Became a Billion Dollar Government Headache
Everyone remembers the Reagan philosophy that the Constitution must be strictly construed as well as the "market driven" philosophy of making the "user" pay for government services -- an approach Congress still uses to avoid increasing taxes through creative use of "fees" and other taxes in disguise.
Last month strict constructionism confronted the new budget philosophy in the Supreme Court and the Constitution won. On March 31, 1998, just weeks after it was argued, the Supreme Court in United States Shoe Corporation v. United States, struck down a harbor maintenance tax ("HMT") assessed on exports on the ground that it violates a constitutional prohibition on taxes or duties on exports. As a result, the government soon must refund over a billion dollars -- an amount which may go higher depending upon how lower courts interpret the new decision.
In the mid-80's Congress needed a mechanism to raise money for port upkeep. But classic user fee options (e.g., assessment per voyage, per ton) found bulk shippers arrayed against containerized ones, high volume ports in opposition to low, and ship owners in conflict with shippers. After years of debate Congress found a relatively painless compromise: a 0.04% ad valorem tax to be collected as a duty on imports and exports.
As with many good ideas, there was one small problem: the Constitution (Art. 9, Sec. 1) commands that "no tax or duty shall be laid on articles exported from any State." This provision was adopted in 1787 to address fears of the exporting South that it would be tyrannized by an industrial North seeking to raise revenue on the back of southern exports while at the same time encouraging a flow of cheaper raw materials in domestic commerce to northern factories.
The HMT Congress was aware of the constitutional prohibition. But cases enforcing the ban dated back to the early 1900's, and since then the power to tax had been given broad brush approval with the New Deal's abandonment of strict constructionism. Deciding that provincial concerns from the early days of the Republic surely would not stand in the way of the needs of the twentieth century, Congress enacted the tax.
Initially the HMT escaped serious notice, funds were raised and harbors were improved. But in 1990 Congress tripled the tax and revenues skyrocketed. By 1993, a surplus of over $450 million had built up, ostensibly in a "trust fund" but in actuality applied to reduce the deficit. And as the surplus grew, taxpayers and users of ports took notice, consulted lawyers and began filing suit in the Court of International Trade in New York City.
By 1995, with over 700 claims before it, the CIT decided to select United States Shoe Corporation as the nominal plaintiff in a test case, but with several prominent members of the customs bar invited to submit arguments. Thereafter, three CIT judges found the HMT unconstitutional. On appeal, the Federal Circuit appellate court in Washington reached the same conclusion.
This set the stage for the appeal to the Supreme Court which less than a month after oral argument unanimously affirmed the courts below. The Court declared that while nothing prevented Congress from exacting fair compensation for government services, a tax assessed ad valorem on exports bearing no correlation to harbor use or maintenance simply wandered too far afield. It further held that expansive interpretations of government power under the Commerce Clause could not justify disregarding the meaningful textual differences and explicit prohibitions against taxes on exports set forth in the Constitution.
As a result, nearly a billion dollars of back taxes must now be refunded. The CIT recently has issued an order directing the government to devise a form and mechanism for processing claims on file. However, this does not end the potential exposure.
First, although two CIT judges intimated that recovery would be limited by a two-year statute of limitations, a third judge argued that all monies collected since the HMT inception be refunded. A motion has already been filed to invoke this "void ab initio" theory.
Second, anyone who files a complaint before May 7th will most likely be able to recover payments since October 1994 because there was an attempt to certify a class action which, although unsuccessful, tolled running of the statute of limitations for a period of time.
Third, the CIT has indicated it will award interest on all taxes from date of payment, compounded daily.
Finally, if the HMT on exports is struck down, its application to imports may be vulnerable because even though the Act contains a severability provision, Congress might not have wanted the tax to fall disproportionately on imports alone. One CIT Judge has rejected the point in a different context, but U.S. trading partners have already invoked WTO procedures to raise the issue of whether an HMT on imports alone violates treaty obligations.
Looking to the future, the High Court has observed that its decision "does not mean that exporters are exempt from any and all user fees designed to defray the cost of harbor development and maintenance." Ports have already indicated they may ask Congress to address the matter, although there is some doubt that Congress may be able to act quickly in an area where years were required to formulate the first HMT. Private litigants, for their part, may be expected to seek out and challenge other funding schemes in other contexts where taxes can be shown to be computed on ad valorem export values.
As each of these new battles is fought, the Courts can be expected to apply time tested precedent. For the constitutional prohibition against taxes on exports has as much force today as it did back in 1789, and will continue to serve as a check on creative funding schemes.
Charles H. Critchlow is a litigation partner in the New York office of Coudert Brothers, an international law firm which represents exporters and importers seeking over $100 million in harbor maintenance tax refunds.