U.S.V.I. Argues Commerce Clause Doesn’t Apply to Excise Tax

STATEMENT OF SUBJECT MATTER AND APPELLATE JURISDICTION

This Court has jurisdiction over the within appeal from final decisions of the United States Virgin Islands District Court pursuant to 28 U.S.C. §1291.

ISSUES PRESENTED

I. Whether the within Appeal is mooted by implementation of Rules and Regulations governing the collection of excise taxes from manufacturers of local goods.

II. Whether pursuant to the powers granted it by Congress, the Virgin Islands may properly impose excise taxes upon imported goods as opposed to finished products.

III. Whether the Commerce Clause extends to U.S. territories.

IV. Whether under the Commerce Clause, the Virgin Islands properly applied the statute permitting the collection of excise taxes.

STATEMENT OF RELATED CASES AND PROCEEDINGS

Although the final Orders at issue are dispositive, motion practice continues before the District Court in an effort to lift the present injunction and permit the Territory to resume collection of excise taxes.

STATEMENT OF THE CASE

Appellee Reefco Services, Inc. (“Reefco”) is a United States Virgin Islands corporation supplying boating marine refrigeration. On December 16, 2014, Reefco filed a Complaint against the Appellants, Government of the Virgin Islands and the Virgin Islands Bureau of Internal Revenue (collectively “GVI”) challenging tax assessments against boat parts imported into the Virgin Islands as part of its marine refrigeration business. (JA 1, Doc. #1). Under Virgin Islands law, certain items shipped into the United States Virgin Islands are subject to an excise tax. Boat parts are exempt from such a tax. On March 13, 2015, Reefco filed an Amended Complaint. (JA 11, Doc. #16-2). On April 20, 2015, the GVI moved to dismiss the Amended Complaint. (Doc. #21-22). By Decision and Order dated March 31, 2016, the Court granted GVI's motion to dismiss in part and denied it in part. (Doc. #38). The Court, inter alia, granted the motion and dismissed with respect to Count Two which sought a declaratory judgment that “the excise tax is facially unconstitutional under the Commerce Clause as the excise tax discriminates against interstate commerce.” The GVI filed its Answer to the Amended Complaint on June 6, 2016. (JA 26, Doc. #39). On April 12, 2017, the parties agreed to submit the remaining issues for a decision on the papers comprised of the various pleadings, exhibits, affidavits, and the arguments of counsel. The papers included the deposition of Glenford Hodge, Bureau of Internal Revenue (“BIR”) Supervisor of Excise Tax. (JA 30, Doc #75-1). Mr. Hodge explained that, barring an exemption, excise taxes are collected on every item imported into the Territory. (JA 47, 54).If an entity utilizes purely locally sourced materials, there exists no basis to levy an excise tax. (JA 52). Manufacturers who utilize a mix of materials, are assessed an excise tax on the imported items only. (JA 53).

Pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, the District Court entered Judgment on September 28, 2018, and sua sponte re-examined its dismissal of Count Two of the Amended Complaint, reversed and held that 33 V.I.C. §42, “as interpreted and enforced”, by the GVI violates the Commerce Clause. (JA 143, Doc. #80). The District Court further ordered the refund of $5, 287.74 remitted in excise taxes by Reefco. On October 12, 2018, Appellants filed a Notice of Appeal to the United States Court of Appeals for the Third Circuit. (JA 166, Doc. #81).

On October 19, 2018, the GVI filed a Motion to Stay the District Court's Judgment pending appeal (Doc. #82) to which Reefco filed its opposition on November 2, 2018. (Doc. #85). The District Court held a hearing on the Motion to Stay on November 8, 2018. (JA 208). During argument, the District Court raised the issue of contempt and questioned the GVI's actions in continuing to collect excise taxes. The parties were instructed to provide briefs addressing the court's concerns. Attached as an Exhibit to the GVI's response, was the affidavit of Mr. Hodge of the BIR. Mr. Hodge noted that as part of his duties, he oversees the collection of excise taxes in the Virgin Islands. During Fiscal Year 2018, excise taxes provided $39 million dollars in revenue to the Territory. Id. Mr. Hodge further related that upon receipt of the District Court's September 28, 2018 Judgment, BIR set about establishing a system for the collection of excise taxes on goods manufactured in the Virgin Islands. Id. Mr. Hodge reviewed the list of local manufacturers which he found to number 142. Of those, many were small in scope and would likely be exempted from excise tax remittance. Id.

A further hearing was held on November 15, 2018 during which Mr. Hodge offered testimony as to BIR's actions with respect to the collection of excise taxes. (JA 267, Doc. #99). Following the hearing, the District Court denied the application for a stay and enjoined the GVI from collecting excise taxes utilizing methods in conflict with its September 28, 2018 Order. In addition, the District Court compelled the GVI to return and seek its permission in order to once again collect excise taxes within the Territory. (JA 170, Doc. #93; See also the November 26, 2018 Memorandum Opinion, JA 175, Doc. #96). On November 19, 2018, and again on November 27, 2018, the GVI amended the Notice of Appeal to include the November 15, 2018 injunction and November 26, 2018 Opinion, respectively. (JA 170 and 175, Doc. #93 and #97).

On November 30, 2018, the GVI filed an Emergency Motion to Lift the Injunction, which remains outstanding. (Doc. #98). Finally, on February 19, 2019, the GVI filed Notice with the District Court and attached the recently promulgated Rules and Regulations governing the collection of excise taxes from local manufacturers. (Doc. #112).

SUMMARY OF THE ARGUMENT

On December 16, 2014, Reefco, a Virgin Island corporation, filed the present refund action to recover excise taxes paid to the GVI during 2011 through 2014. In finding in Reefco's favor, the lower court held that the Commerce Clause applied to the Virgin Islands and that 33 V.I.C. § 42, as applied, was violative thereof. However, the lower court also agreed that excise taxes are local taxes which the GVI has every right to impose. Moreover, nothing about the language of the statute itself is violative of the Commerce Clause. Instead the lower court objects solely to its execution as against the Dormant Commerce Clause. GVI has subsequently promulgated Rules and Regulations guiding the process by which excise taxes are collected from local manufacturers. The issues surrounding the present appeal remain justiciable nonetheless as the District Court continues to improperly enjoin the GVI from the collection of excise taxes and the money judgment awarded Reefco remains in controversy.

Further, contrary to the District Court's findings, there exists disagreement amongst the Circuits regarding the applicability of the Commerce Clause, or the Dormant Commerce Clause, to a territory of the United States such as the Virgin Islands. Sakamoto v. Duty Free Shoppers, Ltd., 764 F.2d 1285, 1288 (9th Cir. 1985) cert denied, 475 U.S. 1081, 89 L.Ed. 2d 715, 106 S. Ct. 1457 (1986) (holding that the Commerce Clause does not limit the Government of Guam, an unincorporated territory, as it limits the governments of the states); United States v. Husband R. (Roach), 453 F.2d 1054, 1059 (5th Cir. 1971) cert. denied 406 U.S. 935, 32 L. Ed. 2d 136, 92 S. Ct. 1785 (1972) (holding that the Canal Zone, an unincorporated territory of the United States, is not subject “to the limitations imposed upon a state legislative body by the Commerce Clause.”) Indeed, where, as here, the actions under scrutiny involve an unincorporated territory, an “immediate servant of the federal government” with no movement towards statehood, “the Dormant Commerce Clause Doctrine would have no pertinence, for a doctrine designed to safeguard federal authority against usurpation has no role when the federal government itself is effectively the actor.” Sakamoto v. Duty Free Shoppers, Ltd., 764 F.2d 1285, 1286 (9th Cir. 1985) (government of Guam "an instrumentality" of the federal government), cert. denied, 475 U.S. 1081 (1986).

Finally, even assuming arguendo that this court finds that the Commerce Clause does apply, the GVI maintains that the taxes imposed were not violative thereof. The excise tax applies to all manufacturers, foreign and local alike, that utilize imported goods. Any impact upon interstate commerce, if at all, was negligible when balanced against the benefit to domestic producers of goods. See Norfolk Southern Corp. v. Oberly, 822 F.2d 388, 399 (3d Cir. 1987).

Given the conflict amongst the Circuits, the GVI respectfully maintains that the applicability of the Commerce Clause to the Virgin Islands is ripe for reconsideration by this honorable court in order to bring the holdings into alignment. The Virgin Island's status as an unincorporated territory, not a Commonwealth such as Puerto Rico, is far closer to that of Guam where the Commerce Clause has been found not to apply. Similarly here, the lower court's finding of applicability must be reversed. In the alternative, the excise tax statute as applied does not violate the Commerce Clause. Any impact upon trade is incidental as compared to the benefits derived by local manufacturers of goods. Further, the present injunction must be lifted as the recent Rules and Regulations implementing the collection of excise taxes from local manufacturers of goods is in full compliance with the judgment of the District Court.

ARGUMENT

I. THE MOOTNESS DOCTRINE DOES NOT APPLY AS THE ISSUES SURROUNDING THE PRESENT APPEAL REMAIN RIPE FOR REVIEW.

“The mootness doctrine derives from Article III of the Constitution, which limits the 'Judicial Power' of the United States to the adjudication of 'Cases' or 'Controversies.' U.S. Const. art. III, § 2; see Rendell v. Rumsfeld, 484 F.3d 236, 240 (3d Cir. 2007). The existence of a case or controversy, in turn, requires "(1) a legal controversy that is real and not hypothetical, (2) a legal controversy that affects an individual in a concrete manner so as to provide the factual predicate for reasoned adjudication, and (3) a legal controversy with sufficiently adverse parties so as to sharpen the issues for judicial resolution.” International Brotherhood of Boilermakers, etc. v. Kelly, 815 F.2d 912 at 915 (3d Cir. 1987) quoting Dow Chem. Co. v. United States Envtl. Protection Agency, 605 F.2d 673, 678 (3d Cir. 1979).

In addressing such questions, this Court has recognized three exceptions that should be considered prior to any determination of mootness, “(1) whether the appellant has expeditiously taken all steps necessary to perfect the appeal and to preserve the status quo before the dispute becomes moot, (2) whether the trial court's order will have possible collateral consequences, and (3) whether the dispute is of such a nature that it is capable of repetition yet evading review.” In re Surrick, 338 F.3d 224, 229-230 (3d Cir. 2003). The central question in most mootness issues is whether changes in circumstances that prevailed at the beginning of the litigation have forestalled any occasion for meaningful relief. Id. at 230. "As a general principle, once a party has complied with a court order or injunction, and has not been penalized or suffered any prejudice that could be remedied on appeal, the appeal is moot." Liberty Res., Inc. v. SEPTA, 54 Fed. Appx. 769, 770, (3d Cir. 2002).

Here, the matter falls squarely within the stated exceptions. Under the first prong, the GVI has timely perfected the instant appeal. Given the magnitude of loss, the BIR did initiate action to stem the reduction in revenue but in all other respects preserved the status quo. The recently promulgated Rules and Regulations establish the process whereby excise taxes are collected from manufacturers of local goods on the finished product, rather than on the raw imported materials utilized as was done previously. Such action does not quell the controversy as to whether the Commerce Clause applies to the Virgin Islands and if so, whether the excise statute as applied ran contrary thereto. See Black United Fund of New Jersey v. Kean, 763 F.2d 156 (3rd Cir. 1985) (New Jersey rendered appeal moot by repealing and replacing old law designating the United Way as exclusively entitled to payroll deductions in violation of free speech and equal protection as per the lower Court.) But see Pilsen Neighbors Community Council v. Burris, 672 F. Supp. 295, 307 (3d Cir. 1987) (new Illinois Act preserved the qualification of United Way and thus claims are not moot). Moreover, the money judgment awarded Appellee is not impacted by changes in the GVI's methods of collection. As such, the action is not moot.

The action satisfies the second prong as well. The collateral consequences of the District Court's Injunctive Order are far reaching and devastating, at any period of time, but even more so as the Territory recovers from two Category five storms that struck the islands in September 2017. The halt in the collection of any excise taxes whatsoever, remains in effect to the complete and utter detriment of the Territory. As such this Court can grant meaningful relief by lifting the injunction and reevaluating whether the Commerce Clause in fact applies to an unincorporated territory such as the Unites States Virgin Islands. See International Brotherhood of Boilermakers, etc. v. Kelly, 815 F.2d 912, 915-916 (3d Cir. 1987) (case not moot where at least part of the relief requested by appellants' complaint before the district court remained available and because without that relief appellant faced possible dissipation of the assets it sought to protect); In re Surrick, 338 F.3d 224, 229-230 (3d Cir. 2003) (this court found appellant attorney's claim disputing an expired period of suspension fit within the exception to the mootness doctrine under the possible collateral consequences, specifically any associated professional stigma).

II. PURSUANT TO THE POWERS EXTENDED IT BY CONGRESS, THE VIRGIN ISLANDS MAY IMPOSE EXCISE TAXES UPON IMPORTED GOODS.

The United States Virgin Islands, an unincorporated territory of the U.S., exercises powers granted it by Congress through the Revised Organic Act of the Virgin Islands, as Amended in 1954. 48 U.S.C. §§ 1541 et seq. Pursuant to that Congressional grant of authority, the Virgin Islands may impose excise taxes on articles, goods, merchandise and commodities imported into the Virgin Islands. This fact was recognized by the lower court in its September 28, 2018, Memorandum Opinion that explained:

In 1980, Congress passed Public Law 96-205. Section 405 of Public Law 96-205 (“Section 405”) provides: “Any excise taxes levied by the Legislature of the Virgin Islands may be levied and collected as the Legislature of the Virgin Islands may direct as soon as the articles, goods, merchandise, and commodities subject to said tax are brought into the Virgin Islands.” Pub. L. No. 96–205, § 405, 94 Stat 84 (March 12, 1980). Expressing support for Section 405, Senator Johnson stated:

The . . . amendment . . . would provide specifically that the Virgin Islands may levy excise taxes on articles as soon as they are brought into the Virgin Islands. This authority already exists and has existed so long as the Virgin Islands has been authorized to collect excise taxes. The amendment is offered only to prevent needless litigation and confirm the already authorized powers of the Virgin Islands government. I would note that this provision has been requested by the Governor of the Virgin Islands with the support of the administration in order to clarify the existing authority and does not represent a new grant of authority whatsoever. Subcommittee on Nat. Parks and Insular Affairs, 96th Cong., Legislative History of the Omnibus Insular Areas Act of 1979-1980, at 173 (1980). Representative Evans indicated that Section 405 “allows for the collection of any excise taxes levied by the Virgin Islands Legislature upon the date of importation of the good in the Virgin Islands rather than at a later date.

(Doc #80 at pages 10-21).

The District Court also pointed out that Congress passed Public Law 97-357 in 1982, which sought to aid the government in the collection of excise taxes at the ports of the Virgin Islands by authorizing United States Custom and Postal Service employees to assist local officials with the collection of excise taxes on imports into the Virgin Islands.

A. 33 V.I.C. § 42, as Written, is Well Within the Confines of the Law

Title 33, Section 42 of the Virgin Islands Code, as amended in 1984, provides that “[e]very individual and every firm, corporation and other association doing business in the Virgin Islands, except those specially taxed, exempted or excluded shall pay an excise tax on all articles, goods, merchandise or commodities manufactured in or brought into the Virgin Islands for personal use, use in a business, for disposition or sale in the course of trade or business, for processing or manufacturing or for any other business use or purpose. . . .” 33 V.I.C. § 42(a).

Section 42a(b) instructs the Director of the Bureau of Internal Revenue 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. § 42a(b). Said rules have now been promulgated are in effect.

When enjoining the GVI from the collection of excise taxes, at a cost of tens of millions of dollars to the territory, the District Court did not strike down the applicable statute which remains neutral on its face. Instead the court relegated its criticisms to the application of the statute upon local manufacturers and those from abroad. The new rules and regulations should serve to address any issues with application as described by the District Court. In establishing the present procedures to levy and collect excise taxes from local manufacturers, the GVI acted in full compliance with the lower court's Memorandum and Opinion. And yet the Territory remains enjoined from the collection of the said taxes, making the continuing injunction inexplicably punitive in nature. In order to mitigate the ongoing damaging effects, the GVI respectfully requests that the injunction be lifted commensurate with the current facts and relevant law.

III. AS AN UNINCORPORATED TERRITORY, THE COMMERCE CLAUSE DOES NOT APPLY TO THE VIRGIN ISLANDS.

Along with the clear congressional permission granted to the Virgin Islands to impose excise taxes on imports and the legally sufficient wording of the statute itself, the rather unsettled and largely unresolved issue of whether the Commerce Clause applies to the unincorporated territories was presented to the District Court. Relying largely on this Court's decision in JDS Realty Corp. v. Government of Virgin Islands, 824 F.2d 256 (3d Cir. 1987), the District Court found that 33 V.I.C. § 42 violates the Commerce Clause. In JDS Realty Corp., however, an excise tax case, which originated in the District Court of the Virgin Islands, the United States Supreme Court granted certiorari, but ultimately vacated and remanded to the Third Circuit to consider the question of mootness. Id., 484 U.S. 999 (1988). The Third Circuit subsequently vacated its decision as moot. Id., 852 F.2d 66 (3d Cir. 1988). Since then, the Third Circuit has held that “because JDS was vacated as moot, we are not bound by our earlier holding there.” Polychrome Int'l Corp. v. Krigger, 5 F.3d 1522 at 1534 n.30. Thus, the vacated decision in JDS Realty Corp. is not precedential. Further, in Molloy v. Gov't of the V.I., 594 F. Supp. 2d 595, 596 (D.V.I. 2007), upon which the District Court also relied, the District Court noted that “[t]he Virgin Islands is an unincorporated territory of the United States and not all constitutional provisions apply to it”. In particular, the Third Circuit Court of Appeals “has not specifically decided whether the Commerce Clause itself is applicable to the Virgin Islands.” Id., see also Government of Virgin Islands v. Bodle, 427 F.2d 532, 533 n.1 (3d Cir. 1970) (all provisions of Constitution do not ex proprio vigore become operative in the Virgin Islands); Ballentine v. United States, 486 F.3d 806 (3d Cir. 2007) (U.S. citizens domiciled in the Virgin Islands not permitted to vote in Presidential elections). Indeed, the holding of this court in JDS, supra, disagrees with that of other jurisdictions, making this issue now ripe for this court's reassessment as to whether the Commerce Clause applies to an unincorporated territory such as the Virgin Islands.

Article IV, § 3 of the Constitution gives the Congress authority to "make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States. . . ." Accordingly, Congress has from time to time established governments in the various territories that have come under federal control. Territorial government in the continental United States was customarily viewed as a transition step to statehood, and statehood in fact resulted.

The United States acquired the Virgin Islands by purchase from Denmark in 1917. It was not until the Organic Act of 1936 that Congress provided a complete government framework, including a Legislative Assembly. The Organic Act, 48 U.S.C. § 1405a, Granville-Smith v. Granville-Smith, 349 U.S. 1, 4-8, 75 S. Ct. 553, 555-557, 99 L. Ed. 773, 776-779 (1955). That legislation was substantially amended in 1954 and has since been known as the Revised Organic Act. Act of July 22, 1954, 68 Stat. 497, 48 U.S.C. § 1541 et seq.

As an unincorporated Territory of the United States, the Virgin Islands, is “not sovereign, in the true sense of that term.” Gov't of V.I. v. Bryan, 818 F.2d 1069, 1072 (3d Cir. 1987) (quoting In re Estate of Hooper, 359 F.2d 569, 578, 5 V.I. 518 (3d Cir. 1966)). Indeed, a review of the applicable case law shows that a vital distinction was made between "incorporated" and "unincorporated" territories. The first category had the potentialities of statehood like unto continental territories. The United States Constitution, including the Bill of Rights, fully applied to an "incorporated" territory. See, e.g., Rassmussen v. United States, 197 U.S. 516 (1905). The second category described possessions of the United States not thought of as future States. To these only some essentials of the Constitution were extended. See, e.g., Balzac v. Porto Rico, 258 U.S. 298 (1922).

In contrast, Puerto Rico was ceded to the United States following the Spanish-American War. See, Treaty of Paris, 30 Stat. 1754 (1898). A brief period of military control gave way to congressional enactment of a series of Organic Acts for the government of the island. However, veto power was retained in the President and Congress over local legislation. By 1950, the call for greater autonomy led to congressional enactment of Pub. L. 600, 64 Stat. 319, which offered the people of Puerto Rico a compact whereby they might establish a government under their own constitution. On July 3, 1952, Congress approved, with minor amendments, a constitution adopted by the Puerto Rican people. 48 U. S. C. § 731d. Pursuant to that constitution the Commonwealth now "elects its Governor and legislature; appoints its judges, all cabinet officials, and lesser officials in the executive branch; sets its own educational policies; determines its own budget; and amends its own civil and criminal code." Leibowitz, The Applicability of Federal Law to the Commonwealth of Puerto Rico, 56 Geo. L. J. 219, 221 (1967); see, 28 Dept. of State Bull. 584-589 (1953); Americana of Puerto Rico, Inc. v. Kaplus, 368 F.2d 431 (3d Cir. 1966); Magruder, The Commonwealth Status of Puerto Rico, 15 U. Pitt. L. Rev. 1 (1953).

The United States Supreme Court has noted the distinction between Puerto Rico, as a Commonwealth, and that of the Virgin Islands. The Court remarked in Alfred L. Snapp & Son, Inc. v. Puerto Rico, ex rel., Barez, 458 U.S. 592, 608 n.15, 102 S. Ct. 3260, 73 L. Ed. 2d 995 (1982) that the Commonwealth of Puerto Rico has standing as parens patriae: “It has a claim to represent its quasi-sovereign interests in federal court as least as strong as that of any State.” The status of Puerto Rico vis a vis the United States, is different from that of the Virgin Islands. Puerto Rico is a Commonwealth that operates under its own constitution, see Calero-Toledo v. Pearson Yacht Leasing Co., 416 U.S. 663, 671, 94 S. Ct. 2080, 40 L. Ed. 2d 452 (1974), whereas the Virgin Islands is an unincorporated territory, Ballentine v. United States, 486 F.3d 806, 809, 48 V.I. 1059 (3d Cir. 2007).

As a jurisdiction that has had occasion to deliberate the status of territories that ultimately attained statehood and those that have not, the Ninth Circuit has opined on the distinctions of note. Thus, for example, in Anderson v. Mullaney, 191 F.2d 123 (9th Cir. 1951), aff'd 342 U.S. 415, 72 S. Ct. 428, 96 L. Ed. 458 (1952), the Ninth Circuit held that while the limitation on state regulation of commerce through the Commerce Clause did not apply by its own force to the Territory of Alaska, the legislative power granted to the Territorial Legislature was such that the territory should be treated as if it were a state. Alaska at the time was an incorporated territory, well on its way to statehood, and all provisions of the United States Constitution applied. Act of August 24, 1912, ch. 387, § 3, 37 Stat. 512 (codified at 48 U.S.C.A § 23 (1952)).

In contrast, the Ninth Circuit held that the Commerce Clause did not limit the Government of Guam as it limits the governments of the states because Guam is not a state. Sakamoto v. Duty Free Shoppers, Ltd., 764 F.2d 1285, 1285 (9th Cir.1985). The court reasoned that “[s]ince Guam is an unincorporated territory enjoying only such powers as may be delegated to it by Congress in the Organic Act of Guam, 48 U.S.C. § 1421a, the Government of Guam is in essence an instrumentality of the federal government.” Any negative implications of the Commerce Clause, designed to preserve congressional authority, cannot limit the Guamanian government, which is a creation of Congress itself. Id. citing United States v. Wheeler, 435 U.S. 313 at 321, 98 S. Ct. 1079 at 1085, 55 L. Ed. 2d 303, 1978 U.S. LEXIS 72 (1978); see also United States v. Husband R. (Roach), 453 F.2d 1054, 1059 (5th Cir. 1971) cert. denied 406 U.S. 935, 32 L. Ed. 2d 136, 92 S. Ct. 1785 (1972) (holding that the Canal Zone, an unincorporated territory of the United States, is not subject “to the limitations imposed upon a state legislative body by the commerce clause.”); Buscaglia v. Ballester, 162 F.2d 805, 807 (1st Cir. 1947) (holding that the commerce clause “prohibition upon the imposition of duties or imposts on imports is inapplicable because that prohibition is laid upon the states, and Puerto Rico, . . . is not a state” but an unincorporated territory); but see Trailer Marine Transport Corp. v. Rivera Vazquez, 977 F.2d 1, 6-9 (1st Cir. 1992)(holding that the commerce clause applies to the Commonwealth of Puerto Rico, which government in many respects resembles that of a state); see also Polychrome Int'l Corp. v. Krigger, 5 F.3d 1522, 1534 n.31 (3d Cir. 1993) (noting disagreement).

The Ninth Circuit noted that the distinction between incorporated territories which are thought of as future states and unincorporated territories, to which only the "essentials" of the Constitution apply, is not new. See, Granville-Smith v. Granville-Smith, 349 U.S. 1, 5, 75 S. Ct. 553, 555-56, 99 L. Ed. 773 (1955). It goes back to the 1901 series of Supreme Court decisions known as the insular cases: Downes v. Bidwell, 182 U.S. 244, 21 S. Ct. 770, 45 L. Ed. 1088 (1901); Armstrong v. United States, 182 U.S. 243, 21 S. Ct. 827, 45 L. Ed. 1086 (1901); Dooley v. United States, 182 U.S. 222, 21 S. Ct. 762, 45 L. Ed. 1074 (1901); DeLima v. Bidwell, 182 U.S. 1, 21 S. Ct. 743, 45 L. Ed. 1041 (1901); see also Downes v. Bidwell, 182 U.S. 244, 21 S. Ct. 770, 45 L. Ed. 1088 (White, J., concurring). “History and the views of scholars and judges who have focused on the issue all support our [the 9th Circuit's] conclusion that the limitations the commerce clause places on the powers of states to regulate commerce do not affect the government of the unincorporated Territory of Guam.” Sakamoto v. Duty Free Shoppers, Ltd., 764 F.2d 1285, 1286-1287 (9th Cir. 1985).

In Sakamoto, supra, plaintiffs and defendants were competing merchants in Guam. Plaintiffs challenged the legality of an exclusive concession agreement giving defendant exclusive rights to sell and deliver certain kinds of merchandise to departing passengers at the airport. On appeal, plaintiffs asserted, inter alia, that the agreement burdened interstate and foreign commerce, violating the Commerce Clause of the United States Constitution. The court found that as an unincorporated territory, Guam was is in many ways an “alter ego or immediate servant of the federal government . . . As such, a doctrine such as the Commerce Clause, designed to safeguard federal authority against usurpation has no role when the federal government itself is effectively the actor.” Sakamoto v. Duty Free Shoppers, Ltd., 764 F.2d 1285, 1286 (9th Cir. 1985).

The V.I. Supreme Court has also recognized that the issue of whether the Commerce Clause applies to the Virgin Islands as an unincorporated territory, remains unsettled. In Bryan v. Fawkes, 61 V.I. 416, 438 n.5 (V.I. 2014), the V.I. Supreme Court, citing Sakamoto, Husband R., and Buscaglia (supra), noted that the “limitations on the power of state governments found in the United States Constitution do not apply to territorial governments, given that territorial governments exercise authority that has been delegated by Congress under Article IV.” See also, People of the Virgin Islands v. Clarke, 53 V.I. 183, 197 (V.I. 2010) (noting split in the authorities regarding application of the Commerce Clause to an unincorporated territory of the United States); Whyte v. Bockino, 2018 V.I. Supreme LEXIS 25, at *11 (V.I. 2018) (stating that numerous courts, including the V.I. Supreme Court, have questioned, in general terms, whether the Commerce Clause applies to United States territories.)

Given the clear congressional permission granted to the Virgin Islands to impose excise taxes on imports and its unincorporated status, this Court should reexamine whether the Commerce Clause in fact applies. Unlike Puerto Rico, that holds the trappings of statehood including that of a Constitution, ratified by the people, not just another Organic Act approved and enacted by the Congress, the Virgin Islands is imbued solely with the powers granted it by Congress. As such it, like Guam, is an instrumentality of the Federal government against whom trade cannot be properly regulated. Thus the Commerce Clause and Dormant Commerce Clause do not apply.

IV. ASSUMING ARGENDO THAT THE COMMERCE CLAUSE DOES APPLY, THE INCIDENTAL EFFECT OF THE EXCISE TAX ON INTERSTATE TRADE BALANCES IN FAVOR OF THE VIRGIN ISLANDS.

This Court has sustained a tax against Commerce Clause challenge when the tax is applied to an activity with a substantial nexus with the taxing state, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977). A tax that fails to meet any one of these four components violates Commerce Clause principles. Id.; Polychrome Int'l Corp. v. Krigger, 5 F.3d 1522, 1535 (3d Cir. 1993).

Although a territorial action that discriminates in favor of territorial interests is subject to a heightened level of scrutiny, actions which only have an incidental effect on interstate commerce are governed by a balancing test. The incidental burden on interstate commerce must be "clearly excessive in relation to the putative local benefits" for the action to be declared unconstitutional. See, Norfolk Southern Corp. v. Oberly, 822 F.2d 388, 399 (3d Cir. 1987); Jackson v. W. Indian Co., 944 F. Supp. 423, 430 (V.I.D.C. 1996).

The statute at issue is non-discriminatory, both on its face and as applied. 33 V.I.C. § 42. The statute unambiguously relegates the collection of excise taxes to all goods imported into the territory. Id. That rules and regulations directing its collection had not been promulgated is of no moment as the BIR had implemented a system whereby all imported goods were assessed an excise tax at the ports of entry. (JA 42-43). Indeed, Reefco initially moved for a refund of excite tax payments, which it erroneously believed should have been exempted. (JA 1). In their Amended Complaint, Reefco asserts that the collection of excise taxes as against them, a V.I. Corporation, discriminates in favor of local V.I. manufacturers. Such claims are without legal or factual support.

Pursuant to statute, the V.I.B.I.R, imposes excise taxes on all good imported into the islands. This includes raw materials utilized by local manufacturers. If, however, a manufacturer produces items from purely local sources, excise taxes do not apply. Taxing of the completed manufactured item was and is neither a barrier to trade nor required either under local law or through the directives of Congress. Instead, as mandated by statute, local manufacturers previously paid taxes on any imported materials utilized in their process.

The taxing of materials for use on refrigeration used on boats has a clear nexus to activities in the Virgin Islands. That the items were not boat parts in particular but used on such vessels was outside the stated excise tax exemptions. The degree to which these products were taxed, as opposed to any raw materials utilized in the manufacturing of good in the Virgin Islands was not discriminatory. Indeed, any disparate application had a minimal impact upon interstate commerce if any. As such, the Order issued by the lower court finding violation of the Commerce Clause and enjoining the collection of such taxes must be vacated.

CONCLUSION

The District Court erred in determining that the excise taxes, as applied in the Virgin Islands, runs counter to the Commerce Clause. Moreover, the Commerce Clause is not applicable to the Virgin Islands as an unincorporated U.S. territory. As such, the lower court must be reversed and the injunction lifted as a matter of law. In the alternative, any impact to interstate commerce was negligible and not on balance deserving of the complete eradication of the collection of excise taxes in the Virgin Islands.

Respectfully submitted,

CAROL THOMAS-JACOBS, ESQ.
Acting Attorney General

PAMELA R. TEPPER, ESQ.
Solicitor General

March 1, 2019

by: Dionne G. Sinclair
Assistant Attorney General
Department of Justice
Attorneys for Appellants
3438 Kronprindsens Gade, Second Floor
St. Thomas, VI 00802
Telephone: (340) 774-5666, Ext 111
Email: Dionne.Sinclair@doj.vi.gov