Supreme Court strikes down harbor tax

Decision will allow some exporters to get millions in refunds, but exactly how that will work has not been decided.

By Staff -- Logistics Management, 5/1/1998

A tax by any other name is still a tax. In striking down the Harbor Maintenance Tax as unconstitutional on exports on March 31, the Supreme Court refused to buy the administration's arguments that the tax was really a permissible user fee. In United States vs. United States Shoe Corp., the government had asked the court to overturn a federal appeals court decision upholding a Court of International Trade ruling that the Harbor Maintenance Tax (HMT) was unconstitutional on exports from the United States.

The HMT, which was enacted as part of the Water Resources Act of 1986, imposes a charge of 0.125 percent of the value of international and domestic commercial cargo shipped through U.S. ports. (A few ports and commodities are exempt.) The tax is collected by the U.S. Customs Service, and its proceeds are supposed to pay for harbor-maintenance projects.

At issue was whether the Harbor Maintenance Tax (or Fee, as government agencies prefer to call it) was a tax or a user fee. If it was a tax, said exporters, it violated Article 1, Section 9 of the Constitution, which says "No Tax or Duty shall be laid on articles exported from any State." But the Justice Department disagreed, insisting the levy was a user fee, which is allowed by the Constitution.

What's the difference? "A tax typically is paid on a percentage basis against the value of something," says international trade lawyer and Logistics columnist Rodney C. Schonland. "It is collected by an agency of the government, but it is not based on the amount or value of services paid by the government, nor is it used to directly and proportionally benefit the user of the services." A user fee, on the other hand, is used only to benefit the payor, the amount bears some relationship to the services provided, and it typically is paid by the user to the provider of the services, he explains.

The Supreme Court justices were unequivocal in their rare 9-0 decision. On the first page of her opinion, Justice Ruth Bader Ginsburg wrote: "We hold, in accord with the Federal Circuit, that the tax, which is imposed on an ad valorem basis, is not a fair approximation of services, facilities, or benefits furnished to the exporters, and therefore does not qualify as a permissible user fee."

Although the court's decision paved the way for exporters to obtain a refund of their HMT payments, it also opened up a Pandora's Box of related issues, says Matthew T. McGrath, Washington counsel for the American Association of Exporters and Importers and Logistics columnist. The immediate task at hand is to develop a mechanism for processing refund claims on the export tax--something that's not as easy as it sounds. "Even though the decision was made [to issue refunds], that doesn't necessarily translate into checks just shooting out of the Treasury Department," he warns. Exporters that have been paying the tax and filing protests will be eligible for refunds. To get that money back, however, they will have to file a court case, McGrath says.

McGrath also expects that the lower courts will have to address how far back shippers may make claims--in other words, can they claim refunds dating back to when the HMT was first implemented, or will there be a statute of limitations? Another question will be how much interest the federal government must pay on the refunds, and from what date interest has accrued--the date the HMT first was implemented or the date the exporter's protest was filed?

In McGrath's opinion, exporters need not continue to pay the Harbor Maintenance Tax. But the U.S. Customs Service disagrees. According to a statement issued April 14, the agency implies that exporters should continue to pay until the Supreme Court issues a "mandate" finalizing its decision and instructing the lower courts to dispose of the case. McGrath's opinion: Ignore it. "The hand of God is not going to reach down and reverse a 9-0 Supreme Court decision," he says.

That's not to say that exporters will get off scot-free, he cautions. The Supreme Court's decision concludes: "This does not mean that exporters are exempt from any and all user fees designed to defray the cost of harbor development and maintenance. It does mean, however, that such a fee must fairly match the exporter's use of port services and facilities."

It won't be easy to come up with a fee that's acceptable to everyone, says Jean Godwin, vice president of government affairs for the American Association of Port Authorities. "One reason we settled on an ad valorem charge [in 1986] was to make sure we weren't unfair to bulk commodities," she says. "A tonnage-based fee would have priced them right out of international markets." Any new fee must avoid adding so much cost that it hampers U.S. competitiveness when the need to increase international trade is greater than ever, she says.

Although there appear to be sufficient funds to carry ports through fiscal year 1999 even without exporters' contributions, the need for an alternative assessment method is pressing. The European Union has filed a complaint with the World Trade Organization alleging that, since the tax now only applies to imports and domestic cargo, it violates several provisions of the General Agreement on Tariffs and Trade. If the complaint is decided in the EU's favor, the U.S. government would have to repeal the Harbor Maintenance Tax altogether.

But the alternatives are no more attractive than they were in 1986, and the federal government may find itself in a corner. "I wouldn't rule out having the general treasury pay for [harbor maintenance] as we did for more than 100 years," Godwin says. Whatever happens, she warns, the situation must be carefully thought out. "We don't want to see a quick and dirty solution. That isn't going to help anyone."