Bacchus Imports, Ltd., Matter of

Citation656 P.2d 724,65 Haw. 566
Decision Date23 December 1982
Docket NumberNo. 7802,7802
CourtSupreme Court of Hawai'i
PartiesIn the Matter of the Tax Appeals of BACCHUS IMPORTS, LTD., Paradise Beverages, Inc., Eagle Distributors, Inc., and Foremost-McKesson, Inc., dba McKesson Wine & Spirits Co., Taxpayers.

Syllabus by the Court

1. Although the strictures of the Equal Protection Clause condition the exercise of a state's power of taxation, the Fourteenth Amendment was not intended to compel the State to adopt an iron rule of equal taxation.

2. In taxation, even more than in other fields, legislatures possess the greatest freedom in classification. And the burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it.

3. The United States Supreme Court does not countenance the unequal treatment of taxpayers based solely on state residence; but if the classification rests upon some reasonable consideration of difference or policy, there is no denial of equal protection.

4. In deciding whether a statute meets the rational-basis test, the dispositive questions are: (1) Does the challenged legislation have a legitimate purpose? and (2) Was it reasonable for the lawmakers to believe that use of the challenged classification would promote that purpose?

5. The encouragement and promotion of a new industry is a legitimate state purpose.

6. The legislature is under no obligation to convince the court of the correctness of its legislative judgment. Rather, those challenging the legislative judgment must convince the court that the legislative facts on which the classification is apparently based could not reasonably be conceived to be true by the legislature.

7. The Import-Export Clause commits sole power to lay imposts and duties on imports in the Federal Government, with no concurrent state power. But the term "Impost or duty" is not self-defining and does not necessarily encompass all taxes.

8. In deciding whether a state tax is a forbidden "Impost or duty", the United States Supreme Court examines the tax with the following policy considerations in mind: (1) the Federal Government must speak with one voice when regulating commercial relations with foreign governments, and tariffs, which might affect foreign relations, could not be implemented by the states consistently with that exclusive power; (2) import revenues were to be the major source of revenue of the Federal Government and should not be diverted to the states; and (3) harmony among the states might be disturbed unless seaboard states, with their crucial ports of entry, were prohibited from levying taxes on citizens of other states by taxing goods merely flowing through their ports to the other states not situated as favorably geographically.

9. The Hawaii Liquor Tax offends none of the three policy considerations which in the opinion of the United States Supreme Court explain the presence of the Import-Export Clause.

10. In reviewing Commerce Clause challenges to state taxes, the goal of the United States Supreme Court has been to establish a consistent and rational method of inquiry focusing on the practical effect of a challenged tax. The method of inquiry presently favored by the Court is the four-part test described in Complete Auto Transit, Inc. v. Brady.

11. Under the test described in Complete Auto Transit, Inc. v. Brady, a state tax does not offend the Commerce Clause if it 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 services provided by the state.

12. The Hawaii Liquor Tax is not a barricade against the movement of trade, nor is it a means through which Hawaii seeks more than a just share of the income earned by taxpayers engaged in multi-state enterprises.

Allan S. Haley, Honolulu (Cronin, Fried, Sekiya, Haley & Kekina, Honolulu, of counsel) for plaintiffs-appellants Bacchus Imports & Eagle Distributors.

Bruce C. Bigelow, Honolulu (Julian H. Clark, Honolulu, with him on the briefs; Case, Kay & Lynch, Honolulu, of counsel) for plaintiff-appellant Foremost-McKesson.

Michael K. Kawahara, Honolulu (Vernon F. L. Char, Honolulu, with him on the joinder; Damon, Key, Char & Bocken, Honolulu, of counsel), for plaintiff-appellant Paradise Beverages.

T. Bruce Honda, Deputy Atty. Gen., Honolulu (Allan S. Chock, Deputy Atty. Gen., on the brief), Deputy Atty. Gen., Honolulu, for defendant-appellee Director of Taxation.

Before RICHARDSON, C.J., and LUM, NAKAMURA, PADGETT and HAYASHI, JJ.

NAKAMURA, Justice.

In this appeal from the Tax Appeal Court, four wholesalers of liquor, Bacchus Imports, Ltd., Paradise Beverages, Inc., Eagle Distributors, Inc., and Foremost-McKesson, Inc. (Bacchus, Paradise, Eagle, and McKesson respectively, the taxpayers collectively) challenge, on constitutional grounds, the levy of excise taxes on the sale or use of liquor pursuant to HRS § 244-4. 1 They assert the statute in question runs afoul of the Equal Protection, 2 Import-Export, 3 and Commerce Clauses 4 of the United States Constitution and the Equal Protection Clause of the Hawaii Constitution. 5 Though we have carefully scrutinized the statute with the cited constitutional provisions in mind, we discern no infirmities in HRS § 244-4. We therefore affirm the Tax Appeal Court's decision.

I.

The Hawaii Liquor Tax, HRS Chapter 244, imposes a levy on the sale or use of alcoholic beverages amounting to twenty percent of the wholesale price of the liquor sold or used, which essentially is an excise levied on the first sale of liquor within the State of Hawaii. See note 1 supra. At its inception, the tax was one imposed on retailers, and the amount of the levy was six percent of the retail price. S.L.H. 1939, c. 222, § 5. But its incidence has since been shifted to wholesalers and the rate has been raised to twenty percent of the wholesale price. 6 Limited exemptions from the tax have been approved periodically by the legislature; transactions involving okolehao 7 and "[a]ny fruit wine manufactured in the State from products grown in the State" 8 were thus free of taxation during the relevant period. This aspect of the Hawaii Liquor Tax has been challenged by the taxpayers.

Bacchus, Paradise, 9 and Eagle are Hawaii corporations licensed to engage in the wholesaling of liquor; McKesson is a Maryland corporation authorized to do business in Hawaii, also licensed as a wholesale liquor dealer under applicable liquor control laws. See HRS Chapter 281. Bacchus initially protested the assessment of excise taxes on its sale or use of alcoholic beverages by a letter directed to the State Director of Taxation on May 30, 1979. It subsequently filed a complaint pursuant to HRS § 40-35, 10 seeking a refund of taxes paid during the period between December 1977 and May 1979. Paradise, Eagle, and McKesson quickly followed Bacchus' lead with their letters of protest to the Director and refund suits. 11

The taxpayers' complaints averred that HRS § 244-4 contravened the Import-Export and Commerce Clauses of the federal constitution because the statute discriminated in favor of locally produced liquor by providing exemptions for sales and uses of okolehao and fruit wine brewed in Hawaii from locally grown products. The cases were consolidated for trial and disposition by agreement of all the parties and submitted to the Tax Appeal Court for decision on Stipulations of Facts. The court ruled the tax is "a valid State tax," and timely appeals to this court were filed by the taxpayers.

II.

Focusing on the allegations of unconstitutionality advanced by the taxpayers, we first consider their claim that the favored treatment of okolehao and locally produced fruit wine denies them equal protection.

A.

We recognize, of course, that the strictures of the Equal Protection Clause condition the exercise of a state's power of taxation. Bell's Gap Railroad v. Pennsylvania, 134 U.S. 232, 10 S.Ct. 533, 33 L.Ed. 892 (1890). Still, "the Fourteenth Amendment was not intended to compel the State to adopt an iron rule of equal taxation." Id. at 237, 10 S.Ct. at 535. For such a construction

would not only supersede all those constitutional provisions and laws of some of the States, whose object is to secure equality of taxation, and which are usually accompanied with qualifications deemed material; but it would render nugatory those discriminations which the best interests of society require; which are necessary for the encouragement of needed and useful industries, and the discouragement of intemperance and vice; and which every State, in one form or another, deems it expedient to adopt.

Id. Moreover, "[i]t has ... been pointed out that in taxation, even more than in other fields, legislatures possess the greatest freedom in classification." Madden v. Kentucky, 309 U.S. 83, 88, 60 S.Ct. 406, 406, 84 L.Ed. 590 (1940) (footnote omitted). And "[t]he burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it." Id. (Footnote omitted).

The legislative arrangement in question, the taxpayers claim, breaches the equal protection guaranty because of its favored treatment of transactions involving okolehao and pineapple wine. But the statute does not establish a classificatory scheme that disfavors any of the taxpayers--all wholesalers of liquor distributing alcoholic beverages in Hawaii are subject to taxation thereunder in similar fashion. Bacchus, Paradise, and Eagle enjoy no advantage over McKesson, a Maryland corporation, by reason of their incorporation under Hawaii law since their transactions are taxed at the same rate McKesson's are.

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