Opinion
As Modified on Denial of Rehearing Oct. 25, 1965.
For Opinion on Hearing, see 51 Cal.Rptr. 524, 414 P.2d 820.
Graham, James & Rolph, Brobeck, Phleger & Harrison, Dorr, Cooper & Hays, Lillick, Geary, Wheat, Adams & Charles, Robert D. MacKenzie, San Francisco, for appellant.
Stanley Mosk and Thomas C. Lynch, Attys. Gen., by James E. Sabine, Asst. Atty. Gen., Ernest P. Goodman and John Klee, Deputy Attys. Gen., San Francisco, for respondent.
FRIEDMAN, Justice.
In this tax refund suit Shell Oil Company challenges California's power to impose its retail sales tax on sales of 'bunker' fuel oil for consumption on ships engaged in foreign and interstate commerce. As to sales made to ships of foreign registry and those engaged exclusively in foreign commerce, the tax is claimed to violate the 'importexport clause' of the Federal Constitution. Secondly, regardless of vessel registry, immunity from state taxation is urged under the interstate and foreign commerce clause of the Constitution.
Article I, section 10, clause 2 of the Federal Const¡tution declares:
Article I, section 8, clause 3 of the Federal Constitution declares congressional power 'To regulate Commerce with foreign Nations, and among the several States * * *.'
The case was submitted to the trial court on a stipulated set of facts. The trial court hpheld the tax and Shell appeals. According to the stipulation, Shell sells 'unbonded' bunker fuel oil as ships' stores to be consumed by the vessels in the course of the voyage. The vessels fall into three categories: (1) vessels registered in foreign countries and engaged in foreign commerce; (2) vessels registered in the United States and engaged in foreign commerce; (3) vessels registered in the United States and engaged in interstate commerce. Each sale was made under a master contract obligating Shell or one of its related companies to furnish fuel to the vessel in any part of the world. Delivery of the oil in question was made at various California ports. In some instances the vessels tied up and received fuel at a fuel dock operated by Shell, in others from a barge operated by Shell or its agent. Each vessel took on cargo at the California port at which it loaded bunker fuel. This cargo was then discharged at foreign or American ports outside California. The stipulation recites that the oil was indispensable to the voyage which followed its purchase and was actually consumed during the voyage. After delivery of the oil Shell submitted a bill to the operator of the vessel. In all cases except one the bill was submitted to a firm located outside California. In two cases the bill was submitted to firms located in foreign countries. In all cases Shell collected the California sales tax and has agreed to refund the tax to the buyers if successful in the present refund action.
Decisions marking the limits of state taxation under the import-export clause usually involve articles unquestionably destined for ultimate use or consumption in a foreign land. The question in such cases is not the article's ultimate character as an export, but whether the process of exportation is under way at the time of the tax incident. The import-export clause prevents California from imposing a sales tax on articles sold within the state if at the time of sale the certainty of a foreign destination is plain. (Richfield Oil Corp. v. Gough Industries, Inc. v. State Board of Equal.,
Union Oil Co. of California v. City of Los Angeles, Matson Nav. Co. v. State Board of Equal., Empresa Siderurgica, S.A. v. County of Merced, A. G. Spalding & Bros. v. Edwards,The initial problem here is not whether the process of exportation has been commenced or completed, but whether the article is an 'export' at all. The present commodity falls within the general class of ships' stores, destined for consumption in transit without ever reaching a foreign port. The federal Supreme Court has left open the question whether local sales taxes may apply to the sale of oil as ships' stores of vessels in foreign commerce. (McGoldrick v. Gulf Oil Corp., 309 U.S. 414, 429, 60 S.Ct. 664, 84 L.Ed. 849 (1940).)
The constitutional words 'import' and 'export' are correlative and the definition of one closely affects the meaning of the other. Commencing with Brown v. State of Maryland, 25 U.S. (12 Wheat.) 419, 6 L.Ed. 678 (1827), a number of decisions define an import as an article brought into a port of the United States from a foreign country. (Woodruff v. Parham, 75 U.S. (8 Wall.) 123, 19 L.Ed. 382 (1869); Arnold v. United States, 13 U.S. (9 Cranch) 104, 3 L.Ed. 671 (1815); Harrison v. Vose, 50 U.S. (9 How.) 372, 381, 13 L.Ed. 179 (1850); Mata v. United States, 1 Cir., 19 F.2d 484, 486 (1927); American Sugar Refining Co. v. Bidwell, C.C., 124 F. 683, 686 (1903); Kidd v. Flagler, C.C., 54 F. 367 (1893); see, Powell, Note, 58 Harv.L.R. 858, 869.) If, as seems evident, the notion of an import implies a domestic port as a necessary element, then the concept of an export connotes the commodity's ultimate destination in a foreign country for use or consumption. (See Dooley v. United States, 183 U.S. 151, 154, 22 S.Ct. 62, 46 L.Ed. 128 (1901).) Neither, then, would cover goods consumed in the course of the voyage. The decisions most in point state that goods placed on a foreign-bound vessel to be consumed on board during the voyage are not exports. (Swan & Finch Co. v. United States, 190 U.S. 143, 144-145, 23 S.Ct. 702, 47 L.Ed. 984 (1903); West India Oil Co. v. Sancho, 1 Cir., 108 F.2d 144, 147 (1939), aff'd on other grounds in West India Oil Co. v. Domenech, 311 U.S. 20, 61 S.Ct. 90, 85 L.Ed. 16 (1940); Kidd v. Flagler, supra, 54 F. at p. 369 (1893); Matson Navigation Co. v. State Board of Equal., supra, 136 Cal.App.2d at p. 583, 289 P.2d 73; Schenley Distributors, Inc. v. State Tax Comm'r, 18 N.J.Misc. 266, 12 A.2d 638 (1940).)
In Swan & Finch Co. v. United States, supra, a federal statute allowed a drawback or refund of previously paid import duties 'on the exportation' of the commodity. The court held that the sale of ships' stores to vessels bound for foreign ports was not an exportation, stating: 'Whatever primary meaning be indicated by its derivation, the word 'export,' as used in the Constitution and laws of the United States, generally means the transportation of goods from this to a foreign country.' (190 U.S. at pp. 145-146, 23 S.Ct. at p. 703.)
We conclude, then, that the vessel's fuel supply is not itself an 'export' within the meaning of the constitutional provision. A more difficult question is whether the tax on the sale of fuel to propel the vessel and its cargo is the equivalent of an impost on the cargo. The import-export clause involves more than an exemption from taxes or imposts upon the goods. (Canton R. Co. v. Rogan, 340 U.S. 511, 514, 71 S.Ct. 447, 95 L.Ed. 488 (1951).) The immunity 'runs to the process of exportation and the transactions and documents embraced in it.' (Empresa Siderurgica, S. A. v. County of Merced, supra, 337 U.S. at p. 156, 69 S.Ct. at p. 997.) Various indirect exactions may be the equivalent of a direct tax on the export commodity. A stamp tax on foreign bills Fairbank v. United States,
United States v. Hvoslef, Thames & Mersey Marine Ins. Co. v. United States,On the other hand, an indirect exaction was sustained in Canton R. Co. v. Rogan, supra. There the taxpayer, a railroad, contested a state gross receipts tax measured in part by revenue from handling export goods and rental of dockside loading facilities. Denying exemption, the court stated: 'But the present tax is not on the articles of import and export; nor is it the equivalent of a direct tax on the articles * * *. The difference is that in the present case the tax is not on the goods, but on the handling of them at the port. An article may be an export and immune from a tax long before or long after it reaches the port. But when the tax is on activities connected with the export or import the range of immunity cannot be so wide.
'To export means to carry or send abroad; to import means to bring into the country. Those acts begin and end at water's edge.' (340 U.S. at pp. 513-515, 71 S.Ct. at pp. 448-449.)
The Canton Railroad decision left open the question whether a tax on stevedoring services might offend the import-export clause. (340 U.S. at p. 515, 71 S.Ct. 447.) Under the related interstate commerce clause, a local tax on the gross receipts of stevedoring services has been prohibited as a tax on the privilege of engaging in interstate commerce, but a tax on the business of supplying stevedores sanctioned as an imposition on a local business. (Puget Sound Stevedoring Co. v. Tax Com., 302 U.S. 90, 58 S.Ct. 72, 82 L.Ed. 68 (1937); Joseph v. Carter & Weekes Stevedoring Co., 330 U.S. 422, 67 S.Ct. 815, 91 L.Ed. 993 (1947).)
We mention without necessarily following City of Philadelphia Tax Review Bd. v. Norton, Lilly & Co., 189 Pa.Super. 91, 149 A.2d 672 (1959), which invalidated a gross receipts tax on a general steamship agent for steamships operating solely in foreign commerce, holding it offensive both to the commerce and the import-export clauses. See Comment, 73 Harv.L.Rev. 586 (1960).
These decisions provide no beacon signaling taxability or immunity here. The problem is one of locating a radius of immunity within the larger circle of auxiliary activities culminating in export. The Hvoslef and Thames insurance cases, decided in 1915, emphasized the economic impact of the tax on the exportation process. The Canton Railroad case, decided 36 years later, demonstrates that a tax on export-connected activities is not void simply because it increases the cost of transportation, stressing instead the spatial relationship of the taxed activity to the physical flow of commodities. Applied as the only or the chief touchstone of immunity, each of these tests leaves something to be desired. Economic burden is not particularly trustworthy as a primary test, since a host of domestic exactions increases the cost of exportation as goods move from raw to manufactured state and from point of origin to commencement of the export voyage. Spatial relationship between the journey and the tax incident is a mechanistic test which shunts constitutional objectives to one side. The A third measurement, utilized in the Richfield Oil case, is the economic effect intended by the framers of the import-export clause. Article I, section 10, clause 2, was adopted at the Constitutional Convention at the insistence of the inland states; its objective, to prevent the seaboard states from levying exactions on national commerce with foreign nations as it flowed through those states. (See Richfield Oil Corp. v. State Board of Equal., supra, 329 U.S. at pp. 76-77, 67 S.Ct. 156; Farrand, The Records of the Federal Convention of 1787 (1911), vol. II, p. 442; vol. III, p. 328; Note, Taxation Under the Import-Export Clause, 47 Colum.L.Rev. 490, 491 (1947).) In the related provision establishing congressional control of interstate and foreign commerce (art. I, sec. 8, cl. 3), room has been found for nondiscriminatory state taxation so that commerce may 'pay its way.' The import-export clause, in contrast, prohibits any tax, even a nondiscriminatory general levy applicable to all goods. The area of tax immunity established by the import-export clause is wider and more impervious than that of the interstate commerce clause. The two provisions are not 'coterminous.' (Richfield Oil Corp. v. State Board of Equal., supra, 329 U.S. at p. 75, 67 S.Ct. 156.)
See, for example, Empresa Siderurgica, S. A. V. County of Merced, supra, 337 U.S. 154, 69 S.Ct. 995; Joy Oil Co. v. State Tax Com., 337 U.S. 286, 69 S.Ct. 1075, 93 L.Ed. 1366 (1949). The economic test was strongly criticized by Mr. Justice Black in his dissenting opinion in Richfield Oil Corp. v. State Board of Equal., 329 U.S. at pp. 87-89, 67 S.Ct. 156.
By all three tests the present tax, applied to sales of fuel oil to foreign-bound ships, invades the core of immunity created by the import-export clause. Either as a result of business economics or state law, the retailer adds the amount of the sales tax to the invoice price of the fuel oil. (See Rev. & Tax.Code, sec. 6053.) In form the exaction is a gross receipts tax on the domestic retailer of oil. In passing on the federal constitutionality of state taxes, the courts concern themselves 'with the practical operation of the tax, that is, substance rather than form.' (American Oil Co. v. Neill, 380 U.S. 451, 455, 85 S.Ct. 1130, 1133, 14 L.Ed.2d 1, decided April 26, 1965.) In a constitutional sense and by economic result, the tax hits the consumer, in this case the operator of the vessel. (Richfield Oil Corp. v. State Board of Equal., supra, 329 U.S. at pp. 84-85, 67 S.Ct. 156; cf. Clary v. Basalt Rock Co., 99 Cal.App.2d 458, 461-462, 222 P.2d 24 (1950); Roth Drug, Inc. v. Johnson, 13 Cal.App.2d 720, 736, 57 P.2d 1022 (1936).) The occasion for the tax is the operator's purchase of fuel oil, a prime and indispensable necessity of the voyage. The tax does not hit some preliminary and distinct stage of the export process. It hits the ocean voyage itself, the very center and irreducible minimum of the export process. The vessel starts burning fuel oil 'at water's edge' and does so all the way across the sea. The operator cannot move the vessel and its cargo to a foreign port without paying the cost of the levy which the state imposes upon the supplier. The cost is a cost of the ocean voyage, directly proportioned to the quantity of fuel and thus to the length of the voyage. The state imposes a greater economic burden on a voyage to Bombay than one to Panama. The state's hand reaches across the sea, the more sea the farther the reach. The economic burden of the state's exaction falls on the cargo, each item bearing a share proportioned in part to the distance of its transportation. The tax is nothing other than a levy on the ocean transportation of export cargo. By burdening a necessity of the voyage, the state erects an economic barrier to the movement of export cargo through California ports enroute to its foreign destination. This is precisely the kind of economic barrier the import-export clause was designed to prevent. A related clause of the federal Constitution prohibits the states from imposing a duty of tonnage. A duty of tonnage has been described as a charge for 'entering or leaving a port.' (United States v. Hvoslef, supra, 237 U.S. at p. 17, 35 S.Ct. 459.) The present exaction on the vessel operator is proportioned to the length of the voyage rather than the tonnage of the vessel; in terms of its interference with foreign commerce, it cannot be distinguished. (See Scandinavian Airlines System, Inc. v. County of Los Angeles, 56 Cal.2d 11, 34-35, 14 Cal.Rptr. 25, 363 P.2d 25 (1961).)
Worthy of note at this point is Mr. Justice Jackson's statement in a separate opinion in Canton R. Co. v. Rogan, supra: 'If the constitutional policy [of equal access to the high seas] can be avoided by shifting the tax from the exported article itself to some incident such as carriage, unavoidable in the process of exportation, then the policy is a practical nullity. I think prohibition of a tax on exports and imports goes beyond exempting specific articles from direct ad valorem duties--it prohibits taxing exports and imports as a process.' (340 U.S. at p. 517, 71 S.Ct. at p. 451.)
Article I, section 10, clause 3, provides: 'No State shall, without the Consent of Congress, lay any Dity of Tonnage, * * *.'
It is possible, by a process of transposition, to cull from the interstate commerce decisions language to obscure the nature and impact of the present exaction. The state does not select export cargo as the target of economic burden, but levies a general, nondiscriminatory tax on all retailers, including the seller of oil, to support the services and protections which the state furnishes both seller and purchaser; the tax is not an impost on the voyage, but an excise levied on the retail business of the seller, a domestic business which bears only an incidental relationship to the export process; contemporary, enlightened judicial policy disfavors the creation of islands of immunity shielded from uniform and reasonable state taxation--such is the general doctrine sounded in the interstate commerce decisions. (See Northwestern States Portland Cement Co. v. State of Minn., 358 U.S. 450, 79 S.Ct. 357, 3 L.Ed.2d 421 (1959); Ott v. Missisippi Valley Barge Line Co., 336 U.S. 169, 69 S.Ct. 432, 93 L.Ed. 585 (1949); additional cases cited, Martin Ship Service Co. v. City of Los Angeles, 34 Cal.2d 793, 795-801, 215 P.2d 24 (1950).) The difference in character between the interstate commerce and the import-export clauses blocks any such transposition of doctrine. No implied qualification permitting general, nondiscriminatory levies can be read into the latter. (Richfield Oil Corp. v. State Board of Equal., supra, 329 U.S. at pp. 76-78, 67 S.Ct. 156.) The hard, obtrusive fact is that the dollar-and-cents burden of the present tax falls on the actual process of exportation, the ocean voyage to a foreign port.
We conclude that California cannot constitutionally apply its sales tax to fuel oil sold as ships' stores to vessels engaged exclusively in carriage of export cargo. The taxpayer is entitled to a refund of taxes to that extent. Ti is thus unnecessary to consider registry of the vessel as an independent determinant of taxability.
We turn to the sales involving vessels engaged in interstate commerce. The interstate commerce clause does not prevent the states from imposing nondiscriminatory taxes on activities essential to interstate commerce so long as the tax does not unduly burden that commerce. (See cases cited, Martin Ship Service Co. v. City of Los Angeles, supra, 34 Cal.2d at pp. 795-801, 215 P.2d 24.) The states may constitutionally impose a sales tax on gasoline and oil fuels used in interstate transport. (Eastern Air Transport, Inc. v. South Carolina Tax Comm., 285 U.S. 147, 52 S.Ct. 340, 76 L.Ed. 673 (1932); Standard Oil Co. of California v. Johnson, 56 Cal.App.2d 411, 132 P.2d 910 (1942).) In holding that the interstate commerce clause did not bar a local gross receipts tax on a firm which loaded ships' stores, the California Supreme Court made a statement which is no less applicable to sales taxation of ships' stores: 'There is a clear distinction between the loading and transportation of commodities for shipment in interstate commerce and the loading of Puget Sound Stevedoring Co. v. Tax Commission,
Eastern Air Transport [Inc.] v. South Carolina Tax Comm., Martin Ship Service Co. v. City of Los Angeles,Another horn to the interstate commerce argument is the assertion that the California tax unconstitutionally exposes interstate commerce to the burdens of multiple taxation. The taxpayer states that the California sales are exposed to taxation in the jurisdicitions where the oil purchase contracts were made as well as at the home ports of the respective vessels. These are nothing but conjurations, abstractions evoking spectral possibilities. The taxpayer has not demonstrated the existence of any tax law subjecting the fuel oil to the property, sales or use taxes of another jurisdiction. The courts will not deal with such abstract possibilities. (General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964); American Airlines, Inc. v. State Board of Equal., 216 Cal.App.2d 180, 193-194, 30 Cal.Rptr. 590 (1963).)
Finally, the taxpayer contends that the federal Congress has 'occupied the field' of taxation of fuel oil sold as ships' stores, impliedly prohibiting state taxation. The taxpayer relies upon section 3451 of the Internal Revenue Code and a related provision of the Tariff Act of 1930 (now appearing in 19 U.S.C. § 1309) permitting free withdrawal of imported commodities held in bond when sold as supplies to foreign vessels. In McGoldrick v. Gulf Oil Corp., supra, 309 U.S. 414, 60 S.Ct. 664, the Supreme Court invalidated a municipal sales tax on the sale of bunker oil manufactured in a bonded warehouse from imported crude oil and sold as ships' fuel in foreign commerce. The court pointed out that although the federal statutes were specifically designed to achieve an exemption from federal import taxation, the purpose of the exemption was to encourage importation of crude oil by assisting American refiners to meet foreign competition in the sale of oil as ships' stores. The court concluded that the municipal tax interfered with that policy objective, thus failing as an infringement of congressional regulation of commerce.
The present version of section 3451 is 26 U.S.C., section 4221. At the time of the sales here in question (1950) this provision was codified as 26 U.S.C., section 3451, and read as follows:
The statutes confronting the court in McGoldrick and the decision itself involved sales to foreign vessels of fuel oil refined from crude oil imported under bond. These statutes, their policy objective and the decision itself have no direct bearing on the problem of taxability remaining in this case, that is, sales of unbonded, domestically produced fuel oil sold to ships engaged in interstate, not foreign, commerce. At this point the taxpayer resorts by analogy to the Former section 3451 extended to ships' stores, including fuel, an exemption from taxation 'under this chapter,' that is, from taxes imposed by chapter 29 of the former Internal Revenue Code entitled 'Manufacturers' Excise and Import Taxes.' The Attorney General points out that chapter 29 imposed no tax whatever on domestically produced crude oil or on fuel oil refined from it. Counsel for the taxpayer does not gainsay that fact. It follows that sales of domestic oil as ships' stores were completely outside the specific terms of former section 3451. To imply from this limited exemption a sweeping prohibition of state sales taxation on domestically produced ships' stores imputes to Congress an intent which would doubtless surprise and confound the framers of the legislation. Excerpts from the Congressional Record evince an intent to assist domestic sellers of ships' stores in meeting competition of suppliers at foreign ports. (77 Cong. Record (73d Cong. First Sess.) p. 3214.) Such a purpose has little connection with vessels engaged in intercoastal and coastwide trade, calling only at American ports. A statute so limited in its language and objectives cannot be stretched to 'occupy the field' to the destruction of completely visible and constitutionally permissible forms of state taxation.
That chapter is currently codified as chapter 32 of title 26, United States Code, and is entitled 'Manufacturers Excise Taxes.' Like its predecessor, 26 United States Code section 4221 confers exemption only from taxes imposed 'under this chapter.'
That portion of the judgment denying a refund of sales taxes on fuel oil supplied to vessels engaged in interstate commerce is affirmed. That portion of the judgment denying a refund of sales taxes on fuel oil supplied to vessels engaged exclusively in the export trade is reversed and the cause is remanded to the lower court for further proceedings consistent with this opinion.
PIERCE, P. J., and REGAN, J., concur.
'No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws * * *.'
'Under regulations prescribed by the Commissioner, with the approval of the Secretary, no tax under this chapter shall be imposed upon any article sold for use as fuel supplies, ships' stores, sea stores, or legitimate equipment on vessels of war of the United States or of any foreign nation, vessels employed in the fisheries or in the whaling business, or actually engaged in foreign trade or trade between the Atlantic and Pacific ports of the United States or between the United States and any of its possessions. Articles manufactured or produced with the use of articles upon the importation of which tax has been paid under this chapter, if laden for use as supplies on such vessels, shall be held to be exported for the purposes of section 3430. * * *'