Stanford student Beverly Moore previews Polar Tankers v. City of Valdez, which is to be heard tomorrow morning at 10am. Additional information and filings are available from SCOTUSwiki, here. Please note that the Stanford clinic wrote the cert. stage brief in opposition.
The Tonnage Clause, U.S. Const., Art. I, § 10, Cl.3, prohibits states or municipalities from “laying a duty of tonnage,†which is defined as a fee imposed “upon a vessel, according to its tonnage, as an instrument of commerce, for entering or leaving a port, or navigating the public waters of the country.†On April 1, in No. 08-310, Polar Tankers v. City of Valdez, Alaska, the Court will consider (1) whether the Tonnage Clause prohibits a municipal personal property tax that falls on large vessels using the municipality’s harbor, and (2) whether a municipal personal property tax assessed on property with an out-of-state domicile violates the Commerce and Due Process Clauses when the assessment includes time spent by the property on the high seas or otherwise outside any State’s taxing jurisdiction.
This case stems from a tax enacted by Valdez, Alaska, which is located on Prince William Sound at the south end of the Trans-Alaska Pipeline System. Each year, oil tankers load hundreds of millions of barrels of crude oil at the City’s port. In 1999, the City extended its property tax to apply to “boats and vessels of at least 95 feet in length†that are neither used “primarily in some aspect of commercial fishing†nor “dock at privately owned docks in the City.†The tax is calculated by multiplying a vessel’s total assessed value by a ratio that is in turn determined by dividing the number of days spent in Port Valdez by the total number of days it spends in all ports with taxing authority. The City resolution approving the tax also allows a taxpayer to petition for a different apportionment method if the default method “does not reasonably represent the portion of the total value of the vessel that should be†attributed to the City.
Petitioner Polar Tankers, Inc., whose principal place of business is in California, operates tankers that transport crude oil from a terminal in Valdez to refineries in California, Hawaii, and Washington. Polar Tankers filed a suit in Alaska state court in which it challenged the constitutionality of the City’s tax on two grounds: (1) the tax violated the Tonnage Clause because it effectively taxed vessels for the privilege of using the City’s harbor; and (2) the City’s apportionment formula violates the Commerce and Due Process Clauses by imposing a risk of duplicative taxation and taxing extraterritorial values.
The Alaska trial court initially held that the tax was unconstitutional under the Tonnage Clause, concluding that large vessels “are the only personal property taxed by the City.†However, on reconsideration, the court changed course, holding that the City’s failure to tax property other than large vessels did not render the tax unconstitutional. On the second issue, the trial court held that the City’s apportionment method violated both the Commerce and Due Process Clauses by creating a risk of duplicative taxation by domicile and non-domiciliary states.
On cross-appeals, the Alaska Supreme Court upheld the City’s tax in its entirety. In holding that there was no Tonnage Clause violation, the court relied on the fact that the amount of the City’s tax was based on the market value of the property being taxed. The court found the apportionment formula proper, even though its denominator excluded days at sea outside the jurisdiction of any taxing authority, because it “apportions the full value of a ship between the taxing jurisdictions in which it is regularly present in proportion to the number of days during the tax year that the ship is not present in each jurisdiction.†The court also upheld the apportionment formula as valid under both the Commerce and Due Process Clauses. It rejected the possibility of duplicative taxation, concluding that the Supreme Court’s repudiation of the “home port†doctrine, which had allowed a vessel’s home port to subject it to property tax, in Japan Line, Ltd. v. L.A. County, 441 U.S. 434 (1979), precluded the owner’s domicile from taxing property during periods in which the property had no specific tax situs.
In its petition for certiorari, Polar Tankers contended that certiorari was warranted for two principal reasons. First, it argued that the City’s tax, by falling only on large vessels and not other types of property, was discriminatory and thus violated the Tonnage Clause. Acknowledging that vessels may be taxed based on their market value, Polar Tankers claimed that the City’s taxing authority was limited by the nondiscrimination principle developed by the Court in Transportation Co. v. Wheeling, 99 U.S. 273 (1878). Under that principle, the Tonnage Clause prohibits a tax that is not levied on vessels “in the same manner as other property of the citizens.†Moreover, a state law that authorizes the City to exempt certain types of personal property from ad valorem property taxes does not override its violation of the Constitution. The tax was also impermissible, Polar Tankers argued, because it was not designed to charge for services provided uniquely to vessels in its port but was rather an attempt to export the City’s local tax burden to out-of-state entities.
Second, Polar Tankers argued that the City’s apportionment formula violated the Commerce and Due Process Clauses. Specifically, because the formula does not account for the times when a vessel is not subject to any taxes — because it is either on the high seas or in ports where it is not subject to tax — it creates the risk of unconstitutional duplicative taxation. This risk stems from the fact that, under Central Railroad Co. of Pa. v. Pennsylvania, 370 U.S. 607 (1962), non-domicile jurisdictions can tax property based on the portion of the year spent in that jurisdiction, while the vessel’s domiciliary state is empowered to tax the value of the vessel in full for all other periods.
Finally, Polar Tankers contended that the formula allows the City to tax values that have no connection to the City, in violation of the Due Process and Commerce Clauses. By allowing the City to tax vessels for time spent outside the City’s jurisdiction, Polar Tankers reasoned, the formula did not correctly apportion the tax to commerce carried on in the City.
Opposing certiorari, the City advanced two basic arguments. First, it asserted that petitioner’s Tonnage Clause claim lacked merit because the City’s property tax applied, at the same rate, not only to vessels, but also to other kinds of property, including certain types of residences. The City contended that the Court’s decisions in Wheeling and Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976), did not establish a nondiscrimination principle requiring the City to tax non-vessel property in order to tax vessels. In any event, the City explained, the Tonnage Clause inquiry should focus on whether vessels are taxed as property based on their value. Moreover, its local taxpayers should not be forced to subsidize services used by vessels in its Port.
Second, the City contended that petitioner’s Commerce and Due Process claims also did not merit review. In its view, the question of whether a vessel’s domicile jurisdictions impose a tax identical to the City’s is a factbound inquiry that is insufficiently important to warrant the Court’s review.
In its merits brief, Polar Tankers presents two main arguments to support its contention that the City’s tax violates three separate provisions of the Constitution. First, it argues that the City’s tax, by falling almost exclusively on certain large vessels for the purpose of raising revenue from vessels that dock in the City, was discriminatory and thus violated the Tonnage Clause. The brief begins by discussing the Framers’ intent in enacting the Tonnage Clause: to complement the Import-Export Clause in preventing States from exploiting their ports to the disadvantage of other jurisdictions. Acknowledging that the Tonnage Clause does not prohibit all tonnage duties, such as a tax imposing a charge for services rendered, Polar Tankers contends that a tax such as the City’s, which “applies whether or not that service is provided,†falls outside the scope of permissible levies.
Polar Tankers then turns to the issue of nondiscrimination, arguing that although a State need not exclude vessels from a generally applicable ad valorem property tax, the Tonnage Clause precludes states from taxing vessels differently from other property. Polar Tankers argues that the Court in Wheeling adopted this ban on discriminatory property taxes on vessels, which it describes as “an essential element of the rule.†Moreover, in Michelin Tire, the Court distinguished between “discriminatory†and “nondiscriminatory†ad valorem property taxes, noting that the latter would not offend the Import-Export Clause. Polar Tankers further contends that the Court had emphasized the nondiscrimination principle with respect to constitutional limits on state taxing authority under the Commerce Clause, and that the City’s tax, drafted to apply only to oceangoing vessels, was “flatly inconsistent†with this nondiscrimination principle. The tax was also not designed to charge for services uniquely provided to those vessels, but rather to raise general revenue, which – according to Polar Tankers – was the “core concern of the Tonnage Clause.†Finally, Polar Tankers asserts that the City, by imposing a tax on large (but not small) vessels and oil tankers but not other types of vessels, was regulating interstate commerce and infringing on federal power.
Polar Tankers next argues that the City’s tax violates both the Due Process and Commerce Clauses. By failing to account for time spent by a vessel on high seas, otherwise outside a taxing jurisdiction, tied up in strikes, or out of service for repairs, the City inflated the proportion of a ship’s value that is subject to taxation in Valdez. The brief includes several examples of vessels that spend a relatively small portion of the year in Valdez, but are nonetheless taxed on a high percentage of their full value under the City’s apportionment formula.
Polar Tankers also argues that the City’s tax was designed to tax “extraterritorial value†and thus contravened the Court’s prohibition in MeadWestvaco Corp. v. Illinois Department of Revenue, 128 S. Ct. 1498 (2008), of state taxation of property “unconnected with the State.†To pass constitutional muster under the Commerce and Due Process Clauses, the tax must be apportioned among all jurisdictions in which the property is subject to taxes. Polar Tankers contrasts the City’s tax with a tax imposed by a domicile State on property that is not subject to taxes elsewhere, explaining that the latter tax would not constitute an improper extraterritorial tax because a domicile State can impose a tax in return for providing the owner unique “opportunities, benefits, or protection.†Polar Tankers goes on to argue that the City’s tax fails to satisfy the requirement that it tax property on the basis of its “actual proportionate presence†within the City.
In its final argument, Polar Tankers emphasizes that the tax creates a risk of duplicative taxation of vessels, and is thus invalid, because a domicile State may, under Central Railroad, tax petitioner’s vessels for periods when the vessels are not subject to tax – even if it does not actually do so. Polar Tankers thus disputes the Alaska Supreme Court’s interpretation of Japan Line as abrogating the authority of domicile States under Central Railroad to tax property during the times in which they are not otherwise subject to taxes. In addition, Polar Tanker contends that a risk of duplicative taxation flows from the City’s taxation of vessels for periods they spend in other ports for repairs or because of a strike. Polar Tankers concludes by urging the Court to resolve the apportionment challenge even if it declares the tax unconstitutional under the Tonnage Clause, reasoning that the City might still impose a new nondiscriminatory tax using the same flawed apportionment formula.
The City brief on the merits advances two main arguments. Beginning with the Tonnage Clause issue, the City contends that the Tonnage Clause does not apply to either property taxes or ad valorem taxes. As an initial matter, the City argues, the Court has consistently recognized that a state tax on vessels that is based on the property’s valuation does not constitute an unconstitutional tonnage duty. Because its tax applies only to those vessels that acquired tax situs – that is, are principally located or used – within the City and was levied on petitioner’s vessels “as property, based on a valuation of the same as property†rather than for the privilege of entering or using the City’s port, it did not violate the Tonnage Clause. The City also refutes Polar Tankers’s claim that the City used the tax revenue for an “impermissible general revenue purpose,†noting that the Court has repeatedly held that taxpayers may not challenge a tax based solely on the manner in which a State chooses to spend the resulting revenues.
The City next contends that its tax is not discriminatory because it applied, at the same rate, to many types of property besides vessels, including mobile homes and recreational vehicles. But even if the tax had not applied to other types of property, it still would not have violated the Tonnage Clause because the “anti-discrimination principle†on which Polar Tankers relies is not supported by either the text or purpose of the Tonnage Clause. Moreover, this Court’s statement in Wheeling that a municipality may tax vessels in the “same manner as other property†refers to taxation based on property value – ad valorem taxation – and does not require a municipality to tax other types of property as well. The City also argues that imposing the nondiscrimination principle advanced by petitioner would require courts to engage in a “futile effort†to determine whether lawmakers harbored a “secret intent†to enact an impermissible duty on vessels. Moreover, the nondiscrimination principle does not apply to the Import-Export Clause, and, even if it did, the City’s tax applied equally to in-state and out-of-state vessels.
The City’s second main argument is that its apportionment formula satisfies both the Due Process and Commerce Clauses. With respect to the Due Process claim, the City argues that its port-day formula is valid because it allows the City only to tax that portion of a vessel’s value that was fairly attributable to its productive commercial activity within the City. The City further contends that the Court has never required taxing jurisdictions to use a particular formula to calculate in-state taxable value; thus, any apportionment method is valid as long as it does not reach beyond the value fairly attributable to economic activity within the jurisdiction. The City discusses a number of apportionment formulas previously upheld by the Court that were based on physical presence in the taxing jurisdictions or commercial value generated while in that jurisdiction. In addition, the City claims that, although Polar Tankers contends that a domicile State may tax vessels for time spent on the high seas, the only relevant issue is how the “taxable pie†is divided among States in which the taxpayer’s activities contributed to taxable value – an issue that the City considered by looking at the relative time spent in competing tax situses. Moreover, the services provided by non-domiciles to vessels in their ports often equal those provided by a vessel’s domicile State.
Moving on to the Commerce Clause challenge, the City argues that Central Railroad did not, as Polar Tankers claims, vest domicile States with exclusive power to tax time on the high seas, but rather required only fair apportionment when property is amenable to taxation by multiple jurisdictions. In addition, the City points out that Polar Tankers’s approach to apportionment would result in the undertaxation of a vessel that spends all its time either in non-domicile ports or on the high seas, because Union Refrigerator Transit Co. v. Kentucky, 199 U.S. 194 (1905), prevents domicile States from taxing property permanently located in other states and petitioner’s approach precludes non-domicile States from taxing time spent on the high seas. Finally, the City concludes that petitioner’s claim that the formula did not account for time spent in dry dock or out of service due to strike is not properly before the Court. Even if it were, however, such time is “not productive†and therefore is necessarily excluded from the formula.
CLICK HERE FOR FULL VERSION OF THIS STORY