JDS Realty Corp. v. Government of Virgin Islands

• Decision Date: 24 August 1984
• Docket Number: Civ. No. 81-183.
• Citation: 593 F. Supp. 199
• Parties: JDS REALTY CORP., formerly known as West Indies Corp., Plaintiff, v. GOVERNMENT OF the VIRGIN ISLANDS and Leroy A. Quinn, Director of Internal Revenue, Defendants.
• Court: U.S. District Court — Virgin Islands

593 F. Supp. 199

JDS REALTY CORP., formerly known as West Indies Corp., Plaintiff, v. GOVERNMENT OF the VIRGIN ISLANDS and Leroy A. Quinn, Director of Internal Revenue, Defendants.

Civ. No. 81-183.

District Court, Virgin Islands, D. St. Thomas and St. John.

August 24, 1984.

Arthur Pomerantz, Charlotte Amalie, St. Thomas, V.I., for plaintiff.

Jada M. Finch-Sheen, Atty. Gen., Leroy A. Mercer, Asst. Atty. Gen., Dept. of Law, Charlotte Amalie, St. Thomas, V.I. for defendants.

MEMORANDUM OPINION

CHRISTIAN, Chief Judge.

In its present posture, this action for refund of excise taxes is before the Court on motion of plaintiff JDS Realty Corp. for summary judgment. On August 14, 1984, we entered an Order granting the motion insofar as said motion challenged the constitutionality of the subject "excise" tax. 33 V.I.C. § 42 (Supp.1983). In all other respects plaintiff's motion was denied. We write now to clarify our ruling and its constitutional underpinnings.

I

Plaintiff JDS Realty Corp. ("JDS") is a self-described "Virgin Islands corporation engaged in the wholesale distribution of liquor, cigarettes, perfumes, and drugs." Memorandum of Law in Support of Plaintiff's Motion for Summary Judgment at 1. The unopposed affidavit of Henry L. Kimelman, chairman of the board of plaintiff corporation throughout the relevant period, establishes, for present purposes, that during the 45 month period from January, 1977, through September, 1980, plaintiff corporation paid $2,046,137.86 in "excise" taxes pursuant to the mandate of 33 V.I.C. § 42.¹ Kimelman's affidavit further avers that said taxes were paid "on various goods primarily alcoholic beverages and tobacco products brought into the Virgin Islands from the United States and various foreign countries." Affidavit of Henry L. Kimelman In Support of Plaintiff's Motion for Summary Judgment at ¶ 8. Affiant further declares, upon personal knowledge, that "no comparable tax was paid on goods purchased within the Virgin Islands, including rum manufactured on St. Croix." Id. at ¶ 9.

Plaintiff contends that 33 V.I.C. § 42 effectively violates the Commerce and Import/Export Clauses of the United States Constitution, U.S. Const. art. I, § 8, and art. I, § 10, respectively, and discriminates in favor of locally produced goods, and against goods brought into the Territory, in violation of § 4 of the Act of Congress of march 3, 1917 (Act March 3, 1917, Ch. 171, 39 Stat. 1132), and clause 1 of § 3 of the Revised Organic Act of 1954. 48 U.S.C. § 1561.

Defendant Government counters that the Commerce and Import/Export Clauses of the United States Constitution do not limit the inherent taxing power of the Government of the Virgin Islands, or do so only in ways not relevant for present purposes. Alternatively the Government argues that even if said clauses limit territorial powers of taxation, they do not preclude imposition of the challenged excise taxes, at least in part because, as defendant sees it, Congress has implicitly approved territorial collection of said tax. Finally, defendant contends that the challenged tax is impervious to attack on due process and/or equal protection grounds in that the promotion of local industry, defendant's proffered justification for the discriminatory taxing scheme embodied in 33 V.I.C. § 42, is a legitimate governmental objective.

For the reasons set out below we have concluded that the challenged excise tax violates both the Commerce and Import/Export Clauses of the United States Constitution. Collection of said tax thus being impermissible whether the taxed "imports" are "foreign", or "domestic", we need not reach plaintiff's due process/equal protection challenge.²

II

Plaintiff has not directed us, nor has our extensive research led us, to any case squarely and expressly holding that the Commerce Clause imposes upon the taxing power of this Territory the same limitations said Clause imposes upon the parallel powers of the several States. Still, the weight of authority overwhelmingly supports such a conclusion.

Both this Court and the Court of Appeals for the Third Circuit have repeatedly assumed the applicability of the Commerce Clause in scrutinizing various challenged actions of the territorial government. See, e.g., Port Construction Co. v. Government of the Virgin Islands, 5 V.I. 549, 359 F.2d 633 (3rd Cir.1966); Alton v. Alton, 2 V.I. 600, 604 n. 5, 207 F.2d 667, 669 n. 5 (3rd Cir.1953); Pan American World Airways, Inc. v. Government, 8 V.I. 82, 315 F.Supp. 746 (D.V.I.1970); Brinn v. Winter, 3 V.I. 105, 126 F.Supp. 902 (D.V.I.1954). See also, Pan American World Airways, Inc. v. Government of the Virgin Islands, 459 F.2d 387, 395 (3rd Cir.1972) (observing that in previous cases the Court of Appeals for the Third Circuit had "presumed, without extensive discussion of the issue, that the commerce clause applied" to the Virgin Islands).

While the assumed applicability of the Commerce Clause was not essential to the result reached in the cases cited immediately above, the holding of the Court of Appeals in Southerland v. St. Croix Taxi Association, 315 F.2d 364 (3rd Cir.1963), is squarely grounded upon the applicability of the Clause. There, the court unequivocally held that the challenged franchise agreement between defendant Taxicab Association and defendant Government "runs afoul of the Commerce Clause of the Constitution." Id. at 369.

Despite the foregoing authority, defendant Government contends that the Commerce Clause does not delimit the authority of the Government of the Virgin Islands in that the Clause is neither among those constitutional provisions explicitly made applicable to the Virgin Islands by operation of § 3 of the Organic Act of 1954, 48 U.S.C. § 1561 (Supp.1984), nor a fundamental personal right guaranteed by the Constitution to all those within its protection, including residents of unincorporated territories. See, Soto v. United States, 273 F. 628, 632-34 (3rd Cir.1921). While defendants factual premises are accurate, its conclusion that the Commerce Clause is therefore inapplicable to the Virgin Islands ignores the structural role of the Commerce Clause in our federal system.

That Congress has plenary power over the territories by virtue of Article IV, Section 3, Clause 2 of the Constitution cannot be gainsaid. That the Commerce Clause and, for that matter, the Import/Export Clause do not embody fundamental personal rights is self-evident. What defendant fails to grasp is that the constitutional grant to Congress of plenary authority to regulate interstate and foreign commerce substantiates a fundamental principle of our federal system of government.

By holding that both the Commerce and Import/Export Clauses delimit the taxing power of the Government of the Virgin Islands, we do not extend to those residing in this Territory constitutional protection in excess of that contemplated by Congress or guaranteed by the Constitution even to residents of unicorporated territories. Rather, we reach the unremarkable conclusion that a territory devoid of the sovereign power reserved to the States under the Constitution, may not, consonant with the Constitution, disregard fundamental structural limitations on the economic power of the States which lie at the core of our federalism.³

A ruling that a particular tax or regulation violates the Commerce Clause or the Import-Export Clause does not, by design, further the interest of those within the taxing or regulating jurisdiction. The constitutional grant to Congress of plenary authority to regulate interstate and foreign commerce constitutes a structural check on the natural tendency of the various state and territorial governments to legislate from self interest to the economic disadvantage of those politically powerless to influence the policies of the taxing or regulating jurisdiction. As the Supreme Court has recently observed:

Unrepresented interests will often bear the brunt of regulations imposed by one State having a significant effect on persons or operations in other States. Thus, "when the regulation is of such a character that its burden falls principally upon those without the state, legislative action is not likely to be subjected to those political restraints which are normally exerted on legislation where it affects adversely some interest within the state." South Carolina State Highway Dep't v. Barnwell Bros., 303 U.S. 177, 185 n. 2, 58 S.Ct. 510, 513 n. 2, 82 L.Ed. 734 (1938); see also Southern Pacific Co. v. Arizona, supra, 325 U.S. 761 at 767-768 n. 2 65 S.Ct. 1515, 1519 n. 2, 89 L.Ed. 1915 (1945). On the other hand, when Congress acts, all segments of the Country are represented and there is significantly less danger that one State will be in a position to exploit others. Furthermore, if a State is in such a position, the decision to allow it is a collective one. A rule requiring a clear expression of approval by Congress ensures that there is, in fact, such a collective decision and reduces significantly the risk that unrepresented interests will be adversely affected by restraints on commerce."

South-Central Timber Development, Inc. v. Wunnicke, ___ U.S. ___, ___, 104 S.Ct. 2237, 2243, 81 L.Ed.2d 71 (1984).

Our decision, then, does not turn on the constitutional rights of those residing within the Virgin Islands, as defendant seems to suggest. It is, instead, dictated by the Constitution's embodiment of

a central concern of the Framers that was an immediate reason for calling the constitutional convention; the conviction that in order to succeed the new Union would have to avoid the economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation.

Hughes v. Oklahoma, 441 U.S. 322, 325-6, 99 S.Ct. 1727, 1730-31, 60 L.Ed.2d 250 (1979), cited with approval in South-Central Timber, ___ U.S. at ___, 104 S.Ct. at 2242. We hold therefore, that the Government of the Virgin Islands...