OPINION BY JUSTICE STEPHEN R. McCULLOUGH.
Dulles Duty Free, LLC, challenges Loudoun County's imposition of a Business, Professional, and Occupational License ("BPOL") tax on a substantial portion of its sales. It argues that the Import-Export Clause of the Constitution of the United States, U.S. Const. art. I, § 10, cl. 2, bars the County from imposing the tax. The circuit court ruled in favor of the County. For the reasons noted below, we reverse the judgment of the circuit court and remand this action for a computation of the refunds for the relevant tax years that are due to the taxpayer.
Duty Free is a retailer of duty free merchandise at Dulles Airport in Loudoun County, where it operates several stores.
The merchandise is sold in a restricted area of the airport. Only passengers with boarding passes may enter and these passengers must first go through security. Duty Free can sell items to both domestic and international passengers. For domestic travelers, Duty Free charges a Virginia sales tax and the purchaser takes immediate possession of the item. When the sale involves a bonded imported item, the domestic passenger pays an import duty. Duty Free does not challenge the imposition of the BPOL tax to such domestic sales.
International travelers, on the other hand, must present a passport and boarding pass to the cashier in the Duty Free shop. The cashier will swipe the boarding pass on the register to record the information that is on the boarding pass. Duty Free does not charge a Virginia sales tax for international export sales and does not collect any import duty, i.e. the sales are "duty free." Instead of receiving the item immediately, the traveler is given a receipt or ticket. A duty free runner delivers the item to the buyer at the jetway immediately prior to boarding and the customer hands the ticket to the runner. See 19 U.S.C. § 1555(b)(3)(F)(i)(II). If a passenger does not appear to collect the item, Duty Free voids the sale and returns the merchandise to the store.
Duty Free is able to track which sales are domestic and which sales are international. International sales represent over ninety percent of Duty Free's sales. Duty Free established that the following gross receipts were attributable to international travelers: for tax year 2009, $18,827,494; for tax year 2010, $13,747,954; for tax year 2011, $15,162,747; for tax year 2012, $18,203,469; and for tax year 2013, $20,151,691.
Duty Free does not dispute that it owns inventory and other personal property in
Loudoun County requires every person "engag[ed] in a business" in Loudoun County to obtain a business license. Loudoun County Ordinance § 840.03(a). Accordingly, Duty Free has obtained a business license to operate in Loudoun County. Code § 58.1-3702 permits "the governing body of every county, city and town" to impose a "tax on the gross receipts or the Virginia taxable income of the business." Code § 58.1-3703.1(A)(3)(a) provides that "[w]henever the tax imposed by this ordinance is measured by gross receipts, the gross receipts included in the taxable measure shall be only those gross receipts attributed to the exercise of a privilege subject to licensure." The tax does not target imports or exports; it applies across the board to all sales.
Loudoun County has chosen to collect the tax based on the measure of gross receipts. See Loudoun County Ordinance § 840.14(o). Loudoun County defines "gross receipts" as "the whole, entire, total receipts attributable to the licensed privilege, without deduction." Id.; Loudoun County Ordinance § 840.01(k). The tax is calculated based on the prior year's gross receipts. Id.; see also Loudoun County Ordinance §§ 840.01(m); 840.03(d); 840.04(a); 840.14(o). For businesses with sales not more than $200,000 per year, the County levies a flat $30 fee. Loudoun County Ordinance § 840.13(c). For businesses with sales above the $200,000 threshold, the County collects 17 cents for every $100 in retail sales for all sales, not just those above $200,000. Loudoun County Ordinance § 840.14(o).
In 2014, Duty Free filed an application for correction of its BPOL taxes for the years 2009, 2010, 2011, 2012, and 2013. Duty Free does not challenge the imposition of the BPOL tax on its domestic sales. It argues, however, that applying the BPOL tax on the gross receipts of its international sales violates the Import-Export Clause of the Constitution of the United States.
Following a hearing, the circuit court issued a detailed memorandum opinion. The court canvassed the cases from the United States Supreme Court and concluded that "[t]he BPOL tax of Loudoun County does not violate the Import Export Clause of the U.S. Constitution." Consequently, the court held that Duty Free "is not entitled to relief from the assessments complained of in its Application." Duty Free appeals from this ruling.
"Arguments challenging the constitutionality of a statute or regulation are questions of law that this Court reviews de novo on appeal." DiGiacinto v. Rector & Visitors of George Mason Univ., 281 Va. 127, 133, 704 S.E.2d 365, 368 (2011).
This case presents an "as applied" challenge rather than a challenge to the facial constitutionality of the BPOL tax. Volkswagen of Am., Inc. v. Smit, 279 Va. 327, 336, 689 S.E.2d 679, 684 (2010) ("Because our jurisprudence favors upholding the constitutionality of properly enacted laws, we have recognized that it is possible for a statute or ordinance to be facially valid, and yet unconstitutional as applied in a particular case."). We accord every legislative act a presumption of constitutionality, including laws subject to an as applied challenge. Id. A party which alleges a statute is being unconstitutionally applied bears the burden of proving that the statute is unconstitutional under a particular set of facts. See FFW Enters. v. Fairfax County, 280 Va. 583, 590, 701 S.E.2d 795, 800 (2010).
The Import-Export Clause provides, in relevant part, that "[n]o 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." U.S. Const. art. I, § 10, cl. 2.
The problems that led to the inclusion of this Clause in the Constitution are well known. "One of the major defects of the Articles of Confederation, and a compelling reason for the calling of the Constitutional
Resolution of the constitutional propriety of the BPOL tax to Duty Free's in-transit export sales hinges on the applicability, and ongoing validity, of the decision in Richfield Oil Corp. v. State Bd. of Equalization, 329 U.S. 69, 67 S.Ct. 156, 91 S.Ct. 80 (1946). Duty Free argues that Richfield Oil controls. The County asserts that the case is distinguishable or superseded by later decisions.
Richfield Oil entered into a contract with the government of New Zealand for the sale of oil. Id. at 71, 67 S.Ct. 156. None of the oil was to be used or consumed in the United States; all of it was for export.
The Court examined whether the oil was an "export." Id. at 78, 67 S.Ct. 156. Surveying its precedent, the Court noted that goods intended for export were not exempt from the "ordinary burdens of taxation." Id. at 78-80, 67 S.Ct. 156. But once goods have been placed with a common carrier for export, "or have been started upon such transportation in a continuous route or journey" (i.e. the goods are in transit), they are exports for purposes of the Import-Export Clause and may not be taxed. Id. at 79, 67 S.Ct. 156. The Court concluded that the oil was an export because it had been delivered "into the hold of the vessel," and this delivery "marked the commencement of the movement of the oil abroad." Id. at 82-83, 67 S.Ct. 156.
The Court found unpersuasive California's argument that the tax in question was "not an impost within the meaning of the Import-Export Clause." Id. at 83, 67 S.Ct. 156. The Court accepted the California Supreme Court's characterization of the tax as "an excise tax for the privilege of conducting a retail business measured by the gross receipts from sales; that it is not laid upon the consumer and does not become a tax on the sale or because of the sale." Id. at 83-84, 67 S.Ct. 156. California pointed out that the tax did not directly target exports, that it instead was "measured by the gross receipts of retail sales" and was "levied on retailers `For the privilege of selling tangible personal property at retail.'" Id. at 83, 67 S.Ct. 156. "[W]hether the tax deprives the taxpayer of a federal right," the Court reasoned, turns
In Low v. Austin, 80 U.S. (13 Wall.) 29, 20 S.Ct. 517 (1872), the Supreme Court interpreted the Import-Export Clause to prohibit a State "from imposing a nondiscriminatory ad valorem property tax on imported goods until they lose their character as imports and become incorporated into the mass of property in the State." Michelin, 423 U.S. at 282, 96 S.Ct. 535 (describing the test in Low v. Austin). This test was known as the "original package doctrine." Boris I. Bittker & Brannon P. Denning, The Import-Export Clause, 68 Miss. L.J. 521, 531 (1998). Following extensive scholarly criticism of Low v. Austin, the Court revisited its approach in 1976 in Michelin, where the tax at issue was an ad valorem inventory tax Georgia imposed on automobile and truck tires and tubes that were imported from France and Nova Scotia. 423 U.S. at 279, 96 S.Ct. 535. The tax was "nondiscriminatory" — it did not single out imports for taxation. Id. at 281, 96 S.Ct. 535.
The Court surveyed the history that led to the adoption of the Import-Export Clause and identified "three main concerns" the Clause sought to alleviate:
Id. at 285-86, 96 S.Ct. 535.
The Court observed that "[n]othing in the history of the Import-Export Clause even remotely suggests that a nondiscriminatory ad valorem property tax which is also imposed on imported goods that are no longer in import transit was the type of exaction that was regarded as objectionable by the Framers of the Constitution." Id. at 286, 96 S.Ct. 535 (emphasis added). The Court overruled Low v. Austin and fashioned a new three-part test based on the three goals that led to the adoption of the Import-Export Clause. Id. at 301, 286-89, 96 S.Ct. 535.
Applying the three-part test, the Court held that the Georgia ad valorem tax at issue did not violate the Import-Export Clause. Id. at 286-89, 96 S.Ct. 535. The Court found that the tax had no impact on the Federal Government's exclusive regulation of foreign commerce because, "[b]y definition, such a tax does not fall on imports as such because of their place of origin." Id. at 286, 96 S.Ct. 535. In addition, a non-discriminatory ad valorem tax does not "deprive the Federal Government of the exclusive right to all revenues from imposts and duties on imports and exports." Id. Finally, such a tax does "not interfere with the free flow of imported goods among the States." Id. at 288, 96 S.Ct. 535.
In holding that Georgia's ad valorem tax was not an "impost" or "duty" under the Import-Export Clause, the Court stressed its "nondiscriminatory" nature. Id. at 279, 281, 282, 283, 286, 287, 288, 96 S.Ct. 535. The Court observed that
Id. at 287, 96 S.Ct. 535.
The Court summarized the new approach in Department of Revenue of Wash. v. Association of Wash. Stevedoring Cos., 435 U.S. 734, 98 S.Ct. 1388, 55 L.Ed.2d 682 (1978). It explained that "[p]revious cases had assumed that all taxes on imports and exports and on the importing and exporting processes were banned by the Clause." Id. at 752, 98 S.Ct. 1388. "Before Michelin, the primary consideration was whether the tax under review reached imports or exports." Id. For imports, "the analysis applied the original-package doctrine." Id. "So long as the goods retained their status as imports by remaining in their import packages, they enjoyed immunity from state taxation." Id. "With respect to exports, the dispositive question was whether the goods had entered the `export stream,' the final, continuous journey out of the country." Id. "As soon as the journey began, tax immunity attached." Id. "Michelin initiated a different approach to Import-Export Clause cases." Id. at 752, 98 S.Ct. 1388. Rather than focus on whether the goods were imports, the Court "analyzed the nature of the tax to determine whether it was an `Impost or Duty,'" and it did so by applying the three-part test mentioned above. Id.
Michelin dealt with imports. Washington Stevedoring Cos., decided two years after Michelin, examined whether Michelin's three-part test for assessing the constitutionality of non-discriminatory taxes on imports should also apply to exports. Washington State imposed a business and occupation tax upon stevedoring, "the business of loading and unloading cargo from ships." Id. at 737, 98 S.Ct. 1388. After its overview of the change wrought by the Michelin decision, the Court adopted what it described as a "similar" approach to exports. Id. at 754, 98 S.Ct. 1388. With respect to the second policy identified in Michelin, protecting the Federal Government's revenue from taxes on imports, the Court noted that, in contrast to imports, the Constitution forbids the Federal Government from taxing exports. Id. at 758, 98 S.Ct. 1388. See U.S. Const., Art. I § 9, cl. 5. Despite this difference, a "tax relating to exports can be tested for its conformance with the first and third policies" identified in Michelin. Id.
Applying this test, the Court concluded, first, that the tax did not "restrain the ability of the Federal Government to conduct foreign policy." Id. at 754, 98 S.Ct. 1388. The tax applies "to virtually all businesses in the State," and it is not a "special protective tariff.... No foreign business or vessel is taxed." Id. As in Michelin, "[t]he tax merely compensates the State for services and protection" it provides to businesses. Id. Second, the tax "falls upon a taxpayer with [a] reasonable nexus to the State, is properly apportioned, does not discriminate, and relates reasonably to services provided by the State." Id. at 754-55, 98 S.Ct. 1388.
The Court added a caveat: "Because the goods [in Michelin] were no longer in transit, however, the Court did not have to face the question whether a tax relating to goods in transit would be an `Impost or Duty' even if it offended none of the policies behind the Clause." Id. at 755, 98 S.Ct. 1388. In Washington
The Court also repudiated what it characterized as dicta in Richfield Oil, the proposition "that the Import-Export Clause effects an absolute prohibition on all taxation of imports and exports." Id. at 759, 98 S.Ct. 1388. The Court reaffirmed "the central holding of Michelin that the absolute ban is only of `Imposts or Duties' and not of all taxes." Id.
The Court concluded as follows:
Id. at 761, 98 S.Ct. 1388.
Later, in United States v. International Bus. Mach. Corp., 517 U.S. 843, 862, 116 S.Ct. 1793, 135 L.Ed.2d 124 (1996), the Court indicated in dicta that it has not overruled the core holding in Richfield Oil with respect to a state tax that is assessed directly on goods in import or export transit. Although that case addressed the Export Clause rather than the Import-Export Clause, the Court stated that it had "never upheld a state tax assessed directly on goods in import or export transit." Id. The Court further indicated that compliance with the Import-Export Clause may be secured "`by prohibiting the assessment of even nondiscriminatory property taxes on [import or export] goods which are merely in transit through the State when the tax is assessed.'" Id. (alteration in original) (quoting Michelin, 423 U.S. at 290, 96 S.Ct. 535).
Finally, in Itel Containers Int'l Corp. v. Huddleston, 507 U.S. 60, 78, 113 S.Ct. 1095, 122 L.Ed.2d 421 (1993), the Court upheld a sales tax on leases of containers used in international shipping. The Court rejected the argument that Richfield Oil was controlling, noting with regard to the prohibition on direct taxation of imports and exports "in transit" that "[e]ven assuming that rule has not been altered by the approach we adopted in Michelin, it is inapplicable here." Id. at 77, 113 S.Ct. 1095. As in Washington Stevedoring, the tax at issue in Itel fell "upon a service distinct from [import] goods and their value." Id. at 78, 113 S.Ct. 1095 (alteration in original) (quoting Washington Stevedoring, 435 U.S. at 757, 98 S.Ct. 1388).
It is fair to say that courts have struggled to determine which test to apply when it comes to assessing the constitutionality of taxes that fall on export goods in transit. In Louisiana Land & Exploration Co. v. Pilot Petroleum Corp., 900 F.2d 816 (5th Cir. 1990), the United States Court of Appeals for the Fifth Circuit invalidated a state tax on jet fuel sold for export to a foreign country. Id. at 821. While noting that Richfield Oil has "never been overruled by the United States Supreme Court," id. at 819, that court relied on both Richfield Oil and Michelin to conclude that the Alabama tax at issue violated the Import-Export Clause. Id. at 820-21.
In Virginia Indonesia Co. v. Harris Cnty. Appraisal Dist., 910 S.W.2d 905 (Tex. 1995), the majority of a divided Texas Supreme Court observed that "[t]he United States Supreme Court has yet to announce whether the new approach set forth in Michelin should be applied to a direct tax on imports or exports in transit." Id. at 910. The Court noted that "[a]lthough the Michelin court rejected the original package doctrine, it did not overrule ... any of the stream of export
Similarly, in U.S. Steel Mining Co. v. Helton, 219 W.Va. 1, 631 S.E.2d 559 (2005), a divided Supreme Court of Appeals of West Virginia accepted Richfield Oil as binding, but held that the goods were not placed in export at the time a coal severance tax applied (when the coal was extracted from the natural resources of the state) and, therefore, there was no violation of the Import-Export Clause. Id. at 567. See also Ammex, Inc. v. Dep't of Treasury, 237 Mich.App. 455, 603 N.W.2d 308, 313 (1999) (concluding that Richfield Oil retains "precedential value," but that the tax in question did not fall upon oil that was an "export" within the intendment of the Import-Export Clause, since it was sold at retail on the United States side of a bridge connecting to Canada, and would have been at least partly used in the United States, even by customers who drove directly over the bridge.
In contrast, a United States District Court in Guam applied the Michelin test to a direct tax on goods in export. See Duty Free Shoppers, Ltd. v. Tax Commissioner, 464 F.Supp. 730, 735-36 (D. Guam 1979) (finding that duty free goods as sold only to passengers leaving the Territory for foreign countries have clearly embarked on their final, continuous journey out of the country, since their movement to foreign shores has "started (or) been committed," and commenting that "[a]pplying either phraseology, we are satisfied that when liquor and tobacco products are delivered to a departing passenger en route to foreign shores in the `sterile area' of the airport, such goods, having entered the export stream, constitute exports;" concluding, however, that no policy of the Import-Export Clause is thereby violated).
Our review of this mass of precedent yields two conclusions that guide our resolution of this case. First, the Supreme Court has not overruled Richfield Oil and, while it has significantly revised its Import-Export Clause jurisprudence, the Court has carefully carved out for future disposition the issue whether the Michelin test would apply to a non-discriminatory tax that falls on export goods in transit. See Itel Containers, 507 U.S. at 77, 113 S.Ct. 1095; Washington Stevedoring, 435 U.S. at 757 n.23, 98 S.Ct. 1388; Michelin, 423 U.S. at 290, 96 S.Ct. 535. We cannot ignore the Court's repeated signals to that effect. Consequently, we conclude that Richfield Oil supplies the rule of decision. As the Supreme Court has noted
Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 484, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989).
Second, the Court has not retreated from its method of assessing the constitutionality of a state tax based on its operation and effect. Richfield Oil, 329 U.S. at 84, 67 S.Ct. 156. A State's characterization of the tax does not control. Id.
The County attempts to distinguish the BPOL tax from the tax the Court invalidated in Richfield Oil. We find the County's arguments unpersuasive. As a threshold matter, we need not confront the often vexatious problem of whether the goods are in export transit. There is no dispute that the merchandise Duty Free sells to international travelers constitutes export goods in transit: these travelers, who are leaving the country, have passed through security checks and they must present their passports and an airline boarding pass to complete the purchase.
The County argues that the BPOL tax is not a "direct tax" and does not resemble the tax the Court invalidated in Richfield Oil. The County takes the view that the tax is placed on "the privilege to engage in a business activity, and that is not the same as a tax on goods." We disagree. The characterization of the tax for purposes of state law does not control whether the tax violates the Import-Export Clause. Richfield Oil, 329 U.S. at 84, 67 S.Ct. 156 (state's characterization of a tax "is not determinative of the question whether the tax deprives the taxpayer of a federal right."). Under Richfield Oil, a tax that falls directly on export goods in transit violates the Clause. Id. (constitutionality of a tax on export goods in transit hinges on "its operation and effect."). The BPOL tax is imposed on a percentage of gross sales, just like California's tax in Richfield Oil. For every $100 worth of sales, Duty Free must pay 17 cents in tax. Although the tax is imposed on the gross receipts of a business, it is in its "operation and effect" a direct tax on the export goods in transit. Richfield Oil, 329 U.S. at 84, 67 S.Ct. 156; see also Crew Levick Co. v. Pennsylvania, 245 U.S. 292, 295-96, 38 S.Ct. 126, 62 S.Ct. 295 (1917) ("[I]mposition of a percentage upon each dollar of the gross transactions in foreign commerce ... [is] in effect an impost or duty upon exports.").
The BPOL tax is imposed on "the gross receipts ... of the business." Code § 58.1-3702. The California tax invalidated in Richfield Oil was based on "the gross receipts of retail sales and is levied on retailers `[f]or the privilege of selling tangible personal property at retail.'" Richfield Oil, 329 U.S. at 83, 67 S.Ct. 156. We are hard pressed to see a difference of constitutional magnitude between the BPOL tax and the tax at issue in Richfield Oil. Indeed, the parallels between the BPOL tax and the tax under review in Richfield Oil are striking.
We also perceive no constitutional significance in the fact that retailers in California were authorized to collect the tax from the consumers, as opposed to the BPOL tax, for which liability lies with the business. The California tax at issue in Richfield Oil was ultimately the responsibility of retailers. See Richfield Oil, 329 U.S. at 84, 67 S.Ct. 156 ("[The tax] is not laid upon the consumer."); see also Western Lithograph Co. v. State Bd. of Equalization, 11 Cal.2d 156, 78 P.2d 731, 734-35 (1938) ("The provisions of the [retail sales tax] act itself specifically are that the tax is laid upon and is a direct obligation of the retailer" and the tax should not be "considered as a tax on the consumer.").
It may be that the Supreme Court will provide additional guidance concerning the applicability of the Import-Export Clause to nondiscriminatory taxes like the BPOL tax that would be imposed upon on export goods in transit. Until then, Richfield Oil compels the conclusion that the BPOL tax is unconstitutionally applied to Duty Free's international export sales.
The BPOL tax as applied to Duty Free's export goods in transit constitutes an impermissible impost upon an export in violation of the Import-Export Clause of the Constitution of the United States. Consequently, we will reverse the judgment of the circuit court and remand this matter for a determination of the refund due to Duty Free.
Reversed and remanded.
