Oral argument: Apr. 1, 2009
Appealed from: Supreme Court of Alaska (Apr. 25, 2008)
TONNAGE CLAUSE, INTERSTATE COMMERCE, TAX, PROPERTY TAX, MARITIME
In 1999, the city of Valdez imposed a tax on vessels using its harbors. This case concerns the constitutionality of that tax and the apportionment methodology used to assess the tax. Petitioner Polar Tankers claims that the tax is a tonnage duty prohibited by the Constitution's Tonnage Clause. Polar Tankers argues that the apportionment methodology utilized by Respondent Valdez distorts a vessel's value, and that the effect of the distortion is to allow Valdez to make revenue that is grossly disproportionate to the amount of time a vessel actually spends using Valdez' ports. Furthermore, Polar Tankers argues that Valdez' apportionment scheme creates a risk of double taxation for vessels. Valdez, however, claims that the tax is nothing more than an ad valorem property tax. Valdez argues that the Tonnage Clause does not apply to ad valorem taxes, and that its apportionment scheme is based on a vessel's productive activity in Valdez. Lastly, in response to the charge of creating a risk of double taxation for vessels, Valdez states that domicile states do not have exclusive authority to tax vessels for time spent on the high seas. Thus, the outcome of this case will affect taxation as it relates to interstate commerce.
1. Whether a municipal personal property tax that falls exclusively on large vessels using the municipality's harbor violates the Tonnage Clause of the Constitution, art. I, § 10, cl. 3.
2. Whether a municipal personal property tax that is apportioned to reach the value of property with an out-of-State domicile for periods when the property is on the high seas or otherwise outside the taxing jurisdiction of any State violates the Commerce and Due Process Clauses of the Constitution.
Whether a city's property tax only on large vessels using the city's ports violates the Tonnage Clause of the Constitution, and whether a state's inclusion of certain out-of-state activities in its calculations of percentage value violates the Commerce and Due Process Clauses of the Constitution.
Situated on the terminus of the Trans Alaska Pipeline System, Respondent the City of Valdez ("Valdez") serves as a crucial link in the transportation of crude oil from Alaskan oil fields to refineries. See City of Valdez v. Polar Tankers, Inc., 182 P.3d 614, 617 (AK 2008). Facing a decrease in Valdez's tax base, the city enacted a new ordinance which taxed vessels longer than ninety-five feet in length that docked at private facilities in Valdez. See id. at 616. The ordinance excluded, among other things, commercial fishing vessels. See id. Petitioner Polar Tankers, Inc. ("Polar") argues that this tax is basically a tax exclusively on large vessels docking at Valdez. See Brief for Petitioner, Polar Tankers, Inc. at 10.
Polar, a wholly owned subsidiary of ConocoPhillips, paid nearly $5 million in taxes under protest to Valdez over five taxable years. See City of Valdez, 182 P.3d at 617. Polar claims this tax is a violation of the Commerce and Due Process Clauses of the Constitution, as well as the Tonnage Clause of the Constitution, which forbids states from taxing vessels for the privilege of using their ports. See Brief for Petitioner at 10. Valdez argues that this is simply an ad valorem property tax (i.e. property tax based on the value of the property), which is permissible even under the Tonnage Clause. See Brief for Respondent, City of Valdez at 9-12.
In addition to the existence of the tax itself, there is also a dispute as to the method by which the tax is calculated. See Docket 08-310. Under the ordinance, a vessel is not necessarily taxed relative to its full value. See City of Valdez, 182 P.3d at 616-17. Under the "port-day" formula, a vessel's value is reduced to the fraction of time the vessel has spent in a Valdez port relative to the time spent in all ports. See id. To illustrate, assume an oil tanker worth $15 million dollars spent ten days in a private dock in Valdez, ten days in a California port, ten days in a New York port, and 335 days at sea (i.e. remainder of the year). The numerator would be ten days (days spent in the Valdez port). The denominator would be thirty days (ten for Valdez, ten for California, and ten for New York). Dividing the numerator by the denominator would yield 10/30 or 1/3, meaning a third of the ship's value (here, $5 million) would be subject to the yearly tax. The tax would then capture a portion of the $5 million taxable value. For example, with a tax rate of 2%, the vessel would be taxed 2% of $5 million, which calculates out to $100,000 owed for the year. See id.
Polar argues that the "port-day" formula captures a portion of the value of the ship spent outside the taxing jurisdiction (i.e. on the high-seas). See Brief for Petitioner at 10-11. Valdez, in contrast, argues that the "port-day" formula adjusts the tax to the portion of the vessel's commercial activities spent in Valdez. See Brief for Respondent at 12-13.
Polar sued Valdez in Alaska superior court and received summary judgment invalidating the tax. See City of Valdez, 182 P.3d at 617. Valdez moved for reconsideration and the superior court vacated the summary judgment. See id. The superior court ultimately held that the "port-day" formula violates the Commerce and Due Process Clauses of the Constitution, but that the tax itself does not violate the Tonnage Clause. See id. Valdez appealed to the Supreme Court of Alaska on the "port-day" ruling, and Polar appealed the Tonnage Clause ruling. See id. at 616. The Supreme Court of Alaska found for Valdez on both issues - the tax did not violate the Tonnage Clause and the "port-day formula" was an ad valorem property tax which did not violate the Commerce and Due Process Clauses of the Constitution. See id. at 617, 622. Polar then appealed to the Supreme Court of the United States, which granted certiorari on December 12, 2008 on the constitutionality of the tax and underlying "port-day" formula. See Docket 08-310; 129 S.Ct. 762.
The Court's ruling in this case will have implications for interstate commerce and taxation. The validity of the tax under the Tonnage Clause may further define or potentially eliminate the power of the Tonnage Clause to control taxation of interstate commerce. Moreover, the Court's interpretation of the "port-day" formula may have implications for the ability of a state to tax property outside of its jurisdiction.
Implications from the validity of the tax under the Tonnage Clause
Opponents of the Valdez tax are concerned that upholding this tax will enable a form over substance bypass of the Tonnage Clause. See, e.g., Brief of Amicus Curiae Tropical Shipping and Construction Co., Ltd. in Support of Petitioner at 12. In other words, amici argue that by re-labeling the Valdez tax as a property tax and effectually limiting it to large vessels, Valdez can bypass the Tonnage Clause and render it a practical nullity. See id. at 21. In addition, amici point out that sustaining the tax may encourage other states to apply similar taxes on vessels using their ports, thereby opening up additional sources of tax revenue. See, e.g., Brief of Amicus Curiae World Shipping Council & Cruise Lines International Association in Support of Petitioner at 5.
Respondent City of Valdez ("Valdez") claims that, despite first impressions, the tax does not violate the Tonnage Clause as the Clause does not prevent all taxation on vessels. See Brief for Respondent, City of Valdez at 16-23. Valdez argues that the nature of the tax, an ad valorem property tax, not only separates the tax from the Tonnage Clause in name, but also places the tax into a permissible category of state taxation. See id. Seventeen states argue as amici for Valdez that the issue here implicates the effective scope of the Tonnage Clause, and that a decision upholding Valdez's tax would not violate the Tonnage Clause as its scope should be narrow. See Brief of Amici Curiae the States of Alaska, et al. ("the States") in Support of Respondent at 1, 27-30.
Implications from the validity of the formula used to calculate in-state taxable value
While the port-day formula (i.e. a calculation based on the ratio of the time spent in Valdez' port versus time spent in other ports) may seem like an isolated issue, it has broad implications for general methods of taxation in other states because it boils down to a dispute as to how out-of-state activity may affect taxation. Specifically, a ruling on the nature of this tax implicates how taxation of out-of-state property may be defined.
Claiming a violation of the Due Process and Commerce clauses of the Constitution, Polar maintains that the port-day formula reaches to out-of-state property (i.e. time spent on the high seas away from Valdez) and introduces a risk of duplicate taxation. See Brief for Petitioner, Polar Tankers, Inc. at 10-11. Valdez, however, claims that the formula merely taxes a permissible share of the vessels' commercial activity. See Brief for Respondent at 12-15. Amici Multistate Tax Commission ("MTC") explains that as a result, the outcome of the decision either way will affect which method of taxation is used-geographic apportionment or commercial apportionment. See Brief of Amicus Curiae Multistate Tax Commission ("MTC") in Support of Respondent at 7-8.
In addition, the Supreme Court's decision could have broader implications for states and their tax systems, beyond that of maritime taxation. As amici for both parties point out, the "port-day" formula parallels "throw-out" taxation formulas that are being used or contemplated in several states for a variety of taxes. See Brief of Amicus Curiae Broadband Tax Institute ("BTI") in Support of Petitioner at 2-4, 7-8; Brief of the States at 3-4, 15-17. A "throw-out" tax formula divides activity attributable to one region by activity attributable to all regions, but removes or "throws out" some of the activities attributable to all regions. See Brief of BTI at 4, 7-8. For example, New Jersey temporarily enacted a "throw-out" corporate tax, which divided a taxpayer's sales receipts in New Jersey by his total sales receipts but excluded from the total any foreign sales receipts where the taxpayer was not subject to tax in that jurisdiction. See Brief of Amicus Curiae Council on State Taxation in Support of Petitioner at 12-15. While litigation is ongoing regarding the New Jersey tax, other states are considering similar tax systems. See id. Thus, a ruling on the ability of a tax formula to include out-of-state activity could also implicate the constitutionality of other taxation methods by which states may tax property. See Brief of the States at 3-4, 16-17.
Consequently, amici for Polar Tankers argues that a decision upholding Valdez's apportionment formula would allow Valdez and other states and cities to overreach the limits of extraterritorial taxation. See Brief of Council on State Taxation at 14-15. On the other hand, amici for Valdez argue that a decision against such formulae may result in tax loopholes, where some activity could escape taxation altogether because a geographic apportionment would not capture significant economic activity. See Brief of MTC at 5, 17. Amici MTC also points out that specifically in the shipping industry, invalidating the formula could give maritime shipping an advantage over rail, truck, or air transport, as railroad and trucks must move within jurisdictions and airlines sometimes use a port-day type formula. See id.
Does the Valdez tax violate the Tonnage Clause?
The Constitution's Tonnage Clause provides that "no state shall, without the consent of Congress, lay any duty of tonnage." See U.S. Const. Art. I, § 10, Cl. 3. A duty of tonnage is a "charge for the privilege of entering, or trading, or lying in, a port or harbor." See Transp. Co. v. Parkersburg, 107 U.S. 691, 696 (1883). One exception to the prohibition against tonnage duties includes "a charge for services rendered or conveniences provided." Packet Co. v. Keokuk, 95 U.S. 80, 84 (1877). A second exception includes a general ad valorem tax, which is a tax based on value. See Brief for Petitioner, Polar Tankers, Inc. at 17.
Petitioner Polar Tankers, Inc. ("Polar") argues that the Valdez tax violates the Tonnage Clause. See Brief for Petitioner at 11. Polar claims that the first exception to the tonnage tax does not apply here because the Valdez tax is not for services rendered or conveniences provided, such as docking or wharfage. See id. at 23. Polar points out that the Valdez City Council explicitly stated that the tax was a general revenue measure intended to facilitate funding for local needs, such as the creation of schools, hospitals, and repairs to infrastructure and facilities, and that this does not satisfy the requirements of the first exception to the Tonnage Clause. See id. Moreover, Polar argues that the availability of the above-mentioned services to vessels does not make the tax a quid pro quo for services rendered. See id. Polar explains that the tax is geared at non-local vessels instead of property in general. See id. at 22. Specifically, the tax excludes local vessels such as commercial fishing boats. See id. at 23. Polar states that the tax was intentionally designed to target "oceangoing tankers," and as such, the revenue from the tax should have a direct correlation to the services Valdez provides for these tankers. See id. at 22.
On the other hand, Respondent City of Valdez ("Valdez") contends that the Valdez tax does not violate the Tonnage Clause. See Brief for Respondent, City of Valdez at 16. Valdez argues that its tax is an ad valorem property tax on vessels, and that the Tonnage Clause does not apply to ad valorem property taxes on vessels. See id. According to Valdez, "the crucial distinction between a (constitutional) property tax and an (unconstitutional) tonnage duty is that the former is assessed based on the value of the vessel." See id. at 19. Valdez argues that a tax based on value is categorically different than a tax for simply entering, trading, or lying in a port or harbor. See id. at 20. Furthermore, Valdez points out, the tax does not apply uniformly to all vessels which utilize the Valdez harbor. See id. at 21. Rather, the tax only applies to those vessels that have acquired a tax situs within Valdez. See id. Moreover, Valdez argues that Polar's contention that the Valdez tax is not a quid pro quo for services rendered does not transform its property tax into a tonnage duty. See id. at 22. Valdez argues that whether or not the tax is being used for a permissible purpose is not a proper subject for argument in court, because judges are not in the best position to search through a city's records to determine whether the tax is being used for vessel-specific purposes or for the general needs of the city. See id.
Does Valdez' apportionment formula violate the Due Process Clause and the Commerce Clause?
The Due Process Clause prohibits a state from depriving a person of property without due process of law. See U.S. Const. amend. XIV, § 1. The Commerce Clause states that Congress has the power to regulate commerce among the states. See U.S. Const. Art. I, § 8, Cl. 3. The Supreme Court has held that in order to tax a property used in interstate commerce, a state must establish "some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax, as well as a rational relationship between the tax and the values connected with the taxing State." MeadWestvaco Corp. ex. Rel. Mead Corp. v. Ill. Dep't of Revenue, 128 S. Ct. 1498, 1505 (2008).
To compute the tax it will impose on vessels, Valdez uses a fraction meant to reflect a vessel's value. See Brief for Respondent at 32. For the numerator of the fraction, Valdez counts the total productive days a ship spends in Valdez. See id. at 31. For the denominator of the fraction, Valdez uses the number of days that a vessel spends in all ports. See id. Valdez excludes from the denominator of the apportionment formula the days a vessel spends on the high seas. See id. at 32.
Polar argues that Valdez' apportionment formula allows it to tax property outside of its territorial jurisdiction, i.e. property that lacks a minimum connection with the state. See Brief for Petitioner at 27. Polar contends that since Valdez knows exactly when vessels are using its harbors, and also knows that the nature of the vessel users' business requires them to spend a great majority of their time on the high seas, the city's tax is intended to allow the city to attribute an inflated value to the vessels. See id. at 31. That is, the apportionment formula allows Valdez to attribute greater value to the vessels than if they simply divided the number of days a vessel spent in Valdez by the number of days in the calendar year. See id. at 26.
Valdez, however, contends that it has latitude to design its tax scheme, as there is no required formula that the tax must be based on the vessels' physical presence in Valdez throughout the year. See Brief for Respondent at 38. According to Valdez, the only restriction on its taxing scheme is the requirement that the taxes are fairly attributable to the vessel's productive business activity in Valdez. See id. at 34. Valdez claims that Polar's argument against Valdez taxing property outside of its jurisdiction involves the taxing authority of other tax situses versus a domicile state, which the Supreme Court has ruled is allowed to tax outside of its jurisdiction. See id. at 42. Consequently, Valdez contends that "[t]here is no constitutional basis for [Polar]'s apparent belief that precisely the same apportionment formula could be constitutional if adopted by a domicile but unconstitutional if adopted by any other tax situs." See id.
Does the Valdez tax create a risk of duplicative taxation?
Polar claims that the Valdez tax creates a risk of double taxation for vessels. See Brief for Petitioner at 42. In support of its claim, Polar explains that a vessel's domicile state may tax a vessel for the time it is on the high seas, even as Valdez's apportionment formula allows taxation of the same vessels for the same time spent on the high seas. See id. at 27. Polar claims that the mere possibility of duplicative taxation renders the Valdez apportionment formula invalid, because the Constitution prohibits imposition of ad valorem taxes on any property that could be taxed by another state. See id.
Valdez, however, claims that there is no constitutional rule that states that a vessel's domicile state has exclusive authority to tax a vessel for time spent on the high seas. See Brief for Respondent at 45. Furthermore, Valdez claims that Polar's argument is an attempt to resurrect the "home-port doctrine," which generally gave a vessel's domicile state the exclusive authority to tax a vessel for its full value. See id. Valdez argues that the Court specifically rejected the home-port doctrine in favor of a state's taxing authority being based on fair apportionment, and that their apportionment scheme is fair because it is ad valorem. See id.
In this case, the Supreme Court will determine two issues. The first is whether a narrowly defined property tax violates the Tonnage Clause of the Constitution. An answer to this question implicates the effectiveness of the Tonnage Clause to control taxation and potentially encourages other states to pursue or avoid such attempts to levy taxes. The second question is whether a formula for calculating taxable value by apportioning in-state from out-of-state activities may exclude certain out-of-state activities, thereby increasing the taxable value available to the state. This question implicates not only maritime commerce, but also many other tax systems that look to out-of-state activities relative to in-state activities. Upholding the formula may encourage other states to follow suit with similar formulae, while striking it down may discourage or invalidate similar tax formulae.
Edited by: Hana Bae
- Anchorage Daily News: Valdez Tax Case Winds Up Before US Supreme Court
- FindLaw Annotations to US Constitution: Tonnage Duties
- Grant Thornton LLP: US Supreme Court to Hear Valdez Property Tax Challenge
- Daniel Fisher at Forbes.com, Supreme Court Cheat Sheet