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Supreme Court to Consider Tonnage Clause of Constitution

3 min readBy: Joseph Bishop-Henchman

Tomorrow, the U.S. Supreme Court will be hearing oral arguments in the case of Polar Tankers, Inc. v. Valdez, Alaska, No. 08-310. The case asks whether Valdez’s property taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on large oil tanker vessels violates the Tonnage Clause of the Constitution, Art. I, § 10, Cl. 3. That Clause prohibits states or municipalities from “laying a duty of tonnage,” which is defined as a charge 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.”

The city of Valdez, Alaska is a key port for loading crude onto oil tankers from the Trans-Alaska Pipeline. In 1999, the city extended its property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. to include the value of oil cargo on large tankers. Polar Tankers, Inc., a tanker operator based in California, claims the tax is discriminatory since it applies only to large vessels, and also violates the Tonnage Clause.

Polar Tankers also argues that the formula used to calculate the tax adopted by the City Council is discriminatory. The formula divides the number of days a vessel is in Valdez by the number of days a vessel is in all ports. For example, if a given cargo is in port in Valdez for 50 days and is in ports anywhere for a total of 150 days in a year, Valdez would assess a property tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. d on 33% of the cargo’s value, even though it spends only 14% of the year in Valdez.

Polar Tankers argues that because this necessarily means that its vessels will be taxed for time it is on the high seas, Valdez is exceeding its taxing power. Further, because its vessels are taxed by their home port while they are on the high seas, they are at risk of double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. .

The state trial court rejected the Tonnage Clause argument on the ground that Polar Tankers receives benefits from the City and thus can be obligated to pay property taxes of general application. However, the court struck down the apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. formula as violating the Due Process and Commerce Clauses of the Constitution. Under protest, the city changed its tax formula to “days in Valdez/365” and appealed. The Alaska Supreme Court upheld the tax on all points, citing past cases to conclude that Valdez could fairly tax time at sea.

In their brief, Polar Tankers notes that the Tonnage Clause came about because prior to the Constitution, port cities were levying punitive access taxes on vessels bringing merchandise to interior cities. Valdez, which argues that it provides benefits to oil tankers (cleaning up oil spills and preventing terrorism, as well as providing access to police, courts, schools, waste systems, the library, the post office, and the city-run airport) and therefore can impose a targeted tax, is mistaken because many jobs and much economic activity in Valdez is derived from oil-related activities. It would be worse off without them. If the city believes that it is provided services specially to Polar Tankers and other companies without compensation, it has the option to withhold those services and demand market payment for them. That a city has expenses is irrelevant to the question of whether or not its tax is discriminatory.

From my perspective, the question comes down to how to treat time spent outside ports. If a vessel spends time on the high seas beyond the power of all taxing jurisdictions, do those jurisdictions still have the power to tax that time? The Multistate Tax Commission, in an amicus brief, warns that allowing vessels to “escape” taxation in this way creates a tax advantage. The Council on State Taxation, in another amicus brief, says the real issue is that governments cannot tax beyond their jurisdictions.

More info on the case: