Company Asks Third Circuit to Affirm Commerce Clause Applies to U.S.V.I.

REEFCO SERVICES, INC.,
Plaintiff-Appellee
v.
THE GOVERNMENT OF THE VIRGIN ISLANDS and
THE VIRGIN ISLANDS BUREAU OF INTERNAL REVENUE,
Defendants-Appellants

United States Court of Appeals for The Third Circuit

ON APPEAL FROM THE DISTRICT COURT OF THE VIRGIN ISLANDS
DIVISION OF ST. THOMAS & ST. JOHN
CIVIL CASE NO. 3:14-cv-000110
HON. CURTIS V. GÓMEZ, PRESIDING

BRIEF OF THE APPELLEE, REEFCO SERVICES, INC.

Respectfully Submitted,

Taylor W. Strickling
USVI Bar # R2016
MARJORIE RAWLS ROBERTS, P.C.
5093 Dronningens Gade, Suite 1
St. Thomas, VI 00802
340.776.7235
340.776.7951 (fax)
tstrickling@marjorierobertspc.com
Attorney for Reefco Services, Inc,

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TABLE OF CONTENTS

TABLE OF CONTENTS

TABLE OF AUTHORITIES

JURISDICTION

ISSUES

STATEMENT OF RELATED CASES AND PROCEEDINGS

STATEMENT OF THE CASE

SUMMARY OF ARGUMENT

ARGUMENT

CERTIFICATE OF BAR MEMBERSHIP

CERTIFICATE OF WORD COUNT

CERTIFICATE OF SERVICE AND FILING

CERTIFICATE OF IDENTICAL BRIEFS

CERTIFICATE OF VIRUS CHECK

TABLE OF AUTHORITIES

Cases

Alton v. Alton, 207 F.2d 667 (3d Cir. 1953)

Anderson v. Mullaney, 191 F.2d 123 (9th Cir. 1951)

Aurelius Inv., LLC v. Puerto Rico, 915 F.3d 838 (1st Cir. 2019)

Bacchus Imports, Ltd., v. Dias, 468 U.S. 263, 272 (1984)

Brinn v. Winters, 126 F. Supp. 902 (D.V.I. 1954)

Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573 (1986)

Cloverland-Green Spring Dairies, Inc. v. Pennsylvania Milk Marketing Board, 462 F.3d 249 (3d Cir. 2006)

Electrolert Corp. v. Barry, 737 F.2d 110 (D.D.C 1984)

Everett v. Schneider, 989 F. Supp. 720 (D.V.I. 1997)

Guy v. Baltimore, 100 U.S. 434, 439 (1879)

Harris v. Boreham, 233 F.2d 110 (3d Cir. 1956)

Hughes v. Oklahoma, 441 U.S. 322, 331 (1979)

Jackson v. W. Indian Co., 944 F. Supp. 423 (D.V.I. 1996)

JDS Realty Corp. v. Government of the Virgin Islands, 593 F. Supp. 199 (D.V.I. 1984)

JDS Realty Corp. v. Government of the Virgin Islands, 824 F.2d 256 (3d Cir. 1987)

JDS Realty Corp. v. Government of the Virgin Islands, 852 F.2d 66 (3d Cir. 1988)

Leb. Farms Disposal, Inc. v. County of Lebanon, 538 F.3d 241 (3d Cir. 2008)

Mabey Bridge & Shore, Inc. v. Schoch, 666 F.3d 862 (3d Cir. 2012)

Maine v. Taylor, 477 U.S. 131, 138 (1986)

Mathes v. Century Alumina Co., 2008 U.S. Dist. LEXIS 90087 (D.V.I. Oct. 31, 2008)

Milton S. Kronheim & Co. v. District of Columbia, 91 F.3d 193 (D.C. Cir. 1996)

Molloy v. Government of the Virgin Islands, 594 F. Supp. 2d 595 (D.V.I. 2007)

Morrow v. Balaski, 719 F.3d 160 (3d Cir. 2012)

Oregon Waste Systems, Inc. v. Dep't of Environmental Quality, 511 U.S. 93 (1994)

Pan American World Airways, Inc. v. Government, 315 F. Supp. 746 (D.V.I. 1970)

Polychrome International Corp. v. Krigger, 5 F.3d 1522 (3d Cir. 1993)

Port Construction Co. v. Government of the Virgin Islands, 359 F.2d 663 (3d Cir. 1966)

Puerto Rico v. Sanchez Valle, 136 S. Ct. 1863 (2016)

Sakamoto v. Duty Free Shoppers, 764 F.2d 1285 (9th Cir. 1985)

Southerland v. St. Croix Taxi Association, 315 F.2d 364 (3d Cir. 1963)

Trailer Marine Transport Corp. v. Rivera Vazquez, 977 F.2d 1 (1st Cir. 1992)

Tri-M Group, LLC v. Sharp, 638 F.3d 406 (3d Cir. 2011)

United States ex rel. Nissman v. Southland Gaming of the Virgin Islands, 182 F. Supp. 3d 297 (D.V.I 2016)

United States v. Barconey, 2019 U.S. Dist. LEXIS 3329 (D.V.I. Jan. 8, 2019)

United States v. Baxter, 2018 U.S. Dist. LEXIS 199234* (D.V.I. Nov. 26, 2018)

United States v. Chabot, 531 F. Supp. 1063 (D.V.I. 1982)

United States v. Lebrón-Caceres, 157 F. Supp. 3d 80 (D.P.R. 2016)

Util. Air Regulatory Group v. EPA, 573 U.S. 302 (2014)

V.I. Port Auth. v. United States, 136 Fed. Cl. 7 (2018)

Virgin Islands Port Authority v. Virgin Islands Taxi Ass'n, 979 F. Supp. 344 (D.V.I. App. 1997)

Virgo Corp. v. Paiewonsky, 384 F.2d 569 (3d Cir. 1967)

Vooys v. Bentley, 901 F.3d 172 (3d Cir. 2018)

Walling v. Michigan, 116 U.S. 446, 455 (1886)

Statutes

26 U.S.C. § 7652

26 U.S.C. § 7653

28 U.S.C. § 1291

28 U.S.C. § 1331

28 U.S.C. § 1367

33 V.I.C. § 42(a)

33 V.I.C. § 42a(b)

33 V.I.C. § 525 et seq

4 V.I.C. § 22

4 V.I.C. § 72

48 U.S.C. § 1395

48 U.S.C. § 1574(a)

48 U.S.C. § 1574(f)

48 U.S.C. § 1576

48 U.S.C. § 1591

48 U.S.C. § 1612(a)

Act of Congress of June 24, 1932, P.L. 72-193

Act of Congress of March 3, 1917, P.L. 64-389

Ordinance of September 29, 1933, of the Colonial Council of the Municipality of St. Croix

Public Law 96-205

Public Law 97-357

Other Authorities

3d Cir. I.O.P. 9.1

3d Cir. L.A.R. 28.3(b)

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JURISDICTION

The District Court of the Virgin Islands had original jurisdiction over this case pursuant to 48 U.S.C. § 1612(a), 28 U.S.C. § 1331, and 28 U.S.C. § 1367, because this action arose under, inter alia, the Commerce Clause and Territorial Clause of the Constitution of the United States. This Court has appellate jurisdiction pursuant to 28 U.S.C. § 1291.

ISSUES

1. Whether the government of the Virgin Islands violated Commerce Clause principles when it imposed an excise tax on imports without imposing an equivalent excise tax on goods produced locally.

2. Whether this Court should reverse its controlling decision in Polychrome International Corp. v. Krigger, 5 F.3d 1522 (3d Cir. 1993).

STATEMENT OF RELATED CASES AND PROCEEDINGS

This is the first time this case has come before this Court. Plaintiff-Appellee Reefco Services, Inc. (“Reefco”) is not aware of any other case or proceeding that is in any way related, completed, pending or about to be presented before this Court or any other court or agency except that the government of the Virgin Islands has one motion pending before the District Court of the Virgin Islands in this case. Emergency Motion to Lift Injunction (Docket #98).

STATEMENT OF THE CASE

This case is the natural culmination of three and a half decades of government failure to heed the guidance of this Court and implement the amended territorial excise tax statute enacted in 1984. Reefco is not the first litigant to challenge the constitutionality of the application of the territorial excise tax in the Virgin Islands. In 1981, JDS Realty Corp., a wholesale distributor of liquor, cigarettes, perfumes, and drugs, filed a law suit in the District Court of the Virgin Islands claiming, among other things, that the territorial excise tax violated the Commerce Clause of the United States Constitution. JDS Realty Corp. v. Government of the Virgin Islands, 593 F. Supp. 199 (D.V.I. 1984). At the time, local Virgin Islands law imposed an excise tax on certain goods that were imported to the Virgin Islands but not on goods that were produced in the territory. Id. at 205. Accordingly, the District Court held that the excise tax was discriminatory and violated the Dormant Commerce Clause. Id. at 206. However, crucially for the later appellate history of the case, the District Court also found that JDS Realty had passed the costs of the tax on to its customers and so was not entitled to a refund. JDS Realty Corp. v. Government of the Virgin Islands, 824 F.2d 256, 258 (3d Cir. 1987).

Mere months after the District Court held that the excise tax violated the Commerce Clause, the locally elected Legislature of the Virgin Islands amended the territorial excise tax statute by expanding its scope to include goods “manufactured in . . . the Virgin Islands” and by instructing the Director of the Virgin Islands Bureau of Internal Revenue (“BIR”) to “promulgate rules concerning procedures for the valuation of goods and payment of excise taxes on items manufactured in the Virgin Islands.” 33 V.I.C. §§ 42(a), 42a(b); JDS Realty Corp., 824 F.2d at 258 n.1. Notwithstanding these amendments, in the intervening thirty-five years the BIR did not promulgate such rules nor did it ever collect the excise tax from local manufacturing. Memorandum Opinion of September 28, 2018 (JA at 158-162).

Meanwhile, the government of the Virgin Islands appealed the District Court's Commerce Clause holding to this Court, which affirmed the District Court's decision. This Court held that the Dormant Commerce Clause was applicable to the Virgin Islands and held further that imposing the excise tax on imports only was impermissible discrimination against interstate commerce. JDS Realty Corp., 824 F.2d at 260-62. In turn, the government of the Virgin Islands appealed to the U.S. Supreme Court, which granted certiorari, vacated the judgment, and remanded with instructions to consider whether the case was moot. The Supreme Court did not address this Court's Commerce Clause holding. On remand, this Court concluded that the District Court's determination that JDS Realty was not entitled to damages had rendered the case moot and ordered the District Court to dismiss the action. JDS Realty Corp. v. Government of the Virgin Islands, 852 F.2d 66 (3d Cir. 1988).

The question of the excise tax's constitutionality under the Commerce Clause lay dormant until Reefco, a marine refrigeration company, filed this action against Defendants-Appellants Government of the Virgin Islands and the BIR (collectively the “government”) in the District Court of the Virgin Islands, arguing, among other things, that the government's application of the territorial excise tax in the Virgin Islands still violated the Dormant Commerce Clause. Memorandum Opinion of September 28, 2018 (JA at 146-147). Reefco asked for declaratory relief and a refund of excise taxes previously paid. Id. After a trial on the papers, the District Court found that the government had not promulgated regulations as required under the amended excise tax law, 33 V.I.C. § 42a(b), and was not charging the excise tax on goods produced locally. Id. (JA at 158-162). The District Court entered its judgment on September 28, 2018, wherein it declared “that 33 V.I.C. § 42 — as interpreted and enforced by the Virgin Islands Bureau of Internal Revenue — violates the Commerce Clause” and ordered the government to “refund improperly assessed excise taxes in the amount of $5,287.74.” (JA at 143-144).

The government filed a notice of appeal on October 12, 2018, and asked the District Court to stay its judgment pending appeal. During the course of oral arguments and evidentiary hearings on November 8, 2018, and November 15, 2018, the government admitted in open court that, notwithstanding the District Court's judgment declaring the excise tax unconstitutional, the government had not changed its behavior and persisted in collecting excise tax on imports without also collecting the tax on local production. Memorandum Opinion of November 26, 2018 (JA at 180-181). On November 15, 2018, the District Court denied the motion for a stay, finding an insufficient showing of likelihood of success on appeal and irreparable harm. Furthermore, in light of the government's rank disregard for the judgment of September 28, 2018, the District Court acted to enforce its prior declaration by enjoining the government from collecting the excise tax unless and until it did so in a fashion consistent with the principles of the Commerce Clause. Order of November 15, 2018 (JA at 171-172). In turn, the government amended its notice of appeal to include the District Court's injunction and associated memorandum opinion.

SUMMARY OF ARGUMENT

It is settled precedent in this judicial circuit that Dormant Commerce Clause principles constrain the government. Polychrome International Corp. v. Krigger, 5 F.3d 1522, 1534 n. 30 (3d Cir. 1993). See also Molloy v. Government of the Virgin Islands, 594 F. Supp. 2d 595 (D.V.I. 2007); Virgin Islands Port Authority v. Virgin Islands Taxi Ass'n, 979 F. Supp. 344 (D.V.I. App. 1997); Everett v. Schneider, 989 F. Supp. 720 (D.V.I. 1997); Jackson v. W. Indian Co., 944 F. Supp. 423 (D.V.I. 1996). Those principles do not permit the government to discriminate against interstate commerce unless it can demonstrate, under strict scrutiny, that the discrimination serves a legitimate local purpose and no less discriminatory alternative means of accomplishing that purpose were available. Cloverland-Green Spring Dairies, Inc. v. Pennsylvania Milk Marketing Board, 462 F.3d 249, 261 (3d Cir. 2006).

In this case, the District Court found that, notwithstanding the 1984 amendments to the territorial excise tax statute and the prior ruling of this Court in JDS Realty Corp. v. Government of the Virgin Islands, 824 F.2d 256 (3d Cir. 1987), the government had neither collected excise tax on goods produced in the territory nor even promulgated regulations to implement the tax as required by territorial law. 33 V.I.C. § 42a(b). All the while, it collected excise tax on imports. This differential taxation of goods based on their place of origin is paradigmatic discrimination against interstate commerce under Dormant Commerce Clause principles and the government has not proffered a justification, let alone a demonstration of no less restrictive means available, for its non-compliance with its own territorial law.

Nor has Congress authorized this discrimination against interstate commerce. To the contrary, Congress has consistently demonstrated a preference for non-discrimination with respect to the territorial excise tax, see, e.g., Act of Congress of June 24, 1932, P.L. 72-193; 26 U.S.C. § 7653, and instituted an entirely separate mechanism for taxing imports. 48 U.S.C. § 1574(f). Public Laws 96-205 and 97-357, which the government submits as evidence of congressional consent, do not expressly authorize any discrimination and are, in fact, merely time, place, and manner rules for tax collection.

This Court should decline the government's invitation to effectively reverse Polychrome and hold that the government may regulate interstate commerce to a greater extent than the sovereign states. Polychrome reflects prior practice in this circuit, see, e.g., JDS Realty Corp. v. Government of the Virgin Islands, 824 F.2d 256, 258 (3d Cir. 1987); Virgo Corp. v. Paiewonsky, 384 F.2d 569, 582 (3d Cir. 1967); Port Construction Co. v. Government of the Virgin Islands, 359 F.2d 663 (3d Cir. 1966); Southerland v. St. Croix Taxi Association, 315 F.2d 364 (3d Cir. 1963); Alton v. Alton, 207 F.2d 667, 669 n.5 (3d Cir. 1953), vacated for mootness, 347 U.S. 610 (1954); JDS Realty Corp. v. Government of the Virgin Islands, 593 F. Supp. 199 (D.V.I. 1984); Pan American World Airways, Inc. v. Government, 315 F. Supp. 746 (D.V.I. 1970); Brinn v. Winters, 126 F. Supp. 902 (D.V.I. 1954), and the District Court has applied it without difficulty since. See Molloy v. Government of the Virgin Islands, 594 F. Supp. 2d 595 (D.V.I. 2007); Virgin Islands Port Authority v. Virgin Islands Taxi Ass'n, 979 F. Supp. 344 (D.V.I. App. 1997); Everett v. Schneider, 989 F. Supp. 720 (D.V.I. 1997); Jackson v. W. Indian Co., 944 F. Supp. 423 (D.V.I. 1996). No intervening changes in fact or law justify a reconsideration.

Furthermore, the government's attempts to resurrect Sakamoto v. Duty Free Shoppers, 764 F.2d 1285 (9th Cir. 1985), and distinguish the Virgin Islands from Puerto Rico, Trailer Marine Transport Corp. v. Rivera Vazquez, 977 F.2d 1 (1st Cir. 1992), are unavailing. The First Circuit's reasoning in Trailer Marine aligns with Polychrome in that it turns on the obvious conclusion that the authority of territories to regulate interstate commerce cannot naturally exceed that of sovereign states. This Court already considered and rejected Sakamoto, which did not consider the applicability of Commerce Clause principles via the Territorial Clause. F.3d at 1535 n. 31. Furthermore, Sakamoto necessarily leads to the same aberrant conclusion that territories are endowed with greater regulatory authority than states.

Accordingly, given the settled precedent, the flagrant unjustified discrimination against interstate commerce, the lack of congressional consent, and no reason for reversing itself, this Court should affirm the judgments and orders of the District Court.

ARGUMENT

I. THE GOVERNMENT VIOLATED DORMANT COMMERCE CLAUSE PRINCIPLES WHEN IT IMPOSED AN EXCISE TAX ON IMPORTS WITHOUT IMPOSING AN EQUIVALENT EXCISE TAX ON GOODS PRODUCED LOCALLY

A. Standard of Review

This Court “exercise[s] a plenary review of the [District Court's] choice and interpretation of legal precepts and its application of those precepts to the . . . facts.” Leb. Farms Disposal, Inc. v. County of Lebanon, 538 F.3d 241, 247 (3d Cir. 2008) (quoting Int'l Union, United Auto., Aerospace & Agr. Implement Workers v. Mack Trucks, Inc., 820 F.2d 91, 95 (3d Cir. 1987). This includes, especially, the District Court's interpretation of the Constitution. Mabey Bridge & Shore, Inc. v. Schoch, 666 F.3d 862, 868 (3d Cir. 2012). The government has not challenged the District Court's factual findings.

B. This Court Has Already Decided That the Virgin Islands Must Obey Dormant Commerce Clause Principles

The government's brief relies heavily on this Court's vacatur of its holding in JDS Realty Corp. v. Government of the Virgin Islands, 824 F.2d 256 (3d Cir. 1987), as the basis for asserting that the applicability of Dormant Commerce Clause principles in the Virgin Islands is an open question. JDS Realty Corp. v. Government of the Virgin Islands, 852 F.2d 66 (3d Cir. 1988) (vacating the earlier judgment on mootness grounds unrelated to its legal reasoning). Combined with selective quotes from Polychrome International Corp. v. Krigger, 5 F.3d 1522, 1534 n. 30 (3d Cir. 1993) (“Because JDS was vacated as moot, we are not bound by our earlier holding there”) and Molloy v. Government of the Virgin Islands, 594 F. Supp. 2d 595, 596 (D.V.I. 2007) (the Third Circuit “has not specifically decided whether the Commerce Clause itself is applicable to the Virgin Islands”), the government has tested the limits of 3d Cir. L.A.R. 28.3(b) and misdirected this Court's attention away from the single most important binding authority for this appeal, namely, this Court's holding in Polychrome. That holding begins where the government's quotation ends:

Under the Territorial Clause, Congress has power to prescribe all “needful Rules and Regulations” for territories. . . . Congress' broad powers under the Territorial Clause necessarily include the power to regulate commerce with the territories.

By necessary implication, when territorial enactments affect interstate or foreign commerce — a subject over which Congress has supreme control — those enactments must be scrutinized under Dormant Commerce Clause principles. Any other conclusion would mean 'that an unincorporated territory would have more power over commerce than the states possess.' . . . Commerce Clause principles are implicit in the Territorial Clause.

Polychrome, 5 F.3d at 1534-35 (citations omitted). Consequently, Dormant Commerce Clause doctrine is good law in the Virgin Islands. In the ensuing quarter century since Polychrome, courts have successfully applied Dormant Commerce Clause principles to acts of the government pursuant to Polychrome on multiple occasions. See, e.g., Molloy v. Government of the Virgin Islands, 594 F. Supp. 2d 595 (D.V.I. 2007) (invalidating the territorial personal use tax); Virgin Islands Port Authority v. Virgin Islands Taxi Ass'n, 979 F. Supp. 344 (D.V.I. App. 1997) (upholding a territorial taxi transportation franchise under Commerce Clause principles); Everett v. Schneider, 989 F. Supp. 720 (D.V.I. 1997) (permitting a Commerce Clause claim to proceed challenging a territorial law restricting inter-island taxi and rental car travel); Jackson v. W. Indian Co., 944 F. Supp. 423 (D.V.I. 1996) (upholding another taxi concession contract). The District Court in Reefco's case has merely followed suit. (JA at 189-190).

In practical terms, this Court's holding in Polychrome is not materially different from its vacated holding in JDS Realty. Indeed, the difference between them appears to be one of semantics more than reasoning; as in Polychrome, the holding in JDS Realty was premised on this Court's conclusion “that the powers granted to Congress by the commerce clause are implicit in the territorial clause.” 824 F.2d at 260. Indeed, the Polychrome panel expressly found JDS Realty “persuasive.” 5 F.3d at 1534. When this Court applied Dormant Commerce Clause principles incorporated by the Territorial Clause to the taxes at issue in Polychrome, this Court applied standard black letter Dormant Commerce Clause doctrine (and found no constitutional violation). The subsequent District Court decisions similarly applied standard constitutional doctrine. Accordingly, any difference between the Commerce Clause acting propio motu and the Commerce Clause acting via the Territorial Clause is purely ontological and has no practical bearing on judicial decision-making.

C. Imposing an Excise Tax on Imports Without Imposing an Equivalent Excise Tax on Goods Produced Locally Impermissibly Discriminates Against Interstate Commerce

“In considering whether a state law violates the dormant Commerce Clause, the inquiry is twofold.” Cloverland-Green Spring Dairies, Inc. v. Pennsylvania Milk Marketing Board, 462 F.3d 249, 261 (3d Cir. 2006). First, this Court must assess whether the government discriminated against interstate commerce. Id. Discrimination in this context “means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter. If a restriction on commerce is discriminatory, it is virtually per se invalid.” Oregon Waste Systems, Inc. v. Dep't of Environmental Quality, 511 U.S. 93, 99 (1994). Courts “have generally struck down [such] statute[s] without further inquiry.” Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 579 (1986).

Here, the government has not challenged the District Court's key factual findings, namely, that for thirty-five years the government never promulgated regulations for the collection of territorial excise tax against local manufacturers as required by its own statute, 33 V.I.C. § 42a(b), Memorandum Opinion of September 28, 2018 (JA at 158-162), and that the government never collected territorial excise tax from local manufacturers. Id. This differential treatment of out-of-territory interests versus in-territory interests — a veritable tariff in effect if not in name — is an unambiguous discrimination against interstate commerce. Bacchus Imports, Ltd., v. Dias, 468 U.S. 263, 272 (1984) (“No State may discriminatorily tax the products manufactured . . . in any other states.”) (quoting Boston Stock Exchange v. State Tax Comm'n, 429 U.S. 318, 337 (1977)); Guy v. Baltimore, 100 U.S. 434, 439 (1879) (It is “settled that no State can, consistent with the Federal Constitution, impose upon the products of other States, brought therein for sale or use, . . . more onerous public burdens or taxes than it imposes upon the like products of its own territory.”); Walling v. Michigan, 116 U.S. 446, 455 (1886) (“A discriminating tax imposed by a State operating to the disadvantage of the products of other States when introduced into the first mentioned State, is, in effect, a regulation in restraint of commerce among the States, and as such is a usurpation of the power conferred by the Constitution upon the Congress of the United States.”).

Second, the government's discriminatory practices will stand only if they survive “the strictest scrutiny.” Hughes v. Oklahoma, 441 U.S. 322, 331 (1979). The burden is on the government to show both “that the [discrimination] serves a legitimate local purpose, and that this purpose could not be served as well by available nondiscriminatory means.” Maine v. Taylor, 477 U.S. 131, 138 (1986).

Unlike in JDS Realty, the government here cannot even contrive a plausible policy purpose to justify its discrimination because its failure to impose an equivalent tax on local manufacturing also violates territorial law in effect since 1984. Without a putative governmental interest behind its discriminatory application of the tax, it is impossible to demonstrate that there were no less restrictive means available to vindicate that non-existent interest. The District Court's application of Commerce Clause principles here was as uncontroversial as possible, accorded with this Court's prior assessment in JDS Realty, and should be affirmed.

D. Congress Has Not Authorized a Discriminatory Excise Tax in the Virgin Islands

Congress itself may authorize state or territorial discrimination against interstate commerce because Congress in such an instance is acting pursuant to its own positive authority under the Commerce Clause (and the Territorial Clause). However, congressional consent to state or territorial action treading on its prerogatives should not be inferred lightly. The consent must be “express” and “unmistakably clear.” Tri-M Group, LLC v. Sharp, 638 F.3d 406, 430 (3d Cir. 2011). “Moreover, the [government] has the 'burden of demonstrating a clear and unambiguous intent on behalf of Congress to permit the discrimination against interstate commerce.” Id. (quoting Wyoming v. Oklahoma, 502 U.S. 437, 458 (1992)) (emphasis added).

Some historical and structural context is useful in interpreting congressional action with respect to excise taxes in the Virgin Islands. The urtext in this regard is the Act of Congress of June 24, 1932, P.L. 72-193. That Act amended section four of the Act of Congress of March 3, 1917, P.L. 64-389 (“Act of Congress to provide a temporary government for the West Indian Islands acquired by the United States from Denmark”). Section four of the 1917 Act, which was enacted roughly contemporaneously with the ratification of the treaty ceding the Virgin Islands to the United States, originally provided that the Danish tax laws, including customs laws, were to remain in effect in the Virgin Islands (except that products made or grown in the United States would be allowed to enter the Virgin Islands free of duty). The United States provided a similar exemption from customs duties for Virgin Islands goods entering the United States in section three of the same 1917 Act. The 1932 addition to section four is instructive and bears quoting in full:

[T]he internal revenue taxes levied by [the Virgin Islands legislative authorities] in pursuance of the authority granted by this Act on articles, goods, wares, or merchandise may be levied and collected as the [legislative authorities] may direct, on the articles subject to said tax, as soon as the same are manufactured, sold, used, or brought into the island: . . . provided . . ., That no discrimination be made between articles imported from the United States or foreign countries and similar articles produced or manufactured in the [Virgin Islands]. The officials of the Customs and Postal Services of the United States are hereby directed to assist the appropriate officials of the [Virgin Islands] in the collection of these taxes.

48 U.S.C. § 1395 (emphasis added). This section remains unrepealed in the United States Code and demonstrates an original congressional intent to maintain a non-discriminatory market regime in the Virgin Islands. Early Virgin Islands tax laws comported with this congressional intent. E.g., section five of the Ordinance of September 29, 1933, of the Colonial Council of the Municipality of St. Croix (imposing excise taxes in St. Croix).

Similarly, as part of the Internal Revenue Code of 1954, which was enacted less than a month after Congress enacted the Revised Organic Act of 1954 for the Virgin Islands, Congress again weighed in on the excise tax in the Virgin Islands. Congress enacted sections, now codified in 26 U.S.C. §§ 7652-7653, that say articles shipped from the Virgin Islands to the United States are subject to the federal excise taxes applicable to goods manufactured in the United States, § 7652(b)(1), and are exempt from the territorial excise tax in the Virgin Islands. § 7652(b)(2). Conversely, Congress said that goods shipped from the United States to the Virgin Islands are exempt from federal excise taxes, § 7653(b), and mandated that “there shall be imposed in the Virgin Islands upon articles imported from the United States a tax equal to the internal revenue tax imposed in such islands upon like articles there manufactured.” § 7653(a)(2). Regardless of where goods originate, Congress intends them to compete on the same level as local goods when they arrive in their final market.

In parallel with the excise tax, Danish customs laws remained in place in the Virgin Islands, which constitutes a separate customs area to this day. Under the Revised Organic Act, Congress gave the government free rein to alter the old Danish laws. 48 USC § 1574(f). The government currently imposes a six percent customs duty on foreign goods pursuant to 33 V.I.C. § 525 et seq. See, generally, United States v. Barconey, 2019 U.S. Dist. LEXIS 3329 (D.V.I. Jan. 8, 2019); United States v. Baxter, 2018 U.S. Dist. LEXIS 199234* (D.V.I. Nov. 26, 2018); United States v. Chabot, 531 F. Supp. 1063 (D.V.I. 1982); V.I. Port Auth. v. United States, 136 Fed. Cl. 7 (2018).

Armed with this background, it is clear that the government's putative congressional authorizations — section 405 of Public Law 96-205 and section 302 of Public Law 97-357 — do not make the government's case. Reefco concedes the government's assertion that these statutes demonstrate Congress's permission to collect excise taxes on imports, but that misses the point. These statutes provide for collection in a certain place, manner, and time.¹ They emphatically do not “expressly” and “unambiguously” “permit the discrimination” itself by authorizing collection of excise tax on imports without a corresponding collection from local production.

Moreover, a tax on imports alone, even one styled an excise tax, is indistinguishable from a tariff. But, as explored above, Congress has already authorized and implemented an entirely separate tariff regime in the Virgin Islands since the year the United States acquired the territory. “[B]earing in mind the 'fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.'” Util. Air Regulatory Group v. EPA, 573 U.S. 302, 320 (2014) (quoting FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 (2000)), the government's consent theory necessarily posits that Congress expressly established one customs regime, implemented laws equalizing the treatment of imports and local production under territorial internal revenue laws, and then silently assented to the creation of an overlapping double tariff on imports. This theoretical scheme's fatuity is so immense, even for Congress, that it beggars credulity.

II. THIS COURT DECIDED POLYCHROME INTERNATIONAL CORP. V. KRIGGER CORRECTLY AND SHOULD NOT REVERSE ITSELF

A. Standard of Review

Although the applicability of the Dormant Commerce Clause to the Virgin Islands is a question of pure law, this Court does “not conduct a plenary re-examination of [its] prior decisions; [it] instead remain[s] constrained by [its] prior precedent 'to the degree counseled by the principles of stare decisis.'” Morrow v. Balaski, 719 F.3d 160, 179 (3d Cir. 2012) (Smith, J., concurring) (quoting Bolden v. Se. Pa. Transp. Auth., 953 F.2d 807, 813 (3d Cir. 1991). This Court has a policy of avoiding intra-circuit conflicts of precedent, 3d Cir. I.O.P. 9.1., and does “not lightly revisit an issue that a panel of this Court has already decided in a precedential opinion.” Vooys v. Bentley, 901 F.3d 172, 184 (3d Cir. 2018). “[D]eparting from [precedent] has always required some special justification” that “must be nothing short of exceptional.” Morrow, 719 F.3d at 179.

Stare decisis applies absent exceptional circumstances rendering a “prior case . . . unworkable — that is, newly discovered facts have undermined the case's reasoning, subsequent legal developments have unmoored the case from its doctrinal anchors, or 'experience has otherwise pointed up the precedent's shortcomings.'” Id. at 180 (quoting Pearson v. Callahan, 555 U.S. 223, 233 (2009). If a “precedent is particularly recent and has not generated any serious reliance interests,” then stare decisis may hold less strongly. Id. If a “precedent's reasoning was clearly wrong, then stare decisis loses some (though not all) of its force.” Id.

B. Polychrome Has Proven Workable

None of these factors warrant the reconsideration of Polychrome that the government's position necessarily entails. The decision has been on the books for a quarter century and reflects the holdings of much older decisions from both this Court and the District Court of the Virgin Islands applying, or assuming the applicability of, the Dormant Commerce Clause to the Virgin Islands. See, e.g., JDS Realty Corp. v. Government of the Virgin Islands, 824 F.2d 256, 258 (3d Cir. 1987); Virgo Corp. v. Paiewonsky, 384 F.2d 569, 582 (3d Cir. 1967); Port Construction Co. v. Government of the Virgin Islands, 359 F.2d 663 (3d Cir. 1966); Southerland v. St. Croix Taxi Association, 315 F.2d 364 (3d Cir. 1963); Alton v. Alton, 207 F.2d 667 (3d Cir. 1953), vacated for mootness, 347 U.S. 610 (1954); JDS Realty Corp. v. Government of the Virgin Islands, 593 F. Supp. 199 (D.V.I. 1984); Pan American World Airways, Inc. v. Government, 315 F. Supp. 746 (D.V.I. 1970); Brinn v. Winters, 126 F. Supp. 902 (D.V.I. 1954).

Since Polychrome was decided, the District Court has applied its Commerce Clause holding without difficulty, sometimes upholding territorial action under the Commerce Clause, e.g., Virgin Islands Port Authority v. Virgin Islands Taxi Ass'n, 979 F. Supp. 344 (D.V.I. App. 1997); Jackson v. W. Indian Co., 944 F. Supp. 423 (D.V.I. 1996), and sometimes invalidating it. E.g., Molloy v. Government of the Virgin Islands, 594 F. Supp. 2d 595 (D.V.I. 2007); Everett v. Schneider, 989 F. Supp. 720 (D.V.I. 1997). Polychrome is a settled, precedential decision upon which the legal and business communities in the Virgin Islands have reasonably come to rely.

Nor are there any recent factual or legal developments, precedential or otherwise, that would justify a reconsideration. Indeed, the government's brief is remarkable in that, aside from assorted dicta from the territorial courts and Molloy v. Government of the Virgin Islands — which, as noted above, is a District Court case striking down a territorial tax pursuant to Polychrome — it does not cite any post-Polychrome cases in its section arguing that the Commerce Clause ought to not apply in the Virgin Islands. The government's proffered authorities and arguments were all available to this Court in 1993 and rejected, sometimes expressly. The government has shown no evidence of any need to reconsider anything.

C. Polychrome Was Correctly Decided

This Court's holding in Polychrome is straight-forward and compelling: Congress has the power to regulate commerce with the territories pursuant to the Territorial Clause; therefore, Article I Commerce Clause doctrine is implicit in and incorporated on to the territories via the Article IV Territorial Clause. To hold otherwise would means that sovereign states are afforded less authority vis a vis Congress to regulate commerce than non-sovereign territories.

The government's brief attempts to draw a sharp distinction between the Virgin Islands and Puerto Rico. Although it does not so state, Reefco infers that the government is trying to distinguish Puerto Rico because the U.S. Court of Appeals for the First Circuit² has held conclusively that the Dormant Commerce Clause applies to Puerto Rico. Trailer Marine Transport Corp. v. Rivera Vazquez, 977 F.2d 1 (1st Cir. 1992).

It is unclear why not having a constitution like Puerto Rico should give the Virgin Islands greater authority to regulate interstate commerce. Trailer Marine Transport's holding, like Polychrome, is not premised on any particular characteristic of Puerto Rico, Trailer Marine Transport, 977 F.2d at 19-20 (“Our reasoning does not rest on a bare analogy between Puerto Rico and individual states for the analogy has much force but also . . . some limitations.”), but rather on the logic of the Dormant Commerce Clause itself: “The central rationale of th[e] dormant Commerce Clause doctrine . . . [is] to foster economic integration and prevent local interference with the flow of the nation's commerce. The rationale applies with equal force to official actions of Puerto Rico.” Id. It also applies with equal force to the Virgin Islands. The First Circuit would not change its holding even if Puerto Rico were constitution-less like the Virgin Islands.

Furthermore, the distinctions the government attempts to draw between Puerto Rico and the Virgin Islands either do not exist or are irrelevant. The government points out that Puerto Rico elects its governor and legislature, appoints its judges, all cabinet officials and lesser executive officials, sets its own policies, determines its own budget, and amends its civil and criminal codes. So does the Virgin Islands. 48 U.S.C. §§ 1574(a), 1576, 1591; 4 V.I.C. §§ 22, 72. The government argues that Puerto Rico has standing to represent its quasi-sovereign interests in court as parens patriae. So does the Virgin Islands. Mathes v. Century Alumina Co., 2008 U.S. Dist. LEXIS 90087 (D.V.I. Oct. 31, 2008). The government next says that Puerto Rico is a commonwealth whereas the Virgin Islands is an unincorporated territory. Here, the government is just making a category mistake: Puerto Rico is both an unincorporated territory like the Virgin Islands and a commonwealth. Aurelius Inv., LLC v. Puerto Rico, 915 F.3d 838, 843 (1st Cir. 2019); United States v. Lebrón-Caceres, 157 F. Supp. 3d 80 (D.P.R. 2016). That Puerto Rico has a constitution, whereas the Virgin Islands operates under an organic act, does not reflect a fundamentally different status as far as the U.S. Constitution is concerned:

Back of the Puerto Rican people and their Constitution, the “ultimate” source of . . . power remains the U.S. Congress, just as back of a city's charter lies a state government. Congress . . . authorized Puerto Rico's constitution-making process in the first instance; the people of a territory could not legally have initiated that process on their own. And Congress, in later legislation, both amended the draft charter and gave it the indispensable stamp of approval; popular ratification, however meaningful, could not have turned the convention's handiwork into law. Put simply, Congress conferred the authority to create the Puerto Rico Constitution.

Puerto Rico v. Sanchez Valle, 136 S. Ct. 1863 (2016) (holding the Puerto Rico and the United States together constitute a single sovereign for the purposes of the Double Jeopardy Clause).

The government next proposes to draw a bright line between incorporated and unincorporated territories following the decisions of the U.S. Court of Appeals for the Ninth Circuit in Anderson v. Mullaney, 191 F.2d 123 (9th Cir. 1951) (applying the Commerce Clause to pre-statehood Alaska), and Sakamoto v. Duty Free Shoppers, 764 F.2d 1285 (9th Cir. 1985) (declining to apply the Commerce Clause to Guam). The government misrepresents the holding in Anderson, a case in which Alaska's charging a fishing tax at different rates to resident and nonresident fishermen was struck down as violative of the Commerce Clause. The Ninth Circuit there did not mention Alaska's status as an incorporated territory as a basis for applying the Commerce Clause. Instead, it anticipated this Court's decision in Polychrome by holding that “because it cannot be said that the Territorial Legislature has any greater power to impose a burden upon such commerce than might be exercised by that of the State, we must conclude that so much of the tax as exceeds that charged resident fishermen is void.” Anderson, 191 F.2d at 133.

The distinction between incorporated and unincorporated territories comes later from Sakamoto, which declined to apply the Dormant Commerce Clause to Guam because “the Government of Guam is in essence an instrumentality of the federal government,” Sakamoto, 764 F.2d at 1286, and the federal government by definition cannot trespass its own prerogative to regulate interstate commerce. Id. The Ninth Circuit proceeded to distinguish Anderson on the grounds that Alaska was an incorporated territory on its way to statehood whereas unincorporated territories do not enjoy the full array of constitutional protections available to states pursuant to the insular cases. Id. at 1287.

It bears emphasizing that Sakamoto had already been published when this Court decided Polychrome and this Court expressly declined to follow it, saying the Ninth Circuit had not considered whether Commerce Clause principles were inherent in the Territorial Clause. Polychrome, F.3d at 1535 n. 31. This Court no doubt tempered its criticism of Sakamoto in the interests of inter-circuit tactfulness by framing the disagreement merely as a one of considering different questions, but it need not have been so politic — Sakamoto's theory leads to the same irrational outcome that Polychrome took care to avoid, in which the sphere of a government's relative authority vis a vis Congress to regulate interstate commerce actually contracts as its attributes of sovereignty increase.

Furthermore, Sakamoto is plain incorrect in its assertion that unincorporated territories are federal instrumentalities or agencies for constitutional purposes.³ See, e.g., Harris v. Boreham, 233 F.2d 110, 113-14 (3d Cir. 1956) (“The local laws enacted under the legislative power granted by Congress are . . . territorial laws, not laws of the United States. . . . [T]he unincorporated territory of the Virgin Islands was a body politic quite distinct from the Government of the United States and . . . had attributes of sovereignty which had been delegated to it by the . . . United States but which were distinct from the powers of that government.”); Jackson v. W. Indian Co., 944 F. Supp. 423, 428 (D.V.I. 1996) (“This Court, however, does not agree that unincorporated territories, specifically the Virgin Islands, and their agencies should be held to be mere instrumentalities of the federal government. The Virgin Islands is more analogous to a state government than to an appendage of the federal government.”). See also United States ex rel. Nissman v. Southland Gaming of the Virgin Islands, 182 F. Supp. 3d 297, 311 (D.V.I 2016) (“conclud[ing] that the Virgin Islands is neither an agency nor an instrumentality of the United States Government for purposes of the [False Claims Act]”). Indeed, if the Virgin Islands were a federal agency, the consequences for the government might be unexpected: the territorial excise tax would be void anyway because the legislators who enacted it were elected locally and not appointed pursuant to the Appointments Clause in Art. II as federal officers must be. Aurelius Inv., LLC v. Puerto Rico, 915 F.3d 838 (1st Cir. 2019). Territories are neither the federal government nor states nor Indian tribes nor foreign countries — they are their own genus and they may not usurp congressional authority to regulate interstate commerce.

The government has shown no defect with this Court's reasoning or any other cause to reconsider Polychrome. Accordingly, this Court should apply its prior precedents and decline to reverse itself.

III. CONCLUSION

The District Court of the Virgin Islands correctly applied this Court's precedents in holding that the government acted unconstitutionally — and contrary to territorial statute — when it imposed an excise tax on imports without imposing a corresponding excise tax on goods produced locally. Accordingly, this Court should affirm the judgments, opinions, and orders of the District Court.

April 15, 2019

Respectfully Submitted,

Taylor W. Strickling
MARJORIE RAWLS ROBERTS, P.C.
5093 Dronningens Gade, Suite 1
St. Thomas, VI 00802
340.776.7235
340.776.7951 (fax)
tstrickling@marjorierobertspc.com
Attorney for Reefco Services, Inc,