Supreme Court to rule on harbor tax

By Staff -- Logistics Management, 2/1/1998

Companies playing the export game could soon land on a "tax refund due" space, if the U.S. Supreme Court rules in their favor on the lawfulness of the Harbor Maintenance Tax (HMT). The court is scheduled to hear oral arguments on the constitutionality of the tax as it applies to exports on March 4, and a ruling is expected by June.

The tax, created in 1986 by the Water Resources Act, is assessed against the value of imports, exports, and domestic goods that move through U.S. ports. Its purpose is to finance the maintenance dredging of navigable channels and harbors. Importers pay the tax on a per-shipment basis, while exporters pay on a quarterly basis. (See "All About the HMT," Logistics Management, March 1997, Page 115.)

Exporters can avoid the tax either by moving freight overland through Canada or Mexico or by shipping through the handful of U.S. ports that are legally exempted from imposing the tax. In addition, some states provide tax credits matching their annual HMT payments to discourage shippers from diverting cargo to exempt ports.

Critics of the tax have urged its repeal on exported goods. They argue that the tax is prohibited by the Export Clause of the Constitution (Article 1, Section 9), which states, "No Tax or Duty shall be laid on articles exported from any State." In October 1995, the Court of International Trade agreed, ruling that the HMT was unconstitutional on exports. That ruling was upheld in June by the U.S. Court of Appeals for the Federal Circuit.

Supporters of the HMT claim that it is not a tax, but rather a user fee paid to the government for the purpose of providing a service that directly benefits those who pay the fee. Critics--and the courts--disagree for several reasons. The Court of International Trade ruling said the HMT was not a user fee because it was assessed against shippers and not the direct users of the ports. In addition, the court ruled, the charge must be considered a tax and not a user fee because it was based on the value of the cargo, not the cost of providing the service it funded.

That also is a sore spot for shippers. Some of the revenues raised by the HMT are indeed used by the Army Corps of Engineers for dredging projects. But the National Industrial Transportation League (NITL), the nation's largest shipper lobbying group, points out that revenues generated by the tax remain largely unspent in a government trust fund and thus, are being used to offset the federal deficit.

In its amicus curiae brief filed with the high court, NITL contends that the HMT is indeed a tax, not a fee, because it is "assessed on the value of articles exported, not their weight, density, or other transportation characteristics." The league further states that the tax "is not applied against all users, as a user fee would contemplate, but rather only against the shipper."

The shipper group also argues that "unlike a user fee, there is a serious mismatch between the benefits and the liability as to the port actually used." That is, all shippers are assessed equally, but those that use ports with naturally deep channels receive fewer benefits from the tax than do shippers using ports that require significant dredging or construction work.

If the Supreme Court does indeed order the federal government to refund HMT payments to exporters, only those shippers that filed formal protests against the HMT with the Customs Service would be eligible to receive them. How those refunds will be administered is an important issue for shippers. "How far back will they go? Where will [refund] money come from?" asks Peter J. Gatti, director of policy for NITL. "If the court affirms lower-court decisions that the tax is unconstitutional, then we will follow the issue of refunds."

Should the high court agree with the lower-court rulings, it will be a victory for shippers but a great disappointment for ports that rely on the HMT funds to defray the cost of maintenance dredging. If that happens, port interests are likely to turn to Congress for another source of funds--one that would withstand any constitutional challenge.