Joshua J. Michaels and Jonathan W. White are attorneys employed by the Hawaii Department of Taxation. The views expressed in this article are the authors’ own and do not reflect the views of the Hawaii Department of Taxation.
In this article, Michaels and White explore the history of Hawaii’s Bacchus Imports Ltd. v. Dias case.
To call 2020 a notable year would be an understatement — a global pandemic, a disputed presidential election, an ever-more-partisan federal judiciary, Liverpool winning the Premier League — you were there, we don’t have to remind you. Even in January, the news — both real and “fake” — was already overwhelming us. While the world reacted to the shocking (albeit for very different reasons) deaths of Qasem Soleimani and Kobe Bryant, an important anniversary passed with relatively little fanfare: January 171 marked 100 years since America’s official start of Prohibition — “the day the boozing died.”2
Other than constitutional law scholars and recreational drinkers, who cares, right? Ah, dear reader, we thought so too. Then, a couple of months later, the world turned upside down, and as humble public servants with the Hawaii Department of Taxation, we were deputized as part of the statewide volunteer effort to provide assistance to the Unemployment Insurance Division (located in the Department of Labor and Industrial Relations). To get “all hands on deck,” as safely as possible, we were assigned to the Hawaii Convention Center — the temporary satellite office, command center, and clearinghouse for all things unemployment.
The trials and tribulations of Hawaii’s unemployment system are beyond the scope of this article,3 but even from our workstations, we could not help but be captivated by the palatial architecture, majestic views, and impressive scale of our convention center — certainly compared with the brutalist/Stalinist design of many other state buildings.4 As the weeks dragged on, and COVID-19’s severe impact on Hawaii’s health, economy, and social welfare became apparent, conversation turned to the state’s budget. Tourism is cratering, savings are drying up, more federal spending isn’t coming. What can the state do to raise revenue?5 Legalize gambling or recreational marijuana?6
A long-time Department of Taxation employee overheard us. “Well, you know,” she said, “the only reason they could afford to build the convention center is because of the Bacchus case.” We had heard this rumor before, and here it was again. Could it be true? Could our impressive, labyrinthine cage have been built with disputed liquor tax money?
The Bacchus Bacchanalia
For tax nerds and tipplers7 alike, Bacchus Imports Ltd. v. Dias8 is Hawaii’s most famous U.S. Supreme Court case. In Bacchus, liquor wholesalers sought a refund of their payments on Hawaii’s 20 percent liquor tax, asserting that the tax had unconstitutional exemptions that protected local industry.9 First implemented by the territorial government in 193910 to defray intoxication-related costs to law enforcement,11 the state legislature amended the tax in 197112 to exempt from taxation okolehao, a brandy distilled from the indigenous ti root (affectionately nicknamed “Hawaiian moonshine”), and again in 197613 to exempt all fruit wines (at the time, the only fruit wine manufactured in Hawaii was pineapple wine). Both exemptions, by their own terms, were effective only until June 30, 1981.14
The wholesalers protested to the tax appeal court, alleging that the Hawaii liquor tax violated both the import-export clause and the commerce clause of the U.S. Constitution, and seeking a refund of approximately $45 million — all the liquor taxes they had paid while the exemptions were in effect.15 After the tax appeal court rejected their claims, the Hawaii Supreme Court affirmed the tax court and rejected an additional equal protection challenge on appeal. The Hawaii Supreme Court held that there was no violation of the Constitution because all wholesalers in Hawaii were subject to tax, regardless of where their liquor was produced, meaning the “ultimate burden is borne by consumers in Hawaii.”16
Hoping that the third time would be the charm, the wholesalers turned to the U.S. Supreme Court. Justice Byron White, writing for a 5-3 majority, reversed the Hawaii court’s decision, emphatically ruling that an exemption for the locally produced alcoholic beverages violated the commerce clause because it had both the purpose and effect of discriminating in favor of local products. White was not impressed by Hawaii’s defense:
Much of the State’s argument centers on its contention that okolehao and pineapple wine do not compete with the other products sold by the wholesalers. The State relies in part on statistics showing that for the years in question sales of okolehao and pineapple wine constituted well under one percent of the total liquor sales in Hawaii. It also relies on the statement by the Hawaii Supreme Court that “[w]e believe we can safely assume these products pose no competitive threat to other liquors produced elsewhere and consumed in Hawaii,” as well as the court’s comment that it had “good reason to believe neither okolehao nor pineapple wine is produced elsewhere.” However, neither the small volume of sales of exempted liquor nor the fact that the exempted liquors do not constitute a present “competitive threat” to other liquors is dispositive of the question whether competition exists between the locally produced beverages and foreign beverages; instead, they go only to the extent of such competition. It is well settled that “[w]e need not know how unequal the Tax is before concluding that it unconstitutionally discriminates.”17
And that was that. The case was remanded to state court to determine remedies, and some settlement was reached. On the strength of White’s repudiation, many scholars and practitioners consider Bacchus to be a big old “DUH! What was Hawaii thinking?” moment. Indeed, the case is a poster child for obvious discrimination against interstate commerce and has become a go-to teaching tool for law professors. Conventional wisdom says this is the prevailing legacy of Bacchus.
Now, we think this is unfair. Bacchus has much more to teach us than meets the eye. What might that be, and what does it have to do with Prohibition? We thought you’d never ask.
Liquor and Logic: A Legal Analysis
As mentioned, the 18th Amendment made Prohibition effective in 1920; it lasted until the December 1933 ratification of the 21st Amendment. Section 1 of the 21st Amendment repealed the 18th Amendment — simple enough.18 But the next section of the amendment contained text that was equally noteworthy:
Section 2. The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited. [Emphasis added.]
For decades, conventional wisdom suggested that section 2 removed regulation and taxation of booze from the strictures of the dormant commerce clause and gave states carte blanche to do as they saw fit, policy-wise.19 Hawaii argued that section 2 provided sufficient justification for its tax exemption policy.20 White’s majority disagreed, making it clear the Court had soured on its prior jurisprudence.
Consider the language the Court used in 1964, when it had to examine its early jurisprudence interpreting section 2: “The Court made clear in the early years following adoption of the [21st] Amendment that by virtue of its provisions a State is totally unconfined by traditional Commerce Clause limitations when it restricts the importation of intoxicants[.]”21
And compare that language to how the Court described its jurisprudence, in Bacchus, 20 years later: “Despite broad language in some of the opinions of this Court written shortly after ratification of the amendment[.]”22
The clear distinction: a difference of deference. The Court made this difference stick with its holding. In Bacchus, the Court stated for the first time that the states’ authority to discriminate against interstate commerce under section 2 was limited to promotion of temperance — “to combat the perceived evils of an unrestricted traffic in liquor” — and not to “promote a local industry” as Hawaii was clearly trying to do.23
The effects of Bacchus rippled far beyond Hawaii, affecting 21 other states that had similar liquor tax exemptions on their books.24 So a total of 22 states were caught out by the Court’s interpretation, but Hawaii remains stuck as the name associated with the case.
Any of those 21 affected states would have been put in the same position had their liquor tax laws been the ones that were challenged. Their defenses probably would have sounded a lot like the defenses Hawaii used — justifying a statute under two separate constitutional provisions. Neither of those provisions — the commerce clause and the 21st Amendment — lent itself to a winning argument. The first, the commerce clause, was a dud, an obvious loser. And the other, the 21st Amendment, relied on precedent that Hawaii had no idea was about to be thrown out the jurisprudential window.
Ultimately, Bacchus is not Hawaii’s bad. The Supreme Court moved the goal posts under section 2 — we lost the case, but any of the affected states would have gotten the same result!
Now that we’ve gotten that off our chests — back to the Hawaii Convention Center.
Known Unknowns
How could Bacchus have bankrolled our construction of the convention center if Hawaii lost the case? Unfortunately, this is where our knowledge ends. It is rumored that the sizable $45 million refund25 originally claimed by the wholesaler plaintiffs was never paid — and that by the conclusion of the litigation, the disputed amount had grown to approximately $100 million.26 We do know that the state Legislature repealed and reenacted the entire liquor tax after the case was decided, out of fear that the case could be used as precedent and interpreted to invalidate the entire liquor tax.27
Clearly, some remedy other than a refund was found — but we can find no evidence of any actual settlement. Nor do we find any concrete link between a hypothetical settlement and the subsequent funding of the convention center. Rumors will continue to swirl. Did the state ever cut a check? Did Hawaii seed the convention center with illegal liquor tax dollars? Did “Hawaiian moonshine” minimize our inhibitions and create the place “where business and aloha meet?”
Right now, it’s impossible to say. But 100 years since Prohibition, 36 years since Bacchus, 22 years since the Hawaii Convention Center opened, and nine months since lockdown started, one thing is clear: We need a drink. Cheers!
FOOTNOTES
1 Though the 18th Amendment was ratified by the requisite number of states on January 16, 1919, its effective date was January 17, 1920.
2 U.S. Const. Amend. XVIII, repealed by U.S. Const. Amend. XXI.
3 Nothing in this article should be read to trivialize the dedication and hard work of the Unemployment Division staff, or the Department of Labor and Industrial Relations staff during the COVID-19 pandemic.
4 Including, notably, the shared permanent location of the Department of Taxation and Department of Labor and Industrial Relations at 830 Punchbowl St. Home, sweet home.
5 Disclaimer: This conversation took place in a personal capacity and does not reflect any official government position. In other words, it was neither high-stakes nor high-level.
6 Or, on the other hand, maybe it was!
7 Bacchus, also known as Dionysus, is best known as the god of the grape harvest, winemaking, and wine, but also as the god of insanity and ritual madness. If 2020 had a mascot, it would be Bacchus.
8 Bacchus Imports, 468 U.S. 263 (1984).
9 Id. at 266.
10 Id. at 265. See also, Act 222, S.L.H. (1939).
11 Haw. House Stand. Comm. Rep. No. 305 (1939).
12 Bacchus Imports, 468 U.S. at 265. See also, Act 62, S.L.H. (1971) section 1.
13 Bacchus Imports, 468 U.S. at 265. See also, Act 39, S.L.H. (1976) section 1.
14 Bacchus Imports, 468 U.S. at 265. See also, Act 62, S.L.H. (1971) and Act 39, S.L.H. (1976).
15 Bacchus Imports, 468 U.S. at 266.
16 Id. at 267.
17 Id. at 268-269 (internal citations and footnotes omitted).
18 And extremely important!
19 See generally Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U.S. 324 (1964); Capital Cities Cable Inc. v. Crisp, 467 U.S. 691 (1984); and Bacchus Imports, 468 U.S. 263 (Stevens, J., dissenting).
20 Bacchus Imports, 468 U.S. at 274. See also Gisele M. Sutherland, “Commerce Clause Reigns Over Twenty-First Amendment: Bacchus Imposts, Ltd. v. Dias,” 38 Tax Law. 527 at 531 (1985).
21 Hostetter, 377 U.S. at 330.
22 Bacchus Imports, 468 U.S. at 274.
23 Id. at 276.
24 Jerry Burris, “Liquor Tax Ruling Casts Cloud Over Law’s Future,” Honolulu Advertiser, June 30, 1984.
25 Bacchus Imports, 468 U.S. at 266, n.6.
26 See Haw. Senate Stand. Comm. Rep. Nos. S2-84 and S3-84 (1st Special Session, 1984). Haw. House Stand. Comm. Rep. No. 1-84, (1st Special Session, 1984). See also Burris, supra note 24. (After the original refund claim and commencement of litigation in 1979, plaintiffs continued to pay all liquor taxes under protest, increasing the disputed amount to $100 million.)
27 Id.
END FOOTNOTES