would say that they're not--

Justice Breyer: Exactly, right.

Mr. Layton: --That's right, and this Court, and in fact Congress has never suggested that there could be this kind of a hybrid provision for exemption.

In each of the instances where we have a financial institution that seeks an exemption from taxes, Congress has either defined the whole scope of that exemption, or left it blank.

Justice Breyer: All right.

Now, given that's their argument, and given we're left with the remnant, why doesn't McCulloch click in?

Mr. Layton: Well, first off that... the McCulloch... well, McCulloch holds that a Federal instrumentality cannot be taxed discriminatorily and in fact goes beyond that to say you can't import... impose certain kinds of taxes.

McCulloch, however, does not suggest that anything that might be labeled a Federal instrumentality qualifies.

Justice Breyer: One obvious reason... one obvious reason would be because they're not a Federal instrumentality.

That's A.

Mr. Layton: That's A.

Justice Breyer: Now, is there a second argument lurking here, that--

Mr. Layton: Yes.

Justice Breyer: --That's what I'm--

Mr. Layton: That McCulloch is restricted to an instrumentality of the type that this Court addressed in the New Mexico case, and we can see the comparison fairly bluntly here.

The Second Bank of the United States was run by presidential appointees.

The Federal Government owned 20 percent of the shares in that bank, and that bank performed governmental functions, not just functions in which the Government had an interest, but it actually issued currency.

It did things that the Government itself must do.

In that sense, the Second Bank of the United States was a little like the Red Cross that this Court addressed in the Department of Employment case.

Again, presidential appointees run the Red Cross, and that entity fulfills treaty obligations that the United States assumed under the Geneva Convention.

The... CoBank mentions the Rural Telephone Bank in their brief.

Well, the Rural Telephone Bank has a 13-member board of directors.

Seven of them are appointed by the President of the United States.

The Governor of the Rural Telephone Bank is appointed by the Secretary of Agriculture, and there is a direct appropriation from Congress in a... over a 10-year period of... or 20-year period of $600 billion for the Rural Telephone Bank.

By contrast, here we have an entity that from the beginning has been controlled by a board of directors that is appointed by its voting shareholders, which did not include the United States.

That is, by the borrowers.

It has always been a private entity, quite distinct from the things that we see in McCulloch.

So what's the distinction from McCulloch?

McCulloch holds that if you have something that is an instrumentality of the type that is the Second Bank of the United States, then in fact there is, absent any congressional language, immunity.

Justice O'Connor: --Well, I guess on the side of your opponent is the fact that these banks were created to perform an important governmental function by extending reliable credit to farmers at the lowest possible cost.

Mr. Layton: And that's certainly true.

Justice O'Connor: Right?

I mean, that was an important governmental interest.

Mr. Layton: Yes.

Justice O'Connor: And by subjecting them to taxation, it's going to drive up that cost.

Mr. Layton: Well, it may or may not drive up that cost.

It's interesting to look a little at the history of what happened here.

In 1933--

Justice O'Connor: Assuming it does--

Mr. Layton: --Assuming it does, assuming that it does drive up the cost, then that would certainly affect the ability of these entities to fulfill that interest in which the Government has an interest, yes, it would.

Justice O'Connor: --Is that enough, then, to exempt them from that interest?

Mr. Layton: No, it is not.

It is not.

If that were enough, then anything that Congress creates within its power and says it has a governmental interest could be exempted, or inherently exempted from State tax.

Justice Kennedy: Would you amend your answer to say, anything the Government calls an instrumentality?

Mr. Layton: Well, no.

I don't know that the Government has to call something an instrumentality in order to give it the exemption under that approach.

Again, instrumentality doesn't have a meaning that is precise as CoBank wishes that it did.

Justice Scalia: Did the statute in McCulloch say... use the term, instrumentality of the United States?

Mr. Layton: No.

There was no statute in McCulloch that referred to a tax exemption, and that is one of the distinctions.

Justice Scalia: No, I mean, but the statute creating the Bank of the United States.

Mr. Layton: As far as I know, it did not.

Justice Scalia: Did it call it an instrumentality of the United States?

Mr. Layton: No.

Justice Scalia: My recollection is that it didn't.

Mr. Layton: I... there's no mention in the case suggesting that it did, and that matters in the sense that... well, not just that it didn't use that phrase, but there's no exemption statute at issue in McCulloch.

That is, Congress, when it created the Second Bank of the United States, didn't say, okay, you have the following exemptions from State and local taxes, but that's what Congress at least since 1916, when it started the farm credit system, has done consistently for the financial entities within the farm credit system.

Justice Ginsburg: Mr. Layton, there's a reason that the other side gives for the exemption of the debt obligations, because, they say, those obligations are held not in the hands of CoBank but in the hands of the lenders, so you need an exemption so that those lenders, who are private and not government instrumentalities, won't be taxed.

Mr. Layton: Well, it's curious that they make that claim in a brief where they also cite the Memphis case in section 742 of, I believe it's title 31, which, if this entity is part of the United States, that is, if this bank of cooperatives has the inherent authority that they ascribe to it, then 742 would cover them, and this provision would be superfluous in 2134.

But it doesn't cover them, because they are not an instrumentality of this sort, and Congress has defined the scope of their authority.

In 1928, this Court in the Shaw v. Gibson Zahniser Oil case, just a few years before the 1933 act that created the Bank for Cooperatives, pointed out that there are instrumentalities of the United States that do not have exemptions unless Congress gives them an exemption, and then 5 years later Congress in this instance defines what the exemption is, and what CoBank and what the Missouri supreme court have done is to say, well, that definition by Congress doesn't really matter.

The third point that I mentioned was that it turns the statute into something in Congress with the rest of the Farm Credit Act.

That is, in each instance in the Farm Credit Act, where Congress has created an entity that is even... that is analogous to this particular one, Congress has said, okay, here is the kind of exemption that you have from State and local taxes.

It always is a comprehensive statement, and does not leave room for some kind of an argument that there is an additional exemption based on some kind of inherent immunity, and in each instance it permits taxation of real property and in many instances taxation of tangible personal property.

And one of the differences that occurred in 1985, according to CoBank, is all of a sudden the statute changed from allowing State and local governments to tax tangible personal property to including only a real property exemption which they ascribe back to the dicta in McCulloch.

In fact, there may be a problem with tangible personal property.

I'm not sure how much of that CoBank would be likely to foreclose upon, but the same statutory language is used for the production credit associations, and it is easily understood that there would be tractors and other equipment that they would foreclose upon that would justify the need for a provision for taxation on tangible local... tangible personal property.

Justice Kennedy: Do we have some cases that say that if you call it a technical amendment, then we can go back behind the intention of the Congress as, treat it as something of a different order than a straight out repealer?

Mr. Layton: No.

There are a couple of cases cited in our brief that stand for the proposition that we don't expect Congress to use technical amendments to make this kind of a change, but neither of them actually says, yes, we can then go back behind the language to determine what Congress did.

But here you don't have to go behind the language to committee reports or something like that.

Just look at what the language was.

If Congress wanted to do what CoBank now says they did, all they had to do was eliminate the last sentence in the prior statute.

That is, the sentence that said, okay, here's the point at which the State's authority to tax begins.

If that had been the scope of the... of Congress' action, just eliminating that last sentence, then except for the tangible personal property question CoBank would have today exactly what they wanted, but that sentence says, okay, the exemption that we are giving you in the prior sentence... that is, you don't have one until we give it to you.

The exemption we are giving you in the prior sentence is going to apply only to a certain point.

And when Congress acted here, they took out not just the, okay, it applies at a certain point, but exemption that they had given, and so today there is no exemption in the statute, and the banks for cooperatives are responsible for paying taxes to State and local governments.

If there are no further questions, I'll reserve the rest of my time for rebuttal.

Argument of David C. Frederick

Chief Justice Rehnquist: We'll hear from you now, Mr. Frederick.

Mr. Frederick: Thank you, Mr. Chief Justice, and may it please the Court:

Our position is that banks for cooperatives under the Farm Credit Act are not exempt from State income taxes for two reasons.

We think the Court should confine its decision to an analysis of the text of the Farm Credit Act, and not go beyond it to discuss or address the constitutional issues relating to Federal instrumentalities.

Under the text of the act itself there are two reasons why banks for cooperatives are not exempt from State income taxes.

First, as the State counsel noted, at section 2134, the first sentence itself just addresses an exemption for notes, debentures, and obligations.

That provision contrasts with two other provisions of the Farm Credit Act that specifically give State income tax exemptions for other entities of the farm credit system.

12 U.S.C. 2023 provides an exemption from State income taxes for farm credit banks and provides expressly that Congress intended for those entities to be exempt from State income taxes.

Moreover, 12 U.S.C. 2098 provides an express exemption from State income taxes for Federal land bank associations.

It's clear, therefore, that when Congress enacted this statute, and it amended it over a 50-year period, it knew precisely how to give the kind of exemption from State income taxes being asserted by respondents in this case and chose not to do so.

Secondly, the history behind this provision, as the State counsel made perfectly clear, does not support respondent's position.

Between 1933 and 1985, the text itself provided for the exemption from State income taxes only in any part of a year in which the Government owned stock.

That ended in 1968.

From a period between 1965 and 1968, the Government retired all of its shares of stock in banks for cooperatives.

So as of 1968, and this is reflected in the Farm Credit Administration's annual report, banks for cooperatives were not exempt from Federal and State income taxes.

When Congress made its amendment nearly two decades later, in the 1985 Farm Credit Amendments Act, there was no Government ownership in any banks for cooperatives.

These were completely privately owned for profit entities and, as such, would have been subject to State income taxes throughout the entire period.

Now, the last point that I'd like to make is that the Court should not reach out to opine about instrumentality status generally.

This... the Court consistently under the Farm Credit Act has looked at the text of the act to determine the scope of exemptions from taxation, and that's true in all of the cases that have been cited by the parties under the Farm Credit Act.

It should not use this case to opine broadly about what instrumentality status means for several reasons.

First, Congress uses the term, instrumentality, in a broader range of contexts, and even in this case and in this statute itself, has used it to describe not only the organizations that are being used to facilitate Congress' purpose, but also the financial instruments themselves.

Section 2023, which is the Farm Credit Bank tax exemption provision, describes the notes themselves as the instrumentalities of the United States, and so by making a decision about what instrumentality status means, the Court could end up having... could create unintended consequences that would affect the taxable status of instrumentalities throughout the Government.

Chief Justice Rehnquist: Well, maybe Congress has already created that confusion by using the term inconsistently.

Mr. Frederick: Mr. Chief Justice, that is certainly an area that Congress would certainly want to address.

The question, though, is, by using that term, and I would give a second reason, and that's that Congress imposes certain obligations on agencies and instrumentalities that are apart from tax questions, reporting obligations for data to the Secretary of Commerce, encouraging--

Justice Stevens: Yes, but Mr. Frederick, isn't it true that for purposes of deciding this case, if we have to... if we rule in your favor and the favor of the petitioner, we must decide that the mere fact that it's labeled an instrumentality is not sufficient to give a tax exemption?

Mr. Frederick: --No, Justice Stevens.

What the Court would say is that use of the instrumentality language by itself would not render the rest of the tax exemption language in the Farm Credit Act surplusage, and the Court would say that Congress defined the scope of the tax exempt status of these particular instrumentalities by expressly dealing with tax exempt status, and that's how the court did it in the First Agricultural Bank case in 1968, when it addressed a very similar question for the national banks, and there the Court said, we're going to look at the text of the statute to determine the scope of the exemption and not reach--

Justice Stevens: Well, we would at least have to say that the mere fact they have used the term instrumentality is not sufficient to overcome the statutory argument.

Mr. Frederick: --That's correct, where there is express tax exempt language given by Congress.

I mean, even in McCulloch itself the Court said that it was up to Congress to decide how it wanted to exercise its powers under the Necessary and Proper Clause.

Justice Kennedy: So is it your principal submission that we should look at the act in its pre-1985 status?

Mr. Frederick: Well, we think that the '85 language which is present here is, in and of itself, sufficient, but it is also supported by the history of the statutory evolution from 1933, which makes perfectly clear Congress did not intend for these entities to be tax exempt when the Government did not own shares in them.

If the Court has no further questions, I have nothing further.

Argument of Richard A. Hanson

Chief Justice Rehnquist: Thank you, Mr. Frederick.

Mr. Hanson, we'll hear from you.

Your opponent said that your client continued to pay taxes to the State of Missouri from, what, 1985 to 1995, is that correct?

Mr. Hanson: Perhaps I could clear that up, Your Honor.

In the first place, the bank was not formed until 1989, so that we obviously didn't have any liability prior to that date.

Chief Justice Rehnquist: How about from 1989 to 1995?

Mr. Hanson: The bank did, in fact, pay tax, and fairly promptly, beginning with the year 1991 filed refund claims to recover that tax.

I would submit that to the extent that they were slow in making those claims, it might have had something to do with the fact that the entire farm credit system had more serious problems to worry about in the late 1980's which was, frankly, its survival.

One point that all parties seem to agree upon, and certainly the Court's opinions make this clear, is that the question of whether or not an entity is entitled to immunity as a Federal instrumentality is up to Congress.

The Court said that in the New Mexico, the... Missouri said that in their briefs, the Solicitor General, of course, said the same thing.

What we now have here, we would submit, is a case where congressional designation as a Federal instrumentality somehow carries less weight than a judicial determination of Federal instrumentality.

Justice Ginsburg: Well, the question is was there really any congressional determination, considering that when one thing we know for sure from '68 to '85, Congress meant these entities to be subject to income tax, and they were.

What happened in '85?

What Congress meant is far from clear.

Mr. Hanson: Well, let me go through the history briefly of the banks for cooperatives, because I think that answers your question.

They were formed in 1933.

At that time, if you look at decisions like James v. Dravo Corporation, to be a Federal instrumentality meant... and I don't think there would have been any dispute, that you were exempt from Federal income tax absent an affirmative authorization.

The banks were, and the Farm Credit Act was then in 1971 completely recodified and Congress again affirmatively, not merely carry over, but affirmatively said, the banks for cooperatives are... continue to be federally chartered instrumentalities of the United States.

That's 1971.

They did that at a time when the Federal Government owned no stock in that entity, and they said the reason--

Justice Ginsburg: But there was still a provision for the Government to come back and use--

Mr. Hanson: --To invest in the stock.

Justice Ginsburg: --Yes.

Mr. Hanson: What changed in 1985 is that the form of potential Government investment changed, and it changed not because of some sense of a difference in the structure of these entities, it changed because Congress determined that a centralized entity, the Farm Credit Capital Corporation, could serve a number of warehousing and centralized financing functions, and it would then become the entry point for Federal investment.

So what we have is, in effect, instead of the money going directly to the bank for cooperatives, it would go to the Capital Corporation, which would then provide it to the banks for cooperatives, and I would submit that that's--

Justice Ginsburg: The infusion would be a loan type--

Mr. Hanson: --It would be a loan, and if you look at the statute, it's a subordinated loan.

It's subordinated to all of the debt of the system.

It's subordinated to the capital provided by the members.

Justice Ginsburg: --It's still not up--

Mr. Hanson: It's still not equity, I would agree, but if you... I mean, if you were trying to value the debt versus the equity and compare their security and their claims on the assets, I think you would find that there very little distinction.

Justice Breyer: --You only tax the income earned equity, don't you?

I mean, basically the income of the bank is... the income goes to the equity holder, doesn't it?

Mr. Hanson: The income goes... the income of the bank is used for four purposes, and these are provided in the statute.

The first purpose is to... and I'll do this in the context of 1991, which is the first year before the Court.

The first use is to rebuild the capital of the bank, because you can't function as a lender without capital to provide security to your bond holders.

The second use... and this is all set out in section 2132 with respect to BC's.

The second use is to rebuild loss reserves, or to make sure that loss reserves are adequate.

These are both things that are necessary for the bank to function.

The third use, of course, in these years is to pay back the Government loan and, as we indicated in our brief, the Bank for Cooperatives National Bank and its successor, CoBank, paid back something like $300 million.

None of those things actually affect earnings.

Justice Breyer: No, but I mean, my point is simply, if I own your bank... you might be very nice... I would expect the State to tax the income, but if the Government owns the bank, probably it wouldn't, and that's what the statute seemed to say.

And then in '85 the Government doesn't own the bank any more.

It lends money to the bank.

Well, so, why would you expect the State not to be able to tax the income?

It isn't the Government's any more.

Mr. Hanson: But it's not the bank's income, either.

Justice Breyer: Whose is it?

Mr. Hanson: It is the members' income.

Justice Breyer: All right.

Mr. Hanson: That's the very nature of a cooperative.

I mean, a cooperative is--

Justice Scalia: What was the fourth purpose?

You said there were four... four things that--

Mr. Hanson: --The fourth would be, and this is because we are a cooperative, would be a distribution to our member borrowers according to the business they did with the bank, not according to their capital, and as this Court pointed out in Kiowa County, the purpose for that distribution is not a purpose to return an investment to the borrower.

It's to reduce the cost of his loan, because one of the fundamental missions of the farm credit system, again as this Court has recognized, is to provide loans for farmers at the lowest possible cost.

Chief Justice Rehnquist: --If your client had never been financed by the Federal Government, the fact that it had those priorities for distribution wouldn't entitle it to any sort of a tax exemption, would it?

Mr. Hanson: No, but I think they make the point that the bank itself is not a for profit entity.

It is a cooperative.

Chief Justice Rehnquist: Why does that bear on its tax immunity?

Mr. Hanson: Well, it bears on why Congress would give the bank a designation as a federally chartered instrumentality of the United States.

The mission of the farm credit system... it's set out in the statute, it's been recognized in your cases, is to provide secure and adequate lending to agricultural borrowers at the lowest possible cost.

Justice Souter: All right, but the lowest possible cost argument would not have washed before the '85 amendment, because before the '85 amendment it was very... as I understand the statute it was very explicit.

That even though you could reduce the cost by rendering the bank nontaxable, you would only... or the bank's income, you would only do that if the United States was in part an owner.

Mr. Hanson: Right.

Justice Souter: And once the United States dropped out, we didn't care whether it made the loans more expensive.

Why would there be a different policy in effect now from the policy in effect then?

Why did we become... why did Congress become more sensitive to cheap loans after '85 than before?

Mr. Hanson: Well, I don't think Congress was any less sensitive.

If you go back to 1933, when the banks were formed, it was obviously the Depression, and Congress did what the Court acknowledges that it does.

It balanced the interests of a Federal program to provide secure and adequate and inexpensive financing to farmers with the fact that the States were also suffering from the Depression, and so the compromise that was struck in Depression conditions was, you can't tax these entities as long as there's a Federal investment, but we will let you tax them when that investment is retired.

As Missouri itself put it in its brief, they said, you know, if the Federal Government has an investment in the bank... an investment here cannot realistically turn on whether it is equity or debt.

I mean, in either case, as I suggested earlier, the terms are such that it's a Federal claim.

They said the States ought to be understood to have to stand aside until that's paid back.

What changed in 1985 is, Congress recapitalized the system.

Justice Souter: Okay, but Congress was saying before 1985, as long as we are an owner, our interest comes before the State interest.

Mr. Hanson: Yes.

Justice Souter: That isn't necessarily a cheap loan policy.

It's a favor the United States policy.

Unknown Speaker: After 1985, the United States says, we're not going to be owners any more.

Justice Souter: Therefore, there's no need to favor the United States, and therefore there's no need to provide a nontaxable policy.

At each time, before '85 and after '85, the United States' policy with respect to the effect of the cost of borrowing on borrowers, on this analysis, would be exactly the same.

Mr. Hanson: Right.

Justice Souter: The only thing that's changed is, we don't have the United States in an equity position to favor any more, therefore there's no need to provide for nontaxability.

Mr. Hanson: Well, I mean, certainly there's nothing in the legislative history that suggests that that analysis was undertaken.

I'm not saying that Congress might not have thought it through that way, but going back to what Justice Breyer was asking me about the profits and income of a bank, there is no source to pay back the United States, except the income.

Justice Breyer: No, my question is actually the same as Justice Souter's, that--

Justice Souter: --No, go ahead.

Justice Breyer: I'm probably just going to put it in a slightly different way, but... you have three sentences in this statute.

Mr. Hanson: Right.

Justice Breyer: The first sentence that says no, no tax on bonds, all right.

The second said, no tax on income, and the third one said, sentence 2 applies only when we're... the Government's an investor.

Mr. Hanson: Right.

Justice Breyer: All right.

Now, just out of curiosity, let's suppose that was still the statute.

We're back in '84.

Why can the State tax a bank's income even where the Government doesn't have an investment?

Mr. Hanson: They clearly could under the statute, because--

Justice Breyer: No.

What do you mean, it clearly could... wait--

Mr. Hanson: --I apologize, Your Honor.

Justice Breyer: --That's... the point is, the statute doesn't say, it can't.

The statute nowhere says that it can or it can't.

What the statute says is, it can't as long as the Government has an interest.

It doesn't say what happens when the Government interest disappears.

All it says is that the preceding sentence exemption doesn't apply when the Government interest disappears.

That's what my version says.

It says, the exemption provided in the preceding sentence shall apply only when the Government is an owner.

Mr. Hanson: That's correct.

That's what it says.

Justice Breyer: All right.

Now the Government isn't an owner.

Therefore the preceding sentence doesn't apply.

Why doesn't McCulloch apply?

Mr. Hanson: Well, and the answer is that the legislative history from 1933--

Justice Breyer: Fine.

Mr. Hanson: --makes it very clear.

Justice Breyer: What you're saying, there's a negative implication.

Mr. Hanson: That Congress was very clear about that.

Justice Breyer: Fine.

Now, once you say there was a negative implication before, why doesn't that same negative implication exist after '85, from the first sentence, unless there's something in that '85 history that shows that what they wanted to do was restore McCulloch, and my reading is there isn't a word on that, but you're prepared to say it wasn't the statute before that wiped out McCulloch.

You're saying what wiped out McCulloch before was a negative implication from the statute, and so my question is simply, why isn't that negative implication still there, just as strong as it ever was, unless, of course, you can point to a reason?

Now do you see my... you see where I'm going?

Mr. Hanson: I understand where you're going.

Justice Breyer: Yes.

That's what I'd like the answer to.

Mr. Hanson: Well, and let me qualify part of my answer, is that the statute has been understood by... it's never been construed by this Court, but it's been understood by a number of State courts and... consistent with what Congress said.

They said, what we are writing with that third sentence is, not that we... we won't tell you what happens when there's no ownership, but we are telling you affirmatively that you become taxable.

Now, was it artful language?

Perhaps not.

So I don't think it's fair to say that the exemption... that the taxability previously existed by negative implication.

I think it was statutory and, of course, the answer, what happened in 1985 was, the statute was repealed.

Now, both the exemption, I agree, and the negative implication.

One thing here that I think the Court needs to focus on, and it's a major point made by the State and by the Solicitor General, is they... citing Rosello and cases like that, they say, well, the farm credit banks have an exemption, and the farm... the Federal land bank associations have an exemption, and you don't have an exemption therefore, and I grant that that's a perfectly valid rule of statutory construction.

But I think it's fair to say that someone ought to at least offer a reason why it makes sense that Congress would discriminate against... differentiate.

They're not discriminating... differentiate between a bank for cooperatives which makes loans to an agricultural cooperative or production credit association which makes a loan to a farmer.

It's also a property, but it's otherwise identical, and a Federal land bank association makes the same loan, and they've clearly granted a statutory exemption in the one case but not the other.

Now, you know--

Justice Ginsburg: Well, why doesn't that text take care of it?

If you take the position that there's no inherent exemption for this kind of organization, that you have three organizations, and for two of them Congress has provided expressly your income is exempt, and for one of them it hasn't, so why isn't the assumption just from the text that two of them have it and one of them doesn't?

Mr. Hanson: --Well, I mean, I think Congress is normally presumed to legislate on a rational basis and have a reason for what it's doing.

My point is, and particularly from--

Justice Ginsburg: I thought in the tax area Congress could shed its grace where it will.

[Laughter]

Mr. Hanson: --Well, I certainly agree with Your Honor on that point, but 1985... and there is this change, and we pointed it out in our brief, that when the banks formed in 1933 and through 1971, in effect they were a stand alone element in the farm credit system.

They issued their own bonds.

They made their own loans.

They were liable only for their own bonds and for their own operations.

From 1975 through 1985 the entire system became interlocking in terms of issuance of bonds and liability therefore, and the operation of all the banks, so--

Chief Justice Rehnquist: You say the entire system.

What are you referring to?

Mr. Hanson: --Well, I'm talking about the major legs of the farm credit system, the... what were originally the Federal land banks and are now the farm credit banks, the production credit associations, and the banks for cooperatives.

Those have always been the three lenders.

But in 1985 CoBank is... or, National Bank for Cooperatives... I'm sorry, 1989... is no longer simply liable for its own operations.

It doesn't issue its own bonds.

Its taxability doesn't affect only it.

Now it affects everybody else, because if Missouri can tax it, it has less income to put into the pool to pay back the Government.

Justice Breyer: That's all true, but are there some other kinds of banks that are very similar that Missouri can't tax?

You're not saying there's some other very related kind of bank that Missouri cannot tax?

Mr. Hanson: I don't believe so.

Justice Breyer: No.

Mr. Hanson: I mean, the national banks, which, of course, have always been viewed and designated as Federal instrumentalities, the statute now tells you what to do.

The other types of lending institutions, you know, in the first place they're not designated as federally chartered instrumentalities.

Again--

Justice Breyer: Well, isn't the obvious answer to your question, what... you say, well, the Government's thought was, while we're the owner, Missouri can't tax us, but once we're no longer the owner, because we don't own stock, then it can, and if that raises the price of credit, so be it.

I mean, isn't... that's what it seems to say.

Mr. Hanson: --Well, then I guess I would... that's one way of looking at it, but it seems frankly implausible to me.

I mean--

Justice Scalia: What about the other two--

Mr. Hanson: --because the Government... I'm sorry, Justice Scalia.

Justice Scalia: --I thought you were done.

Finish it.

Mr. Hanson: The Government... and again, this... part of the problem that we have with this is, we recognize that there were distinctions made between the banks.

The Federal land banks, which were originally capitalized--

Justice Kennedy: It seems implausible... you were finishing your answer.

It seems implausible to you because?

Mr. Hanson: --That Congress would make that determination with respect to the banks for cooperatives, but it wouldn't make that determination with respect to the other banks.

Justice Scalia: Are the other banks... this was my question.

Does the Government own stock in the other ones?

Mr. Hanson: It does not own stock in the other banks.

It originally capitalized the Federal land banks, which had been before this Court numerous times.

But--

Justice Scalia: So you could not explain the difference on the ground that the Government is a participating investor in the others--

Mr. Hanson: --No, and--

Justice Scalia: --in a formal sense, whereas it is not here.

Mr. Hanson: --Those statutes... their statutory exemption continued after the Government's stock was retired.

It was not made conditional, as the banks for cooperatives exemption was, as it appears to us, because when the banks were formed in 1933, that was a political calculation that Congress made.

They said, the States are desperate for revenue, and while we need to accomplish this program, we're willing to make this accommodation.

Chief Justice Rehnquist: But the accommodation didn't kick in for 35 years.

Mr. Hanson: That's right.

It did not kick in until the late 1960's, and that accommodation--

Chief Justice Rehnquist: Kind of one sided compromise.

Mr. Hanson: --Well... I mean, partly that goes to the nature of farming.

You offered to buy the bank, and I suspect I have members who would happily sell it to you.

But--

Justice Scalia: But it does show the Government was willing to treat CoBank differently then, and there's no reason to believe that Government isn't willing to treat it differently now, just as then you say the other instrumentalities, even though the Government was no longer a participating investor, would continue to have their exemption, that was not the case for CoBank.

Mr. Hanson: --That's correct.

Justice Scalia: So it's always been treated differently for--

Mr. Hanson: There is that differentiation.

But it comes... it all comes down to 1985, and did Congress change the rules, and we suggest that the law before 1985 was, we are exempt as long as the Federal Government has an investment, and technically in the stock of the bank, and I understand that.

In 1985, Congress says, we have to provide a line of credit to this entire system to keep it from falling.

It managed in 2 years to lose 40 percent of the capital it had accumulated over 7 years.

And not only are we going to do that, but we're going to make the whole thing interlocking in terms of how it functions, and we're doing all of this because the bank is critical, because the commercial banks will not lend to agriculture in times of stress... Congress said that in 1633 in '87... and because the farmers are suffering from interest rates that they have to pay to the farm credit system, which in large part was a function of the cost of borrowing in the capital markets, because the capital markets had lost confidence in the banks, so we had--

Justice Ginsburg: --Congress said all this in a technical and conforming amendment, but nothing to suggest that they meant to do anything more than get rid of the obsolete provision that referred to the Government's ownership.

Mr. Hanson: --Well, you know, the State has suggested that that is the reference in the committee report which describes this change, and we would submit that's not true for two reasons.

First, as we pointed out in our brief, the committee report refers to a version of the bill which did not, in fact, establish... it did not, in fact, repeal the second sentence.

It repealed only the third.

I understand that's a two edged sword, but they say it's only a technical and conforming amendment when what Congress was doing was repealing only the third sentence of the act, which would leave us with a complete exemption, so I don't know that you can prove too much... I don't know if I'm being clear about that.

Justice Ginsburg: But what puzzles me is if the tax, the State tax was on from '68 to '85.

If Congress was saying, stop, States, you would expect that to be something that people would stand up and take notice of, and yet there's not anything explicit to suggest that Congress meant to take away from the States the tax authority that they had for this and the... what is it, the PCA's as well?

Mr. Hanson: Yes, it was, basically.

Justice Ginsburg: That it meant to take that away from the States.

Mr. Hanson: Well, I think there are two answers to that, and first is, as we've pointed out, you know, this legislation started out, as legislation does, with hearings and worrying about governmental regulation, and farmers complaining about the cost of borrowing, and by the time it got into the system in November, the question was whether or not you could save the farm credit system, because it turned out that it was basically hemorrhaging money.

And Congress, the bill was introduced on, I think, the 20th of November, and it was signed by the President on the 18th of December.

I mean, this went, bang, bang, bang.

It was described in the Wall Street Journal as legislating on the fly.

They were, you know, as the Wall Street Journal would be very offended by that.

But... so you have... you have a lot of very high priority concerns that Congress was trying to deal with and articulate and explain, and then you've got this State tax exemption which I'm... and liability, which is clearly important to Missouri, I've no doubt about that, but on a list of priorities, I doubt that it was very high when Congress was concerned... as the comments on the floor indicate, they're worried about losing the entire system, and... but I think the second point, and again, in 19... I know I'm repeating about this point, but in 19... prior to the change, the statute said that the bank was exempt as long as the Federal Government owned stock in the bank.

After 1985, if you accept our interpretation, we are saying that the bank is exempt because the Federal Government has reinfused capital, admittedly in a different form, but certainly not financially, economically different, and in a form for which the banks were liable, so that I would submit that the only difference between the circumstances in 1984 and 1986, if you will, is that in the first place Congress was being explicit, and in the second place Congress was relying upon--

Justice Souter: If you look at--

Mr. Hanson: --that designation.

Justice Souter: --I mean, that's why... not everyone agrees, but I like to look at legislative history, and you would have expected, given... even cooperative banks at that time, they'd have lawyers who were doing this, and if they thought that in removing words that grant an exemption the intent was to give an even bigger exemption, I would certainly think somewhere somebody would have said something.

Mr. Hanson: Well, I don't understand, and I've... we've never accepted this notion that somehow we have a bigger exemption.

Justice Souter: No, equal to.

Mr. Hanson: I'm sorry, Your Honor, but... well, not even equal, because previously we were exempt from Federal income tax.

Subsequently we're not exempt from Federal income taxes, and in... I mean, and that's fairly significant.

Now, you can say, well, doesn't that undercut the notion of lending at the lowest possible cost?

The answer is, I think the Government is sort of indifferent whether it gets its money... in paying back the loan whether it gets its money from taxes or gets a loan repayment, and in fact the banks were never truly exempt from Federal tax because they were... even when they were exempt from Federal income tax the statute imposed a franchise tax based on net earnings, which is functionally equivalent, so in that sense the status quo was maintained, and I think that's our argument.

The status quo was maintained.

The design was maintained.

The facts changed, and under the circumstances, and given the pressure Congress was under, I think it's entirely rational that they would look at this... I mean, the bill came out of the House on the 6th of December.

It was passed, completely changed and passed by both Houses on the 10th.

I think it's... you know, it's asking a bit much to expect a nice, detailed explication of all the provisions.

Justice Souter: Could you go to the reason for the tax, the Federal income taxability?

Is it taxable under a special statute that says, CoBank, pay Federal income taxes now, or is it taxable simply because there's no express exemption for CoBank?

Mr. Hanson: It is... it's taxable because the Internal Revenue Code provides that it would be taxable absent an express exemption, and there is none, so it's... entities have always been subject to--

Justice Souter: Does the code refer specifically to this bank?

Mr. Hanson: --No.

The code refers to Federal instrumentalities and tells you how to--

Justice Souter: Okay.

Mr. Hanson: --that they are exempt... I'm sorry, that they are taxable absent an express exemption in the income tax law.

It's 501(c)(1).

So... you know, so the presumption, the pattern is opposite for a Federal tax.

You're taxable unless there's a statutory exemption.

Here, and I'd like to simply conclude by where I started.

If you look at the New Mexico decision which Missouri relies upon at length, and you go to page 736, and I pick this out... this is illustrative.

You were talking about whether those particular Federal contractors were exempt from State tax, and you said, the Court's other cases describing the nature of a, quote, Federal instrumentality.

That is a term of art.

It's been a term of art since Justice Marshall first coined it in McCulloch v. Maryland, and the one attribute that's always been associated with a Federal instrumentality in this Court's cases is an exemption from State taxation absent a waiver.

I mean, I've looked... I can't claim that I... this is complete.

The Court has never held that an entity which is a Federal instrumentality is taxable in the absence of an affirmative congressional authorization, whether you're talking about the Department of Employment, you're talking about New Mexico, you're talking about Graves, you're talking about James v. Dravo, never, at least not that we can find.

That term carries with it that attribute, and we submit that Congress, in designating us a federally chartered instrumentality, consistent with what we do... they didn't do it haphazardly... intended precisely the same designation, and we would suggest that that also fits with the overall goals of Congress in passing the 1985 act and rescuing the farm credit system and trying to give the agricultural borrowers some relief from high interest rates.

It seems to us it all fits together, and what the State is literally saying is, well, we want to act like the law didn't change, that there was no repeal.

Well, there was a repeal.

The law did change, and the question is, did Congress intend that we become taxable without regard to the Federal investment, or did they intend that we become exempt under the McCulloch rule, and those are basically the choices facing the Court.

If there are no further questions--

Chief Justice Rehnquist: Thank you, Mr. Hanson.

Mr. Hanson: --Thank you, Your Honor.

Rebuttal of James R. Layton

Chief Justice Rehnquist: Mr. Layton, you have 7 minutes remaining.

Mr. Layton: I'll note first that I believe that the banks for cooperatives were subject to Federal income tax prior to 1985, but I'd also note the franchise tax that counsel referred to.

In the 1971 act in section 4 it sets out a franchise act that could be as high as 25 percent of net income for the banks, but interestingly, that franchise tax applied so long as the Government holds shares in the bank, and that the Government didn't hold any shares at that point, and there was obviously an incentive, given that franchise tax, not to allow the Government to pick up any shares in your particular bank.

I should note also that although the National Bank for Cooperatives was formed in 1989, it was the merger of other banks for cooperatives, and there have been banks for cooperatives operating in Missouri for many, many years prior to 1989.

Turning to the legislative history, if, indeed, we have to get to the legislative history, the history does talk about the reasons for the 1985 act, and one of the things that's there is a note that the banks for cooperatives themselves were healthy.

This was not prompted by a problem with the banks for cooperatives.

It was prompted, as Mr. Hanson accurately said, by a system wide problem.

That is, there may have been... there were other entities within the bank, the farm credit system that were having enough problem that it was bringing down the ability of the entire system to sell bonds, and yet the argument being made here is that because some other entity had a problem and Congress created a system wide remedy, that is a remedy that would provide Federal financing to the system as a whole, and never to particular institutions, that somehow these banks for cooperatives attained a new exemption.

Before, they only had an exemption when they had Federal investment.

Afterward, according to CoBank, they all have an exemption even if no one has a Federal investment, and the most that's likely is that some production credit association or someone else would have an investment, and yet somehow they get this exemption back.

They also... the--

Justice Scalia: Mr. Frederick, what is the effect of Congress' calling an institution a Federal instrumentality?

I'd always thought that the primary reason they do that is precisely to exempt it from State income tax.

Mr. Layton: --Well--

Justice Scalia: What other effect does it have?

Why would you enact a statute that says, you know, the Red Cross, or whatever it is, is a Federal instrumentality?

Mr. Layton: --I think one reason is to ensure that that entity... in the tax context one reason is to ensure that that entity cannot be subjected to discriminatory taxation.

Missouri, for example, could not pass a tax that was restricted to the income of federally charter... or, excuse me, of cooperative banks that serve cooperatives, farm cooperatives.

Because the only one that exists is this instrumentality, that would be aimed at a Federal instrumentality and would be a discriminatory tax and it would be illegal, because that is a Federal instrumentality.

There may be other reasons as well, but certainly that is one impact of use of that term.

The change that is alleged to have come about in 1985 is not just to remove the connection between the Federal investment and the bank that is asserting the exemption, but also to remove the temporal aspect.

That is, before, the exemption only was in place while the Federal investment was in place.

At the time in 1985 there was 5-year sunset provision on the credit corporation through which the funds that Mr. Hanson spoke of would be channeled, and yet the exemption that he asserts is one that would exist indefinitely.

That's inconsistent with the legislative history and with the language of the statute.

CoBank poses the question as to why differentiate between production credit associations and banks for cooperatives on the one hand and other institutions such as land banks on the other, and we shouldn't have to ask that question, because Congress made that determination in 1933.

There has always been a distinction.

We're just discussing today what the distinction now is.

But there are a couple of possible reasons for Congress to have made that distinction.

One is simply temporal.

In 1933 we were in the Depression era, and not only was there a problem with the farm credit, with credit for farmers, but there was a problem with banks generally, and so here Congress was setting up some institutions that would compete with commercial banks that themselves were failing throughout rural areas in the United States, and Congress set up a system that said, okay, for the time being, we will give you an advantage over your commercial competitors, but only for the time being.

At some point it's going to go back to where you do not have that extent of commercial advantage.

Sure, you can still issue obligations that will be tax free, but you won't be able to avoid tax entirely.

Another reason that there may be a distinction is that the land banks that Mr. Hanson referred to lend, as I understand it, based on the farmer's land as collateral, and there has always been a feeling in Congress that we don't want to take the land away from the farmers.

That is distinguishable from the question of lending based on their crops, which is what a production credit association would do, or based on the equipment and land that is held by a cooperative that may be producing or processing the crops or otherwise providing services for the farmers.

There is a distinction.

It's worth noting that today between two thirds and three quarters of agricultural lending in the United States is done by entities outside of the farm credit system, and those entities must compete on the grounds that Congress set forth, and not on the grounds that can be divined by some reference to past history.

If there are no further questions, I thank the Court.

Chief Justice Rehnquist: Thank you, Mr. Layton.

The case is submitted.

Attribution:

The Oyez Project

Featured:

Hunt-Wesson, Inc. v. Franchise Tax Board of California - Oral Argument

Fri, 09 Jan 2009 14:50:16 +0000

Case:

Hunt-Wesson, Inc. v. Franchise Tax Board of California

Media File:

98-2043_20000112-argument.mp3

Related Transcript:

1999_98_2043_argument.xml

Transcript:

Argument of Walter Hellerstein

Chief Justice Rehnquist: We'll hear argument next in Number 98-2043, Hunt-Wesson v. Franchise Tax Board.

Spectators are admonished, do not talk so long as you're in the courtroom.

The Court remains in session.

Mr. Hellerstein.

Mr. Hellerstein: Mr. Chief Justice, and may it please the Court:

This case involves a constitutional challenge to two mechanisms that California employs to deny nondomiciliary corporations, like petitioner here, an otherwise allowable interest expense deduction.

Each of these mechanisms provides an independent basis for invalidating the application of California statute to petitioner.

First, as respondent has stipulated, California denied petitioner an interest expense deduction entirely because it received nontaxable dividends from nonunitary subsidiaries.

Second, California denied petitioner an interest deduction because those dividends were paid by subsidiaries that did no business in California.

It is worth stressing at the outset, Your Honors, that the second mechanism is indistinguishable from the taxing scheme that this Court struck down in Fulton Corporation v. Faulkner.

Justice O'Connor: Well, I suppose we don't have to answer all the questions here if we were to find that the interest offset is unconstitutional because it taxes income over which California lacks jurisdiction to tax.

That's the end of it, presumably.

Mr. Hellerstein: That is correct, Justice O'Connor.

Either basis would be... would invalidate the statute.

During the tax years at issue here, 1980 to '82, petitioner Hunt-Wesson, which is the successor in interest to the original taxpayer in this case, the Beatrice Foods Company, earned lawfully $ 75 million in dividends from nonunitary subsidiaries.

Now, it is undisputed here that California had no power to tax those dividends under this Court's decisions in ASARCO, and Woolworth...

Chief Justice Rehnquist: Beatrice was an Illinois domiciliary the same way Hunt-Wesson is?

Mr. Hellerstein: Yes, Chief Justice Rehnquist, Beatrice was an Illinois domiciliary.

Actually, Hunt-Wesson is a California domiciliary, but they... again, they were the successor in interest.

During the years at issue we are dealing with an Illinois domiciliary.

Now, during those same years, California denied Beatrice an interest deduction...

Chief Justice Rehnquist: Beatrice, I think.

It's named after a little town in Nebraska, and I think it's pronounced Beatrice.

Mr. Hellerstein: Beatrice.

Mr. Chief Justice, I will pronounce it Beatrice.

[Laughter]

Justice Stevens: Smart move.

Unidentified Justice: [Laughter]

Mr. Hellerstein: During these years, Beatrice received a... its interest expense deduction was denied on a dollar-for-dollar basis simply because it received these nontaxable dividends.

There is no evidence, no evidence at all in this case that the interest expense bore any relationship to these dividends.

Indeed, even if we had proven... if we had proven that every penny of our interest expense had gone to generate California taxable income, we would have been denied this interest expense deduction simply because we had these nontaxable dividends.

Now, this...

Justice Stevens: Let me ask this question.

What if the interest expense had been incurred to generate different nonunitary income.

Say you borrowed money to buy a lot of securities in Japan, whereas the income here is from income from securities in Germany, would it then be permissible?

Do you understand my question?

Mr. Hellerstein: I'm not sure.

I mean, the way that...

Justice Stevens: I want to give you a hypothetical in which the interest expense is incurred to generate nonunitary income but not the nonunitary... not the same nonunitary income that might be earned elsewhere.

Mr. Hellerstein: Yes, Justice Stevens, I understand your question, and the answer to your question is that this statute works regardless of any proof of any relationship.

Justice Stevens: I understand.

Mr. Hellerstein: There could be a relationship, there couldn't be a relationship.

It's like throwing darts at a dartboard.

Chief Justice Rehnquist: Well...

Mr. Hellerstein: It might work, might not.

Chief Justice Rehnquist: Well, maybe in Justice Stevens' hypothetical it wouldn't be deductible in the first place.

Mr. Hellerstein: Well, in Justice Stevens' hypothetical, if we have interest expense, under the California regime we get the deduction first against any interest, business interest income we have, and then we're denied the deduction if we have the nontaxable dividends.

Chief Justice Rehnquist: But the interest has to be business interest income, does it not, used for a purpose... the money has to be used for a purpose in connection with the business, or does it not?

Mr. Hellerstein: The interest expense that we have, the interest expense is defined at the Federal level.

We use a Federal taxing scheme, so the Federal Government does not distinguish between whether or not the interest expense is business or nonbusiness.

Now, under the California statute and under their own... or their own schedule, the very first thing we do is, we take any interest expense that is, in fact, attributable to the nonbusiness income, and we take that out of the mechanism.

Then the only thing that is left is the interest expense associated with the business.

It is that interest expense that in fact is put into this little mechanism that California has that denies us on a dollar-for-dollar basis the deduction against the nonunitary dividends.

Justice Souter: Is that the subject of that...

Go on.

Was that the subject of sort of the disagreement as to whether in fact under the California scheme you are supposed to deduct the nonbusiness income from... interest expense from...

Mr. Hellerstein: That is correct, Justice Souter.

Let me explain that, because there has been a dispute, and both sides say the dispute doesn't matter.

Justice Scalia: Could you tell me, for...

Mr. Hellerstein: Yes.

Justice Scalia: I was about to ask what you mean by nonbusiness interest expense.

Is it just interest expense, or nonbusiness income, for that matter?

Does that mean just income that California can't tax, or does it have some other meaning?

Mr. Hellerstein: Yes.

Justice Scalia: Let's get a definition.

Mr. Hellerstein: Okay.

Let's start with nonbusiness income.

Nonbusiness income is income that under this uniform statute that many States have is allocated, that is, is sent to one jurisdiction or another, rather than put into this mix that's mixed up and apportioned.

Now...

Justice Scalia: It's really business income that just can't be taxed...

Mr. Hellerstein: Oh...

Justice Scalia: in this case by California.

Mr. Hellerstein: Well, let me... I must be a bit more... I've got to polish it a bit, because in our case that's correct.

In our case the particular nonbusiness income we're talking about are nonunitary dividends, and there's no dispute that California can't tax that.

If, for example, Beatrice had an unrelated beauty parlour in California, California could have taxed that.

That might be nonbusiness income, but if it was in California it could have been taxable.

But in this case, there's no distinction.

There's no dispute that the nonbusiness income is not taxable.

Now, to answer your question about what is nonbusiness interest expense, I think we use that term, and I don't think there'd be any disagreement here, we would use that term to describe any interest expense that could be directly traced to the nonbusiness dividends.

If, for example... and there's no evidence in this case that anything like this happened... if, for example, we had gone out and borrowed money to acquire the nonunitary subsidiaries, and you could trace that borrowing to the nonunitary subsidiaries, then to be sure you would have nonbusiness interest expense, and we would... our position here is that California could probably deny that.

They could probably deny it if they had a tracing mechanism, which they don't, if they said, we've seen that you've gone out and you borrowed money to buy something that's going to generate income that you can't tax, we accept that.

Indeed, we even accept their notion, which is that it's impossible to trace.

All interest is fungible.

All the money is fungible.

Who knows where we use this.

Again, we can... we accept that proposition.

The problem is that California statute doesn't implement that proposition.

When, in fact, you don't know where the interest expense is earned, that is, you can't do the tracing that we're talking about, what do jurisdictions do?

Justice Kennedy: I'm not sure what you accept insofar as the fact that all money's fungible and can't be traced.

You say you accept that proposition.

Mr. Hellerstein: No, what I'm saying is...

Justice Kennedy: And that's... it seems to me that you might accept that proposition in some instances, but not in every instance, or then you'd lose your case.

Or am I wrong?

Mr. Hellerstein: I think, Justice Kennedy, I don't believe you're right that we'd lose our case, because we're willing to... we accept the proposition that a State can reasonably take the position, and California in this case could reasonably have taken the position that all money is fungible, and therefore it is impossible ever to trace on a direct basis a dollar of interest income to a dollar of interest expense.

But even accepting that proposition, one thing is clear from... when you accept that proposition that you are then saying, you don't know where money is coming from or going, but then it cannot be... it cannot be assigned disproportionately to nontaxable income rather than to taxable income, so even accepting the notion that money is fungible, all we're saying... and we're not saying... we're not trying to constitutionalize any particular methodology.

All we're saying is, do what 48 other State, or 45 other States do, do what the Federal Government does.

Spread it around on any of a variety of reasonable bases, including, if you'll read the letter that California's already written to General Electric if they lose this case, spread it around based on where your assets are.

That is, if you don't know where your money's coming from...

Justice Kennedy: Or deny the deduction altogether.

Mr. Hellerstein: Justice Kennedy, if California wanted to deny all interest deduction to all taxpayers, whether they had taxable or nontaxable income, we wouldn't be here.

We think that's quite arbitrary.

It might no longer be a net income tax, but that's not the constitutional issue raised by this case.

The problem here is that what California has done is, under the guise of saying money is fungible, come up with a mechanism that disproportionately assigns income, at least in our case, to the nontaxable income, so based on the undisputed facts of this case, California's taken the position that somehow we never make a dollar, a penny... we never make a penny from interest expense invested in nonbusiness income.

Chief Justice Rehnquist: But if California could deny interest deductions in toto... your claim here is more of an equal protection claim, that you've been treated differently than other California corporations similarly situated, and I'm not sure that's made out.

Mr. Hellerstein: No, Chief Justice Rehnquist, our claim is that while we agree that California could have an across-the-board nondiscriminatory treatment of interest expense, what California is doing, and the court below held... the trial court held they were violating the Equal Protection Clause, but we've not raised that here.

We're saying that what this does, what this statute does is two things.

First, it sweeps nontaxable income into the tax base.

That's a due process violation.

That's an extraterritorial component.

California in fact says that we're going to measure your tax by these dividends out there that we can't get our hands on under ASARCO, under Woolworth, number 1.

Number 2, we're also... in our view this also has a discriminatory component, because when you look at who gets this interest deduction it's only the domiciliary rather than the nondomiciliary.

As arbitrary as the statute is, it helps the domiciliary because these... this interest expense is always attributed to the nonbusiness income, which in this case would be taxable by California, so the nondom... so the domiciliary gets the full tax deduction, whereas the nondomiciliary...

Justice Breyer: Oh, I don't see how that helps you.

I mean, I'm not saying that you don't have a good case in the other part, but I mean, after all, it's an Illinois corporation.

I take it if they allocate all of the interest income to the Illinois Mongolian sheep farm, that Illinois, they'll get the deduction on the Illinois income tax.

Mr. Hellerstein: No, Justice Breyer, because Illinois does not have this arbitrary system like California does.

Illinois would take the position that this... one of two positions.

I'm assuming it could either trace... it could say, we're going to directly trace...

Justice Breyer: Do you know, does that really happen?

So in other words when California insists that the tin can business allocates its interest income to its Mongolian sheep farm, the... Illinois will not allow them to deduct that interest expense that California shifted over there.

Mr. Hellerstein: That is correct.

In other words... let me just make sure that I... I mean...

Justice Breyer: I'm making up... what I keep...

Mr. Hellerstein: Yes.

No, but... no...

Justice Breyer: is, in my mind I imagine a tin can company selling all over the United States.

It owns a Mongolian sheep farm.

Mr. Hellerstein: Exactly, and...

Justice Breyer: Okay.

Now... go ahead.

Mr. Hellerstein: And therefore the... this would... it would generate nonbusiness dividends.

California would say, gee, you have interest equal to those nonbusiness dividends, no deduction, and then in Illinois... then the question would be whether Illinois would take the same position, and the answer is no, because Illinois, being a State that is not off the radar screen like California, but does what other States do, they'd look at their interest expense, see whether or not this interest was associated first with the Outer Mongolian sheep farm.

If it wasn't... if it was, they get the deduction, because this is a domiciliary State.

If it wasn't, it would go into the pool and they might spread it around, so that's how it would work.

Justice Ginsburg: Mr. Hellerstein, your position is not that California couldn't reject any part of this.

It could have an offset, but it as to be according to some apportionment, some reasonable apportionment.

Mr. Hellerstein: That is precisely right, Justice Ginsburg.

Our position is that there are a wide variety of acceptable methodologies for assigning or allocating income to various jurisdictions.

They're in place in all of the States, they're in place at the Federal level, and what we're simply saying is that you cannot have allocation by wishful thinking, which is essentially what California has here.

It's a simply...

Justice Scalia: What is... assuming we agree, but what does California do with respect to these back years that have already been treated this way?

Mr. Hellerstein: Well, I can tell you that our...

Justice Scalia: Can it adopt a, what you would consider a constitutional rule, and apply them to those past years?

Mr. Hellerstein: Justice Scalia, I can only speak to two specific situations that... one that I'm aware of because it's our case, another because it's in the amicus brief.

Certainly with regard to our case there has been... we have stipulated to the refund to which we're entitled should we prevail in this case.

It was my understanding from... certainly from the letter that California has written to General...

Justice Scalia: On the basis of what, some kind of apportionment scheme that you're willing to accept?

Mr. Hellerstein: No.

The stipulation... the stipulation was based on a... it was an all-or-nothing proposition.

We were going... there might have been settlement negotiations earlier, but at this point we agreed here...

Justice Scalia: You'll get it all back.

Mr. Hellerstein: If we win.

Justice Scalia: And it's too late for them to say, okay, we'll apportion some of it.

They... none of it would be...

Mr. Hellerstein: For these particular years, that is correct, Justice Scalia.

However, I think it's quite clear, from the letter appended to the General Electric's brief, that California is aware of this litigation, they have written letters to General Electric and presumably to other taxpayers saying, and by the way, if we lose this case, you'd better apportion your interest expense by a reasonable amount, namely an asset allocation method, so I...

Justice Kennedy: Well, on that basis maybe you could help me understand what the State says in its red brief at page 21.

It says, if a deduction of the entire amount of interest expense is allowed, the corporation stands to gain a tax windfall, and then it goes on.

I take it that's only because California does not have an apportionment system in place, is that correct?

Mr. Hellerstein: I think frankly...

Justice Kennedy: I mean, is that the way you would answer that?

You'll say, well, sure, but if you have an apportionment scheme in place like other States do, there won't be a windfall.

Is that how you answer that?

Mr. Hellerstein: Actually, Justice Kennedy, the way I would answer that, I think that's because of California's Californiacentric view of the universe.

In fact, there is no windfall, because Beatrice pays taxes in 45 other States, so that the... any income... we're not talking about tax exempt municipal bonds here.

I mean, income that California says is not taxable in California because it's not a unitary... part of the unitary business is presumably taxable somewhere else.

The only time there would be a windfall would be if the income that California is not taxing under a proper scheme is somehow not taxed by the other jurisdiction.

Justice Kennedy: Well, is the answer there wouldn't be a windfall if there were an apportionment scheme?

Would you accept that answer?

Mr. Hellerstein: I would certainly accept that if California apportioned in the way that other States apportioned, there would be no windfall, that is correct.

Chief Justice Rehnquist: But you don't contend, do you, Mr. Hellerstein, that California has to have the same method of taxing that... even if 48 other States have it, the Constitution doesn't require them to have...

Mr. Hellerstein: Absolutely not, Mr. Chief Justice.

Absolutely not.

We are saying that there are... we are saying that their method is so far off the radar screen, is so different from any method that even approximates a reasonable method, and there are a large variety of them, whether it's assets or gross receipts or net income, any of those would be appropriate.

Indeed, to look at this Court's own opinions, this Court has looked at this problem in a number of instances, generally when the question was whether or not a taxpayer, or how a taxpayer should attribute expense between taxable income and tax exempt income, generally either municipal bond income that wasn't taxable at the Federal level, or alternatively, Federal taxable income that wasn't taxable by the States, and what the Court has said... when the Court has looked at this, the Court has really rejected both extremes.

The Court has rejected the extreme view of the States, which has been to say... or the taxing authority, when the taxing authority has said, you may not deduct 1 penny of this expense... that is, the expense must be matched dollar-for-dollar against the tax-exempt income, which is what the... the kind of situation that arises in National LIfe, the Court said, you can't do that, because that really undermines the exemption.

On the other hand, when taxpayers have been greedy, when taxpayers have said, we don't want $ 1 of our expense assigned to our nontaxable income, because that undermines the exemption, the Court has said no, that's not right, either.

What the Court has said is really precisely what most States and thel Federal Government have said in this kind of situation, is when you don't know, when you can't trace the amounts, what you do is, you spread it evenly.

This Court has said, there's no reason in law, or no sound legal or economic reason for distinguishing between the taxable and the nontaxable dollar.

That's the theme.

So long as there is some reasonable apportionment between taxable and nontaxable, that, I think, is all the Constitution requires.

What the Constitution forbids is a disproportionate assignment of income to values that cannot be taxed.

Justice Breyer: Can you... because I'm not totally familiar.

Which part of the Constitution forbids that?

Mr. Hellerstein: Forbids...

Justice Breyer: I mean, let's assume you're completely right.

Mr. Hellerstein: Right.

Justice Breyer: This is totally irrational.

I mean, it's completely unfair.

They're taxing income that arises in other places.

What is... what... can you just trace through for 1 second what the argument is that that violates the Constitution?

Mr. Hellerstein: Yes, Justice Breyer.

It will depend on...

Justice Breyer: I know there will be cases that support you, but I mean, what's the reasoning?

Mr. Hellerstein: Well, I guess, you know, it would depend on the provision.

Well, the basic thought is that by arbitrarily denying the deduction you are taxing the income, so...

Justice Breyer: And what prevents California from taxing income from Mongolia, or Illinois or something?

Mr. Hellerstein: The Due Process and the Commerce Clause, as this Court has held in Allied-Signal and ASARCO and Woolworth.

In the intergovernmental immunities cases, that is, when we're dealing with... let's deal with the modern cases.

We're dealing with State taxation of Federal obligations such as in the Barker Bank case.

There, Georgia would have been forbidden under the... under McCullough v. Maryland, but as embodied in, know in Federal statutes from taxing the Federal income.

Some of the earlier cases are based on the...

Chief Justice Rehnquist: But the Federal principle that a State can't tax a Federal entity wouldn't necessarily carry over if you weren't dealing with a Federal entity.

Mr. Hellerstein: Well, Chief Justice Rehnquist, the way the cases have arisen with regard to that issue, that is, it is a given proposition of... I think of Federal constitutional law and also valid Federal statutory law that States may not tax income from Federal obligations, so a State, for example, could not come along and deny, as California has denied, an interest expense deduction arbitrarily assigned to every dollar of Federal income that it can't tax.

Chief Justice Rehnquist: Yes, but income from a Federal obligation may be different for constitutional purposes than income from some other kind of obligation.

Mr. Hellerstein: That is correct.

That is correct.

Justice Breyer: And so what is it that... one day California says, you know, we're taxing people.

We don't want to be fair, and what we're going to do is, we are going to tax income that arises in Illinois, and moreover, it's going to be terrible, because companies are going to have to pay more tax than they have income.

Justice O'Connor: Well, I thought we'd held in Allied-Signal that it violates the Due Process Clause...

Justice Breyer: That's what I wondered.

Justice O'Connor: for a State to tax...

Justice Breyer: It's the Due Process Clause that it does that...

Extraterritorial...

because it takes their property without due process.

Mr. Hellerstein: It is both, indeed, as Justice O'Connor was pointing out, and in Allied-Signal the Court said that the extraterritorial analysis, or the bar on State taxation of extraterritorial values is rooted both in the Due Process and the Commerce Clauses, so you'd have two constitutional bases for that.

Justice Ginsburg: Well, what about the argument that, indeed, your client is getting a windfall because home States like Illinois give a tax break for this category of investment income?

Mr. Hellerstein: Well, in fact, Justice Ginsburg, Illinois is not a tax haven, and during the years at issue here, the... and this... by the way, these were years during which there was considerable uncertainty as to whether or not income was apportionable.

There were the... this Court... some members of this Court will recall the ASARCO and Woolworth and container cases in the eighties, where there was uncertainty.

Illinois had a regulation at that... during those years that actually allowed a domiciliary corporation like Beatrice, and the regulation is 300-2(c)(2)(A), that during those years allowed a domiciliary corporation to apportion its income.

Now, that was a decision made by Illinois.

Illinois had the constitutional power, and indeed our... it is stipulated in the... it's... I believe it's stipulation, paragraph 8.

It's stipulated that nonunitary dividends were taxable by the State of Illinois, so there's no windfall tax haven issue here.

In fact...

Justice Scalia: You don't think that matters, though, do you, anyway?

Mr. Hellerstein: No.

Justice Scalia: If Illinois decides to be generous and not tax something, California, if it has no jurisdiction to tax, can say, hey, you know, somebody's getting a break.

We ought to be able to reap that tax.

Mr. Hellerstein: That...

Justice Scalia: It would still not be... not be justified.

Mr. Hellerstein: That is precisely right, Justice Scalia.

California's power to tax does not expand based on Illinois' decision whether or not to tax.

We'd have... I'd like to reserve the next 5 minutes for rebuttal.

Thank you.

Argument of David Lew

Chief Justice Rehnquist: Very well, Mr. Hellerstein.

Mr. Lew, we'll hear from you.

Mr. Lew: Mr. Chief Justice, and may it please the Court:

I think the issue before this Court can be simply stated, and that is, what interest expense is California constitutionally required to treat as a tax deduction?

As this Court has held, a State bears no constitutional obligation to permit a taxpayer to take a deduction for an expense which relates to income which that State is barred from taxing.

The petitioner in this case has conceded that States such as California have the constitutional authority to allocate expenses to different streams of income and, more importantly, concedes that States have the authority to do so by applying formulas that assign interest expense to income that is not taxable by the State of California.

The petitioner's narrow...

Justice O'Connor: Yes, but the problem here is, California has chosen to allocate 100 percent of the taxpayer's interest expense in excess of its business interest income to its generation of nonbusiness income that's not taxable by California.

Mr. Lew: Well, the...

Justice O'Connor: I mean, it's California's choice to have this scheme, and it's enacted one that does raise concerns of trying to tax extraterritorial income, in effect.

I mean, California wouldn't have to do it this way.

California could have a reasonable allocation method.

But what's the rationale for this scheme it does have, which just seems to go beyond what California is authorized to do?

Mr. Lew: Well, the answer to your question, Justice O'Connor, is that what California is trying to do with this statute is basically eliminate a double tax benefit that arises whenever a corporation, number 1, incurs debt, and there is therefore interest expense generated by that debt, and at the same time has funds invested in nontaxable activities which produce nontaxable income.

The problem is that part of the debt either directly or indirectly is used to support the nontaxable activities.

Justice Kennedy: But you solved that problem by denying it against all nonunitary income whether or not the interest expense was related to it.

Mr. Lew: Well, what the statute is attempting to do, Justice Kennedy, is to essentially close that loophole in the most effective way possible.

Justice Kennedy: Well, of course, it's always effective if you deny apportionment.

Mr. Lew: Well, the theory behind doing it on a dollar basis... and if I may just take one step back.

The formula first allocates interest expense to... against the corporation's business interest income on a dollar-for-dollar basis.

Justice Kennedy: And if the business interest is big enough, then there's going to be no problem.

Mr. Lew: That's correct.

All of it is... all of it is deductible.

Justice Kennedy: Of course.

Mr. Lew: To the extent that any remains, that is allocated also on a dollar-for-dollar basis against the corporation's nonbusiness income, and again it's intended basically to eliminate the possibility that any amount of that interest expense which is related to the generation of income that's not taxable by the State of California is used by the corporation to reduce its California tax base.

Justice Kennedy: Yes, but it's not allocable against all its nonbusiness income.

Mr. Lew: It's... well, the answer to your question is, it's allocable against its nonbusiness interest and dividend income.

That's what the statute calls for.

Justice Breyer: My can company has no business interest income.

It's not in the lending business.

It sells $ 1 million worth of cans in California.

It happens to borrow about $ 900,000 to get the tin.

Now, what conceivable reason does California have to allocate that $ 900,000 that they used to buy the tin for the cans to some kind of income it has from the sheep farm in Florida?

Mr. Lew: Because the money that is borrowed basically is... can't... is used to free...

Justice Breyer: Say you don't know.

Maybe they're lying.

They said they used it for tin, but maybe they're not telling the truth.

Okay, other States have dealt with that problem by saying, since we can't trust anybody here, and it's hard to trace, what we'll do is, we will proportionately allocate.

If you have a million coming in from the tin business, and you have 100,000 from the sheep farm, do it 10 percent to the sheep farm, 90 percent to the tin.

All right.

Now, why... what possible reason is it for not taking some variation on that theme?

Of course, if you can show it went to the sheep farm, that's the end of it.

You win.

But where you just don't know...

Mr. Lew: There's nothing wrong with a proportional approach, Your Honor, except that it doesn't really close the loophole.

Justice Breyer: How does it not close the loophole?

Mr. Lew: Because to the extent that less than $1 of interest expense is used to offset a dollar of nonbusiness income, there's still that differential that exists.

Justice Breyer: Sure there's a differential, but the sheep farm had nothing whatsoever to do with the lending.

Mr. Lew: Well...

Justice Breyer: I mean, I don't see why you call that a loophole.

Mr. Lew: The assumption is that it's not related, and...

Justice Breyer: Yes, right.

Oh, you mean maybe it is related?

Mr. Lew: Indirectly, yes.

Justice Breyer: Well, maybe the tin is really related, so why don't you allocate all the deduction for the tin to the sheep, too?

Mr. Lew: Well, the answer is that you just don't know that, and what... and what California is trying to do is to prevent any of that interest that might be related to the generation of income that it cannot tax to be used to reduce its California tax base.

Justice Souter: Well, when you say they just don't know, what you're referring to is the... a process in which most States know by virtue of a reasonable apportionment formula, and so when you say, well, we just don't know, that seems to be the equivalent of saying, well, we can't apportion, but you clearly can.

Mr. Lew: Well, there's no problem, constitutional problem with apportionment.

I mean, that is one way to deal with the problem for sure, but to the extent that interest in fact does relate to nonbusiness, or nontaxable income, there's still that... there's still that possibility that a portion of the interest expense that in fact relates to generation of nontaxable income is going to be applied to reduce the corporation's California taxes.

Justice Souter: Yes, but you don't know either, and instead of adopting an apportionment formula, what you in effect do is adopt an irrebuttable presumption, and as against an apportionment formula, which provides a rational basis, and an irrebuttable presumption which ignores the facts, due process normally requires the rational process.

Mr. Lew: Well, I can only say that the objective of the State is to attempt to eliminate that possibility of the taxpayer receiving a double tax benefit.

Justice Souter: Oh, you certainly do that.

Yes.

Unidentified Justice: [Laughter]

Justice Souter: No question.

Justice Scalia: You achieve that objective.

Unidentified Justice: [Laughter]

Mr. Lew: And toward that objective it seems that the way that California does it is reasonable, because a dollar-for-dollar offset of interest expense and interest or dividend income basically returns the corporation to the same economic position...

Justice Souter: Well, it does if there's a dollar-dollar relationship between the expense and the income, and you're in effect saying, we don't care.

We will simply assume that, and we will assume that by means of this presumption, and due process requires rationality, not irrebuttable presumptions.

Mr. Lew: Well, you know, we can't say that it does or it doesn't.

That is...

Justice Scalia: But you have to say that it does.

You don't have a right to send a tax bill to every nondomiciliary of California for all of their income, and you say, well, you know, we can't be sure that we can't tax it.

Unidentified Justice: [Laughter]

Justice Scalia: It's just irrational.

You either demonstrate that it comes from this other nontaxable income, or... or, if you can't demonstrate it, then, you know, do a reasonable apportioning, but you do neither one.

You're just saying, here, here's a tax bill, pay it, or we're not sure where this income comes from, but we don't want you to get away with something.

Mr. Lew: Well, it seems to me that the economic reality... the dollar-for-dollar allocation is really an attempt to reflect the economic reality that interest income is the economic counterpart to interest expense.

If a corporation borrows money...

Justice Stevens: If you treat the interest as paid... say you have a mortgage on a new plant that you're using in California.

You treat it as the functional equivalent of interest to buy securities in Mongolia that are going to have nothing to do with the unitary business.

You just merge all of your interest income and treat it as fungible.

Mr. Lew: That's...

Justice Stevens: Your interest expense, I mean,...

Mr. Lew: That's correct.

Justice Stevens: Yes, and notwithstanding the fact that it's very easy to identify that in fact some of the income produced by those borrowings is not part of the unitary business.

Mr. Lew: Well, I think that if the Court accepts the notion of fungibility, then the problem is being...

Justice Scalia: If it wasn't spent there, it could have been spent elsewhere, so it's hard to say that it necessarily went to this.

It's saving you spending other money elsewhere.

Of course, that's true.

Mr. Lew: That's correct.

Justice Scalia: But if you adopt that fungibility principle, which your opponent is quite willing to accept, what it leads to is not the conclusion that you can tax all of it, but the conclusion that you should apportion it.

Mr. Lew: Well... well, I disagree with the idea that it is being taxed.

After all, the formula itself allows as a first step an allocation of interest expense against a corporation's business interest income, so to the extent that the amount of business interest income is... swallows up the entire amount of the expense, then all of it is allocated to reduce the corporation's California taxes.

Justice Breyer: I don't see what that... I mean, most businesses, except if they're in the financial business, don't have a lot of business interest income compared to their other business, so I don't think that helps too much, does it?

Mr. Lew: Well, I think it... I think it demonstrates that the statute applies its rules in a fair and even-handed way.

I mean, certainly it is possible under California's statute for a corporation to come out better than it would under a proportional approach, and I think that that is one of the things that has to be understood, that the statute does allocate interest expense to interest income and dividend income in a fair and in an even-handed basis.

In fact, the first step of the statute allocates it to business interest income.

And with regard to the... what the statute does, it basically shifts those deductions which it considers to be attributable to nontaxable income to the... it attributes it to the income which is then taxed... which is then allowed as the deduction by the State of domicile if, in fact, that State utilizes a statutory scheme which is similar to California's.

Now, it is true that none of the other States currently adopt such a provision, but under this Court's internal consistency analysis I'm not sure whether or not that's a constitutionally significant point.

If in fact it were the case that all of... that all States utilized this formula, then the taxpayer would be able to have the benefit of all of the deductions which California has essentially shifted over to the State of domicile and enjoy a reduction in its nonbusiness income in that State.

It... the statute simply attempts to assign interest expense to its proper use or application, and it does so on a dollar-for-dollar basis against its business income and against the corporation's nonbusiness income.

In that sense, it is applied even-handedly, and again, those deductions would be available to the corporation in the State of domicile under a consistent... internal consistency analysis.

Now, as I said, the proportionality approach is one way of dealing with the problem, but again it doesn't solve the problem of a corporation obtaining a tax benefit completely, because to the extent that less than...

Justice Scalia: Wait, only if Illinois or, you know, some other State decides to give it the tax benefit, and that's none of your business.

If some other State wants to give them a tax double benefit, that's none of California's business.

Mr. Lew: Sure.

I agree.

Justice Scalia: So... but that's the tax benefits you're talking about.

Mr. Lew: No.

I'm talking about the tax benefit that arises when a corporation incurs debt, is able to write off the interest expense from that debt, and at the same time use that debt, either directly or indirectly, to generate income which California is not permitted to tax.

That is the double tax benefit that I'm talking about.

Justice O'Connor: Yes, but California asserts here the right to treat it as though it was all used, the money, to generate nonbusiness income.

Mr. Lew: That's right.

That is correct.

Justice O'Connor: Even though we know on the facts of this case, don't we, that that isn't true, and there's no move made by California to do any allocation.

Mr. Lew: Well, I don't agree that under the facts of this case that was... that is, in fact, the case.

If the Court is... if Your Honor is referring to the stipulation, then I don't believe that that is what the parties stipulated.

If the parties stipulated...

Chief Justice Rehnquist: Where are you reading from, Mr. Lew?

Mr. Lew: I'm reading from joint appendix page 21, stipulation number 14.

I believe that is what Justice O'Connor was...

Justice O'Connor: Well, that doesn't cover that point, but... and I can find it elsewhere, I assume, but let me ask you this.

Let's assume what I said is true.

The effect of the California provision would be to not allocate it at all.

Mr. Lew: It... well...

Justice O'Connor: You treat it as though all of the expense incurred in borrowing money went to the outside nonunitary business.

Mr. Lew: Well, what... again, and I know that I've said this before, what California is attempting to do is basically ensure that none of the interest expense was used, in fact, to generate income which California's not permitted to tax.

Chief Justice Rehnquist: Is it your position, Mr. Lew, that California in the long run, by its system, doesn't... is not able to tax any more income than it would be by the proportionality just because some people get a break and others don't under it?

Mr. Lew: I'm not sure if I understand your question completely, Your Honor, but let me try to answer it this way.

I think that the argument... the criticisms that can be leveled against California's statute can also be leveled against a proportionality approach in the sense that a certain portion of interest expense is being allocated to nonbusiness, nontaxable income.

Now, we don't know whether or not the amount that was allocated is the correct amount, but it does have the effect of increasing the corporation's tax in the State of California, so to the extent that that can be viewed as an indirect taxation of nontaxable income, that is what is being done there, and that's the same criticism that's being made in our case as well.

Justice Breyer: You can't ask the State to do more than it can do.

I mean, if it's hard to do it, hard to allocate it, that's an effort, that's a reasonable effort, so they're not unreasonable when they make a reasonable effort, even if it doesn't all work out perfectly.

But given the possibility of that reasonable effort, what justification is there for taking the money that's not apportionable?

Mr. Lew: Well, again... same argument, Your Honor, and that I think is... it's a reasonable objective, and the approach that it takes is the surest way of closing that loophole.

Justice O'Connor: Well, it's sure all right.

It's 100 percent dollar-for-dollar.

I mean, it makes no effort to apportion, and you're going to have to persuade me that that's reasonable, because I don't find anything in what you've said that makes me think that's reasonable.

No other State does that.

There's no effort made to allocate it.

I just... I have yet to hear a reason.

I guess...

Except I want to be sure, 100 percent sure.

I guess the California supreme court case on which the California court of appeal decision here was based was decided a long time ago.

Mr. Lew: That's correct.

Justice Scalia: Before our decisions in Allied-Signal and ASARCO.

Mr. Lew: That's correct.

Justice Scalia: Right.

And it's sort of hard for you to give up that old 1972 California supreme court opinion.

Unidentified Justice: [Laughter]

Mr. Lew: Well, I think that... I think that in that the court, the California supreme court has held that it does not result... that the allocation of interest expense to nontaxable income on a dollar-for-dollar basis does not constitute a tax, I think it's still applicable here, even in light of Allied-Signal and other cases.

Justice Ginsburg: The argument has been made that if you look at how the Federal taxation works, income taxation, in the main there is an allocation, but there's also an argument that at least in one respect the Federal income tax... I forgot whether it's... it has something to do with foreign investment, or foreign corporations, that the Internal Revenue Code does what California does in that one discrete area.

Mr. Lew: That is my understanding, yes, Your Honor, that there is a dollar-for-dollar allocation allowed under certain circumstances in the Federal scheme.

Justice Ginsburg: So you could make the argument that if it's rational for the Internal Revenue Code to do that, so it's rational for California to...

Mr. Lew: I think there's a basis for doing that, Your Honor.

I also believe that in... that section 265 of the Internal Revenue Code as well provides for a dollar-for-dollar offset in certain situations.

Justice Breyer: If I'm right... I don't know if this is the only place that does that in the code.

There's a rule which my law clerk found which is a controlled foreign corporation netting rule, and that has to do with a circumstance where you have to allocate income expense to certain foreign source income earned when you lend the money to a controlled foreign corporation and there's both been an increase in lending and an increase in borrowing.

And under those circumstances there is some rationality, where you've loaned more money to your off-shore corporation, and at the same time you've increased the borrowing, so I could at least see a rational there for saying we're going to assume this extra lending is allocated to the extra borrowing, but I don't think you even have anything like that here.

Mr. Lew: Well, I...

Justice Scalia: In other words, it's a tracing rule, rather than an allocation rule.

All that your opponent is asking is that you either allocate or trace, but you've done neither.

Mr. Lew: Well...

Justice Scalia: The Federal provision seems to try to trace.

Mr. Lew: Right.

The California statute is definitely not a tracing rule.

It's actually just an assignment rule, and it's basically based on the idea that it's extremely difficult, if not impossible, to trace interest expense to its ultimate use or application, and again it's just based on the idea that this is what... California's interest in trying to close this loophole.

That's what the statute is trying to do, and I think that to the extent that that constitutes a legitimate State objective, I think it certainly accomplishes that goal, and it does so, I think, in a fair way in the sense that it does allow that first step to allocate interest expense to... on the basis of business interest income, and to the extent that there is any remaining, it does allocate it against its nonbusiness income.

Justice Stevens: Why can't you just ask the taxpayer to assume the burden of persuading you that any interest... any income, or interest deduction that it seeks to obtain is attributable to the unitary business?

Mr. Lew: Well, I think that that is... that is one way to go, but I think that's also subject to manipulation as well, Your Honor.

Justice Stevens: The same is true of payroll and other expenses in this gigantic balance sheet and income statement they have to prepare in these things.

There's always room for...

Mr. Lew: And that's... I think the problem, if you're trying to determine, you know, a corporation's motive, I think that's just, as a matter of tax administration, extremely difficult to do, and it's essentially a facts and circumstances kind of test, and I just think that it's extremely difficult to administer that kind of test, you know, especially for a State like California.

That, I think, is what the problem is, and that is why there is this statute, which essentially eliminates any type of concept of motive or, you know, purpose, and just says, look, if you have interest expense, and you are using some of your capital to generate income that is not taxable in the State of California, that there is the...

Justice Stevens: It does seem to me it's not entirely unlike taking the president of the corporation's salary.

You do some allocating there.

You've got to... you know, there's room for... I don't know why interest is any harder to allocate than something like that.

Mr. Lew: Oh, it's... well, interest is harder to allocate than other... the thing about interest is that it is extremely fungible, I guess is the best way to put it, and you can't...

Justice Stevens: The dollars paid to the president of the corporation are pretty fungible, too.

Chief Justice Rehnquist: Is there any...

Justice Stevens: For salary, I mean.

Chief Justice Rehnquist: Is there any requirement that the interest deduction be based on loans that were made in California, or can they be made anywhere?

Mr. Lew: I believe they can be made anywhere, Your Honor.

Justice Ginsburg: Do you think that California, if we were not to accept your position, and were to say that you have to make some effort to allocate, California could do that...

Mr. Lew: Yes.

I think it...

Justice Ginsburg: without having a new statute that does it?

That is, the example... which company was it that we have in these cases?

Is it General Motors, or General Electric?

I don't remember.

Could the tax commissioner say, well, what we did is no good, here's something else that is good, so we're going to do that even though we don't have a statute that so provides?

Mr. Lew: Yes.

It is my belief that that could probably be done pursuant to other California regulatory authority which allows for a spreading of interest expense similar to the method that has been endorsed by the petitioner.

I don't think that it would necessarily require a... the enactment of a new statute.

I don't really have anything else.

If the Court has any further questions I'll be happy to answer them.

Other than that, I'm done.

Rebuttal of Walter Hellerstein

Chief Justice Rehnquist: Thank you, Mr. Lew.

Mr. Hellerstein, you have 5 minutes remaining.

Mr. Hellerstein: I have three very brief points.

First, with regard to the CFC netting rule that both Justice Breyer and Justice Ginsburg referred to, you're quite right, Justice Breyer, the CFC netting rule is, in fact, a very finely tuned tracing rule, as Justice Scalia said.

It only arises in a situation when there's... you go to some unrelated lender, you borrow money, you then relend that money to your controlled foreign corporation, the controlled foreign corporation then pays you interest.

That's the situation we're talking about.

If California had anything like that, we certainly wouldn't be here.

Again, a finely tuned mechanism addressed to a specific tax evasion problem which actually doesn't even... it just reduces the foreign tax credit, is what we're talking about.

It's not even a... it's not a jurisdictional problem.

Point two, Mr. Lew suggested, gee, these... all these other formulas that we're suggesting are reasonable are vulnerable to the same sort of criticism that we're making, and that's not true.

The criticism that we're making is that the California formula disproportionately assigns interest expense to nontaxable income.

All of those other formulas do it on an even-handed, nondiscriminatory basis.

And finally, his suggestion that, because the statute is internally consistent it is therefore constitutional, is a non sequitur.

It would be... if California had a statute that assigned income based on the number of square miles in a State, that would be internally consistent, but I think would plainly be unconstitutional and, indeed, in cases involving retaliatory taxes, which are entirely consistent, this Court has also held they are unconstitutional.

If the Court has no further questions...

Chief Justice Rehnquist: Thank you, Mr. Hellerstein.

The case is submitted.

Attribution:

The Oyez Project

Featured:

Jefferson County v. Acker - Oral Argument

Fri, 09 Jan 2009 14:50:13 +0000

Case:

Jefferson County v. Acker

Media File:

98-10_19990329-argument.mp3

Related Transcript:

1998_98_10_argument.xml

Transcript:

Argument of Jeffrey M. Sewell

Chief Justice Rehnquist: We'll hear argument first this morning in No. 98-10, Jefferson County, Alabama v. William Acker.

Mr. Sewell.

Mr. Sewell: Mr. Chief Justice, and may it please the Court:

I want to speak to you first this morning about the jurisdiction issues in this case.

This case presents the question of how, not whether, but how the Tax Injunction Act applies to a tax collection case removed to Federal court.

That, in turn, depends on whether the act is interpreted and applied as a broad jurisdictional barrier or simply as a limitation on a court's remedial power.

We say that the... the act should be applied broadly to keep collection cases out of Federal court altogether because any lesser approach, any more narrow approach is just... is unworkable.

Chief Justice Rehnquist: Well, in this case, Mr. Sewell, the... the county brought the action in State court, didn't it, to collect the taxes?

Mr. Sewell: Yes, sir.

Chief Justice Rehnquist: And then the defendants... the judges removed it to Federal court.

Mr. Sewell: That's right.

Chief Justice Rehnquist: And so, it... you say at that point the Tax Injunction Act applied to prevent the State from... from collecting a tax?

Mr. Sewell: I say that the Tax Injunction Act ought to apply to a tax collection case whether it's removed by a defendant by a taxpayer to Federal court or whether we had brought the case ourself in Federal court.

I think the Tax Injunction Act should bar... should keep these cases out of Federal court for a number of reasons.

The...

Chief Justice Rehnquist: Go ahead.

Mr. Sewell: The reason is, is because if you have some lesser approach, it's just not workable.

The Tax Injunction Act is going to apply in some form or fashion if a case is removed, a collection case is removed.

For... for example, if you go into Federal court in a tax collection case, the... it seems to me that that would allow the taxing authority, me in this case, the government, to use the Tax Injunction Act as both a sword and a shield to whipsaw a taxpayer.

Chief Justice Rehnquist: Well, what... what if this action had been brought in State court to collect taxes on the basis, say, of diversity of citizenship, and it was removed on that basis to the Federal court and there was no claim that the tax was unconstitutional?

Maybe there was just a claim that it had been paid and the county said, no, it hasn't been paid.

You think the Tax Injunction Act would still apply?

Mr. Sewell: Yes, Your Honor, I do.

I believe... and I look to footnote 22 partially of the Grace Brethren Church opinion.

Chief Justice Rehnquist: Well, that's not the greatest place to look for controlling law.

Mr. Jones: [Laughter]

Mr. Sewell: I thought it was a good place to look.

[Laughter]

And... and when I went back and read that footnote, that footnote gives a very thorough history and analysis of the Tax Injunction Act, and it quotes the Senators and the Members of Congress that were responsible for enacting that act.

And that footnote demonstrates... demonstrated to me conclusively that the purpose of the Tax Injunction Act, the central purpose, was to keep a Federal court from interfering in any manner in a State tax if there's an adequate State remedy.

That seems to me to be the... the clear purpose.

Justice Ginsburg: Well, then why didn't the act simply say the Federal courts have no jurisdiction in State tax cases?

Mr. Sewell: I think that the act... I wish that the act had... had said that, and I think that that's... you know, the act talks in terms of Federal courts not having the jurisdiction to... to enjoin, suspend or restrain a levy, assessment, or collection of a State tax.

But, in effect, Your Honor, that's what happened here.

Justice Ginsburg: I don't understand that because the... the suit didn't change its shape from being a suit to collect, not a suit to enjoin, but a suit to collect.

That's what it was.

Mr. Sewell: That's right.

Justice Ginsburg: And that was what was removed, and it remains a suit to collect.

Mr. Sewell: It does, and the... I'm assuming that the purpose of the Tax Injunction Act, the overreaching purpose, is to prevent a Federal court from interfering with the collection or the administration of State tax, and I believe that's what the Court's Grace Brethren Church opinion, specifically footnote 22... that's exactly what it said.

Now, the... the way I see this, the... in this case, the Federal court did interfere with the collection, not only of our tax.

In this case... this case has stopped us from collecting the tax not only from the respondents, but from all the Federal judges in the Northern District.

It's exposed us to refund suits from the other judges who paid the tax other... other than these two respondents.

It's resulted now in hundreds of Federal employees that work in Jefferson County refusing now to pay the tax, demanding explanations from us as to... as to why they have to pay if the judges don't have to pay.

We're having now to respond to all of that, and it looks as though we may... we may have to...

Justice Kennedy: Well, why would that be any different as if it were just in State court and a State court judge said, well, I have real problems with this?

I'm going to take it under submission, and the word gets out.

Justice Breyer: It's the same thing.

Mr. Sewell: I think that there would... we may have some... some of the same results, but I think again the purpose of the Tax Injunction Act is to keep the Federal court from doing that.

Chief Justice Rehnquist: But the purpose of diversity jurisdiction is to provide a... basically a more neutral forum perhaps than the State court but to resolve the case in exactly the same way that the State court would have resolved it.

So, if... if there had been a decision of the Alabama court saying that this was... couldn't be applied to... you'd have the same claims, wouldn't you, on the part of Federal employees?

Mr. Sewell: I think that you may have some of the same results and you may have some of the same displeasure from the Federal employees, certainly.

Certainly.

Justice Scalia: What if the Alabama Supreme Court finally decides that the tax can be collected and then certiorari is sought here?

I mean, it stays in the Alabama court.

Justice Kennedy: It goes all the way...

Mr. Sewell: This case.

Justice Scalia: Yes.

It goes all the way to the supreme court, and the supreme court says the tax can be collected.

And then the judges seek certiorari.

We grant certiorari.

If we reverse the Alabama Supreme Court, would we be enjoining a State tax?

Mr. Sewell: Well, Your Honor, I think that...

Justice Scalia: Under your analysis, we would I suppose.

Mr. Sewell: I think this Court would certainly have appellate jurisdiction to review the decision of the Alabama Supreme Court.

Justice Scalia: Yes, but under your broad definition of what constitutes the... the... enjoining of a State tax... namely, to give a judgment against a person who is resisting the collection of a State tax... we would be violating the Anti-Injunction Act.

Mr. Sewell: I think that your jurisdictional... and I understand your point and you're correct, but your... your basis for an appellate review of a State court decision is different from what I'm suggesting to you.

I'm talking about jurisdiction at the trial level, the initial Federal jurisdiction.

Perhaps I'm using... I'm painting with too broad of a brush.

Maybe I am.

Justice O'Connor: Do you plan to argue that removal was improper under section 1442(a)(3)?

Mr. Sewell: Yes, ma'am.

Justice O'Connor: I'm not sure you're going to win on your tax injunction argument.

I wondered if you wanted to pursue that other inquiry.

Mr. Sewell: Yes, ma'am.

I had planned to argue that.

We feel that under 1442 that... that neither test is met because refusing to pay taxes is not an act done under the color of a judge's office, and it's not done in the performance of any judicial duty.

I know of no Federal statute, I know of no act of Congress that... that instructs a judge to not pay his or her taxes.

Justice O'Connor: I guess the inquiry under 1442 is pretty much tied up with the merits of whether the tax can be imposed.

Mr. Sewell: I think that... that perhaps it is, and I certainly... and I don't suggest to you that... that... that the judge would have to win on the merits to... to have jurisdiction.

But I... I do suggest to you that there has to be something colorable about the defense that's pled, and to me if... if... if the people in Mesa v. California couldn't convince the Court that... that when they ran over somebody in their... in their postal buggies that they were engaged in their official function, I don't see how not paying a tax would satisfy that.

Certainly if these judges didn't pay Alabama's income tax...

Justice Kennedy: But... but this tax says that it's unlawful to perform the function, i.e., it's unlawful to be a judge if you don't pay the tax.

Mr. Sewell: No, sir.

I disagree with that.

The tax... the ordinance says that it's unlawful to work in the county without paying the tax.

The court of appeals seized on that language, but that... what they failed to do... they failed to do two things.

One of those things was they failed to recognize the difference between a license tax which is for revenue purposes, which is what ours is, which stems from our taxing power, versus a license tax for regulatory purposes which stems from the police power.

Justice O'Connor: Let me ask you this.

Does the county have any authority to impose an income tax?

Mr. Sewell: No, ma'am.

We're prohibited from doing that by the Alabama constitution.

Justice O'Connor: And yet, for you to prevail, you have to persuade us that this is in fact an income tax.

Mr. Sewell: Under Federal law it clearly is an income tax.

Justice O'Connor: Even though the county lacks the power to...

Mr. Sewell: Under State law.

Justice Breyer: impose an income...

Mr. Sewell: Just as in Howard v. Commissioners, yes, ma'am.

Justice Breyer: Why is it clearly an income tax?

It doesn't say it's an income tax.

Mr. Sewell: No, sir.

It is clearly under Alabama law a license tax.

Justice Souter: Yes, fine.

Justice Breyer: So, you said, to win, which I think you're right, that you'd have to persuade us it's an income tax.

Justice Kennedy: All right.

Justice Breyer: Why is it an income tax?

Persuade us or me.

Mr. Sewell: I will persuade you, Your Honor.

I'll try to persuade you with the... with the Howard v. Commissioners decision where you all persuaded me...

[Laughter]

that a... that a license...

Justice Souter: I must not have written that.

Mr. Jones: [Laughter]

Mr. Sewell: that a license tax in Louisville, Kentucky that is indistinguishable from our tax was an income tax under the Buck Act.

Justice Breyer: And why... why is it... I mean, this... why is it basically an income tax?

Mr. Sewell: Because the Buck Act makes it an income tax.

Congress... Congress converted all State and local license taxes to be income taxes under Federal law.

Justice Breyer: So... so, if you pass a tax that says anybody who... anybody... take an unpopular matter.

Anyone who applies the Federal sentencing guidelines will pay a tax measured by their income.

Is that an income tax?

Mr. Sewell: That is a... I would think, a discriminatory tax that would violate the...

Justice Breyer: Yes, but is it an income tax?

Mr. Sewell: I don't know.

Justice O'Connor: All right.

Justice Breyer: Now, here they're... we read the opposition's brief and they say, first, it doesn't say it's an income tax, and second, there are vast numbers of employees who don't pay it measured by their income.

They pay it measured by $50 a year.

They include... we just have the A's I guess... architects, attorneys, auctioneers, automobile dealers, automobile accessory dealers, and that's only the A's and I'm only halfway through.

All right?

So... so, vast numbers of people pay $50 a year, $125 a year.

Some people pay it measured on their income, and it's also not called an income tax and it would be illegal to... to have one under State law.

Okay, now, why is it an income tax?

Mr. Sewell: Your Honor, in answer to your question, I disagree first with the word vast.

92 percent of the people who earn wages in our county pay our tax.

92 percent.

8 percent pay license fees to the State of Alabama, and those are predominantly Federal employees.

Justice Breyer: Where does that number come from?

Mr. Sewell: It comes... that is... that number is not in the record because this issue was never raised until we got to this Court.

Justice Breyer: Well, how would I find out whether... you know, I see a big list of occupations.

How do I know... how am I supposed to find that out?

Mr. Sewell: Well, this... this information is not in the record, nor is the fact that 1,209 of the 12,000 Federal employees in Jefferson County... 1,209 of them... pay State license fees and do not pay our tax.

Justice Kennedy: In the Howard case that you rely on, were there categories by business as... as your ordinance has it?

Mr. Sewell: Exemptions.

Some, yes, there are some.

Some of them were.

Some were, of course, domestic servants...

Justice Kennedy: So, you could be either an employee in sort of a catchall group or a person with a specific business and you had to pay different rates according...

Mr. Sewell: As I understand it, yes.

Justice Scalia: to your business?

Justice Kennedy: That... that was... that was the... the pattern of ordinance in Howard?

Mr. Sewell: There was... there was... yes, sir.

There was a separate law, and whether it was a State law or whether it was a city law, that I don't know.

But it... but when you read it carefully, you see that it applies to insurance companies and then other corporations, persons that are taxed by these other sections of Louisville law or by Kentucky law.

So, the Louisville occupational tax had exemptions.

I don't know how broad they were.

I don't know how narrow they were.

I know how narrow ours are.

It's only 8 percent of the people.

I don't know how... how broad or narrow Louisville's was.

Justice Kennedy: Yours... yours doesn't look like an income tax because it's... it's on gross receipts.

There are no deductions.

But that was also true of the Howard case.

Mr. Sewell: That's right.

Chief Justice Rehnquist: And the Buck Act defines income tax very broadly, doesn't it?

Mr. Sewell: It does.

Chief Justice Rehnquist: It's any tax levied on with respect to or measured by net income, gross income, or gross receipts.

Mr. Sewell: And ours is, yes, sir.

There's no dispute about that.

Justice Stevens: But don't you have the additional problem, your license fee or tax or whatever it is is arguably discriminatory under Davis against Michigan?

Mr. Sewell: No, sir.

No, sir.

Our tax does not... our tax does not discriminate against any person, Federal or otherwise.

Justice Stevens: All the people... all the people on the list that Justice Breyer referred to don't pay it.

Mr. Sewell: The... I understand.

Justice Stevens: The architects, barbers, hair dressers, all that list.

Mr. Sewell: As I understand...

Justice Souter: And they do not pay it.

Mr. Sewell: Well, I think that there is... I think that there is factual discrimination because we have... our tax applies to this group and the State levies its license fee on the others.

And what that is is just a simple division of taxing authority.

Justice Stevens: Yes, but the... but the amount that is paid by the respective people in the different jobs is quite different from the amount the judges have to pay.

Mr. Sewell: Some.

Some are and... and some are not.

Justice Scalia: Well, they all are, aren't they?

Mr. Sewell: It depends on how...

Justice Stevens: They're all flat fees, aren't they?

Mr. Sewell: It depends on how much... how much money a person makes.

Justice Stevens: Are there any of those which the license fee is as high as the income tax on the judges?

Mr. Sewell: Well, if... if a... yes.

Depending on... depending on a... how much a person would make, they could pay more instead of less...

Justice Stevens: Well, you know what Federal judges make and you know what the license fees are.

I was under the impression that none of the license fees were as high as the tax on the judge.

Mr. Sewell: Okay, I'm with you, and I don't... I don't know if it is.

I really don't.

I doubt that it is, but...

Justice Stevens: But assuming that's true, why... how then do you get around Davis against Michigan?

Mr. Sewell: Because I read Davis v. Michigan as... as the problem with that tax was that it discriminated against Federal employees by favoring State employees...

Justice Breyer: Right.

Mr. Sewell: because of the source of the compensation, which is what the Public Salary Tax Act says.

There may be other forms of factual discrimination.

Chief Justice Rehnquist: That wasn't the basis, though, of the Eleventh Circuit's decision here, was it, that it discriminated?

Mr. Sewell: The Eleventh Circuit said... noted that the trial court found that the tax did not discriminate and went on to say the judges didn't appeal it, and so they were not going to address it.

Justice Ginsburg: And is it true, Mr. Sewell... Mr. Sewell, is it true that this tax would apply to State court judges in the same way it applies to Federal judges?

Mr. Sewell: It applies to all constitutional officers of the State of Alabama.

Justice Ginsburg: And the same with prosecutors.

Mr. Sewell: Yes, ma'am, who work in Jefferson County, Alabama.

Justice Souter: So, the State court judges are taxed on their income in the same...

Mr. Sewell: Just like the Federal judges, and the Alabama Supreme Court Justices, three of those who have offices in our county, satellite offices, pay the...

Justice Breyer: Prosecutors are not.

The prosecutors are not.

Mr. Sewell: Prosecutors may be... I think prosecutors are required to have a State law license.

Justice Breyer: So, they pay... they don't pay one-half of 1 percent of their income.

Mr. Sewell: They pay the State law license.

Justice Breyer: They pay $200 a year flat or something like that.

Justice Ginsburg: That would be the same for the U.S. Attorney, though, wouldn't it?

Mr. Sewell: Yes, ma'am.

That's very important.

It's also true for the doctors who work at the VA hospital.

We have a large VA hospital.

All of the doctors and all of the nurses are required by their Federal job descriptions to have a State physician's license to practice medicine and the nurses are required to have a State nursing license to be a nurse for the Federal Government.

Justice Scalia: Mr. Sewell...

Mr. Sewell: Yes, sir.

Justice Scalia: I want to erase a... a stupid question I asked.

The answer to my question about the supreme court in deciding this case would be violating the Tax Injunction Act.

Unfortunately, the act was not reproduced in your brief.

Having dug it out, I find it only applies to district courts, doesn't it?

Mr. Sewell: Yes.

Justice Scalia: That's the right answer.

Mr. Sewell: Yes, sir.

Thank you.

I wish I had thought of that.

[Laughter]

I would like to reserve the rest of my time, please, if there's no more questions.

Argument of Kent L. Jones

Chief Justice Rehnquist: Very well, Mr. Sewell.

Mr. Jones, we'll hear from you.

Mr. Jones: Mr. Chief Justice, and may it please the Court:

The Tax Injunction Act bars only anticipatory relief against State taxation in Federal courts.

As Justice Stone said for this Court in Matthews v. Rodgers, which is cited in the legislative history of the Tax Injunction Act, although injunctions against State taxes should not be heard in Federal courts, Federal courts remain competent to decide questions of State law, and therefore can adjudicate collection and refund cases brought in Federal court so long as the essential elements of Federal jurisdiction are present.

It's our position that in this case, the essential elements of Federal jurisdiction are not present.

The only asserted basis for Federal jurisdiction is the Federal removal statute which does not apply here because the action of the judge in refusing to pay a tax on his private income is not an act taken under color of authority or pursuant to his duties as a Federal officer.

In the removal petition, respondents incorrectly stated that the tax was imposed on the act of performing their official duties.

That's not correct.

The tax is imposed on, it's calculated on and assessed on their earnings.

And this Court made clear in the O'Malley v. Woodrough case that the responsibility of Federal judges to pay taxes on their earnings derives from their private responsibilities as citizens and that they have the same responsibility as everyone else to share in the costs of paying for the benefits the government provides.

Justice Kennedy: But the way the tax is designed is that you are... it is illegal to engage in the duties unless you pay the tax.

You don't have simply a financial liability for the tax.

Mr. Jones: I don't...

Justice Kennedy: There... there is a prohibition to... against engaging on the duties themselves.

Mr. Jones: What it really says is it's unlawful to do it without paying the tax, and then you have to see what that means.

What that means is if you don't pay the tax, you have to pay interest and penalties.

There are no other enforcement mechanisms in this case.

We would have a vastly...

Justice O'Connor: Does it matter at all that under State law the county is prohibited from imposing an income tax?

Do we care about that?

Mr. Jones: Not on...

Justice Kennedy: They can't do it.

Justice O'Connor: It's ultra vires.

Mr. Jones: Well, let's go right to the merits.

I've just been talking about jurisdiction.

But on the merits, no.

The income...

Justice O'Connor: I think the removal argument is tangled up a little bit with...

Mr. Jones: Well, it shouldn't be because the... there is no question that they... they need to show a colorable Federal defense.

But the existence of a colorable Federal defense doesn't dispose of the requirement that the act for which they were sued be one that they took in their official capacities.

And it's our position that... that any Federal officer who doesn't pay his Federal... his State or local taxes is acting in a private capacity.

Justice Scalia: Some judges in this jurisdiction have paid the tax.

Justice Stevens: Right?

Justice Scalia: And... and presumably would have been violating their duties if... if resisting the tax was part of the Federal responsibilities of these people.

Mr. Jones: I just don't think Federal duties apply in any direction on... on the private decision about paying your tax on your personal income.

The Supreme Court in... in O'Malley seems to me to have made that point.

Justice Souter: It seems to me a Federal judge could have taken the position that it is simply unlawful to condition under State law my performance of my Federal powers and exercise of my Federal responsibility.

And... and if the case is looked at that way, then the... the removal I suppose is in a different posture.

Mr. Jones: If... we have... in deciding whether removal is proper, you have to look at what case was brought in State court.

If there were a case brought in State court that said that this judge should be enjoined or should be prevented from performing his official functions, then the judge could remove the case and say that what's at issue is my official acts, whether I can perform my official function.

Justice Souter: Well, here the judges I suppose could have taken the position that the... that the disposition of the case that was brought was simply a... a predicate to what could have been an injunction against their performance of their... their Federal responsibilities.

Mr. Jones: Well, I don't think it is a predicate to an injunction.

I don't think and none of the courts below thought that an injunction could possibly be issued.

Justice Kennedy: Why not?

Mr. Jones: Well, if for no other reasons, inequity wouldn't... the legal remedy of collecting the tax is sufficient, but beyond that, what this tax says is what's unlawful... what happens when it's unlawful and the tax isn't paid is interest and penalties.

It doesn't say anything beyond that.

Justice Souter: Well, it provides for interest and penalties, but I suppose if there is arguably a prohibition against the exercise of the... of the professional responsibilities, State equity would... would enforce it.

Mr. Jones: If this... again, if the State... if the suit in State court arose in connection with that act, that would be the act at issue in the removal.

The act at issue in this case was paying the tax and that was a private act, not an official act.

On the merits...

Justice Kennedy: Well, just... just... on... on that point, in... this district has multiple locations.

If the chief judge of the district says you must come to Birmingham and try this class action for a year and a half, the judge has no choice.

That's... he's exercising his official duty.

Mr. Jones: That may well be and it may well be true too that when a Federal judge goes to different States... I mean, an appellate judge goes to different States, he might become subject to their taxes also.

On the merits...

Justice Breyer: Doesn't it say on... the language of it is it is called a license fee for the privilege of engaging in or following such vocation or occupation.

It doesn't... it says in the statute that it's for the privilege of engaging in the vocation.

Mr. Jones: The... this issue is already well plowed in this Court's cases.

In Howard v. County Commissioner, the Court upheld a similar business privilege tax against the very objection that the tax was an improper license fee on Federal workers.

Justice Scalia: No.

Justice Breyer: The objection here is it isn't income tax.

They don't even measure it by income.

They measure it by gross receipts.

Mr. Jones: Well, the tax doesn't have to be an income tax to be valid.

The Public Salary Tax Act authorizes a tax on pay or compensation.

The Buck Act authorizes a tax on... authorizes an income tax but defines that by statute to mean any tax on income.

Chief Justice Rehnquist: Or gross receipts.

Mr. Jones: Yes, and... well, income as used in the broadest sense, as near as we can tell from looking at that statute.

And this Court has defined that term to mean any accretion to wealth.

So, this tax doesn't have to be a Federal income tax or a State income tax.

It has to be a tax on income, which it is.

And in... in Howard v. Commissioner, the Court said the fact that the tax is described is in the form of or labeled as a license fee doesn't make it invalid.

What is... what matters is that it's practical operation is to tax the income of Federal officers.

If in its practical operation it taxes their income, it is valid regardless of the form or label applied.

Justice Scalia: Do you have any thoughts on the merits?

Mr. Jones: That's what I was kind of working on there, Justice Scalia.

[Laughter]

The only other thought I have on the merits is that their contention that discrimination prohibits this tax is simply wrong.

In Davis v. Michigan, the kind of discrimination the Public Salary Tax Act prohibits is discrimination based on the sovereignty of the employees.

This is not like the pension discrimination involved in Davis v. Michigan where State workers were treated better than Federal workers.

Under this tax scheme, it appears that regardless of whether you're a Federal worker, a State worker, a private worker, the tax applies the same way to you.

It's true that there are exemptions in the State... in the county tax provision for undertakers and barbers, for people who are already licensed under the State licensing scheme, and the evident purpose of those objections is to avoid a double tax on these previously licensed professions.

Those kinds of equalizing adjustments don't discriminate on the basis of sovereignty.

They apply equally and this case does not present any question about equal protection issues whether these kinds of discriminations satisfy the rational basis standard because those issues weren't raised below.

The only discrimination issue involved under the Buck Act is... under the Public Salary Tax Act is whether the statute discriminates because these are Federal workers, and the answer to that is not.

Justice Ginsburg: Mr. Jones, if we should agree with you about that issue on the merits, what about the issue that the Eleventh Circuit didn't decide and that is the diminution of compensation?

Would we...

Mr. Jones: Well, the O'Malley v. Woodrough, the Court held that... that a tax on the incomes of Federal judges would not be a diminishment of their compensation for Article III purposes.

Justice Stevens: Mr. Jones, I don't think the tax in Michigan discriminated against the Federal workers because they were Federal workers.

It just treated them like every other citizen in the State, discriminated in favor of a very small group of State workers.

Mr. Jones: It did discriminate on the basis of sovereignty, though, and I believe you dissented in this case.

Justice O'Connor: I did.

Mr. Jones: [Laughter]

Justice Stevens: I think the cases are quite similar.

Mr. Jones: It's the majority's view is what I was trying to describe.

[Laughter]

Justice O'Connor: Yes.

Justice Stevens: You're not asking us to reexamine Davis, though.

Chief Justice Rehnquist: Mr. Jones, you've repeated several times about your reliance on O'Malley against Woodrough, and yet it isn't cited in the government's brief.

Could you file a citation to that with the clerk?

Mr. Jones: It's certainly cited, if not in our brief, in one of the briefs.

But I will... I'll provide you with the citation, and... and perhaps Mr. Sewell can give it to you in his reply.

Argument of Alan B. Morrison

Chief Justice Rehnquist: Thank you, Mr. Jones.

Mr. Morrison, we'll hear from you.

Mr. Morrison: Mr. Chief Justice, and may it please the Court:

Before turning to the merits, I want to deal with the justiciability Tax Injunction Act issue and the removal which are all kind of tied together in our view.

This case was removed from the small claims division of the State court of Alabama by the respondents, two Article III Federal judges, and they alleged in their removal petition that the provision that the... both the Justice Kennedy and Justice Souter focused on about the unlawful... making it unlawful to engage in the occupation was tantamount to an imposition of a licensing requirement by the county upon Federal judges, which if carried out, would interfere with their Federal... carrying on the duties of Federal judges.

For purposes of removal, that is clearly a kind of Federal immunity defense, saying that the Constitution does not allow Jefferson County to do that.

If ultimately we are wrong on the merits... and I'll try to explain why we don't think we are... that would not have allowed us... that would not defeat the removal.

But significantly for removal I want to point out that at no time did Jefferson County in the district court or in the court of appeals suggest that removal was improper.

And the rules... the statute requires that removal be objected to within 30 days or at least by the... if you allege that this is subject matter jurisdiction, which I'm not sure whether it is or not, that has to be done by the time of final judgment.

So, even this Court's decision in the Caterpillar case... Mr. Chief Justice, I do not cite that in my brief, but it was a recent decision a couple of years ago... allowing these removal issues to be raised later...

Chief Justice Rehnquist: You do not cite decisions that are only 2 years old?

Mr. Jones: [Laughter]

Mr. Morrison: Your Honor, I... I didn't think of it until I saw what their reply brief said, and that... I wasn't sure that it was going to come up until I was actually preparing for my argument today.

In any event, I'm not sure whether it's jurisdictional or not, but in any event, it was never raised and we think it's...

Justice Ginsburg: If it is, it's pretty important because the Court would then have an obligation to remand on its own.

Mr. Morrison: That is correct.

Justice Ginsburg: And in Caterpillar, that was... going in, that was recognized that this Court should have remanded.

The problem was we were at the end of the line.

There was at that point complete diversity.

So, it was a very practical oriented decision.

It said that the district court did wrong in not remanding.

It should have done that in the beginning.

Mr. Morrison: But in this case they were never asked to remand on the grounds of 1442(a)(3).

The provision that allows officers of the courts of the United States to remove should not have been invoked.

The only basis for saying that the case was not properly in Federal court was the provision of the Tax Injunction Act, and that was what the petitioner relied upon.

In any event...

Justice Ginsburg: I don't follow that because I don't think the tax collector in Alabama could originally have brought this case in Federal court.

Not... he... he has no Federal question on the face of his complaint.

There is no diversity.

On what basis could it come into Federal court originally?

Mr. Morrison: I think that's correct, Your Honor.

It could not have come into Federal court originally.

But I believe that the... the... under 1442(a)(3), we must have a colorable Federal immunity claim.

As I've explained, we have a colorable Federal immunity claim in this case because we claim that the license fee is tantamount to a licensing requirement which would interfere with our Federal... our Federal duties as Article III judges, if that was imposed.

Justice Ginsburg: And even if you're wrong about that, there's enough... it's an arguable...

Mr. Morrison: Yes.

Justice Ginsburg: proposition...

Mr. Morrison: And as this Court has said on many occasions, the... one should not confuse the issue of jurisdiction with the issue of the merits, and that... and that so long as we have a colorable Federal immunity defense, we would... we would be able to be in court.

Now, if our only claim were, however, that the tax was unduly discriminatory... that is to say, it violated the... the Public Salary Tax Act... and that it was not a license of any kind, we might be in a different situation then.

In any event...

Justice Scalia: I... I don't think that's confusing jurisdiction with the merits.

I mean, the... the question of whether, in making this claim, your clients are acting pursuant to their official duties has nothing to do with the... with the merits of the case.

That is a question that just goes to the jurisdiction.

Mr. Morrison: Well, I agree with that, Your Honor.

I was... the... the Government has made a great deal of saying that we... that this is not in fact a license fee and therefore we lose.

And that may be right on the merits.

Justice O'Connor: Right.

Mr. Morrison: But... but it is... it doesn't defeat our jurisdiction.

And I think one ought to take a practical construction of the statute, and the question is did Congress intend to allow Article III judges, who are the principal persons covered by 1442(a)(3), when they are sued and they believe that the suit involves matters directly relating to their official functions.

They raise a claim of Federal immunity, whether they have the right to have that case heard in the Federal courts or, nonetheless, have to have it heard in the State courts.

Justice Souter: Well, is a colorable claim enough?

Mr. Morrison: Yes, it is, Your Honor.

Chief Justice Rehnquist: What's the authority for that?

Mr. Morrison: Willingham and I believe that Mesa against California also is.

The Willingham case is... is...

Chief Justice Rehnquist: Well, if you don't have it handy, you have it covered...

Mr. Morrison: I have...

Chief Justice Rehnquist: You cover it in your brief.

Mr. Morrison: Yes, on page 25.

Also, Jamison... Jamison against Willy from the Fourth Circuit, Mesa against California, and Moe against the Salish and Kootenai Tribes, as well as the Willingham case, all stand for the proposition that on issues of... of removal, as long as the colorable Federal defense of a Federal immunity applies, it is... it is sufficient.

Justice Scalia: That's the merits question.

Justice O'Connor: Yes, I think...

Justice Scalia: That's not... that's not the question of... of whether the official is acting in official capacity in... in bringing the suit.

A purely jurisdictional...

Mr. Morrison: Well...

Justice Scalia: I understand the Chief Justice to be asking whether it is enough that you have merely a colorable claim under the jurisdictional provision.

Mr. Morrison: Oh, I'm sorry.

I did not understand your question, Mr. Chief Justice.

Justice Scalia: I thought that's what he was asking.

Mr. Morrison: The question is... as I understand it, there's no question that these persons are covered persons by 1442(a)(3).

Justice Breyer: Okay.

Justice Scalia: You have to establish...

Mr. Morrison: We have...

Justice Breyer: that, period.

Chief Justice Rehnquist: Not colorably but...

Mr. Morrison: Period and they are.

They are officers of... of the courts.

All right.

That's point number one.

Point two is, is the claim that they are raising... are they raising a Federal immunity defense and their claim of Federal immunity defense must not be proven but must be colorable.

And their Federal immunity defense is that the county is trying to license them.

It is not imposing an income tax.

It is trying to license them, and by trying to license them, just as much as if they tried to get an injunction against them, if the end in this case would say they must submit to the licensing scheme, which we contend is unconstitutional, then we have a Federal immunity not to be part of that licensing scheme.

And that is the basis of our Federal defense on which 1442(a)(3) says that we must have one in order to be able to get into the Federal... Federal courts.

And the Congress has said in those circumstances, Federal judges should be entitled to have Federal cases litigated in Federal courts before Article III judges instead of the State courts in which the action happens to be brought.

Now, I want to turn now to the merits of this case which I believe turns on the proper characterization of the ordinance.

Justice Kennedy: And in the course of your remarks, please present them as you wanted to, but the Howard case stumps me.

Mr. Morrison: Well, let me...

Justice Kennedy: I... I just don't know how to get around that.

Mr. Morrison: Well, let me... let me begin with Howard since it has taken up some attention.

The first thing I think we ought to recognize is that the Howard ordinance, insofar as it was before the Court, was only... the single footnote in note 2 in the Howard opinion quotes all of the ordinance that was actually in this Court.

I have gone and looked at the joint appendix, and there is nothing about exemptions in the Howard ordinance at all.

So that insofar as the Court was aware, and despite whatever may have been the actual state of the law at the time in terms of Louisville ordinance, there were no exemptions.

It now appears... and there has been several rounds of submissions on this, but it appears that the Louisville ordinance in effect at that time did have three exemptions.

One for domestic servants and the ordinance specifically says with respect to that that the... the exemption is because of the great costs of administration and difficulty of collection involved, domestic servants are excluded.

Second, there is an exclusion for ministers.

I don't want to get into another constitutional issue here today, but whatever that exclusion is and the questionable nature of it under First Amendment law, it was not a broad exclusion.

The other exclusion was for insurance companies who had other taxes, and there was another provision that said other businesses that had licenses.

They didn't lose their licenses, but they still had to pay the tax under the ordinance.

Stated another way, instead of the 140 exemptions across a broad range of issues that we have in this statutory scheme here, we had a very narrow set of exemptions, one for obvious administrative convenience reasons.

Chief Justice Rehnquist: Well, I think your problem isn't so much the Howard case as the definition in the Buck Act that says an income tax is any tax levied on, respect to, or measured by net income, gross income, or gross receipts, which the Court was simply interpreting in Howard.

Mr. Morrison: Well, I want to be clear.

The fact that this is not an income tax like the Federal income tax is not the reason that we say that this is not a tax covered by... by the statute.

Second point.

The Buck Act is principally a provision to remove the possibility that someone would claim, well, you cannot tax someone because you're working on a Federal enclave.

Chief Justice Rehnquist: Well, whatever it may be principally, do you dispute the fact that this... this tax was measured by either gross income or gross receipts?

Mr. Morrison: I do not, Your Honor.

Chief Justice Rehnquist: Then why... why doesn't the Buck Act cover it by its very terms?

Mr. Morrison: The Buck Act is not an enabling provision.

The Public Salary Tax Act is an enabling provision.

The Buck Act, which was passed 2 years subsequent to that, was a provision intended to close a possible loophole.

That the argument is that even though in this... in the case of Louisville, the ordinance there was physically within the confines of the City of Louisville.

It was actually... the property was actually owned by the United States, and the concern was that someone would say, as someone did in that case... and that was the principal focus of the issue.

In that case, the... the United States Government has right to the property and therefore no locality may impose the tax.

The Buck Act didn't impose any tax or authorize it.

It removed an impediment.

Indeed, those are I think the words in the... in the Howard opinion itself.

But even if this is an... and then that gets me to my next question which is while one might think of this as a... as a tax on pay or compensation, that we believe that the fact that there are these massive exemptions, exemptions which are totally unrelated to income...

Justice Ginsburg: But they're also totally unrelated to the source.

You're not... or maybe you are... making an equal protection case, that it's arbitrary to let the barbers pay less than the judges.

Mr. Morrison: I am not making an equal protection argument.

Justice Ginsburg: But here all the State judges are in the same boat.

The U.S. Attorney pays the... the other fee, and so does the district... local district attorney.

So, there's no discrimination between like groups.

Mr. Morrison: Well, I want to... I want to take on the... the direct thrust of your question, but first I want to make what I believe is a... is a... a clarification.

If you are a lawyer working for the Federal Government and you are assigned to go to Alabama to be an Assistant U.S. Attorney or work in the Small Business Administration of the Internal Revenue Service, you may have to be a lawyer, but you don't have to be admitted to the bar of the State of Alabama.

You must be a lawyer someplace, and the same I believe is true for doctors and others.

You must have a law license, but Alabama can't say that you must have an Alabama law license to engage in legal activities in Alabama.

That's up to the lawyers.

All right.

Leaving that aside, when one looks at the statute initially, the discrimination as to source, one could believe that since Federal judges pay and State judges pay, it's the same.

I do not believe that this Court's decision in Davis against Michigan allows that kind of construction.

That was the very argument that was made there, that there was only a narrow group of... of discrimination there.

The Court said... and Justice Stevens is perfectly aware of this because he wrote the dissent there.

He said the Court has adopted, in effect, a most favored nation provision under which if Federal employees are treated worse than State employees, then that is the proscribed discrimination, different from an equal protection discrimination.

And the Court, 8 to 1, said that that is entirely correct.

That is, in essence, what we have here, that there are 140 occupations in the State of Alabama who pay license fees which are not calculated on income.

Justice Kennedy: We... we began with the case being removed because you have a Federal defense, and now, all of a sudden, it's discrimination which is...

Chief Justice Rehnquist: Yes.

You didn't argue...

Mr. Morrison: We have two claims.

We have a first claim that it's a... there are two separate but related claims based on the exemption.

One is that the exemptions destroy the essential licensing aspect... destroy the income tax aspect.

That is, they turn it into a licensing scheme.

It is what it says it is.

It's an attempt to license, and it's not a tax on pay or compensation of the kind envisioned in the Public Salary Tax Act.

That is our first argument.

That is the argument that gets us into the Federal court under 1442(a)(3).

Our second argument... and I would agree this would not get us into the Federal court.

I believe I said that earlier... is if it is an income tax, there was no question about it being an income tax, there were none of the... of the evidences such as the language making it unlawful to engage in our profession, the language calling it a privilege tax, calling these license fees, we would still have a discrimination argument based on Davis.

Chief Justice Rehnquist: But was that... was that argument passed on by the Eleventh Circuit?

Mr. Morrison: They said there was no discrimination, Your Honor.

Chief Justice Rehnquist: Yes.

Mr. Morrison: The argument based on Davis was not.

I was not counsel of record then.

Chief Justice Rehnquist: Yes, and did you file a cross petition for certiorari?

Mr. Morrison: No.

I don't believe I have to, Your Honor.

I believe that so long as I'm asking for the same judgment, which is that the tax is declared unlawful, that I do not have to file a cross petition.

Chief Justice Rehnquist: So, you're asking us to reverse a holding.

The district court said there was no discrimination.

The court of appeals said they would not consider that.

Mr. Morrison: Your Honor, I'm asking you to affirm the judgment.

You could do it on either of two grounds: that it's a license, in which case we're affirming exactly what the district court and the court of appeals said; or in the alternative, that it's an unjust discrimination

And either of those grounds would result in the identical judgment of the district court and of the en banc court of appeals, although...

Justice Kennedy: If the basis for your removal under the Federal part of the removal statute fails, shouldn't the district court simply remand to the State court to hear the discrimination issue?

It's kind of like a pendent issue here.

Mr. Morrison: If the...

Justice Kennedy: In other... in other words, if your business privilege tax argument falls away, which was the...

Mr. Morrison: On the merits.

Justice Kennedy: on the merits, which was the basis for you to get into Federal court, the Federal court... you want it to go on and decide the discrimination issue on the grounds that it's pendent jurisdiction here at issue?

Mr. Morrison: Yes, I would say that would be correct, Your Honor.

And under 28 U.S.C. 1367, the supplemental jurisdiction provision, which... since this question had not been presented, I didn't... I didn't note it... allows for pendent jurisdiction for claims arising out of the same transaction or occurrence.

I believe it's case or controversy.

The terms actually are there.

So long as... as there are no additional facts.

And in the case of Federal questions, which this would be... this is not even... indeed, it's not even a different claim.

It's a different defense to the same claim raised by the State given the purpose to promote economy and the fact that we are here and everybody has briefed this issue.

There's no facts in dispute.

There's no...

Justice Ginsburg: Mr. Morrison, may I just interrupt you there because 1367, the supplemental jurisdiction provision, applies when the claim... there is a claim within the original jurisdiction of the Federal court.

This case, whatever, is not within the original jurisdiction.

You agreed with me there was no diversity.

The suit to collect is not based on Federal law.

It's in the removal... it's... it's removed based on a Federal defense.

And there's no provision for original entry into the Federal court based on a Federal defense.

So, supplemental jurisdiction I think would not apply because there is no claim here...

Mr. Morrison: Well...

Justice Ginsburg: over which the Federal court has original jurisdiction.

Mr. Morrison: I believe it attained original jurisdiction if the removal was proper in the first instance.

But in any event, 1367... and I was thinking on my feet a little bit... principally relates to additional claims, not to additional defenses.

And what we have here is an additional defense by the judges, the discrimination as opposed to the license defense.

And given that the common nucleus of the operative facts, there would be no reason not to decide this... this question.

Justice O'Connor: Mr. Morrison, we have held, I guess, that whether the tax should be characterized as an income tax is a matter to be determined on Federal law.

Mr. Morrison: That is correct.

Howard so held that.

Justice O'Connor: And in making the Federal law determination, do we look at all at State law which says that the county has no authority to levy an income tax?

Mr. Morrison: I...

Justice O'Connor: Is that part of the Federal law...

Mr. Morrison: It is certainly...

Justice O'Connor: calculus or not?

Mr. Morrison: It is part of it.

Justice O'Connor: And how have we dealt with that?

Mr. Morrison: Well, I think you've dealt with it in the context of looking at the statute as a whole which includes both the fact that the... the State forbids the collection of income tax, the fact that this is designated a license fee, that it's an occupational license tax for the privilege of engaging in the business.

But the Court has made it clear that the labels are certainly not controlling.

They are some... some assistance to the Court in trying to understand... and I think I would put it this way.

When Congress in 1937 passed the Public Salary Tax Act, it permitted States and localities to tax pay or compensation.

And what we are trying to do here is to understand the meaning of that term.

Obviously, the pay and compensation tax does not have to be a mirror image of the Federal income tax in whatever iteration we're talking about, 1937 or 1997.

It must be a tax related to... a tax, for instance, on wages alone that didn't tax passive income would be perfectly acceptable.

Or conversely, a tax on passive income would be... would be acceptable.

There could be deductions allowed.

They could be the same as Federal.

They could be different.

All of that would be a tax on pay and compensation.

The question is, does a scheme like this one in which there are massive exemptions for persons whose exemptions are not based on anything related to pay or compensation... they are based upon a fixed license fee paid to the State in an amounts that range from $2.50 in fixed amounts up to $250 or $500.

But regardless of what those amounts were...

Justice Kennedy: Was this not argued in... in the... the Howard case?

Mr. Morrison: No, Your Honor.

Justice Breyer: Because the Howard case applied simply to area discrimination.

Mr. Morrison: Yes.

It was a... it was a geographic fight.

The principal issue in Howard was whether a complicated annexation by the United States and then giving back to the City of Louisville had somehow made this no longer part of the City of Louisville, and that was the first issue the Court dealt with.

The opinion is only six pages.

The second part was whether the Buck Act applied and whether this was the kind of Federal enclave that permitted it.

There was no question in the majority opinion as to whether this was an income tax.

Mr. Justice Douglass, Mr. Justice Black in their dissent said, I find it hard to understand how there can be an income tax under Federal law that's not an income tax under State law.

And our answer to that is, all right, we accept that proposition.

The label alone doesn't control it, but with that plus all of the remaining indicia, we think that this is not the kind of tax that Congress said that Federal employees should have to pay when they cannot get an exemption.

Justice Breyer: Why does the Buck Act apply, or... or does it, or why does it not apply?

That is, the Buck Act, the Court said, says income tax, any tax measured by gross receipts.

Mr. Morrison: Well...

Justice Breyer: This is a tax...

Mr. Morrison: That definition...

Justice Breyer: measured by gross receipts.

Mr. Morrison: That definition, Justice Breyer, applies only to the Buck Act.

The Buck Act is sections 106 through 110 of title 4.

The Public Salary Tax Act, which is the authorizing provision for taxation here, is in section 111, and the definition does not apply to that.

Justice Breyer: Why does it not apply here?

The Buck Act.

Mr. Morrison: The Buck Act is not an authorizing provision.

Justice Breyer: The Buck Act says it applies only to Federal enclaves.

Mr. Morrison: It...

Justice Breyer: This is not a Federal enclave.

Am I right about that?

Mr. Morrison: Well, I don't know whether the Federal courthouse is a Federal enclave, Your Honor.

I think the Court has not decided that.

But what the Buck Act does... and I'll read the language, and this is in the appendix to the petition for certiorari at page 119.

It says, no person shall be relieved from liability on... by reason of his residing within a Federal area or... or receiving income from an area in a Federal enclave, to paraphrase.

It is a relieving... it's a loophole closing provision.

The Public Salary Tax Act is the imposition or the authorizing provision, the consent or, as the history of the act makes clear, it is confirming that which this Court had decided just a few years ago, just immediately preceding it in the Graves case, that the Constitution did not present any independent barriers.

And they wanted to be sure that there was never any backsliding.

So, the Buck Act in itself doesn't give them any authority to impose anything.

It simply says, by the way, these two possible exceptions do not apply in this case.

Justice Ginsburg: Well, couldn't one say even though it doesn't strictly apply, Congress gave a definition of a tax on income there and it didn't have a different one in the Public Salary Act?

So, one can assume that acting so close together, what they said about what constitutes a tax on income in the one case also applies in the other.

Mr. Morrison: They certainly could, Your Honor.

And we do not suggest that simply because this is a gross receipts tax in and of itself, it loses its character as an income tax, and the tax is impermissible.

It's the fact that it's a gross receipts tax and there are these massive exemptions and there are the provisions making it a license fee...

Justice Ginsburg: If it were called a professional income tax, would your argument be any different?

Mr. Morrison: Based on the exemptions, no, it wouldn't, Your Honor.

Justice Ginsburg: Everything is the same.

The label is different.

Mr. Morrison: It would be a little bit less of an indication that this is a licensing scheme which is, after all, what the State says it is, but it wouldn't be dispositive.

Justice Ginsburg: But the county has to say that because of an impediment under State law that it can't have a, quote, income tax.

Mr. Morrison: Well...

Justice Ginsburg: But you don't deny that something can be a tax on income for one purpose and not for another.

Mr. Morrison: I do not deny that at all, Your Honor, and I wanted to be clear.

I hope I was clear about that.

We recognize that the county and the State may properly take into account the fact that persons who are licensed by the State and pay fees... in the case of lawyers, a considerable fee; in case of most other professions, a quite modest fee in Alabama... that all of those persons have... the State could properly take the payment of those fees into account.

Chief Justice Rehnquist: Well, can't the... doesn't the State also speak of licensing people who engage in certain kinds of businesses and collect a sales tax from them based on gross receipts?

Most States do I think.

They call it a license tax, but it's simply measured by gross receipts and it's a sale tax.

Mr. Morrison: Well, that is in addition to all the taxes that are at issue here, and that I don't think... whatever the State sales tax is, it doesn't... as far as I am aware, doesn't distinguish between persons who are licensed under these 140...

Chief Justice Rehnquist: Just hypothetically, what if... what if a State said that, you know, in order to engage in the following businesses... and it names virtually every business... you need a license and the... you're going to have to pay a sales tax measured by gross receipts?

That would be an income tax under the Buck Act, would it not?

Mr. Morrison: It... I'm trying to think how it applies to Federal employees or Federal judges.

I assume that nobody is going to talk about them paying taxes on their opinions...

Justice Kennedy: No, no.

Mr. Morrison: that they issue.

Chief Justice Rehnquist: Just... just assume... assume it applies to... to anybody who engages in certain kinds of businesses that produce gross receipts.

Mr. Morrison: Well, the Buck Act, of course, doesn't talk about how States and localities can do it.

It only applies... the Buck Act only applies when there are Federal officers or employees involved.

Chief Justice Rehnquist: Yes, but... that's true of the Public Salary Act too, isn't it?

Mr. Morrison: Yes.

They're both limited to Federal employees, Your Honor.

Chief Justice Rehnquist: But it seems to me you're... you're trying to say that a license tax is something quite peculiar to just certain professions, and I don't... don't think it is at all.

I think...

Mr. Morrison: Oh, I didn't mean to say that.

Chief Justice Rehnquist: I think you have a license tax in most places to engage in any kind of business.

It's called a sales tax.

Mr. Morrison: Well, most of them are fixed fees.

Chief Justice Rehnquist: Certainly a sales tax is not a fixed fee.

Mr. Morrison: Of course, not.

Of course, not.

But the Public Salary Tax Act doesn't talk about sales taxes at all.

It's clear that that's measured on income.

Now, there...

Chief Justice Rehnquist: But under the Buck Act, a sales tax would be an income tax.

Mr. Morrison: A gross... a gross receipts tax.

For instance, the court reporter in the City of Pittsburgh case sold transcripts.

We have no question about the fact that the transcripts that were sold to the public are properly taxable under the Public Salary Tax Act, and that's in large part because it's not a licensing scheme in any way and also because there are no exemptions for other kinds of reporters and others in similar situations, no arguable discrimination.

In any event, we... we are confident that the State of Alabama can construct a licensing tax scheme, or whatever kind of scheme they want to call it, that takes into account the fact that persons pay licensing fees to the State, and they can do it in a number of ways.

They can give a credit against the payment.

They can allow it as a deduction.

But the one thing they cannot do, consistent with the Constitution and with the Public Salary Tax Act, is to give a total exemption to those who pay State licensing fees that are unrelated to income, while at the same time attempt to tax Federal employees, and in this case Federal judges.

Accordingly, for those reasons, the judgment should be...

Justice Kennedy: And why can't they do that?

Mr. Morrison: They cannot do that for two reasons.

One, because the scheme is no longer a scheme... a tax scheme based on pay or compensation, argument number one.

And argument number two, it is discriminatory against Federal employees under this Court's decision in Davis against Michigan.

Rebuttal of Jeffrey M. Sewell

Chief Justice Rehnquist: Thank you, Mr. Morrison.

Mr. Sewell, you have 4 minutes remaining.

Mr. Sewell: Yes, sir.

A couple things very quickly.

Our motion to remand does include 1442.

I'm holding a copy of it in my hand.

The Buck Act... Buck Act has to be as broad as the Public Salary Tax Act to accomplish the purpose of putting employees in a Federal area in the same posture as those who are not in a Federal area.

What Mr. Morrison is telling you is, is that the Public Salary Tax Act doesn't consent to a license tax.

And I say that it does, and I won't repeat what I've told you in my briefs because I think that it's very clear that it does.

And it... and it has to.

The O'Malley cite that you asked for is 307 U.S. 277.

Also another case on the issue, United States v. Will, W-i-l-l, 449 U.S. 200.

Final thing.

This case... where the trial court went wrong, where the court of appeals went wrong is by blurring the distinction between the Government, the United States, and its employees.

And I think it really is just that simple.

Certainly when you all sit on this Court and you're asking me questions, you're performing your duties, but when you all are paying your taxes, you're acting as citizens.

You're not... I just don't think that you're the United States Government when you pay your taxes any more than you're the United States Government when you pay your credit card bills.

Justice Ginsburg: Mr. Sewell...

Mr. Sewell: Yes, ma'am.

Justice Ginsburg: what about the argument that this discriminates against Federal employees?

Because if that were so, there would be a case here, wouldn't there?

Mr. Sewell: If that were so, there would be, but that's not so.

And this... that argument... every time we go to a different court, that argument changes, and it has changed now.

Now... now, for the first time, we're claiming that there's some discrimination, and Mr. Morrison told you that Federal employees can't get our exemptions.

I told you this morning, a while ago, that 1,209 of the 12,000 Federal employees in Jefferson County have our exemptions.

They can get them.

They have them.

That's 10 percent.

Justice Breyer: The point on discrimination I think is not... one point is that it's unlawful because of that, but the other is that it just... it helps to characterize the tax.

If it were really an income tax, they wouldn't charge lawyers $250 flat and judges depending on their salary.

If it were really an income tax, they'd run it like an income tax.

What's your response to that?

Mr. Sewell: My response is, is that Kentucky also prohibits its cities by State law from levying an income tax, and that all of the exemptions, the exemptions for insurance companies and the others, in... in the ordinance that this Court considered in Howard... those other exemptions... my understanding is, when you go back... you've got the ordinance.

You go back and look at it, you will see that they are flat fees.

It's the same situation.

Justice Stevens: Of course, Holloway was decided long before Davis against Michigan.

Mr. Sewell: You mean Howard?

Howard v. Michigan.

1953.

And you all... we struggled to get that ordinance.

You've got it now.

You've got the actual ordinance that was at issue in that Howard v. Commissioners case.

And it's just... it's virtually identical.

How did... how did the Court reach the conclusion in that case, which the Court reached and it had to reach, that there was any basis at all for a Federal employee to pay a license tax if Congress didn't consent to a license tax?

Justice Kennedy: Well, was Federal immunity argued other than the fact that it was a former enclave?

Mr. Sewell: I think that... that there...

Justice Kennedy: Maybe that question almost answers itself.

It's no longer an enclave.

Mr. Sewell: I think it answers.

I think it does answer itself.

I think that there... there's no... there has to be some... Mr. Morrison says the Buck Act doesn't consent to anything.

There has to be some consent for the Court to have reached its conclusion in the Howard case that Federal employees must pay a license tax, otherwise there's...

Chief Justice Rehnquist: Thank you, Mr. Sewell.

Mr. Sewell: Thank you.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The OYEZ Project

Featured:

South Central Bell Telephone v. Alabama - Oral Argument

Fri, 09 Jan 2009 14:50:11 +0000

Case:

South Central Bell Telephone v. Alabama

Media File:

97-2045_19990119-argument.mp3

Related Transcript:

1998_97_2045_argument.xml

Transcript:

Argument of Mark L. Evans

Chief Justice Rehnquist: We'll hear argument next in No. 97-2045, South Central Bell Telephone Company v. Alabama.

Mr. Evans.

Mr. Evans: Thank you, Mr. Chief Justice, and may it please the Court:

After this Court granted certiorari in this case, respondents adopted a surprising strategy.

In their brief on the merits, they refused to address the two issues on which the Court granted review and instead offered up lengthy arguments on issues that the Court had not agreed to review and, in fact, arguments that respondents had not made or mentioned in their brief in opposition.

And then in yet another surprise about 2 weeks ago, respondents later withdrew one of those three arguments in their... in their merits brief.

Barring another surprise today, therefore, what we are left with are two arguments, neither of which can succeed unless the Court is prepared to overrule a very large number of its Eleventh Amendment and Commerce Clause precedents.

To bring the case rather briefly back to where it started, the Court granted certiorari to consider two questions: one involving Alabama's use of res judicata as a bar against a constitutional challenge to an Alabama State tax brought by taxpayers who were complete strangers to the prior judgment that was asserted as a bar, and the second involving the lawfulness of Alabama's franchise tax under this Court's Commerce Clause precedents

Now, although respondents put up a defense on both of these issues in their brief in opposition, they obviously chose not to do so again in their merits brief.

And I think I can understand why.

It's because both issues are controlled by this Court's recent and frequently unanimous precedents.

The due process in our case is a near... in our... in our judgment is a near clone of Richards against Jefferson County, which was decided less than 3 years ago by a unanimous Court in another case that came from Alabama.

And the Commerce Clause question is controlled by Fulton against Faulkner and in another recent Commerce Clause decisions of this Court that have condemned facially discriminatory taxes and that have narrowed the complementary tax doctrine.

I don't think I will belabor these points because they are not contested at this point, but as we explained in our brief, the Alabama franchise tax is unlawfully discriminatory because it taxes Alabama corporations based on the par value of their capital stock, a figure that they are utterly free to set and adjust as they wish without any effect on their business operations.

But it taxes out-of-State corporations based on the capital actually employed in the State, in other words, based on their business operations in Alabama.

In our view there's no... no need to look any further because any tax that allows in-State corporations to, in effect, determine their own tax liability and not out-of-State corporations is facially discriminatory.

In their merits brief in this Court, respondents obviously have abandoned their defense on both of these issues, and they've raised three new issues, one involving the jurisdiction of the Alabama State courts, one challenging this Court's appellate authority under the Eleventh Amendment, and one attacking the entire body of this Court's negative Commerce Clause jurisprudence.

The first of these issues need not concern the Court any longer because 2 weeks ago Mr. Cooper wrote a letter to the clerk withdrawing his jurisdiction argument and acknowledging that it was in error.

And in our view...

Justice Ginsburg: Mr. Evans, may I just...

Mr. Evans: Yes.

Justice Ginsburg: ask to... I... I take it, from what you've said so far, that... that Justice See on the Alabama Supreme Court who spoke before on the nine... that his position is essentially right.

Is that...

Mr. Evans: Yes, exactly right.

Justice See actually... just... just one minor correction... spoke for three with another who did not join the opinion but... but also dissented.

In our view, the Court need not reach any of the other issues that... either of the other issues that respondents raise here because they've waived those arguments by not presenting them in their brief in opposition.

But if the Court does reach the issues, we believe the Court should reject both of these arguments.

Both ask the Court to overrule rafts of its own precedents without any serious justification in our view.

The Eleventh Amendment theory is that in actions brought against the State in State court with the State's consent, this Court has no constitutional power at the end of the... the end of the process to review a resulting State court judgment raising Federal questions and... and deciding them in the favor of... in favor of the State.

But that issue was unanimously resolved against respondents' position just 9 years ago in McKesson, and respondents have provided no good reason to revisit it.

And in their negative Commerce Clause argument, the respondents ask the Court to nullify a principle the Court has embraced for at least a century and a half and that has engendered enormous reliance throughout the Nation's economy.

And moreover, they ask the Court to do this in the least controversial aspect of the negative Commerce Clause, one that invalidates State laws that... that facially discriminate against interstate commerce.

As we explain in our reply brief, there is simply no reason to do either of these things.

Neither of the doctrines that we're talking about were announced and splintered or badly reasoned opinions that reflected departure from established precedent.

Neither has proved unworkable.

Some members of the Court have questioned what they view as excesses in the application of the negative Commerce Clause, but even those members have regularly expressed a willingness to continue to apply the core principle of anti-discrimination.

And finally, it's not insignificant that Congress has power to alter the effects of both of these jurisprudential principles.

Under the negative Commerce Clause, they can exercise authority to permit the States to do what respondents here would like to be able to do, and even under Article III, Congress could restrict this Court's appellate authority if it felt it was appropriate to do so.

And the Court's precedents have repeatedly made clear that stare decisis has extra force where Congress can itself make changes in the Court's decisions.

Chief Justice Rehnquist: Mr. Evans, do you think the... the Congress could cut off this Court's appellate jurisdiction, say, just in Commerce Clause cases?

Mr. Evans: I... I don't know the answer to that, and it's clearly not something we need to worry about at the moment.

But I think it would raise an interesting question, and it may well be able to do that under... under its Commerce Clause authority.

It would be an interesting question I think constitutionally whether that is appropriate or not.

Justice Scalia: But it can reverse our Commerce Clause decisions.

Mr. Evans: That's for sure.

This... one of the things that I've noticed recently, in this term even, is that the Court has repeatedly refused to consider arguments raised by respondents as alternative grounds for affirmance that have not been preserved, sometimes invoking rule 15.2, sometimes not.

And the most recent was in El Al Airlines just last week where the Court declined to consider an argument that was not presented in the brief in opposition.

Earlier this term, there was a case called Knowles.

So, from the point of view of petitioners, the Court should not address either of these new arguments that have been made by respondents, but should simply decide the questions on which it granted certiorari, reject the arguments that respondents made in their brief in opposition on those grounds, reverse the judgment, and remand it for provision of appropriate relief consistent with the Court's precedents.

Justice Scalia: In any of those cases, was the new argument that we rejected an argument to the effect that we have no jurisdiction?

Mr. Evans: There are cases, Justice Scalia, in which... at least two cases in which the Court has recently said that if a State does not raise an Eleventh Amendment argument, it need not be considered.

And in one case, Patsy...

Justice Scalia: Is that because that may not be a jurisdictional argument?

Mr. Evans: Well, that's right.

It has... it has... as the Court has put it, it partakes of jurisdiction in the sense that it can be raised later in the process than at the first instance, but it is not jurisdictional in the sense that the Court must consider it on its own motion.

And in... in fact, in Patsy, where the argument was raised in a brief in opposition but not pursued in the merits brief, the Court felt no obligation to consider it.

Justice Scalia: I think you have to make that point because... I think you have to make that point because if it is strictly speaking a jurisdictional...

Mr. Evans: Yes.

Justice Scalia: point, not only do we have to entertain it if... if the respondent raises it here for the first time or the petitioner, indeed we have to entertain it on our own, even if he doesn't raise it here for the first time.

Mr. Evans: I... I fully agree.

Chief Justice Rehnquist: Well, there's some earlier Eleventh Amendment cases, aren't there, Reed Detective and that Indiana case, that say it can be raised here for the first time?

Mr. Evans: It can be raised here for the first time, and I'm not suggesting anything to the contrary, but it needs to be raised properly.

And here, where in... in these more... in Patsy where it was not raised properly in the merits brief, even though it had been raised here, the Court felt no obligation to consider it.

Here, what I think is even worse, it was not signaled to the Court in the brief in opposition, but showed up for the first time in the merits brief.

Certainly a respondent could not come here and make an argument for the first time in oral argument.

There's some requirement of propriety about when something must be presented, and this Court has every reason to disregard an argument that shows up for the very first time in the brief on the merits.

Justice Stevens: Mr. Evans, what are the two cases you were saying where we had done this before?

Mr. Evans: The case called Knowles, K-n-o-w-l-e-s, which was decided earlier this term, footnote 2, which refused to consider an alternative argument presented for the first time in the merits brief and not in the brief in opposition, and El Al Airlines, which again was not preserved in the... where the argument was not preserved in the merits brief, and that was in footnote 10 of that decision.

Justice Breyer: Well, I don't see why... why is it inappropriate to raise this?

What he's raised in the Commerce Clause is an argument he couldn't really raise before this Court.

I mean, the argument previously was whether or not the Commerce Clause jurisprudence was properly applied, and... and now he agrees that Alabama was wrong.

They didn't apply it properly.

But he's saying that the cases of this Court which set it forth are wrong and we should overturn them.

Well, I don't it's fair to ask him to have raised that before the lower court...

Mr. Evans: And I'm not... Justice Breyer, I'm not asking that they do... that the respondents have any obligation to do that.

If they want to present that argument here...

Justice Breyer: Yes.

Mr. Evans: they can.

But they do have an obligation to present it in their brief in opposition, in part, to give notice to petitioners so that we can consider briefing the issue in the opening brief, but more importantly, for this Court's control of its own docket, to know what it is buying into when it grants certiorari.

Justice Stevens: And also to give notice to the amicus.

Mr. Evans: And to the amici, absolutely.

Justice Ginsburg: And that's why we have it in our rules, that if you want to bring it up, put it in the brief in opposition and not for the first time in the respondents' brief.

Mr. Evans: That's right, Justice Ginsburg.

Unless the Court has further questions, at this point I will reserve the balance of my time.

Argument of Charles J. Cooper

Chief Justice Rehnquist: Very well, Mr. Evans.

Mr. Cooper?

Mr. Cooper: Mr. Chief Justice... excuse me... and may it please the Court:

The argument that has preceded me has crystallized, I think, two issues: one with respect to our Eleventh Amendment argument, one whether or not it is appropriate for it to be taken up and considered by the Court in light of the fact that it was not mentioned in the opposition to the certiorari; and second, if it is, whether it has merit

This Court's rule 15.2 says that we may waive an objection based upon what occurred in the proceedings below if the objection does not go to jurisdiction.

Go to jurisdiction.

We submit to the Court that the Eleventh Amendment goes to the jurisdiction of this Court.

Just a little over 2 years ago, this Court in Seminole Tribe said that the Eleventh Amendment stands for the constitutional principle that State sovereign immunity limited the Federal courts' jurisdiction under Article II.

The Court has repeatedly stated that the Eleventh Amendment, for example, in the Ford case which really is on all fours with our circumstance here, the Ford Motor case...

Justice Ginsburg: Mr. Cooper, may I interrupt you with this point to read from a unanimous opinion 9 years ago with which you are no doubt familiar.

It says, the Eleventh Amendment does not constrain the appellate jurisdiction of the Supreme Court over cases arising from State courts.

Period.

Now, that... you are asking us to overrule a unanimous 9-year-old decision.

Is that correct?

Mr. Cooper: That is accurate, Justice Ginsburg.

I have many reasons for that request that I... that I will... that I will address, but...

Justice Ginsburg: May I ask you also as an anterior question, do we take it that you are not pursuing any of the... the questions that were in... raised originally?

You are... you are not defending the res judicata point that the Alabama court relied on and you're not defending their analysis of the discriminatory tax.

Mr. Cooper: Justice Ginsburg, that is accurate.

We are saying that the Commerce Clause merits argument is that we... we're entitled to prevail on that but not because of the Alabama Supreme Court's correct application of the Commerce Clause precedents, but rather because, as three members of this Court argued not long ago, the dormant Commerce Clause cases are not well considered, and the Court should carefully reexamine those arguments that were advanced by those...

Justice Ginsburg: But so, if we don't... if we don't accept these new arguments you're presenting today, then you agree that we must reverse the... the judgment.

Mr. Cooper: Unless some member of this Court can think of a different argument, Justice Ginsburg, for upholding the Alabama Supreme Court's decision, that is accurate.

Our premise argument however, Justice Ginsburg, is that this Court cannot reach the merits of this issue because of the Eleventh Amendment.

And again, Ford Motor Company, which I think the Chief Justice was referring to earlier, the Indiana case, Your Honor, is on, we believe, all fours in terms of the ability of the Court to take the case up.

There the... the State of Indiana did not raise the Eleventh Amendment in the district court.

It didn't raise it in the Seventh Circuit.

It didn't raise it in its op cert. In fact, it raised it in its merits brief because...

Justice Stevens: Of course, we've changed our rules on what the brief in opposition has to include since the City of Tuttle... Oklahoma City against Tuttle I think.

Mr. Cooper: If... if the... if this is not a jurisdictional point, if this issue doesn't go to jurisdiction, then the Court could certainly exercise its discretion not to reach the issue.

It's our submission, Justice Stevens, that the Eleventh Amendment and this Court's consistent understanding and application of it...

Justice Breyer: I don't understand your rule actually.

I mean, this is... can you explain?

The copy I have, which may be... it says, any objection... any objection to consideration of a question presented, based on what occurred in the proceeding below, if the objection does not go to jurisdiction, may be deemed waived.

I take it yours is not an objection based on what occurred in the proceeding below.

Mr. Cooper: Not at all, Justice Breyer.

In fact...

Justice Breyer: Then this rule doesn't cover it.

Mr. Cooper: Well, this... this... the element...

Justice Breyer: Is that an argument?

I don't know.

I haven't focused on this rule.

Mr. Cooper: Oh, it's... it is absolutely our argument, Justice Breyer.

Our... our contention is not that the Alabama Supreme Court was barred by the Eleventh Amendment.

We don't have a problem with what... what took place below.

It is that what took place below, the adjudication of the merits of the issue, can't take place here.

That... that is our argument.

And the reason it can't take place... so, we have a double argument under the... under rule 15.2, Justice Breyer.

That's point number one.

But point number two is in any event, the Eleventh Amendment goes to jurisdiction.

Justice Stevens: Well, a better practice under rule 15 under the previous part of the rule, two sentences previous as to what Justice Breyer quoted, is for you to notify the Court what issues are properly before us, including jurisdictional issues.

Justice Kennedy: You don't think you can just lay back...

Mr. Cooper: No, Your Honor.

Justice Kennedy: from the standpoint of good practice and not tell us about jurisdictional issues.

Mr. Cooper: No, Your Honor.

We regret that this point was not mentioned in the opposition to certiorari.

It would have been better practice if it had been.

The part of the rule, however, that goes to and alerts counsel to the possibility of waiving an argument speaks to jurisdiction and it speaks to objections based upon what occurred below.

Justice Breyer: I understand.

Mr. Cooper: And with all due respect, we maintain that this Court actually doesn't have discretion in a jurisdictional argument that is waived... that is asserted to the Court to... to not reach the issue.

Again...

Justice Ginsburg: Mr. Cooper, this is... this is the problem, as I see it, with fair notice.

One could hardly anticipate such a question given that there was a unanimous decision 9 years ago addressing precisely that question and rejecting your position.

So, the petitioner could hardly expect that that would be an issue in this case, and that's why this is so troublesome, that you're bringing up something that one really could not have anticipated.

Mr. Cooper: Your Honor, all I can say is that the issue, again, goes to jurisdiction.

The question is whether or not... I think there are two different questions, whether it would have been better practice, and certainly it would have, to have mentioned this in the opposition to certiorari.

The issue had been spotted that in fact what we have in this case is a suit in which... that was commenced by the petitioners, none of whom are citizens of Alabama, against the State of Alabama and its Department of Revenue, State defendants.

And if this Court exercises... does reach the merits, it will be exercising the judicial power of the United States.

The case is squarely within the very letter of the Eleventh Amendment, and it is our respectful submission to the Court that the McKesson case, for a number of reasons, was simply wrong.

In fact...

Justice Scalia: If... if it is a jurisdictional objection based upon sovereign immunity, which is what you assert, right, the Eleventh Amendment being a reflection of sovereign immunity, sovereign immunity is normally waivable, isn't it, by the sovereign?

So, I mean, it may be jurisdictional, but... but maybe it's a peculiar... it has to be a peculiar kind of jurisdiction.

Mr. Cooper: Your Honor, sovereign immunity can be waived, but this Court's decisions have clearly stated that sovereign immunity must be waived in the most unequivocal way, that...

Justice Ginsburg: Not this particular situation of... of appellate review by the Supreme Court.

This was not just a offhand statement.

This is a very heavily footnoted, 5-page discussion of the issue, citing cases going back to Martin against Hunters Lessee.

Mr. Cooper: You're referring to McKesson?

Justice Ginsburg: Yes.

Mr. Cooper: Well, Justice Ginsburg, since that case was decided, the Seminole Tribe case has been decided, and four members of this Court characterized the reasoning in McKesson as being specious, particularly in light of the Seminole Tribe case.

And I would...

Justice Souter: They were also the same four who would find Federal question jurisdiction here.

Mr. Cooper: Yes, Your Honor, but if there is Federal question jurisdiction, if... if... if the Eleventh Amendment does, indeed, bar a Federal question case, that is, a case as in Seminole brought by a citizen of the State against the State, then the Court's analysis... or the dissenting Justices' analysis in Seminole Tribe, it seems to us, is precisely correct.

Justice Kennedy: Well, of course, those... those who agreed with the majority position did so on the assumption that the Supreme Court had jurisdiction.

If that assumption were to change, then those who were in the majority in McKesson might rethink the correctness of the position advanced in the dissent.

Mr. Cooper: Might as well, Your Honor, and it may well be that here my argument is focused more specifically on the five members of the Court in the... in the majority in Seminole Tribe.

But McKesson, Justice Ginsburg, while it was a unanimous decision, was premised upon... its central linchpin was the Cohens case, and it... it is simply based, we respectfully submit, on a serious misreading of the Cohens case.

That case involved...

Chief Justice Rehnquist: You don't challenge the Cohens case itself, I take it.

Mr. Cooper: No, not at all, Your Honor.

It seems that the Cohens case, Your Honor, is... is quite correct.

It simply stands for the proposition that a... when a State commences a suit against an individual, that is not a... an individual commencing a suit against the State.

And so, it's not within the language of the Eleventh Amendment, number one.

It's not within the purpose of the Eleventh Amendment.

A State doesn't need immunity to...

Justice Ginsburg: Why isn't it within the language if it's... if it's... the State brings the proceeding, but the person who's bringing it to the Supreme Court on writ of error, or whatever it is, is going against the State at that point.

I don't understand why that wouldn't...

Mr. Cooper: Your Honor...

Justice Ginsburg: You say, oh, and the language in one case... in the Cohen case, the language covers it.

In the case where the parties are on opposite sides, it doesn't?

Mr. Cooper: Your Honor, Chief Justice Marshall examined that very issue at length.

In fact, we've excerpted on page 19 of our briefing the analysis of... of the Court in Cohens that went to that issue.

And the... the central point is that a suit for purposes of the Eleventh Amendment is a judicial proceeding instituted by an individual that seeks some demand upon the State, some demand upon the State.

And that character doesn't change when a writ of error is taken to this Court to review a decision.

The... the individual is still seeking a demand upon the State.

So...

Justice Stevens: Your view of... just to kind of... your view is that any proceeding in a State court brought against the State by a citizen of another State could never be reviewed by this Court.

Mr. Cooper: If... if the State itself is the party defendant...

Justice Stevens: Right.

Mr. Cooper: as opposed to an officer of the State.

And, Your Honor, in this very case, the Commissioner of Revenue was a party until the case went to the Alabama Supreme Court.

He was dropped out at that stage, and this Court could have considered this very decision... this very case had the Commissioner remained in under this Court's decisions in the Ex parte Young.

Justice Stevens: Would the respondent have... would it be within the judicial power of this Court to grant a motion by the respondent at this stage of the proceedings to add that individual as a defendant in order to preserve the jurisdiction and review?

Mr. Cooper: I do not think it would be, Justice Stevens.

I think whether or not the Commissioner is a party to this suit as a defendant depends upon whether he was a party in the Alabama Supreme Court under this Court's rules.

And it is clear from a case called Sperau, which we cite and discuss in footnote 1 of our briefing, that... that when the Commissioner was not named in the notice of appeal from the Circuit Court of Montgomery County to the appellate courts, that the Commissioner was no longer a party.

The court there said it is settled law that a notice of appeal from a judgment in favor of two or more parties must specifically name each party whose judgment the appellant wishes to overturn.

And this...

Justice Stevens: Let me go back a second.

I understand your response to that and I think it's probably correct.

But does it... what is your view of suing individuals in their official capacity, with the Eleventh Amendment as usually taken, to bar such a suit?

Can they... could... could under your view an out-of-State plaintiff avoid the Eleventh Amendment problem, when it's thinking it may need review in this Court ultimately, by suing State officials in their official capacity?

Mr. Cooper: Yes.

Yes, Your Honor, under Ex parte Young.

And...

Justice Scalia: To get money out of the State treasury?

Mr. Cooper: No.

Justice Scalia: To get back money which they have... they claim was erroneously paid into the State treasury?

Mr. Cooper: No, Justice Scalia, but they can certainly prevent it from going forward, and that's the purpose of Ex parte Young.

The question here I guess would be...

Justice Scalia: You're trying to get it back, though, aren't you?

Are you trying to get it back or are you trying to prevent its payment?

Mr. Cooper: Oh, I'm obviously trying to prevent its payment, Your Honor.

I represent the State.

Justice Ginsburg: But they're trying to get it back.

Justice Scalia: To the extent... these... these plaintiffs here... I thought they had coughed it up already.

Mr. Cooper: Well but, Your Honor, they... they...

Justice Scalia: So, they're trying to get money back out of the State treasury.

Mr. Cooper: Not just to get it back.

They also sought injunctive relief to prevent the collection in the future of this tax, and that, Justice Stevens, would be a case that if the Commissioner were still in this...

Justice Ginsburg: But you're saying that they have nothing... nothing... no way of getting back... getting a refund.

This is a suit for a refund.

Mr. Cooper: Well, they... they... they have the Alabama court system for getting back a refund.

The question is whether or not...

Justice Ginsburg: Yes, but whatever Alabama says, this Court has no... and it's a Federal question that we're dealing with.

Alabama will be the final word on that Federal question with respect to outsiders.

Mr. Cooper: With respect to this suit, yes, Justice Ginsburg.

Justice Ginsburg: Well, all taxpayers from out-of-State.

Justice Scalia: With respect to all suits involving a claim for money.

Mr. Cooper: Well, but I... I want to hasten to note, as the Court pointed out in Seminole Tribe, that there are... there are several methods where ongoing violations of the... of the Constitution, if that's what this is, can be prevented.

The United States can bring an action.

An Ex parte Young action can be brought.

The Congress can decide to abrogate the State's sovereign immunity.

Chief Justice Rehnquist: What would be the authority for the United States to bring an action in a case like this where you're talking about the negative Commerce Clause?

Mr. Cooper: Well, Your Honor, I... I think that... I don't have a case to cite the Court that the United States would have authority on that score, but at least broadly considered, the United States can sue a State and there's no... there's no Eleventh Amendment problem to this Court's jurisdiction over that.

Chief Justice Rehnquist: Well, do you think the United States can just go around and sue a State whenever it feels like it?

Mr. Cooper: Oh, no.

No, Your Honor.

That's... that is not my submission.

But... but I think the key point here is that Ex parte Young would... would provide the taxpayers relief with respect to going forward.

But...

Justice O'Connor: But in any event, for... for you to prevail here, I guess we would have to overturn McKesson and ignore our own rule as a minimum.

Mr. Cooper: Your Honor, I think... I think that the Court need not... if you're speaking about rule 15.2, I believe the Court can apply its rule and... and reach the Eleventh Amendment.

That is our submission.

I do also believe, however, that yes, it is true that McKesson was wrongly decided.

The Court should reexamine it, and... and it should overrule it.

Your Honor, sovereign immunity... inherent, Justice Ginsburg...

Justice O'Connor: This is the kind of argument that one would certainly hope that amici would focus on and be interested in.

Nobody had a clue it was going to be raised until your remarkable brief appeared here in this Court.

Mr. Cooper: Once again, Justice O'Connor, the Eleventh Amendment argument is a constitutional one.

It is a jurisdictional one, and it is our respectful submission to the Court that the State can raise this in its... in its merits briefs.

By no means did it waive its sovereign immunity in this... in this case.

And, Justice Ginsburg, with respect to the notion that... that the petitioners here would have no Federal avenue of appellate review, inherent in the notion of sovereign immunity is... and inherent in the notion of the Eleventh Amendment is that the Federal courts are precluded from taking jurisdiction over a case brought against non-citizens against the State itself.

And this is a case against the State itself.

Justice Breyer: Once you hold that... once you say that, you know... once you treat the Eleventh Amendment as including citizens of a State against a State, which I take it we have to read into it... right?

Isn't that so?

Mr. Cooper: Well, that's the Hans case, Your Honor.

Justice Breyer: Yes, all right.

So... so then could... is it reasonable that the thing... if we accepted your view of the statute that this applies to the Supreme Court, cases coming out of the State courts, then wouldn't there have been a large subset of cases where it would have been impossible or difficult to enforce a uniform Federal law striking down unconstitutional State statutes, that power that Holmes thought was absolutely essential to create a Federal Nation?

I... I think if your... if your view had been adopted back then and we had Hans, there would have been a whole subset of potential unconstitutional State laws that it would have been impossible for the... or State laws that conflict with the Federal statute, that it would have been impossible or difficult for the Supreme Court ever to reach.

So, you would have had that.

Now, is... now, you're going to deny that, and I'm very interested in your reasoning.

Mr. Cooper: Well, Justice Breyer, I think that the point I would make to you is that if Chisolm, in Chisolm against Georgia, had advanced a Federal cause of action, I don't think that the State's reaction would have been any different.

It would have... the general alarm that swept the... the country when the Supreme Court took jurisdiction over that State law claim against the State would not have... I would submit to you would not have been different if a Federal constitutional claim had been included in it.

And, in fact, the... the Congress and the ratifiers of the Eleventh Amendment would have used exactly the same words in order to reach what happened there.

This... this Court's...

Justice Breyer: The only way it could have reached the Supreme Court would be if the States basically had waived their sovereign immunity within their own courts.

Right?

Otherwise, the issue couldn't have come up.

Mr. Cooper: Well...

Justice Breyer: And if it had come up in that form, what would have been the objection to the Supreme Court hearing it?

Mr. Cooper: Two points, Your Honor.

First, that the... this Court has recognized that a... a State's waiver of its own State sovereign immunity in its own courts doesn't... in Atascadero, the Court made clear that the waiver of sovereign... of the Eleventh Amendment must be specifically worded.

So, Alabama's waiver here does not include a waiver of its Eleventh Amendment because it doesn't mention the Federal... the Federal court.

And the... as I say, in the Chisolm case, the... if... if there had been a contract clause or... and that was an original action.

But, Your Honor...

Justice Breyer: So, your answer to me is, well, the Eleventh Amendment does create such a subset of cases.

All the State has to do is keep out of the courts.

And... and this doesn't make matters that much worse.

That's the answer.

Mr. Cooper: That's... that's... that's essentially it, Your Honor.

But... but I think the Court's focus on... on... on Chisolm is... or at least on the origins of the Eleventh Amendment is... is... is well taken.

Chief Justice Rehnquist: Well, does your... does your doctrine that you're espousing now have a Ex parte Young exception to it?

Mr. Cooper: Your Honor...

Chief Justice Rehnquist: So that you could sue... you could sue the Alabama Revenue Commissioner in... in... in State court and bring that suit here if it was decided against you on a Federal ground.

Mr. Cooper: Yes, Your Honor.

Justice Stevens: For refund?

For refund, is it?

Mr. Cooper: No.

Thank you, Justice Stevens.

I think that's an important amendment.

I think Ex parte Young only goes as far as Ex parte Young, but I think it's available to the petitioners in this case and it would... and it would allow the case to be brought to this Court as an at least...

Justice Ginsburg: How... how many years was, Mr. Cooper, this case in litigation, this refund claim?

Mr. Cooper: Your Honor, the... the refund claim I think was in the Alabama court somewhere on the order of a decade.

Justice Ginsburg: Yes, and all that time the corporation must pay the tax, and on your Ex parte Young theory, maybe there could be a prospective relief, but for all those 10 years, the Federal Court, this Court, is unable to say that the State law was unconstitutional.

And there's no remedy at all for 10 years of unconstitutional behavior on the part of the State.

Mr. Cooper: Your Honor, I think that's... I think that is the consequence, the unavoidable consequence, of sovereign immunity.

I think that is inherent in the notion of sovereign immunity.

Justice Ginsburg: And that would certainly run counter to Justice Breyer's reference to Holmes saying it wouldn't matter so much if this Court didn't have the authority to declare an act of Congress unconstitutional, but if it lost that power with respect to State laws, the Union would be something quite different from what it is.

Mr. Cooper: Your Honor, the... the language of the Eleventh Amendment, its... its very letter, does not contemplate this exception.

It says the judicial power of the United States.

When this Court reaches the merits of this case, it will be exercising the judicial power of the United States.

The Eleventh Amendment specifically and precisely enjoins this Court from construing the judicial power of the United States to extend to a suit commenced by these petitioners, non-citizens of Alabama, against Alabama.

Justice Kennedy: Well, if we're going to be fastidious about the language of the Eleventh Amendment, we'd have to redo a lot of our jurisprudence, wouldn't we?

[Laughter]

Mr. Cooper: Well, Your Honor, I think that... my answer, Justice Kennedy, is this.

Never has this Court cut back on the Eleventh Amendment.

In fact, every time it has recognized that the letter of the Eleventh Amendment doesn't exhaust the protections of the Eleventh Amendment, it has extended it, such as in Hans, to citizens of a State, such as in Monaco, to foreign nations.

How is it... how can it be that in Seminole Tribe that a case that is not within the letter of the Eleventh Amendment, brought by citizens of the State of Florida, and despite...

Justice Stevens: Mr. Cooper, the issue I suppose, even on the letter, is whether this is a suit within the meaning of the Eleventh Amendment, and that's the answer Justice Marshall gave.

The writ of error was not a suit.

And you could similarly, it would seem to me, say that a proceeding in State court is not a suit within the meaning of that provision because that's dealing primarily with original Federal actions.

Mr. Cooper: Your Honor, I think Cohen is a very difficult road for that argument.

A writ of error in that case wasn't a suit because it was... because the suit had been commenced by the State against the individual.

Justice Stevens: I understand.

Mr. Cooper: And... and...

Justice Stevens: But it's still a key to your argument that we read the word suit to refer to the State proceeding because...

Mr. Cooper: Oh, yes.

Justice Stevens: the petition for cert isn't a suit.

So... and... and it seems to me one could conceivably say they were thinking about actions originated in a Federal court, and that's the kind of suit that is referred to in that... in that provision.

That's consistent with what Chief Justice Marshall said.

And incidentally, we don't just have to overrule McKesson.

We've got overrule all the cases in the footnote he cited too.

There are about 30 of them there.

Mr. Cooper: Your Honor, I think Chief Justice Marshall in Cohens made clear that the... that... and that was a case that came up out of the State...

Justice Stevens: Correct.

Mr. Cooper: appellate system.

And... and... and if it was as easy as nothing that happens in the State constitutes a suit, then...

Justice Stevens: Within the meaning of the Eleventh Amendment.

Mr. Cooper: Within the meaning of the Eleventh Amendment, then a very short opinion.

But Justice... but Chief Justice Marshall analyzed at great length what a suit is, and he said it's any proceeding brought in a court of law, court of justice, which included, presumably, the courts of Virginia, by a non-citizen.

So, Your Honor, I think... I think it would be a very strange, with all due respect, interpretation of the word suit to suggest that the framers and the ratifiers of the Eleventh Amendment didn't contemplate at all a suit coming to the courts through the appellate route as opposed to initially instituted in the Federal court route.

In fact, presumably, the Federal courts of appeals could be authorized to review State supreme court decisions if... if... if that view is correct.

Justice Breyer: They are actually in some instances.

In the FDIC area...

Mr. Cooper: Well, this...

Justice Breyer: there were some.

In the FDIC area, there... when... a Federal takeover of a bank, there is appellate jurisdiction.

I've had them.

We had those cases.

Mr. Cooper: But surely not when the State is...

Justice Breyer: Yes, it was tried in the State court, tried in the State court, and they got their appeal over to the Federal appeals court.

Mr. Cooper: When the State itself is a defendant.

Justice Breyer: In that case.

Mr. Cooper: Yes.

Justice Breyer: I... it didn't...

Mr. Cooper: Your Honor, I... my time is about expired and obviously I have little time left to devote to our... our respectful request that the Court reexamine this Court's negative Commerce Clause jurisprudence.

We have nothing to add to the treatment that was provided by Justice Thomas in his dissenting opinion not... not long ago in the... in the Camps Newfound case on the merits of that point.

But I would like very briefly to address the issue of stare decisis and the... thank you, Your Honor.

Rebuttal of Mark L. Evans

Chief Justice Rehnquist: Thank you, Mr. Cooper.

Mr. Evans, you have 18 minutes remaining.

Mr. Evans: Just three very quick points.

Mr. Cooper has referred to Seminole's... the opinion in Seminole as suggesting that there are other routes to raise Federal issues.

The footnote I believe he is referring to is footnote 14, and the three items that are mentioned are a suit by the United States, an Ex parte Young action, and then I'd like to just quote this language.

And this Court is empowered to review a question of Federal law arising from a State court decision where a State has consented to suit.

That is this case, just to underscore Justice Kennedy's point that the assumption underlying Seminole may well have included this Court's appellate authority over a case like this.

Second, Mr. Cooper mentioned the Ford Motor case as an example of one that held that a... a waiver of State sovereign immunity does not necessarily translate into a waiver of Eleventh Amendment immunity.

True, but only with respect to actions in the district court.

That very case, which is typically cited for this proposition, says the following at page 470 at 323 U.S....

As we indicated in the Reed case, the construction given the Indiana statute leaves open the road to review in this Court on constitutional grounds after the issues have been passed on by State courts.

So, the very decision in which the Court held that a... a State sovereign immunity waiver does not convert to an Eleventh Amendment waiver also assumes that there's review available in this Court.

And finally, a lot of this we believe is entirely hypothetical because the... for purposes of Alabama law... this is a case cited at page 6 of our reply brief... in a case called State against Norman Tobacco, which was basically the reason the jurisdictional argument that Mr. Cooper had made as his first argument did not work.

The Alabama Supreme Court said that a... an action of the sort we have here... and I'm quoting again... is not a suit against the State.

Now, that doesn't necessarily bind this Court in its interpretation of the Eleventh Amendment, but that bears some relevance to the question.

Unless the Court has further questions.

Chief Justice Rehnquist: Thank you, Mr. Evans.

The case is submitted.

The honorable court is now adjourned until tomorrow at ten o'clock.

Attribution:

The Oyez Project

Featured:

Lunding v. New York Tax Appeals Tribunal - Oral Argument

Fri, 09 Jan 2009 14:50:01 +0000

Case:

Lunding v. New York Tax Appeals Tribunal

Media File:

96-1462_19971105-argument.mp3

Related Transcript:

1997_96_1462_argument.xml

Transcript:

Argument of Christopher H. Lunding

Chief Justice Rehnquist: We'll hear argument next in Number 96-1462, Christopher H. Lunding v. the New York Tax Appeals Tribunal.

Mr. Lunding: Mr. Chief Justice, and may it please the Court:

In calendar year 1990 I was a lawyer practicing law in the City of New York and residing some 38 miles from my office in the State of Connecticut, some 9,000 feet, plus or minus, over the State border.

It is something I did not think of when I moved to the State of Connecticut that I would be here today on my on behalf, challenging a statute of the State of New York as discriminating against me as a nonresident in taxation.

Unknown Speaker: What, 9,000 feet would be roughly, what, 2--

Mr. Lunding: A little less than 2 miles over the State line, Your Honor, into Connecticut.

Unknown Speaker: --Well, but... okay.

Okay.

Mr. Lunding: Right.

Close to the border.

Not that I think that in--

Unknown Speaker: That doesn't make a difference, though.

Mr. Lunding: --No, it does not, Your Honor.

I do not urge that the distance from the State line is legally relevant in this case.

What is legally relevant, though, is the question of the constitutionality of New York State tax law 631(b)(6), which entirely denies--

Unknown Speaker: Well, you don't argue, do you, or maybe you do, that in apportioning this income for people who work full or part-time in New York, that New York has to allow personal deductions of various kinds to out-of-State residents, do you?

I mean, deductions that don't relate to the production of income in New York?

Mr. Lunding: --Well--

Unknown Speaker: Let's talk about that kind of deduction.

It doesn't relate to the production of your income in New York.

Now, does New York have to worry about personal deductions of that kind?

Mr. Lunding: --Well, the money is fungible, Justice O'Connor, and a substantial portion of my income and a much more substantial person... portion of other taxpayers' nonresident-in-New York income is earned in the State of New York.

I think there could be made a persuasive argument that, because of that, it is a requirement of the Privileges and Immunities Clause that nonresidents be allowed to take deductions in proportion that their New York income bears to their total income for personal expense items.

It is not necessary to reach that point in this case, and that's particularly because the nature of alimony is very different from the nature of other personal expense items in several respects.

In the first respect, in the State of Connecticut, as well as in other States, the amount of alimony is based, must be based upon the payor's total income from all sources.

Inevitably... one case so holding is Wanatowitz v. Wanatowitz, which is found in 533 A. 2d.

Because of that, inevitably in the setting of the amount of the alimony my New York income was taken into account.

So that's point number 1.

There's a direct connection there between the alimony and my New York income which is not present if it were a charitable deduction, or a real estate tax, or any number of--

Unknown Speaker: Couldn't you say, too, that you couldn't afford a very nice house in Connecticut which perhaps you have if you didn't make a good deal of money in New York, and therefore that New York ought to allow your property tax in Connecticut to be deducted?

Mr. Lunding: --That may be true, but it wouldn't... but the property tax would not be determined based upon my New York income in part.

That's the difference I'm articulating here.

Alimony specifically is determined on the basis of total income.

Property taxes are determined on the basis of the value of the real estate in question, and therefore not so clearly connected to--

Unknown Speaker: Yes, but that would be true even... supposing your divorce took place while you were getting all your income in Connecticut, and then you later started to practice in New York and had the same alimony, would that make it a different case?

Mr. Lunding: --Well, we--

Unknown Speaker: You're relying on the fact that your alimony is partially determined by your New York income, but we'd have the same case before us if that were not the fact.

Mr. Lunding: --Right.

I believe I must say that that is correct, and it's because this statute has as its unitary basis for discrimination nonresidents and no other factor.

It is, of course, true that only that factor is really before this Court, and to some degree all other elements are extraneous.

Unknown Speaker: Well, I'm not sure that that's the way the State of New York would see it.

Won't... wouldn't they say we're not discriminating based solely on residence, we're discriminating based on (a) nonresidents, and (b) the fact that this particular deduction was not related to the earning of income in New York?

Mr. Lunding: Well, that--

Unknown Speaker: And--

Mr. Lunding: --Right.

Unknown Speaker: --that seems to me very, very... a very different case.

Mr. Lunding: Well, they are discriminating--

Unknown Speaker: Now, am I characterizing their position correctly, to begin with?

Mr. Lunding: --Well, let me--

Unknown Speaker: Perhaps not.

Mr. Lunding: --Let me go back and state the analysis here under the Privileges and Immunities Clause.

The first element is, is this statute discriminatory against nonresidents.

There's a two-prong test.

I will answer your question, but in a long way, if I may.

The first test is to be satisfied is, is this statute discriminatory?

Well, this statute is discriminatory.

It has one sole, unique, intentional purpose, which is to discriminate against nonresidents by denying this particular adjustment to income.

That element is satisfied in this case.

The State of New York is unclear actually on that point, but objectively we certainly assert that it's satisfied.

Unknown Speaker: Mr. Lunding, let me ask you about that.

Mr. Lunding: Yes.

Unknown Speaker: Because I had always thought of alimony as an income-splitting between the payor and the ex-spouse.

Mr. Lunding: Correct.

Unknown Speaker: Now, I could see, if you were presenting us with a situation where what... New York lets you deduct the tax to your ex-spouse so that New York gets the tax on that amount of money that you earned in New York, but you would like to take the deduction while on the income side, if there is any income, it is to the exspouse, who is a Connecticut residence, so it seems to me you say, let me take the sweet and New York will be stuck with the bitter.

Mr. Lunding: Well, I would not agree with that conclusion, Your Honor, but I would point out this about the nature of alimony.

The statute calls alimony a deduction, and we... we're talking about personal deductions here.

Alimony is not really a deduction at all.

For Federal purposes and for New York purposes it is an adjustment to income, meaning it is... and it is taken out of the income of the payor, transferred to... functionally the responsibility to pay tax transferred to the income of the payee, or the recipient for tax purposes.

On your Federal return that's the way it works, and if you're a resident in New York that's the way it works, and that's irrespective of where the recipient lives.

Unknown Speaker: Yes.

Mr. Lunding: Right.

Unknown Speaker: And in the Federal union that's fine, because the IRS is going to get it either way.

Mr. Lunding: Right.

Unknown Speaker: The husband or the wife, it could be, deducts it, and the one who receives it pays income on it.

Mr. Lunding: Right.

Unknown Speaker: But when you're in one State and you're dealing with nonresidents, in the generality of cases if you have a marital situation it's in the State of their residence.

Mr. Lunding: Yes.

Unknown Speaker: So one State is going to get the income to tax, the other State is not going to get that tax, so there seems an imbalance there, and my only question is, why is it a violation of Privileges and Immunities to say that when New York doesn't get the chance to tax the one who's getting the money, getting the alimony, it shouldn't have to give a deduction to the one who's paying it?

Mr. Lunding: Well, my point there was, if I had been a resident of New York there would have been an adjustment in which I would have been absolved entirely for the tax on the alimony amount, and it would have been transferred to my spouse.

Now, the New York statute doesn't require for that operation for a resident that the spouse live in New York.

The spouse could live anywhere in the world, and if the spouse did not live in New York there would be no tax captured by New York on any part of that transferred income, so this is really, I believe, a factor which is not a motivating factor for New York, and if you look at it in terms of the incidence of the tax as to residence, it apparently is completely irrelevant in the economic analysis.

In the case of nonresidents, in any event the residence of the recipient is also irrelevant.

The statute doesn't say, which it could, if the recipient lives in New York, and therefore we tax that money in New York, we let you off the hook, Connecticut taxpayer.

It hits everybody.

This is... these are another example of extraneous elements that are not really involved here, where the only basis for discrimination is nonresidence and everything else is--

Unknown Speaker: Now, I don't think we completed our--

Mr. Lunding: --Yes.

Yes.

Unknown Speaker: --brief colloquy on what you think the standard is.

Mr. Lunding: Well--

Unknown Speaker: Does New York have to treat residents precisely the same as nonresidents in every category of taxation?

Mr. Lunding: --Well, Austin v. New Hampshire teaches us that New York has to treat nonresidents under a rule of substantial equality of treatment, and--

Unknown Speaker: Can that substantial equality of treatment be based on a theory that the income... pardon me, that the deduction or the adjustment must be related to the income that's earned in New York, and income-producing activities in New York?

Mr. Lunding: --As regards personal expenses, the answer is no, because money being fungible, as a practical matter, looking at the actual, practical impact of the tax, which is the method of analysis, not labels, not anything else, but the actual practical impact, there is a discrimination here.

There is a higher tax paid by nonresidents than by residents.

It is not insubstantial in this instance or in any other, and it is much worse in the case of people with proportionately greater New York-source income in proportion to the whole, and therefore New York may not, the petitioners urge, distinguish between the two in the manner that this statute does.

Unknown Speaker: Now, you don't earn all your income in New York, is that correct?

Mr. Lunding: About half of it in my case, year-in, year-out.

That's right.

Unknown Speaker: But a person who earns all income in New York but lives in Connecticut, strictly the bedroom community situation--

Mr. Lunding: There are many such people, yes.

Unknown Speaker: --As to that person, there would be a very substantial difference, I suppose.

Mr. Lunding: Well, the State has--

Unknown Speaker: If alimony is not deductible.

Mr. Lunding: --Or... well, it would be... yes, that is correct, and the amount of course, would vary according to how much alimony, and in proportion to the total income, but in that scenario the amount which would be paid by the nonresident in New York tax would be greater than the amount that would be paid by a resident of New York.

I mean, in whole dollars, not in proportion to anything.

And this is another problem with the way this statute does operate.

Unknown Speaker: May I ask you a question just for my own clarification?

Mr. Lunding: Yes.

Unknown Speaker: Is it correct that the rate that New York imposes on the nonresident is based in part on the nonresident's non-New York income?

Mr. Lunding: That's correct.

The case that allowed that is named Brady v. State, and they take into account worldwide income in setting the rate, which is progressive.

Unknown Speaker: Do you... did you... you didn't challenge that feature of the tax in this case, did you?

Mr. Lunding: No, I did not, and I... therefore I don't have the standing to... I have a view on it, but I don't think it's appropriate necessarily to state it at this time.

But you're--

Unknown Speaker: What is--

Mr. Lunding: --Yes.

Unknown Speaker: --What is the top rate?

Mr. Lunding: I don't really... 9 percent, I believe, currently.

I don't... I'm not sure what it is today, but it's 8 or 9 percent is the... and I'm thinking about 1990.

I frankly don't remember.

But that's ball park, and it is progressive, and they do tax... they do take into account in setting the rate worldwide income, and that could be another basis upon which it could be said as a matter of the Privileges and Immunities Clause that they also must allow some proportion of worldwide deductions, whatever they may be, or adjustments, because strictly speaking alimony is not a deduction, not subject, for example, to the Federal limit on deductions, but an income transfer, as Justice Ginsburg pointed out.

Unknown Speaker: But an income transfer that can be very beneficial.

Mr. Lunding: Well, the actual effect in any particular case will, of course, vary according to the personal circumstances, where the receiving ex-spouse lives and many other factors, but the effect of this statute in all cases compared to the situation if the statute were not there will be to discriminate against nonresident taxpayers who pay alimony, because this reduction in their income, taxable income, will obviously discriminate.

Unknown Speaker: Well, when you say discriminate, you mean treat differently, I take it.

Mr. Lunding: Treat differently than residents who pay alimony, yes, that's what I mean, and the amount in this case is [dollars] 3,724 for the year 1990 in my particular case, or a 15-percent increase in the tax in my case.

Unknown Speaker: But you deduct if Connecticut has an income tax?

Mr. Lunding: It did not have a tax on earned income in 1990 at all.

Unknown Speaker: Which is the year in question.

Mr. Lunding: Issue.

The year in issue.

Unknown Speaker: But ordinarily, if a State has an income tax, the resident State, you could then deduct the New York tax from the Connecticut tax.

I'm just trying to see how much in practice is left when you take into account, well, you have to pay New York more, but then you got a bigger deduction in your home State.

Mr. Lunding: Well, looking at the matter currently, the tax rate in Connecticut is 4-1/2 percent.

The tax rate in New York is... I don't remember, 8 or 9 percent.

The deduction in Connecticut is at the rate in Connecticut, and therefore there still is something left over to be discriminatory on that regime, 4-1/2 percent, whatever it is, the difference between the marginal rates in the two States, but--

Unknown Speaker: And in figuring the level of discrimination, do we take account at all of the tax that's being paid on these funds by the Connecticut resident who's receiving them?

Mr. Lunding: --No, and that is because in Austin v. New Hampshire this Court held that the constitutionality of one State statute that discriminates against nonresidents may not be... depend upon the present configuration of the statutes of another State, which is what we're talking about here as to the State of Connecticut.

What its tax laws may or may not be at any particular time cannot be the basis for holding constitutional this discriminatory statute in the State of New York.

Unknown Speaker: Are there some deductions or credits that really are closely tied to the taxpayer's domestic life as opposed to his or her business life?

Mr. Lunding: Well, there are commentators... Professor Hellerstein in a 1974 article in the Michigan Law Review seems to suggest a possible test in the abstract that there would be some particular deductions which are particularly tied to the particular circumstances of the State of residence, without identifying what they are.

Unknown Speaker: Isn't it true, Mr. Lunding, that the standards by which tax law classifications are judged are about the most generous known to the law?

Mr. Lunding: No, I don't think that... well, the petitioners would not agree with that statement.

Austin--

Unknown Speaker: Well, several of our cases say that.

Perhaps not in the Privileges and Immunities Clause kind, but just in the sense of classification generally for tax laws.

Mr. Lunding: --Well, the standard there... I'm thinking of Allied Stores v. Bowers, which is one of the places where the test you're describing I believe is set forth.

Assuming first that the particular act by the State does not violate the Federal Constitution, which is what it says in that case, there is a wide latitude, but if it... but if--

Unknown Speaker: Well--

Mr. Lunding: --that assumes the conclusion which is--

Unknown Speaker: --There's a total latitude if it doesn't violate the Federal Constitution.

Mr. Lunding: --Well, that... and in any event, that is not the... yes, that's correct, but the issue in the privileges & immunities context, in light of Austin v. New Hampshire, the first thing is that there is a standard of review substantially more rigorous under the Privileges and Immunities Clause for State taxing decisions affecting individuals than affecting business organizations, trades, or professions.

That is part of what the case says, and therefore I would not agree that there is a... in this context a greater degree of latitude than in others.

In fact, in the taxing area petitioners would argue that this is a case where a substantially heightened scrutiny is required, a rule of substantial equality is required, and it is our position that it has not been met in this instance.

Unknown Speaker: Mr. Lunding--

Mr. Lunding: Yes.

Unknown Speaker: --I hate to think we're going to have to go through State deductions one by one in order... in case after case in order to decide which must be allowed to out-of-Staters and which need not be.

What is your criterion for whether it must or need not be?

Mr. Lunding: Well, the only criterion that needs to be addressed... well, I guess I under... I'll answer the question in two parts.

The only criterion that needs to be addressed in this case is evidently whether alimony as an adjustment, and I've stated the unique aspects of that, so--

Unknown Speaker: If that's all we do, then we're going to have another case on the next item, and another case on the next item.

I want a principle.

Mr. Lunding: --Well, the simple principle view... the simple principle view is that when you're talking about taxes which fall by their terms upon personal service income... and this is a personal income tax in New York.

That's the label that goes on it.

That's what it taxes, my personal individual income in New York.

When the State wishes to tax a nonresident's personal income, the bright line rule would be that if there are personal deductions, no matter what they are, or adjustments, such as alimony, no matter what they are, then they must be allowed in the proportion that the New York State income bears to total income, period.

Unknown Speaker: What are nonpersonal deductions?

Mr. Lunding: Business expenses, or running a donut shop in Connecticut, or something along those lines might be treated differently, and I'm thinking of Shaffer v. Carter, which appeared to do that.

Whether there's a principle basis to treat any deduction differently we could debate, but we're talking about personal deductions here and I was trying to answer your specific--

Unknown Speaker: All right.

Mr. Lunding: --question on that subject.

Unknown Speaker: What about life insurance--

--What about--

--premiums?

What about home... excuse me.

What about... what about--

Mr. Lunding: Life insurance or home mortgage interest?

Unknown Speaker: --No.

What about a deduction for investing in a solar panel for your home, which is in Connecticut?

Mr. Lunding: Well, responding to Justice Scalia, the bright line rule which will avoid what... the problem he foresees is to just say, if you tax personal income, you must give all personal deductions that the State gives to its own residents in the proportion that the income in that State bears to total income.

Unknown Speaker: So this--

Mr. Lunding: Therefore the answer would be, for solar panels or for anything else, if New York gives that personal deduction from personal income of its residents, it must do so in proportion for nonresidents which it taxes.

Unknown Speaker: --Of course, when I asked you that question at the start, you said, oh, no, no, no, we're just talking about alimony here--

Mr. Lunding: Right.

Unknown Speaker: --and there's a big difference, and that's all we're talking about, and we're not going to talk about personal deductions.

Mr. Lunding: Well--

Unknown Speaker: Now we've got a whole different approach.

Mr. Lunding: --Well, no.

He asked me a hypothetical question about where the line would be in--

Unknown Speaker: Right.

Mr. Lunding: --if we were dealing with other subjects.

It is... to be clear, it is our position that the question before the Court today is one and unitary, and that is the adjustment-for-alimony issue, and we do believe it's different, and I pointed out why I believe it's different, for many reasons, from the standard run of personal deductions--

Unknown Speaker: Mr. Lunding, are you--

Mr. Lunding: --and not getting into solar panels or other matters.

Unknown Speaker: --Are you attacking the New York statute as it applies to your particular facts, or are you saying it is invalid as to everybody who doesn't get an alimony deduction?

Mr. Lunding: The latter is the answer.

Unknown Speaker: Across the board.

Mr. Lunding: It is... yes.

Unknown Speaker: So you're in effect here on behalf of the person who has 100-percent New York income, 100 percent of his income comes from New York, but if his alimony is... if he's a nonresident he gets taxed at a higher rate than the New York resident does.

Mr. Lunding: It is certainly true that the petitioners view themselves... well, we are attacking the statute on its face, not as apply to the petitioners in particular, and proceeding, if you will, by principles of stare decisis at least, whatever happens here, for the benefit of all other nonresidents similarly situated who pay alimony.

Unknown Speaker: And then we get into this fascinating question of what is the standard for judging a facial attack, because under your view... you might say it's clearly unconstitutional in the hypothetical you have in your brief about the... all the income comes from a New York... you know, a New York resident and a nonresident both earn all their income in New York.

Mr. Lunding: Right.

Unknown Speaker: On the other hand, at the other end of the spectrum you say it's perfectly all right... you might say it's perfectly all right on a fact picture such as yours, because--

Mr. Lunding: Well--

Unknown Speaker: --your income is... you know, is different.

Mr. Lunding: --It would... the petitioners evidently would not agree with that conclusion, Your Honor, but I think I may bring in here some question of the particular laws of New York and why I'm standing here alone rather than in a representative capacity or some other.

New York has a rule, which was stated in a case called Martin v. Lavine, L-a-v-i-n-e, in 1976 and elsewhere, including in the intermediate appellate court in Brady v. State, that when a tax statute is challenged in New York, generally speaking, you cannot have a representative action.

You have to proceed individually, and therefore in the State court system, which is where this started, you are prohibited from proceeding in a representative capacity.

Unknown Speaker: I didn't know you could sue for a refund or... in the Federal system either in a class action capacity.

Mr. Lunding: Well--

Unknown Speaker: Isn't that generally the rule with respect to challenges?

Mr. Lunding: --I can only say in Brady v. State, which involved the question of considering worldwide income and setting the progressive rate in New York, it was brought as a class action, and it was stopped as a class action because of this rule, and the rule is based on the theory as to the Government that an individual who would win a case on the constitutionality of a statute gives the benefit to all others by way of stare decisis, and therefore there is no need for--

Unknown Speaker: Oh, this Court has said that in a number of cases.

Mr. Lunding: --Yes, of course, but--

Unknown Speaker: Let me just be clear, because you do have to, if you're invoking privileges and immunities, give us some kind of principle.

Mr. Lunding: --Yes.

Unknown Speaker: That you... you are candidly saying yes, anything that's personal, including your medical expenses, including what could be ambiguous in some cases like life insurance, whether it's to protect the business or to protect the individual, but all of those you have to be treated just like a resident.

Mr. Lunding: I'm saying if a bright line rule is desired, which is what Justice Scalia asked, that that would be a rational bright line rule which would avoid the necessity for future definition of what is or is not appropriately required.

Unknown Speaker: May I raise one--

Mr. Lunding: But that's... but it's not this case, and we do not argue for the adoption of such a general rule in this case.

This case is limited to alimony, and the only purpose of the petitioners here is to have a decision on the question of whether the adjustment for alimony, which in many ways is different from other sorts of items which are deductions, must be given as a matter of constitutional right under the Privileges and Immunities Clause.

Unknown Speaker: --Well, if Justice--

Mr. Lunding: It need not get into all this other--

Unknown Speaker: --Assuming we--

--If Justice Souter would permit me for just one reason, to--

Mr. Lunding: --Yes.

Unknown Speaker: --Justice Scalia and Justice Ginsburg and I have all asked you, what is your... we have to write this opinion.

Mr. Lunding: Yes.

Unknown Speaker: This violates the Privileges and Immunities Clause because it's not equal?

That... That's not the standard.

We need a standard that's more specific than that.

Mr. Lunding: It favors... well, it... well, I think the standard under Austin v. New Hampshire is that there is a rule of substantial equality of treatment of nonresidents mandated by the Privileges and Immunities Clause in the area of judging the constitutionality of State taxes which impact nonresidents, and the petitioners' view of the matter is that in this instance there is a lack of equality.

There are no reasons for it which are cognizable, and accordingly it's a rather simple matter that this particular exaction and the statute which gives rise to it is unconstitutional.

Unknown Speaker: Mr. Lunding, I, too would like to have, if not a bright line rule, at least a bright line principle, and I have this reservation about the one that you suggested.

You suggest a line to be drawn essentially between personal expenses and... or deductions and business deductions, deductions for the production of income in the other State.

My reservation comes for this reason.

You also suggested, and I thought with some cogency, that because New York takes into consideration worldwide income when the rate is set, therefore, New York ought to take into consideration worldwide deductions.

Mr. Lunding: Yes.

Unknown Speaker: The income, the worldwide income that New York takes into consideration includes business income, I assume.

Mr. Lunding: Yes, it does.

Unknown Speaker: And therefore, if we were to adopt what I suggested might be a cogent rationale, I think we've got to go the whole hog, and I think we've got to say, whatever is related to the production of any income, or whatever would be appropriate as a deduction from any income, must be allowed in New York pro tanto.

Mr. Lunding: Certainly petitioners would not object to such a rule for... but--

Unknown Speaker: Yes.

Mr. Lunding: --I mean, I can understand the struggle here.

Unknown Speaker: But wait a minute--

Mr. Lunding: I don't mean to indicate... I don't mean to indicate, though, Justice Souter, that there should necessarily be a different rule for business than for personal deductions.

I mention that only because of Shaffer v. Carter and there are no business deductions involved in this case.

Unknown Speaker: --Surely that would be an unfair rule, because New York takes into account out-of-State income--

Mr. Lunding: Yes.

Unknown Speaker: --For purposes of what rate you pay.

Mr. Lunding: That's right.

Unknown Speaker: But it does not tax you on that out-of-State income.

Mr. Lunding: No.

Unknown Speaker: So it would certainly be unfair to let you get dollar-for-dollar deductions on that--

Mr. Lunding: We're only asking for it in proportion.

We're not asking for it dollar-for-dollar.

We're asking for it in the proportion that the New York State income bears to the total income and because of that it doesn't raise the question of fairness which I think you're--

Unknown Speaker: --Well, and you're only asking for it to the extent that New York allows the same deduction for its own residents.

Mr. Lunding: --Yes.

It can certainly make the decision not to allow it to its own residents and it need not give it to nonresidents, and that's true whether it's a deduction or an adjustment or they use some other label because, as this Court's decisions tell us, labels are not determinative.

It's the practical effect.

Unknown Speaker: Well, I thought our test was something along the following lines, that a statute that discriminates against nonresidents must be justified by a substantial reason for the discrimination against the nonresidents, beyond the mere fact that they're citizens of another State.

What do you think the reason is that's offered by New York here, and is it substantial?

Mr. Lunding: Well, there are two reasons.

One is that there exists untaxed income, meaning they can't reach it because of the Due Process Clause under Shaffer v. Carter, and for that reason they're free to discriminate as they please, which is their actual position as regards personal deductions, adjustments, or whatever.

That part of the position is foreclosed by Travis v. Yale & Towne, which says because the statute does not condition its discrimination on the existence of untaxed income, whether that exists or not is irrelevant to the constitutionality of the statute on its face, so that reason number 1, Travis takes out.

The only other reason that... well, my colleague will speak for himself, but the only other reason that I foresee here is the lack of connection argument which we've been talking about for most of this oral argument, and we allege that there is a sufficient connection and obvious connection, and that therefore this statute is unconstitutional on its face--

If I may, I'd like to reserve the remainder... well, I have no time remaining.

Unknown Speaker: Thank you... thank you, Mr. Lunding.

Mr. Lunding: Thank you.

Unknown Speaker: Mr. Bing, we'll hear from you.

Argument of Andrew D. Bing

Mr. Bing: Mr. Chief Justice, and may it please the Court:

The issue in this case is really whether New York is required by the Privileges and Immunities Clause to afford nonresidents an alimony deduction because it affords the same alimony deduction to residents.

In New York's view, New York is not so required because the basis upon which New York taxes residents and nonresidents is completely different.

New York's taxation of residents is based on the fact that they reside within New York, residence giving New York plenary jurisdiction over their income from every source worldwide.

With respect to nonresidents, the basis of New York's taxation is that nonresidents--

Unknown Speaker: Would you address at the outset the one little flaw in that presentation, namely the rate is in part determined by non-New York income and therefore, whether directly or indirectly, you are to a certain extent taxing this gentleman at a higher rate than you would someone who had just the same amount of New York income, who lived in New York, that he has.

Mr. Bing: --Justice Stevens, it is correct that we tax... that the rate is set based upon the nonresident's worldwide income, but as Justice Scalia pointed out a moment ago we are not taxing the--

Unknown Speaker: But you really are in a way, if the bottom line, you get more money than you would if that weren't the fact.

Whether you say it's taxing, it does affect the total tax he pays.

Mr. Bing: --It affects the rate, Justice Stevens.

The--

Unknown Speaker: Well, it affects the rate, the... more money on the check he has to write to you.

Mr. Bing: --The--

Unknown Speaker: Does it not?

Mr. Bing: --It does.

Unknown Speaker: Yes.

What's the percentage of... you say... I believe Mr. Lunding said the high end of New York's tax rate was 9 percent.

What is the low rate?

What is the low end?

Mr. Bing: During the... during 1990, the lowest marginal rate for married filing jointly and surviving spouse was 4 percent, and the highest rate at which I believe... the top marginal rate was 7.875 percent, which was the rate at which the additional deficiency was calculated in this case.

Unknown Speaker: Now, let's consider the situation, which must occur with some frequency, of people who earn all their earned income in New York and live outside the city, outside the State.

Mr. Bing: Those--

Unknown Speaker: And the end result is going to be the payment of a substantially higher tax than would be the case for a similarly situated New York resident who nevertheless lived in New York.

Mr. Bing: --It is true that in the case of the nonresident who derived all, or substantially all his or her income in New York, that the tax that the nonresident pays would be higher than the resident who derives all of his income in New York.

Unknown Speaker: What is the substantial reason that New York offers for the validity of such an arrangement?

Mr. Bing: This is the inevitable result of the fact that New York, with respect to nonresidents, is only looking at, and believes it is entitled to only look at their net income from the economic activity that they conduct within New York State, and that deductions, however large they may be in relationship to the total income, which have no relat... which are not incurred to produce or to generate that in-State income, are simply not something that New York is required to take into account.

Unknown Speaker: Why?

You don't do that for New Yorkers.

You allow New Yorkers to do that stuff.

It is not incurred in the generation of the New York income.

You give them all sorts of personal deductions.

Mr. Bing: But again--

Unknown Speaker: What justification is there for not allowing the same treatment to the out-of-Staters?

Mr. Bing: --In the context of the New York resident, again we are looking not only at the New York resident's New York income but the New York resident's worldwide income, and so the New York resident as a general matter is someone who will generally be subject to a burden of taxation which is greater than that of an individual in petitioner's situation.

Again, under the Privileges and Immunities Clause--

Unknown Speaker: You're saying if you're looking at all his income for purposes of taxes, you're entitled to give him all deductions of any sort, but these people, since they're out-of-Staters and you're not looking at all of their income, except as to the rate, and therefore you don't have to give them all of the deductions.

I guess there's a certain parallelism there.

Mr. Bing: --That is correct, Justice Scalia.

Residence also affords the State an opportunity to take into account certain personal activities of its residents that it is not in our view required to take into account for purposes of nonresidents, and under the Privileges and Immunities Clause absolute equality of treatment has never been the hallmark.

Unknown Speaker: But absolute equality of treatment, I found it awfully easy to construct bizarre examples.

That is, I just imagined a person at $100,000 income, all out of New York, and $50,000 alimony, and all you have to do is, you multiply by 4 percent, and that person is paying, what, 4 percent times 50,000 I guess is $2,000, and then apply your formula, and your formula will be [dollar]s 100,000, the total income, over Federal, minus the alimony, which will be 50, so you get a multiple of 2, and so you have the New York person paying 2,000, the Connecticut person paying 4,000.

And if, by the way, the person had a bad year, and his income went down to where it was close to the judicial decree for alimony, suppose he had 100,000, his alimony was 90, you're going to get results that are going to be phenomenal.

I mean, what will happen is the New York person on [dollars] 1,000 will pay... let's say, if it's 10 percent, they pay 1,000.

You'd have to multiply by a multiple of 10, and you would discover that the Connecticut resident has a $10,000 tax in New York, or if it's 8 percent, $8,000, and his real income is 10,000.

Am I wrong in those?

I mean, I just... all I did was apply the formula, you know.

I took the formula.

It says, he has [dollars] 100,000, he has 90,000 alimony.

For New York purposes, he has [dollars] 10,000 income.

He pays, let's say, 8 percent, or 10 percent.

That's [dollars] 1,000.

Then it says you're supposed to take the New York total, which is [dollars] 100,000, right, and then you have in the... that's the denominator, his Federal, but not counting alimony, so that's 10.

So 100 is 10 x 10, so you multiply 10 times the New York tax, and you discover you've got [dollars] 10,000 in tax.

Wow.

I mean, I could create, you know, worse ones, or I suppose there are a lot of better ones, but it seemed to me that it was pretty easy to create odd examples, and... which seem very unfair.

Now, am I wrong about the ease of doing that, or is there some justification for that, or is it just bizarre that a person would have, say, half his income in alimony and yet all of his income out of New York, or that he could have a bad year, or what?

Mr. Bing: Your mathematics are entirely correct, and your application of the formula are correct.

The justification for it that New York has offered is, I guess, twofold.

The first one, again, is this is exactly the result that is contemplated by this Court's decision in Shaffer and by this Court's decisions in the portion of Travis upon which we rely, and has been accepted--

Unknown Speaker: What was that portion, because that's been a little fuzzy to me.

I know what they held about the exemptions, that you have to give the out-of-Stater the same personal exemption, but what is the part that you were relying on?

Mr. Bing: --The taxpayer in Travis also specifically challenged a provision of the New York... then New York tax laws, section 360, subdivision 11, which permitted nonresidents the deductions available to residents only if and to the extent connected with New York income, and the taxpayer specifically challenged that provision in its brief in this Court arguing that it would, for example, disallow the Connecticut resident who worked in New York the deduction for his real property taxes while at the same time allowing the New York resident a deduction for the real property taxes on the New York residence.

Unknown Speaker: Was it hypothetical, or was there something in the case, that this taxpayer said, I want a deduction for my real property tax or my life insurance premium and they're not giving it to me?

Mr. Bing: I believe that because of the posture of that case and because of who the taxpayer was that issue was hypothetical.

The taxpayer in this case was a Connecticut corporation that employed a number of Connecticut residents in New York as well as residents of other States and was challenging the entire personal income tax treatment of nonresidents, including personal exemptions, including the fact that it was required to withhold only with respect to nonresidents in this deduction provision.

So there were a number of provisions that were being challenged by the employer rather than by any particular taxpayer who was pointing to him or herself and saying, this tax adversely affects me this way, but that example was included within their brief, and I believe that that example was what this Court responded to when it said that the State is permitted to limit the deduction in the case of nonresidents to those expenses that are connected with the New York income, as settled by the Shaffer case.

I think they were referring to that particular contention of the taxpayer in the Travis case, and subsequent to Travis, this Court has repeatedly in summary dismissals in effect permitted States to recognize that the difference in tax treatment which is mandated by the Constitution, the fact that we can only reach the nonresident's State-source income, permits, justifies a State treating personal deductions differently in the case of nonresidents.

Unknown Speaker: You say personal deductions, so I gather that you are making the distinction between expenses for the production of income and personal expenses, and you are not relying to any extent on the peculiarity of alimony, that it is a two-way thing, one gets a deduction, the other gets income.

Mr. Bing: We treat alimony... in our view alimony is properly treated as a personal expense deduction because it is not incurred to produce income within New York State, that New York State--

Unknown Speaker: Just like the sole, or whatever, so... but you're not... I would just like to be clear on getting a factor out of my head if it shouldn't be there, that is that the spouse who receives the alimony would be paying the State in which he resides income on it.

Mr. Bing: --The residence of the recipient is not a factor in our analysis.

Unknown Speaker: Well, if the former wife receiving the alimony lived in New York, would that spouse be taxed on the alimony income by New York?

Mr. Bing: Yes, New York would tax the recipient.

Unknown Speaker: Yes.

Mr. Bing: Regardless of the location of the payor.

Unknown Speaker: Right.

But you don't, on the other hand, allow the deduction as a result, as the Federal Government would.

Mr. Bing: We--

Unknown Speaker: I thought that under our cases, under the Privileges and Immunities Clause there had to be a reasonable relationship between whatever the evil is presented by the nonresident and the rule adopted by the State, and I just haven't heard what that reasonable relationship is here to justify New York's rule.

I'd really like to hear that.

Mr. Bing: --The... again, the relationship is, I guess, twofold.

First, we don't tax the nonresident with respect to anything that occurs outside New York, and in our view we are not required, as a result of that, to take into account with respect to the nonresident anything that is unrelated to the economic activity that that nonresident is doing within the State of New York.

Again, we're put in the posture of not being able to afford equality of treatment.

From the very beginning, this is not a case where New York has gone out of its way to single out nonresidents.

They're different by virtue of the Due Process Clause and by virtue of our reach.

Unknown Speaker: But he's not asking for the entirety of the deduction.

He's only asking for a percentage of the deduction that is equivalent to the percentage of his total income which consists of New York income.

I mean, your answer would be a good one if he was coming in and saying, give me a full deduction, and you say, well, we can't tax you on your out-of-State and therefore we don't have to give you a deduction.

But he's saying, don't give me the whole deduction.

Just give me the same percentage that I... you know, that New York income constitutes of my total income.

Mr. Bing: We don't dispute that that is a reasonable approach.

In fact, it's one that New York did follow between 1961 and 1987.

We do believe, however, that New York is not required to afford a proportionate deduction, and we believe that our rule is, in fact, a better rule because it recognizes that the alimony simply has nothing to do with where petitioner earns his income.

There's no particular reason--

Unknown Speaker: How is it a better rule in the circumstances described by Justice Breyer?

Why is New York's present rule better?

It looks to me like there are some circumstances where it's an absolutely lousy rule.

Mr. Bing: --There are cases where the hypothetical posited by Justice Breyer will happen.

Unknown Speaker: In fact, isn't it true that... one of the things that troubles me, and I... it's a very troublesome case... is if the nonresident turns out in one year to be extraordinarily generous, giving large amounts of money to charity, to hospitals, one thing and another, they're all deductible on his Federal return.

The net effect of that is to increase his New York tax, because it makes the denominator so much bigger in your fraction.

Mr. Bing: That's true, but--

Unknown Speaker: So that in a way his activities out of State... this is a second way in which activities out of State impact on the tax he pays in New York in kind of a perverse way, because if he's a very generous person, he'll end up with a higher New York tax.

Mr. Bing: --He ends up with a higher New York tax than a comparably situated New York resident having the same--

Unknown Speaker: Or that he would have had to pay if he didn't do all these things.

If he didn't have all those deductions the denominator would be smaller, and therefore his New York would be smaller.

Mr. Bing: --With respect to charitable contribution deductions I'm not sure that they... because they don't affect either... they're below-the-line deductions, in other words.

They're deductions from adjusted gross income for Federal purposes--

Unknown Speaker: Could I--

Mr. Bing: --to get the taxable income.

They're not... I believe that the fraction is neutral with respect to them, because they are not a reduction of either New York-source income or Federal adjusted gross income.

Unknown Speaker: --I failed to understand that from the briefs.

I see.

Mr. Bing: Federal adjusted gross is the denominator in that, so with respect to those, I don't believe that there would be a difference akin to the difference with respect to alimony, but--

Unknown Speaker: My examples were meant to be quite ordinary, most of them.

I mean, the one that they have 100 percent in New York, then you get the odd rate.

But whether it's those examples or the... you know, the unusual ones you can construct with the generous person, you had two justifications, because you've said twofold several times, and I've heard one, and I want to be sure I get the other.

Mr. Bing: --The second one is simply, again, the concept that New York can do for its residents things that it is not obligated to do for nonresidents, and that... again, the Privileges and Immunities Clause and other provisions of the Constitution have been allowed... have been construed to permit certain beneficial residence treatments based on policy adopted by particular States with respect to the right to vote, the right to hold elective office, the right to free public education or welfare or medical benefits.

Unknown Speaker: Well, maybe you could allow... I could see your allowing a deduction for contributions to New York charities that are not allowed for deductions to out-of-State charities, or maybe allowing a deduction for payment of county or municipal taxes in New York only, and not out of State.

I can see some policy justification for that.

But you're not giving me any policy justification, just sort of a yah, yah, yah argument.

We do it because we can do it, that's why.

I mean, that doesn't seem to me a policy justification.

Mr. Bing: It's not intended to be a simply-because-we-can argument, Justice Scalia.

With respect to the treatment of alimony, the policy, if you will, is to really conform the treatment of alimony, of income-splitting post marriage with the treatment of income-splitting if people are married.

Unknown Speaker: So now you are going back when you say it does count that most often the spouse will be in the other State, so that you are not allowing the deduction, but on the other hand, you're not getting your hands on the income to tax.

Mr. Bing: It's because with respect to married people we don't allow income-splitting unless they're both residents.

If one of the parties is a nonresident, income-splitting is not permitted in the case of people who are still married, and this provision is... conforms that same rule with respect to income-splitting with respect to people who are no longer married.

Unknown Speaker: But even--

--Why did New York change in 1987?

You said they had the other rule where they allowed the same deductions, personal deductions, and then they changed.

What prompted the change?

Mr. Bing: Well, the treatment of marital income generally was addressed in '87, and at that time New York abolished the filing-separately-on-the-same-return status that married people had previously enjoyed and went to more or less full income-splitting for the first time, which is premised on the assumption that spouses share total marital income equally.

Again, that was the assumption underlying treatment of people who are still married to each other, and because alimony, as you pointed out, is a tax-shifting device rather than a true deduction, the treatment of alimony with respect to nonresidents was designed to bring it into congruence with the treatment of income-splitting for people who are still together, still married to each other.

Unknown Speaker: But there's the countervailing consideration, isn't there, in the fact pointed out by your brother that alimony is characteristically assessed on the basis of total income, and therefore there is a very strong relationship between the amount of alimony ordered and income earned in New York.

Mr. Bing: There is a relationship, but in our view the controlling standard is the one set forth by this court in the Gilmore case, which looks to the origin of the claim in characterizing an expense as personal or business under section 162 of the Internal Revenue Code with respect to marital dissolution.

In Gilmore, simply because the expenses were incurred to preserve and to protect the taxpayer's income-producing assets, it was not enough to give them a sufficient nexus to make them related under section 162 to be deductible for income tax purposes.

We argue the same standard ought to apply in a case like this, that the alimony in this case, related though it may have been to petitioner's... the amount of petitioner's worldwide income, including the New York-source income, was not incurred to produce that income, or incurred in carrying on the trade or business that generated that income, and that that should be the test with respect to alimony or any other personal expense.

Unknown Speaker: Do you know how many States do it the way New York is currently doing it?

Mr. Bing: I believe that in addition to New York there are six other States that specifically disallow alimony deductions.

However, there are a number of other States that have relied upon the general tenor of the Shaffer and Travis cases, as well as summary dismissals such as Goodwin, to treat a number of different items differently for nonresidents, including, in addition to the alimony expenses we're talking about today, real estate taxes and mortgage interest in out-of-State residence, medical expenses, insurance premiums, moving expenses, income averaging, rollover of gain on sale of principal residence, grocery and medical tax rebates, food sales tax credit, and homestead tax rebates, all of which have been upheld under Privileges and Immunities Clause challenges.

Unknown Speaker: Well, under your principle I suppose if a taxpayer living in Connecticut had a second home on Long Island in New York, you could deny him the home interest deduction.

Mr. Bing: The deduction would not be allowed in computing New York-source income, that is correct, because it does not relate to the production of the New York-source income.

I guess I'd like to address the policy reason.

What is it about these personal deductions and about the nonresident status that seems to be... that justifies what we're doing, and again, we're not simply saying we're doing it because Shaffer and Travis and Goodwin and the others say we can.

We're doing it because we think it's perfectly reasonable, and it's entirely justified for New York to say with respect to nonresidents, all we have jurisdiction over regarding you is what you do here, your economic activity here, and that it's reasonable and permissible for us to say to those people, we will allow you deductions with respect to the production of the income, the net income from your economic activity.

We'll look at what you do here, and we'll let you deduct that.

We'll tax you on your net income, but we're not going to let you take into account either losses or deductions arising from expenses in out-of-State businesses over which we have no jurisdiction, and we're also not going to take into account personal expenses that you may incur in your personal life in some other jurisdiction, even though with respect to people who reside in New York we will allow them.

New York has believed and continues to believe that that is a substantial justification and a legitimate reason for what New York has done in this case.

Unknown Speaker: Why aren't those personal expenses... I mean, if 20 percent of your income is from New York, why isn't 20 percent of those personal expenses fairly attributable to New York income?

I mean, you're sort of adopting the premise that all of your personal expenses come from non-New York State income.

That seems to me an unreasonable premise.

Mr. Bing: Again, we're not saying that the contention is... is being argued for in terms of this would be a reasonable approach is not true.

We're not saying it's an unreasonable approach, but we are saying that we don't think the Privileges and Immunities Clause--

Unknown Speaker: Requires--

Mr. Bing: --requires that absolute equality, or at least that percentage equality of treatment.

And again, these expense actions have nothing to do with where Mr. Lunding earned his income, and there really is no principle basis, other than just saying, well, 20 percent of the income, 20 percent of the deductions, for looking at what happened in Connecticut.

There's no reason for us to say well, it could be 20, but it could be more than 20.

We could say that with respect to his medical expenses he's entitled to more than that because it was really primarily related to his getting back and forth to New York and dealing with the rush-hour traffic.

I mean, there's no principled reason, no constitutional principled requirement for New York to be forced under the Privileges and Immunities Clause to adopt a rateable approach, even though, as I said, that is one that New York has followed in the past.

Unknown Speaker: --Can I just give you one hypothetical that keeps running through my mind and just ask you to comment on it?

Supposing you've got a Connecticut resident and a New York resident, both of whom make exactly the same amount of money, both of whom derive all of their income from New York... they're commuters.

One of them is a commuter and one lives in the city, and one of them, the one who lives in Connecticut, donates a substantial amount of money to the law school in New York and wants a charitable deduction.

The one who lives in New York donates a substantial amount of money to Yale in Connecticut.

The one who gets the deduction is the one who makes a donation to the New York recipient.

Mr. Bing: Well, Justice Stevens, in computing--

Unknown Speaker: I mean, the one who does not get the deduction is the one... yes.

Mr. Bing: --In computing the New York-source income portion of the equation, that's correct, but in computing the tax as if a resident, which is the number by which the fraction is multiplied, you do treat the nonresident as if the nonresident were a resident, so that there is... again, this doesn't affect the computation of the fraction, because the charitable contribution--

Unknown Speaker: Right.

Mr. Bing: --deduction is below the line in both cases, so there is a--

Unknown Speaker: Would they be taxed the same in my hypothetical as... would the bottom line be the same?

Mr. Bing: --I believe that the... obviously the... when you computed the New York... the taxes if a resident, on the part of the New York resident, then obviously you'd stop, because that would be the answer.

The percentage of that that would be paid by the nonresident wouldn't be affected by the formula, by the fraction, which is the other thing, because New York-source income is a net number without any reduction for... itemized deduction such as the charitable contribution.

Unknown Speaker: I thought, to oversimplify it, that the New York resident would get the deduction and the Connecticut resident would not, in my hypothetical.

Mr. Bing: In looking at the New York fraction, Justice Stevens, there's no difference in the New York-source income number... there would be no deduction in computing New York-source income for the charitable contribution.

Unknown Speaker: That's not a constitutional point, so any constitutional holding that permitted you to do what you've done here would permit Justice Stevens' hypothetical.

All it would take would be a Federal statute that does the same thing that this statute did here.

A delegation imposes... you know, convinces the other Members of Congress to write a little thing which says that New York-source alimony is not... you know, the way they did it here, they'd do the same thing for charities.

They could do the same thing for anything, so it would be easy under the Constitution to replicate just that problem, wouldn't it?

Mr. Bing: Our--

Unknown Speaker: And that's what's worrying me.

Of course, if it's constitutionally permissible to do this, the States that are always anxious to get more money could think of, you know, dozens and dozens of ways to produce the kinds of results that we were talking about.

Mr. Bing: --It's true that I believe our argument would permit... it doesn't work in New York's particular methodology, but our argument is based on the legitimacy of permitting States to focus solely on the economic activity within the State and not to look at the personal--

Unknown Speaker: Maybe the distinction is that New York treats nonresidents as just purely mechanical money-making machines, whereas it treats its own people as whole persons and citizens who have all sorts of interests other than making money, because that's what you treat the nonresident--

--They're New Yorkers, after all.

Yes.

[Laughter]

Or they're non-New Yorkers.

Mr. Bing: --In fact, as to New York State, that is a permissible... in our view, that's all right.

That's a distinction that we seek to draw.

It's a distinction that New York and other States have always, at least since 1920, thought that they had the power to draw, and it's a reasonable distinction based on the fact that we argue that we should not be required to take into account the fact that yes, Mr. Lunding does have a personal life, but it's a personal life that is related to Connecticut, not related to any of the other places from which Mr. Lunding derives his income.

If there are no further questions, thank you, Your Honor.

Chief Justice Rehnquist: Thank you, Mr. Bing.

The case is submitted.

Unknown Speaker: The honorable Court is now adjourned until Monday next at ten o'clock.

Attribution:

The Oyez Project

Featured:

Camps Newfound/Owatonna v. Harrison - Oral Argument

Fri, 09 Jan 2009 14:50:08 +0000

Case:

Camps Newfound/Owatonna v. Harrison

Media File:

94-1988_19961009-argument.mp3

Related Transcript:

1996_94_1988_argument.xml

Transcript:

Argument of William H. Dempsey

Chief Justice Rehnquist: We'll hear argument next in Number 94-1988, Camp Newfound Owatonna, Inc. v. the Town of Harrison, Maine.

Mr. Dempsey.

Mr. Dempsey: Mr. Chief Justice and may it please the Court:

The question that is raised in this case is whether a particular provision in a Maine statute dealing with property tax exemptions for charitable organizations is or is not constitutional.

The challenge to the statute is laid upon the commerce Clause in its dormant or negative aspect, that is, without the existence of any relevant congressional action under the proviso a charity that is otherwise entitled to receive the exemption is denied that exemption if, to use the words of the statute, it is conducted or operated principally for the benefit of persons who are not residents of Maine.

Now, the petitioner is such a charity.

It was denied the exemption on those grounds, and that really is the core of the case.

Now, the remaining facts are simple.

They're not contested.

I can summarize them quite swiftly.

The matter was disposed of on summary judgment below.

The petitioner is a Maine corporation.

Its only activity is to conduct a summer camp for children in the town that is now Harrison that is the respondent in this case.

It is dedicated to serving Christian Science families.

There are not a great many Christian Science families in the State of Maine, and accordingly it recruits and advertises outside the State broadly, and it serves principally people, children who are not residents of the State of Maine.

Indeed, during the three tax years in question about 95 percent of the campers that were served at the camp came to the camp from other States, States other than Maine.

Unknown Speaker: Why should the taxpayers of Maine subsidize charity to people outside of Maine?

I don't know why they should be compelled to do that--

Mr. Dempsey: Well, they're not--

Unknown Speaker: --by the Commerce Clause.

Mr. Dempsey: --Surely.

The purpose, Justice Scalia, which is asserted... and let me go directly to that.

The purpose that is asserted to be the purpose on the face of this statute is a quite reasonable purpose.

It is to confine the dedication of the resources of the State, of the community, to the benefit in these particular areas of residence of that State.

Now, that purpose is as legitimate as the purposes that were served in the waste disposal cases that you've had before you, the purposes of encouraging private industry, all the purposes that are listed in the opinion of the courts in Chemical Waste, for example.

There's nothing at all sinister about the purpose.

The question, as in almost all of these cases, is whether or not the means that were adopted to achieve that purpose impacted improperly upon interstate commerce.

Unknown Speaker: Do those other cases... those other cases don't involve as proximately as this one does the... in effect the expenditure of State money.

It seems to me that this... that is, the granting of a tax deduction to charities, it's just like giving charities the State money.

I don't know that those other States involve... those other cases involve that.

Mr. Dempsey: Well--

Unknown Speaker: It seems to me this is closer to the situation in which the State is a market participant, and the State chooses to purchase its goods only from in-State companies.

Mr. Dempsey: --Well--

Unknown Speaker: Which it's entitled to do.

Mr. Dempsey: --Let me try to address that question in the two aspects in which I understand it.

In terms of its being a... the equivalent of a tax expenditure, your first point, that, as I believe you yourself have indicated in your concurring opinion in the West Lynn Creamery case, is true of all exemption and credit cases, and the Court, as you pointed out, has always regarded tax exemptions and credits as being the equivalent of taxes themselves.

So that if you take a case that I think is closely on point, the Darnell case, involving a property tax again, exemption upon lumber that was produced in the State that was involved, an exemption for that lumber but not for others, that amounts to a tax expenditure, or, if you wish, a subsidy.

In the Bacchus case, the exemptions that were granted there to the liquors that were produced in the State of Hawaii were in fact tax expenditures on behalf of those people, of those manufacturers.

Unknown Speaker: Well, logically there's... it's hard to see a difference between a tax exemption and a direct subsidy, isn't there?

Mr. Dempsey: That's precisely what I'm trying to say.

Unknown Speaker: But you say the Court has drawn that distinction.

Mr. Dempsey: I'm sorry, Justice O'Connor.

Unknown Speaker: But you say the Court has treated them differently.

Mr. Dempsey: This Court has treated them the same.

Unknown Speaker: I mean, what if it were a direct subsidy of cash to a Maine charity--

Mr. Dempsey: Right.

Unknown Speaker: --based on how many Maine residents were served by the charity.

Mr. Dempsey: Precisely.

Unknown Speaker: Would that be all right for Maine?

Mr. Dempsey: That's a very interesting question.

Let me try to move into it more gradually, if you will, and I want to come back to the market participation question that Justice Scalia raised, because these are really the dual, dual justifications that the State advances in this case.

Either it's like market subsidy... market participation, or it's like subsidy, or both.

Let me just preliminarily, though, note a problem with that argument.

The State, as you know, is not here.

The State participated... it intervened as a defendant in the trial court, but when it lost it did not pursue its appeal to the Maine law court, and it has not taken advantage of its opportunity to participate in this proceeding, so the defense of the State statute is left to the town of Harrison.

Excuse me, Justice--

Unknown Speaker: That's because the tax goes to the county, not the State, this real property tax?

Mr. Dempsey: --I... yes, I'm sure that's right, but... in terms of fact, but the reason for the State's participating at the trial court level and not appealing is a matter that I am in no position to comment on at all.

There may be precedent for that in this Court, but I've not seen a case in which a State statute has been attacked as unconstitutional in which the State participated in the... at the trial court level and then abandoned the case coming before you, but I--

Unknown Speaker: But the tax... the tax in this case was the town's tax--

Mr. Dempsey: --Town's tax.

Unknown Speaker: --that was authorized by State law.

Mr. Dempsey: Yes.

Yes, correct, Justice Ginsburg.

Yes, so you could--

Unknown Speaker: And while you were outlining the, is it like a subsidy, is it like a participant in the market, it's... is it at all relevant that real estate... taxes on real estate go back a pretty long way, and I thought that the original... that that thought had little to do with commerce, but had to do very much with the public service that the charity, or most traditionally the church, was supplying for the local community.

Mr. Dempsey: --Yes.

Unknown Speaker: And not some notion of worldwide benefit.

Mr. Dempsey: Well, I... let me make sure that I understand your question correctly, Justice Ginsburg.

Unknown Speaker: I'm asking you to... whether this... we can say real estate taxes originate... exemptions from real estate taxes--

Mr. Dempsey: Yes.

Unknown Speaker: --you don't tax the church property... from something that had to do with benefiting locals, and that's why we... that's why these exemptions from the real estate... real estate doesn't move from one State to another like lumber does.

Mr. Dempsey: No.

Unknown Speaker: Is there something special about real estate where an exemption from the tax might be supportable in that area and not in others?

Mr. Dempsey: Well, let me put it this way.

If you were to take that view and distinguish between the real estate and personal property taxes, for example, because after all personal property does move, then you would have an awkward situation here, because part of this tax was personal property, and part was realty.

My first point is that that makes an awkward distinction in this particular case, as it would in any case.

My second response would be that, consider Darnell.

That was a personal property tax on lumber that was brought into the State from another State, the exemption being given to lumber that was produced in the State of Tennessee.

Now, if they could escape the effect of Darnell simply by transforming the form of the tax, they could then levy the tax on the real property, the warehouse in which the lumber was stored.

Now, I'm suggesting that if that kind of an exception is made, it would open the door to all kinds of manipulation of taxes in order to take advantage of that single loophole.

Unknown Speaker: Not if it's limited to charity.

Mr. Dempsey: Now... yes.

Unknown Speaker: Before you can decide that there's been discrimination against out-of-State commerce, you have to decide that you're dealing with two taxpayers who are similarly situated, and why isn't it entirely reasonable to say that they are not similarly situated where a charitable... where this deduction is at issue where one of the taxpayer provides charity to the citizens of Maine--

Mr. Dempsey: Right.

Unknown Speaker: --and the other one does not.

Mr. Dempsey: Right.

Well--

Unknown Speaker: Why are they similarly situated?

I don't think you can run that argument in the normal commercial case where all you can say is that one is an outlander, the other one isn't.

Mr. Dempsey: --All right--

Unknown Speaker: But here one is giving something--

Mr. Dempsey: --Yes.

Unknown Speaker: --gratis to the citizens of Maine.

Why doesn't that make that taxpayer different?

Mr. Dempsey: I understand... I understand, Justice Scalia, the force of that reaction to the case.

Now, let me try to catch up with the strands of questions that I have, because they're all related, and I don't want to lose track of any one of them.

Let me go to the church support by property tax, because that's in a way related to the very last question you asked, Justice Scalia.

I suggest to you that... and the market dominant, market participation and the subsidy issue.

I suggest that if the State were here, it would be very, very reluctant to make the market participation or subsidy argument.

There are in every State... I'm sure there are statutes, exemption statutes for church property.

Now, if, as the respondent argues, what the State is doing here by virtue of market participation is somehow purchasing camping services for the benefit of its residents, or subsidizing the camps for the benefit of its residents, then, by parity of reasoning, it is somehow purchasing religious services from the churches.

Unknown Speaker: No, but isn't the answer to that that it's purchasing a great number of other things, too, and for that reason it doesn't fall afoul... I mean, it's purchasing all sorts of secular benefits on the same ground for that reason it doesn't fall afoul of establishment.

Mr. Dempsey: Oh, I'm sure it doesn't fall afoul of establishment, Justice Souter, but the reason it doesn't is because it's not market participation.

The State, as Justice Scalia, as in the New Energy-Limbach case, the State here is not purchasing anything from anyone.

Unknown Speaker: I don't think the argument is that the State is a market participant.

I was just arguing that by analogy to the reason we think market participation is okay--

Mr. Dempsey: Right.

Unknown Speaker: --and you can discriminate against your out-of-State citizens when you're a market participant--

Mr. Dempsey: Right.

Unknown Speaker: --so also you can do it in this situation, where you're dealing with someone who is providing a... you know, a service gratis--

Mr. Dempsey: A service gratis, yes.

Unknown Speaker: --to the State.

Mr. Dempsey: All right, well let me address... but just before I forget, Justice O'Connor, on the subsidy question, of course, the subsidy defense does not have the same quality of imprimatur from this Court as yet as the market participation test does, but as I've indicated, for my purposes I'm perfectly wiling to assume, arguendo, that any sort of a subsidy is immune from the dormant Commerce Clause just... because this just isn't subsidy, that's all.

It's, as in Limbach, it's a tax, as Justice Scalia said.

It's the primeval function of the Government in laying and collecting taxes.

Now, what is suggested is that... and I really thought from the start that this is the way in which this case might develop.

It really hasn't developed this way until right now, and that is to suggest that there is some sort of an exception for charities that is analogous to the market participation, or the subsidy of that, indeed, as an exception.

Now, the respondent abstains from making that argument.

That doesn't mean that it's not a good argument, but I point out that we did say at the outset well, let's consider, this issue, and the respondent says no, we're not trying to draw that distinction.

I think myself that the respondent is correct in doing that, because it seems to me it can't possibly... or shouldn't, anyway, make a difference whether you're dealing with a nonprofit or a profit.

Let me just start at that sort of primitive... on that primitive basis.

Nonprofits in this country, and that's what we're talking about, are big business in every sense of the word, except that they don't make a profit.

In terms of their employment, in their purchases, in their interstate commerce that they affect, they are big business.

Now, instead of taking camps for a moment... but they're in business.

They're in business in the State of Maine, as Justice Souter, I'm sure, is aware.

Unknown Speaker: Before you go too far down that road--

Mr. Dempsey: Yes.

Unknown Speaker: --as I understand this law, it doesn't apply to all nonprofits.

Mr. Dempsey: Correct.

Unknown Speaker: It applies to only those... they have to sell their services for no more than $30 a week, isn't--

Mr. Dempsey: No.

Well, yes.

Excuse me.

No, you're quite right.

Unknown Speaker: --Do you know any--

Mr. Dempsey: If they have a modest charge then they get a modest exemption, but if they charge more than $30 then they lose the exemption entirely.

Unknown Speaker: --Then they lose the exemption.

Mr. Dempsey: Right.

Unknown Speaker: Now, do you know anybody that can possibly run a camp for $30 a week without giving a lot of that away for free?

Mr. Dempsey: Well--

Unknown Speaker: So you're not just talking about "nonprofits", you're talking in every case under this law about companies who are giving away stuff free to residents of Maine.

Mr. Dempsey: --No, we're talking about nonprofits here who serve primarily citizens of Maine whom they charge $1,000 a week, who get the exemption.

Unknown Speaker: That applies only to when they're serving out-of-State people, and it's $30.

Mr. Dempsey: If they're serving primarily or principally Maine citizens, then they may charge $1,000 or $2,000, and they get the exemption.

Unknown Speaker: I see, and the $30 applies only to out-of-Staters?

Mr. Dempsey: No.

If you serve primarily out-of-State citizens but only charge $30 a week, then you lose only part of your exemption.

Unknown Speaker: I see.

Mr. Dempsey: So--

Unknown Speaker: Fifty thousand, which might not be the lion's share of the tax anyway, right?

Mr. Dempsey: --The... oh, the tax in this... if you're asking about the--

Unknown Speaker: Well, it depends on what is the value of the property.

Mr. Dempsey: --What is the value of the property.

In this case, the tax in each of the tax years in question averaged about $22,000, so it does depend entirely on the... so what you have--

Unknown Speaker: I'm glad you clarified that.

Mr. Dempsey: --Yes.

So what you have--

Unknown Speaker: So we really are talking--

Mr. Dempsey: --Right.

You have--

Unknown Speaker: --just about charitable organizations.

Mr. Dempsey: --a protected relationship with the State, nursing homes, camps, some of which are... many of which are nonprofit, but they are in competition directly with these charities, so-called charities, and these people lose the exemption, and they lose the exemption because they serve too many people from out of State.

Unknown Speaker: Would a hospital lose its exemption if it took a lot of out-of-State patients?

Mr. Dempsey: The hospitals are not covered by this provision of the statute, Justice Stevens, and I should point that out.

This proviso applies only to the... now, I'm saying that without really being certain, and I'm going to consult, when I sit down with my colleague, Mr. Dale from... because what we have in the State of Maine, and it's not my field, goodness knows, is a statutory system in which a number of different categories fall under different provisions.

So that, for example, Bates and Bowden and Colby, who serve, certainly, more nonresidents than they do residents, don't... are not subject to this proviso because that provision of the statute does not burden with this proviso, so it's only this section which deals with so-called benevolent and charitable organizations, a catchall, but does identify with particularity some types, camps, nursing homes, boarding homes, and mental health treatment facilities of communities, and then whatever else falls within the catchall, and I've got to get the answer as to whether hospitals do or not.

Unknown Speaker: Well, at least you've given me the answer for a mental institution.

If they took too many out-of-State patients they would lose--

Mr. Dempsey: Mental... community mental treatment centers, so it would not be a mental hospital.

But take a nursing home.

Now, nursing homes, obviously, there are private, there are profit-making nursing homes, there are nonprofit nursing homes.

If you're on... close to the border of whatever State you're close to the border of and you serve more than half... now, the division as to what is principally and what is not has not been made, but let's say it's more than half people from the other State, you lose your exemption, and you're in competition with those other nonprofit nursing homes.

Unknown Speaker: --And that's true--

--If it were pro rata, would you have the same... would you have a constitutional objection?

Suppose it said to the extent that you serve people from out of State you don't get the exemption, but to the extent that you serve, so in your case you could get 5 percent exemption because you have 5 percent from in-State.

Mr. Dempsey: No.

My argument would be the same, because my argument has to do, when they're getting to interstate commerce, you can approach that problem in different ways, as I indicate.

We focused on the impact on interstate commerce because of Edwards v. California and a long line of cases bringing it within the affirmative and the dormant Commerce Clause interstate transportation and the effect of statutes on it, but the effect would be there anyway.

Unknown Speaker: Well, what is the effect, the harm that you're complaining about?

Can you be precise about that?

Mr. Dempsey: Yes.

Yes.

Well, what you have here is a plain incentive to these organizations to limit the number of nonresidents that they serve.

Now, they can do that in order to get the tax exemption if they're close to the edge.

They can do it by... yes.

Unknown Speaker: But your camp isn't even within that range.

Mr. Dempsey: We're not close.

Unknown Speaker: I mean, you describe some things, this will give camps like yours an incentive to take people only from in the State, but it's... your camp can't operate... that's not what it is.

Mr. Dempsey: Not without a massive conversion to Christian Science in the State.

We're in great difficulty, yes.

[Laughter]

Unknown Speaker: So it's not going to have that impact.

Mr. Dempsey: It is not.

Unknown Speaker: What is the impact that you have?

Mr. Dempsey: All right... but I don't want to leave that, because I think the statute is attacked on its face, and surely you must contemplate in judging the probable impact of the statute situations in which by imposing a quota, or imposing a differential fee schedule, a camp, or a nursing home, or whatever, could qualify, so--

Unknown Speaker: Do we know, in fact, that there is any such camp in the entire State of Maine--

Mr. Dempsey: --That's--

Unknown Speaker: --where there would be that... they say, gee, we're pretty close to the 50 percent mark so we have to serve in-State people not out-of-State?

Mr. Dempsey: --No.

The record does not disclose... the record... all that the record shows is that there are some camps that qualify for the exemption and some that don't, and that's all.

Unknown Speaker: What if the statute granted a charitable exemption only to charities domiciled or headquartered in the State of Maine?

Mr. Dempsey: Absolutely, without any question in my judgment that is perfectly all right, and indeed, I think it is natural, normal, to be expected, proper, in every way reasonable for a State to say we're not going to grant a charitable property tax exemption unless this charity is here, doing work to benefit the people of this State.

Unknown Speaker: Well, why?

I don't have any problem with that at all.

I mean, you can be there without doing work to benefit the people of the State.

Your domicile can be there--

Mr. Dempsey: Right.

Unknown Speaker: --and all of your charity can be expended in Bangladesh.

Mr. Dempsey: Right, but I'm going beyond that, beyond the Chief Justice's question, in saying I think it's also proper to say that the charity must perform charitable services in the State.

Now, we don't... that question isn't here.

This camp is open to everybody in the State of Maine--

Unknown Speaker: But that's a different question than, you can be domiciled in the State, have all of your operations in the State, but everybody you serve is from out of State.

Mr. Dempsey: --That could well be, and all that I'm suggesting is that a requirement that a charity expend... if this is the question--

Unknown Speaker: But the Chief's question... I--

Mr. Dempsey: --not only be domiciled there but spend money in the State.

Unknown Speaker: --Mr. Dempsey--

Mr. Dempsey: Yes.

Unknown Speaker: --I thought the Chief's question was, suppose the Maine law was, charities who are domiciled in this State are exempt from real property taxes in this State.

I thought you answered that that would... you gave an unequivocal, that would be okay.

Mr. Dempsey: Absolutely, in my judgment.

Unknown Speaker: So what... so let's take a charity situated in Maine, operating only in Maine--

Mr. Dempsey: Right.

Unknown Speaker: --but serving only children from India.

Your answer is that that would get--

Mr. Dempsey: I... I--

Unknown Speaker: --That would be constitutional.

I mean, there would be no--

Mr. Dempsey: --Would be unconstitutional?

Unknown Speaker: --I'm sorry.

Mr. Dempsey: No.

Unknown Speaker: It serves only people from out of State.

Mr. Dempsey: Right.

Unknown Speaker: There wouldn't be any complainant.

Mr. Dempsey: Let me see if I can... this is a question, of course, I considered as soon as I started on this case.

What happens to a State that wants to make sure that a charity that gets an exemption does something for the people of the State, and... excuse me.

Unknown Speaker: How does it do that?

Mr. Dempsey: Well, it's been my view, and there's no case law on this that I know of, but it's been my view that it is appropriate and proper for a State to say not only must the corporation be a Maine corporation, which this statute does require, but that it's got to do something in the State of Maine.

Now, some of my amicus curiae friends would not agree with me on that issue, you know, I think.

Unknown Speaker: Can we get back to the question of how people situated as your client is, how they're harmed.

Mr. Dempsey: Yes.

Unknown Speaker: Because we've already established that at least for this category of camp they're not going to change the composition of the people who come to them, and we don't know whether any such entities that would decide to take--

Mr. Dempsey: Right.

Unknown Speaker: --We just don't know that.

Mr. Dempsey: Yes.

Unknown Speaker: So what is... what other harm are you complaining about?

Mr. Dempsey: Well--

Unknown Speaker: You're complaining about the tax.

Mr. Dempsey: --Complaining about the--

Unknown Speaker: You're out of pocket, I suppose is your big complaint.

Mr. Dempsey: --Well, but I mean, that's right, Justice Scalia.

Unknown Speaker: Yes, but you can't--

Mr. Dempsey: In other words, we are suffering a financial loss, and what the record does show is that part of that is passed on to the campers and part of it detracts from the ability of the camp to perform certain services.

That's the other line of interstate commerce approach to this problem that one could take.

Unknown Speaker: --But if you're just complaining about, there's this tax and you don't like to pay it, suppose Maine has a higher sales tax than other States, and it could cost you more to operate in Maine because of that?

Mr. Dempsey: No, but if... if the sales tax or the real estate tax or any tax is imposed upon an organization because it serves too many people from out of the State... a hotel, a motel, any kind of a service... a grocery store.

Because it serves too many people from out of the State, that involves a competitive relationship between those organizations and organizations that get the exemption within the State, and that's a financial burden that disadvantages them.

Unknown Speaker: But you're not competing with charities that serve Maine people.

That's not... I don't see the competitive situation.

Mr. Dempsey: Well, I'm--

Unknown Speaker: Because you just started out by saying, no, we wouldn't change... our camp is for Christian Scientists from all over the United States.

Mr. Dempsey: --No, but just... now, that point has been made by the law court that we're not really in competition with anybody else because we serve just Christian Scientists.

Now, that argument has, it seems to me, a rather unfortunate ring to it, but taking that... and ignoring that, the fact is that other camps are in the State of Maine and they're open to Christian Scientists, Science families, so that we're competing for that group.

Unknown Speaker: You're competing to give away money, not to make a profit.

It's unreal to talk about competing to give away money.

I can give away more money than you can.

Are you hurt if someone else gives away more money than you're giving away?

I don't understand that.

That is not competition to my mind.

Mr. Dempsey: Justice Scalia, nonprofits are nursing homes... just looking at the way that nursing homes operate, or any kind of a treatment facility, any kind of nonprofits, they are in competition for contributions, they are in competition to build up their staffs, they're in... you've got the evidence of their competition every day in the mails.

They are in relation one to the other in competition, and they are affecting interstate commerce.

And I don't want to leave the point that you made, Justice Ginsburg, without noting again that this statute is being attacked on its face, and Justice O'Connor, the question you raise about kind of a graduated subsidy to me is a very difficult question.

I will just say that.

I think that clearly the State could have done what it wanted to do here by eliminating the tax exemptions and providing vouchers to the citizens of the State to use however they want.

Unknown Speaker: Could it do it by saying every organization, that every charitable organization that serves the citizens of this State gets a $1 deduction from its income tax each time it serves a citizen of the State?

Could it do that?

Mr. Dempsey: No, I don't think so.

Unknown Speaker: I think it could.

Mr. Dempsey: Well, I--

Unknown Speaker: Well, as I understand, your argument is, even if you lose on this point about the parity of competition, your argument, as I understand it, is essentially the same, because you say, number 1 you can't draw a charitable versus for-profit distinction because in fact they are both businesses in a given place, and number 2, even apart from competition, you are discouraging interstate activity.

Mr. Dempsey: --Exactly.

Unknown Speaker: And that's the essence--

Mr. Dempsey: Exactly.

That is the essence of the argument.

Unknown Speaker: --Yes.

Can you tell me, what is the philosophy that allows you to concede, in the voucher hypothetical, there would be no Commerce Clause violation?

What is the basis for the distinction between that case and this?

Mr. Dempsey: In that case, with each citizen armed with a voucher to go wherever, there would be no incentive on the part of any camp to limit its service to non-State people.

There just wouldn't, that's all, so that aspect of the case just disappears in the context of a voucher system.

In the context of a subsidy system that's graduated to out-of-State service, then you're getting to the edge, it seems to me, of where the Court has been moving in terms of validating subsidies.

A flat subsidy would be okay.

That kind of a subsidy I think there's a question about.

I would like to reserve the balance of my time.

Unknown Speaker: Very well, Mr. Dempsey.

Mr. Plouffe, we'll hear from you.

Argument of William L. Plouffe

Mr. Plouffe: Mr. Chief Justice, and may it please the Court:

Before addressing in detail the three arguments in my brief which I use to support the conclusion or the results achieved by the Maine law court, I want to address two fundamental points which I think should be addressed at the outset.

The first one is that there is no Federal constitutional right for a nonprofit organization to receive a tax exemption from local property taxes.

The second fundamental point is that State legislatures have great latitude in deciding who should be tax exempt and who should not be tax exempt.

This is especially true, I believe, when we are talking about taxation from real estate tax, or exemption from real estate taxes which really are a quintessentially local matter.

I would suggest to you that that discretion of State legislatures extends to being able to determine what benefit Maine residents in this case are to achieve... are to receive in return for this tax exemption.

In response to the amici in this case, who, from reading their briefs--

Unknown Speaker: You're asserting that, unlike other tax exemptions, this is a quid pro quo type of tax exemption.

They're giving this one because the State is getting something gratis from these organizations, and that distinguishes it from other tax exemptions.

Mr. Plouffe: --Fundamentally, Justice Scalia, that is one of my arguments, that this is like the market participant exemption in Hughes v. Alexandria' Scrap and the Massachusetts Council case involving the City of Boston.

Unknown Speaker: So it's like, for example, we give a special exemption to our farmers, only to our local farmers because they keep the land green and they in addition provide employment, and they maintain the State as primarily agricultural.

I mean, is that a justification--

Mr. Plouffe: Justice Breyer, this is--

Unknown Speaker: --for discriminating against out-of-State farmers?

Mr. Plouffe: --This actually is quite unlike that kind of a subsidy or--

Unknown Speaker: Oh, I understand that.

I understand that.

My question really is, if we're going to start looking to local benefits as a basis for discriminating against out-of-State travel or commerce, what road are we going down?

Doesn't that erode most of the Court's jurisprudence?

Mr. Plouffe: --I don't think so when we're talking about exemptions for charities, and the reasons are these.

First, what is being returned by the charity to the people are in the nature of governmental services, services that the Government otherwise would provide.

Feeding the hungry, sheltering the homeless.

Unknown Speaker: And that means, then, that in fact the hungry in other States, the children who want to travel to the local hospital across State lines, the people who want to travel across State lines to get an education, all of the different people out of State that want to use commerce to take advantage in-State... you see, I'm saying, so?

Mr. Plouffe: The--

Unknown Speaker: Or weekend canoeing at Camp Okefenokee.

I don't know that a State would provide that if a charity wouldn't provide it.

Don't those people use commerce?

Aren't they discriminated against just like the out-of-State farmer?

What actually is the distinction that arises out of the fact that it's a charity?

Mr. Plouffe: --Well, the second distinction is that the other exemptions that are addressed by this Court... for example, in West Lynn Creamery, there were two problems with that.

One, it was intended to give a competitive advantage.

There really is no competitive advantage here, and secondly, the tax that was collected--

Unknown Speaker: Well, why is there no competitive advantage?

Suppose they get an identical camp that just has 95 percent of its residents are children from Maine.

Why isn't there a competitive advantage?

Mr. Plouffe: --Well, of course, the fundamental discrimination that we draw is between for-profit camps and nonprofit camps that receive an exemption.

Unknown Speaker: But they're competing.

Mr. Plouffe: There's also competition there, Justice Stevens, and--

Unknown Speaker: But let me... I just want to challenge you on your no competitive advantage.

You have two nonprofit camps.

One has 55 percent Maine children there, and one has 35 percent Maine.

Doesn't one have a competitive advantage if it gets an exemption and the other does not?

Mr. Plouffe: --Well, part of the answer I think is, what is the competition?

Is it to dispense more charity, to feed more homeless... more homeless people, or to shelter more homeless people?

I really don't look at that in terms of competition.

In a case like, situation like this, one camp--

Unknown Speaker: Actually, you dispense more charity by losing more money, I assume.

Well, of course there are universities which are charitable in some respects, anyway, and they say that each education they give out costs more than the student pays.

Nonetheless, they compete for students.

Mr. Plouffe: --Of course, universities in Maine are under a separate section of the statute and this provision we're talking about which, primarily, benefits doesn't apply to them.

Unknown Speaker: Yes, but they can be under this section of the statute if you win the case.

Mr. Plouffe: If the State legislature were to so determine.

Unknown Speaker: Right.

If you win this case, the State legislature, or whoever makes these decisions in Maine, can say, Bates, Colby, et cetera, are all going to be fully taxed if they have this high proportion of out-of-Staters, isn't that so?

Mr. Plouffe: Well, we haven't done that.

Unknown Speaker: No, but you can, can't you, if you win this case?

Mr. Plouffe: It's legislative discretion.

Could a legislature do it, and to the amici I would say, legislators could choose to tax colleges and universities.

Unknown Speaker: That's not so scary.

I mean, the legislatures right now, no matter how we come out on this case, could simply eliminate the tax deduction for public... for private universities and choose to subsidize, give some of the in-State tax money to those in-State universities that have a majority of in-State students.

They can do that, right?

Mr. Plouffe: They could do that, Justice Scalia.

Unknown Speaker: So this horrible can come about no matter how we come out in this case.

Mr. Plouffe: There is no constitutional right to a tax exemption.

Unknown Speaker: No, but they couldn't give the subsidy to a church camp, could they?

Mr. Plouffe: Ah.

That's the Walz question, Justice Stevens.

Unknown Speaker: Yes.

Mr. Plouffe: And I would like to address the Walz question because that has been brought up in the reply brief.

The... Justice Burger's opinion in Walz, Chief Justice Burger's opinion in Walz specifically avoided focusing on the secular good works that churches do as the rationale for granting them an exemption.

He focused rather upon the history of how we have treated churches and religious organizations in this country since its founding, and before that, how England treated them, and he also focused upon wanting to avoid the entanglement between Government and the churches that could come about.

If we did tax them and they didn't pay their taxes, we might have to foreclose on their property.

Justice Douglas, dissenting, to another view.

He said, this is over some secular good works.

To get to the issue made in the... by the camps, or the petitioner in their brief, this Court actually, I think, dealt with the problem that is raised by the subsidy to the churches in Regan v. Taxation With Representation, when then Justice Rehnquist, now Chief Justice Rehnquist, wrote that in fact exemptions... this was under a case involving a 501(c)(3) exemption, and the petitioner felt that they were being discriminated against because they engaged in lobbying activities, and under 501(c)(3) could not be granted that status so contributions to the petitioner were not tax deductible.

And Chief Justice Rehnquist wrote first that the exemption is really the equivalent of a subsidy or even a cash grant... those are the words that were used, cash grant... and that really the Government has no obligation to subsidize the First Amendment activities in that case of the petitioner.

And in a footnote, the Chief Justice acknowledged Walz, and did not find it to be at variance with this case with Regan, where they were dealing with clearly secular matters, so I think the Court has addressed the problem that has been brought up by the petitioner.

Unknown Speaker: Mr. Plouffe, what is the cut off for being... serving... for qualifying for this exemption?

You have to serve dominantly Maine residents, but what is it, 50 percent?

What is it?

Mr. Plouffe: Justice Ginsburg, the statute says principally benefits, and throughout the course of this litigation we have treated this as being 51 percent.

With respect to the other sections of the statute that have been raised, if I could take this opportunity to do that, hospitals are... hospitals licensed by the Maine Department of Human Services are in a separate section of the statute that doesn't apply.

Unknown Speaker: Let me stay where the division is, because do I understand the statute to work this way: we have two camps, say, for the blind.

One serves 50 residents of Maine and it's exempt from this tax.

The other serves 50 residents of Maine and 50 residents from elsewhere in the United States.

It doesn't get the exemption, yet it's providing the same services.

Mr. Plouffe: That would be up to the local assessor, who acts as an agent of the State, to determine whether or not the 50-50 meets the test of principally--

Unknown Speaker: Well, let's make it 60-40 so we won't run into that problem, 40 percent from Maine, 60 percent from outside.

Mr. Plouffe: --That--

Unknown Speaker: No exemption at all.

Mr. Plouffe: --That would be true if... if the nonexempt entity chose to be insular, not to provide any other services to the surrounding people, and that's one of the problems in this case.

If the statute--

Unknown Speaker: I'm not sure I... it's a camp for the blind, and it serves the same number of Maine people as the camp that serves only Maine people, but it's a larger camp so it also takes in a lot of people from out of State, so it's rendering exactly the same benefits to the State of Maine, but it's also including these other people.

Mr. Plouffe: --Let me answer your question directly.

Under... if that is all that camp did in terms of dispensing charity, then the answer is yes, it would not get the tax exemption and the other camp would, even though they both serve the blind.

But the point I wanted to make is, when read carefully, this statute doesn't focus on the residency of the campers, or in your hypothetical the residency of the blind people.

The statute focuses on how the charity spends its money, and certainly in the case of the summer camp they're usually going to spend their money just on the kids who pay the money, the tuition money, but they could choose to do things like open their beautiful beach to the people of Harrison, and that would be a benefit to Maine people that could be included in the computation of, do they principally benefit Maine people, but they don't do that.

Unknown Speaker: But a camp that served just Maine residents would not have to do that.

Mr. Plouffe: A camp, because they would already be serving Maine people--

Unknown Speaker: So you're right back to where you started.

There's a discrimination between in-State and out-of-State campers.

Mr. Plouffe: --There's discrimination drawn, Justice Kennedy, based on the benefit to Maine people or no benefit to Maine people--

Unknown Speaker: How long has this law been in effect?

It seems to me it's more trouble than it's worth.

My goodness.

[Laughter]

Computing... how do you value the use of a beach, for example?

Has this thing been around a long time?

I mean, I see endless litigation over this.

Mr. Plouffe: --The provision that we are arguing about--

Unknown Speaker: Maybe we should strike it down for foolishness or something.

[Laughter]

Mr. Plouffe: --The provision that we're arguing about was enacted in 1957.

It was upheld by the Maine supreme court in 1963, in a case that was decided on Fourteenth Amendment ground, in which the law court said, we don't think that it's irrational or unreasonable for the State of Maine... and this is peculiar to charities... for the State of Maine to require that its people get something in return... in return for this forgiveness of taxes, and that was a Fourteenth Amendment case.

This Court, when it visited this issue before in WHYY, Inc., a similar issue, only that one was the State of incorporation of the charity, used a Fourteenth Amendment analysis, and there was dicta in WHYY, Inc. to suggest... and I admit that it is only dicta... to suggest that, had the facts been as they are here today, that may have been okay under the Fourteenth Amendment.

Now, the petitioner raised the Fourteenth Amendment claims in this case below, and the law court ruled against the petitioner, so did the superior court, and they chose not to appeal that Fourteenth Amendment decision to this Court, apparently agreeing that the statute does pass the Fourteenth Amendment test.

Unknown Speaker: Well, I think you... we accept the fact that the Fourteenth Amendment is a much more lenient standard of review on these matters of economic regulation than the Commerce Clause.

I mean, that's a given under our jurisprudence today.

That's why the other Darnell case got over... in effect overruled or rewritten in the Carolina Tax case last year.

I mean, the standards are distinctly different, so the fact that you may pass muster under the Fourteenth Amendment doesn't get you over the line on the Commerce Clause.

Mr. Plouffe: I understand, Your Honor, that the Court can and in this case is looking at this under the Commerce Clause.

Unknown Speaker: And in looking at it, what test do we apply?

It appears to be facially discriminatory against interstate commerce, so it may be a tougher standard.

Mr. Plouffe: If we choose not to use something like the market participant exception, and therefore apply the dormant Commerce Clause to it, then the question is, is it, per se, a flexible approach, and the law court chose the flexible approach.

Looking at the per se question, I think there are three things we need to look at: the statute, the statutory language, and then if it survives that, the effects of the statute, actual effects, and incurred effects.

And the statute itself, as I said before, I think focuses on the benefits that are provided by the corporation and not by the--

Unknown Speaker: Well, but if you concede that even nonprofit organizations can engage in interstate commerce you can certainly look at this, let's say, in the nursing home context as being facially discriminatory.

Mr. Plouffe: --I respectfully disagree, Justice O'Connor.

On its face it's a tax, or an exemption from a tax on real estate, number one.

We've never considered real estate under the Commerce Clause here before.

Number 2, it looks at the identity of the people who are benefited, not the identity of the people who cross the State lines.

And so I don't think that there is facial discrimination.

And number 3, as the law court said, it treats all Maine camps the same.

Unknown Speaker: May I ask--

Mr. Plouffe: There's the target.

You can go out and meet the target if you want the exemption.

Unknown Speaker: --Do you think the people benefited do not include the church that runs the camp?

Mr. Plouffe: I'm not sure that I understand the question, Justice Stevens.

Unknown Speaker: Well, you say... you look at the people benefited, and I just suggest one of the people benefited would be whatever the charity it is that gets the benefit of an exemption.

Mr. Plouffe: The Christian Science Church in Boston, for example, the church is actually owned by a separate Maine corporation.

Unknown Speaker: And supposing it... just focus on the church for a minute.

Supposing the church is near the State line and over half the people came from out of State, would the church... would you say that the church should not get its exemption because the people benefiting from the exemption are the people that cross State lines?

It seems to me the principal beneficiary of the exemption is the church itself.

Mr. Plouffe: Well, again, I think that under Walz churches are treated differently by the Court.

Unknown Speaker: And we have a church here.

Mr. Plouffe: Excuse me, Your Honor?

Unknown Speaker: We have a religious organization here.

Mr. Plouffe: We have a nonprofit Maine corporation that is not itself a church.

Churches are treated differently under the Maine statute--

Unknown Speaker: I see.

Mr. Plouffe: --and the 50 percent just doesn't apply.

It's a nonprofit Maine corporation.

They have an affiliation somehow, and I'm not exactly sure how, with the Christian Science Church that do allow only Christian Science children in, and I believe that at some point during the day they review the tenets of the Christian Science faith, but it is not a church.

Unknown Speaker: I see, but let me ask one other... you place so much emphasis on the fact that it's a real estate tax.

If it were not a charity, you would not contend, I do not suppose, that in a commercial context that the State could discriminate... have a tax exemption for businesses that sold only to Maine customers and no tax exemption for those that sold out-of-State customers?

Mr. Plouffe: I think I have a couple of responses to that, Justice Stevens.

One, I think it would fail Fourteenth Amendment analysis.

Unknown Speaker: Well, under... just confine our analysis to the Commerce Clause--

Mr. Plouffe: --and would have under Green Acre B'hai, which is the main case.

Under the Commerce Clause, I suggest that because it is a... the implications of it being exempted from a tax of real estate is that it would fall under the flexible approach, but would fail under the flexible approach because there would be no legitimate State interest.

Unknown Speaker: --Well, the interest would be to encourage local commerce, encourage transactions within the State, encourage the local economy.

Mr. Plouffe: I do not think that that would survive.

Just--

Unknown Speaker: Well, supposing there were two camps, not charitable camps but just for-profit camps.

One served out-of-State, and the other served local, and they say, we won't... we'll give a tax exemption to those serving the local people.

Would that have the same justification as this?

Mr. Plouffe: --I don't think it would.

Maybe the charity is becoming involved in my thinking, but--

Unknown Speaker: Sure it would.

I'm just suggesting that the charity is critical to your argument, and you seem to... and I don't think your real estate argument can stand without coupling it with your charitable argument, but I'm not sure what your position is.

Mr. Plouffe: --I... again, if it's real estate, then I don't think it's facial, that it's an indirect effect on interstate commerce, and because it's indirect, you look at it under the flexible approach, but I think it would fail under the flexible approach because it would not... I can't conceive of a legitimate state interest, for example, in the motel situation that's raised in the reply brief.

I can't think of a legitimate State interest for taxing a motel--

Unknown Speaker: Providing cheaper housing for local residents.

Give them a cheaper rate at the hotels, if people have marginal income.

There's certainly a State interest in having people sleep indoors at night.

Of course, you could make all of those same arguments against the market participation exception we've created.

You can say it's the same thing.

The State is simply trying to give its own citizens an advantage over out-of-State.

We've made an exception there, and we've made an exception in the subsidy area, and the issue is whether we should make an exception for charities, whether that also is a distinctive situation.

Mr. Plouffe: --And again, under Regan... Regan, I'm sorry... this Court has clearly characterized charitable exemptions as cash grant subsidies.

The amici here say they're subsidies, and they are from the general fund of the Town of Harrison.

This tax goes into the general fund to pay for municipal services, police protection, fire protection, roads, and the very services that ironically benefit the petitioner, yet they don't want to pay the tax.

But the point of the general fund is the language in West Lynn Creamery seemed to be very interested in the fact that any subsidy had to come out of a general fund.

This is a broad-based tax.

All of the people in the Town of Harrison have to pay this tax.

Unknown Speaker: Mr. Plouffe, could you... going back to Justice Stevens' hypothetical, could you explain to me why it is in the case of the two profit-making corporations as to which a distinction is made the discrimination would not have been facial?

You said it would not have been.

You said it would get the, as you put it, the flexible approach, and I don't see why.

Mr. Plouffe: I think because we're talking about real estate, and we have never applied the Commerce Clause to the taxation of real estate which doesn't move across State lines, that effects that a tax on real estate, or an exemption from a tax on real estate have on interstate commerce are indirect.

Unknown Speaker: Why the fact that real estate doesn't move across State lines?

Why is that significant?

Mr. Plouffe: Well, the language of the positive Commerce Clause--

Unknown Speaker: I mean, interstate commerce is going to be affected whether you're doing it through a real estate tax or any other form of taxation.

Why should it matter that the specific race that is taxed happens to be itself nonambulatory?

Mr. Plouffe: --Perhaps I have a narrow view of the dormant Commerce Clause, but--

Unknown Speaker: Isn't it the effect on interstate commerce that we're concerned with?

Mr. Plouffe: --We are, but the question becomes, is it per se a flexible one.

I'm saying there isn't a... there could be in the hypothetical an effect on interstate commerce, but that it would be indirect and not subject to the per se rule, and I would also add that--

Unknown Speaker: Directness and indirectness hasn't got anything to do with the fact that it's real estate that's being taxed, number 1, and number 2, I don't know where the direct-indirect distinction comes from.

Mr. Plouffe: --Well, I think that the tax on real estate may or may not be incorporated into the charge made by the for-profit organization.

There are other ways that they could handle that.

If the competitive marketplace said, gee, we just can't pass on this tax and stay in business, we'll find other ways to deal with this in the marketplace, for example, reducing staff, or reducing overhead, those types of things, it's very indirect before it gets to the consumer.

And the other issue about the hypothetical is whether or not we are going to treat consumers as articles of commerce.

Unknown Speaker: Well, nobody is arguing that you're going to treat consumers as articles of commerce.

The argument is that interstate commerce... that is to say, the movement of people back and forth, the provision of services to people from out of the taxing State... is going to be affected.

Their argument isn't... they don't make the argument that the campers are articles of interstate commerce.

Mr. Plouffe: Well, they... I think they did in their first brief.

Let's put that aside.

They certainly do make it in--

Unknown Speaker: It escaped me, but it's clear in any event that they have abandoned any such attempt if they ever made it, isn't it?

Mr. Plouffe: --They certainly have not abandoned the attempt to say that the travel of these campers across State lines is protected by the Commerce Clause.

Unknown Speaker: Well, I... are you challenging that assumption?

Mr. Plouffe: I certainly am attesting that... challenging that.

Unknown Speaker: Interstate travel is not protected under the Commerce Clause?

Mr. Plouffe: I don't read Heart of Atlanta or Edwards for the proposition put forth by the petitioners.

Unknown Speaker: Do you think that interstate travel has an effect on interstate commerce?

Mr. Plouffe: I think the provision of interstate travel by bus companies, for example, does.

I think that salesmen who travel across--

Unknown Speaker: Wouldn't these campers perhaps arrive in Maine by bus, or by plane, or by train, or some such means?

Mr. Plouffe: --But we're not taxing the plane or the bus or the train.

Unknown Speaker: No, but we're asking whether interstate commerce is affected, and if it's affected by bus travel, then I suppose this is a case in which it's affected.

Mr. Plouffe: And I'm suggesting that it would be an indirect effect and subject to the flexible approach, but I still do not read those two cases for the proposition for which they want them to stand.

Unknown Speaker: How broadly do you take charities outside the dormant Commerce Clause?

I know your position here is that charitable exemptions, real property tax exemptions shouldn't be analyzed in interstate commerce, and you've given several reasons for that, but are you saying that nonprofits and whatever exemptions the legislature, State legislature chooses to give to them is ever and always, because they're nonprofits it falls outside the range of the Commerce Clause?

Mr. Plouffe: My argument goes so far as to cover an exemption from income taxes, which was the case in Regan, Federal income taxes, excise taxes, if they would pay... having occasion to pay them, and sales taxes.

We exempt them from sales taxes and income taxes and property taxes in the State of Maine, and if they are going to challenge the impact, how the lines are drawn by the legislature in granting those exemptions, then my argument would say--

Unknown Speaker: Do we--

Mr. Plouffe: --that it's under market participation, because in each one of those cases the State is asking something in return.

We may think that it's provincialism on the part of the State of Maine to write its statute this way, but I don't think that's the question.

The question is whether or not the State legislature in Maine can do this.

Unknown Speaker: --We would never think of accusing the State of Maine of provincialism.

[Laughter]

The... do you know of any case of ours that involves a Commerce Clause challenge to real estate taxes?

What cases of ours... or exemptions to real estate taxes.

Mr. Plouffe: I have found none, Your Honor.

I... The WHYY case is as close as I could come.

Unknown Speaker: That's very interesting.

Does it produce a sort of discrimination against out-of-State... an out-of-State church, for example, to give a tax exemption to any church that owns real estate, they're exempt from the real estate tax, but if you're an out-of-State church, of course, and happen to be located in a State that taxes church real estate, you're at a commercial disadvantage, I suppose, if you consider the attracting of parishioners as commerce.

Mr. Plouffe: I have great difficulty considering the attraction of parishioners as commerce.

Unknown Speaker: Garnering a collection plate.

[Laughter]

Mr. Plouffe: I would say that WHYY in this Court did strike down the distinction based on the domicile of the corporation, and that was a real estate tax, and that was a charity, but it was determined under the Fourteenth Amendment.

The Commerce Clause was not mentioned at all.

If there are no other questions, I thank the Court.

Unknown Speaker: Thank you, Mr. Plouffe.

Mr. Dempsey, you have 2 minutes remaining.

Rebuttal of William H. Dempsey

Mr. Dempsey: Thank you, Mr. Chief Justice.

I just have two comments.

The... one of the questions that Justice Scalia raised in terms of how old this statute is raises another question, and also your last question about property taxes, and that is, why hasn't this Court ever seen a case like this before, and the short answer is that legislatures have not passed statutes like this before.

Now, there have been scores, thousands of statutes that we don't know anything about, but we have examined, and the respondent has, the statutes on the books.

We have discovered one in the State of Michigan that can be considered comparable.

The respondent has turned up three more.

We deny that they're comparable.

But in any case, if this statute is not absolutely unique, it is almost unique, and that says something, because the policy of the Commerce Clause doesn't have to do just with economics, it has to do with interstate comity, and we suggest that this unbroken, almost unbroken pattern of behavior by the legislatures says something about how the States feel to meet the demands of interstate comity.

Now, the last point is Justice Connor's comment and Justice Scalia's comment, I hope it goes without saying, because I didn't say it, that our case is rooted in the basic premise that this statute is facially discriminatory against interstate commerce.

Justice Scalia, I think you're absolutely... I started with this notion in the petition of certiorari.

If you apply all the ordinary canons that this Court has established over the years dealing with these cases, the other side has got to lose, in my judgment.

The only way out is to create an exception for... I wouldn't say charities, nonprofit organizations comparable to the market participation or the subsidy charity.

Now, we've advanced all the reasons that we think that that would be an unwise move on the part of the Court, but that really I think is the issue.

Mr. Chief Justice.

Unknown Speaker: Thank you, Mr. Dempsey.

The case is submitted.

Attribution:

The Oyez Project

Featured:

General Motors Corp. v. Tracy - Oral Argument

Fri, 09 Jan 2009 14:50:07 +0000

Case:

General Motors Corp. v. Tracy

Media File:

95-1232_19961007-argument.mp3

Related Transcript:

1996_95_1232_argument.xml

Transcript:

Argument of Timothy B. Dyk

Chief Justice Rehnquist: We'll hear argument next in Number 95-1232, General Motors Corporation v. Roger W. Tracy.

Mr. Dyk.

Mr. Dyk: Mr. Chief Justice and may it please the Court:

This case involves the question whether the State of Ohio can discriminate against interstate transactions in the application of its sales and use tax of natural gas purchases.

If the purchaser in Ohio, such as General Motors in this case, purchases from a local public utility which supplies the gas through its own distribution lines, the sale or use is exempt.

On the other hand, if the gas is supplied by an interstate marketer of natural gas which has no distribution lines within the State, the purchase is not exempt, and this is--

Unknown Speaker: When you say discriminate, Mr. Dyk, you suggest that these two entities should be treated as equals.

Mr. Dyk: --Well, I--

Unknown Speaker: That there aren't really any factors that distinguish them.

Mr. Dyk: --There are no factors that distinguish them in our view, Mr. Chief Justice.

It's the same gas that can come from the same well, distributed over the same interstate pipeline, distributed through the same local pipeline, and the local natural gas company may or may not be selling tariff gas.

In other words, it may be--

Unknown Speaker: Well, but isn't it a public utility that we're talking about?

Mr. Dyk: --Justice O'Connor, it is a public utility, but the sales by the public utility are not regulated sales.

Unknown Speaker: Well, I'm very concerned about your theory, frankly, because it seems to me that your theory would really eviscerate public regulation of public utilities.

Mr. Dyk: Well, I don't think so, Justice O'Connor.

First of all, what we have here is our local public utilities, which are making to a very significant extent nontariff sales.

That's admitted at the very outset of the respondent's brief at page 1 and 2.

It's reflected in the record, in the Joint Appendix at pages 229 and 230.

As a result of local deregulation, natural gas public utilities in Ohio, and this is true in other States as well, are permitted to engage in the business of gas marketing.

In other words, they're largely unregulated.

All they had to do during the period in question was to file the contract with the public utility commission.

They in fact were allowed to do this, to engage in these unregulated sales, because they faced competition from these interstate marketers, and the public utilities--

Unknown Speaker: But I assume that the overall rate the utility can earn is limited by regulation.

Mr. Dyk: --Not in these sales, Justice O'Connor.

These sales are unregulated sales.

There is no tariff for them.

The price at which the gas is sold is not regulated.

The whole purpose of this was to allow these local public utilities to compete with the interstate marketers so they wouldn't have to sell pursuant to a tariff, so that they could engage in the same kind of competition, the same kind of discounting, the same kind of individual pricing that the out-of-State marketers--

Unknown Speaker: Was this a new statute, Mr. Dyk, or was... the statutory permission for the utilities to do unregulated sales, was that statute in effect during the tax period here in question?

Mr. Dyk: --It wasn't a statute during the tax period in question.

What you had was permission from the Ohio Public Service Commission to engage in these kinds of sales, and there was a 19... October 1987 order, for example, with respect to East Ohio Gas, which I'll lodge with the Court.

It's not in the record, but it is a public order of the commission which said yes, you can engage in these kinds of sales, and these went on for a number of years.

This is reflected, as I said, in the record at 229 to 230.

Then last June, this was formalized by statute for the first time, and the Ohio legislature said, you don't even have to bother to file these arrangements, these marketing arrangements, with the public utilities commission, you just go ahead and do it, and go on your merry way.

Unknown Speaker: Suppose the unregulated sales were subject to the sales tax so that there would be equivalence between the utility's unregulated sales and the interstate sales, would your case then go away, or would you still argue that there's discrimination?

Mr. Dyk: I still... I would--

Unknown Speaker: I take it your theory is that there's still discrimination.

Mr. Dyk: --I think that... that is not this case, but there is still discrimination involved, because the public utilities are allowed, under an Ohio law, to file volume discount tariffs and things of that sort which allow them to compete even under the tariffs, and this October 1987 order of the public utilities commission which I mentioned shows on its face that Northeast Gas in that particular case was able to compete and actually offer a lower price pursuant to these tariffs.

Unknown Speaker: But public utilities have a number of other burdens on them, do they not, particularly serving retail customers.

They may have to provide gas to people who can't pay the bill, or supply a certain amount of heat during the winter.

Mr. Dyk: They may, Mr. Chief Justice, but they also engage in this unregulated business, and the fact that they are a favored local industry, that the State wishes to protect theme, has not in this Court's other Commerce Clause cases been a sufficient basis for discrimination.

Unknown Speaker: But don't you have to look at their entire business, and not just the part that you single out?

Mr. Dyk: I don't think so, Mr. Chief Justice.

For example, in the Armco case, which is cited in the amicus brief of Columbia Gas, they had a situation where there was a discrimination against out-of-State wholesalers, and the theory was, well, we can treat in-State manufacturers/wholesalers differently, and the fact that you may combine competitive interstate business with some sort of local business doesn't justify discrimination under the Commerce Clause, and I understand the Court in that case to have directly addressed that question and to resolve it in favor of invalidating the discrimination.

Unknown Speaker: Mr. Dyk, when you say that these nontariff sales are not part of its regular business, is it also the case that for purposes of determining what their allowable rate of return will be, the profits they make from these sales are not considered, it's just the separate... they can make as much money as they want from these nonregulated sales, and it will not be considered in fixing their tariffs for the next year.

Mr. Dyk: That is my understanding, Justice Scalia--

Unknown Speaker: Well--

Mr. Dyk: --and the purpose of this is, what you have as a result of Federal deregulation is you have a lot of competition in the natural gas market.

Anybody can sell gas, transport it over interstate pipelines, and the same kind of deregulation has taken place at the State level.

You can take the gas over the local public utility lines and sell it.

Anybody can go into that business.

And as a result of this competition, what happened was that the local public utilities were suffering.

People were going to these interstate marketers, and the local public utilities commissions wanted to find some way of enabling these companies to compete with these new marketers, and the way they figured out to allow them to compete in many instances was to say, okay, we'll allow you, too, to make unregulated sales and to act as marketers, and to compete with these interstate businesses so you don't lose the in-State business.

Now, there's a very important reason for that, of course.

They wanted them to earn additional money to increase their profitability, but that did not come into account in fixing the rates pursuant to the tariffs for natural gas--

Unknown Speaker: --Mr. Dyk, may I ask you a question on that score?

You've indicated that the same intrastate pipelines are used by both the independent seller and the public utility, and are those pipelines owned by the public utility?

Mr. Dyk: --They're owned by the public utility, and--

Unknown Speaker: And how do they determine the charge for the gas sold that's delivered through those pipelines in the independent marketer sales?

Mr. Dyk: --Well, what you have is both open access... that is, people who are not in the public utility business have the right to use those transportation facilities... and so-called unbundling, which was a concept that originated at the Federal level but also exists at the State level, in which there are separate statements for transportation charges and the transportation charges have to be... has to be... have to be justified.

Of course, the public utilities really remain as public utilities when they're supplying the transportation service, but that's unbundled.

It's charged separately, and the rates are calculated separately.

Unknown Speaker: And those are... they're charged separately, but are they controlled by the State public utility commission?

Mr. Dyk: The transportation rates are still controlled by the State public utility commission, though in some instances even those transportation rates are now being individually negotiated.

But by and large those are pursuant to tariffs set by the public utility--

Unknown Speaker: If they're individually negotiated, it would seem to me that the market would take care of the disparity between the taxed and the no-tax sellers.

Mr. Dyk: --Justice Stevens, I'm not under... I'm not sure why I understand the market would take care of that.

What you have is the charges for the gas are stated separately, and if the public utility has an advantage, there's no 5 to 7-percent use tax on the purchases from them, they have an advantage over the interstate seller, who must sell to a purchaser, and the tax is on the purchaser, the purchaser has to pay this 5 to 7-percent tax, and in a business like this, which is highly competitive, 5 to 7-percent can be a significant amount of money and a significant advantage.

Now, what the State says is, oh well, we impose a gross receipts tax on the public utilities.

The problem is that the gross receipts tax doesn't satisfy this Court's standards for a compensatory tax.

It's not imposed on a substantially equivalent event.

It's not even imposed on the same people.

Unknown Speaker: Mr. Dyk, is it clear that for what you call the unregulated sales both before it was formalized in the law and under the new law, that those unregulated sales also escaped the sales tax?

Mr. Dyk: Yes, because the natural gas company is still a supplier of natural gas.

It is still a natural gas company which is supplying the gas over its own distribution lines within the State, and--

Unknown Speaker: Well, couldn't... could Ohio say, because the public utility has obligations that the State imposes on it, and because the regulated sales have bundled together these other aspects, while there won't be an escape from the sales tax entirely, there will be an allocation, so that only the part that's attributable to the commodity is subject to the sales tax and not the part that's attributable to these other items?

Mr. Dyk: --Well, there is no sales or use tax on the transportation.

There's only a sales or use tax now on the gas purchase, so what you have is a discriminatory situation, and these public utilities have the advantage of being able to act as gas marketers.

Unknown Speaker: Even with respect to the gas, the obligation that you must have enough supply to serve everybody at all times, could that be factored out so that you could make the gas sale of the regulated company similar to the unregulated sale?

Mr. Dyk: Justice Ginsburg, there are many ways that the State could achieve its interest here without discriminating against interstate commerce, as you suggest.

For example, if there is concern, and that's expressed in some of the amicus briefs in support of the respondent, if there's concern that residential customers shouldn't have to pay the sales or use tax on gas purchases, it's a simple matter to just exempt residential customers from the sales or use tax.

It's very easy to construct a system that treats equally purchasers from interstate companies and purchasers from local public utilities.

It's not hard at all, and there's no justification for the State framing it the way it does in a discriminatory manner.

I should add that--

Unknown Speaker: Well, you suggested that if there were an exemption for residential customers, no sales tax, that would be all right, but you're recognizing that there can be some recognition by the State that it is imposing, that this is a regulated industry.

What else could the State do to take into account the obligations that the regulated utility is under?

Mr. Dyk: --Well, obviously they could reduce the gross receipts tax, which appears to be what they've done in this new legislation of last June in House bill 476.

They don't have to impose this kind of gross receipts tax on public utilities, but what they can't do under this Court's jurisprudence is to say, we're going to have two identical purchases here.

On one of them we're going to have a use tax; on the other one we're not going to have a use tax.

There's a rule of strict equality here, and it makes particular sense in the context of this very highly competitive natural gas market, and this is not only true with respect to industrial purchasers, and industrial purchasers are the ones who suffered during the period we're involved in here, but it's going to happen in the residential market also.

These... there are tariffs being filed in Ohio and elsewhere, and I think this is again recognized in the Columbia Gas brief, that will allow competition at the residential level.

The whole industry is changing dramatically as a result of congressional policy, reflected in the 1978 and 1989 statutes and the implementing FERC regulations.

There's going to be competition at the residential level for gas sales between the public utilities and between the out-of-State marketers.

Unknown Speaker: I take it an apportioned gross receipts tax would be constitutional, and if everybody paid their gross receipts tax then your client's suppliers would pay an apportioned gross receipts tax.

Mr. Dyk: Well, I think it would be constitutional to have an apportioned gross receipts tax, except for the fact that you probably can't reach out-of-State sellers with a gross receipts tax because of Public Law 86-272, so the State would probably choose to approach it by having a use tax imposed on all people and to remit... as they apparently are seeking to do in the new legislation remit the gross receipts tax so it doesn't bear so heavily on the public utilities.

Unknown Speaker: Can you tell me, getting back to the unregulated sales that the utilities make, is there anything in the record that gives us an idea of the significance, the percentage of sales that were... the utility made that were unregulated sales during the tax period in question?

Mr. Dyk: No, there's no statistic for that.

What I think the record reflects is that about 20 percent of the industrial sales continued to be made by public utilities during the period, but there's no breakdown as to what part of that 20 percent is unregulated sales and what part might be pursuant to volume discount tariffs or other things of that sort.

Now, what... the State--

Unknown Speaker: Mr. Dyk, I just wanted to make sure, in light of what you said about, that even the residential sales are being deregulated.

You responded to me, to my question, what could the State do to recognize that this is a public utility?

You said, it could exempt sales to residential users, and you stand by that?

Mr. Dyk: --Well, I... sure.

Of course they could exempt sales to residential users, as long as a residential user who chooses to purchase from the out-of-State marketer as opposed to the in-State public utility is treated the same way.

Unknown Speaker: Right now, there isn't that choice, is there?

Mr. Dyk: In some places there is, but by and large there isn't.

It's a coming phenomenon.

It hasn't really arrived in substantial degree yet.

What Ohio supreme court said here is, well, we don't have any problem here, because this excise tax to be sure is not imposed on the local public utilities, but it is imposed on local gas marketers who are not public utilities under this Court's precedents for over 100 years, ranging from the Brimmer case way back when up to this Court's decision in Carbone.

The fact that some local people may be disadvantaged is no excuse under the Commerce Clause, and what the State is trying to do now... and this is not an argument that it made below and not an argument that was adopted by the Ohio supreme court... it is saying, well, the Federal regulatory scheme has blessed this discrimination that we have made in amendments to the Natural Gas Act that were passed in the early 1950's, which allowed the State public utilities commissions to continue to regulate the interstate gas market and effectively overruled this Court's decision in East Ohio.

And we've shown in our brief, I think, that these 1950 amendments had nothing to do with permitting discriminatory taxation by the States.

Even this Court's decision in East Ohio recognized that the tax doctrines really didn't have much to do with this and it was addressing itself only to regulatory issues.

But I think the most significant thing is not that Congress in the fifties authorized this kind of discrimination, but that Congress in the seventies and 1980's has taken a very strong position that it wishes to have a competitive natural gas market, that it has taken actions again and again and again to create a competitive natural gas market in this country, and it has recognized that natural gas is a commodity which should be treated separate from transportation... in other words, this is the unbundling aspect of it... and it has said that it wants all the competitors who were selling natural gas to have an equal opportunity, and if there's any Federal policy here, we respectfully suggest, it is a Federal policy that everybody should be treated the same and--

Unknown Speaker: Mr. Dyk, can I interrupt you for just a second?

In response to Justice Kennedy, you said that the record indicated that about 20 percent of the utility sales were industrial sales, but you don't know how much of those were un... pursuant to volume discount tariffs, and how much were unregulated.

Assume they were all pursuant to volume discount tariffs.

Would you win or lose this case?

Mr. Dyk: --Well, I think we would still win, because I think whether the public utility sales are made pursuant to tariffs or are unregulated, that in either event the public utility is a competitor with the out-of-State marketer, and that--

Unknown Speaker: But without the power to set its own prices.

Mr. Dyk: --Well, it has the power to set its own prices in the sense that it can propose tariffs, some of which may be marginal cost tariffs rather than fully allocated tariffs.

Unknown Speaker: Let me put the question a little differently.

The record doesn't tell us how much the 20 percent is unregulated and how much isn't, and I suppose you have the burden of establishing unconstitutionally generally, and if the amount of unregulated sales are critical to your case, I suppose you have the burden of showing us how many they were, so is it correct that we should decide the case on the hypothesis that all of those 20 percent were actually regulated?

Mr. Dyk: Oh, I don't think you need to do that, Justice Stevens.

I think this Court has made clear in a lot of cases that if there is even a small discrimination against interstate commerce; and if you look at the unregulated sales as being the only significant ones, which we don't, there were still some of them, and for example, in Associated Industries and Bacchus the court has said, well, even if the favored sales are very small in volume, and maybe wouldn't be considered economically significant, there's no de minimis doctrine under the Commerce Clause.

It's still invalid.

You just can't discriminate.

Unknown Speaker: Would the whole tax be invalid, or only the tax as applied to those sales, assuming that the tax as applied to other sales by the utility is okay?

Why would we strike down even the sales that were pursuant to volume discounts?

Mr. Dyk: Well, I don't--

Unknown Speaker: Tariff volume discounts?

Mr. Dyk: --Justice Scalia, I don't think you're striking down particular sales that were favored.

I think what you are doing is saying, you can't disfavor the General Motors purchases from the out-of-State marketer of natural gas, and the fact that there is only a small volume of favored sales doesn't matter, that the whole volume of disfavored sales is still treated unconstitutionally.

Unknown Speaker: Just what does the record show about, not the volume of discount sales, but the unregulated sales of the utility?

Mr. Dyk: It shows that they occurred, at pages 229 and 230, and as I mentioned at the beginning of the argument, in the very outset of the respondent's brief they mention that these sales occurred, too, and it's confirmed in the amicus brief in support of the respondent filed by Columbia Gas Company.

Unknown Speaker: And your position is, even if only 1 percent of the 20 percent was this kind of sale, your client is exempt from paying the sales tax, the use tax.

Mr. Dyk: Well, it is until the sales tax is made constitutional, that our view is that any amount of discrimination against interstate commerce and in favor of a local seller or a purchaser from a local seller is unconstitutional, and I think that this Court has never required that there be a particular volume of discrimination, and I think it's made quite clear that it doesn't matter what the scope of the discrimination is, it's still forbidden.

Unknown Speaker: Well, again, I take it your view, even if zero percent is unregulated, it's unconstitutional.

The discrimination exists.

Mr. Dyk: Well, yes, Justice Kennedy, my position is that it's still unconstitutional, but that would be on a different theory.

I think obviously there have to... on the theory that the discrimination here is between unregulated sales by the public utility and the out-of-State marketer, there has to be some volume of sales.

There is.

The record confirms that, and the amicus brief confirms that.

But I think, as you suggest, we would also say that even if there had been no sales, which is not the situation here, even if there had been no sales we would still prevail in this case because you can't--

Unknown Speaker: How can an amicus brief confirm a factual question?

I mean, I can imagine the record might.

Mr. Dyk: --Well, the record does confirm that.

Unknown Speaker: But how can an amicus brief do it?

Mr. Dyk: Well, it's an amicus who's in this business and who said--

Unknown Speaker: But the State isn't bound... the State may... the respondent may be bound by its statements in its own brief, but certainly it's not bound by statements in some amicus brief, even though the amicus is in support of the respondent.

Mr. Dyk: --Well, I'm not suggesting they're bound by it, Mr. Chief Justice, and I think the record and the public orders of the public utilities commission and the respondent's brief provides ample evidence that these kinds of sales occurred, and occurred during the period that's involved here.

Unknown Speaker: Mr. Dyk, who was the witness who was testifying at 229 and 230?

Is he your witness, or the State's witness?

Mr. Dyk: I believe it's the State's witness, but if I look at the record here for a moment I can tell you.

Unknown Speaker: It's a Mr. Duffy.

Mr. Dyk: No, that's the counsel.

Mr. Duffy's sitting here.

He wasn't the witness.

Unknown Speaker: He would like to have testified.

Mr. Dyk: It's the tax commissioner's witness.

Unknown Speaker: Mr. Dyk, you would be making the argument that you're making even if every sale by the public utility was regulated.

Mr. Dyk: Yes, I would because--

Unknown Speaker: And would you spell out what that argument is?

Mr. Dyk: --Well, I think the argument is that where you have a competitive gas market like this, and... you cannot favor an in-State interest simply because it has public utility status, and I think this Court's decision in Buck and Kuckendall, which is 267 U.S., dealing with motor transport... it's an opinion by Justice Brandeis from 1925, but I think it's still good law... says that you can't come in here and say, well, this is a market that needs to be regulated and we're going to require certificates of public interest, convenience and necessity, we're not going to let people compete from out of State.

I think the argument that you could treat a public utility differently might have had and made sense 20 years ago.

I don't think it makes sense now.

There's a competitive market, there's a competitive market there as a result of national policy, and I think even if you had nothing but tariff sales, that you couldn't discriminate against the out-of-State marketers.

That wouldn't be permissible under the Commerce Clause.

Unknown Speaker: You're saying that to do that under this market is really to adopt by subterfuge a compensatory tax justification, I take it, then.

Mr. Dyk: Well, I... certainly it's possibly based on that.

They suggest that it's designed to compensate for the gross receipts tax, and our answer is, fine, if you think the gross receipts tax is a problem, fix the gross receipts tax, but have equality in the use tax so that some sellers are not advantaged and others disadvantaged.

Mr. Chief Justice, I'd like to reserve the remainder of my time.

Unknown Speaker: Very well, Mr. Dyk.

Mr. Sutton, we'll hear from you.

Argument of Jeffrey S. Sutton

Mr. Sutton: Thank you, Mr. Chief Justice, may it please the Court:

I'd like to start by addressing an argument that I began thinking about about 8:00 last night, and that is the nontariff argument that was just made.

It's a very clever argument, because what it does is try to take on what I think is our best argument.

Our best argument is that the marketers are trying to have their cake and eat it too.

They want the benefits of utility status, but not the burdens.

And what General Motors is now saying is, they're saying, well, that's not actually true, the utilities are trying to do the same thing, and that's the reason they've relied on this 1987 order, and that's the reason they suggested that there actually were nontariff sales by utilities during the audit period.

That's a great argument.

It's just not supported by the record or by the law.

It's not supported by the record because if you look at pages 229 and 230, it doesn't make any indication that there were actually nontariff sales during the audit period, 1987 through 1989.

There's nothing in the record at all that indicates that.

The notion that 20 percent of the sales to industrial consumers were nontariff sales is also unsupported.

That's simply not true.

But let me--

Unknown Speaker: Well, do we have to take this case on the basis that we assume they were tariff-regulated sales?

Mr. Sutton: --Your Honor, yes, I think you do, but I can make another point, and that is that even if they were nontariff sales, let's say the record actually did support their argument, they've got another hurdle to clear, and that's that Ohio has a doctrine called the dual capacity doctrine.

What the dual capacity doctrine says, and we've cited a case called American Transportation in our brief that deals with it, the dual capacity doctrine acknowledges that utilities can sometimes operate as utilities in a tariff setting, and then other times they can be operating like other businesses.

In this instance, it would be a marketer.

A good example is precisely the facts of American Transportation.

That was a situation where a utility... it happened to be a motor carrier... decided to get into the business not just of delivering services, that is, transporting people or goods, they decided also to get into the business of actually manufacturing part of the trucks, and they thought they could do that and still get utility status with respect to certain tax benefits.

They didn't get it, and the Ohio supreme court recognized that very doctrine.

There's a recent decision that we relied on in our brief called Carnegie, which makes the precise same point.

It was decided less than a year ago, and recognized that you can operate in one setting as a utility, and in another not as a utility.

Unknown Speaker: This is a decision of the supreme court of Ohio?

Mr. Sutton: The Carnegie decision, Your Honor, is not.

The American Transportation decision is an Ohio supreme court decision.

The Carnegie decision is a decision from the Ohio Board of Tax Appeals, which is our intermediate tax court.

It applies throughout the State.

It binds the tax commissioner, the PUC, and the Attorney General's Office.

Unknown Speaker: Was that the decision that said an out-of-State public utility regulated by some other State but not Ohio remains a public utility even though it's acting as a marketer in Ohio?

Mr. Sutton: Your Honor, that is the decision.

Unknown Speaker: And is... are you adhering to that decision?

Are you adopting that decision as part of your position, that once a public utility always a public utility, whether in Indiana, Pennsylvania, Ohio--

Mr. Sutton: Your Honor, the candid answer is the Ohio supreme court and the Ohio courts are wrestling with that issue right now.

The dichotomy they're trying to deal with is, do you decide it's a status-based inquiry, once a utility, always a utility, or do you look at the activity and determine on a case-by-case basis whether they're acting as a utility?

The American Transportation case seems to take this case-by-case, activity-by-activity approach.

We're not saying Carnegie should be good law, should bind this Court, should bind the Ohio supreme court.

The reason we're relying on Carnegie is for a very different point.

We rely on it to show that there are no facial lines here, that the Ohio supreme court has yet to address the question whether utilities actually are defined by State boundaries, so that was part of our alternative argument, Justice Ginsburg.

Unknown Speaker: --Well, to the extent the case is as you first described it, it's... and I was listening to it.

It seemed to me to help Mr. Dyk's position more than yours, i.e., that this is not a utility for some purposes, and therefore it should be comparable to the out-of-State suppliers that sell to GM.

Mr. Sutton: Your Honor, that's not true, and if I said that, I misspoke.

Every single--

Unknown Speaker: You didn't say that.

It was just the inference I was drawing, and maybe I'm--

Mr. Sutton: --Well, I mis... would it be, I implied, you inferred.

The thing I'm trying to say is that the utilities in this instance, all of the sales, every single sale at issue in this case was a tariff sale.

There's absolutely no evidence that any were nontariff, and so they simply can't rely on that argument.

That's my first point, that it's just--

Unknown Speaker: --Well, it may be the next case, but can you tell me under the new law, are the unregulated sales exempt from sales tax?

Mr. Sutton: --Your Honor, the new law does not address that.

Unknown Speaker: Well, either they're... they have an exemption under current law.

Does that exemption apply to the unregulated sales?

Mr. Sutton: Your Honor, what I'm saying is, the new law went into effect a month ago.

To my understanding, it does not address the question what happens to a nontariff sale, so it's not simply... it's not been decided by the General Assembly of Ohio, and it's not something the Ohio courts addressed--

Unknown Speaker: Yes, but until that law of a month or so ago, during the period developed in this lawsuit, if the utility made unregulated sales, they were exempt from tax.

That's clear, I think, is it not?

Mr. Sutton: --Your Honor--

Unknown Speaker: If they made any.

Mr. Sutton: --Your Honor, it's not entirely clear.

That is not entirely clear, and that goes back to the American Transportation case.

The American Transportation case was a situation in which the utility was acting as a manufacturer, and it was treated like a manufacturer in that capacity.

My guess, my assumption is that they're probably going to treat utilities across the board as regulated entities when it comes to tariff or nontariff sales, but that's just not been decided by the record.

In fact, in the order they're citing, this 1987 order, the utility was not even allowed to earn a profit on the gas.

It was acting as an agent of the producer, so the nontariff hypothetical they're positing is one, not only it wasn't presented there, I'm just not sure what the precise facts are that they're talking about.

Unknown Speaker: Mr. Sutton, did you want us to decide this case on your assumption, or would you be content with a narrow decision that says, at least since we don't know in this case that any nontariff sales are exempted from the tax, it's certainly okay to exempt tariff sales from the tax, it's certainly okay to exempt tariff sales from the tax, and that's all we have to decide?

Mr. Sutton: Your Honor, that's correct.

That's precisely correct.

There's--

Unknown Speaker: You'll... what's correct, that you'll take the latter?

Mr. Sutton: --Absolutely, Your Honor.

Unknown Speaker: Take the latter and run.

Mr. Sutton: Absolutely, which is precisely the way the--

[Laughter]

Unknown Speaker: Right.

Mr. Sutton: Which is precisely the way the case has been argued, or briefed at least, until now, the assumption being that they all were tariff sales.

Ohio's not contriving this regulatory distinction between utilities on the one hand and all other businesses on the other.

It's been with us for as long as we've had a dormant Commerce Clause, and it's a distinction that in one way or another is reflected in the statutes of every State in the country, including the District of Columbia.

What's going on in this instance, and the danger presented by this case, is that you've got a situation in which marketers have been allowed to enter a natural gas business, they've been allowed to enter the business in an unregulated capacity, which as they acknowledge is critical to this business being... even being in existence.

What they're now trying to do is reach over this regulatory wall and pick off some of the benefits of utility status without sharing in any of those burdens.

That simply just doesn't make sense as a matter of Commerce Clause jurisprudence.

Unknown Speaker: Well, they're just saying, you know, we don't want all the benefits.

There are a lot of other benefits you can give to utilities.

All they're saying is, there's one particular benefit you can't give to utilities, and that is, in transactions that are equivalent, giving them a commercial advantage by reason of your tax.

I mean, you can help these utilities a lot of different ways.

You don't have to do it this way.

Mr. Sutton: Your Honor, these transactions, however, simply aren't equivalent.

There's nothing about them that is equivalent.

In one setting you have prices that are set by the free market, what the market will bear.

The obligations that the seller takes upon themselves are solely obligations that are a matter of contract.

On the other side of the line, you have a completely different sale.

Unknown Speaker: You're assuming all tariff... all these sales were tariff sales.

Mr. Sutton: Absolutely.

The rates are not set by the seller, so they can't price-compete.

They have a public duty to the whole State, to all consumers.

That public duty requires them to supply natural gas on demand at all times in the year, on the coldest day of the winter.

What's critical about that, and what makes these two transactions so different, is that utilities, as a result of their public duty obligation, must enter into long-term contracts to make sure the commodity is available on the coldest day of the winter, and they must also reserve space on interstate pipelines to make sure that they can ship it when they need to.

Unknown Speaker: What if you have a long-term contract by the independent marketer who... that contains all those provisions, we'll deliver gas when it's cold, and we'll guarantee that it will be there and the pipe will be.

Why then are they different?

Mr. Sutton: Your Honor, because in that instance they would be imposing those obligations upon themselves as a matter of contract, not as a matter of State law.

They would be able independently to bargain, both the buyer and the seller, as to whether they wanted to do that.

But let me add another point, Your Honor.

Unknown Speaker: But the other thing that's puzzling about it, the whole rationale for regulating the prices of the utilities are to prevent them from charging too much.

Mr. Sutton: That's absolutely... that's absolutely correct.

Your Honor, the other problem that marketers are going to have in the situation, I think ultimately there's an end game here.

The suggestion that deregulation that is started at the Federal level is going to inexorably extend to the State level, I think is mistaken.

I think there's a stopping point, and the stopping point is that if you're going to have State utility laws like Ohio does that require utilities... and let's say they impose it on marketers as well... to make sure natural gas can be supplied year-round, what happens is, you end up in a situation where the marketer has to own pipeline.

There's simply no way the marketer can guarantee, if he or she does not own pipeline, that natural gas is going to be supplied year-round on the coldest day of the winter.

That is a business that utilities will always control, utilities always will have to control.

That's something marketers can never do.

They can say as a matter of contract we'll do our best, but the reason they can't guarantee it is, someone else owns the pipeline, and that's the public utility, so that's a fundamental distinction.

It's a fundamental distinction that will always be there, and I think as a matter of a State's police power, it's properly always going to be saying to itself, we've got to have a utility industry.

It might be a different utility industry than we had 20, 30 years ago, but the reason we need a utility industry, the reason we can't keep going down this deregulation road, is people die if they don't have heat in winter.

There's no elected official I know of that's going to let the private market, in simply contracts between buyers and sellers, determine whether natural gas is delivered in Cleveland, Ohio, in January of a given year.

Unknown Speaker: We do it for food.

Mr. Sutton: Your Honor, in the food setting, number one--

Unknown Speaker: It's no less essential, and we don't feel the need to have the Government take over bread distribution.

Mr. Sutton: --The distinction between food, Your Honor, and natural gas is that in one you've got a natural monopoly setting and in the other you do not.

There's nothing about the delivery of food that requires you to lay pipelines, telephone wires, or some other form of distribution system to get the good, the commodity from the producer or wholesaler to the individual consumer, so a State would never go down that road because they wouldn't need to.

What's unique about your natural monopolies is, it's a situation where monopolies are actually a good thing.

They're a good thing visually because no one wants pipelines criss-crossing their State more than necessary.

They're a good thing economically because they're much more efficient.

It's much more efficient to have one natural gas pipeline, or two or three at the most, serving an area, than it is to have several.

All economists would agree with that.

That's a problem, Your Honor, that just doesn't exist in the food setting or in other commodity settings.

It just doesn't exist.

I'd like to make another point.

Unknown Speaker: Mr. Sutton, what about Mr. Dyk's argument that of course you can recognize that these are public utilities, but not by the sales tax exemption so long as you're imposing a compensating use tax.

You can adjust the gross receipts tax, you can exempt residential sales.

How do you respond to that?

Mr. Sutton: Our principle argument, Justice Ginsburg, beyond the argument that they're differently situated, is that these are actually transactions that can't be reconciled.

I don't think the court under the guise of the Commerce Clause should be forcing States to reconcile what are inherently irreconcilable transactions.

The reason they're irreconcilable is number 1, because one involves the sale of a naked commodity, the other is a commodity in the service, so they're just, to begin with, different transactions, different in a way that would be true of other sales services versus just a sale.

The other difference is, of course, the rate control and the duty you have to the public.

I don't know quite how... I mean, if the Court... let's just take as an example, if the Court's decision, God forbid, were okay, Ohio, when it comes to public utility sales, you now have to put a 5 to 7-percent tax on all of those sales.

Why... why is that compensating?

It's not clear to me that it's compensating.

It's not clear to me that there's any more integrity in that system than there is in the current one, and that's because the transactions and the sellers are so very different.

In fact, I think this Court's compensatory tax cases most recently Fulton, from just last term, and Associated Industries from three terms ago, stand for that very point.

In rejecting... in rejecting the State's efforts to establish that there was a compensatory tax which justified discrimination, the Court was saying, in effect, we're not going to look at apples and oranges comparisons.

They've got to be mutually exclusive proxies before you can justify a discriminatory tax.

Unknown Speaker: Do most States or almost all States decline to impose sales tax on gas or electricity sold through a utility?

Mr. Sutton: Your Honor, there are seven State statutes which are cited in the Kansas amicus brief that are precisely like ours.

I should note one of them is from the District of Columbia, which of course is something Congress controls and would create, I think, an anomaly here if Ohio was forced to make this change, the District of Columbia would not.

Unknown Speaker: Do other States... you say seven don't.

Does that mean that--

Mr. Sutton: No, I'm sorry, seven have precisely the same system we have.

I'm not aware of the numbers that have, you know, one form of tax and another.

Unknown Speaker: --You think Congress controls the District of Columbia more than it controls Ohio?

I mean, the only point is, Congress could change it in the District of Columbia.

It certainly could change it in Ohio if it wanted to.

Mr. Sutton: Oh, absolutely.

I agree completely.

The point I'm saying is, you have a situation where a different branch of Government would be compelling Ohio to do something.

It would be a branch of Government that couldn't compel the District of Columbia to do it.

I think that's an anomaly.

In fact, Dean Milk, the 1951 case, suggests that's quite relevant.

What is Congress doing with respect to the District of Columbia in an interstate commerce discrimination setting?

But Justice Kennedy, I want to come back to your point, because I think it's an important one.

There are... of the States that have taxation systems with respect to utilities and other businesses, 31 divide their taxation systems between those entities that are public utilities and those that are other businesses.

The problem with General Motors' position in this argument, and I think this also responds to something, Justice Ginsburg, you were asking, is that if you say Ohio has to endorse or adopt a sales tax that's precisely the same for marketers as it is for utilities, then you're going to have to go down a road which requires you to examine the differential treatment in each of these 31 States for utilities on the one hand and other businesses on the other.

I can give you an example of how that plays out in Ohio.

In Ohio, all businesses are required to pay what is effectively an income tax.

It's a corporate franchise tax.

Now, utilities don't pay that tax.

They've never paid it.

They pay lots of other taxes.

In fact, they're a very heavily taxed entity.

But if we lose this case, the next case, and it's one that should be filed the next day, would come in and say, marketers should no longer be forced to pay a corporate income tax, and the reason is because their competitors, public utilities, do not.

Westinghouse would require that very proposition if you adopted the view that they're similarly situated entities that must be taxed and treated the same.

Unknown Speaker: Why do you figure Westinghouse?

Mr. Sutton: Your Honor, because Westinghouse was a case involving corporate taxation, and I'm making the point that this would be a corporate taxation setting.

Westinghouse establishes that you can have a Commerce Clause discrimination at the corporate level... in other words, where sellers are being taxed differently at the corporate level depending on whether they sell in-State or out-of-State, so while I don't want to be arguing against myself if we lose, I'm just making the point that this would be a problem that would come down the road.

That's just the income tax.

There are other problems as well.

Why is it that utilities, for example, should get franchises?

Why should they get exclusive areas where they alone sell a product and no one else does?

It seems to me that if General Motors is correct--

Unknown Speaker: Of course, in most of those situations they don't have competitors.

Mr. Sutton: --Most--

Unknown Speaker: This is an usual case, because a public utility has a competitor for a significant part of its business, but in most public utility regulation there's... it's a natural monopoly and there's no competitor to be concerned about.

Mr. Sutton: --I'm not sure I'm following that, Your Honor.

I mean, the point I'm making is that utilities get a franchise.

That franchise allows them to be the distributor of all natural gas in that area and, if they're asked, to be the seller of the gas and the service.

What I'm saying is that General Motors and its marketers would be allowed to come in and say--

Unknown Speaker: Maybe they could get Congress to pass a must-carry provision.

[Laughter]

Mr. Sutton: --I thought I should have read the briefs below in the case before.

The other point I'd like to make, Your Honor, and I think this is... as I read your decisions in the Commerce Clause area it's an efficiency inquiry.

I know some of you have disagreed on that point, but it seems to me if you look at the Court's most aggressive Commerce Clause cases, what I see going on is an efficiency inquiry.

Is the State doing something that is compelling an activity that could be done more efficiently somewhere else within its borders?

That's what I see the Court saying in Carbone.

That's what I see it saying in West Lynn Creamery, and certainly Boston Stock Exchange.

I think fundamentally General Motors is a problem in that area.

I don't see the efficiency problem going on here.

We know, if you look at the natural gas industry and divide the different transactions that go on, there's nothing we're doing discriminatory with respect to solicitation.

That can be done by utilities and marketers anywhere, in-State, out-of-State.

We're not doing anything with respect to where the gas originates.

Is it from Ohio?

Is it from Texas?

There's nothing there.

What we're doing that's discriminatory, we're told, is with respect to the ultimate distribution.

The problem with that efficiency argument is, there's absolutely no way as a matter of common sense and economics to have a more efficient distribution system of natural gas in a State other than Ohio.

That can't be done.

In Ohio, an elected official that said we ought to ensure that the distribution lines are working properly in Indiana would be laughed out of office.

There's an inherent nature to utility sales that they have to be in-State.

There's nothing wrong about that, and as long as Ohio is not saying as a precondition to being--

Unknown Speaker: Well, to say there's an inherent nature that they have to be in-State, the reason they have to be in-State generally is because of a legal provision.

It's that Indiana won't allow an Ohio public utility to come into Indiana, and vice versa.

Mr. Sutton: --Well, I mean, actually Ohio would allow an Indiana utility to come into Ohio.

What Ohio would say is that if you're going to take on an obligation to supply natural gas year-round to every corner of the State, you've got to own pipelines here, and that's the problem.

You can't--

Unknown Speaker: Are there any... are there any Indiana utilities which presently serve retail customers in Ohio?

Mr. Sutton: --Your Honor, I am not aware of any, but I will say this, and it's reflected in the amicus brief of Columbia Gas, Columbia Gas is a great example of a national utility.

They have utility operations I think in at least four States, including Ohio.

There's nothing about Ohio law that says an Ohio... an Hawaii-owned utility can't buy transportation lines and take on the obligations of an Ohio utility.

Unknown Speaker: And that would be the case for the Indiana utility, the Chief Justice's... if that Indiana utility did provide services in Ohio, it would become an Ohio utility as well, right?

Mr. Sutton: Absolutely.

Absolutely.

The point I'm making is--

Unknown Speaker: Now we still have in limbo, Mr. Sutton, that Carnegie you sort of cite, and you say, I want to use it whichever way I can use it, but that seems to be at least one tribunal in Ohio saying, if you are a public utility any place, we'll treat you as a public utility here, even though you're acting as a marketer here.

Mr. Sutton: --Right.

Your Honor, I want to make it perfectly clear, Carnegie helps us.

The reason Carnegie helps us is because that's a setting, or that's a case that suggests of a utility transaction took place outside of Ohio... in other words, we're not dealing what the Chief... Mr. Chief Justice was just asking about.

The utility transaction actually takes place in Indiana alone.

Carnegie suggests you would still get the use tax exemption.

The reason we're relying on Carnegie... and I want to make it clear, it's for a very narrow ground for this decision.

The reason we rely on Carnegie is, it shows that Ohio treats, or at least potentially treats utilities the same whether they own transportation equipment in Ohio or outside of Ohio.

We're trying to... we're taking on the facial absolutism component of General Motors' argument, the notion that you own... you set a requirement that you own transportation equipment in the State, and because you do that that's a facial line, it discriminates against other entities, you lose.

We're saying, that's not true.

We can even respond to the facial absolutism argument.

Unknown Speaker: Well, but you can't be exempted from the sales tax as a utility unless you own pipes, pipeline in Ohio, isn't that so?

Mr. Sutton: No, that's precisely the quandary that Carnegie suggests, and here's why that's true, Your Honor.

You get the benefit of the use tax exemption if it would be a transaction that would be exempt had it been a sale in the State, okay.

If we have an Indiana transaction, what happens is the Indiana utility sells to General Motors or Pipeline, uses its transportation equipment, it winds up in Ohio, there's an argument... it's an argument that there's a use tax applicable.

That is not our preferred ground.

In fact, I think it would be dangerous for the Court to issue an opinion that suggests that in 1996 or 1997 that the only way utilities in this country... and it's just not natural gas utilities, it's all utilities... the only way they can be constitutional is if you don't have a requirement that they own transportation equipment in the State.

I think that's an odd rule, and that's why our fundamental argument is that they're differently situated entities, and even if Ohio law does require you to own the transportation equipment within the State boundaries, it's still constitutionally permissible under the Commerce Clause.

Unknown Speaker: May I ask, just supposing, if Ohio wanted to, could it impose on the competitor, the independent marketer that sells to General Motors, an obligation to sell only at the same price that the utility can charge?

Mr. Sutton: Your Honor, I think in this instance they'd have difficulty doing that, because the transactions occurred out of State, so that they simply couldn't do that.

But to answer your question with respect to what happened if it were in-State, and that happens here, some of these transactions were by in-State marketers, absolutely.

In fact, I think it's important--

Unknown Speaker: And also, I suppose, could require them to supply their customers in the winter even if they don't pay their bills.

Mr. Sutton: --Oh, Your Honor, that's precisely... it's ironic why we're here.

The reason we're here is because back in 1982 some marketers came to Ohio and said, listen, we'd like to sell natural gas, but we'd like to do it in a deregulated capacity, and Ohio at that point had the choice to say, no.

You're a utility, or you're not a utility, and we could still do that under the Natural Gas Act.

But Ohio chose not to, and what Ohio chose to do was to say, well, we think deregulated gas is a good thing.

It's particularly good for industrial consumers.

We're just... the only thing we're going to condition it on is that there's a regulatory line, and if you're on the deregulated side you get the benefits and burdens of it, if you're on the regulated side you get the benefits and burdens as well, but you can't pick and choose.

Once you're one you have to comply with all of those rules and all of those laws.

Unknown Speaker: If they were compelled to comply with the rules, then of course they could not... they would also get the tax exemption, you're saying.

Mr. Sutton: Oh, yes, absolutely.

Absolutely.

They of course would ultimately probably have to get transportation equipment as well, right.

This gets back to the point we were talking about earlier, that Ohio... the Ohio Public Utilities Commission, it's elected officials, can't be certain that a company will be able to provide natural gas whenever it is needed, however cold, unless that company owns transportation equipment, so I think fundamentally... I mean, I don't know of an Ohio opinion that says that, but I think as a practical matter, they probably would end up saying that very point.

Unknown Speaker: Mr. Sutton, just to clear out one thing, you're not arguing standing any more at this--

Mr. Sutton: No, we're not, Your Honor.

Your Honor, I'd like to very briefly address the congressional authority argument that we have also raised.

Let me tell you why it's a difficult argument, but why I think we can still make it.

It's a difficult argument because back in 1938 when the Natural Gas Act was passed, and again when it was amended in 1953, I don't think it was in any Congressman or-woman's mind that they needed to pass this law to constitutionalize the status of utilities, so that's a problem I had.

It simply just wasn't something they were after.

They were trying to fill a regulatory void with respect to interstate transportation of gas.

But that said, the language does the trick.

The language indicates that there's a dichotomy between all retail sales on the one hand and all wholesale sales on the other.

In this instance, that's all we have.

All we have are retail transactions, and under section 1(b) and (c) of the act, which is codified at 15 U.S.C. 717b and c, that's precisely what Ohio's allowed to do.

Now, General Motors has argued that's not true.

The enabling language simply gives you authority to regulate rates, services.

It doesn't use the magic words, tax.

We don't think Congress had to use the magic words, tax, in order to bless this form of transaction, and the reason is straightforward.

Number 1, the text of the Commerce Clause itself, of course, uses the word regulate.

It says nothing about tax, and we wouldn't be here if the word regulate in the Constitution didn't cover discriminatory taxes, so that's a starting point.

A second point is a matter of common sense.

As this Court has indicated, is the word regulate does cover tax.

Indeed, in General Motors' own opening brief at page 28, and again in one of their amicus briefs, at page 13 of the Chamber of Commerce brief, they made that very point.

The Chamber of Commerce said, what's going on here is Ohio is using taxes as a back-door way to regulate marketers, so I think as a matter of common understanding, everyone understands the broad term regulate to cover taxes.

There's another reason why this is legitimate, under congressional blessing, and that's the fact that what Ohio has done to all of the marketers... and I think this is important for the Commerce Clause issue as well.

What Ohio has done is treated the marketers like all other businesses.

Unknown Speaker: --Thank you, Mr. Sutton.

Mr. Sutton: Thank you, Your Honor.

Unknown Speaker: Mr. Dyk, you have 5 minutes remaining.

Rebuttal of Timothy B. Dyk

Mr. Dyk: Just very briefly, Mr. Chief Justice, Mr. Sutton suggests that he's not sure, but maybe these unregulated sales by public utilities would not be taxed, would not be exempt.

There's no basis for that in the statute.

The statute does not distinguish between regulated and unregulated sales by public utilities.

All public utility sales are exempt.

All natural gas sales are exempt.

And while we think the interpretation of the Carnegie case that they supply is not correct, if that interpretation is correct, what they're saying is, anybody who can claim the status of public utility can come into any part of the State and make exempt sales as a gas marketer, whereas the out-of-State companies are never going to get the exemption if they can't claim that public utility status.

The congressional policy here, we suggest, is clear.

It's in favor of competition.

It's in favor of allowing everybody to compete on an equal footing.

We respectfully suggest that that policy leads to the same conclusion that this Court's Commerce Clause precedents do, and that is the discrimination here is not acceptable.

Unknown Speaker: What's your best case that we look to of congressional policy in determining whether or not there's a violation of the dormant Commerce Clause, some of the rubbish cases, or... I can't think of a Commerce Clause case where we specifically really rely on the congressional policy.

Mr. Dyk: I can't remember one either, Justice Kennedy, but suggest that this might be an appropriate instance in which to rely on that policy as illuminating the meaning of the Commerce Clause, but we think we don't need that.

We don't need a finding as to congressional policy.

We think the result here is absolutely clear under the Commerce Clause precedents, even without that.

Thank you.

Chief Justice Rehnquist: Thank you, Mr. Dyk.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

Fulton Corporation v. Faulkner - Oral Argument

Fri, 09 Jan 2009 14:49:47 +0000

Case:

Fulton Corporation v. Faulkner

Media File:

94-1239_19951031-argument.mp3

Related Transcript:

1995_94_1239_argument.xml

Transcript:

Argument of Jasper L. Cummings, Jr.

Chief Justice Rehnquist: We'll hear argument now in Number 94-1239, Fulton Corporation v. Janice Faulkner.

Mr. Cummings.

Mr. Cummings: Mr. Chief Justice and may it please the Court:

The outcome of this case will depend on three points.

First, the North Carolina tax upon the intangible value of stock discriminates, both facially and in actual operation, against interstate commerce.

Second, there is no defense to this discrimination either under the compensating tax defense or otherwise.

Thirdly, this case is not controlled by the 1912 decision in Darnell v. Indiana.

First, I would like to speak to the discrimination.

That the discrimination in the tax is facial is admitted either explicitly or implicitly by the decision of the North Carolina supreme court and by the State in its brief before this Court.

Were it not for that facial discrimination, there would not be necessary the attempt to prove the compensatory tax defense which both the State supreme court and the State before this Court have argued.

Not only is there facial discrimination against interstate commerce, but perhaps more importantly, this tax--

Unknown Speaker: May I just ask you, it's really not discrimination against commerce as it's discrimination against those who own stock that... the company of which does business elsewhere.

It's discrimination against the stock ownership, not against the activity, is what I'm saying.

The ownership in different kinds of companies is taxed differently.

Mr. Cummings: --That's correct, Your Honor, just as in the very early case of I. M. Darnell Company, which in fact was the same corporation involved in the Darnell case, the company that receives logs shipped from another State and was taxed in that case differently from logs that it had received from the taxing State, while it might not have been the outside shipper of the logs, it suffered the first impact of discrimination.

Unknown Speaker: Was the tax on the ownership interest in the company the tax on the stock there?

Mr. Cummings: The tax at issue here is the tax--

Unknown Speaker: Here it is, yes.

Mr. Cummings: --on stock, yes, sir.

Unknown Speaker: It wasn't in that case though, was it?

Mr. Cummings: Well, there it was a tax on logs which were owned by the in-State company, but we've had many cases before this Court where the party who was objecting before this Court was not the party dealing in interstate commerce but was just a local party who had dealt with someone who was in interstate commerce.

Unknown Speaker: But have we squarely held that it would be impermissible to tax at a different rate the ownership in stock of a company that did its business in the State, as opposed to stock in a company that only did its business out of State?

Forget all the gradations of, you know, half... just the extreme polar cases.

Is that... you think that's clearly invalid.

Mr. Cummings: Yes, sir.

Unknown Speaker: And what is the closest case on that point, in your view?

Mr. Cummings: The closest case to the facts in this case, I believe, is Westinghouse v. Tully, the 1984 decision of this Court written, I believe, by Justice Blackmun.

Westinghouse v. Tully also involved the tax on a shareholder.

The shareholder in that case was Westinghouse Corporation.

It had a subsidiary that was a DISC, a domestic international sales corporation, and the tax at issue was the parent's franchise tax.

The franchise tax was computed in a way that increased the parent's franchise tax as the subsidiaries exports through the ports of other States increased.

It didn't matter that the exports through the ports of the State of New York stayed the same, but if the subsidiary did more activity in interstate commerce, the shareholders' franchise tax went up.

We submit that that same type of discrimination exists here.

Under the--

Unknown Speaker: The Court... are you saying the Court struck down the tax in Westinghouse v. Tully?

Mr. Cummings: --Yes, Your Honor, the Court struck down the tax on the shareholder, which was a franchise tax in that case.

So we have here both the facial discrimination, which as I indicated was admitted both in the brief and by the North Carolina supreme court, we have the actual penalty against interstate commerce, in that here the corporation could do the same amount of business in the State of North Carolina but could expand its business in interstate commerce and as a result of that the shareholders' stock tax will go up.

So therefore the two taxes, the stock tax which my client has paid and the corporate income tax which is said to be a compensatory tax, which we will get to in a minute, are not in this case mutually exclusive proxies for each other.

This is not an either-or case.

This is not a situation where one tax goes down and the other tax goes up.

Just as in Westinghouse v. Tully, or by analogy to that, the tax paid by the corporation to North Carolina could remain the same, the shareholders' tax could go up just because the subsidiary of the corporation had increased this interstate commerce.

Having shown both actual and facial discrimination against interstate commerce, we turn to the compensating tax defense on which the State and the North Carolina supreme court primarily relied.

First, it is important to notice that the compensating tax defense has never been allowed to impose an actual penalty on interstate commerce by its operation.

As I have illustrated, it would do so if it were allowed to be applied in this case.

Unknown Speaker: Your theory of the penalty is the theory that, in effect, the investment will be siphoned out of interstate commerce and into investment in corporations that do business solely intrastate.

Mr. Cummings: Yes, Your Honor.

Unknown Speaker: Is that argument affected by the fact that, by and large, the investment market is a national investment market?

I mean, if the stock were being sold entirely in the State, your argument would be a very strong one.

Stock characteristically, though, is sold on national markets, and is this fact, this tendency to favor intra rather than interstate investment in effect going to be diluted almost to the point of the incidental by the fact that we have a national market, and that the investor in Oregon isn't going to be worrying about this?

Mr. Cummings: Your Honor, it might be somewhat invested.

I can say from personal experience that I know from many persons in North Carolina they like to invest in corporations like CP&L, Carolina Power & Light, Duke Power, local corporations that they know about, and it motivates them, and there is some evidence in the record of this motivation... there's an affidavit... to invest in a corporation in which there will be less intangibles taxed.

There are many decisions of this Court stating that we do not need to know how great the impact on interstate commerce is to strike down discrimination.

A third point, just 2 weeks ago, the supreme court of the State of Kentucky, in a case titled St. Ledger, dealt with a very similar tax upholding it, relying on the Darnell case, which we will come to in a minute, but finding, as a factual matter, the very discrimination that you just described to actually occur and to be a concern to that court, by analogy.

Unknown Speaker: Why do you say that none of the other compensating facts cases involve any discrimination, discriminatory effect on interstate commerce?

I would think even the classic one does.

I mean, that is the offsetting sales and use taxes.

Every time such a tax is imposed, it becomes much less attractive to buy a car in another State where there's no sales tax.

I mean, you know, if there's a sales tax in Virginia and no sales tax in North Carolina, I will go and buy my car in North Carolina all the time.

Mr. Cummings: I don't think that sort of interstate luring by nontaxation is the type--

Unknown Speaker: Oh, you can call it luring, but any difference in price is a luring.

This happens to be a difference of price caused by the imposition of a sales tax.

Mr. Cummings: --Well, up to this point, this Court's opinions in that type of case have... by my reading have looked to two types of discrimination.

First, is the imported good taxed by this State?

Let's talk about the State of North Carolina.

Is the imported car taxed by North Carolina at the same rate as the car bought locally?

If the answer is yes, that's the first cut that there is no discrimination.

Unknown Speaker: Okay.

Mr. Cummings: Then, as this Court discussed in the decision in Jefferson Lines, there needs to be a credit applied by this State... let's say North Carolina... for any sales tax paid to the other State from which the car was imported.

When that credit is applied, that's the second cut to ensure that there is no interstate discrimination.

Unknown Speaker: Okay.

Well, you can say that there cannot be undue interstate discrimination, perhaps, no more than is necessary to prevent your higher taxes from having what would be the normal economic effect of higher taxes.

Mr. Cummings: Perhaps the response to your question would be a statement that was made in Armco v. Hardesty, which is a very important case to us.

As you may recall, in Armco v. Hardesty, there was concern about the fact that out-of-State manufacturers had to pay the in-State wholesaling tax, but in-State manufacturers only had to pay the in-State manufacturing tax and did not have to pay the wholesaling tax.

The decision... of course, that was struck down.

The decision posited the situation where one State might impose simply a wholesaling tax and one State might impose simply a manufacturing tax, and the decision said that would be okay, that's not a discrimination, and I think that's somewhat analogous to your situation that one State might choose not to tax at all, and another State might tax.

Unknown Speaker: Now, in order to win, Mr. Cummings, I guess you would have to persuade us to overrule Darnell.

Mr. Cummings: Your Honor, no.

I believe Darnell... if it please the Court, I believe Darnell can be distinguished.

If you choose not to distinguish it, we do ask you to overrule it, and if you'd like me to turn to Darnell now, I will.

Darnell is a very cryptic decision.

It's a decision that is hard to understand, and it's hard to understand the facts without resort to the decision of the underlying Indiana supreme court, which I've done and will embroider a little bit on the facts of Darnell.

Unknown Speaker: Well, when you say embroider, you mean take it from the Indiana--

Mr. Cummings: Take it from the Indiana supreme court... I certainly will not add to that... yes, Your Honor.

It is important to notice that in Darnell there was not the set of facts that we had here.

In Darnell, there was not a situation where the tax paid by the corporation to the State of Indiana could remain level, and the tax paid by the shareholder could increase, because the corporation had entered into interstate commerce.

That was not the way the regime in Indiana worked.

The regime in Indiana was a true, either-or situation.

It was a true set of mutually exclusive taxes.

The taxpayers would either pay one or the other.

What the State of Indiana tried to do, I believe, was to tax all stock that it could get its hands on at 100 percent.

If the stock were owned by a local resident in an out-of-State corporation, the State of Indiana made that local shareholder pay tax on 100 percent of the value of the stock he owned, a very unremarkable sort of tax, sort of property tax.

If the corporation was domestic... and this is where the either-or comes in.

If the corporation was domestic, the shareholder didn't have to pay tax on his stock, but the corporation paid tax, in essence, on all of its stock as if it were paying for the shareholder, and the way that was done was, the corporation paid tax on the greater of the value of the tangible personal property in Indiana that it owned, or the capitalization value of all its market value stock.

And therefore, Justice Holmes looked at this situation and said, well, certainly Indiana can tax the stock of residents, and certainly Indiana can make the corporations pay tax on their property, including their capital stock, and we don't see anything wrong with that, and by the way, we're not going to consider the situation where the corporation might own property in Indiana and in other States, because--

Unknown Speaker: --Was capital stock a net or gross?

Mr. Cummings: --Gross.

Well, it was the true market capital value of the stock.

Unknown Speaker: Yes, but if they had liabilities, did they subtract it?

Mr. Cummings: Yes, Your Honor.

Unknown Speaker: They subtracted liabilities.

Mr. Cummings: Correct.

Unknown Speaker: So therefore in almost every case the gross... if there's goodwill in the company, and unless in an unusual circumstance except for that, then the value of the... the total value of the stock will be greater than the intangible or tangible property... the tangible property.

Mr. Cummings: That was my--

Unknown Speaker: So almost every case, what they're really paying tax on in the corporation is the stock.

Mr. Cummings: --Is the stock, right.

I agree, Your Honor, and therefore it seems that Indiana was simply trying to tax all the stock in the State.

It taxed the stock to the domestic corporate issuer, and it taxed the stock to the local shareholder of the foreign corporation.

Unknown Speaker: If we don't look any further than what Justice Holmes wrote, wouldn't it be simpler to say that what Holmes was, and what the Court was holding in that case was really something about equal protection in judging economic regulation, and the one thing that is clear today is that that is not the standard for dormant Commerce Clause taxation and let it go at that?

Mr. Cummings: I'm with you all the way, Justice.

I agree completely.

Unknown Speaker: But I mean, it really could be--

Mr. Cummings: It really could be--

Unknown Speaker: --looked at as simply as that, couldn't it?

Mr. Cummings: --Yes, Your Honor.

The case can be parsed between the Commerce Clause discussion and the Fourteenth Amendment discussion, and the Commerce Clause discussion falls in the middle of the second paragraph, I believe, where they said... where Justice Holmes said, we're not dealing with the case where a foreign corporation owns some Indiana property, and property tax was paid to the State of Indiana but there was no deduction allowed against the shareholders' stock.

He said, we're not going to deal with that, because they're not our facts, and that is the very paradigm case that I stated at the outset that represents the actual penalty here, where we can have--

Unknown Speaker: Well, what did the Court say it was deciding in Darnell?

Mr. Cummings: --It said it was deciding, Your Honor, whether a State can tax the property of a domestic corporation, that property including the capital value of its stock, in the stock of a foreign corporation.

Unknown Speaker: Yes, but it didn't say that in the abstract.

I mean, if the State couldn't do it, it would have to be some provision of the Constitution that would prevent it.

What provision of the Constitution did the Court say was involved in Darnell?

Mr. Cummings: The citation follow... well, the Court said at the outset of the opinion that there had been a claim made under the Fourteenth Amendment and under the Commerce Clause, but when it got to the last paragraph, where it discussed the stock tax on in and out-of-State corporations, it cited the case of Kidd v. Alabama, which was a 1903 decision that was purely under the Fourteenth Amendment.

And Kidd v. Alabama went off on Coe v. Erroll, and Coe v. Erroll was one of those early cases which dealt, again, with timber... they seemed to have a lot of timber in the early days... and it simply held that the State from which the timber was cut could tax the timber, and then if the timber was shipped across the State line, the State where it was received could tax the timber.

Unknown Speaker: Well, but that's not equal protection, even Fourteenth Amendment.

That's due process, isn't it?

Mr. Cummings: Yes, Your Honor.

I believe it was both due process and to some extent equal protection.

Unknown Speaker: Well, did it... is there any mention of equal protection in the opinion?

Mr. Cummings: There's a mention of "substantial equality".

Justice Holmes in the last paragraph said that substantial equality is attained by taxing the stock of the foreign corporation and the property of the domestic corporation, and I agree that the Commerce Clause, part of the decision was really not decided by the Court because it did not have the facts before it.

Unknown Speaker: Do you think we follow that approach today, that is, evaluate the tax just on the basis of how it applies to the particular petitioner before the Court and not how it applies overall?

Mr. Cummings: No, Your Honor.

Unknown Speaker: I don't know that we've done that in the cases since I've been sitting here, anyway.

It seems to me we look at the tax's overall impact, so no matter how you slice it, you're asking us to cut back on what we said in Darnell.

Mr. Cummings: Well, I believe... yes, Your Honor, and I believe a straw has already been put into the wind on that issue in the Jefferson Lines decision earlier this year.

It was the first time that this Court has cited Darnell since 1935.

And in that citation, in the footnote in Jefferson Lines, the Court was dealing with giving credit for... to one taxpayer for a tax paid by another taxpayer, or perhaps for a different tax paid by that taxpayer, and this Court said, if a State chooses to have an apportioned gross receipts tax on a bus company, and if it chooses to give a credit for the sales tax paid to that State by the bus rider, then it must give a credit for out-of-State sales taxes paid by bus riders that bought their ticket out of State.

The last line in that footnote said, however, we're not now deciding... probably because cert had been granted here... we're not now deciding whether a similar credit must be given to a tax paid by a C. F. Darnell, the first cite of Darnell since the 1935 decision in Colgate v. Harvey.

I think you were sending us a signal that you saw the inconsistency of Darnell with the credit mechanism set up in footnote 6 in Jefferson Lines, and I say to you that your question about third party is, I think, easily answered, because Darnell is no more a "third party"... excuse me.

The corporation in relation to its shareholder is no more a "third party" than is the buyer of the bus ticket a third party in relationship to the bus company.

In fact, there is an even closer relationship, because these are related parties.

These are corporation and shareholder, and if the State chooses to think that there's a close enough relationship that the State can create this sort of intertwining of the corporate tax and the shareholder tax, then certainly this Court can see that there's a close enough relationship to be concerned about the impact on interstate commerce.

Unknown Speaker: Is it your position that there is no tax that a State can constitutionally impose on the in-State shareholders of an out-of-State operating corporation?

There is no constitutionally permissible tax?

Mr. Cummings: No, Your Honor.

We believe--

Unknown Speaker: What tax could a State impose on the shares that its taxpayers hold in corporations acting out of State?

Mr. Cummings: --We have no objection to a tax on 100 percent of the value of stock in an out-of-State corporation.

Unknown Speaker: All stock, so if they didn't--

Mr. Cummings: A hundred... if the State of North Carolina wants to tax 100 percent of the value of all the stock owned by everybody, that suits us fine, because--

Unknown Speaker: --But nothing singularly.

Is there any tax that could be imposed on North Carolina shareholders of out-of-State corporations that are operating out of State, period?

Are you saying that any tax... of course, if you tax domestic corporations you can put it on evenly, but just with respect to the out-of-State--

Mr. Cummings: --I would not think so, Your Honor, and that question is somewhat similar to the question that was raised recently in the Perini case from Massachusetts involving the distinction between how you were going to give a franchise tax relief for in-State and out-of-State corporations, and the Massachusetts supreme court held for the taxpayer and this Court did not issue certiorari, my closest analogy in a recent case.

Unknown Speaker: --Well, has North Carolina repealed this tax--

Mr. Cummings: Yes--

Unknown Speaker: --do I understand?

Mr. Cummings: --Yes, Your Honor.

Unknown Speaker: How many other States have a similar scheme, do you know?

Mr. Cummings: At least four.

Unknown Speaker: And what would they be?

Mr. Cummings: One is Kentucky.

I believe Georgia is another.

They are listed in the response of the State to our petition.

Whether--

Unknown Speaker: The same... I mean, I... just perhaps following up on Justice O'Connor's question, I suppose your reasoning here is going to be equally applicable when we're talking about related taxes on different taxpayers who are themselves related not as shareholder in corporations but as debtor and creditor.

I mean, I suppose this is going to be applied, your rule would be applied in the area of taxation of savings account interest, and so on, on banks, wouldn't it?

A bank could not say, well... a State could not say well, we will not tax interest earned in the banks of our State, but we will tax interest earned in the banks of other States.

The rule would be the same.

Yes, Your Honor, and that issue has percolated up through the appellate courts.

Justice O'Connor, if you are concerned about the repeal, the repeal occurred on April 18 of this year, 3 days after the last due date for the filing of the '95 returns, and therefore the repeal has not even taken effect yet.

Last week I called three attorney... three accountants and was told of five cases of assessment of this tax that have occurred since the repeal, and therefore this tax is ongoing in the State of North Carolina.

The Court has not questioned the compensating tax defense, and I will not dwell on it except to say that it is designed to prevent a preference for interstate commerce.

It is designed to address the situation where the normal taxing regime somehow misses taxation of interstate commerce.

Well, here, the normal taxing regime, the compensated tax, according to the decision of the North Carolina supreme court, is the corporate income tax.

What does the corporate income tax fall on?

It falls on all of the income earned from business in the State of North Carolina.

This Court has said many times that's all the State of North Carolina is entitled to tax the corporation upon, and therefore, nothing has been missed.

There's nothing left to be compensated for, and yet the North Carolina supreme court decision did indicate that the stock tax was a proxy for tax on corporate income earned out of State.

No doubt realizing the difficulty of this position, the State has developed a new theory on its appeal brief to this Court that somehow there must be a payment for access to capital markets by foreign corporations, and if the foreign corporation is not paying a corporate income tax to the State, then its shareholders must pay a stock tax, which is a proxy tax on the foreign corporation.

Getting back to Justice Ginsburg's question, we have no objection to a tax on 100 percent of the value of the foreign corporation's stock, as long as it's also applied to the value of the local corporation's stock.

The issue is not really so much the compensating tax defense as the need, as the other shoe that the State has to drop, which is, oh, by the way, we don't just want to tax 100 percent of the value of the stock for access to capital markets, we want to give this deduction so that we don't have double taxation intrastate, and that is, I believe, the real issue in this case.

And that brings us, Justice Souter, back to Jefferson Lines, because I believe Jefferson Lines indicated that a State cannot attempt to avoid intrastate double taxation and at the same time create interstate double taxation and ignore taxes paid to other States.

And Justice Rehnquist, this also brings us back to... Mr. Chief Justice Rehnquist, this also brings us back to Darnell, because in Darnell Mr. Justice Holmes said, we need not, or the State of Indiana need not concern itself with the taxes paid by the corporation to other States.

That can just simply be irrelevant.

Well, we know that the more modern Commerce Clause jurisprudence of this Court indicates that a State must concern itself with taxes paid to other States, and that was mentioned in Armco v. Hardesty, where the decision said, this out-of-State manufacturer who is paying the local wholesaling tax undoubtedly is paying an out-of-State manufacturing tax, or may be paying an out-of-State manufacturing tax and therefore it is subject to dual taxation, whereas the manufacturer who sells at home only pays one tax.

Now, there might be some question of whether other States have manufacturing taxes.

Frankly, we don't have one in the State of North Carolina, but there's not much question that almost every State in these 50 States has a corporate income tax, so with respect... so regardless of how many States have stock taxes, every State has a corporate income tax, and therefore to the extent other States are collecting corporate income taxes on multi-State corporations, when their stock is held in North Carolina there will be double taxation, whereas if the stock is owned by the local corporation, and more importantly if the local corporation just keeps its business at home, only one tax is paid.

If there are no further questions, thank you.

Very well, Mr. Cummings.

Mr. Rothfeld, we'll hear from you.

Mr. Rothfeld, how does an individual taxpayer in North Carolina, who perhaps owns some shares or something, figure out what he ought to pay?

Argument of Charles A. Rothfeld

Mr. Rothfeld: Mr. Chief Justice, and may it please the Court:

Do you mean in filing as individual tax return?

Unknown Speaker: Yes.

There's a graded scale?

Is he supposed to find out for himself whether the shares he owns are of an out-of-State corporation or in-State, and that sort of thing?

Mr. Rothfeld: My understanding, Your Honor, is that there is a list of stocks that's maintained by the State, and he can determine that simply by looking to that list to determine which percentage of the stock is taxable, so I think it's a fairly routine and easy mechanical matter.

I should say, I think that this case involves two distinct Commerce Clause principles.

The first is the principle of nondiscrimination, which we think in this case turns on application of the compensatory tax doctrine.

The second distinct principle is the principle of apportionment, which we think in this case turns on the application of the internal consistency test, and I think it's useful to keep these principles straight, and I'll discuss them separately, starting with the question of discrimination, and on that question, given some of the discussion thus far, I think it's useful to begin with what the State understood the relationship to be between the income tax and the shares tax at the time that it enacted the taxable percentage deduction that's at issue in this case.

Now, at that time, before it enacted the taxable percentage deduction... and I think I should note, as has been observed, the taxable percentage deduction and, indeed, the entire intangibles tax, have been repealed.

Unknown Speaker: Why don't you slow down a little bit, Mr. Rothfeld.

Mr. Rothfeld: Oh, I'm sorry.

We're so excited to get to the meat of the case, Your Honor, that I'm speeding along.

Before the State enacted the taxable percentage deduction it entirely excluded corporate shares from the reach of the intangibles tax, and when the State began to consider an expansion revision of the intangibles tax, it was of the view that intangibles were simply paper representations of other values that might already be subjected to other State taxes, and in particular, that corporate shares were representations of other corporate values that might be subjected to the State property tax or income tax, and when the State determined to expand the intangibles tax to reach corporate shares, it decided to try to avoid duplicative taxation of these related intrastate values.

Now, the State considered but rejected the idea of a discriminatory tax that would exempt the shares of domestic while taxing the shares of foreign corporations, and instead hit upon the idea of the taxable percentage deduction under which the shares of a corporation that pays income tax are exempted from the shares tax, and the shares of a corporation that does not pay income tax are subject to the intangibles tax.

The idea was to impose a single, nonduplicative tax on all related intrastate corporate values.

Unknown Speaker: Why didn't you do the same thing with the whiskey tax?

Mr. Rothfeld: Well, I--

Unknown Speaker: I mean, people out of State don't pay the whiskey tax--

Mr. Rothfeld: --Well, I think--

Unknown Speaker: --and foreign corporations don't pay tolls.

I suppose the reason they don't pay income tax in North Carolina is they don't have income in North Carolina, nor do they buy whiskey in North Carolina, nor do they use North Carolina bridges, so I mean, that's obviously the thing that's bothering me.

Mr. Rothfeld: --Well, I think what you say is right, Your Honor, but I think that the State's view... and I'll suggest in a minute the State's view is clearly supported by the decision in Darnell.

The State's view is that these paper representations that it's trying to tax are representations that exist elsewhere, but they're values that also are present in the State in the form of the corporate shares, and the States... I think as a matter of economic reality, it is true that there is a close relationship between the value of a corporation's shares and the amount of the corporate income, and therefore the States took the position--

Unknown Speaker: I... you're saying that the ones that do business in North Carolina pay an income tax to North Carolina, and what you're trying to do is make up for the fact that the people who don't do business in North Carolina, unfortunately North Carolina will lose that income for the income tax.

Mr. Rothfeld: --Well, I think--

Unknown Speaker: And the problem that I have with that is not the technical thing, it's just the practical thing.

Of course North Carolina loses the income tax of a California company.

So do they lose the whiskey tax.

So do they lose a lot of things.

If we were to uphold this, wouldn't we have to say a State could impose some kind of tax on a Maine company to make up for the fact that its employees don't buy whiskey in North Carolina?

What's the difference?

Mr. Rothfeld: --I think the difference, Your Honor, is that there is something in the State that's taxable, and that's the corporate shares, and the corporate shares represent something.

They represent an ownership interest in a part of the corporation, and there are various ways that one could look at what those shares represent.

In Darnell, we think that the State looked at it, and this Court--

Unknown Speaker: Let me try once more.

Could you assess a tax on shares in North Carolina of a foreign company to make up for the fact that that foreign company has employees who don't buy food in North Carolina so they don't pay the sales tax, to make up for the fact that they don't use bridges in North Carolina?

You see--

Mr. Rothfeld: --Yes, I--

Unknown Speaker: --if I accept your principle, wouldn't I also have to accept that?

Mr. Rothfeld: --I think clearly not, Your Honor.

Unknown Speaker: Because.

Because.

I think that the... what we visualize this tax as being, we visualize corporate shares and corporate income as having a particular relationship, just as corporate shares and perhaps corporate property do.

We don't think that corporate shares and the food purchases of the corporation's employees have that relationship.

We don't think that that's what corporate shares represent, or were understood to represent when the State passed this test.

What we think the shares represent are corporate values, and we think income is one of those values.

Well, then if that is true, you could tax 100 percent of the income of any corporation regardless of where its income was earned--

Mr. Rothfeld: Well, we--

Unknown Speaker: --which you know you can't do--

Mr. Rothfeld: --We clearly--

Unknown Speaker: --and why does that not point to the problem in this case?

Mr. Rothfeld: --Well, I think that leads us to the compensatory tax analysis here.

It certainly is true that--

Unknown Speaker: You're saying compensatory tax analysis in effect can supplant the rule that requires an apportionment of income.

Mr. Rothfeld: --Well, I--

Unknown Speaker: I think that's what you're saying.

Mr. Rothfeld: --I don't think so.

We're... both of these taxes--

Unknown Speaker: Well, that's going to be the effect of it, isn't it?

Mr. Rothfeld: --I don't--

Unknown Speaker: That's the effect of your theory, isn't it?

Mr. Rothfeld: --I don't think so, Your Honor.

I think that--

Unknown Speaker: You're saying the intangible stock is in effect a surrogate for income, and therefore the two may be considered in relation to each other in determining what I should tax, and if, in fact, there is this surrogate relationship, and you are justified in taxing the one, you would be justified, I suppose, in taxing 100 percent of the income even though 80 percent of it was earned out of the State.

Mr. Rothfeld: --Well, we certainly recognize that the State can't tax 100 percent of the income, or any of the income which is earned outside of the State, unless the State has apportionable taxing nexus to it, and we're not trying to tax the income.

What we're suggesting is that under the compensatory tax doctrine, related values that are present in the State and out of State may be subject to tax, and I think it's important, Your Honor, not to confuse the apportionment principle which relates to credits for taxes paid elsewhere and the nondiscrimination principle, which relates to whether or not the taxable percentage deduction here must be struck down as being discriminatory.

Now, our understanding of how that deduction should be viewed is that there is one... there are substantially related values, and that is the test the Court has articulated in the compensatory tax doctrine cases, that there are substantially related values between the value of corporate shares and the amount of corporate income as a matter of economic reality, and we think given that substantial relationship, imposing a tax, a tax as a mutually exclusive proxy either on income, if income is taxable, or on the corporate shares which represent those values, that that does not impose a discrimination.

Now, the question of whether or not we're taxing too much total value, whether the tax is on apportionment, is a separate internal consistency question which I'll get to once we've disposed of the discrimination problem.

Now, I think that first of all the Court has addressed this issue in Darnell.

Now, I know Mr. Cummings said that it was a cryptic decision.

We don't find it cryptic.

Unknown Speaker: Mr. Rothfeld, the Kentucky supreme court recently dealt with this matter, and as I understand its decision, it rejected your argument up until the last step.

It found that there was discrimination against interstate commerce.

It went all the way down the line as though it were going to hold for the taxpayer, but in the end it said, but Darnell is the Supreme Court's instruction, and so despite the prior steps that went in the taxpayer's favor, at the bottom line, Darnell is the Supreme Court's instruction and so we follow it.

But as I understand the Kentucky supreme court, it rejected the argument that you have been making so far.

Mr. Rothfeld: Well, I'm not sure that I agree with everything in the opinion of the Kentucky supreme court in that case, although the Kentucky tax was a different tax than this tax.

The Kentucky tax was a property tax which actually differed even from the property tax in Darnell, in that as I understand the Kentucky system, if a corporation paid tax on 75 percent of its property to Kentucky, then there would be an automatic complete deduction in taxability of the shares, which is not the system we have here.

But insofar as the Kentucky court was saying that the kind of system we have here is discriminatory and is not saved by the compensatory tax doctrine, which we disagree with that analysis, as I say, first of all we think that the Court addressed precisely this problem in Darnell, which we don't find cryptic, and I think looking at what Justice Holmes said for a unanimous Court, and looking at the arguments that were made to the Court in Darnell, the argument was precisely the argument that's being made here, that there was a discrimination in the treatment of the corporate shares.

Unknown Speaker: I do find it cryptic, so maybe you can explain it to me.

Mr. Rothfeld: As I understand it, and perhaps I'm missing the crypticism there, but as I understand it, what was happening in Darnell was that there was a tax on real and tangible property that was imposed on corporations, and there was an intangibles tax imposed on the value of all corporate shares in the State, and insofar as the State paid intangible... insofar as the corporation paid tax on its tangible and personal property in the State, then the taxpayer was relieved, the individual shareholder was relieved of paying a shares tax, just as there is relief here for the individual shareholder if the corporation pays income tax.

And the Court, looking at this scheme, said that a tax on the property of a domestic corporation... and this was the Court's language... a tax on the property of a domestic corporation and on the shares of a foreign one is consistent with substantial equality, and that's precisely what we're saying here, that there are related values that are being taxed in precise proportion to one another.

Unknown Speaker: Well, why are they any more related than whiskey is related?

I'm sorry to go back to that, but it just seems to me that the reason that you don't have an income tax on California companies in North Carolina is because the California companies don't have income in North Carolina.

Mr. Rothfeld: Well, I think the best I can do... perhaps I can't satisfy you completely, Your Honor, but the best I can do is that the share is a representation of something else.

It's a representation of other values.

Unknown Speaker: It's a discounted value of a future income stream, and some of that income stream will be taxed when it reaches a North Carolina person, and the other is taxed in the form of an income tax.

Mr. Rothfeld: And--

Unknown Speaker: And North Carolina gets its share of that, and the others get their--

Mr. Rothfeld: --Well, I think--

Unknown Speaker: --I mean, I agree that's what it represents.

You don't have to... so--

Mr. Rothfeld: --Well, and our analysis is that taxing both the representation of the income stream and taxing the income stream is in a sense a kind of duplicative taxation, and... because one is a representation of the value, the other is the value itself.

I mean, that is the rationale for what the State is doing here.

Unknown Speaker: --Do you agree with Darnell that the shares represent property?

Mr. Rothfeld: Well, in a sense... I mean, when you look at the shares of--

Unknown Speaker: I don't think anybody--

Mr. Rothfeld: --No, I think--

Unknown Speaker: --any moderately sophisticated stock analyst would value shares on the basis of book--

Mr. Rothfeld: --I think that's right.

That's why this--

Unknown Speaker: --So Darnell must be wrong.

Mr. Rothfeld: --Well, I think this case is a stronger case for the State than Darnell, because as you say, clearly investors understand shares as representing a portion of income.

I mean, that's why price-to-earnings ratio is such an important instrument for investors, so I think that... Darnell makes our case a fortiori if Darnell was a representation of equivalent value.

Unknown Speaker: Mr. Rothfeld, how many cases have we had that have approved compensating taxes?

What kinds of taxes have been approved as compensated?

Mr. Rothfeld: There have been very few decisions of this Court involving compensating taxes at all.

I mean, there was a recent decision, the Oregon Waste decision, which rejected a compensated tax argument.

Unknown Speaker: Right.

Mr. Rothfeld: There was a decision, the Arctic Maid case, which is cited in the briefs, which accepted a compensating tax argument involving one tax which was imposed upon the canning of fish and another tax that was imposed upon the freezing of fish.

Now, that is not a perfect analogy to our case because both taxes were--

Unknown Speaker: So canning and freezing of fish, and sales and use taxes.

What other ones?

Mr. Rothfeld: --Well, we plead that Darnell--

Unknown Speaker: Darnell.

Mr. Rothfeld: --is a compensating tax which is directly on point, and I think it's useful, Your Honor, to contrast this case with the Oregon Waste Systems decision from 2 years ago, which I think is very instructive on how to analyze this.

The Oregon Waste Systems case, Oregon argued that its discriminatory tax on disposal of waste at Oregon landfills and its income tax were substantially related and that the taxes were compensatory, and the Court rejected that argument because it found that disposal of waste at an Oregon landfill and earning income are not substantially related, and to prove that point, the Court found it decisive that an Oregon firm that disposed of waste in an Oregon landfill would be subject both to the income tax and to the discriminatory landfill fee, meaning that the case... that the taxes were not mutually exclusive proxies for each other.

Now, I mean, here, I think that the test--

Unknown Speaker: I know, and these are substantially... because you said here what is going on is basically a tax on access to capital markets, is that--

Mr. Rothfeld: --Well, I think that... that should not be misleading here, Your Honor.

Neither of these taxes is a tax on access to capital markets as such.

The income tax is a tax on the earning of income in the State, and it's justified by the benefits that the State provides to corporations that earn income there, and the shares tax is a tax on the ownership of property, intangible property in North Carolina, and the taxpayer here is a North Carolina resident--

Unknown Speaker: --So I should ignore all the stuff about access to capital markets.

Mr. Rothfeld: --Well, we make that point, Your Honor, simply because, in response to the taxpayer's argument here that the effect of this tax is to burden out-of-State corporations in their issuing of shares, and that somehow that's unfair because those corporations get no benefit from North Carolina.

In fact, we think they derive substantial benefits from services provided by North Carolina which allow those firms to sell to residents who have accumulated capital and to engage in transactions with these out-of-State firms, so we don't justify these taxes because each tax is imposed in precisely the same way on access to capital markets.

We justify these taxes because, and perhaps my exchange with Justice Breyer was unsatisfactory, but we justify these taxes because we view, as we think the Court did in Darnell, corporate shares as being representation of other values, and those values may be equivalent.

They may be substantially similar within the meaning of the--

Unknown Speaker: The taxes are not equivalent, and there is no substantial equivalent of taxing event.

Mr. Rothfeld: --Well--

Unknown Speaker: I mean, if your argument is sound, then we're going to read an awful lot of recent compensatory taxation law going off--

Mr. Rothfeld: --I don't think that's right, Your Honor.

I think that the only really relevant recent compensatory taxation law is the Oregon Waste Systems case, and as I say, the decisive fact, the Court identified as the decisive fact in that case that the two taxes were not imposed as mutually exclusive proxies for one another.

Here, the taxes are mutually exclusive proxies by definition.

They're linked in the text of the tax statutes.

If a corporation pays income tax, then its shares are exempt from tax, from the shares tax.

If a corporation does not pay income tax, its shares are subjected to the shares tax, so they are by definition mutually exclusive proxies.

That, I think, is the first and most important evidence that the taxes are--

Unknown Speaker: --Mr. Rothfeld, could I ask you a sort of preliminary question that I want to be sure I'm right on?

You do concede, do you not, that if the State repealed its income tax on corporate activity and merely taxed the stock of the residents at different rates, depending on whether the corporation did business out of State on the one hand or was a local corporation on the other, that that would be invalid?

Mr. Rothfeld: --Well, as your initial question to my colleague suggested, I think the Court has never actually squarely resolved that, and it is arguable that, given the nature of intangible property, this is something we can get to in the apportionment part of our argument.

It is conceivable that duplicative taxation, those intangibles would be permissible, and that principle might also suggest that discriminatory taxation--

Unknown Speaker: But you really haven't argued that.

Mr. Rothfeld: --We have not made that argument.

We have argued on the assumption that there is a discrimination within the meaning of the Court's cases, that there is a compensatory tax that overcomes that discrimination.

I think one should look to the three parts of the compensatory tax test that the Court has identified.

It has asked that the taxpayer... that the State identify the intrastate tax burden for which it is trying to compensate.

Here, that is clearly the income tax.

It has asked that the taxes be shown to be a roughly equivalent amount.

Here, the North Carolina supreme court demonstrated that in its opinion, pages 12 to 14, the petition... the appendix to the petition for certiorari to the North Carolina supreme court ran through an analysis showing that the actual dollar amounts imposed--

Unknown Speaker: I'm beginning to see something in what you say, that this is a... the State has a use tax, say 4 percent, on refrigerators bought out of State.

Can it charge that use tax if I go... say you have that in North Carolina.

I buy my refrigerator in New York, and I have to pay a New York sales tax.

Do I have to pay the New York sales tax of 4 percent, then take the refrigerator back to North Carolina and also pay the use tax?

Mr. Rothfeld: --Well, probably not, Your Honor, although the Court has never squarely resolved in a holding that--

Unknown Speaker: If that were so, I could understand why you have this income tax argument.

Mr. Rothfeld: --Right, but let me say--

Unknown Speaker: It's not so, or it is so, in your opinion?

Mr. Rothfeld: --Well, I think it is an open question, and--

Unknown Speaker: Most States allow for the rebate.

Mr. Rothfeld: --Virtually all States do, but I think this is an important point--

Unknown Speaker: And when this Court addressed it, it was in the context of a credit situation, was it not?

Mr. Rothfeld: --The Court in Jefferson Lines very strongly suggested that such a credit would be necessary, but I think that that--

Unknown Speaker: So that if you were a betting man, you would know the answer to the open question.

Mr. Rothfeld: --Oh, I--

[Laughter]

Fortunately I am not a betting man, Your Honor, so I guess that gives me the right not to express an opinion on how that would be... on the outcome.

But assuming that such a credit would be necessary in the sales and use tax situation, and I will assume that for purposes of answering your question--

Unknown Speaker: Can I ask you a question about your other argument?

If you want to finish... are you finished?

Mr. Rothfeld: --Well, I think that the outcome would be different here.

Even if a credit is necessary there, we think that because this is a tax on intangible property, there's a different outcome here.

The reason that the credit is required, if it is required in that situation, is the apportionment requirement, not the nondiscrimination requirement of the Commerce Clause.

It's an internal consistency problem, and apportionment and internal consistency go to the question of whether the State is taking more than its fair share of the value from any one transaction, more than its fair share of any tax value, and the Court has said in Jefferson Lines that a failure of internal consistency is... as a general matter shows that one State is taking more than its fair share.

That's the problem generally with duplicative taxation, that two States are taxing the same thing, each taking 100 percent of the value, which might be the situation you hypothesized, the sales and use tax.

Then we assume that one State is taking... or perhaps both States are taking more than their fair share.

But the Court has said that principle does not apply to the taxation of intangible property, and while with income one can see where the inputs that go to the creation of income are located and apportion taxing authority over that income accordingly, one can see where tangible property is located and can assign taxing authority to the States of that location, the Court has said, and I'm here quoting from the Court's opinion in Curry v. McCanless which was written by Justice Stone, and it's very closely associated with that element of the Court's modern due process doctrine... or modern Commerce Clause doctrine.

The Court has said that very different consideration is both theoretical and practical applied in the taxation of intangible property, and that is because it is impossible to identify a single location for something that has no physical characteristics and that is intimately associated with the laws in more than one State, and the Court--

Unknown Speaker: But how can you rely on that kind of an analysis when in your earlier breath you stood here and told us that the State's theory in effect is that this intangible is, in fact, a surrogate, and for purposes of Commerce Clause analysis somehow can be identified with the income of the corporations?

If we accept that analysis, then we, I suppose, should not give any kind of special status to the taxation of the intangible here, and if we accept that analysis, it seems to me that backs you right into the internal inconsistency, because on that analysis, if all States enact the same tax there's going to be more than 100 percent of taxation on the identical segment of value, or the identical event.

I mean, you can't have it both ways.

Mr. Rothfeld: --I would strive to make my arguments not internally inconsistent themselves, Your Honor.

It is certainly our position that the values reached by the income tax and the shares tax are substantially related within the meaning of compensatory tax doctrine in the Oregon Waste Systems decision, but we do not say that the shares tax is, in fact, a tax on income.

It's a tax on the ownership of intangible property, and as the Court has said, even though substantially related values are reached by two taxes, the constitutionality of the tax, and indeed the apportionability of the tax, may turn on the form in which the tax is pleased, the legal incidence of the tax, the nature of the tax--

Unknown Speaker: Well, if the form is going to govern, then it seems to me you've got a different problem, and that is the problem of compensatory taxation, supposedly, but involving different classes of taxpayers, and to the best of my knowledge, unless you rely on Darnell, we have never applied the analysis under those circumstances.

Mr. Rothfeld: --Well--

Unknown Speaker: Isn't that true?

Mr. Rothfeld: --Well--

Unknown Speaker: Maybe I'm overlooking something.

Mr. Rothfeld: --Well, I think, I mean, the sale and use tax situation, one tax is imposed upon--

Unknown Speaker: The buyer of the property is... the class of buyers is the only class that's being taxed.

Here, to the extent that you cut the ownership of shares adrift from the corporation and its earned income, you've got two classes of taxpayer.

Mr. Rothfeld: --Well, I think many States like North Carolina impose the legal incidence of their sales tax on the seller, whereas the legal incidence of the use tax is invariably on the buyer, so in that situation you have different categories of taxpayers, and the very first of the Court's compensatory tax cases, Hinson v. Lott, involved a tax on... one tax on distillers, another tax on distributors and dealers in liquor, so there are different categories who can be subject to the tax.

I think... I mean, the way that the Court has described the compensatory tax doctrine has not required precise equivalents on every aspect of the tax, has not required that the taxes be graphed and all the peaks and valleys match exactly, as long as the ultimate burden on interstate and intrastate commerce match up.

And indeed, the way the Court has described the compensatory tax doctrine in the Oregon Wastes Systems case is that the taxes must be substantially similar, not that they must be identical, which mirrors the language very closely in the Darnell case upon which we rely that their taxes must be consistent with substantial equality, so I don't think that we have to find precision to satisfy the compensatory tax--

Unknown Speaker: The only substantial equality we've ever recognized is between sales and use, isn't it?

Mr. Rothfeld: --Well, I guess that depends in part upon the--

Unknown Speaker: Darnell.

Mr. Rothfeld: --Darnell.

Alaska Maid was not a question--

Unknown Speaker: Darnell was a case that precedes modern compensatory taxation analysis, so that the question is, do we subsume Darnell under the modern law, that Darnell was not applying anything like the modern law, was it?

Mr. Rothfeld: --Well, I think that it was, Your Honor.

I think that... as I say, the Court in Hinson v. Lott, the case that this Court cited in Oregon Waste Systems decision as the genesis of the compensatory tax doctrine, long preceded Darnell, and the language the Court used in Darnell is similar, substantially similar to the language that it uses in the Oregon Waste Systems case, so there's no reason to think the Court was applying different standards.

In any event, in Oregon Waste Systems, the Court's most recent decision, it referred... has used the language of substantial similarity, and not precision.

I think the point of the doctrine is not a formalism that's designed to match up the taxes, as I say, at every point.

The idea of the doctrine is to be sure that interstate commerce is not being disadvantaged, ultimately, in contrast to intrastate commerce, and I think we can demonstrate to you that as a matter of economic reality, that that is not happening.

But to return to the question of apportionment, and in terms of consistency, which I think is a crucial question here, and whether or not this should be treated as an intangible property tax and an income tax, the fact is, this is an intangible property tax.

As in Jefferson Lines, the fact that the tax is put in that form may determine whether or not it's apportionable, and if... look at it this way.

The taxpayer's complaint here, ultimately, on the apportionment part of the argument, is that its values are being subjected, or could be subjected to duplicative taxation in other States.

If we're right about the treatment of intangible property, and we think that the Court's holding on that are absolutely clear, then if this precise tax, this precise shares tax on 100 percent of the value, were replicated in some other State, he would have no complaint.

The taxpayer would have no complaint because of that duplicative taxation.

So if other States had shares taxes at 100 percent of value, there would be no complaint by the taxpayer here.

The fact that the State had income taxes and that is a duplicative taxation because of the substantial similar value shouldn't give him more of a complaint than he has now, and I think Jefferson Lines is very good authority on that point, that one looks to the nature of the taxes being challenged.

Even though the economic effect of the tax, economic reality of the tax may be similar to a tax that has to be apportioned, the fact that the tax is put in forms that does not require apportionment should be dispositive.

So I think ultimately for the Court to rule for the taxpayer in this case, it clearly would have to overrule Darnell v. Indiana, which we think is clearly on point, it would have to set aside the precedents holding that duplicative taxation of intangible property is permissible.

It would also, we think, have to cut back on the principle and say intrastate commerce can be made to pay its own way and need not be placed in a favored position, because if the taxpayer's position here prevails, the State will have to either impose duplicative taxation of intrastate commerce, which is clearly, as an historical matter, what it was trying to avoid, or it will have to abandon any taxation of intangibles altogether, which means it will have to give up the chance to tax values that clearly are present in the State and that it has a right to tax.

There is no reason for the Court to take such a substantial step in the decision, and the North Carolina supreme court therefore should be affirmed.

If there are no further questions--

Unknown Speaker: Thank you, Mr. Rothfeld.

Mr. Rothfeld: --Thank you very much.

Unknown Speaker: Mr. Cummings, you have 2 minutes remaining.

Rebuttal of Jasper L. Cummings, Jr.

Mr. Cummings: If this Court finds for Fulton Corporation, I would request that the Court in its decision give some indication of the application of its decision to the 1990 tax year issue.

The reason for my concern is that the only decision we have below, which was a decision of the North Carolina court of appeals, which ruled for Fulton Corporation and found the tax to be unconstitutional, postponed the effective date of its decision for a year-and-a-half after the date of the decision, and therefore Fulton Corporation received no remedy.

We moved before that court for rehearing on the basis of this Court's decision in Harper v. Virginia, which expressed a very strong desire for--

Unknown Speaker: Yes, but is it not clear that they have an alternative, either doing away with the exemption or doing away with the tax?

You could lose, and you could win the legal principle and lose this in dollars.

Mr. Cummings: --I agree, yes--

Unknown Speaker: Yes.

Mr. Cummings: --Your Honor, but I would like to make sure that they... that the State makes that decision either to do away... either to make everyone pay the full tax on stock they... in 1990 forward, or to give refunds.

Thank you, sir.

Unknown Speaker: You agree that there could be a retroactive imposition of a tax on people who had no notice at the time that the tax liability accrued?

Mr. Cummings: This... yes, Your Honor.

This Court many times has indicated that is a theoretical possibility.

Unknown Speaker: And they said that without the party affected before the Court.

Mr. Cummings: I'm never aware of that having actually been done, and I would not expect it to be done in North Carolina.

I think all we're talking about here is refunds.

Thank you.

Chief Justice Rehnquist: Thank you, Mr. Cummings.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

Oklahoma Tax Commission v. Jefferson Lines, Inc. - Oral Argument

Fri, 09 Jan 2009 14:50:00 +0000

Case:

Oklahoma Tax Commission v. Jefferson Lines, Inc.

Media File:

93-1677_19941128-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Stanley P. Johnston

Chief Justice Rehnquist: We'll hear argument now in Number 93-1677, the Oklahoma Tax Commission v. Jefferson Lines, Inc. Mr. Johnston.

Mr. Johnston: Mr. Chief Justice and may it please the Court:

Before the Court today is the question of whether the State of Oklahoma may constitutionally impose on the in-State purchaser and require the in-State vendor to collect a sales tax on the purchase of bus transportation sold within the State, the tax being measured by the full purchase price of the ticket even though the ultimate destination of the trip, or a portion thereof, is to be traveled beyond the State's borders.

The facts of the case are basically very simple.

The State of Oklahoma has a general sales tax which taxes the sale of tangible personal property and certain services, including bus transportation by common carriers.

This tax, as most or all common sales taxes, is imposed upon the consumer, is collected by the vendor, it is a percentage of the purchase price, and is added to that.

Unknown Speaker: Mr. Johnston, does Oklahoma tax the sale in Oklahoma of bus tickets for transportation that is not at all conducted in the State of Oklahoma, that neither begins nor ends in the State of Oklahoma?

Mr. Johnston: Under--

Unknown Speaker: The ticket is purchased there--

Mr. Johnston: --Yes, ma'am.

Unknown Speaker: --for transportation outside the State.

Does Oklahoma tax that?

Mr. Johnston: Your Honor, I believe it would if the sale occurs in Oklahoma under the statute.

Unknown Speaker: Yes, that's what I asked.

Mr. Johnston: Yes.

Unknown Speaker: Assume the sale occurs there, but none of the transportation.

Mr. Johnston: Yes, Your Honor, it would.

Under the statute, if the sale occurs in Oklahoma, then the transaction is taxable in Oklahoma.

Unknown Speaker: Are any such sales at issue in this case, do you know?

Mr. Johnston: They are not to my knowledge, Your Honor.

Under the stipulations that are in the Joint Appendix, beginning at page 3, the intrastate routes and interstate routes that are operated or were operated by Jefferson involve... the intrastate being, of course, totally within the State of Oklahoma, and according to the stipulation the only sales involved in this case were those which originated in Oklahoma and terminated outside of the State.

Unknown Speaker: The stipulation seems inconsistent with something stated in the bankruptcy court opinion, and I just didn't know which one to think was the correct one.

Mr. Johnston: I... my memory of the opinion was that it did recognize that Jefferson sold other types of interstate trips in the State of Oklahoma.

For instance, round trips would be one type.

The stipulation wasn't part of that, but that was a stipulation that is in the record, that these sales, the exact sales in question in this case were all those which originated in Oklahoma and extended outside the State, or had a destination outside the State.

In that respect, Jefferson, while operating in Oklahoma and selling its bus trips and selling its bus tickets from various outlets and locations across the State for both intrastate and interstate trips... that is, extending beyond the State's borders, collected sales tax only on those bus tickets which were sold for intrastate trips.

Jefferson, of course, had a sales tax permit issued by... as a vendor by the State of Oklahoma, the Oklahoma Tax Commission, and dutifully reported all sales made in Oklahoma, both intrastate and interstate trips.

On the sales tax report, however, Jefferson then deducted those sales which were connected with interstate trips, did not collect or remit sales taxes on those sales, only the net.

Jefferson filed for bankruptcy, and office audits by the tax commission of Jefferson's sales tax report developed that the interstate trips, the tax was not being collected or remitted, and a claim was filed.

Jefferson objected in the bankruptcy court to the claim.

The bankruptcy court sustained Jefferson's claim that it violated... that the tax on these trips violated the Commerce Clause.

The court, of course, analyzed the State tax in view of the four-prong test of Complete Auto.

Analyzing and realizing that Jefferson is physically present in the State of Oklahoma when it makes all of these bus sales, these ticket sales, and that Jefferson's customers are physically present in the State when the sale is made, the bankruptcy court found that this presence satisfied both the nexus requirement of Complete Auto and also established that the State was providing services both to Jefferson and to its customers in connection with the sales transaction, and therefore the fourth prong was satisfied that the tax was fairly related to services provided by the taxing State.

As to the second prong of the Complete Auto test, however, that the tax be fairly apportioned, the court looked at the accepted test of whether or not the tax is internally consistent.

That is whether, if every other State enacted the same tax, would there be multiple or double taxation.

The court found that there is not, because, of course, a bus ticket can be sold in only one State.

As to the second portion, however, the bankruptcy court determined that the tax as it applies to interstate trips was not fully... fairly apportioned because the court envisioned that the tax was essentially the same as the tax in a prior case, Central Greyhound Lines v. Mealey.

However, in the case before this Court today, we are talking about a sales tax.

It is a tax on the consumer.

The taxable transaction is the sale itself, and it is not the thing that is purchased or the use of the thing purchased.

In Central Greyhound--

Unknown Speaker: Mr. Johnston, one more background fact.

In the two bankruptcy proceedings that I think involved another bus company there was a statement that you tax even tickets that were sold outside the State.

Was... the bankruptcy judge thought that the tax reached transportation of... where the ticket was sold out of State.

Was that incorrect?

Mr. Johnston: --I... it's incorrect under the law, Your Honor, and you're speaking of the Greyhound case, which is an almost identical case which is currently pending in the Fifth Circuit.

The stipulations in that case were a bit broader than the stipulations.

They did not restrict themselves to trips, only to trips originating in Oklahoma and terminating outside insofar as interstate trips are concerned, but the... I'm sorry--

Unknown Speaker: Does the tax reach, as the bankruptcy judges seem to think, transportation sold in other States, but that occurs at least in part in Oklahoma?

Mr. Johnston: --No, Your Honor, it does not.

Under the statute and under the Oklahoma supreme court decisions the Oklahoma sales tax is effective and applicable only if the sale occurs in Oklahoma, and in this case, that is if the trip is sold in Oklahoma.

That is, if I go and buy a ticket.

I'm not talking, of course, just the piece of paper but what the ticket represents and, of course, in common parlance one does not buy transportation to New York, one buys a ticket to New York.

Unknown Speaker: So this statement, the statute also allows Oklahoma to tax transportation sold in other States which occurs in Oklahoma, that's just flat wrong, is that your position?

Mr. Johnston: That's just flat wrong, Your Honor.

Under the statute and under the supreme court decisions in regard to the Oklahoma sales tax, the sale to be taxable in Oklahoma must occur in Oklahoma.

It cannot occur outside the State.

It simply doesn't apply.

Unknown Speaker: May I ask if your tax would cover... forget interstate commerce and transportation for a moment.

Supposing you bought your Super Bowl tickets in Oklahoma, would the tax apply, the Super Bowl being played in some other State?

Mr. Johnston: Yes, Your Honor, I believe it would, because my memory of the statute is that it does tax admission to places of amusement, and if the sale were made in Oklahoma, then it would be taxable in Oklahoma, because, as with the Super Bowl ticket or a bus ticket, the way people purchase these services--

Unknown Speaker: And going back to Justice O'Connor's question, there doesn't have to be any part of the service performed within the State?

Mr. Johnston: --Not in such circumstances, where you have certainly physical evidence in the form of the ticket, but legal evidence where the service is bought and paid for and at that point the purchaser has the right to the service and the right to do with that service as he will.

The ticket, for instance, whether it be a football game or a bus ticket, the purchaser once they buy and pay for the ticket they can give it away, they could sell it, I suppose they could leave it in a will.

In either case, I would also suggest that the ticket doesn't have to be used.

The service doesn't have to be enjoyed for the transaction to have occurred and for the transaction to be taxable.

In this case, the transportation involved doesn't have to be used.

It is not a tax on transportation, and that is the error of the courts below in their reliance upon Central Greyhound Lines v. Mealey, because that was a tax on the revenues from transportation.

It was tax... a gross income tax on the bus company.

Unknown Speaker: So, then, a travel agency doing business in Oklahoma pays the tax on all the sales it makes regardless of what the tickets are?

In other words, somebody buys tickets from an Oklahoma travel agent for use going from New York to London or some place, he'd still pay the tax in Oklahoma?

Mr. Johnston: If it's in regard to transportation?

Unknown Speaker: Yes.

Mr. Johnston: Yes, sir, under this statute.

If the sale occurs there, and it would be in that case, as I understand the question, then it would be taxable, yes, sir.

Unknown Speaker: Well, exactly what is the provision of the Oklahoma tax, because in answer to that question of Justice Stevens, you said if it applies to transportation, but then certainly a Super Bowl ticket to admit one into the Super Bowl doesn't deal with transportation.

What is the relevant provision of the Oklahoma tax statute?

Mr. Johnston: As to transportation it is... and that's contained on pages 2 and 3 of the brief for petitioner... in section 1354, title 68 of the Oklahoma statutes is the general levying statute, which levies the sales tax of 4 percent, it is now 4-1/2 percent of the gross receipts or gross proceeds of sale of a) tangible personal property, c) transportation for hire to persons by common carriers... I've omitted the rest of that, but it includes--

Unknown Speaker: Well, how would that reach tickets to the Super Bowl?

Mr. Johnston: --In other sections or subsections, rather, of the sales tax statute, the tax is levied on the sale of admission to amusement... sports and amusement places.

I thought I had made that clear.

But it is not in this subsection, but it is within the taxing statute as a specifically enumerated service.

The courts below, both the bankruptcy court, or all three of the courts, the bankruptcy court, the district court on appeal, and then the Eighth Circuit Court of Appeal, all held that the tax was not fairly apportioned under the external consistency test.

All three, however, based their decisions and relied upon the case of Central Greyhounds v. Mealey.

As I believe I earlier said, this was... that case involved a different kind of a tax, a different kind of a taxpayer, on a totally different transaction.

The district court, I believe it was, indicated that it found no substantial difference between a sales tax in this case and a gross income tax in the Central Greyhound case.

Unknown Speaker: With respect to Central Greyhound, is it your position that if New York had made that tax a tax on the sale of the ticket, then it would have come out the other way?

Mr. Johnston: I believe it would, Your Honor.

If it had been a sales tax on the consumer as opposed to an income tax on the provider of the service, then I believe that the focus of the constitutional examination which looks at the transaction would be looking at the transaction involving the consumer and his purchase, as opposed to the bus company and taxing its revenues from the providing of the service, and that, I believe, is the difference.

If it had been a different tax, I believe... if it had been a tax similar to this, then the results would have been different.

Unknown Speaker: But as a practical matter, what's the difference?

The measure is the same, which is the sale price of the ticket.

It's exactly the same measure.

Mr. Johnston: It is, Your Honor, but I believe that under all the precedents you have to look at the transaction that is being taxed.

In this situation, the transaction that is being taxed is the purchase of the service, not the providing of the service nor the making of money from the providing of the service.

Unknown Speaker: But there's no separate transaction in Central Greyhound, is it?

It's simply the moment at which you do the figuring.

Instead of saying the tax is due when the ticket is purchased, the tax is due when you add up all your gross income and find out what it is.

Isn't that the only difference?

Mr. Johnston: I don't believe that that is the only difference.

It certainly has that similarity, Your Honor.

Unknown Speaker: Is there... was there any other kind of income that went into gross income in Central Greyhound that is... in addition to revenue from the sale of transportation?

Mr. Johnston: I'm afraid I'm not... I'm not aware that there was.

If there was, I'm not aware--

Unknown Speaker: Then I'm not... then, like the court below, I'm not sure what the difference is, then.

Explain that to me again.

Mr. Johnston: --Because in Central Greyhound we are talking about taxing the bus company on its revenues, its gross receipts in that case, not net revenues, but from the providing of... providing its own income, the generation of income, in that case more than one State.

Unknown Speaker: Well, is the difference, then, that in the case of the tax here, the bus company is given an authorization to add on the tax up front and state it as a tax when it collects it, as distinct from simply dealing with it as a cost of business and passing it on sub silentio when it figures the price of its ticket?

Mr. Johnston: In this case the bus company is not only permitted to do that, it is required.

It's a provision of the statute.

Unknown Speaker: Well, I realize that, but is that, then, the only distinction between the two?

It's up front in one case and it's an unstated cost of doing business which increases the cost of the ticket in the other case?

Mr. Johnston: I think that's not only correct, Your Honor, but it also is constitutionally significant, because--

Unknown Speaker: That's the only difference.

That's what I'm trying to get at.

Mr. Johnston: --It is the primary difference, yes, sir.

As far as the economic result of an income tax for a corporation, of course, it is basically always going to trickle down to its customers in the form of higher prices for whatever the corporation is doing.

However, the tax on the corporation's income, even though the ultimate cost of that tax may eventually increase the cost of its services to the customers, for instance in the Liggett & Myers case, that does not, according to the court, make that a tax on the customer, and I believe we have--

Unknown Speaker: I thought Greyhound was a tax on the company?

Mr. Johnston: --Central Greyhound was, yes, sir.

Unknown Speaker: And that this is a tax on the purchaser, not on the company?

Mr. Johnston: Yes, sir, that is correct.

Unknown Speaker: That's a big difference.

Mr. Johnston: That is the difference.

Unknown Speaker: Why does that make a difference?

I mean, a State... the State of New York has a big interest, I take it, in the income that its own corporations make, so the connection between New York and its company, Greyhound, is great.

Here, with the sales tax, I guess Oklahoma has far less interest either in the company or in the trip, so if there's a difference, why does it cut in your favor?

Why doesn't it cut against you?

Mr. Johnston: The difference is, as far as Oklahoma's interest, is that Oklahoma is levying a transaction tax on the purchaser in Oklahoma and not on the bus company.

That transaction occurs totally within the State of Oklahoma and nowhere else.

Unknown Speaker: All right.

Is it the case here, I'm not certain, but suppose I'm in Massachusetts and my son's at school in California, and I think it would be nice to send him an apple every month, so I get these things in the mail you do, they'll send Washington apples to California once a month.

Can that be taxed in Massachusetts if I buy the apples in Massachusetts?

They're Washington apples going to California.

Mr. Johnston: I would doubt it.

Unknown Speaker: The answer's no, I take it.

All right.

Why is it any different if I buy him a haircut once a month?

I mean, suppose I'm in Massachusetts, I think he should get a haircut out at Stanford, so there's a new service, which there ought to be, that they'll give him a haircut once a month.

[Laughter]

I mean, does it make any difference?

If you can't tax the apples going from Washington to California, why should you be able to tax the haircut?

If you can't tax the haircut, why can you tax the bus trip?

All of those things are bought in Massachusetts.

Mr. Johnston: I think that the difference as it applies to this case, Your Honor, is that in the case of tangible personal property, a sales tax on that, you're taxing the transfer of the title or possession of that personal property.

Unknown Speaker: In all cases?

Mr. Johnston: The question is, is where does it occur?

Unknown Speaker: Yes, but why should there be a difference, my point is, between the apples and the haircut and the bus trip?

They all take place totally outside the State of Massachusetts, but the sales of each take place within.

Is there any reason they should be treated differently?

Mr. Johnston: Under that situation, Your Honor, yes, I believe there is, because if the sale of a ticket that represents the right to the bus trip on behalf of the customer, if that sale occurs in Massachusetts, according to your example, then the transaction whereby I purchase and acquire all the rights to the thing that I have purchased, that occurs in Massachusetts, and if Massachusetts has the Oklahoma-type sales tax, then it's taxable there, I submit.

Unknown Speaker: Why is that different from the apples?

All your rights to the apple are acquired in Massachusetts.

I really don't understand the distinction you're drawing.

In fact, I thought you told me earlier that the apple transaction would be taxed?

Mr. Johnston: I'm sorry, Your Honor.

Unknown Speaker: I thought you told me earlier that a comparable transaction to the apple transaction would be subject to the tax.

I asked you about a Super Bowl ticket.

That's... I don't see the difference between going to the Super Bowl in Miami and selling apples in Miami.

Mr. Johnston: Your Honor, I think--

Unknown Speaker: The right to have the event take place is purchased in your State.

Mr. Johnston: --Yes, Your Honor.

I made the distinction only between tangible personal property and service to this extent, that it's well settled that for tangible personal property you have the delivery of either title or possession.

That is... and the right to control.

In the situation of the bus ticket and intangibles, intangible services, then we are talking about the same transaction, it's the same transfer, but it is the right to have and control that service, not necessarily the ultimate enjoyment.

For instance, it is not the tax on the eating of the apple or the riding of the bus.

Unknown Speaker: You have to make the distinction for personal property because we've held that the State where the contract for sale is made cannot impose a sales tax, haven't we?

Mr. Johnston: I believe you have, Your Honor.

Yes, you have.

If that's--

Unknown Speaker: Mr. Johnston--

Mr. Johnston: --the only--

Unknown Speaker: --That's the only reason for the distinction I can see.

I'm still puzzled by the initial question that Justice O'Connor posed and your answer to it.

You do have in the stipulation that here, interstate routes are those which originate in Oklahoma and terminate in a State other than Oklahoma.

Mr. Johnston: --Yes, ma'am.

Unknown Speaker: So does that stipulation mean that what we have been talking about, a ticket purchased in Oklahoma but for transportation between States other than Oklahoma, that that is something that the statute purports to reach but is not at issue in this case?

Mr. Johnston: That is correct, Your Honor.

Unknown Speaker: So the only sales that are at issue in this case are routes that originate in Oklahoma and terminate some place else?

Mr. Johnston: That is what the stipulation covers, and that's all it covers, Your Honor.

I have no doubt that it's possible for the sales that were reported during these periods by Jefferson, some of them may have been round trips... round trip... round trips out of the State and back in.

I do not know.

The record doesn't reflect it.

The only stipulation is what we have before us.

Unknown Speaker: What are the case authorities that you can point us to that require this distinction between tangible services and the sale of goods, or intangible services, rather, and the sale of goods?

Mr. Johnston: Your Honor, I--

Unknown Speaker: I take it you're sticking with that distinction so that if Oklahoma tries to tax a sale for goods that are shipped and delivered in other States, the shipment outside of Oklahoma, the delivery outside of Oklahoma, the receipt outside of Oklahoma but the sale in Oklahoma, I take it you say that's not taxable?

Mr. Johnston: --If Your Honor... if I understand, this would be, for instance--

Unknown Speaker: This is--

Mr. Johnston: --a sale in Oklahoma--

Unknown Speaker: --This is the apple.

Mr. Johnston: --of something that occurred totally outside.

Unknown Speaker: Yes.

Justice Breyer's apple hypothetical.

Mr. Johnston: Yes.

Your Honor, it... under the statute, if under all the circumstances of the case the sale occurred, then I believe that where the service were employed or enjoyed would not make a difference under the statute.

Unknown Speaker: Even if this service were for the delivery of tangible property?

I mean, it's hard to call that a service.

The apple hypothetical, are you sticking with the answer that that is not taxable?

Mr. Johnston: If a sale were... if I ordered the apple to be delivered from one State to another State--

Unknown Speaker: You complete the sale in Oklahoma, but the apples are going to be shipped from Washington to California.

Mr. Johnston: --There is a question in my mind whether in that case, although you're assuming the complete... the sale in Oklahoma.

I'm not sure it would be an Oklahoma sale in that case.

The... for instance, in the--

Unknown Speaker: Well, why is that different from Justice Stevens' Super Bowl problem?

Mr. Johnston: --Because in the Super Bowl problem, as the question was posed, the sale was completed.

That is, in the State of Oklahoma, both parties were there, and the transfer of the ticket representing the service and giving the right to the service was transferred from one to the other in the State of Oklahoma.

So as I understood the question, all of the transaction as far as the right to the service occurred within the State of Oklahoma.

Unknown Speaker: Well, let's assume the same thing happens with the apple hypothetical.

The deal is made, signed, sealed, completed in Oklahoma, and delivery and receipt to take place outside of Oklahoma, delivery of the goods that are the subject of the completed sales contract.

Mr. Johnston: The cases with which I am familiar do require that there be some sort of delivery, the completion, although the statute requires transfer of either title or possession in the State.

Unknown Speaker: Okay.

Is that the McGoldrick case?

What are the cases that--

Mr. Johnston: The McGoldrick--

Unknown Speaker: --you can point us to from this Court that require us to make a distinction between services and tangible goods, if that's the distinction you want us to make?

Mr. Johnston: --The McGoldrick case would be one case, Your Honor, because the agreement was made first, then the coal was mined or released, then it was shipped from a place out of State into New York, and actual physical delivery of the coal to the buying customer was made in New York, so the interstate portion of that delivery the Court found to be basically incidental and not violative of interstate commerce.

Other cases to which we would point the Court's attention, and we have in the brief, are those situations involving, for instance, airline fuel in Wardair Canada.

Although the fuel was delivered and sold to the airline in the State of Florida, it was actually used primarily out of the State of Florida.

The courts nevertheless found that it was taxable certainly for domestic Commerce Clause purposes.

There was, of course, the foreign Commerce Clause additional considerations.

And the similar situation in the Itel Containers, where the containers leased were used exclusively in foreign commerce and, of course, we believe that the decision in Goldberg v. Sweet involving the telephone calls is very similar to the situation in this case, because in effect you had a tax there very similar to a sales tax.

It was of an intangible service.

Unknown Speaker: What about the Court's stress of the credit mechanism that was present in that case and not in this case?

Mr. Johnston: I believe because of the circumstances or the nature of that transaction, and the statute provided the possibility as the Court noted, although I believe the Court said that there was a very, very slight possibility, but a possibility, that an interstate telephone call could be subject to tax in two States, but only two States, and the Court then, of course, observed that even if there was that slight possibility, then the credit provision would act to take care to avoid any actual multiple taxation.

I believe in this case that where you have the transaction... I don't believe any other State would have nexus to tax the transaction that we're talking about here, and that is the sale of the trip.

Unknown Speaker: But it would have... would be able to put a gross receipts tax on the company--

Mr. Johnston: It could.

Unknown Speaker: --for the miles in that State.

Mr. Johnston: It could in that event, Your Honor, as I believe most bus companies are entitled to various taxes, and certainly income taxes.

Under the scenario that is adopted by the courts below, if one State taxed a bus company and another State taxed a customer, that amounts to multiple taxation, then obviously one of those taxes has to go, and that I believe is not... this is not what the law says, and it's certainly not what we have today.

Most companies, if not all companies, are subject to taxes on their income along with other taxes.

This does not, under the Commerce Clause, however, prevent States from taxing their customers when those customers buy products from those companies.

I believe the two different types of taxes are not equatable and, therefore, in this case we do not have the, even the--

Unknown Speaker: Thank you, Mr. Johnston.

Your time has expired.

Mr. Johnston: --Thank you.

Unknown Speaker: Mr. DeRuyter, we'll hear from you.

Argument of Steven D. DeRuyter

Mr. DeRuyter: Mr. Chief Justice, may it please the Court:

The practical effect of this tax and the express language of the taxing statute are the same.

This is a tax on interstate bus transportation.

However the State of Oklahoma may attempt to labelize or localize the activity which it seeks to impose its tax, this is a tax on interstate activities which occur far beyond the borders of that State.

Now, the lower--

Unknown Speaker: Would it be the same for an income tax on the revenues derived from interstate transportation?

Are they also exempt?

Mr. DeRuyter: --This Court has held that income tax must be fairly apportioned and has dealt with a number of apportionment formulae which it requires that income taxes be subjected to, so the answer to that--

Unknown Speaker: But the income from interstate transportation is not exempt from State taxes, is it?

Mr. DeRuyter: --It is not exempt, no.

Unknown Speaker: But you're saying that the... that a sales tax cannot be imposed on interstate transportation.

Mr. DeRuyter: I am not saying that a sales tax cannot be imposed on interstate transportation.

I am simply saying that when it is imposed on interstate transportation it must follow the precedents of this Court, the Complete Auto requirement of fair apportionment.

Unknown Speaker: What about a... supposing your bus company has a route from Oklahoma City to Dallas, and the bus fills up in Oklahoma City with gas, enough to take it to Dallas, now can Oklahoma tax the entirety of that purchase of gas even though a lot of it is going to be used for transportation in Texas?

Mr. DeRuyter: Yes.

The answer to that is yes, because the total delivery of possession of that gas is made within the State of Oklahoma.

That's similar to the Itel case and McGoldrick and a number of cases where this Court, as the State of Oklahoma has said, the delivery of possession and title, but principally delivery of possession, gives a State the right to impose a tax.

Unknown Speaker: Well, what about a tax on... an excise tax on interstate phone calls made from or to an in-State address?

Mr. DeRuyter: That's similar to what... the situation that this Court dealt with in Goldberg.

Unknown Speaker: Exactly, and what did we hold there?

Mr. DeRuyter: The Court held there, based on the particular, different facts from this one, that--

Unknown Speaker: Well, didn't we hold that the State could tax those calls?

Mr. DeRuyter: --You held that the State could tax that service address.

Unknown Speaker: The whole price of the call--

Mr. DeRuyter: That's--

Unknown Speaker: --including the portion that covered the out-of-State use of the facilities of the telephone company.

Mr. DeRuyter: --That is correct.

Unknown Speaker: Well, why is this different?

Is it any more difficult to divide up or apportion telephone line charges than highways?

Mr. DeRuyter: The finding of the Court in Goldberg... the answer to your question is yes, this case is different than the Goldberg situation.

The Court in that case made a finding based on the facts that there was an administrative impossibility of apportionment.

Here, by contrast, and we cite the Central--

Unknown Speaker: Well, that strikes me as being insubstantial.

I don't see why it's any more difficult there than here.

I would think you have exactly the same thing.

Mr. DeRuyter: --There were parties to that case that argued that... that it was administratively feasible in Goldberg to apportion the tax between the States, but the Court found, as part of its decision, that it was administratively impossible.

Here we have the contrast where this Court in a number of situations has held that it is not only administratively possible but has approved judicially the apportionment on the basis of mileage.

In fact, in Complete Auto itself, the Court indicated that it was fairly apportioned because it only applied to transportation within the State of Mississippi.

Unknown Speaker: Well, how about Justice Stevens' Super Bowl ticket purchase in Oklahoma?

Mr. DeRuyter: I believe that--

Unknown Speaker: How do you apportion that?

Mr. DeRuyter: --I believe that that should not be subject to the Oklahoma tax because, assuming that you find that the Super Bowl ticket is a service, a performance, then the place where the service is performed is the place that may... that has the jurisdiction to impose a tax.

That is what the... by the way, the State of Oklahoma supreme court in the Pioneer Telephone case has so held.

It has held that the place of delivery of possession is the place where goods may be taxed, but the place of performance is the place that can tax a service.

Interestingly, that case, plus the Tad Screen case which we cite in our brief, are never dealt with by the commission in their briefs or in its argument before this Court.

Unknown Speaker: Well, don't those cases suggest that maybe this tax should not have been imposed as a matter of State law, rather than as a matter of Federal constitutional law, if you're relying on the Oklahoma supreme court opinion?

Mr. DeRuyter: We're arguing both, Your Honor.

Unknown Speaker: But don't we have to assume... or maybe we don't, I don't know... that this tax is properly imposed as a matter of State law?

If it isn't, we surely can save ourselves a lot of work.

Have you argued that it's not imposed, that as a matter of State law the tax is not collectible?

Mr. DeRuyter: I don't believe we have.

We've argued in our brief that the manner in which the State has applied the tax to Jefferson Bus Lines is inappropriate because they have argued that they can impose their tax on the sale of a ticket, the transaction or the payment, it's not clear, rather than on the delivery of the service, which is the operating incidence, the object of the tax, and therefore we have argued that as applied, this is unconstitutional.

Unknown Speaker: Mr. DeRuyter, one argument that was made, I think by the tax commission, was that if they were able to tax the customer who is traveling on Oklahoma roads, set up tolls, maybe, along the road, so they taxed all of the miles within Oklahoma, that they'd probably net more than they are now, when they're taxing only the person who purchased the ticket in Oklahoma.

Have you shown that that is not so, that in fact if they went on your theory of taxing people who travel the roads in Oklahoma, no matter where they begin, no matter where they end... the argument is that they State would collect even more if they did it that way.

Have you shown that that's not so?

Mr. DeRuyter: No, we have not shown that.

That... that would be a different case.

It is not before the Court, and what they're... I mean, what they're suggesting is that by applying a use tax in combination with the sales tax only to all miles traveled within the State, they're suggesting that they would... they would get equal or more tax than they're getting here.

That argument, that averaging argument has not been sustained by this Court.

I think this spring in Associated Industries the argument was made that a use tax on average was fair, but this Court held that that kind of analysis was not appropriate, that you must look at the individual taxpayer, and that is where it is significant that the tax here is imposed upon the individual passenger, because to say on average, passengers are not discriminated against or unfairly apportioned does not solve he dilemma of the individual passenger.

Unknown Speaker: Under your theory, I take it all sales taxes on rent-a-cars have to be apportioned to the extent the rent-a-car's being driven out of State?

Mr. DeRuyter: If the tax... the answer is yes, assuming the tax is imposed on the delivery of the rental itself as opposed to the situation in, I believe it was Itel where they... there was a lease of containers, but they said the tax was imposed on the delivery of possession.

If the tax is like Itel, then the answer would be different, but if the tax is imposed on the lease, then you should have an apportionment.

Unknown Speaker: And the same if you hire an attorney in one State but all of the services really involve his or her traveling out of State to make a report and a recommendation, if there's a State service tax that has to be apportioned?

Mr. DeRuyter: That is correct.

That is what I do with the State of South Dakota.

I allocate my bills to clients that I bill in South Dakota on the portion of the services that I do in Minnesota.

Unknown Speaker: How are you coming out on that with the State, pretty well?

[Laughter]

Mr. DeRuyter: But we are required--

Unknown Speaker: But you think constitutionally this is required?

Mr. DeRuyter: --Yes.

I look at Evco, Ingram-Richardson, decisions of this Court which dealt with services rendered wholly within one State, and the Court said the tax is properly imposed because all of the services were rendered within a single State.

The same thing in Complete Auto.

There just has not been the case that at least I'm aware of where you have services rendered across State lines as you have in this case.

Unknown Speaker: Well, except for the telephone calls in Goldberg.

Mr. DeRuyter: Goldberg, as I indicated, administratively impossible.

There the Court said that there were only two States that could impose the... that had the nexus to impose the tax, and they also said that to the extent there was a credit mechanism there could be no multiple taxation, and therefore in discussing the apportionment aspect of Complete Auto, the Court said that... that the... that the way the telephone calls were made were... the way people understood the use of the telephone was consistent with applying a tax on the user in the State.

Unknown Speaker: Well, if you say the taxable event is the sale of the ticket, only one State can impose it, isn't that so?

You don't get the problem of multiple taxation if the taxable event is the sale.

Mr. DeRuyter: I believe that you do, that by saying that you impose a tax on the sale of the ticket, at bottom what you are saying is that you are imposing a tax on the contract, making of the contract and the making of the payment.

In this case, we happen to have a coincidence of the making of the contract and the making of the payment in the State of Oklahoma, but it would be quite simple... I mean, obvious in a different situation.

I think Justice Breyer has given us an example--

Unknown Speaker: But in this situation, what other State could tax the sale, do you suppose?

If the purchase is made in Oklahoma, and the payment of the ticket is made in Oklahoma, what other State can tax the sale, in your view?

Mr. DeRuyter: --No other view can tax the act of making the sale.

Unknown Speaker: Right.

Mr. DeRuyter: However, I'm... the... this Court has said you must look at the operating incidence of the tax.

The operating incidence of this tax is on the measure of the tax, and the measure of the tax is the gross receipts from the total trip, and therefore our argument is that the... the argument of the State of Oklahoma is too narrow, that you can't look only at the actual transaction, but you must look at the operating incidence of the tax, and that is clearly on the total gross receipts, which is not apportioned.

Unknown Speaker: And your apportionment formula that you suggest is mileage traveled in each State?

Mr. DeRuyter: The determination of an apportionment formula is in essence a legislative decision.

There is in this case... to answer the Goldberg situation, there is in this factual situation an administratively feasible method of apportionment which is judicially sanctioned, and that's what we're saying.

Unknown Speaker: Which is mileage?

Mr. DeRuyter: Which is mileage.

Unknown Speaker: Well, suppose that a person transfers.

He takes the bus from Oklahoma to St. Louis, and then has to transfer and spends a lot of time in St. Louis.

It would be like an airline hub, changing to a different bus to go on, say, I don't know, to New Orleans.

Couldn't Missouri argue, well, it's not just miles, because there was a hub here, and there was a bus change so we get more of the tax, it's not just mileage?

It seems to me that mileage might not be administratively feasible or necessarily fair.

Mr. DeRuyter: I agree in a theoretical sense that that is a legislative decision.

We're not asking the Court--

Unknown Speaker: But it's not just a legislative decision if we're asking whether or not the apportionment mechanism is available and feasible, because that's what we need to distinguish the Illinois tax on telephone calls.

Mr. DeRuyter: --I certainly believe that apportionment on the basis of mileage is not only feasible but judicially sanctioned, and it was referenced as such in the Illinois decision, citing Central Greyhound v. Mealey.

Unknown Speaker: Mr. DeRuyter, would you explain why it isn't necessary for New York in the Berwind-White situation to take off something because the coal traveled interstate?

New York can tax the full value of the sale... although it started some place else and value was added all along the way it's the place where it ends up can tax the full value.

Why can't, equally with regard to services, the place where it starts out tax the full value?

Why such a difference between the treatment of goods on the one hand, where we let the State tax it all at the end, and here, a similar thing that the State can lay its hands on, the sale of the ticket, can also tax the whole thing?

Why should we treat those differently?

Mr. DeRuyter: We argue that our position is consistent.

In the McGoldrick Berwind-White case, the State is allowed to impose a tax on the full sale price of the delivery of possession of the good.

That is the entire object of the transaction.

What we are arguing is that applying that same rule to the delivery of services, that the State is entitled to impose a tax on the object of the transaction, which is the delivery of the services where those services occur, and only the portion of those services that occur in the taxing State can that State tax.

Unknown Speaker: Are you saying that unlike goods, where we let somebody tax the full value, nobody in an interstate sale can tax the full value of the service?

Mr. DeRuyter: No.

What I am saying is that the combination of States in which the service is performed in total can tax 100 percent of the value of the service.

Unknown Speaker: I don't follow that.

Tell me who can tax the full value of a bus trip from Oklahoma to Texas.

Mr. DeRuyter: Assuming... Oklahoma and Texas in combination can tax 100 percent of the value of that--

Unknown Speaker: But New York didn't have to worry about combining with anybody in Berwind-White.

It could tax the full value of the sale.

I'm asking you, and I think you answered that services, yes, one place could tax the full value of the service too, but you have answered the concrete example differently.

You said two places could, but not one place.

Mr. DeRuyter: --I go back to what this Court has said in those delivery of goods cases, that the object of the transaction is the delivery of the good.

Unknown Speaker: So you're then making a distinction between, there isn't one place that can tax in full a service that's rendered interstate, unlike goods.

Mr. DeRuyter: I agree with that.

Unknown Speaker: Why isn't the object of the transaction in this particular case the right to obtain travel services at some future time, and why isn't that transaction just as complete as the transaction when goods are purchased?

Mr. DeRuyter: Because when a person purchases a ticket, they don't have the full right to the object of that transaction.

Unknown Speaker: But they do.

They've got the ticket, and if the bus company won't carry them, they can sue the bus company for damages.

I mean, economically, it seems to me, they've got the full value of the transaction, and they're going to realize that value either by traveling or by making the bus company pay.

The distinction, I suppose is, when they buy the coal, the people along the line responsible for getting the coal there no longer have to do anything, whereas in this case people along the line in the future do have to do something.

Either they've got to carry them on the bus, or they've got to pay up in some way, but the fact is the right to the service is what he's buying, and I would suppose that right is complete once he pays the money.

Mr. DeRuyter: I don't agree with that.

I believe that the delivery of the good cases essentially say that when a purchaser of goods has complete dominion and control on those goods, the transaction is complete, whereas in the purchase of a service, the dominion and control of the object of that transaction can never be complete until the passenger completes their travel, and if that is interrupted in the middle, they have a right to a refund of the portion of the sales tax, on the portion of the trip they didn't complete.

Unknown Speaker: Would you agree, then, that if the bus company were selling the tickets in the first place to travel agents and travel agents were then selling them to the travelers, that at least the transaction as between the bus company and the travel agent would be complete at that point, and that would be fully taxable?

Mr. DeRuyter: I don't believe that's the case.

Unknown Speaker: Well, that isn't the case here, but if that were the case, would that particular transaction as between the company and the agent, as distinct from the agent and the traveler, even on your theory, be fully taxable without apportionment?

Mr. DeRuyter: I don't think so, because the travel agent is simply an agent in that situation, either for the passenger or for Jefferson Lines, and it should not make a difference on how the transaction is taxed.

The object of the transaction, the object of the tax and the tax is not laid on the travel agency but rather it's laid on the passenger, the user of the service, so I think the answer is that it passes through the travel agency.

Unknown Speaker: This may not be a very legally persuasive argument, but it seems to me that if Oklahoma were right in this case, many, many States would have enacted sales taxes where none now exist on transportation tickets.

Do you agree with that?

I mean... let me put it this way.

I take it this is a unique tax, or am I incorrect?

Do many States tax the sale of airline tickets for interstate travel, for instance?

Mr. DeRuyter: I think airline tickets are... Congress has acted in that area, but--

Unknown Speaker: The antihead tax, right?

I mean, that you can't have a head tax.

Mr. DeRuyter: --Right.

Right.

Unknown Speaker: But what about other bus companies?

Is Oklahoma peculiar in taxing bus tickets, or do other States do it, too?

Mr. DeRuyter: Jefferson operates on routes that basically go north and south from the State of Minnesota.

The only State that we're aware of in that system that imposes a tax on bus transportation is the State of Missouri, which imposes a tax applicable only on intrastate tickets.

In other words, they only impose their tax on a ticket purchased for travel beginning and ending within the State of Missouri, never touching another State.

Other than that, there may be two or three other States throughout the country that seek to impose a tax on bus transportation.

Unknown Speaker: I'm not sure I understand the state of the art on this, but if the... or, I start out in Washington, the State of Washington, and I buy a bus ticket and a crate of apples, and I'm going to New York, and I take it if I eat up the apples on the way, all New York can tax is the two remaining ones that are with me in New York.

Is that the state of the law on goods?

I bought the whole thing, by the way, in New York.

But is that the state of the law on goods?

Mr. DeRuyter: Yes.

Unknown Speaker: Yes.

Okay.

Mr. DeRuyter: Yes, if they were all delivered to New York.

Unknown Speaker: Then I take it on services... if that's the state of the law on goods, then I take it on services it would be the same, that New York could tax me on that portion of the bus trip that takes place in New York, but it couldn't tax me on the portion in Iowa any more than... on your theory any more than it could tax me on the apples that I ate as I was going through Iowa.

Mr. DeRuyter: Exactly.

Unknown Speaker: All right.

But then what do you do about the case of the telephone system, because with the telephones I can understand that I'm in Illinois, and I phone my brother in New York, and I can easily imagine I got the service of talking to my brother when I was in Illinois.

It's as if he's sort of curled up inside the receiver.

[Laughter]

There's a voice there, and I hear it, and so forth.

But also the same thing is happening in New York, so why couldn't you say, well, look, at least New York and Illinois could tax this.

So how do we reconcile that case with what our theory was on the bus with the apples?

That's where I'm having... I mean, we've got... I've got it all worked out, almost but not quite.

That's--

Mr. DeRuyter: I can't answer your question without reference to the Goldberg decision.

There, they only imposed the tax on calls charged to a service address in Illinois, so there would not be a tax on a call that was charged to a service address in New York.

That's the first part of that answer.

Secondly, they found as a matter of fact that it was administratively impossible to allocate... you know, where the service was performed.

If... and I submit, if another case came up, technology has changed that they can allocate that telephone service, then I would argue that telephone case would be similar to the case we have before the Court today.

Unknown Speaker: --Why couldn't they simply have said, we allocate it 50-50, one person is curled up inside the telephone in Illinois, another one is curled up in New York, we split it right in half, and each State could--

Mr. DeRuyter: I think--

Unknown Speaker: --What about the States in between?

There's nobody curled up anywhere.

[Laughter]

Mr. DeRuyter: --Are we talking buses now or telephones?

Unknown Speaker: Telephones.

Mr. DeRuyter: If we're talking telephones, the... that's similar to a tax that we cite in our materials, the case out of Florida, and that's exactly what they did, and that might be an appropriate apportionment.

What this Court held in Goldberg was that the State of Illinois could impose a tax on 100 percent of the fees charged to a service address in Illinois.

Unknown Speaker: And spoke of the problem of, the difficulty of attribution.

Mr. DeRuyter: Exactly.

Unknown Speaker: Yes, and it doesn't seem to be a difficult... I mean, it looks as though there's a very simple way that they might apportion, and so the question is, do we follow... do we say, well, if it was tough in the phone case, it's equally tough in this case, and say there can't be an apportionment, or do we say we were wrong about apportionment in the first case, it's easy in each instance, and therefore we see it your way here?

Which way do we go?

Mr. DeRuyter: I've thought about... I thought about... you know, when I've read Goldberg, my view of that is simply that I don't think the State of Oklahoma argues that apportionment on a mileage basis is difficult, or impossible to do.

They simply argue it's not relevant in this case.

As opposed to the telephone situation, as I indicated before, if the facts were different in Goldberg I think the result might have been different in Goldberg, and if you have the technology to allocate to States where there's a real nexus to tax in Goldberg, I think you might have a different... my view of it, there would be a different result.

Unknown Speaker: You haven't shown that there's any multiple taxation in fact in this case.

In other words, the transportation, say, from Oklahoma to Texas, Texas is not laying a tax on that customer so that the ticket is being taxed twice.

Mr. DeRuyter: You are correct.

We have not shown actual multiple taxation.

We suggest that there's a high possibility, particularly once the States read the decision in this case, for other States to impose use taxes or sales taxes with the same language that we have in this case.

In other words, the tax here is on the rendering and furnishing of services.

They could impose that or a gross receipts tax where a credit mechanism, for example, would not--

Unknown Speaker: As long as the tax is imposed on a customer, how could they impose... how could another State, other than the one where the ticket is bought, impose a tax?

Charge it on the bus?

I mean--

Mr. DeRuyter: --How could another State impose a tax on the customer?

Unknown Speaker: --On the passenger.

Mr. DeRuyter: On the passenger.

A use tax, for example.

Unknown Speaker: How would that work?

You get on the bus in Oklahoma City to get off in Minneapolis.

You buy your ticket, you pay the sales tax.

How would Minneapolis collect a use tax?

Mr. DeRuyter: Minnesota would simply audit the tickets purchased outside the State and ask for an allocation on the... assuming mileage--

Unknown Speaker: On the passenger, by--

Mr. DeRuyter: --Impose it on the passenger, require that the bus company collect the tax.

That's typical use tax.

Unknown Speaker: --When they get off the bus.

I see.

Mr. DeRuyter: Not when they get off the bus.

The passenger would have it... would have it collected by Jefferson, you know, when he bought the ticket in Oklahoma.

Unknown Speaker: But the taxable event in Minneapolis is alighting from the bus?

Mr. DeRuyter: No.

The taxable event in Minnesota is the travel which commences at the Iowa border and concludes at the terminal wherever they get off.

Unknown Speaker: So you wouldn't be taxing the full value of the ticket in Minnesota, you would just be taxing an aliquot share based on mileage?

Mr. DeRuyter: That's what I would suggest.

However, if Minnesota adopted a sales tax statute identical to the tax statute before the Court, I believe that there's no apportionment.

They could impose a tax on the full value.

Chief Justice Rehnquist: Thank you, Mr. DeRuyter.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

Reich v. Collins, Revenue Commissioner Of Georgia - Oral Argument

Fri, 09 Jan 2009 14:49:57 +0000

Case:

Reich v. Collins, Revenue Commissioner Of Georgia

Media File:

93-908_19941011-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Carlton M. Henson

Chief Justice Rehnquist: We'll hear argument now in Number 93-908, Charles Reich v. Marcus E. Collins.

Mr. Henson.

Mr. Henson: Thank you, Mr. Chief Justice, and may it please the Court--

This is yet another, and hopefully the last, in a series of cases involving the State's unconstitutional taxation of Federal retirement benefits.

Since at least 1985, when Federal retirees first filed suit in Georgia.

Federal retirees across this country have been trying to collect refunds of taxes that were illegally and unconstitutionally collected from them by the States.

In 1989 in Davis, this Court confirmed that a State may not impose an income tax on Federal retirement benefits if it simultaneously provides an exemption from State retirement benefits.

Two years later in Barker, the Court confirmed that the holding in Davis applied to military retirement benefits, and in 1993, in Harper, this Court confirmed that its decision in Davis must be applied retroactively.

Harper, however, stopped short of awarding refunds.

Thus, after almost a decade of effort by Federal retirees, this case ultimately presents the question of whether the Constitution requires refunds to Federal retirees under the circumstances here presented.

This question has already been answered in the affirmative by this Court.

As the Court held in McKesson, our precedents establish that if a State penalizes taxpayers for failure to remit their taxes in timely fashion, the Due Process Clause requires the State to afford taxpayers a meaningful opportunity to secure post payment relief.

Further, the Court held that if a State avails itself of this approach, establishing various sanctions and summary remedies designed so that taxpayers tender tax payments before the objections are entertained and resolved, the State does not provide a meaningful predeprivation hearing.

Georgia does not dispute that it has established summary sanctions, summary remedies and sanctions here, nor does it dispute that the purpose of these sanctions and remedies is designed to ensure payment.

On page 30 of the brief of the respondents, they write,

"Georgia's statutory provisions concerning the nonpayment of taxes are all reasonable measures designed to see that taxes are paid if they are legally owed. "

Unknown Speaker: Well, Mr. Henson, in your view, what can a State do to ensure that taxes are paid without running afoul of this coercion, or whatever you want to call it?

Mr. Henson: Without triggering the requirement to provide meaningful--

Unknown Speaker: Yes.

Mr. Henson: --backwardlooking relief?

O'Connor talks about reasonably equal terms, and Harper references constitutionally significant duress, so by implication there's some level where there is constitutionally insignificant duress, or the terms might be unequal but not reasonably unequal.

I don't have a specific formula to present to the Court.

If the States are looking for a bright line rule, then I think parity is one that's fairly read from the cases, but this case is far beyond anything that the Court--

Unknown Speaker: Well, can a State require payment under protest?

Mr. Henson: --I don't think there's any question that McKesson clearly holds that.

Unknown Speaker: And payment, rather than just protest.

Mr. Henson: I think that's clear from McKesson, Your Honor.

The sanctions that the State has here, though, are much more severe than just some minimal requirement that the taxpayer pay under protest.

Unknown Speaker: Would you agree that if the State's insurance consisted of a lien and interest running on any unpaid balance at something substantially equivalent to market rate, that that would create no problem?

Mr. Henson: I think that's a closer case, Your Honor.

I think that probably would satisfy the McKesson standard.

Unknown Speaker: What about the posting of a bond?

Mr. Henson: By itself, no financial sanctions, no penalty, in that case, Your Honor, I think that's very much like the Chief Justice's payunderprotest hypothetical, basically.

Unknown Speaker: Well, when you say no penalty, does that assume that if the taxpayer prevails, he's entitled to reimbursement for the bond premium?

Mr. Henson: Well--

Unknown Speaker: Suppose he's out the bond premium?

Mr. Henson: --I'm sorry, I didn't hear the question.

Unknown Speaker: Suppose the taxpayer has to pay for the cost of the bond premium, and there's no reimbursement in the event he prevails.

Mr. Henson: That, to my ear that sounds like he runs afoul of McKesson.

That... that is more than just the... more than just insignificant duress.

Unknown Speaker: What if--

Mr. Henson: That's a real cost that the taxpayer begins to bear there.

Unknown Speaker: --Yes.

He could pay under protest--

Mr. Henson: That's right.

Unknown Speaker: --instead of doing that, and that would be okay.

He has the option of either paying under protest, or posting a bond.

Mr. Henson: All right.

Unknown Speaker: That would be okay, wouldn't it?

Mr. Henson: I think you're right, Your Honor.

Of course, what we have here is far more severe than either of those hypotheticals.

Unknown Speaker: Let me just ask a little bit about what we have here.

Suppose you have, hypothetically, a State with an adequate predeprivation remedy, and it also has a refund statute.

The taxpayer elects the refund route, and the refund statute's repealed.

Mr. Henson: Ex post facto?

Unknown Speaker: Yes.

Mr. Henson: I think that would be unconstitutional, Your Honor.

Unknown Speaker: Is that what happened here?

Mr. Henson: Well, it was rep... effectively, yes.

There was absolutely no doubt that the refund statute applied to these Federal retirees, and the respondents repeatedly wrote in briefs before the Georgia supreme court and in other courts of Georgia that... there were Georgia supreme court cases on point.

Unknown Speaker: Isn't the problem that Georgia supreme court said, no, it doesn't apply to a constitutionally invalid tax, that's what our law is now, that's what our law was then, and we have the same right to take the position, in fact obligation, that everything we say about what the law is, was, is fully retroactive, the same right and obligation that the U.S. courts do?

Mr. Henson: If... if that was the case, I would agree with Your Honor, except here, both the... the legislative history of the statute clearly established that the purpose of the statute was to provide for refunds of taxes that were later declared unconstitutional.

The Georgia supreme court had issued a decision in the Parke, Davis case that expressly held that the refund statute was the appropriate procedure for challenging an unconstitutional tax under the Federal Constitution, in that case a Commerce Clause challenge.

Unknown Speaker: Well, you--

Mr. Henson: So--

Unknown Speaker: --Do we have to hold that Georgia changed its law?

I mean, I'm willing to accept what the Georgia supreme court said.

If Georgia supreme court says that was always Georgia law, it was always Georgia law.

But your argument would remain, well, if it was Georgia law, it certainly didn't seem to be Georgia law.

Mr. Henson: --Precisely, Your Honor.

Unknown Speaker: And... but isn't that the only point you have to make?

You don't really have to argue that Georgia changed its law.

You only have to argue that Georgia should have made its law clear so that a taxpayer would know how to get a refund and not be snookered by thinking he could proceed one way and then be told after the fact that he couldn't.

Mr. Henson: That's exactly right, Your Honor.

The rule this--

Unknown Speaker: Well, is Georgia now, as you understand it, asserting sovereign immunity and just saying, we do not waive our sovereign immunity for backwardlooking relief?

Is that what Georgia is saying today?

Mr. Henson: --That does seem to be their latest idea, Your Honor.

Unknown Speaker: What if this suit were in Federal court?

Would the Eleventh Amendment enable Georgia to take that position and defeat a remedy if the suit were in Federal court?

Mr. Henson: I think we would have a problem under the Eleventh Amendment with respect to the Department of Revenue as a defendant.

With respect to the individual claims against Marcus Collins as the Revenue Commissioner, my understanding of the Court's jurisprudence is that we would not.

I think that--

Unknown Speaker: But you say that if the suit is in the State's own court it can't assert sovereign immunity.

Mr. Henson: --Well, no, Your Honor, not under the circumstances of this case, and particularly here.

You know, they put this forward as a threshold issue regarding the State's interpretation of its own sovereign immunity.

Well, presumably the Georgia supreme court is part of the sovereign, and presumably it's a pretty good arbiter of what the sovereign immunity would be, but they stepped right over that threshold.

They didn't hesitate for a nanosecond to get to the merits of this issue.

They didn't have any problem with sovereign immunity.

Unknown Speaker: Well, this is a pretty Pyrrhic victory, then, for... maybe not for your clients, but certainly for future taxpayers who are treated similarly.

You're saying that all the State has to do is enact a statute closing its doors to claims for retroactive tax relief.

Mr. Henson: No, Your Honor.

Unknown Speaker: I thought you said that.

They can't come into Federal court, and so long as the State closes the State court, where do you expect them to sue, in another State?

Mr. Henson: I'm not suggesting for a moment, Your Honor, that the State can close the door.

I'm simply suggesting that this Court need not reach that issue here because the Georgia supreme court did not reach it.

However, I do believe that this Court's precedents establish that the Fourteenth Amendment prevails over sovereign immunity in cases such as this.

Carpenter v. Shaw is this case.

It was a case brought against the Oklahoma State auditor.

It was a case where the Court recognized that refunds were going to be paid out of the State Treasury.

The Court had no problem awarding refunds in this case.

In Ward v. Love, it was a case involving a county defendant, but the Court expressly distinguished the sovereign immunity issues raised in Ex Parte Young.

It said, this is not Ex Parte Young because this is a takings case under the Fourteenth Amendment.

Unknown Speaker: Well, Mr. Henson, what if we decide this point the way you want us to.

Is that going to open the States up, States if they don't have a tort claims act?

Are they going to be met with the argument, well, if we're injured, we've got a right to sue you for whatever damages we've got, even though you haven't waived sovereign immunity?

Mr. Henson: I'm not sure I under--

Unknown Speaker: Well, if sovereign immunity is not a defense on the part of the State, even though... which has not waived it for a claim for a tax refund, how about a constitutional claim, or asserted claim for other kinds of injuries, personal injuries, say, at the behest of a State vehicle, or something like that?

Why wouldn't that argument be equally available to them?

Mr. Henson: --Well, I believe the Court's jurisprudence in the Fourteenth Amendment area is what answers the question for this case.

I'm not familiar enough with the Court's decisions under the Tort Claims Act that would resolve that for other areas, but I think the Carpenter v. Shaw, Ward v. Love, the bank cases, I think they clearly answer that question, at least for unconstitutional deprivation through taxing and, indeed, I think the rule that the Court has enunciated in McKesson has been consistently applied, and I don't think the State really disputes, as I pointed out, that it has these sanctions, it has these remedies.

Indeed, much of the State's briefing is designed, or answers, deals with this issue of this critical need to have sanctions and summary remedies, but that issue's been decided.

That's not the issue here.

As the Court noted in McKesson, the Court has long held that the State may impose such sanctions and remedies in tax cases, but if a State establishes those sanctions and summary remedies, it does not provide a meaningful predeprivation hearing.

In McKesson, the Court described the meaningful predeprivation hearing again as the root requirement of due process, and when a State does not provide this root requirement, it must provide backwardlooking relief.

That's the tradeoff.

That's the price, and it's not a tremendous or high price.

Virtually every State has some sort of refund statute.

The United States Government has a refund statute.

Even Georgia has a refund statute.

It just doesn't apply here.

But that's not good enough for the States.

They want you to say that you really didn't mean it in McKesson.

They want to have it both ways.

They want you to overrule McKesson and Harper.

They want to have their cake and eat it, too.

In short, they want you to change the rules, and why, because they've changed the rules on the retirees over and over and over again.

Unknown Speaker: Are you saying that the system that Georgia now has in place... let's say there has been no appearance that there was a refund remedy available, and what Georgia now lists as its remedies is all there is, and it's clear that in this class of cases there's no refund remedy.

Would the list of remedies that Georgia sets out and says it now has for this category of cases, would that be constitutionally adequate?

Mr. Henson: No, Your Honor, because of the summary remedies and sanctions that the State has established, and they concede in their brief they've established these, and they concede that the purpose of these is to require taxpayers to make payment.

They are constitutionally permissible, but because the State chooses to have these remedies, it must provide meaningful backwardlooking relief.

I mean, that's the issue, is--

Unknown Speaker: Isn't the State saying that if you... if there's been an assessment and you appealed it successfully, you would lose nothing, you would not... there would be no penalty, and the only thing you would lose is the bond premium?

Mr. Henson: --That's correct, Your Honor.

That is their argument.

However, that does not comply with this Court's statements in O'Connor and McKesson.

All the while, while you're litigating your claim in Georgia, you're subject to criminal prosecution, you're subject to the possibility of a penalty, you're subject to 12 percent interest, you're subject to levy, execution, and garnishment.

They would have the taxpayer run the risk of all those sanctions in the hopes that in the end the taxpayer might win.

That is a far cry from what Justice Holmes talked about as reasonably equal terms in O'Connor.

Unknown Speaker: Incidentally, if that were to happen, what is the mechanism for the taxpayer to get redress.

Suppose his property is seized pending the assessment procedure, and then he wins in the assessment procedure.

What is the statutory mechanism for repayment?

Mr. Henson: There is none that I'm aware of, Your Honor.

He's just out of luck.

I mean, he's lost his property.

If they come and garnish his bank account--

Unknown Speaker: Has there been any administrative practice of paying the money back if it's been seized and the assessment procedure continues?

Mr. Henson: --There's none that I'm aware of, Your Honor, and there's none reflected in the record in this case.

Unknown Speaker: Do I understand you correctly that you're not seeking a refund back to 1980, that it's only 3 years back from the first time you made a protest noise, is that correct?

Mr. Henson: Well, that's correct, Your Honor.

That was my mistake.

I foolishly believed that the refund statute applied in this case, and that the limitation period in the refund statute would preclude us from going back, so when we appealed from the trial court, the trial court applied the refund statute to this petitioner and said, the limitation period precludes you.

I thought it was so clear that it applied, I did not appeal that part of the judgment, so those tax years are not properly before the Court.

Unknown Speaker: You don't really mean foolishly believed.

Mr. Henson: I'm... I'm--

Unknown Speaker: You're--

Mr. Henson: --That's correct, Your Honor.

[Laughter]

No, not--

Unknown Speaker: --You mean reasonably believed.

[Laughter]

Mr. Henson: --In short, Georgia, what Georgia really wants here is the discretion to pick and choose when it wants to apply its refund statute.

If you're a Federal retiree with a constitutional claim, the refund statute doesn't apply to you.

If, on the other hand, you're a liquor distiller like the folks in Beam, and you've got a claim based on the U.S. Constitution there also, well, guess what, the refund statute applies to you, but we're sorry, folks, the limit... the procedural barriers there preclude you from having standing.

But if you happen to be a taxpayer who pays a sales tax on a private sale of used cars in Georgia, and you say that that tax violates State law, Georgia wants to be able to say, well, of course, your claim violates State law.

Of course our refund statute applies to you, and here's millions and millions of dollars in refund for you folks.

After almost 10 years, it's time to stop changing the rules.

What Georgia and the other States seem to have overlooked is that it's not the role of courts to change the rules, but to apply the rules, and a straightforward application of the rule in McKesson, O'Connor, and Harper, requires the entry of judgment in favor of petitioner in this case.

Unknown Speaker: Well, McKesson did not involve a case where the State had not waived its sovereign immunity, did it?

I mean, in Florida the State had waived it.

Mr. Henson: Well, that's an interesting point, Your Honor.

I'm not sure I agree with that proposition.

McKesson and Harper are very similar to the case here in that regard, because in both instances the whole predicate of the cases being here was that the State refund statute did not apply as a matter of State law, so if it doesn't apply in Harper and McKesson, yet the court sovereign immunity does not preclude the court reviewing it, then why should it preclude review here, and I think the answer is, it doesn't.

It's a Fourteenth Amendment claim.

That's the way the Court treated it in McKesson.

That's the way it treated it in Harper, and that's the way it is here, and that's consistent, as I suggested, with the Court's jurisprudence beginning with O'Connor, Carpenter v. Shaw, Ward v. Love, and those cases.

If there are no further questions--

Unknown Speaker: I have just one question.

Mr. Henson: --Yes, Your Honor.

Unknown Speaker: Is your argument equally strong if the basis of invalidity is addressed entirely on the statute, rather than the Constitution?

Mr. Henson: I'm not--

Unknown Speaker: Well, in Davis, the Court construed section 111, and arguably it may or may not have decided a constitutional question.

Does it make any difference to you?

Mr. Henson: --I'm not sure that it does.

I'm not aware of any authorities, and I don't think it does.

If it's illegal under Federal law, it's illegal.

Unknown Speaker: Very well, Mr. Henson.

Mr. Calvert, we'll hear from you.

Argument of Warren R. Calvert

Mr. Calvert: Mr. Chief Justice, and may it please the Court--

As recognized in Harper, a State which has provided predeprivation due process to a taxpayer is under no obligation to return amounts which the taxpayer chooses instead to pay, even if it is subsequently determined that the tax in question was unconstitutional.

Now, the petitioner in this case had available to him under Georgia law numerous predeprivation remedies by which he could have contested Georgia's income tax treatment of his Federal retirement benefits.

Unknown Speaker: But subject to 12 percent a year and the 25 percent penalty, isn't that correct?

Mr. Calvert: Georgia does provide for 12 percent annual interest in the event the taxpayer loses, that's correct, Your Honor.

Unknown Speaker: And a penalty up to 25 percent?

Mr. Calvert: There's the possibility of an assertion of a penalty.

Unknown Speaker: But nobody can tell in advance whether it will be asserted or not, so I mean, it has to be considered.

There's no way... in other words, there's no way to guard against its imposition, I take it?

Mr. Calvert: The way one guards against its imposition, Your Honor, is to assert reasonable arguments only.

The statute by its terms provides that the penalty--

Unknown Speaker: On the theory that a State official will not act unreasonably to penalize a taxpayer?

Mr. Calvert: --Well, the question, Your Honor, is whether the taxpayer's position was reasonable.

The code section provides the penalty may not properly be imposed if the failure to pay was due to reasonable cause.

Now, of course, initially, the State Revenue Department, when it issues its assessment, makes its own evaluation of the reasonableness of a taxpayer's position, but ultimately that's a question for the courts to decide.

Unknown Speaker: Has it been determined that a misperception of the law is ever reasonable cause?

I mean, if I read that phrase, I would think reasonable cause means, you know, I had an emergency.

I had to save my child's life, or something.

You're saying it's reasonable cause if the taxpayer is wrong about the law?

Reasonably wrong about it, but wrong about it.

Mr. Calvert: Yes, Your Honor.

Unknown Speaker: That's Georgia law.

Mr. Calvert: I believe it is, Your Honor, and I say that... there are no--

Unknown Speaker: You believe it, or there are cases to that effect?

Mr. Calvert: --There are no cases that have interpreted that section, Your Honor, and I submit the reason that's the case is because there simply have been no instances where the Revenue Department has tried to assert that penalty in situations where it was arguable that the taxpayer had a reasonable basis for his argument.

Unknown Speaker: So where is it established that that determination one way or another by the Georgia Commissioner would be reviewable in court?

You said it would be reviewable in court, the reasonableness of the taxpayer's erroneous action.

Mr. Calvert: Well, Your Honor, the particular penalty would have to be assessed by the Revenue Department, and the issuance of the assessment triggers the right to go into court.

That's how you'd get a judicial determination of that.

Unknown Speaker: And one of the... a reviewable item would be the Commissioner's discretion about whether this was a reasonable action on the taxpayer's part?

Mr. Calvert: Yes, Your Honor.

Unknown Speaker: And you're saying there are cases which the taxpayer has lost on the merits before the Commissioner, but which... in which he did not attempt to impose any penalty?

Mr. Calvert: I'm not aware of any instance, Your Honor, where the Revenue Department has, in fact, attempted to impose this penalty on someone who has contested their liability.

Unknown Speaker: Is there also a potential criminal penalty in Georgia for nonpayment of taxes when due?

Mr. Calvert: There are two criminal statutes to which the petitioner in this case refers.

One of the two statutes was held unconstitutional by the Georgia supreme court prior to the time when the return for the first tax period that's at issue in this case would have been due.

The second statute has a willfulness requirement in it, and it's... we submit that a taxpayer who has pursued a reasonable argument pursuant to an accepted predeprivation procedure in Georgia has not acted wilfully within the meaning of those criminal statutes.

Unknown Speaker: Again, there are no cases, I suppose.

Mr. Calvert: No, Your Honor.

The particular... of the two criminal statutes in question, the one that is still valid in Georgia is pattered after a similar provision of the Internal Revenue Code.

Unknown Speaker: Would a reasonable taxpayer in Georgia in the 1980's have assumed that a post deprivation remedy was available by way of refund for an unconstitutional tax?

Mr. Calvert: We cannot assert, Your Honor, that it would have been unreasonable to have read the refund statute in that way.

We do assert, however, that in the absence of any prior construction of that statute by the Georgia supreme court, in the absence of any reported decisions that we're aware of where refunds of unconstitutional taxes have in fact been provided under that statute, that the taxpayers... taxpayers assume the risk that the ultimate interpretation may turn out to be other than they believe, and we believe that... we submit that's what happened in this case.

Unknown Speaker: Was one of the bases for the supreme court of Georgia's opinion that an injunctive action could have been brought?

Mr. Calvert: It's last opinion in this case, Your Honor?

Unknown Speaker: Yes.

Mr. Calvert: The Georgia supreme court concluded that one of the predeprivation remedies that could have been brought by these taxpayers was an action for declaratory or injunctive relief prior to the time when the taxes were due.

Unknown Speaker: And the statute on page 20 of the blue brief, Georgia 48-7-84, on its face says no action for the purpose of restraining the assessment shall be maintained in any court.

It's hard for me to square that with our requirement that there be a clear avenue of predeprivation relief for the taxpayer.

Mr. Calvert: Your Honor, one thing we would like to note is, until the filing of the brief in this Court, the petitioner had never mentioned that particular code section, had never pointed it out to the parties or to the Georgia supreme court as representing a bar to that particular type of action.

Unknown Speaker: Well, then, the Georgia supreme court might be wrong in saying there's an injunctive possibility here?

Mr. Calvert: Oh, no, Your Honor.

I think it's correct.

This--

Unknown Speaker: Well, what about the statute?

Mr. Calvert: --That particular code section, again, it's a statute that has never been applied or interpreted.

However, we think, based on the Georgia supreme court's interpretation of 48-3-26, which provides generally that there can be no judicial interference with the collection or levy of taxes in general, that that... that 48-7-84 would be interpreted as no bar to an action for injunction where the tax was alleged to be unconstitutional.

Unknown Speaker: Well, the question is whether or not this was clear to the taxpayer at the time, and the Georgia supreme court cites, as I recall, a sales tax case, Beam, and this is a statute that applies to income tax.

Mr. Calvert: Well, I believe, Your Honor, that the question in this case, we take... we initially take... we dispute the taxpayer's statement of the standard of clarity that a predeprivation remedy has to provide before it can satisfy a State's due process obligations.

What the Court has indicated in McKesson and Harper is that a State must provide a fair opportunity to litigate your liabilities, and a clear and certain remedy in the event that you prevail.

In the McKesson case, for example, the State of Florida attempted to argue that McKesson could be put back in a hypothetical position of parity visavis other distributors.

Unknown Speaker: Well, injunctive action is a remedy, isn't it?

Mr. Calvert: We say it's a predeprivation procedure that the--

Unknown Speaker: Are you saying that the injunctive action that the supreme court of Georgia suggests was available to the plaintiff was clear and certain before that opinion?

Mr. Calvert: --I submit that it was, Your Honor, for several reasons.

The Georgia supreme court's decision regarding declaratory and injunctive relief was based on numerous prior Georgia decisions that had talked about the availability of that type of relief where you were talking about unconstitutional taxes.

There had also been other cases involving income taxes where those types of actions had been entertained by the Georgia courts notwithstanding 48-7-84... for example, the case of Parrish v. Employees' Retirement System, which was an action brought by State retirees immediately after the Davis case, when the Georgia supreme court, when the Georgia legislature had amended its statutes to provide for equal treatment of Federal and State retirement benefits.

State retirees filed an action for declaratory and injunctive relief against Georgia, contesting the constitutionality of Georgia's new income tax statutes, and the Georgia courts entertained that case and decided it on its merits.

Unknown Speaker: But didn't this petitioner try a declaratory judgment action, and wasn't he thrown out?

Mr. Calvert: In the Salter case, Your Honor, that was an action that was filed, eventually went to Fulton County Superior Court.

That was an action that was filed subsequent to the Davis decision, and after this taxpayer had already paid the taxes that he now wants returned.

What happened in that case is, after the Georgia General Assembly amended the income tax statutes and provided for equal treatment for Federal, State, and private pensions, the trial court in that case dismissed the action.

We submit it was moot.

Unknown Speaker: You say there's no remedy if you overpay, is that--

Mr. Calvert: Well, Your Honor, the Georgia supreme court has found that the income tax refund statute does not apply to taxes paid under a statute later found unconstitutional.

We submit that what... that these taxpayers should have pursued the predeprivation remedies which were available to them under Georgia law.

If it please the Court, I'd like to talk specifically about those aspects of the Georgia tax system which this petitioner contends subjected it to constitutionally significant duress.

Now, it's important to note that the petitioner is arguing only that he was subject to implied duress.

It's undisputed that in this case he was never so much as threatened with a levy, attachment, any criminal prosecution, garnishment, or any other sanctions if he did not pay the taxes that he now seeks to have refunded.

Unknown Speaker: --But didn't the latest bill that he got include a penalty assessment?

Didn't it have the interest and penalty on it?

Mr. Calvert: He received an assessment notice with respect to the 1988 taxes--

Unknown Speaker: Right.

Mr. Calvert: --which he showed as due on his return as filed, and which he did not pay.

He got a computergenerated assessment notice which basically said, you've reported this as due on your return, therefore we're assessing it, and here's the interest and penalty.

Unknown Speaker: So it's an automatic assessment of a penalty?

Mr. Calvert: The computer essentially spit it out that way.

That's correct, Your Honor.

But as far as the taxes that he wants returned in this case--

Unknown Speaker: Well, does your computer follow Georgia law?

[Laughter]

Mr. Calvert: --It's... certainly we hope so, Your Honor, and the point the court is making is this.

The computer, if you will, made the initial determination that if one has reported a liability as due on your return, and you do not pay it, that that penalty is appropriate.

If the taxpayer in this case had filed his return, and removed from the tax base the Federal retirement benefits, the Revenue Department would have been obligated to issue an assessment to him which would have triggered the right to go into court.

Unknown Speaker: Well, would that have subjected him to criminal penalties, if he omits it from the return?

Mr. Calvert: Your Honor, if a taxpayer has made full disclosure on his return that he's taking an item out based on a constitutional objection, I don't see how he can be subject to criminal prosecution.

Unknown Speaker: Well, isn't that exactly what... I thought that's exactly what he did here.

He said it's owing under the Georgia statute, but the Georgia statute is unconstitutional.

Isn't... that's just the substance of what you've just described, isn't it?

Mr. Calvert: But he... but he's not been criminally prosecuted, Your Honor.

Now, he's asserted in this case--

Unknown Speaker: But I thought you were suggesting that he should have done something other than he did in his return.

Mr. Calvert: --Oh, no.

No, Your Honor.

I'm saying that if... clearly when one reports... reflects on your return the constitutional objection that you're making, that... I submit that whether that objection is reasonable or unreasonable, that you have not acted wilfully within the meaning of the criminal statutes.

That's what I--

Unknown Speaker: Are you serious about that?

Supposing... you know, there are a lot of tax protesters out there who think all income taxes are unconstitutional, and they would never be subject to this penalty, you say, if they put an appropriate recital in about how bad taxes are, and so forth.

Mr. Calvert: --Your Honor, this Court dealt with that question in Cheek v. United States, and my reading of Cheek is that the taxpayer in that case, because of his constitutional objections, which were constitutional objections that had been repeatedly rejected by the courts, simply withdrew himself from the tax system.

He filed excess withholding allowances so that he had no withholding on his wages, and he simply didn't file returns, and the Court found in that case that it was inappropriate to have a jury instruction that a sincerely held constitutional belief that wages were not income could subject him from criminal penalties under the Internal Revenue Code under those circumstances.

But at the same time, the Court's opinion suggested that if he had filed his return, made full disclosure on his return, and utilized the predeprivation procedures before the United States Tax Court, that that would have been a much different story.

And that's what we're suggesting here, that this taxpayer had predeprivation remedies available.

If he makes full disclosure on his return and pursues one of those procedures, he's not... he's not properly subject to prosecution in Georgia.

Unknown Speaker: Mr. Calvert, can I ask you about the refund statute which you say he should have known, or at least shouldn't have been sure provided for refund?

It's Appendix G to the petition for certiorari.

Mr. Calvert: Yes, Your Honor.

Unknown Speaker: It says,

"A taxpayer shall be refunded any and all taxes or fees which are determined to have been erroneously or illegally assessed and collected from him under the laws of this State, whether paid voluntarily or involuntarily. "

These taxpayers thought that that would enable them to obtain a refund of taxes that were determined to have been illegally assessed and collected under the laws of Georgia.

Two Federal courts had held that that's what the statute meant, and that therefore the Federal Tax Injunction Act applied, since there was an adequate State remedy under this provision and... among others, and yet you tell me that it was reasonable to expect him to know that this would not apply to that one category of illegal taxes that consist of taxes unconstitutional under the Federal Constitution.

I mean, if the Georgia supreme court wants to make that up and read the statute that way, that's fine, that's State law.

But you tell me that a lawyer reading that should have known that he couldn't get a refund?

Mr. Calvert: Well, Your Honor, there... I submit that there... every day lawyers make their best decisions concerning the interpretation of procedures and the substantive law, and many times they turn out to be wrong.

Unknown Speaker: Illegally assessed and collected from him under the laws of this State, whether paid voluntarily or involuntary.

Mr. Calvert: Your Honor, I believe... I believe what the Georgia supreme court... the way the court arrived at its construction is this.

There had been no prior Georgia cases interpreting the refund statute.

Unknown Speaker: And there was a lot of money owing.

Mr. Calvert: Well, certainly, Your Honor.

[Laughter]

But there were no reported instances in which taxes of unconstitutional... unconstitutional taxes had in fact been repaid under that statute.

At the same time--

Unknown Speaker: And the word illegally does not cover unconstitutionally.

Mr. Calvert: --Well, at the same time, Your Honor, there were--

Unknown Speaker: You should get less of a remedy for an unconstitutionally assessed tax.

Mr. Calvert: --Well, Your Honor, at the same time, there were many decisions, prior decisions of the Georgia appellate courts which had recognized that a refund statute is in the nature of an action for money had and received, and that the plaintiff coming in under a refund statute bore the burden of showing that the defendant held money which he was not in equity and good conscience entitled to hold.

There were also... and we've cited these cases in our brief in opposition to cert in this case.

There are also many cases where the Georgia courts have found that where statutes were invalidated, retroactive relief need not necessarily be provided if, because of the reliance interests of the parties and other similar considerations, unjust results would follow.

Unknown Speaker: We took care of that in our Federal constitutional decisions, I had thought.

Mr. Calvert: Well, I submit, Your Honor, that what the Georgia supreme court was doing in its interpretation of the refund statute was drawing upon these prior principles of Georgia law and extending them in construing the statute.

Unknown Speaker: It seems to me that if this is not a snare and a delusion to any taxpayer who had a valid claim, I don't know what would be.

This in effect announces, don't worry, you don't have to protest in advance, we have a refund statute that says you can be refunded all taxes that are illegally assessed and collected.

I could not imagine a more deceptively phrased statute if one had set out to do it.

Mr. Calvert: Well, Your Honor, I believe the Court's concern, though, has already been addressed and disposed of in the Brinkerhoff case.

That case recognizes, and other cases recognize generally, that... that a court's construction of its own laws, even if it's an unexpected construction, does not necessarily give rise to a due process problem.

In that particular case, in Brinkerhoff, the Court found that there was a due process problem.

The taxpayer in Brinkerhoff had pursued the only tax procedure which was then available to him under settled Missouri law.

He... the trial court found against him.

He took it on appeal to the Missouri supreme court.

The Missouri supreme court reversed its prior decisions and announced... and found a newly announced but timebarred procedure which it said the taxpayer should have used, and this Court said that under those circumstances, the taxpayer was effectively left without any remedy at law.

He didn't have... the court had found that the one he chose was not available, and by the time they found that out, the one they said he could have used was not available.

But the Court said that absent... in the absence of a prior construction of the statute by the State's highest court, the plaintiff would have to assume the risk that the ultimate interpretation of the statute might differ from his own.

Unknown Speaker: Any risk at all.

A statute can mean anything in the world, and there's no due process claim.

A statute says black, and the supreme court of a State interprets it as white, and that's no due process problem.

It reads out the word, not.

It reads it as saying yes, when it reads no.

No due process problem at all.

Mr. Calvert: Your Honor, I don't believe that the Georgia supreme court's reading of the refund statute is that extreme.

Unknown Speaker: I think it is, and is the argument that you're making that no matter how contrary to the words of a statute a supreme court's interpretation is, there is no due process problem so long as it's the first time the court has ever interpreted it?

Mr. Calvert: Your Honor, I believe... I believe that is the... that is the holding of the Court in the Brinkerhoff case.

Unknown Speaker: All right.

Mr. Calvert: Again, I submit that that's not... that does not comport with the facts in this case, but I believe Brinkerhoff settles that if a... that State courts interpret their State procedures and their substantive law, and except in extraordinary circumstances which we believe are not present in this case--

Unknown Speaker: So the answer's no.

You say there are circumstances where that will not comport with due process.

Mr. Calvert: --I'm not sure which question--

Unknown Speaker: I asked whether it is always the case that so long as it's the first time a supreme court of a State is interpreting a statute, it can interpret it to mean whatever it wants so long as it's the first time it's ever interpreted it.

Is that your position?

Mr. Calvert: --I believe that's what Brinkerhoff stands for.

Unknown Speaker: All right, but now, most recently you've said, except in extraordinary circumstances.

Mr. Calvert: Well, what I... what I intended to say, Your Honor, is that the Court in Brinkerhoff indicated that except in extraordinary circumstances an interpretation by a State court of particular procedures available to taxpayers is not going to give rise to due process problems.

Unknown Speaker: Maybe what it meant by extraordinary circumstances was an interpretation that is so flatly contrary to the language of the statute.

I consider that a pretty extraordinary circumstance to read this language to mean that you can't get a refund.

Mr. Calvert: Well, I think there is also one other factor, Your Honor, in Brinkerhoff, which I believe compelled the result in that case, and that is, by virtue of the timing of the Missouri supreme court decisions, this taxpayer was effectively left with never having had an opportunity to contest his liability, and in this particular case there were predeprivation procedures available to the petitioner which he chose not to use.

Unknown Speaker: He chose not to use them because this statute announced to him that he didn't have to use them, that he could always get a refund later.

Mr. Calvert: Well, that was his reading of the refund statute--

Unknown Speaker: Ah... and he shouldn't have read it the way it was written.

Mr. Calvert: --And Brinkerhoff--

[Laughter]

And Your Honor, and Brinkerhoff stands for the proposition that in the absence of a prior controlling decision by that statute, that's the risk that all litigants run.

Unknown Speaker: Isn't there... aren't there two prior controlling decisions?

As I read the brief, there was a case called Wright, and a case called Henderson.

I looked at those Georgia cases, and it seemed as... my first reaction was both of those cases held that the reason a person couldn't enjoin an unconstitutional tax in Georgia is because there's a perfectly good remedy for him to get a refund later.

And just to be sort of absolutely definite about it, one of them quoted the Governor, who sent a message when he passed this refund statute, and the Governor said, I'm sending you over this statute to pass because certain taxes have been paid into the State Treasury under laws that have been declared unconstitutional, and so I'm passing this statute so that you'll have a remedy.

So it wasn't as if they came into court with an open question.

I mean, don't we have here this extreme case?

If we do have the extreme case, what do we do next?

That is, suppose that we decided this... so I really have two questions.

Do you want to deal with the first and then ask the second?

Mr. Calvert: Yes, Your Honor.

I believe that the first question concerned the Henderson and the Wright v. Forrester cases, and also the legislative history, or the statement of the Governors that is quoted in the Wright case.

What is clear, Your Honor, is that notwithstanding what the Governor had hoped to achieve by way of enacting the refund statute, the language that was... what the General Assembly did in enacting the refund statute did not have fully that effect.

He had certain specific taxes in mind, and in a subsequent case... I believe it was Eibel v. Forrester... the Georgia supreme court said that the legislature had not made the statute retroactive to the tax periods in question, so the particular taxpayers he had hoped to benefit were not benefited.

We submit that there's nothing, other than the mere statement from the Governor that's cited in that case, to suggest that the language that the General Assembly actually used was intended to have scope broad enough to encompass unconstitutional taxes.

The Court's second question--

Unknown Speaker: I haven't asked.

Mr. Calvert: --If you could repeat it, please.

Unknown Speaker: Well, suppose that we think they've been getting what you might call colloquially the runaround.

I gather that if the State has money that belongs to them under the substantive constitutional law, they would like to get it back.

Assuming that's so, they say here they've tried this route.

The refund statute suddenly is interpreted against them.

All right, suppose you lose on that.

From your brief, it appears you're going to assert sovereign immunity next.

I don't quite know how you do that, since it's a State court, not a federal court.

The Eleventh Amendment doesn't apply.

And then I take it you have several other things that you're not telling us about, but... or you might.

What should we do as a remedy if we think what the State is done is awfully unfair, unfair to the point where it falls within McKesson?

What should this Court do?

Should this Court say, for example, just pay them, enough is enough?

Do we have authority to do that?

What do we do about other people?

I mean, since you have no refund statute which happened to limit refunds to 3 years, is there now no limitation?

And since you've interpreted that away, anyone who ever has paid this tax can bring a lawsuit?

What are we supposed to do next, in your view, assuming you lose on the merits?

I'm not saying you will, but I'm just saying, assuming that.

Mr. Calvert: I think, Your Honor, the argument that the tax... that the petitioner in this case has made is that if we lose on the adequacy of our predeprivation procedures, that we are obligated to refund these amounts, and that all other taxpayers, regardless of any statute of limitations, are open.

Now, the Georgia... the basic Georgia tax scheme was in effect since the 1940's.

Assumedly under that argument someone would try to assert refunds back to the 1940's, assuming they're still here to make those claims.

Unknown Speaker: I thought it was conceded in this case that you could go back only to 1985.

Mr. Calvert: It is in this case, Your Honor, but there are other cases pending in Georgia where that limitation is not being applied, where the petitioners are seeking to collect taxes back beyond 3 years.

But I think the question, Your Honor, concerning sovereign immunity, we've asserted that even if... even if Georgia's predeprivation remedies are found to be constitutionally insufficient, that that raises the question regarding whether a State can be sued in its own courts for monetary... retroactive monetary relief notwithstanding sovereign immunity, and I submit that that's a question that is very much left open by the McKesson case.

In McKesson, the taxpayer had filed an action under Florida's repayment of funds statute, and the Court was careful to note in its opinion that, under the particular facts of that case, there was a Federal due process obligation for the payment of relief, or backwardlooking relief pursuant to that particular State's post deprivation procedure.

So the Court was very careful to note that there was the waiver of sovereign immunity.

The Court has indicated in numerous cases that absent a waiver of its sovereign immunity the States generally can't be sued in any court by any person on any cause of action, and we submit that that--

Unknown Speaker: What would be left of the essential holding of McKesson, then, that the State must provide an adequate remedy, if we can say, well, we'll elect to rely on our sovereign immunity?

Wouldn't the whole point of the whole doctrine be gone?

Mr. Calvert: --Well, I think, Your Honor, that what... if I understand the question, or what the concern is, is that you could have a constitutional violation with no effective remedy.

We submit that the various immunities and similar doctrines that have been recognized by this Court generally demonstrate that there can be many circumstances where, because of qualified immunity, or absolute immunity, or the bar of the Eleventh Amendment, that retroactive monetary relief may be unavailable, and we submit that this is just such a situation.

Unknown Speaker: Are you suggesting that in a whole line of cases, including the Brandeis decision in IowaDes Moines National Bank v. Bennett, that there was an initial step that was just skipped over?

Didn't Brandeis say in that case taxpayer complaints about unequal treatment, the State can remedy it in one of two ways, either give him a refund or tax his neighbor, but the State's got to do one or the other?

Or not because he was... did he just overlook the threshold question of sovereign immunity?

Mr. Calvert: As far as I can tell from the reading of those cases, Your Honor, sovereign immunity did not come up as a direct issue, and again, I believe that the Court has indicated in the McKesson case, in my reading of the oral arguments in that case, a concern that sovereign immunity is very much an issue in the context of a situation like this.

Thank you.

Unknown Speaker: Thank you, Mr. Calvert.

Mr. Henson, you have 12 minutes remaining.

Rebuttal of Carlton M. Henson

Mr. Henson: Thank you, Your Honor.

Unknown Speaker: Mr. Henson, would you address the question of how far back a taxpayer could go?

Mr. Henson: Yes, Your Honor.

The limitation period that's applicable to taxpayers, for taxpayers besides the particular petitioner, is unresolved.

In briefs both parties have argued at different points in time in this case that the money had and received statute would be the most analogous limitation period, which would be 4 years, and would either... depending on when you started it would either be tax years '85 through '89, or tax years '84 through '89, and there is an issue with regard to tolling, because some 40,00 retirees relied on Georgia's refund statute, which makes you wait a year before you file suit.

So, for example, this suit did not arise until April of 1990, rather than in the weeks right after Davis was decided, so that... you know, in this case the State has not disputed, as far as I read their briefs, that the tax years '85 through '89 are properly before the Court.

I'd like to address briefly Justice Breyer's question, and that is the issue of remand.

The Court did remand in McKesson, and the Court remanded in Harper, and the State's response in both of those cases has been to continue to deny relief to the taxpayers.

In the record... there's no evidence in this record that Georgia will do any better if those questions are left open.

Iowa Bank and the Montana National Bank cases are both instances where the Court said, refunds are appropriate.

The States have had a chance to look at it.

The State didn't do... didn't choose an appropriate remedy.

The Georgia legislature has met in special session to address Davis.

It provide only prospective relief.

The Georgia supreme court has had this case twice since Davis was decided and McKesson was decided, and still has denied relief.

In short, in response to Justice Breyer's question, enough is enough.

These people are entitled to refunds.

Thank you.

Unknown Speaker: Do you think the State really has waived it's sovereign immunity?

A State can consent to be sued.

It went right to the question, engaged the due process question.

Mr. Henson: Your Honor, I don't think the State can come in at this date and talk about sovereign immunity.

As I responded to the Chief's question earlier, I believe this Court's Fourteenth Amendment's jurisprudence covers that, but also, in Georgia, Georgia allows under... as a matter of State law, allows takings claims brought directly against the State, and there's no State sovereign immunity, and if they were going to say, well... I mean, it's the same thing all over again.

They want to say, well, you can have a direct takings claim against the State of Georgia based on State law and based on the State constitution, and we won't assert sovereign immunity, but if you want to assert it based on the Federal Constitution, we're going to raise State sovereign immunity, and the authorities for that are CFI Construction v. Board of Regents, it's 145 Georgia Appeals 471, a 1978 case, and State Board of Education v. Drewery, Drewery, 263 Georgia 429.

They just want to change the rules over and over again.

It's time to stop.

These people are entitled to refunds.

Unknown Speaker: Mr. Henson, these people are all retirees, I suppose.

Mr. Henson: And perhaps--

Unknown Speaker: As this drags on, many of them are never going to see what they're entitled to, I suppose.

Mr. Henson: --Many of them already won't, Your Honor.

I estimate that at least 15 or 20 percent have already died since Davis.

Thank you.

Chief Justice Rehnquist: Thank you, Mr. Henson.

The case is submitted.

Unknown Speaker: The honorable court is now adjourned until tomorrow at ten [= 10] o'clock.

Attribution:

The OYEZ Project

Featured:

Barclays Bank Plc v. Franchise Tax Board Of California - Oral Argument

Fri, 09 Jan 2009 14:49:51 +0000

Case:

Barclays Bank Plc v. Franchise Tax Board Of California

Media File:

92-1384_19940328-argument.mp3

Related Transcript:

1993_92_1384_argument.xml

Transcript:

Argument of Joanne M. Garvey

Chief Justice Rehnquist: We'll hear argument now in Number 92-1384, Barclays Bank, PLC v. Franchise Tax Board of California, Number 92-1839, Colgate-Palmolive Company v. Franchise Tax Board.

Ms. Garvey.

Mr. Garvey: Mr. Chief Justice and may it please the Court:

At issue in this case, the Barclays case, is the constitutionality of worldwide combined reporting as applied to a foreign multinational enterprise.

The United States and the nations of the world all use one method to divide international income for tax purposes... the arm's length separating accounting method.

That all nations have agreed to use one, and only one method, demonstrates the essential need for uniformity in this area.

For over 20 years, California has defied this international standard by applying a different and inconsistent method... worldwide combined reporting.

Whether or not this method is constitutional as applied to a domestic multinational corporation, it's patently unconstitutional when applied to a foreign-owned corporation.

First, it prevents the Nation from speaking with one voice when regulating foreign commerce, second, it presents a substantial risk of international multiple taxation, and third, as applied by California, it has imposed discriminatory compliance burdens.

Now, the California supreme court circumvented these issues by creating a new test for avoiding dormant Commerce Clause analysis.

Under the California supreme court's test, congressional silence replaces the traditional requirement of affirmative congressional action.

California's approach has no basis in Wardair or in any other case of this Court.

Wardair looked at the negative implications from congressional enactment, not negative implications for no enactment at all.

The California method is practically unworkable as well.

It is difficult enough to ascertain a congressional meaning from an act of legislation.

Gleaning congressional meaning from congressional inaction is impossible.

The United States-United Kingdom treaty is a good illustration of the difficulties.

The treaty, as finally ratified, contained no mention of State use of worldwide combined reporting.

From the text, it is not possible to discern any senatorial preference or dislike for the use of worldwide combined reporting.

Now, the legislative history of the courts that go to that, because for some reason to text is ambiguous, indicates a Senate preference for barring the States' use of worldwide combined reporting rather than any affirmative congressional policy to permit the States to use that method.

Unknown Speaker: But a preference not strong enough to be reflected in the Senate's exercise of its power, because it didn't have enough votes for the supermajority necessary.

Mr. Garvey: That is correct, and as a result, Justice Rehnquist, this does not reflect any policy sufficient to take the case out of dormant Commerce Clause analysis, which is the State's argument, and moreover, at least some of the supporters of the reservation were concerned about the use of the treaty method rather than with any restriction on worldwide combined reporting to... by the States as such, and in fact, both of the contracting parties, the United States and the United Kingdom, have made it clear in the past and before this Court that they do not think the treaty reserves the issue, so--

Unknown Speaker: Nonetheless, it is clear from the history that you recited that Congress was certainly well aware of this problem and this debate, and did nothing.

Mr. Garvey: --Well--

Unknown Speaker: Although it surely could have.

Mr. Garvey: --Senatorial awareness, of course... because I don't think both Houses of Congress had addressed the issue... senatorial awareness is not a substitution for this Court's off-affirmed principle that Congress must act affirmatively to remove the State act from scrutiny by this Court under the dormant Commerce Clause, and in fact, at best, the treaty situation is much like a filibuster in which the majority wasn't sufficient to break the filibuster over a particular provision, and so you had to delete that provision to move the rest of the legislation forward.

That deletion would not, certainly, indicate congressional policy in favor of the opposite of the deleted provision.

Unknown Speaker: There was in the Wardair case, as you mentioned, the use of the words, affirmatively acted, but the affirmative action was by nonaction, right, by failure to forbid the State taxes?

Mr. Garvey: Yes, but you had a prohibition.

Actually, you did have an action which was a direct prohibition on the use of a portion of State taxes.

The Chicago convention contained an enactment in which aviation fuel on... State tax on aviation fuel on inbound flights was specifically prohibited.

There was no mention in the text of that enactment, signed by 156 other nations, of anything to do with State tax on outgoing flights.

From that, plus the fact that the Court had the Federal Aviation Act, which extensively had legislated in the area of domestic aviation and would specifically permit this tax, this Court could start with a text from which to discern congressional policy.

In this case, we still have no text.

Congress has not acted here, and this case should be analyzed under the dormant Commerce Clause, and this case presents a textbook example of a State tax that's violative of the dormant Commerce Clause.

Japan Line and Container provide the framework here for analysis, and the result falls on the Japan Line side of the leger.

The dispositive factor is that Barclays is foreign.

There are direct implications on United States foreign policy that were not present in Container, where a domestic enterprise was affected by a domestic tax.

Barclays should prevail under this Court's jurisprudence for at least four reasons.

First, the clearest evidence of implication on United States foreign policy, lacking in Container, is present here.

Foreign nations are offended by the use of the California method.

Their offense has led to retaliatory acts, and foreign nations have a long-recognized and proper interest in the well-being of their nationals and protection of their rights.

The United States has acknowledged the validity of foreign reactions.

The second reason, even if the objective evidence of foreign policy implications were not present, application of the Container objective factors demonstrates that in the circumstances present here, foreign offense is inevitable.

First of all, foreign multinationals are exposed to a greater risk of double tax because, typically, more of their operations are in jurisdictions which have the primary right to tax that income that California includes in its tax base, and second, a foreign Government's own interests are affected.

Under the international practice, the home nation has the obligation to relieve double tax, and if a foreign nation has to relieve excess tax from the California system, the nation then has the Hobson's choice of relieving the tax and affecting its own revenues, or making its businesses less competitive by not relieving the tax.

There is no framework--

Unknown Speaker: Was that argument available to the taxpayer in Container Corporation?

Mr. Garvey: --No, that argument was not available, Your Honor... Mr. Chief Justice.

I'm sorry, I couldn't tell where the question came from.

Unknown Speaker: It's from over here.

Mr. Garvey: I'm sorry, Justice Kennedy.

My apologies.

No, that argument was not available--

Unknown Speaker: Well, but were there not foreign affiliates in Container Corp.?

Mr. Garvey: --That is correct.

Unknown Speaker: And would not a foreign nation under your hypothesis have felt some duty to lesson the impact of the California tax on those foreign affiliates that were within its jurisdiction?

Mr. Garvey: No, because the obligation to relieve the tax flows back to the home country.

In the Container case, that would have been the United States, and plus there was no obligation on a foreign affiliate, for example, doing business in Italy.

Unknown Speaker: Well, to me when we say, obligation, that's simply hypothetical anyway.

Mr. Garvey: It's a hypothetical obligation, but it is part of the overall international practice in which--

Unknown Speaker: I still don't quite understand.

If an English... the English Government is concerned that one of its subsidiaries... one of its corporations, which is a subsidiary of an American company, is paying too much tax in California, then wouldn't it have the same motive to give it some amelioratory treatment as it would in the case that you have posed?

Mr. Garvey: --Right.

Unknown Speaker: I don't see why it makes a difference that there is a parent in one case and a subsidiary in the other.

Mr. Garvey: Well, if I might try to see if I can answer that in this fashion, Justice Kennedy, first of all, in Container, the ultimate parent was the United Kingdom company... I'm sorry, a United States company.

The subsidiary could be a foreign subsidiary of any nation.

The impact of the tax was actually in the United States, and so there was no interest, or no problem necessarily arising directly on the foreign subsidiary in that circumstance.

In this case, the foreign parent is the... a United Kingdom corporation, and in fact one of the taxpayers is also a United Kingdom corporation, a second level subsidiary, and so when the tax falls on the taxpayer here, ultimately the burden falls back into the United Kingdom group and the parent company, because it will be the United Kingdom, as the ultimate sovereign of the parent, that must decide whether to grant a credit to relieve the taxation on income earned abroad by either the domestic subsidiary, in this case a United Kingdom corporation, not the United States, so the argument was not available to--

Unknown Speaker: May I ask you a question about--

Mr. Garvey: --Yes, Justice Stevens.

Unknown Speaker: --Isn't the assumption, if you think this very complex system really works, that all that's being taxed is income earned in California, and that one looks at the other income only for the purpose of determining what share of the total is attributable to California?

Mr. Garvey: Justice Stevens, I would have to respectfully disagree.

The California method puts all income of the worldwide group wherever earned, into a single pool, and then divides that income according to a formula ignoring geographic boundaries profitability and other nations and so forth.

Unknown Speaker: Because you acknowledge you have a unitary business.

Mr. Garvey: Because of the unitary business principle that is accepted in the United States but has never been... we are here to--

Unknown Speaker: It is not challenged in this case.

Mr. Garvey: --Right.

Right.

We are not conceding... we are not arguing the fact that we are or are not unitary in this case.

We have conceded that.

Unknown Speaker: We have to assume you are for purposes of our decision.

Mr. Garvey: Exactly.

Unknown Speaker: Right.

Mr. Garvey: Yes, so for purposes of this... however, under the international standard, division of the income is done on an entirely different basis, but for purposes of the California methodology, it's a little difficult to say that anyone is simply measuring by a worldwide pool of income which requires worldwide information gathering even to begin to compute the tax to say that you're only taxing California income, but the problem... the more--

Unknown Speaker: Explain that to me.

Now, I ask, putting aside for one moment the extreme burden of complying, assembling information, if one assumes that the system works as it is designed to work, and I don't know whether it does or not, then is it not true that you're only taxing that proportion of the total which the business in California represents to the total?

Mr. Garvey: --If the system worked as it were designed to work, and you were only taxing that fair amount, then the system... yes, you would only be taxing California income.

However--

Unknown Speaker: And if that's true, then there's no danger of double taxation.

Mr. Garvey: --However, there is a danger of a different kind of double taxation, but... and you also must consider in these circumstances the implications on foreign policy, and you further have--

Unknown Speaker: I'm just addressing--

Mr. Garvey: --Yes.

Unknown Speaker: --the one argument of multiple taxation.

Mr. Garvey: Right.

With respect--

Unknown Speaker: And I must say I don't understand it.

Mr. Garvey: --All right.

With respect... I'm not sure I do, either, Justice Stevens.

It's a complex area.

With respect to the double taxation point, the difficulty you have is this.

Under the international system, nations are granted the primary right to tax.

That tax is based on geography, because the purpose of the system is essentially to resolve competing claims among nations as to how you divide the tax base, because in a unitary business or in a worldwide group, you eventually end up with a base, and the question is internationally how do you divide it?

Because foreign nations are more likely to be doing business in jurisdictions that under the international standard, the international practice, have primary right to tax, it is more likely than not that a portion of the income which California claims is going to be included in the tax base that some other nation has the right also to tax, and in this case there was actual double taxation, but the problem essentially is, you have two competing and incompatible systems, and as a result, whether you have double tax on every... on a day-to-day basis, you have the risk, because the two systems are inapposite and cannot be reconciled.

Unknown Speaker: What is it that you mean by a jurisdiction having the primary right to tax?

Mr. Garvey: Under the international system, the international practice that we've referred to of arm's length, separate accounting, there are some basic rules.

The first is that the nation... the host country into which a foreign corporation comes in to do business has the right to tax that foreign corporation--

Unknown Speaker: May I clarify what you... when you're talking about right, you say that nations in an international community agree that this is a fair way of doing things, but there is no right.

There is no obligation to do it that way.

You say under the international system--

Mr. Garvey: --Under the international system which is represented in internal laws, a network of treaties, model treaties, and agreements by all of the nations that enter into treaties at all in the world, this is the one way they all agree to do it, so if a nation were to deviate from this methodology, they would essentially have to consider what effect it had on their other--

Unknown Speaker: --What retaliation might--

Mr. Garvey: --Right.

Unknown Speaker: --but there is no treaty, there is no higher law that is being violated.

You're bringing this case under the U.S. Constitution saying the Foreign Commerce Clause is a stopper, but there's no international law that would--

Mr. Garvey: Well, this--

Unknown Speaker: --stop California from doing this.

Mr. Garvey: --This has actually attained the custom of nations, but there is no international jurisdiction or sovereign that could say to California or the United States you're in violation.

However, there are treaty obligations, and the treaty obligations do provide a framework, and in fact--

Unknown Speaker: But they're not binding on... the United States has not subscribed to that particular treaty that would prevent California from taxing.

Mr. Garvey: --It is true that the United States in its treaties has not specifically addressed--

Unknown Speaker: Well, not--

Mr. Garvey: --Has not... has--

Unknown Speaker: --Not specifically or any other way, has it?

Mr. Garvey: --That's correct.

That is correct, because that is the point.

They have not addressed the point.

However, you have an international practice that is consistently applied, and the issue here under the Commerce Clause is whether the uniformity with that policy is essential.

Unknown Speaker: Just before we get to uniformity, and before we leave the double taxation point--

Mr. Garvey: All right.

Unknown Speaker: --that Justice Stevens raised, I take it that the double taxation is caused by the juxtaposition of the two systems.

Mr. Garvey: That is absolutely correct--

Unknown Speaker: So that if everybody had the worldwide reporting system, there would be no double taxation.

Mr. Garvey: --That is... if the worldwide reporting system were all applied in the same fashion, the answer would be yes.

If all nations of the world used this, the answer would clearly be yes, but the problem is, no nation of the world uses this, and so as a result, under the dormant Commerce Clause, the inquiry before the Court is whether or not uniformity is essential, and the Court has set forth tests as to whether that is essential.

One test, as here, where a State tax is at variance, is where it implicates foreign policy, and this case probably presents one of the clearest evidences of implication of foreign policy.

We have offense, we have the problems of the objective factors, we have the compliance burdens, and we have the longstanding difficulties in terms of trying to comply both with respect to the implications, but also with the stand-alone issues of burden, which is a discriminatory effect, and the double taxes we have just discussed.

Mr. Chief Justice, I would like to reserve the balance of my time.

Unknown Speaker: Very well, Ms. Garvey.

Mr. Kleier, we'll hear from you.

Argument of James P. Kleier

Mr. Kleier: Mr. Chief Justice, and may it please the Court:

Today is the culmination of 11 years of national and international reaction to this Court's decision in the Container case.

The immediate aftermath of that decision, including reactions from the Federal Government and foreign Governments, resulted in the formation of the President's Worldwide Unitary Taxation Working Group, and ultimately President Reagan's statement directing executive departments to act to end worldwide combination.

The case which provoked this Federal and international outcry was Container, a case which, like Colgate, involved a U.S. based group engaged in foreign commerce.

This reaction, as chronicled in the record in this case, demonstrates that the result in Container was wrong.

However, it is not necessary for, and Colgate does not ask this Court to overrule Container.

Indeed, Colgate asks only that this Court apply the doctrine set forth in Container to the record in this case.

This record demonstrates that the failure of Container was a lack of proof of a consequence to worldwide--

Unknown Speaker: Well, Mr. Kleier, you say that this reaction demonstrates that the decision in Container was wrong.

Would you care to spell that out?

Mr. Kleier: --Yes, Chief Justice Rehnquist.

What has happened since Container is not only evidence of a Federal policy opposed to the application of worldwide combination, and that is the primary evidence, I guess, that I would point to.

Unknown Speaker: Well, you mean something that has developed since Container?

Mr. Kleier: Not entirely.

Actually, the majority opinion in Container, the majority did have before it the 1982 submission in the Chicago Bridge and Iron Case.

However--

Unknown Speaker: And it rejected that.

Mr. Kleier: --the opinion... that's right.

The opinion found there was no evidence that in 1983, at the time of the Container decision, that that brief represented the continuing position of the Federal Government, yet the subsequent developments, including President Reagan's statement and up to and including the Solicitor General's statement in this case--

Unknown Speaker: Why should President Reagan's statement have anything to do with it?

Mr. Kleier: --Well, to be more direct, I guess, the submission of the Solicitor General in this case--

Unknown Speaker: Why should the Solicitor General's statement have anything to do with it, other than advising us of the position the Federal Government takes, but surely that's not conclusive.

Mr. Kleier: --It certainly is not conclusive, and indeed, that was set forth in Container.

What I'm suggesting is that the record in this case chronicles a series of pieces of evidence of what the policy is and of that interference, and certainly the Solicitor General's submission in this case, President Reagan's statement, those are all pieces of evidence.

Unknown Speaker: And you draw from these various pieces, as you describe them, the conclusion that Container was wrong?

Mr. Kleier: That the result in Container was wrong, yes, Your... yes, Chief Justice Rehnquist, because Container did not have before it evidence that the Chicago Bridge and Iron case represented the continuing position of the Federal Government, and furthermore, Container did not have before it evidence that there is a purpose to U.S. foreign policy that is... that worldwide combination interferes with.

Other than simply the danger of retaliation, there is a purpose, a key element of U.S. foreign policy other than keeping foreign nations happy, and that is to ensure competitive balance for U.S. business in trade with foreign countries.

This objective, and that it is an objective of U.S. foreign policy, is set forth again, evidenced by statements in the record, but more importantly, that objective is at the very heart of the purpose of the Foreign Commerce Clause.

To paraphrase Alexander Hamilton in the Federalist Number 22, no nation acquainted with the nature of our political associations would be unwise enough to enter into stipulations with the United States while they found from experience that they might enjoy every advantage they desired in our markets without granting us any return.

Unknown Speaker: Well, if it's at the very heart of the Foreign Commerce Clause, one would think you wouldn't need statements by President Reagan or a brief from the Solicitor General to confirm it.

Mr. Kleier: Certainly that... first you have to determine that the interest is at the heart of the Commerce Clause, then, what the Court requires further is some indication that there is interference by California's method with that purpose of the Commerce Clause, and that is what is supplied beginning with the statement in the Chicago Bridge and Iron case.

As a result of the principle of competitive balance for U.S. based foreign commerce, which has existed as long as the Federal Government has existed, worldwide combined reporting should not be applied to either Container or to Barclays.

In addition to this violation of a clear Federal directive, the Container court expressly acknowledged the lack of evidence of that doctrine in the Container opinion, and had to see... basically could not determine whether the Chicago Bridge and Iron submission still represented its position.

The Solicitor General's submission here, as well as the other statements, indicate that it does.

The Solicitor General's brief does not indicate that application of worldwide combined reporting to Colgate and Barclays in this case is now somehow suddenly consistent with Federal policy.

Instead, the Solicitor suggests that a result adverse to Colgate and Barclays is appropriate--

Unknown Speaker: May I just clarify one thing?

When you refer to Federal policy... earlier you talked about the position of the Federal Government.

Are you actually saying the position of the executive branch of the Federal Government?

Mr. Kleier: --Yes, Justice Stevens.

This Court has certainly recognized that some aspects of foreign policy are not properly, or very well-conducted at the pace and in the public forum that Congress provides, and as a result that the executive must have some authority in the foreign policy arena, and that is what we're talking about in this case.

Unknown Speaker: Commerce is in fact entrusted to Congress, foreign commerce is.

Mr. Kleier: The Commerce Clause certainly entrusts the power to regulate commerce to Congress.

Nonetheless, this Court has recognized that entrusting that power to Congress has to keep the States out of certain areas, and as evidence of what areas the State should be kept out of, this Court has historically looked to indications from the Executive Branch of whether a particular area is one that the States should not interfere in, even in the absence of congressional regulation.

Unknown Speaker: Well, whatever the rule should be for determining the foreign policy position of the United States... and this case itself shows that that's a very difficult determination to make... once this Court has spoken, as we did in Container, it seems to me then that there is a special obligation on the Congress to act affirmatively if it wishes to change our assessment of that policy--

Mr. Kleier: Well, certainly--

Unknown Speaker: --And we said as much in a domestic context in the Quill case.

Mr. Kleier: --Well, certainly Congress could act to change the policy, but there are certainly areas, very sensitive areas, that this Court has recognized Congress isn't very good at getting involved in, and particularly the foreign commerce area is one of these.

Unknown Speaker: Well, don't you think they might be a little bit better after we've decided the issue?

[Laughter]

Mr. Kleier: You would hope that that might provide some incentive to act.

Nonetheless, because of the sensitive nature and competing interests at stake, with respect to foreign commerce, that has been a particular area that has demanded special scrutiny.

It is something that this Court has recognized that it is particularly difficult for Congress to act.

Unknown Speaker: Does this case involve the tax on foreign commerce?

Mr. Kleier: It certainly in... this Court found in Container that a situation involving a U.S. parent corporation with foreign subsidiaries is foreign commerce, and as a result, it does involve a tax on foreign commerce.

Unknown Speaker: I thought the tax was on California operations of subsidiaries of foreign entities.

Mr. Kleier: Well, certainly the structure that California uses is to attribute income to the California... I'm sorry, the U.S. parent, in Colgate's case.

Being a U.S. parent with foreign subsidiaries is to use worldwide income to measure what they are going to attribute to Colgate for purposes of the California tax.

whether it really is income earned by the U.S. parent or the foreign subsidiaries, that economic determination basically--

Unknown Speaker: Foreign commerce is a base from which the tax is calculated, but theoretically at least... and one always has to be skeptical... theoretically the tax is on domestic business.

Mr. Kleier: --Certainly... I don't know about theoretically, but in terms of the California statute it is.

Economically, there certainly is a serious question as to whether or not it is on the California business.

That is certainly the way that California attempts to justify jurisdictionally the imposition of its tax, because they would have no due process right to tax the income if they acknowledge that it was income of the foreign subsidiaries.

Unknown Speaker: Going back to Justice Kennedy's question, in the aftermath of Container, would you agree that there is at least one point on which Congress does have a particular competence, and that is the capacity in effect to change a tax rule without raising the kinds of problems of retrospectivity and refund that would be the case if we saw things your way?

Congress really could do a much better job of, as it were, adjusting the balance, than we could, could it not?

Mr. Kleier: Justice Souter, the problem, I guess, is Congress getting to that point, because it does involve questions of how foreign commerce is taxed, and that being an area where Congress has particular difficulty to even substantively get to the question where the remedy is.

Unknown Speaker: But if it gets to it, it can do a better job of it, or at least a somewhat less fiscally messy job of it than we can do, in effect by turning tail so soon after Container.

Mr. Kleier: In terms of... I'm not sure if I fully understand the question.

Unknown Speaker: I'm saying that if Congress sees it your way, the tax is going to be changed on a purely prospective basis.

If we were to look... if we were to accept your argument, there would be a serious question about refund, California reliance, and so on, is that not the case?

Mr. Kleier: Well, certainly there are issues with respect to the refund in this case, and I submit that those same issues would exist in the event that Congress was to come to the table.

The problem is that by the time Congress acts with respect to this question, there are going to have been a number of years that elapse where California has intruded in an area of foreign commerce, basically has interfered with an area where uniformity is essential, and contrary to a Federal directive.

Unknown Speaker: Well, but--

Mr. Kleier: By the time that exists... I'm sorry.

Unknown Speaker: --But it's acting... so far as Congress may be concerned, at least in the case of a domestic corporation, it may feel there is no need for any action because the Container Corporation says there is no violation of the Commerce Clause.

Mr. Kleier: The Container case certainly said that based on the facts before it at the time.

Unknown Speaker: You say, Mr. Kleier, that Congress has a great deal of difficulty getting to foreign commerce questions.

Do you mean anything more by that than they simply don't agree when they do get to them?

Mr. Kleier: Certainly not at all.

I mean, certainly the diversity of Congress adds to the difficulty in terms of the pace and the sensitivity with which Congress can deal with those questions, and that--

Unknown Speaker: Well, but you could say that about any branch of the law, where something came up in Congress and Congress proved unable to enact any law because there were so many different opinions on the subject, and we don't generally say well, that means Congress has kind of defaulted so somebody else is going to step in.

Mr. Kleier: --Well, certainly in most areas there is no... that's right... overriding interest that simply the fact of disagreement should have any effect, but when foreign commerce and foreign nations are involved, and the equality of U.S. business doing this in foreign countries, it is a particularly sensitive area where--

Unknown Speaker: Why is that an overriding interest compared to crime, health care reform... any number of other things that might be before Congress where there might not be any agreement?

Mr. Kleier: --Because of what was recognized in the Constitution as the need for particular Federal attention to the area of commerce, and going beyond that, this Court has not always limited that to--

Unknown Speaker: So the Constitution gave Congress the power to regulate, and whatever we say, am I right, that we are not... we would not be the final arbiter.

The last word is for Congress in this area.

Mr. Kleier: --Certainly, whatever this Court were to say, Congress could enact a statute to the contrary, and that would control.

Unknown Speaker: One of the major themes running through the briefs on your side is the international community and the international custom, and yet I don't know of any other country in the world where a question like this would be referred to a Court as the decision-maker.

It would be a legislative judgment.

Mr. Kleier: It certainly, in terms of the method, if the method were not to affect foreign commerce and foreign relations, then indeed it could be handled purely internally.

In this area, as in a number of other areas, when foreign commerce and foreign nations become involved, this Court has generally treated that as an area that warrants more sensitivity, and where the executive sometimes must be able to act as opposed to Congress, and if there is sufficient evidence of that executive action, and a State law which is inconsistent with that executive action, this Court will invalidate the State law, and that certainly isn't just in the area of taxation, although most of those cases have been tax cases.

Certainly, not entirely.

For example, in the Zschernig v. Miller case, this Court invalidated Oregon's inheritance scheme to the extent that it prohibited East German nationals from inheriting--

Unknown Speaker: Mr. Kleier, if Congress were to disapprove in the future State taxation of foreign international corporations such as the petitioner in the prior case, but not for domestic multinationals such as your client, would you be back here arguing a constitutional violation under equal protection?

Mr. Kleier: --Certainly not under... under both equal protection and the Commerce Clause, and indeed, that issue has been raised in this very case.

There are two elements--

Unknown Speaker: Excuse me, what is your answer?

Mr. Kleier: --Yes.

The answer is, I guess we would be back by saying that--

Unknown Speaker: You don't think Congress can do that?

Mr. Kleier: --I'm sorry?

Unknown Speaker: You don't think Congress can treat the two differently?

Mr. Kleier: I think that there would be an issue as to whether Congress could treat the two differently.

The way... what we believe controls is the Commerce Clause, and that in fact even under the Commerce Clause the two can't be treated differently, but in that case only if Congress doesn't override that result, that is correct, so we certainly have not raised the equal protection argument the same way as the Commerce Clause argument.

Unknown Speaker: And you don't think that the mere fact that the domestic company is here which normally gives primary tax authority to the country in which the parent is formed would justify some difference in treatment--

Mr. Kleier: Certainly not--

Unknown Speaker: --even legislatively.

Mr. Kleier: --Not simply because it is a U.S. company that is before the Court.

To the extent this Court has spoken at all on the subject, it has indicated that protected forms of commerce, there should be no discrimination under the Commerce Clause between different protected forms of commerce, although the only time the Court has expressly taken up the issue, it involved two different forms of interstate commerce in the Boston Stock Exchange case.

With respect to this case, to treat a U.S. based company differently simply on the basis that it is a U.S. entity, even though it is engaged in foreign commerce and is going to compete with foreign businesses in the exact same markets, would undercut the purpose of the Commerce Clause to actually see that U.S. based businesses play on a level playing field, and as a result, the purpose of the Commerce Clause would warrant no discrimination.

Unknown Speaker: Well, don't you think the Quill opinion has some bearing on the situation?

Mr. Kleier: In what respect, I'm sorry?

Unknown Speaker: Stare decisis.

The Court has dealt with this very statute in California.

Mr. Kleier: Certainly, in terms of... that's exactly right, and in the Quill opinion, however, there was no demonstration of a sufficiently different and changed state of affairs.

Here, the reaction to the Container case, all the way up through the Solicitor General's submission in this case, demonstrate that indeed what was missing, the evidence that was missing both of a purpose of U.S. foreign policy to see that U.S. businesses are treated on an equal playing field, and then additionally, of a clear Federal directive, neither of those existed in Container, and in fact, with respect to stare decisis, we are asking that the doctrine of Container be applied, but we are asking that it be applied to the facts that are before the Court here.

We certainly take the position that a Federal policy which is motivated by the Government's desire to ensure competitive equality between U.S. based and foreign-based groups is at the very heart of the Federal interests that are protected by the Commerce Clause.

A Federal directive which furthers competitive balance has to be part of the Government's one voice in international trade.

As Mr. Hamilton implied in the Federalist Papers, foreign Governments simply will not take seriously efforts by the President to eliminate unequal treatment of U.S. based businesses in foreign markets, as, for example, in the recent trade negotiations with Japan, if those foreign Governments see that the President is powerless to prevent the United States' own States from putting U.S. based businesses at a disadvantage in foreign commerce.

Unknown Speaker: I thought Mr. Hamilton was arguing that in support of giving Congress the power to regulate foreign commerce, I take it.

Mr. Kleier: Well, he certainly was explaining the need for Federal regulation of commerce, and ultimately that power was given to Congress, but what he was explaining was the need to keep the States out, and it is that need to keep the States out where this Court has sometimes looked not only to congressional statutes, but to sometimes less formal directives in the area of foreign policy and foreign commerce which are not evidenced in any statute or in any treaty.

With respect to the Solicitor General's suggestion that it is not present policy which controls, and instead it is only some historical policy, the impact of a tax on foreign commerce is certainly not felt at the time a tax is accrued.

It is, indeed, when a tax is collected and levied that the impact in international trade is felt.

In Colgate's case, the tax is not collected or anywhere close to collected in 1970 to 1973, the year that the tax accrues.

California must first determine under State law administratively whether it wishes to apply that method to Colgate, and indeed, the tax is ultimately paid in 1982, and the final administrative action that California takes is its denial of Colgate's claim for refund in 1984.

That is the action that causes the interference with international trade, and that is the action which Colgate is here contesting today.

As a result, it is certainly not some historical inquiry that the Court should be undertaking, and in addition, there certainly is no precedent in this Court's decision for such an approach.

In Itel, Container, and Japan Line, in none of those is there some historical inquiry limited to particular years, and indeed, for the President, in conducting foreign affairs, to say I'm sorry, but I can't do anything about what happened last year... I can't do anything to fix it today... would simply gut the notion of executive... any executive authority in the area of foreign policy and foreign commerce, and if there are no further questions, I would like to reserve the rest of my time for Ms. Garvey's rebuttal.

Unknown Speaker: Very well, Mr. Kleier.

General Days, we'll hear from you.

Argument of Drew S. Days, III

Mr. Days, III: Thank you, Mr. Chief Justice, and may it please the Court:

In the view of the United States, petitioners have not sustained their burden of showing that the taxes at issue in this case were unconstitutional, whether their claims are viewed from the perspective of California law as it exists today, or from the perspective of a legal situation that existed during the tax years at issue.

Unknown Speaker: General Days, do you take the position that the California tax is perfectly valid today as applied to Barclays?

Mr. Days, III: Yes, we do.

Our position is that insofar as the issue presented in this case is the ability of the Federal Government to achieve uniformity in foreign affairs or speak with one voice, that what California has done as of September 10, 1993, to change its law and provide corporations like Barclays with an option, an election to adopt water's edge--

Unknown Speaker: How about September 9th?

Mr. Days, III: --September 9th?

Unknown Speaker: Before they adopted it.

Mr. Days, III: Before they adopted it, we have not taken a position in this case as to whether it would satisfy the standards that we've set out.

Unknown Speaker: Well, I'm asking you what your position is as of September 9th and before they adopted this change.

Mr. Days, III: I would say--

Unknown Speaker: But not going back to the tax year in question.

Mr. Days, III: --Yes.

I would say, Your Honor, that the same analysis that we've utilized with respect to the tax years at issue in our brief is the one that should be applied here.

What we have on September 9th, 1993, is a situation where California has changed its law in 1986 to provide a water's edge election, and so it seems to us that for the Court to determine whether there was a violation between 1986 and September 9th, 1993, would depend upon whether during that period the United States felt that it could not speak with one voice, or that there was a need for Federal uniformity.

Unknown Speaker: Well, if the 1970 California tax were still in operation, the tax that Barclays objects to, if it were still in operation, what then would be your position as to its validity?

Mr. Days, III: Our position would be that during the period from 1980 through 1986, there were expressions of concern by the Federal Government... that is, by the executive branch... with respect to the California taxing scheme.

Thereafter, there was a change in the policy and what we saw as our history indicates in our brief, a movement on the part of the executive branch to seek legislation, and then a pulling back in response to California's change in its law.

We have not gone through a thorough analysis of that period, because as we've suggested to the Court, the issue presented by this case is whether American foreign policy during the tax year in question was in fact such that California's practice was unconstitutional under the Foreign Commerce Clause.

Unknown Speaker: Well, would it be constitutional, consistent with our foreign policy interests, for California today to reinstate the worldwide reporting statute that it seeks to apply to Barclays?

Mr. Days, III: I think, Justice Kennedy, that what would be necessary is an evaluation of the principles that have been set out by this Court in Japan Line and Container Corporation.

I think we have to start from the proposition that California has been using a method that this Court upheld in Container Corporation.

It's not a situation where California is trying to tax income that is not justifiably taxed by the State of California.

In fact, this Court has said that California's method is really a benchmark insofar as taxing schemes, apportionment schemes are concerned.

Unknown Speaker: But I take it you cannot say with assurance that under my hypothetical case the statute would be consistent with our foreign policy interests.

Mr. Days, III: That is correct.

We are very clear, looking at the record as to the tax year in question, and think that during that period what the record reflects is a preference on the part of the United States, on the part of the executive branch, but not a policy.

To the extent that there's reliance on the U.S.--

Unknown Speaker: So our analysis should just turn on when the executive branch has spoken, and with what clarity, and that's what turns the tide?

Mr. Days, III: --Not at all, Justice O'Connor.

The suggestion that briefs filed by the executive branch, or, indeed, executive branch pronouncements, determine the constitutional issue before the Court, is not an argument that we're making.

What we see the situation presented as being is a case where we know that the Federal Government has foreign affairs concerns, we have a State taxing in a way that this Court has said is constitutional, and so the question is, what does the Court look to in the absence of an explicit statement by Congress through statute, or by way of a treaty?

We think that under those circumstances it's appropriate for the Court to look at what the executive branch has done, what was executive branch policy during that period.

Unknown Speaker: Sort of a Teague rule for the Commerce Clause?

[Laughter]

Mr. Days, III: Well, not quite, Your Honor.

It's really a question of taking that as evidence, and to the extent that there's been citation to briefs filed in this case and in other cases expressing the views of the United States, as we've argued in our brief, it's important for the Court to look at not the briefs as an indication of American foreign policy or executive branch policy, but to look at them only to the extent that they reflect foreign policy determinations that have been made elsewhere, and in this case we are suggesting that whatever briefs may have been filed subsequently, they did not focus on the tax years at issue.

If one focuses on those tax years, as I've indicated, we see a preference but not a policy, a willingness on the part of the executive branch to allow States, except in the context of the U.K. U.S. tax convention originally, to tax foreign nationals using the worldwide combined reporting method, and therefore we think that that is the correct representation.

But to return to my other point... it's a point raised, I think, by Justice Souter's question... what does the Court do under these circumstances?

It seems to us, however the Court resolves this issue, and with regard to whatever years, that this is really a third party claim on the part of Barclays.

What we ultimately are boiling this case down to is whether what California was doing prevented the Federal Government from speaking with one voice or achieving uniformity.

We think that with the change made by California in September of last year, whatever retaliatory concerns that might have been raised for the entire Federal Government, certainly for the executive branch, have been removed, and therefore this is not a situation where we have a discriminatory tax.

Justice Stevens, you're exactly correct on the whole question of what's being taxed.

Unknown Speaker: What about Vermont's tax that we reviewed in the Mobil case?

What about all the other States?

Does the fact that California changes its policy govern the entire Nation?

Mr. Days, III: It is something that the Court has to take into consideration in determining objective considerations, whether what California or Vermont is doing violates the Foreign Commerce Clause, but failing a clear answer with respect to those objective inquiries, it is our position that one place to look is to the executive branch, and what we are saying not as a matter of history, but speaking about the contemporaneous relationship of the United States Government with our trading partners that what California has done has removed whatever tension might have been presented at an earlier point by what California was doing.

This is also not a situation where there is anything to be served by paying California's taxes back to Barclays in the form of a refund.

Backward-looking relief is infeasible under these circumstances.

To the extent that what California has done to impair the Federal Government's relations in the foreign affairs area, that has already been accomplished.

Requiring California to refund money under those circumstances--

Unknown Speaker: You in effect--

Mr. Days, III: --it seems to us would be inappropriate.

Unknown Speaker: --I'm sorry.

You in effect are arguing that we should look at this the same way Congress would look at it, aren't you?

Because I think you're saying that because the retaliatory effect is less with respect to an event subsequent to the tax years in question, that simply should color our judgment with respect to the tax years in question.

Whatever that is, I don't suppose that's a statement of legal principle, is it?

Mr. Days, III: Certainly, this Court has never explicitly held... may I complete the answer +/?

explicitly held this, but we think that looking at this Court's decisions with respect to refunds of taxes, this Court has held that refunds were required when it was a matter of discrimination, where the tax went beyond merely what was legitimate within the taxing jurisdiction, or where the parties taxed were immune from taxation.

We think that this particular situation is unique, and therefore are suggesting that the Court adopt a unique remedy.

Unknown Speaker: Thank you, General Days.

Mr. Days, III: Thank you very much.

Unknown Speaker: Mr. Laddish, we'll hear from you.

Argument of Timothy G. Laddish

Mr. Laddish: Thank you.

Mr. Chief Justice, and may it please the Court:

It's extremely helpful for the Solicitor General to point out a fatal flaw in the taxpayers' approach, but I'm afraid we must point out that both the taxpayers and the executive branch have lost sight of two of the bright stars of Commerce Clause navigation.

First, that the Constitution gives the power to regulate commerce to Congress, not to executive branch letters or policy statements or anything of the like.

And second, that there must be a clear line of demarcation maintained between a dormant Commerce Clause analysis and a nondormant Commerce Clause analysis, and confusion results from the taxpayers' brief in this area.

Well, what is dormant?

Well, just a grizzly bear is dormant when it's hibernating, Congress is dormant as to a Commerce Clause issue when it is not making decisions on that issue informing United States law.

What is not dormant?

Well, if the bear's out of the den, down at the stream choosing which fish to swat up on the shore and which fish to let go by, that bear is not dormant as to any of those fish.

Similarly, if Congress, informing the commerce law of the United States, is choosing which tax practice to prohibit and which tax practice to let go by, then Congress is not dormant as to any of those tax issues that are under congressional scrutiny.

Unknown Speaker: Well, under your theory, I guess, or maybe it's the theory adopted by the court below that you're supporting, if Congress has a bill before it to deal with the issue of State taxation and for whatever reason doesn't pass it, then that's congressional action.

Mr. Laddish: No--

Unknown Speaker: That's it.

There we are.

Mr. Laddish: --No, Justice O'Connor, we would not take that position.

That is not the position this Court has ever taken and we would not take that position.

What we do... what we do rely upon is this Court's Wardair decision.

And I should label this.

We're talking nondormant Commerce Clause here, where the one voice has spoken.

The Wardair Court in the Wardair decision makes it clear that permission, congressional permission, the one voice can speak in terms of congressional acquiescence that is implied in congressional actions.

If, indeed, such implied permission exists, then the one voice has spoken through the congressional actions and no dormant Commerce Clause analysis is required or necessary.

That is the holding in the Wardair case and that clearly falls on the nondormant side.

Now, here it's claimed that the California Supreme Court held something different.

Well, actually, if you look at page A-27 of the appendix to the petition, where the California Supreme Court holds that the Federal Government has affirmatively acted rather than remain silent and has acquiesced in the taxes in this case, that's--

Unknown Speaker: May I ask you a sort of basic question--

Mr. Laddish: --Certainly.

Unknown Speaker: --Mr. Laddish.

Supposing we didn't have all this history.

None of this had happened, Congress had never considered, nobody had talked about it, a purely dormant Commerce Clause issue... you argue it's a nondormant.

If it were a dormant Commerce Clause issue 100 percent pure and simple, would the tax be constitutional or unconstitutional?

Mr. Laddish: The tax would be constitutional.

And would you like me to go into that aspect at this point?

Unknown Speaker: I would think that that's part of your case.

Mr. Laddish: Certainly.

Unknown Speaker: You don't argue that very much.

Mr. Laddish: Well, I plan to, Your Honor.

If I might, I could get... I'll be getting back there.

With the Wardair decision... which, by the way, explicitly did not rely upon the Federal Aviation Act.

There's a statement in the Court's decision saying it's not doing that... the U.S. U.K. treaty in this case provides a perfect opportunity for this Court to apply the Wardair analysis.

In fact, it's a better opportunity than Wardair itself, because in the U.S. U.K. treaty the Court need not assume that the State tax issue was before Congress when Congress made the action.

In the U.S. U.K. treaty, the treaty came to the Senate with a direct ban on the States' use of worldwide combined reporting contained in the treaty.

As long as that ban remained in the treaty, the treaty could not obtain the constitutionally required two-thirds vote for Senate approval.

With that ban on the States' use of worldwide combined reporting in the treaty, the treaty died, and it could only be resurrected when Congress, the Senate did something, as one Justice pointed out.

They did something by putting in a reservation to that treaty which removed the ban as to the States' use of worldwide combined reporting, kept it as to the national government.

The treaty then went back for renegotiation with the United Kingdom, and with some concessions that the United States had to give in order to get U.K. approval, the treaty then came back to the Senate, was approved, and was ratified with no ban as to the States' use of worldwide combined reporting, but a ban as to the Federal Government.

It's admitted that there could be no clearer situation for the Wardair analysis, to find an unmistakable implication in the law that the States had been permitted to use worldwide combined reporting.

In terms of the grizzly bear, the Congress had chosen to swat the national fish and let the State fish go by, and after considerable scrutiny.

Unknown Speaker: You're relying on what's, in effect, a negative implication from action which Congress took.

Mr. Laddish: Yes.

Unknown Speaker: You say that's the same thing as Wardair.

Mr. Laddish: Yes, in those terms, Mr. Chief Justice; that's what they used.

The U.S. U.K. Treaty--

Unknown Speaker: What negative implication is there from the action that Congress... what action did Congress take in the normal sense of congressional action?

Mr. Laddish: --In the same sense that in Wardair they found an implication... I should say you found an implication... in that the national government of a Federal system was the sole member of that system that was... that had a limitation put upon it.

And from that, the Court in Wardair drew an implication that the States within that Federal system would not have the same implication, and--

Unknown Speaker: But there were allied provisions that did contain a limitation, and it's just a straightforward application of an old maxim of interpretation, inclusio unius.

But, you know--

Mr. Laddish: --Well--

Unknown Speaker: --The explicit inclusion of one thing implies the exclusion of another.

What is included here that implies the exclusion of the other?

Mr. Laddish: --Well, I mean, it's the same principle as in Wardair, but also it's the culmination of decades of congressional acquiescence in the other treaties.

Unknown Speaker: Well, but that's quite different.

Mr. Laddish: We also have--

Unknown Speaker: I mean just mere congressional inaction is quite different from a situation in which the maxim inclusio unius is applicable.

Mr. Laddish: --I don't... I'm afraid I don't understand any distinction between what the Court did in Wardair and what the U.S. U.K. treaty was.

They have the same sort of application of the limitation... I'm just talking right now from the terms of the treaty, without looking at all the history.

It's clear from the history, as the Solicitor General has pointed out, that going into the treaty and through all the negotiations and finally in the final renegotiations and the signing of the treaty--

Unknown Speaker: Never mind the history; give me the text.

Mr. Laddish: --Oh, the text.

Unknown Speaker: Yes.

Mr. Laddish: Yes.

The text is... as it came out and was approved by the Senate, the text was

"this limitation applies to the national government. "

and there's no mention of the States in that particular text.

The States are mentioned in the treaty, that States are subjected to other limitations.

Just as in Wardair, in separate treaties or separate agreements, the States were subjected to certain limitations and not others.

Here we have one document with a synergistic combination of both of the types of implications from Wardair.

Adding to that, you have the implication of through the history of these bilateral treaties where the international model treaty of the OECD would restrict the States, as well as the national government, to the arms-length approach, thus barring them from using the unitary business approach, particularly as to branches of the corporations.

In all the treaties, in dozens and dozens... in every United States bilateral income tax treaty through the years, the Federal Government has been subjected to an arms-length limitation and the States have not been subjected to that limitation.

Certainly, the issue was on the table as to these treaties because there are these model foreign treaties that would have subjected the States.

And, in fact, in a considerable number of these treaties which are set forth on page 17 of the Alaska brief in support of our position, there are a significant number of these treaties where the political subdivision of the other States of the other Nation were subjected to this arms-length restriction, and still the States of the United States were not.

So I submit that the indications, certainly in the Wardair treaty with the history, but forget the history, look to the language of the U.S. U.K. treaty and to the other dozens and dozens of United States treaties.

The common feature in all of those... and if this is the international standard, I'm perfectly happy to live with it... is that the national governments are restricted to the use of the arms-length approach.

The State governments are not, and thus can use the unitary business approach with its formulary apportionment of income, one form of which is worldwide combined reporting.

So under Wardair, and under the Itel Containers case from 1993, if the standard is put in Itel, the most rational inference to be drawn from the body of law, from the treaties themselves, Federal law, is that the States are impliedly permitted to use worldwide combined reporting.

Unknown Speaker: Does the record tell us at all what the difference in money would be if California were collecting based on the arms-length method as opposed to the worldwide combined--

Mr. Laddish: What the record shows is that... as to the differences in the amounts between the returns that were filed and the assessments as to tax amounts, for Barclays Bank International it was $1,678; for Barclays Bank of California, for example, it was $152,470.

That was approximately 12 percent and 28 percent, respectively, difference between the systems.

But I would like to point out--

Unknown Speaker: --Does the system that California uses impact particularly because California has high property values or perhaps high wages or something, and these are part of the formula--

Mr. Laddish: --Well, I should point out... there's an assumption... and I was going to wait until I got to my dormant Commerce Clause analysis, but I think there's an assumption we have to dispel here that somehow we collect excess taxes and we cost the taxpayers the inordinate amount of money to comply with our wild scheme of taxation.

First, I'd point out that this Court, in Container, which is consistent with this Court's doctrine through 70 years of Court procedure, has held that this is a proper and fair method of taxation, that it is a method of taxation that fairly apportions income to the taxing jurisdiction with a reasonable sense of how income is generated, and that... and this is the word from Container... it avoids the basic theoretical weaknesses of arms-length separate accounting, such as giving the taxpayer the chance for manipulations through tax havens and this sort of thing.

Through the arms-length method, the Federal Government... and this is on much congressional discussion and everything else... the Federal Government is having a terrible time trying to use the arms-length method, trying to catch up with taxpayers and enforce the Federal tax.

The States' approach of worldwide combined reporting, all the taxpayer needs to provide, basically, is the California and worldwide respectively property, payroll, and sales, and the worldwide net income.

Any business is going to keep track of those things, no matter how many countries they're in.

That's the sort of thing they keep track of for their own taxpayers, for any filings they might have to make with the United States SEC if they're going to be selling any shares of stock in the United States.

These... this is information that they will have.

And as the court of appeal below has held in Barclays, the California system provides for a user-friendly system of reasonable approximations where the Franchise Tax Board is to look at the financial records of the corporation and work from there, if at all possible, open to any time that the taxpayer wants to come in with its actual refiguring under the exact technical determinations of the system, if they don't want to use the reasonable approximations.

Unknown Speaker: --But, I had thought... you indicate that they have these figures, every company has them.

Wasn't there a finding that it would cost something in the range of $5 million--

Mr. Laddish: $2 million and $5 million--

Unknown Speaker: --To establish this system, and then substantial sums in order to maintain it.

Mr. Laddish: --They... that was a--

Unknown Speaker: Are you saying that it's not burdensome because there's this approximation option?

Mr. Laddish: --Exactly, Your Honor, and that's what the California Court of Appeal has held is a reasonable system, and that--

Unknown Speaker: But if the approximation option were not available, this would be a substantial burden on the taxpayer from the standpoint of accounting costs, would it not?

Mr. Laddish: --As the testimony indicates, it would be a substantial burden whether it was foreign parented or domestic parented, yes, Your Honor.

Unknown Speaker: Well, but that doesn't quite square with your argument that everybody has these figures and it's easy to give the figures.

Mr. Laddish: Well, it's that if they were going to do... everybody has those figures in their financial accounting records which, as the court of appeal has held, the board of franchise... the Franchise Tax Board has to consider those in applying the reasonable approximations approach.

If the taxpayer says it's going to cost us too much to go set up... and this is what the $2 million, $5 million things... assessments were... set up separate books in every county or every nation, every subdiv... subsidiary is going to have a separate set of books for California taxes.

The Franchise Tax Board has never required that.

We've looked at our requirements and we say, yes, that would be a substantial burden upon you, so you may use reasonable accounting.

And in this particular case there is absolutely no evidence on the record that Barclays Bank was deprived of any benefit or of any injury at all through the California system.

They claim risks, but as this Court in Complete Auto Transit indicates, just a claiming of a risk of discrimination is not enough; you have to show there's some injury, and they have not done that.

I would like to mention the taxpayers and the executive branch approach to the dormant Commerce Clause, where they would give determinative weight, under varying circumstances, depending on which person you're listening to, to the bind... to Federal pronouncements under... as a binding Federal one voice Commerce Clause policy that could somehow preempt the States.

But this would... this is not truly a dormant Commerce Clause analysis, because in a dormant context you cannot have such a binding Federal policy.

It's... a very similar argument was rejected by this Court in the Wardair case where the executive branch, the Solicitor General argued that a resolution of ICAO, which is an international body, expressed the international policy which the executive branch joined in, that should be determinative in that case.

And this Court looked at that resolution and said, well, this is a... this is a common aspiration that's being voiced here of the body, but this Court rejected any policy significance for this resolution because it had no force of law.

Executive branch pronouncement must have the force of law before it can possibly preempt the States' power to tax, which this Court most recently in Oregon v. ACF held that this... the power to tax is central to State sovereignty.

The Constitution provides a very carefully crafted system of Federalism with the States having certain protections within that Federal system.

By giving the power to control or to regulate commerce to Congress and by setting forth procedural rules like the two-thirds vote required for Senate approval of any treaty, the Constitution has forged a balance between the national need for a capability of imposing a uniform commerce policy on the States and the need under Federalism for the States to have a voice, through their elected representatives, in the formation of any such policy.

In contrast--

Unknown Speaker: What do you say, Mr. Laddish, to the difficulty of Congress' enacting legislation in this area?

Mr. Laddish: --Well, the Constitution gives that job to Congress, Justice Scalia, and I think Congress has certainly... I'll... let me shift now to dormant Commerce Clause analysis, because I think we've just... we have to get there.

The Congress is given the power to regulate foreign commerce, and the... Container has established that in a dormant, truly dormant one voice situation, the question is is uniformity of the State tax practice with the Federal tax practice essential.

And we submit that this question as to whether the basic Commerce Clause interests require uniformity of the State and Federal tax practices is a question... one this Court has testing, and should look at under current circumstances.

This is because we view this Court in a dormant one voice situation where the one voice has not spoken, as a sort of one voice police that can do what Congress might do if Congress had a full chance to do it.

Unknown Speaker: But may I interrupt you--

Mr. Laddish: Certainly.

Unknown Speaker: --You say that Congress has not spoken.

If you assume there can only be one voice and only one policy with this kind of tax, Federal policy is quite different from California's policy.

Mr. Laddish: I--

Unknown Speaker: Isn't that, by hypothesis, a demonstration that there are two voices out there?

Mr. Laddish: --I--

Unknown Speaker: One says to use one kind of accounting, the other says use the other.

Mr. Laddish: --I... it depends on what you say the one voice is.

We say that in Commerce Clause area, Congress is the branch that has the one voice.

There can be no binding policy by any other... any other branch of the policy--

Unknown Speaker: Are you suggesting that any State tax on foreign commerce or had a severe impact on foreign commerce would be valid as long as Congress has not spoken?

Mr. Laddish: --No, Your Honor, but I think if the Court looks to the facts--

Unknown Speaker: Why isn't there a violation of the one voice policy if Congress has spoken in a limited area and says when we're talking about Federal taxes, this is our voice, none of this kind of stuff.

Mr. Laddish: --That's our basic argument.

Unknown Speaker: And the State has a different policy, why isn't that two voices?

Mr. Laddish: Well, if Congress has spoken and said--

Unknown Speaker: But, they have.

They've said we... the Federal Government will not impose this kind of tax.

Mr. Laddish: --Oh, I'm sorry.

And that... well, I will have to rely upon this Court's ruling in Container that that, by itself, is not Congress voicing the one voice of the Commerce Clause.

The Court in Container specifically disclaimed any significance of that in its determination of the one voice issue.

Congress had to choose some method of taxation for Federal purposes, but that does mean that Congress--

Unknown Speaker: Well, they did more than that; they disabled themselves from using another.

Mr. Laddish: --Yes, they did, just as... as in the treaties, they disabled themselves from using the unitary business approach, but enabled the States to do so.

Unknown Speaker: They didn't enable them.

They just left those alone.

Mr. Laddish: But when Congress acts in a... well, that... I'm giving our argument and you may be giving your views.

Unknown Speaker: The thing... I'm puzzled.

It seems to me you keep vacillating between dormant and nondormant and I've been trying to get the picture in my mind of a 100 percent pure dormant Commerce Clause analysis, where--

Mr. Laddish: Well, that's what I... let's assume--

Unknown Speaker: --And it seems to me that--

Mr. Laddish: --I mean, to do that, we must assume, arguendo, that Congress has not spoken.

Unknown Speaker: --Right.

Mr. Laddish: To permit or prevent.

Unknown Speaker: This particular issue.

Mr. Laddish: This particular issue, that's right.

Unknown Speaker: But they have spoken to the international world generally that one aspect of American policy is the Federal Government will not impose this kind of tax.

Mr. Laddish: Um--

Unknown Speaker: But you say that doesn't count as a voice.

Mr. Laddish: --Actually, what Congress has said in the statutes... the statutes would permit Congress to use a formulary system very, very similar to what California's doing.

The tax... the tax treaties with the foreign governments have limited the Federal Nation, but when they've done that they've made clear... they've been very careful to leave the State out of it.

Unknown Speaker: Well, that's--

Mr. Laddish: So if you look at the Federal tax statute, it is very broad and permits many types of approaches.

But in this situation where we're assuming now that Congress hasn't acted to prevent or permit, you have the long legislative history before Congress that the issue has been presented to Congress many many times in a highly visible fashion, sometimes by the administration, to ban or prevent or restrict the States' use of worldwide combined reporting.

It's come with much expressions of... the foreign complaints that are being voiced to the Court today have been voiced and directed at Congress and quoted by Congress.

Unknown Speaker: --Let me try the one voice concern again.

I want to be sure I understand your position.

It's not only one voice with California and the United States Government.

There are 50 States out there.

Mr. Laddish: That's correct.

Unknown Speaker: You would not contend, would you, that all 50 States must apply this unitary business approach?

Mr. Laddish: No.

And in a dormant situation, all we're looking at is whether... whether--

Unknown Speaker: Well, if half the States can use--

Mr. Laddish: --Uniformity is essential.

Unknown Speaker: --If half the States can use the other kind of accounting and California... how can that be one voice?

Mr. Laddish: What... the point I'm trying to get to is that if Congress has indicated that not acquiescence, not a permission that would completely give the States all rights under the Commerce Clause to do, you know, worldwide combined reporting, even if it might violate discrimination or anything else... I'm not talking about that.

If Congress has indicated that through it's inaction... here we are talking about inaction.

Unknown Speaker: You're back... you're back to nondormant.

It seems to me--

Mr. Laddish: No, no, no, no.

I'm talking about dormant.

They... when they have indicated inact... through their inaction that the uniformity is not essential, it would usurp Congress' role as the regulator of commerce under the Constitution for this Court to step in and impose its own notions of what might be uniform or might be required for uniformity in a case where Congress has shown through the decades and all of this, you know, congressional activity, that uniformity is not essential.

Unknown Speaker: --Well, I'm trying to hypothesize a case and I can't seem to get you to address it.

Mr. Laddish: I'm sorry.

Unknown Speaker: In which Congress had been totally silent.

Nobody had ever spoken to Congress and the executive never said anything about this.

Mr. Laddish: Got it.

Unknown Speaker: But the English company comes in and says we're entitled to have a rule of law that is the same, under the one voice principle, throughout the United States.

Mr. Laddish: Yes, all right--

Unknown Speaker: Is your argument that the one voice principle does not apply at all, or when 50 States use 50 different programs that's still one voice?

Mr. Laddish: --I... what I say is that the Court needs to look at what the situation is.

If that were the situation, the Court needs to apply the standards of one voice as this Court has developed them, as--

Unknown Speaker: And would you lose that or would you win?

Mr. Laddish: --No, we would win, Your Honor.

Unknown Speaker: And do you win because the one voice rule doesn't apply or because there's only--

Mr. Laddish: Because--

Unknown Speaker: --One voice even though 50 States all act differently?

Mr. Laddish: --What... we would win because it has not been established by the taxpayers that uniformity is essential, and that there are--

Unknown Speaker: Well, then you're saying they don't need one voice.

Mr. Laddish: --And that the use of worldwide combined reporting, they have not shown that it implicates foreign affairs in the manner in which the Container case looked at such a situation.

What--

Unknown Speaker: How will you ever... how will you ever be defeated on a one voice theory, then, when Congress has not acted?

Mr. Laddish: --Well, in our situation, we--

Unknown Speaker: Because if it hasn't acted you're going to say the one voice is that each State can do what it will.

Mr. Laddish: --No, no, I have not... I have not meant to say that.

If I have, I would retract it.

The Court has to apply the standards that it did in Container, look to the foreign complaints that are being made, determine whether it's truly implicating foreign affairs or not.

If the Court here looks at the complaints that are made in this case by the foreign governments, what the Court will hear is a complete rehash of the arguments which this Court flatly rejected in Container.

I mean, the foreign governments simply will not agree with this Court, or let on that they agree that this Court has held that worldwide combined reporting is proper and fair, and that it apportions income in a fair manner.

As in Allied Signal this Court recognized that it does a better job of apportioning values between parts of a unitary business than arms-length separate accounting does.

What you're hearing from the foreign governments is just the same complaints you heard in Container.

And it's... I submit that this Court has given the foreign governments a chance to come up with something new and they have not.

So... but that, in another context, perhaps foreign governments could provide, and the taxpayers could argue, that there is a true implication of foreign affairs.

Here if the foreign governments were really arguing what their real interests are, what they would be telling this Court is we want California to be bound to the same arms-length approach that the States are... or that the Federal Government is, because the Federal Government cannot possibly administer that tax and our taxpayers can find ways of manipulating their books to get around it.

We would be hearing we like to provide tax havens to our taxpayers.

And so if the California method is taken away... the ability to impose worldwide combined reporting is taken away from the States, we won't have to worry about that anymore and the tax havens can continue to be just as effective as they are with the Federal Government.

No matter how hard the Federal Government tries to enforce arms-length separate accounting, what it is doing is gradually getting as close as possible to a global formulary apportionment of income, as can be done under the treaties that restrict it to arms length.

So the Federal... the foreign governments' complaints really are just a rehash of what this Court has already rejected in Container.

And the United Kingdom, of course, has put a retaliatory statute on its books, and it will brandish that statute for dramatic effect whenever it feels that it's appropriate, and yet it hasn't ever implemented that statute.

And, of course, the reason is clear.

The Federal Government has testified before Congress that implementation of that statute by the United Kingdom would be a direct violation of the U.S. U.K. treaty which the U.K. bargained for and signed onto knowing that it had been unsuccessful in its attempts to have the States barred from using worldwide combined reporting.

I'd like to point out that as to our arguments on the executive branch... excuse me, as to... back now to the nondormant side, the executive branch actions have confirmed that Congress has acquiesced in the States' use of worldwide combined reporting.

No matter what their statements might be... they might well be jawboning as the Solicitor General says... they executive branch's actual statements... or, excuse me, actual actions show... like when they drafted their own model income tax treaty, they made it very clear that the national government would be subjected to the arms-length restrictions, but the States would not.

When the foreign model treaties are drafted by the OECD, why the Federal Government... the executive branch has entered formal reservations to those treaties.

When after the U.S. U.K. treaty, the other foreign governments wanted the executive branch to negotiate the same sort of ban on the States' use of worldwide combined reporting as it had in the U.S. U.K. treaty, the executive branch pointed to the actions of the Senate and said, no, we will not do that; it would not be successful in the Congress.

The executive branch, when it has wanted to change the States' use of worldwide combined reporting, has not tried to issue its own Federal... clear Federal directive prohibiting the States' use.

It has, instead, gone to Congress and asked for Congress to change the rule as it applies now permitting the States.

The issue has been fought through in the U.S. U.K. treaty and the issue has been on the table in dozens and dozens of other income tax treaties, bilateral treaties.

The State of California, by using worldwide combined reporting, is only doing what these treaties permit the States to do, and nothing that the executive branch or the foreign governments or the taxpayers can say or do can negate this congressional acquiescence in the State tax.

I might point out that the 1993 California legislation, as the Solicitor General pointed out, is the culmination of a campaign by the executive branch for the States to adopt a compromise solution, the water's edge approach, which contains both worldwide combined reporting elements and separate accounting elements.

And since that tax law has been inserted in 1993, which amended a 1986 statute, the United Kingdom has withdrawn its threats of retaliation for the moment and has recognized... at least impliedly recognized that such retaliation would not be justifiable at this point.

So in the dormant Commerce Clause context--

Unknown Speaker: Mr. Laddish, may I take it, then, that you're answering the question that General Days did not answer.

That is, that you'd say you can go back tomorrow and do what you have been doing for years, and it would not be offensive to the Federal Constitution?

Mr. Laddish: --That is correct.

Politically, would that happen?

Probably not.

But what we're dealing with is a political question that should be submitted to Congress, that has been submitted to Congress.

Congress has acted to permit the States' use of worldwide combined reporting.

Even if it has not... if it's assumed that Congress has not, Congress has at least indicated that uniformity of the State tax practice, in a dormant Commerce Clause context with the Federal tax practice, is not essential, which should end this Court's... any of this Court's considerations under a dormant Commerce Clause context.

I would... thank you very much.

Unknown Speaker: Thank you, Mr. Laddish.

Ms. Garvey you have 4 minutes remaining.

Rebuttal of Joanne M. Garvey

Mr. Garvey: Thank you, Chief Justice.

United States has sought, from the very beginning, to resolve this problem of States' use of an inconsistent method in only one way; have the States' respect the international practice by receding to a tax base that is confined to the United States tax jurisdiction.

And so the United States has appeared six times in this case, four times in support of Barclays, beginning in the California trial court, and now twice on the other side.

But even though the current administration now supports California, its position, as explicated by the Solicitor General and in its briefs, actually continues to underscore the reasons why this Court should rule in Barclays favor.

First, the current administration did not support California until California changed its law to bring it into ostensible conformity with international practice.

And, in fact, as the California legislative committee reports acknowledge, the change in the law was requested by the administration to avoid retaliation, which shows the clear causal connection between utilization of this State tax to divide international income and the problems and the implications on United States foreign policy.

And the Solicitor General also mentioned, but the brief clearly brings out, that the United States continues to supports Barclays on very significant points.

California's Wardair analysis is inapplicable in the eyes of the United States.

And, second, under the applicable dormant Commerce Clause analysis, worldwide combined reporting is unconstitutional when it is incompatible with the international practice, and it is incompatible.

So when all is said and done, the current administration's difference with Barclays is a tiny issue.

Now, they say there were not sufficiently clear Federal executive pronouncements to make the tax unconstitutional by the year of tax accrual, which is actually 1978.

Respectfully, that is legally and factually incorrect.

The Federal executive does not have to issue a clear Federal directive for the tax to be unconstitutional.

This position ignores the very presumptive need for uniformity that underlines... that underlies the dormant foreign Commerce Clause issue, because it is uniformity that is issue and it is the need to comply to prevent exactly what has happened here.

With respect to the 1994 legislation, that is not before this Court.

Prospective only solution does not solve past constitutional violation.

The taxpayer is entitled to be put in the position it would have been had the tax been collected constitutionally.

And finally, the United States is factually incorrect because there were clear Federal executive pronouncements... if that is the test, and we do not contend that it is; we believe it is the implication on foreign policy that is the test, and the inherent problems caused by the variation.

But in any event, in the year 1975 the United States executive signed a treaty with the United Kingdom that would have banned this, and what could be a clearer indication of Federal executive policy, a policy that was consistently followed and has not been deviated even by the President--

Unknown Speaker: Was the treaty ever ratified, Ms. Garvey?

Mr. Garvey: --No.

Unknown Speaker: Thank you.

Mr. Garvey: Thank you.

Unknown Speaker: The honorable court is now adjourned until tomorrow at ten o'clock.

Attribution:

The OYEZ Project

Featured:

Associated Industries of Missouri v. Lohman - Oral Argument

Fri, 09 Jan 2009 14:49:52 +0000

Case:

Associated Industries of Missouri v. Lohman

Media File:

93-397_19940328-argument.mp3

Related Transcript:

1993_93_397_argument.xml

Transcript:

Argument of Thomas C. Walsh

Chief Justice Rehnquist: We'll hear argument next in Number 94-397, the Associated Industries of Missouri, v. Janet Lohman.

Mr. Walsh.

Mr. Walsh: Mr. Chief Justice, may it please the Court:

This case is a Commerce Clause challenge to section 144.748 of the revised statutes of Missouri, which imposes an additional use tax of 1-1/2 percent on all goods purchased from out of State for use, storage, or consumption in Missouri.

Now, the Missouri overall taxing scheme is thus as follows.

There is a 4.225 State-wide sales tax.

There is a 4.225 equivalent State-wide use tax.

The challenged statute adds an additional 1.5 percent use tax to be charged across the State on all transactions from out of State.

There is no corresponding additional sales tax State-wide.

Cities and counties and other municipalities within the State, however, are authorized to enact local sales taxes with the approval of the voters.

There is no authority for any such local use taxes.

Now, the result of this unusual statutory scheme is a patchwork taxing scheme within the State of Missouri that has 22 different local sales tax rates, ranging from zero percent in several counties to 3.5 percent in one city, and bear in mind that throughout the whole State, the 1-1/2 percent additional use tax is applicable, so the total use tax applicable throughout the State of Missouri is 5.725 percent.

Unknown Speaker: Is there any correspondence, Mr. Walsh, between the size of the local sales tax and the population of the taxing jurisdiction?

Mr. Walsh: Not directly, Your Honor.

Some of the higher sales tax rates are in the larger cities, and some of those that have no additional sales tax are the smaller rural communities, but there's no... you can't really draw a specific correlation.

Unknown Speaker: Mr. Walsh, at one time was there a provision that said if a local community imposes an additional sales tax of its own, that it would impose an equivalent use tax at the same time?

Mr. Walsh: There was a provision, Justice O'Connor, in 1990, right before this particular law became effective.

Unknown Speaker: Had that been adopted by the legislature?

Mr. Walsh: Yes, it had.

It was--

Unknown Speaker: Did it ever go into effect?

Mr. Walsh: --Well, it was on the books for about a year, but it was never implemented.

Unknown Speaker: Had that been implemented, would you be here?

Mr. Walsh: Not at all, Your Honor.

I... we have no quarrel with that kind of--

Unknown Speaker: Why was it not implemented?

Why was this shift made?

Mr. Walsh: --The record doesn't really show that, Your Honor, except that a) the state thought it was easier, apparently, to do it the way that it eventually decided to do it, and b) I think there was probably some concern about whether local voters would actually adopt a local use tax.

Unknown Speaker: Is that the method employed in some other States that allow local imposition of additional sales tax?

Mr. Walsh: The record shows, Your Honor, that there are 28 States that allow local use taxes, and every one of them has some sort of mechanism which prohibits the local use tax from being greater than the local sales tax.

Missouri is the only State that has adopted this kind of a scheme, except back in the seventies, Oklahoma tried it, and the Oklahoma statute was invalidated by the Oklahoma supreme court under the Commerce Clause, a scheme very similar to this one, but we did have--

Unknown Speaker: But the National Conference of State Legislatures is amicus on the other side.

They would like it.

Mr. Walsh: --Very much so, yes, Your Honor.

They would like to experiment with use taxes and to avoid the strict rule of equality that has pertained to use taxes since this Court started deciding these kinds of cases.

The--

Unknown Speaker: Mr. Walsh, I may be repeating what Justice O'Connor asked you, but I want to be sure.

You are attacking section 144.748, aren't you?

Mr. Walsh: --Yes, Your Honor.

Unknown Speaker: You are not attacking the local delegation power.

Mr. Walsh: The local delegation of sales taxes--

Unknown Speaker: Yes.

Mr. Walsh: --Your Honor?

No, we're not.

No.

The statute that we're attacking imposes the additional 1-1/2 percent across-the-board, State-wide use tax.

It's contained in a separate--

Unknown Speaker: It's the latter that causes the difficulty here.

Mr. Walsh: --That's the statute that causes the difficulty, and it's a self-contained statute.

We're not even attacking the basic 4.225, basic use tax, which is equivalent to the State-wide basic sales tax.

It's the add-on that causes the problem.

Unknown Speaker: It's the combination of the use tax exceeding the sales tax.

Mr. Walsh: Yes, it is, Your Honor, but the excess 1.5 is in a separate statute, and it could be invalidated without affecting the base.

Unknown Speaker: It is true, is it not, that the scheme that you said you would not challenge in response to Justice O'Connor, if all of the local jurisdictions in fact added on a use tax, would have netted more money rather than less.

You had a line in your brief about Missouri attempting to swell its coffers at the expense of interstate commerce, and yet the scheme that you say would be constitutional could have netted the State more.

Mr. Walsh: Well, it could have, if the local municipalities had adopted it.

One of our objections to this is that the State tried to preempt the local option by imposing this use tax at the State level, and I think it's just a matter of supposition whether the local municipalities would have gone along with a local use tax in all situations.

Unknown Speaker: Well, if we accept your submission, we would not strike down any provision of Missouri law across the board.

For instance, you have no grounds of complaint, as I understand it, about the situation in Kansas City, or perhaps Jackson County, or the City of St. Louis.

Mr. Walsh: Well, the statute, though, that creates the problem, Your Honor, is 144.748.

That is a statute applicable State-wide.

Unknown Speaker: But--

Mr. Walsh: It does not produce equality State-wide.

Unknown Speaker: --Well, but you have to show that it produces a higher use tax than sales tax in a particular jurisdiction.

You can't show that with respect to Kansas City or with respect to the City of St. Louis.

Mr. Walsh: But you can't... I respectfully submit, Your Honor, you can't take averages, as the State wants to do.

You have to look at this tax as it operates in the marketplace--

Unknown Speaker: But--

Mr. Walsh: --In all the marketplaces.

Unknown Speaker: --But you have to look at it with respect to each of the taxing jurisdictions.

What complaint do you have about the situation, say, in Jackson County?

Mr. Walsh: The fact is that this is a State-wide statute.

Unknown Speaker: In mean... but answer my question.

Mr. Walsh: Well, insofar as--

Unknown Speaker: What complaint do you have about the situation in Jackson County?

Mr. Walsh: --Insofar as the... the sales tax in Jackson County is higher at present time than the use tax, there is arguably no damage from the discrimination in Jackson County.

Unknown Speaker: And the same is true in the City of St. Louis, is it not?

Mr. Walsh: It... I believe the sales and use tax are equal in the City of St. Louis, but in... out of... in 841 out of 1,573 jurisdictions in the State of Missouri, the use tax is higher than the sales tax--

Unknown Speaker: Mr. Walsh, why--

Mr. Walsh: --and that's because... excuse me.

Unknown Speaker: --I agree with you that the State statute appears to be the problem, and perhaps your remedy for the future is that that statute is invalid, but as far as collection of taxes past paid, is it your assertion that anyone, no matter where those taxes were paid, whether in Kansas City or anywhere else, is entitled to a refund?

Mr. Walsh: Yes, Your Honor, it is, because the State statute has created the discrimination.

It can't be severed.

It's--

Unknown Speaker: Well, why not, Mr. Walsh?

Why wouldn't it be an adequate remedy to simply say the Constitution prohibits the enforcement of the statute in those jurisdictions where it produces a higher total than produces any discrimination?

Mr. Walsh: --Well, I guess that would be some sort of a geographical severance type article.

Unknown Speaker: Yes, sure.

Mr. Walsh: But the statute is a... it imposes a 1-1/2 percent use tax in... everywhere, to every transaction.

Unknown Speaker: I understand that, but there's nothing wrong with the collection of it in Jackson County, for example.

It's only those jurisdictions in which you have this disparity running in one direction.

I don't know why your remedy wouldn't be adequate to just say it cannot be enforced in those jurisdictions.

Mr. Walsh: But that assumes, I think, that the legislature had some intent that it would apply where it's legal and not apply where it's not legal, and the next--

Unknown Speaker: It would assume the Federal Constitution just requires correction of Federal constitutional violations.

It doesn't require a windfall.

Mr. Walsh: --But you can't analyze the statute that way, because every year, it changes.

Every--

Unknown Speaker: Why wouldn't that be a question of State law?

I mean, if the... your argument on Federal constitutionality is you can't have a higher use tax than sales tax.

If this Court just says that, then why isn't the State free to say, our statute stands to the extent that it doesn't violate that constitutional requirement?

Mr. Walsh: --Well, I think that... I think it's primarily, first of all a question of Federal constitutional law, because the--

Unknown Speaker: Constitutional law where the use tax higher than a sales tax is no good.

Mr. Walsh: --Right.

Unknown Speaker: Once that proposition... if that proposition is decided in your favor, then why shouldn't the rest... what happens next, excepting that premise, be for the State to determine?

Mr. Walsh: Well, I think the Court has to make a determination, looking at this statutory scheme as a whole, whether there is any basis, whether in State or Federal law, for severing offending parts of this statute and salvaging the rest.

Unknown Speaker: Yes, but you keep speaking of offending parts of the statute.

The question of severance is offending taxing jurisdictions, and how those particular taxing jurisdictions reach the point of offending seems to me is a question of State law.

It's the result which is a question of Federal law.

Why do we not, in order to rule your way, simply declare the disparity is unconstitutional, leaving it to State law to unscramble the eggs any way it wants to in order to get the required result?

Mr. Walsh: Because I think that the issue of facial discrimination here makes the entire scheme unconstitutional.

Unknown Speaker: The facial discrimination is... I was going to say the bottom line.

I guess it's the top line.

That's where the discrimination is.

I don't see where it becomes a Federal question to identify whether one element of a complex State tax scheme is the particular culprit as distinct from the unconstitutional result that all of those elements produce.

Mr. Walsh: When you have a 1-1/2 percent across-the-board additional use tax that is applied by the State in every situation, that offends the Commerce Clause, because--

Unknown Speaker: No.

It only offends the Commerce Clause because it's being added on to two other layers of tax, one of which is within the control of particular counties and municipalities.

Mr. Walsh: --But at the State level you have 4.225 sales tax, you have 5.725 use tax, and that is... that is the scheme that is being delivered to the counties, the municipalities, the cities, and--

Unknown Speaker: Are you telling us that in order for you to win your case we have in fact got to, as it were, tell the State how to unscramble the causes that bring about this top line violation?

Mr. Walsh: --Our position is that within--

Unknown Speaker: Well, yes or no.

Yes or no.

Mr. Walsh: --Yes, because... because our position is that within a single taxing jurisdiction, within any State, if a use tax exceeds a sales tax, that violates the Commerce Clause.

That inhibits interstate commerce.

Unknown Speaker: Yes, but you mention the word severability.

I don't understand why the severability question isn't for the State to decide.

If it were a Federal law, yes, it would be for this Court to decide.

Mr. Walsh: But the disparity is created by the facial difference at the State level between sales tax and use tax.

Unknown Speaker: Suppose that every county were like Kansas City and Jefferson County, and that there were no disparities because the counties in every instance adjusted their laws so that the sales and use tax were equal.

Would there be a violation of the Constitution?

Mr. Walsh: That would be statistically improbable, but the facial problem that exists with regard to the overall statute would still exist.

There might not be any discrimination in fact.

Unknown Speaker: Well, could you bring a suit in those circumstances?

Mr. Walsh: I might not have any injury, but I... no, I probably couldn't.

Unknown Speaker: So if one county, or one municipality, then deviates, then the entire statutory scheme falls?

Mr. Walsh: No.

The problem is that there's no compensation.

There's no compensatory tax rate in the sales tax area that you can point to for which this use tax supposedly compensates.

Now, the theory... the only theory that the State has here is that this is a complementary, compensatory use tax, but where is the tax for which it compensates?

It's not at the State level, and I don't think this Court has ever upheld a system whereby one sovereign can enact a tax, pass a tax that discriminates against interstate commerce and rely on some other sovereign--

Unknown Speaker: But you're assuming that we're deciding a question of State sovereignty.

Isn't it the State's business to decide how it's going to, as it were, allocate its governmental taxing power?

Don't we simply look to the State as a whole and ask what the result is?

Mr. Walsh: --The State may allocate taxing responsibility, but it's our position that if the State is going to create a compensatory use tax system, then either it has to do so at the State level, or it has to do so... it has to delegate to the municipalities the right to do so, and require that any use tax be no greater than any sales tax.

Unknown Speaker: Well, what's your authority for that proposition, Mr. Walsh?

Now, it would be something about the structure of State Government.

It certainly has nothing to do with interstate commerce.

Mr. Walsh: Well, it has to do with the requirement of Halliburton, of Silas Marner, that... Silas Mason.

[Laughter]

Silas Mason--

Unknown Speaker: Good book.

Mr. Walsh: --that the use tax, because of its inherently discriminatory and protectionist nature is allowed, but only under very restricted circumstances, and the law is that you must... in building in a use tax you must provide that local and out-of-State sellers are treated equally, local and out-of-State goods are treated equally, and, as the Court said in Boston Stock Exchange, a use tax is only valid if a purchaser, looking at the options between buying in-State and buying out-of-State can make that decision without regard to the tax consequences.

Unknown Speaker: Now, those are all Commerce Clause principles.

Mr. Walsh: Yes.

Unknown Speaker: But you're urging here something that I don't think has ever emerged in any of our commerce cases or any other case, and that is that somehow the State has to handle it all itself, and you don't look at the net result between taxing authorities and the State, but there's some principle that requires the State to do certain parts of it and the counties to do a certain part of it, and we have many cases saying that the State can divide up its authority the way it wants to.

Mr. Walsh: The question... the ultimate question in the case, Your Honor, is, is this a compensatory tax, because a use tax, if it's not a compensatory tax, is prima facie violative of the Commerce Clause.

Its only purpose is to protect local industry and, by definition... by definition it discriminates against interstate commerce, so where is the compensating sales tax that this act is designed to protect local merchants against, and at--

Unknown Speaker: It's in St. Louis, certainly, and it's in Jackson County.

You've agreed to both of those.

Mr. Walsh: --But it's a lot of places... there's a lot of places where it isn't, and it isn't a tax that compensates for the use tax.

It is a range of 22 different... a hodge podge of 22 different local sales taxes.

Unknown Speaker: Well, but that's true in lots of jurisdictions, that you have a State sales tax, and then you have also a local sales tax.

Mr. Walsh: No--

Unknown Speaker: Certainly you're not attacking that principle.

Mr. Walsh: --No sales tax... no use tax, sales tax arrangement has every been upheld, to my knowledge, where there was a difference within a taxing jurisdiction... any taxing jurisdiction--

Unknown Speaker: But wouldn't you agree that you would have no constitutional claim if the cities were all allowed to impose sales taxes of at least 1-1/2 percent, and there was a hodge podge of those from 1-1/2 percent to 5 percent?

Then you wouldn't have any claim, would you?

Mr. Walsh: --If they were required to, as--

Unknown Speaker: Required to have a minimum of 1-1/2 percent.

Mr. Walsh: --And you had an across-the-board use tax--

Unknown Speaker: But a hodge podge above 1-1/2 percent, and the hodge podge does not mean anything, does it?

a--

Mr. Walsh: --Well, it means that within 841 jurisdictions in the State of Missouri, the use tax is higher than the sales tax.

Unknown Speaker: --No, no, no, I'm assuming that it can't be, that you have a 1-1/2 percent--

Mr. Walsh: If you mandated a minimum of sales tax--

Unknown Speaker: --On the sales tax, yes, of 1-1/2 percent.

Mr. Walsh: --Then I think you could point to that use tax as compensating for that minimum.

Unknown Speaker: For the minimum, and the hodge podge and the excess would be constitutionally irrelevant.

If there's a hodge podge all by itself, it doesn't mean anything.

It's just that there is some jurisdictions in which that there is a lack of total compensation.

Mr. Walsh: Well, the gross disparity from jurisdiction to jurisdiction is unprecedented.

It's--

Unknown Speaker: I understand it's unprecedented, but you seem to agree... at least, I think you do... that if you had the same gross disparity but the minimum of 1-1/2 percent, there would be no problem.

Mr. Walsh: --I think an argument could be made under those circumstances that that was a compensating use tax, but I don't find in this case anything that can be pointed to as a compensating sales tax, the tax for which--

Unknown Speaker: Well, it compensates for 1-1/2 percent in Jackson County and St. Louis.

Mr. Walsh: --But that's not what this use tax was designed to compensate for.

Unknown Speaker: Well--

Mr. Walsh: The State just decided they wanted to do it a different way, and there isn't any reason they couldn't have done it the right way.

As a result, there are 26 percent of Missouri citizens who live in areas where the use tax is greater than the sales tax, and that's because of this statute.

That's 1,300,000 people, who when they decide to buy an appliance from the J. C. Penney catalogue store are going to pay a higher use tax than if they went down to the corner and bought the same--

Unknown Speaker: --So your proposition is that a use tax discriminates against interstate commerce unless in all instances it compensates for a State sales tax.

Mr. Walsh: --For a sales tax, yes and that's what this Court has held, Justice Kennedy.

That... Silas Mason said, equality is the theme that permeates this--

Unknown Speaker: Even though in some cases, in some counties, where there's a larger population, larger percent sales, interstate sales can be said to be preferred because the total tax burden on them will be less.

Mr. Walsh: --There is a... in some counties there is a higher sales tax than a use tax, that's correct.

Unknown Speaker: Though in those cases you can say the discrimination is in favor of interstate sales.

Mr. Walsh: That's what the State argues, but I... you can't discriminate in some areas of the State and say, well, we're sorry about that, but we're making it up over here in Kansas City.

Unknown Speaker: Well, that's the question.

Mr. Walsh: Well, yes, and I don't think--

Unknown Speaker: If you say, can you... if you look at it, the whole picture, interstate sales are being favored, but in particular counties in-State sales are favored.

Mr. Walsh: --Well... and I don't know that they're being favored, but there are more sales taxes being collected than if the uniform sales tax rate were 1.5 percent, but the State says, well, we have the right to charge more over here and less over here, but that leads to exactly the kind of trade, or potentially to the kind of trade wars that the Commerce Clause is designed to prevent.

What, for instance, would prevent the State of Missouri from enacting large use taxes around the perimeter of the State to frustrate citizens from going across the border and buying goods and having no use taxes in the center of the State?

That's what they want the right to do.

They even would support by their argument a State statute which authorized the enactment of local sales and use taxes by the local municipalities with no correlation to each other.

They would say that any municipality could have a sales tax here--

Unknown Speaker: Well, you're saying a lot of things that they would say, but I haven't heard it from them.

I thought their whole point was, it's the collection of this is a nightmare if we do it by how much each locality puts on, so we're trying to make it simple, and we're simplifying it in a way that overall interstate commerce is not being disadvantaged.

If anything, the interstate... doing... looking at the whole picture, the interstate sales are being taxed less.

Mr. Walsh: --Well, first of all, Justice Ginsburg, administrative convenience is not an excuse for a violation of the Commerce Clause, and the courts have been uniform in holding that, but you can't look at averages around the State and say, it comes out with more sales tax than use tax.

Commerce is conducted in the local marketplace, in the counties, in the cities, and the highways and byways, where individuals are making decisions about what goods to buy and from where, and where merchants are being required to compete against people from out of State, and the State of Missouri has created a situation whereby in more than half of the areas of the State, the interstate vendors are being disadvantaged.

Unknown Speaker: Well, Mr. Walsh, you say half the areas of the State.

Now, the respondents in their brief say that 92 percent of all taxable transactions in the State carry a sales tax rate equal to or greater than the average use tax rate.

Do you disagree with that?

Mr. Walsh: That... no.

That number was found by the trial court, but that relates to the sales being made in-State, not to the use tax analysis, which frankly isn't developed in the record, but what is developed is that 26 percent of the population live in areas where they pay higher use tax than sales tax, and that's not anybody's fault except the State of Missouri.

Unknown Speaker: I guess what you're saying is that a more relevant figure is what percentage of out-of-State sales are made in jurisdictions that charge less than the offsetting sales tax.

Mr. Walsh: Yes, and--

Unknown Speaker: And we don't know that.

Mr. Walsh: --We don't know that, but we know that 1,300,000 people live in areas where, if they buy from out of State, they're going to pay more.

Unknown Speaker: Do you have any answer, other than administrative inconvenience is no excuse, to the argument that, well, if you do this to us as a practical matter, we can't leave it to local option?

Is there any convenient way to allow local option?

Mr. Walsh: Oh, absolutely.

Unknown Speaker: And you collect the tax.

Mr. Walsh: Absolutely.

Section 144.747, the repealed statute that Justice O'Connor questioned me about, did it the way that every other State in the Union does it.

That is, it says... the State says to the local municipality, you may enact a sales tax.

You may also, at the same time, enact a use tax.

Unknown Speaker: But what you have to do is restrict local option to this extent Sales and use tax have to go hand-in-hand?

Mr. Walsh: Yes, unless you impose them both at the State level.

Yes, Your Honor.

I'd like to reserve the rest of my time, please.

Unknown Speaker: Very well, Mr. Walsh.

Mr. Downing, we'll hear from you.

Argument of Don M. Downing

Mr. Downing: Mr. Chief Justice, and may it please the Court:

What petitioners would have this Court do is invalidate a State compensatory tax system that substantially favors interstate commerce overall.

Well, this Court's never been willing to do that, for good reason.

To do so--

Unknown Speaker: Wait, I'm not sure that that's true.

Do you mean that a State can have a blatantly unconstitutional tax upon interstate commerce coming into one county and the State say no, but anybody who does business in this county from out of State shall pay $1,000 a day, so long as that is offset by beneficence to interstate commerce in other sections of the State, and you look on the balance and say, well, on balance, you know, the business in this county is being discriminated against, but they're really good to interstate commerce elsewhere.

Is that the argument you say we--

Mr. Downing: --Your Honor, certainly there's ample precedent in this Court's cases... the Bacchus case, for example.

Unknown Speaker: --For that, you say yes, that's okay.

Mr. Downing: No... Your Honor, I'm saying in terms of, if the purpose for that county's action was to protect the local market segment, or an industry, if we're getting into the Bacchus situation where there's an identifiable market segment, that's one issue, but this Court's Commerce Clause cases have looked historically at the overall effect of State regulation on the national economy.

As the Court said in the Exxon case, the Commerce Clause is designed to protect the interstate market, not particular interstate firms.

Unknown Speaker: So you... does that mean your answer to my question is, that is okay?

Mr. Downing: If one county enacted a... decided to have no sales tax in order to benefit local businesses, that would be okay, as long as the overall effect of State regulation on the national economy was either neutral or pro interstate commerce, like it is here.

Unknown Speaker: One county can impose a $100 fee on people doing business in that county from out of State, so long as other counties give people doing business a rebate, in equivalent dollar amount?

Mr. Downing: I think that's a different situation, Your Honor, because that's not a compensatory tax case.

In the compensatory tax area, this case is analyzed differently from... for example, I think the hypothetical you're talking about is somewhat similar to the Fort Gratiot case the Court decided 2 years ago, where a local county had an environmental regulation in which it decided it was not going to accept out-of-State waste.

Well, all the other counties in the State treated out-of-State waste evenhandedly.

They treated them just like it was in-State waste, so the net effect of Fort Gratiot, just like I think in the hypothetical you're pointing out, the net effect was an overall burden to interstate commerce.

Every county was treated equally.

One county was discriminating... net, overall burden.

Well, here, the parallel to this case--

Unknown Speaker: Wait, before you get off that one, what you're saying is, if the other counties had favored out-of-State waste, that would be okay, So a State can pass a law saying, the eastern half of our State, no out-of-State waste is allowed.

The western half, we favor out-of-State waste, so all out-of-State waste has to go into the western half, and none of it can go into the eastern half.

A State can say that--

Mr. Downing: --I think that--

Unknown Speaker: --so long as the net effect is pretty good.

Mr. Downing: --I think the Court could conclude, certainly, that that was not isolationist, that the State was trying to... not to--

Unknown Speaker: Oh, we could conclude anything we want.

I'm asking you, is it constitutional or not?

[Laughter]

Mr. Downing: --Well, it's not a compensatory tax case.

Environmental cases, the Philadelphia v. New Jersey--

Unknown Speaker: Is it constitutional or not?

Mr. Downing: --Yes, I think it could be.

I think it could be, under the Philadelphia v. New Jersey case, and under the Chemical Waste case and Fort Gratiot.

Environmental regulations have been treated differently by this Court than compensatory tax cases.

Unknown Speaker: We can split up a national market.

We just have to do it in a checkerboard pattern, with each square on the checkerboard being less than an entire State.

Mr. Downing: Your Honor, as long as this Court... the Court 2 years ago pointed out in Quill that unlike the Due Process Clause which is concerned with the effect on individuals and particular firms, the Commerce Clause is not concerned about particular interstate firms, it's concerned about the overall effect of State regulation on the national economy.

Here, interstate--

Unknown Speaker: Why do you say that?

What is your support for that?

We don't care what you do to any individual in interstate commerce so long as the overall effect isn't bad.

What is your authority for that?

Mr. Downing: --Well, the Exxon--

Unknown Speaker: I find that astounding proposition.

Mr. Downing: --The Exxon case specifically held that.

It was a situation in which you had three interstate firms that were petroleum refiners, and the State there prohibited petroleum refiners from having a gasoline station in their State, allegedly to protect local gasoline dealers.

They didn't want the Exxons and the Amocos coming into their State, and the Court held in Exxon that the mere fact that three interstate firms suffered a net competitive disadvantage as a result of the State statute doesn't matter under the Commerce Clause, because it said, and I quote,

"The Commerce Clause protects the interstate market, not particular interstate firms. "

Unknown Speaker: But you're dealing with a provision that is not facially discriminatory there.

The examples I've been giving you are examples where on its face the statute discriminates against interstate commerce.

I want a case like that, in which where there is such facial discrimination we say, that's okay, so long as somewhere else it's balanced off.

Mr. Downing: Well, Your Honor, I think it turns on how you define what discrimination against interstate commerce is.

Here, Missouri's system substantially favors interstate commerce overall.

If you define discrimination on a transaction-by-transaction or firm-by-firm approach, I would agree with you.

If you define it on an overall level--

Unknown Speaker: Well, how about county-by-county or city-by-city, and clearly, in a good many communities there, there is facial discrimination.

I mean, there it is.

You have to accept the case on that theory and then tell us how we deal with it and what you rely on, other than that general acceptance case.

Mr. Downing: --Well, in terms of a compensatory tax, the State was attempting to compensate.

Mr. Walsh raised that there was nothing for the State to compensate for.

Well, in Maryland v. Louisiana, and Tyler Pike, the analysis for a compensatory tax, you look at... you try... the first step is to identify the burden.

Not the tax, but the burden for which the State is attempting to compensate.

Well, here it's plain.

The State was attempting to compensate for the effect of the varying local taxes upon intrastate commerce.

It did that by setting a use tax rate, State-wide, which is 20 percent less than the average local tax rate.

In Missouri, Missouri businesses are at a 20-percent net competitive disadvantage to interstate firms selling to Missouri residents.

Unknown Speaker: You had a scheme in 1990, one that Justice O'Connor mentioned at the outset of this argument, that wouldn't raise any constitutional questions but it was never implemented.

Can you tell us why that scheme was abandoned and this uncommon one adopted in its place?

Mr. Downing: Your Honor, I think Missouri found a better way to accommodate the practical needs of interstate sellers.

Interstate sellers... as this Court is well aware from the Quill case, interstate sellers don't like the varying local rate solution, because it is extremely burdensome for them.

To determine for every transaction they sell into the State of Missouri, there are over 1,000 taxable jurisdictions.

They would have to determine for each transaction the applicable current use tax rate for that transaction.

So that's one reason, and it wasn't... Missouri didn't do this out of an altruistic sense to benefit interstate sellers.

I don't want to make that claim.

But States realized that, to the extent a tax is easy to comply with by a taxpayer, it's more efficient to collect.

We get a greater... we can collect a greater percentage of our taxes by setting a State-wide rate, because all interstate sellers now selling into Missouri know exactly what their tax is on a use tax basis, so that's one of the reasons.

Another reason is, the identical use and tax rates in each jurisdiction approach, well, it doesn't solve the constitutional problem that Mr. Walsh has tried to point out.

It doesn't guarantee equal treatment in each and every instance.

For example, suppose Missouri adopted that system, and you had a resident of a local jurisdiction who wanted to purchase a washing machine.

He happened to live in a jurisdiction where the local use tax rates and sales tax rates were high.

Well, he would have essentially three options.

He could purchase from a local vendor and pay a high local sales tax rate, or he could purchase from an out-of-State vendor and pay the equally high local use tax rate, or he could travel to another local jurisdiction in Missouri and pay a low sales tax rate.

Well, from the out-of-State seller's perspective, that out-of-State seller is at the precise competitive disadvantage in that situation as he is under our present system, so Missouri recognized that going to this identical rate in each jurisdiction solution doesn't cure any supposed inequality that might exist.

So to accommodate the needs of interstate sellers, and to make it more practical, admittedly, also from the State's perspective, it's easier for the State to administer on a State-wide basis, so those are the reasons Missouri went to that system.

Unknown Speaker: Well, you say easier to administer.

Don't you mean easier, in a way, to legislate, because I take it the tax is actually paid to the county or the municipality.

It's not paid to the State, and then the municipalities and counties remit the State portion to it, is that correct?

Mr. Downing: No, Your Honor, it's paid to the State, and then the State remits to the local Governments.

It keeps a 1 percent administration fee, in essence, and then remits the remainder to local Governments.

Unknown Speaker: And you say in the age of computers it's really a lot of trouble to figure out?

Mr. Downing: Your Honor, that's... that's--

Unknown Speaker: In the various counties, you have... you know where it's being sold into, and you know what the tax rate is there.

It doesn't seem to me like a whole lot of trouble.

Mr. Downing: --Your Honor, as a matter of fact, the Court pointed out in Quill that very point, that even in the age of computers, the ease with which interstate sellers can calculate... you see, within various counties, you have different taxable jurisdictions.

You can't just go by the county.

You can't just go by the city.

You can't even go by the zip code.

Unknown Speaker: You know what I would tell those... I would tell those sellers, well, just... if it's a whole lot of trouble, just pay 1-1/2 percent and you'll be sure always to be giving enough, which is what you're making them do.

They could do that voluntarily, if it was really a lot of trouble to figure out what the proper rate was.

Mr. Downing: Well, Your Honor, it's interesting that you mention that, because currently pending before Congress, Congress in response to this Court's decision in Quill is actively considering this session a bill which would enable... and essentially adopt the Missouri system, which would allow States to set, on a State-wide basis, a State-wide use tax rate based on their local sales tax rates.

And my point is not that this Court should necessarily defer to Congress, but that in these difficult practical issues of State taxation... the Court in Quill expressly recognized that Congress may well be better equipped to address some of these issues than this Court, and that was one of the reasons the Quill court chose not to overrule the Bellas Hess case.

That case provided a bright line rule that States could use in devising their tax systems.

Well, that's the situation here.

The bright line rule that General American and this Court's cases have devised in this area is that if the tax that the State imposes on in-State sales, if the average tax is greater than or equal to the tax on interstate sales, then there's no Commerce Clause concern.

Unknown Speaker: Well, I thought the bright line rule was no facial discrimination.

Mr. Downing: Well, Your Honor, again that gets to the issue, do you measure discrimination on a transaction-by-transaction approach, or do you measure it on an overall State-wide basis?

Unknown Speaker: Jurisdiction by jurisdiction, I suppose.

Mr. Downing: Well, again, I would submit that this Court has never invalidated a State tax, compensatory tax, that on an overall basis is favorable to interstate commerce like Missouri's is here.

Unknown Speaker: But have we ever distinguished between... have we ever, rather, ignored jurisdictions in the way that you are asking us to ignore jurisdictions, because what the State is doing, as you described to me a moment ago, is becoming a collection agent for the various sub-State jurisdictions, but the tax... to the extent that there is a differential, the tax is a tax of that sub-State jurisdiction, and you are in effect saying, ignore the actual taxing jurisdiction in this case.

Have we ever done that?

Mr. Downing: Yes, Your Honor, on at least three occasions I can think of.

The General American case is one which is discussed extensively in the briefs.

That case plainly involved, just like here, a State which had varying local tax rates, and a State-wide rate that was set to compensate for those varying local rates.

Unknown Speaker: So that the rate for any given transaction was going to be the same, isn't that correct?

Mr. Downing: No--

Unknown Speaker: --and that's not so here.

Mr. Downing: --That's not... that system plainly allowed for the same possible instances of unequal treatment that our system... just like here.

In that case, Louisiana parishes had varying local rates that applied in-State, and a State-wide rate that applied to nonresident railroad companies, so it plainly... just like here, it allowed for possible instances--

Unknown Speaker: But that wasn't a Commerce Clause case.

Mr. Downing: --Your Honor, I would beg to differ, with all due respect.

Unknown Speaker: Wasn't that an equal protection case?

Mr. Downing: Justice Cardozo believed it was a Commerce Clause case, in the Silas Mason case, and Professors Hellerstein and Hartman in their treatises in this area, respected commentators, both analyzed that case as a Commerce Clause case.

I would grant you there is some ambiguity in the language--

Unknown Speaker: Unfavorably, as I recall, in the case of Hellerstein.

He thought it was a Commerce Clause case that was decided wrong, or at least wouldn't be decided that way today.

Mr. Downing: --He indicated something to that effect, Your Honor, I would grant you that, but again--

Unknown Speaker: Let me--

Mr. Downing: --Professor Hellerstein--

Unknown Speaker: --Oh, go ahead, finish your answer.

I didn't mean--

Mr. Downing: --No... I was going to another thought.

Unknown Speaker: --Would you just comment on one point that it's hard for me to get out of my mind?

If the law has been as clear as it has been since 1926 with the General American tax case, and if the advantages of your system are so obvious, why do you suppose you're a pioneer?

Mr. Downing: Well, Your Honor, I think in large part the States... for example, the equal use tax and sales tax rate in every jurisdiction States, well, that has some superficial appeal to it from a Commerce Clause perspective, I would grant you that, but Missouri was aware of the practical needs of interstate sellers.

I mean, it was fully aware of the Quill case, as it was going up through the courts to this Court, and there the interstate commerce and the interstate sellers came into Missouri and said, listen, there's a problem here.

We've got a practical problem of State taxation.

We want to comply with your tax, but it's very difficult for us to do that.

Can you help us?

Missouri sets a State-wide rate that makes it very easy for them to comply, and I might add that the interstate sellers are the ones in favor of the pending congressional legislation.

They're the ones who want State-wide rates, even though there might be possible instances in which there could be inequality.

Unknown Speaker: Mr. Downing, can I ask you to imagine for a moment the unlikely and horrible event that we don't agree with you on the constitutionality of this scheme.

I assume you would prefer that we not say that all of the imposed taxes are unconstitutional, but rather, only those that exceed the local rates in the counties affected.

I assume you would prefer that outcome to--

Mr. Downing: Absolutely, Your Honor.

Unknown Speaker: --Why?

Why is that a proper way to do it?

Mr. Downing: Well, Your Honor, there's certainly no unconstitutionality under the Commerce Clause for a State in any local jurisdiction to have a use tax rate that's lower or equal to its sales tax rate.

Unknown Speaker: All right, but--

Mr. Downing: I think Mr. Walsh concedes that.

Unknown Speaker: --Suppose a State just passes a general law saying all out-of-State sales shall pay... all out-of-State sellers shall pay $500 a year to the State, all right.

Now, would we analyze the constitutionality of that by going case-by-case to find out whether in fact for this particular seller the sales taxes that that seller avoided offset the $500 and say only those who ended up paying more than would have been taken out of their hides in sales tax, only those have been treated unconstitutionally?

We wouldn't do that, would we?

Mr. Downing: No, Your Honor.

Under this Court's cases the compensatory tax has to reach substantially equivalent events.

There, I don't think you would have any events that the $500 flat rate fee were taxing, so under the Court's precedents, no, that would not be analyzed as a compensatory tax case.

Unknown Speaker: So you say once you're taxing substantially equivalent events, then it's only where there are differences at most, where there are differences that we would require the funds to be refunded.

Mr. Downing: Absolutely.

I'd like to move on to a different subject.

Even if this Court were to require the transaction-by-transaction or firm-by-firm approach advanced by the petitioners, the respondents nonetheless should prevail in this case.

They haven't provided any evidence in the record at all that any interstate firm has suffered any competitive disadvantage when attempting to sell to Missouri residents.

Now, even if they had... even if they had pointed to and produced evidence that there is an interstate seller that competed in a local jurisdiction where the use tax rate was higher than the sales tax rate, and competed in that local jurisdiction with a Missouri business, well, that wouldn't end the analysis, because then one would have to focus--

Unknown Speaker: Well, but may I just interrupt you?

Your whole argument, I take it here, is rejecting the notion that there is a facial discrimination, so on this argument, it's a pure allocation of burden argument, is that right?

If we say there is a facial discrimination, then I take it this argument would not have any application.

Mr. Downing: --If you conclude, under the Court's cases, it's a facial discrimination because the transaction-by-transaction approach is the approach the Court wants to adopt--

Unknown Speaker: Or taxing jurisdiction by taxing jurisdiction approach, but in any event, if we... to the extent that we say there's a facial discrimination, I take it this argument would not be inappropriate, right?

Mr. Downing: --The lack of injury argument?

I think--

Unknown Speaker: Yes.

Mr. Downing: --I think you're right.

I think the Court's cases on a facial challenge do not require petitioners to show injury, but I would submit to you--

Unknown Speaker: I don't think that's entirely correct.

You're suggesting, and you suggest you're in agreement with Justice Souter, that someone can come in and attack a tax that he claims discriminates against interest... even though he has suffered no injury from the thing?

Mr. Downing: --No, Your Honor, I didn't mean to say that.

What I... that's a standing question.

Unknown Speaker: Well, that's what I would have thought.

Mr. Downing: What I was addressing was the injury in fact, and I'll move right to the standing question, then.

Petitioners themselves have shown that they have suffered no injury in fact.

As this Court pointed out 2 years ago in the Lujan case, in order to show injury in fact, a plaintiff must plead and prove... to show standing, excuse me... a petitioner must plead and prove that there's an injury in fact that's both concrete and particularized, and that is fairly traceable to the alleged unconstitutionality that he claims.

Unknown Speaker: Now, the State and the petitioner stipulated here, didn't they, on some facts?

Mr. Downing: The only record of stipulation is that they would... the petitioners would have significant administrative costs of compliance with the system.

Unknown Speaker: There was no stipulation that governed whether any particular plaintiff suffered injury as a result of the operation of the Missouri--

Mr. Downing: Not at all, Your Honor, not any injury that's fairly traceable to the unconstitutionality of the system.

The fact that there are differing use rate, or higher use tax rates in certain jurisdictions than sales tax rates, that's the unconstitutionality they claim that's in our system.

They haven't claimed any injury as a result of that.

Unknown Speaker: --They haven't even claimed paying... they haven't even claimed paying the use tax in a jurisdiction that has a lower sales tax?

If they've claimed that, they've claimed injury.

Mr. Downing: They have not claimed that.

There's no evidence in the record that they've claimed that.

The only transaction that is in the record is petitioner Alumax Foils made a purchase in St. Francis County, where the use tax rate is higher than the sales tax rate.

Well, they paid sales tax.

That was an in-State transaction.

They paid sales tax on that transaction.

Well, under their system, if the sales tax rates had been moved up to be equal to the use tax rate, they would have paid more sales tax, so they haven't been injured by any unconstitutionality in the system.

Let's look at Alumax Foils where they're based.

They're based in St. Louis, where the use tax rate and the sales tax rates are identical.

They certainly haven't shown any injury in fact in those counties.

They don't claim there's any constitutional problem in those counties.

Unknown Speaker: Do you really want to win this case on that ground so we can do it again another day?

Mr. Downing: Well, Your Honor... no.

Certainly, I would prefer that this Court say that you must look at the overall effect of State regulation on the national economy, just like you did in Quill 2 years ago.

I would prefer the Court to say it's the interstate market that's protected by the Commerce Clause, not particular interstate firms.

Unknown Speaker: But if we have a facial discrimination and there is a transaction that is taxed, the party... the seller to that transaction would pass your test, would he not?

Mr. Downing: I'm sorry, I need to hear the hypothetical again.

Unknown Speaker: If we have a facial discrimination, and one of the petitioners--

Mr. Downing: In a particular local jurisdiction--

Unknown Speaker: --And one of the petitioners here is an interstate seller whose transaction was taxed at the facially discriminatory rate, that's enough, isn't it?

Mr. Downing: --Right.

There's no evidence of that here, Your Honor.

There's no evidence in the record at all that any... let me move on to the other petitioner, which is Associated Industries, which has both in-State members and out-of-State members.

As to their in-State members, there's no evidence in the record that any in-State member is located in a jurisdiction where the use tax rate is higher than the sales tax rate.

There's no evidence in the record--

Unknown Speaker: No allegation, either?

Mr. Downing: --No allegation.

No allegation whatsoever.

There's no evidence in the record that they had any transactions in any jurisdiction in which the use tax rate is higher than the sales tax rate, and moving on to their out-of-State members, there's no evidence in the record that any out-of-State member of Associated Industries competes with any Missouri business in any local jurisdiction in which the use tax rate is higher than the sales tax rate.

Unknown Speaker: No allegation that any of them paid the use tax in the juris--

Mr. Downing: Oh, to be sure, they paid the tax, but that's--

Unknown Speaker: --In a jurisdiction that had a lower sales tax.

Mr. Downing: --No.

No, there's no allegation to that effect at all in the record, Your Honor.

They have alleged simply that they paid the use tax.

That's the extent.

There's no allegation they paid it in a local jurisdiction where the use tax is higher than the sales tax.

Unknown Speaker: Well, but now, wait a minute, in the supreme court of Missouri opinion on page A-2 of the petition, the opinion says

"The parties, however, have stipulated that appellants pay sales taxes in geographical areas where the aggregate sales tax is less than the aggregate use tax. "

Mr. Downing: Your Honor, that may be in the Missouri supreme court's opinion, but it's not in the record.

Unknown Speaker: Well, we take a care pretty much the way the State supreme court gives it to us on factual matters.

Mr. Downing: Well, Your Honor, I don't... I'm not precisely sure what the Missouri supreme court meant by that, but if they meant to say that there's stipulation in the record that Associated Industries does business in a local jurisdiction where the use tax rate is higher than the sales tax rate, I don't think there's anything in the record about that.

That's my point.

So neither--

Unknown Speaker: Do you make this point in your brief in opposition?

Mr. Downing: --Your Honor, we had it in our brief, and one of our amicus made the argument, frankly we thought in a very good fashion.

We didn't want to have this Court read duplicate points on that, so we adopted it in a footnote in our brief.

I can point that out to you if you'd like me to show you where we--

Unknown Speaker: Well, no I accept that.

Just tell me.

Mr. Downing: --Okay.

We did.

We thought it was a very important argument, because it's jurisdictional to this Court.

Finally, I'd like to make... really, I'd just like to say, really what we have here in this case is a group of local Missouri businesses who don't like section 144.748 simply because it represents a tax increase to them.

They're not concerned about any supposed undue burdens or unequal treatment on interstate commerce.

If there were such burdens, they're not the victims of it.

Rather, they've lost in the Missouri political process, of which they are a part.

They are Missouri businesses, and they want this Court to overturn the sound judgment of the Missouri legislature, a judgment which I might add goes further to accommodate the practical needs of interstate sellers than Missouri was required to go, so I would just respectfully submit to this Court that it not allow petitioner's feigned concern for any supposed burden on interstate commerce which doesn't exist here to transform what is essentially a local political question... a local political issue into a Federal constitutional question, which we don't think is presented here.

Finally, I'd like to offer just a couple of--

Unknown Speaker: I just had one other question on the basic standing.

If their challenge is to the entire statute, then they wouldn't have to allege, which I think your opponent argues, rather than just to the jurisdictions where there's a disparity.

They do have standing to make that challenge, don't they?

Mr. Downing: --Standing to make the challenge that it's... as applied in every case it's unconstitutional?

Unknown Speaker: Yes.

They're claiming a total refund of the whole... so that much is at least before us.

Mr. Downing: If they could succeed in their argument as applied in every xx--

Unknown Speaker: Yes.

Mr. Downing: --Absolutely, I agree with you.

Finally, I want to make three observations that this Court made 2 years ago in the Quill case, which was the last time this Court had an opportunity to analyze the Commerce Clause issues raised by sales and use taxes.

First, the Court observed and reaffirmed the Bellas Hess case in large part because it viewed Bellas Hess as providing a bright line rule here.

As I mentioned before, the Court now has an opportunity to provide another bright line rule that would greatly aid States in devising tax systems that they could be sure would satisfy the Commerce Clause.

The identical treatment in each and every instance approach, the problem, from the State's perspective, of that approach is the State would have to be clairvoyant and try to imagine a possible contingency.

Well, could we have any possible area of unequal treatment?

I dare say that the States that have adopted the identical use and sales tax rates in each local jurisdiction probably thought that they had solved the constitutional problem of... that if there was a constitutional problem, they have outlawed any unequal treatment.

Well, the example that I gave you a few minutes ago shows that that system can result in the same kind of instances of unequal treatment that our system has, so it would be much easier for the State to say, listen, we have a tax on interstate commerce, we have a tax on intrastate commerce.

As long as the tax on interstate commerce is not greater than the tax on local commerce, on an average basis, the tax is constitutional.

Unless, of course, as Justice Scalia pointed to... unless, of course, there was an identifiable market segment or industry that was singled out for special protection, as was the case in the Bacchus case.

Unknown Speaker: How does it work in States that have the county option?

Does the State also collect and remit to the individual county, depending on what that county's tax rate is?

Mr. Downing: Your Honor, I'm no certain of how various other States perform the task of collection.

I'm not certain whether it goes to the county or the State, like it does in our system.

Unknown Speaker: Your system, you were the innovator of it.

Mr. Downing: It's... you're right, Your Honor.

we had the benefit of looking at what other States have done, and also the input from the interstate firms that were involved in the Quill case, so we were fully cognizant of what other States had done when we devised our system.

The second point I'd like to make from the Quill case is, the Court recognized that the critical importance of the doctrine of stare decisis in the area of State taxation, for at least 67 years, the overall burden approach has been firmly embedded in this Court's precedents.

For the Court now to change that rule would raise all sorts of new questions and undoubtedly engender substantial litigation over the validity of a whole host of State taxes that had been enacted during that time period.

I would submit that the Court need not open that can of worms here.

The third point I wanted to make about Quill is the point I made before.

Congress has plenary power in this area, as the Court recognized in Quill.

If it wanted to, it could outlaw the Missouri system.

It has chosen not to for the last 67 years... the overall burden approach... and so therefore I would respectfully submit that unless there is a clear, adverse effect on interstate commerce overall, the Court should be hesitant to exercise its jurisdiction in this area.

Unknown Speaker: Thank you, Mr. Downing.

Mr. Walsh, you have 4 minutes remaining.

Rebuttal of Thomas C. Walsh

Mr. Walsh: Thank you, Your Honor.

This is a discriminatory tax case.

This is not a burden case like Exxon, this is not a health or safety measure, it's not economic regulation, it's not environmental.

It's a discriminatory tax case, and it's guided by the Court's opinion in Complete Auto Transit, and the third element of Complete Auto Transit is, no discrimination against interstate commerce.

This Court has decided three use tax cases since use taxes came into being back in the thirties.

The first was the Silas Mason case... strict equality.

The second was the Halliburton case in 1963, where Chief Justice Warren struck down for the Court a use tax which did not provide strict equality.

There was a differential in the basis between the way the use tax and the sales taxes were calculated.

Unknown Speaker: Excuse me just a moment.

I hate to interrupt you when you're on your final thing.

Are you going to address standing at all?

Mr. Walsh: Your Honor, as, I think Justice Stevens said, we are attacking the statute on its face.

It is stipulated all of the members of our organization and the individual petitioner here have paid the use tax since it went into effect, so the facial validity is challenged by us for having paid the use tax, and--

Unknown Speaker: Is it also stipulated that you paid it in jurisdictions where the use tax was higher than the sales tax?

Mr. Walsh: --Not expressly, no, but we have paid the tax.

We are attacking 144.748 on its face.

We're not asking the Court to carve it up and uphold part of it where it's legal and part of it where it's not legal, because we don't think the statute is susceptible--

Unknown Speaker: Obviously not.

You don't want any it.

Mr. Walsh: --Well, but the statute isn't susceptible to that, Your Honor.

I mean, you'd have to seriously rewrite this statute, which is a State enactment, in order to come up with that sort of--

Unknown Speaker: Oh, we wouldn't have to do anything except say what the principle is, and the rest is for State law.

Mr. Walsh: --Well, the principle is that a taxing system that treats a use tax and a sales tax differently is now and forever discriminatory and facially invalid, and it's not General American that controls that.

General American was not a use tax case, was not even a modern type of compensatory tax case.

It was more an equal protection case than a Commerce Clause case.

The law in this area, if you want to talk about stare decisis and the bright line, the stare decisis and the bright line come from Silas Mason and the Halliburton case, and in Halliburton the Court said,

"The conclusion is inescapable. "

"Equal treatment for in-State and out-of-State taxpayers similarly situated is the condition precedent for a valid use tax on goods imported from out of State. "

That's a bright line.

That's the line that the State of Missouri for its own reasons decided to cross in this case and experiment with a new type of taxation which, if permitted by this Court, I suggest could lead to all sorts of abuses and, in fact, some of the amici are sort of champing at the bit to see whether the opinion of the Court in this case will open some new loopholes in use tax regulation which, since 1937 in the Silas Mason case, have been closed.

The bright line is desirable.

The bright line is equality.

The State of Missouri either can enact either local sales and use taxes at the State level, or it can delegate to the States... to the subdivisions the right to enact local sales and use taxes, as 28 States, other than Missouri, have done.

You're right, Justice Souter, they are a pioneer... I guess, Justice Scalia... they are trying to be a pioneer here.

We think that's illegal.

Chief Justice Rehnquist: Thank you, Mr. Walsh.

The case is submitted.

Attribution:

The OYEZ Project

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