Appeal of R.J. Reynolds Tobacco Co.

• Decision Date: 19 March 1985
• Docket Number: No. 8410PTC481,8410PTC481
• Citation: 73 N.C.App. 475,326 S.E.2d 911
• Parties: , 6 ITRD 2363 In the Matter of the Appeal of R.J. REYNOLDS TOBACCO COMPANY from the Denials of Its Claims for Exemption by Durham County and Forsyth County for 1983.
• Court: North Carolina Court of Appeals

Page 911

326 S.E.2d 911

73 N.C.App. 475, 6 ITRD 2363

In the Matter of the Appeal of R.J. REYNOLDS TOBACCO COMPANY from the Denials of Its Claims for Exemption by Durham County and Forsyth County for 1983.

No. 8410PTC481.

Court of Appeals of North Carolina.

March 19, 1985.

Horton, Hendrick & Kummer by Thomas L. Kummer and John A. Cocklereece, Jr., Winston-Salem, for R.J. Reynolds Tobacco Co., appellant.

Asst. County Atty. S.C. Kitchen, Durham, for Durham County, appellee.

P. Eugene Price, Jr., and Jonathan V. Maxwell, Winston-Salem, for Forsyth County and its Affected Municipalities, appellee.

John G. Wolfe, III, Kernersville, for Town of Kernersville, appellee.

Asst. City Atty. Henry D. Blinder, Durham, for City of Durham, amicus curiae.

COZORT, Judge.

R.J. Reynolds Tobacco Company appeals from an adverse decision of the Property Tax Commission. Reynolds had argued to the Commission that imported tobacco owned by Reynolds and stored in the United States customs bonded warehouses located in Durham and Forsyth Counties was excluded from ad valorem taxation. The Commission disagreed and denied Reynolds' claims for a property tax exemption. We affirm.

The basic facts are undisputed. R.J. Reynolds Tobacco Company is a New Jersey corporation qualified to do business in North Carolina with its principal offices in Winston-Salem. Reynolds manufactures in Forsyth County finished tobacco products which it sells to wholesale distributors and other authorized purchasers in the United States and abroad. Reynolds uses tobacco grown in the United States and in foreign countries in the manufacture of its tobacco products. In May and June of 1983, Reynolds appeared before the Durham County and the Forsyth County Boards of Equalization and Review, seeking a property tax exemption for imported leaf tobacco stored in customs bonded warehouses located in each county. The total tax involved is over seven million dollars for 1983.

The allegedly "exempt" tobacco had been imported from Bulgaria, Syria, Turkey, Lebanon, and Brazil. The tobacco is shipped by bonded carrier to the United States and unloaded from the carrier at a port of entry where it is placed under customs bond. A "customs bond" is a bond given by the importer at the time the tobacco is physically imported into the United States for the purpose of securing the payment of federal import duties. The tobacco is then transported by rail or truck to a storage facility where it remains under customs bond until it is withdrawn from storage.

The storage facilities used by Reynolds to hold its imported tobacco are United States customs bonded warehouses. The customs bonded warehouses and the land on which they are situated in Durham and Forsyth Counties are owned by Reynolds which is the sole user of the warehouses. The warehouses themselves and the land underlying them are subject to property taxation in both counties. In all, Reynolds has twenty-six customs bonded warehouses in Durham County and sixty-two customs bonded warehouses in Forsyth County. Imported tobacco is normally held in storage by Reynolds for two years before it is withdrawn and blended with domestically-grown tobacco in the manufacturing process. When the imported tobacco is withdrawn from bonded storage for manufacturing, customs duties are paid by Reynolds to the federal government.

Virtually all the imported tobacco stored in these customs bonded warehouses in Durham and Forsyth Counties is used by Reynolds for the domestic manufacture of finished tobacco products. Furthermore, virtually all the tobacco products manufactured by Reynolds from imported tobacco are sold and consumed in the United States.

From the denial of its claims for property tax exemption by the Durham and Forsyth Counties Boards of Equalization and Review, Reynolds appealed to the Property Tax Commission. Prior to a hearing on the matter, Durham County filed a motion to dismiss the appeal from that County's Board on the ground that Reynolds had failed to properly perfect its appeal to the Commission. The denial of this motion is the subject of Durham County's cross-assignment of error.

The Property Tax Commission held that the Durham and Forsyth Counties Boards of Equalization and Review correctly denied Reynolds claims for exemption from property taxation of imported tobacco stored as of 1 January 1983 in customs bonded warehouses.

I.

The scope of our review on appeal from a decision of the Property Tax Commission is governed by G.S. 105-345.2. See In re McElwee, 304 N.C. 68, 283 S.E.2d 115 (1981). Section (b) of this statute lists six grounds on which an appellate court may reverse, remand, modify, or declare null and void the findings, inferences, conclusions, or decisions made by the Commission. Although in the record Reynolds has taken other exceptions, for example, to certain findings of fact, it has failed to bring them forward in its brief. Instead, Reynolds has couched its entire appeal on the ground set forth in G.S. 105-345.2(b)(1) that the Commission's conclusions of law are in "violation of constitutional provisions." Basing its argument on three constitutional grounds, Reynolds argues that imposing ad valorem property taxes on imported tobacco stored in United States customs bonded warehouses is unconstitutional. Our review of Reynolds' appeal is confined to this issue.

First, we briefly explain the concept of and purpose behind customs bonded warehouses. In order to encourage merchants here and abroad to use American ports, Congress was willing to waive all duty on goods that were reexported and to defer for a prescribed period the duty on imported goods destined for domestic consumption. See 19 U.S.C.A. § 1557(a). To carry out this objective, Congress, pursuant to its powers under the Commerce clause, established a comprehensive customs system which created secure and duty-free enclaves or government-supervised bonded warehouses. For a five-year period, imported goods may be stored in the warehouses duty-free. If during this period the goods are withdrawn and reexported, no duty is paid. If the goods are withdrawn for American consumption or stored beyond five years, any duty owed on the goods becomes due. Xerox Corp. v. County of Harris, 459 U.S. 145, 103 S.Ct. 523, 74 L.Ed.2d 323 (1982).

At the outset, we note three cases which guide our determination of the issue presented: Michelin Tire Corp. v. Wages, 423 U.S. 276, 96 S.Ct. 535, 46 L.Ed.2d 495, rehearing denied, 424 U.S. 935, 96 S.Ct. 1151, 47 L.Ed.2d 344 (1976); Xerox v. County of Harris, supra; and American Smelting and Refining Co. v. County of Contra Costa, 271 Cal.App.2d 437, 77 Cal.Rptr. 570 (1969), appeal dismissed for want of substantial federal question, 396 U.S. 273, 90 S.Ct. 553, 24 L.Ed.2d 462 (1970).

A.

The first ground asserted by Reynolds as a basis for holding unconstitutional the imposition of ad valorem taxes on its imported tobacco in Durham and Forsyth Counties is the Import-Export clause. Article I, § 10, clause 2 of the United States Constitution provides in part that "[n]o state shall, without the consent of congress, lay any imposts or duties on imports or exports." Reynolds maintains that the tobacco involved in this case is still in the import stream of commerce. It argues that because Congress has decided that goods can remain in customs bonded warehouses duty-free for five years, Congress has thereby defined the period during which goods remain in foreign commerce.

This argument is without merit. In Michelin Tire Corp. v. Wages, supra, county tax officials assessed Georgia ad valorem property taxes against imported tires and tubes which were included in the corporation's inventory maintained at its wholesale distribution warehouse located in the county. The U.S. Supreme Court held that Georgia's assessment of a nondiscriminatory ad valorem property tax against imported goods that were no longer in import transit did not violate the Import-Export clause, regardless of whether the goods had lost their status as imports by being mingled with other goods of the importer. Id. 423 U.S. at 279, 96 S.Ct. at 538, 46 L.Ed.2d at 499-500. This decision expressly overruled Low v. Austin, 13 Wall. 29, 20 L.Ed. 517 (1872), which had held that the states were prohibited by the Import-Export clause from imposing a nondiscriminatory ad valorem property tax on imported goods until they have lost their character as imports and have become incorporated into the mass of property in the state. Id. 423 U.S. at 279, 282, 96 S.Ct. at 538, 539, 46 L.Ed.2d at 500, 501. The Michelin decision indicates that "a state or local tax on imported goods is permissible if the goods have lost their status as imports, and that such a tax is also permissible, even if the goods have not lost their status as imports, if the tax is nondiscriminatory." Annot., 46 L.Ed.2d 955, 967 (1977). The focus of Import-Export clause cases has therefore been changed "from the nature of the goods as imports to the nature of the tax at issue." Limbach v. Hooven & Allison Co., 466 U.S. 353 104 S.Ct. 1837, 1842, 80 L.Ed.2d 356, 363 (1984). It is unnecessary for this Court to determine whether the imported tobacco involved in this case was "still in the import stream of commerce." Neither party disputes the fact that the property taxes levied by Durham and Forsyth Counties are nondiscriminatory. We hold that the imposition of a nondiscriminatory ad valorem property tax on Reynolds' imported tobacco located in customs bonded warehouses in Durham and Forsyth Counties is not prohibited by the Import-Export clause of the U.S. Constitution.

Two companion cases, Youngstown Sheet & Tube Co. v. Bowers and United States Plywood Corp. v. City of Algoma, 358 U.S. 534, 79 S.Ct. 383, 3 L.Ed.2d 490 (1959), which did not have the benefit of the Michelin rule, saw no justification in allowing imported goods to escape a nondiscriminatory property tax. In Youngstown, iron ores were...