Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
The Import-Export Clause and Territorial Taxation
Evan M. Stern
The Import-Export Clause is a rarely cited constitutional provision that reserves for Congress the power to generate revenue by taxing imports and exports. Local taxes that offend the Import-Export Clause often also offend the Commerce Clause, which, unlike the Import-Export Clause, has a voluminous case law history. Courts often deal with tax cases on more familiar Commerce Clause grounds before they even address relevant Import-Export Clause issues. This situation obscures the significance of the Import-Export Clause. In particular, the courts’ decisions not to analyze the application of the Import-Export Clause has blurred the rights of unincorporated territories to impose taxes. Recently, the applicability of the Import-Export Clause to unincorporated territories was highlighted by Molloy v. Virgin Islands. The court in Molloy invalidated a United States Virgin Islands personal use tax on Commerce Clause grounds and did not reach the plaintiff’s Import-Export Clause challenge.
In August 2005, Molloy relocated from Virginia to the Virgin Islands and brought two automobiles with him. When the vehicles arrived in the Virgin Islands, Molloy was required to pay a Virgin Islands personal use tax of $2,067.60 for both vehicles. He then imported construction materials and was required to pay a personal use tax of $297.53 on those materials. Molloy claimed his right to a refund of these taxes, and challenged the Virgin Islands’ personal use tax under both the Commerce Clause and the Import-Export Clause. On July 25, 2007, the District Court of the Virgin Islands struck down the Virgin Islands’ personal use tax under the Commerce Clause of the United States Constitution. As a result, the court ordered the government of the Virgin Islands to refund to Molloy the personal use tax he paid. Although Molloy challenged the personal use tax under both the Commerce Clause and the Import-Export Clause, the court did not reach the Import-Export Clause issue.
By choosing to ground its decision solely in the Commerce Clause, the court declined to address the interaction between the Import-Export Clause and unincorporated territories. After the decision in this case, in instances where a tax only implicates the Import-Export Clause, it remains unclear whether a court would hold the Import-Export Clause applicable to unincorporated territories.
In Part I, this Comment examines where the Import-Export Clause applies to unincorporated territories in fact and in effect and explores the interaction between the clause and unincorporated territories. Part II discusses the general judicial treatment of the Import-Export Clause. Part III discusses the general constitutional status of unincorporated territories, the specific taxation provisions in the organizing acts and constitutions of several United States territories, and specific territorial taxes that are relevant to the Import-Export Clause issue. Part IV applies the general information from Parts II and III and, through use of reasoning from modern Commerce Clause rulings, concludes that the Import-Export Clause likely applies to unincorporated territories. Part V explores whether direct authorization from Congress has exempted any territories from application of the Import-Export Clause. Part VI discusses whether, in view of the constitutional, political, and economic status of unincorporated territories, congressional acquiescence has rendered the Import-Export Clause ineffectual as applied to unincorporated territories. It concludes that because Congress has plenary authority over the government of unincorporated territories, its failure to mandate compliance with the Import-Export Clause indicates Congress’s desire for the clause to be ineffective and renders the clause a dead letter in this context. Finally, Part VII examines the pragmatic implications of unincorporated territories’ ability to impose taxes that states cannot exact under the Import-Export Clause.