AMMEX INC V DEPT OF TREASURY
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STATE OF MICHIGAN
COURT OF APPEALS
AMMEX, INC.,
FOR PUBLICATION
October 19, 2006
9:00 a.m.
Plaintiff-Appellee,
v
No. 260049
Court of Claims
LC No. 02-000082-MT
DEPARTMENT OF TREASURY,
Defendant-Appellant.
AMMEX, INC.,
Plaintiff-Appellee,
v
No. 265936
Ingham Circuit Court
LC No. 04-000369-CZ
DEPARTMENT OF TREASURY,
Defendant-Appellant.
Official Reported Version
Before: Borrello, P.J., and Saad and Wilder, JJ.
BORRELLO, P.J.
These consolidated cases concern whether plaintiff 's sale of duty-free gasoline and diesel
fuel from January 1, 2001, through March 31, 2001, at its duty-free retail facility in Detroit,
Michigan, adjacent to the Ambassador Bridge, is subject to state taxation under the motor fuel
tax act, MCL 207.101 et seq.,1 and the General Sales Tax Act, MCL 205.51 et seq. In Docket
No. 260049, defendant appeals as of right a judgment for plaintiff. In Docket No. 265936,
defendant appeals as of right an order granting summary disposition in favor of plaintiff. For the
reasons set forth in this opinion, we affirm in both cases.
1
The motor fuel tax act, MCL 207.101 et seq., was repealed by 2000 PA 403.
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I. Facts and Procedural History
Plaintiff operates a United States Customs Class 9 bonded warehouse,2 also known as a
"duty-free sales enterprise"3 or a "duty-free store,"4 in Detroit, Michigan. The warehouse is
adjacent to the entrance to the Ambassador Bridge, which links the United States and Canada.
Although plaintiff 's duty-free store is within the United States, it is located beyond the exit point
for travelers leaving the United States and is designated as "sterile" by the United States
Customs Service because it is physically designed to ensure that anyone who enters the store has
no alternative but to depart from the United States and enter Canada. Duty-free products
purchased at plaintiff 's store are therefore necessarily exported to Canada. The property on
which plaintiff 's facility is located is privately owned. In addition, all the roads leading from
plaintiff 's duty-free store to Canada and the Ambassador Bridge are also privately owned.
Plaintiff sells a variety of products from its duty-free store, including alcoholic
beverages, tobacco products, perfume, watches, and other items of tangible personal property. In
September 2000, the United States Customs Service granted plaintiff permission to expand its
Class 9 customs bonded warehouse operation to include its three gasoline storage tanks and three
diesel fuel storage tanks at the Ambassador Bridge facility, which allowed plaintiff to sell dutyfree gasoline and diesel fuel.5 In 2001, plaintiff purchased all the motor fuel sold from its dutyfree retail facility in Canada from a Canadian supplier. The motor fuel was then transported to
plaintiff 's duty-free facility under a United States Customs "in transit" bond and stored in fuel
storage tanks at plaintiff 's customs bonded warehouse to be sold to customers duty-free.
Plaintiff prepaid Michigan gasoline and diesel fuel taxes to its Canadian supplier from January 1,
2001, through March 31, 2001.
Plaintiff filed a claim for a refund from defendant, seeking to recoup $204,158.95 in state
gasoline taxes and $178,769.27 in state diesel fuel taxes that it prepaid its Canadian supplier for
the period of January 1, 2001, through March 31, 2001. Defendant denied the refund, asserting
that the Michigan motor fuel tax act does not exempt the sale of duty-free gasoline and diesel
fuel from motor fuel taxes. After defendant denied plaintiff 's claim for a refund, plaintiff filed a
complaint in the Michigan Court of Claims. In its complaint, plaintiff sought, among other
2
Under federal law, a customs bonded warehouse is a building where imported goods may be
stored, manipulated, or undergo manufacture duty-free for a specific period. 19 USC 1555; 19
USC 1557.
3
19 USC 1555(b)(8)(D).
4
19 CFR 19.1(a)(9).
5
On November 1, 2001, the United States Customs Service revoked its authorization of
plaintiff 's sale of duty-free gasoline and diesel fuel from its customs bonded warehouse.
However, the United States Court of Appeals for the Federal Circuit affirmed the holding of the
United States Court of International Trade that the United States Customs Service abused its
discretion in revoking its authorization of plaintiff 's sale of duty-free gasoline and diesel fuel
from its duty-free store. Ammex, Inc v United States, 419 F3d 1342 (CA Fed, 2005).
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relief, a declaratory judgment that federal law regulating duty-free retail facilities preempted the
imposition of taxes under the motor fuel tax act, and a declaratory judgment exempting
plaintiff 's purchase of gasoline and diesel fuel from its Canadian supplier from state motor fuel
taxes. Plaintiff also requested a refund of the state motor fuel taxes that plaintiff prepaid to its
Canadian supplier for the period of January 1, 2001, through March 31, 2001.
The case was submitted on stipulated facts to the Court of Claims. The Court of Claims
held that the federal government's "extensive statutory and regulatory frameworks . . . preempt[]
the operation of Michigan law" and enjoined defendant from assessing and collecting Michigan
motor fuel tax on plaintiff 's sales of motor fuel designated as duty-free merchandise and from
enforcing any agreement requiring prepayment of such taxes to plaintiff 's Canadian supplier.
The court also ordered defendant to refund the motor fuel tax prepaid by plaintiff for the period
in question, with interest.6 Defendant appeals this judgment in Docket No. 260049.7
Plaintiff also filed a complaint in the Ingham Circuit Court challenging defendant's
imposition of state sales tax on plaintiff 's duty-free gasoline and diesel fuel. Plaintiff sought a
declaratory ruling that the state sales tax did not apply to plaintiff 's duty-free operations, that
federal law regulating duty-free facilities preempted the state sales tax, and that application of
the state sales tax act violated numerous provisions of the United States Constitution, including
the Export Clause, the Import-Export Clause, the Commerce Clause, the Equal Protection
Clause, and the Due Process Clause. Plaintiff moved for summary disposition under MCR
2.116(C)(10), arguing that it was entitled to summary disposition because there was no genuine
issue of fact that the assessment of state sales tax on plaintiff 's duty-free sales, including its sales
of gasoline and diesel fuel, was preempted by federal law because of the existence of a
comprehensive federal regulatory scheme governing the operation of duty-free stores. The trial
6
On March 22, 2005, this Court issued a stay pending its review of defendant's appeal. Ammex,
Inc v Dep't of Treasury, unpublished order of the Court of Appeals, entered March 22, 2005
(Docket No. 260049).
7
In Docket No. 260049, plaintiff urges this Court, as a preliminary matter, to make a
determination that the motor fuel tax, according to its language, should never have been imposed
on plaintiff 's purchase of gasoline and diesel fuel from its Canadian supplier. According to
plaintiff, the purpose of the motor fuel tax was to prescribe a privilege tax for the use of
Michigan's public highways by owners and drivers of motor vehicles, and neither plaintiff nor
plaintiff 's customers used motor fuel for that purpose. Thus, plaintiff contends, the motor fuel
tax should not have been imposed on plaintiff 's purchase of motor fuel from its Canadian
supplier. We note that the trial court did not rule on this issue; therefore, it is not preserved for
review. Fast Air, Inc v Knight, 235 Mich App 541, 549; 599 NW2d 489 (1999). However, we
observe that this Court rejected this argument in Ammex, Inc v Dep't of Treasury, 237 Mich App
455, 470; 603 NW2d 308 (1999), although that case was decided before the United States
Customs Service authorized plaintiff to sell motor fuel duty-free and therefore did not consider
the implications of plaintiff's sale of duty-free gasoline and diesel fuel.
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court agreed and granted plaintiff 's motion for summary disposition. Defendant appeals this
order in Docket No. 265936.
II. Analysis
A. Standing
In Docket No. 260049, defendant contends as a preliminary matter that plaintiff lacks
standing to pursue an action against defendant because plaintiff did not suffer an injury in fact in
light of the fact that, according to defendant, plaintiff shifted the burden of the motor fuel tax to
its customers and therefore did not bear the economic burden of the motor fuel tax.8 Thus,
defendant contends, refunding the motor fuel tax prepaid by plaintiff would result in plaintiff
receiving a windfall. Whether a party has standing is a question of law that this Court reviews
de novo. Nat'l Wildlife Federation v Cleveland Cliffs Iron Co, 471 Mich 608, 612; 684 NW2d
800 (2004).
Plaintiff, as the party invoking the court's jurisdiction, had the burden to establish that it
had standing to pursue a cause of action for a tax refund against defendant. Lee v Macomb Co
Bd of Comm'rs, 464 Mich 726, 740; 629 NW2d 900 (2001). There are three elements to
establish standing:
"First, the plaintiff must have suffered an 'injury in fact'—an invasion of a
legally protected interest which is (a) concrete and particularized, and (b) 'actual
or imminent, not "conjectural" or "hypothetical."' Second, there must be a causal
connection between the injury and the conduct complained of—the injury has to
be 'fairly . . . trace[able] to the challenged action of the defendant, and not . . .
th[e] result [of] the independent action of some third party not before the court.'
Third, it must be 'likely,' as opposed to merely 'speculative,' that the injury will be
'redressed by a favorable decision.'" [Id. at 739, quoting Lujan v Defenders of
Wildlife, 504 US 555, 560-561; 112 S Ct 2130; 119 L Ed 2d 351 (1992) (citations
omitted).]
8
Defendant also contends on appeal that plaintiff was not a proper party to seek a motor fuel tax
refund under MCL 207.112(2) because only a "purchaser" is eligible to receive a refund under
MCL 207.112(2), and that plaintiff, as a retailer, did not qualify as a "purchaser" under the
statute. A defendant challenging a plaintiff 's legal capacity to sue under a statute must raise
such an argument in the defendant's first responsive pleading or in a motion filed before that
pleading. MCR 2.116(D)(2); Glen Lake-Crystal River Watershed Riparians v Glen Lake Ass'n,
264 Mich App 523, 528; 695 NW2d 508 (2004). Because defendant failed to raise the MCL
207.112(2) argument in its first responsive pleading or in a motion filed before that pleading, the
issue is waived. Glen Lake-Crystal River Watershed Riparians, supra at 528. Moreover, the
trial court never addressed the issue whether plaintiff had the legal capacity to seek a refund
under MCL 207.112(2). An issue that is not addressed by the trial court is not preserved for
review. Fast Air, Inc, supra at 549. We therefore decline to address defendant's claim that
plaintiff was not a proper party to seek a motor fuel tax refund under MCL 207.112(2).
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Defendant's argument concerns the first element of standing: whether plaintiff suffered
an injury in fact. The motor fuel tax act, MCL 207.101 et seq., "imposes a tax at a specific rate
per gallon on all gasoline and diesel fuel sold in Michigan or used in propelling motor vehicles
on the public roads and highways of Michigan." Ammex, Inc v Dep't of Treasury, 237 Mich App
455, 459; 603 NW2d 308 (1999). "The purpose of the act is to 'prescribe a privilege tax for the
use of the public highways by owners and drivers of motor vehicles.'" Id., quoting Roosevelt Oil
Co v Secretary of State, 339 Mich 679, 685; 64 NW2d 582 (1954). "Although the tax is intended
to be imposed on the ultimate consumer of gasoline or diesel fuel, it is collected by the supplier
at the time of distribution." Id.
The parties stipulated that plaintiff prepaid Michigan gasoline and diesel fuel taxes to its
supplier from January 1, 2001, through March 31, 2001, and that plaintiff prepaid this tax to
comply with defendant's demands that the supplier collect the tax from plaintiff. Defendant
suggests that plaintiff shifted this cost to its customers and therefore suffered no injury in fact.
In Anniston Mfg Co v Davis, 301 US 337, 348; 57 S Ct 816; 81 L Ed 1143 (1937), the United
States Supreme Court stated, "[w]hile the taxpayer was undoubtedly hurt when he paid the tax, if
he has obtained relief through the shifting of its burden, he is no longer in a position to claim an
actual injury . . . ." Therefore, the factual inquiry in this case concerns whether plaintiff bore the
economic burden of the motor fuel tax itself or whether it shifted this burden to its customers.
The parties stipulated that plaintiff posted signs informing its customers that "duty and tax free
diesel must be exported without road tax." Furthermore, the parties stipulated that plaintiff 's
sales receipts stated that "no state, federal duty, sales motor fuel or other taxes are part of the
price." In light of the parties' stipulations, we reject defendant's contention that the evidence
revealed that plaintiff shifted the burden of the motor fuel tax to its customers. To the contrary,
the parties' stipulations constitute sufficient evidence to establish that plaintiff suffered an injury
in fact and therefore had standing to bring the action against defendant.
B. Jurisdiction
In Docket No. 235936, defendant argues as a preliminary matter that the circuit court
lacked subject-matter jurisdiction to render a declaratory ruling that invalidates a tax assessment
because MCL 205.22 grants exclusive jurisdiction to appeal a final assessment to the Tax
Tribunal or the Court of Claims. Although defendant raised this argument below, the trial court
did not address it. Nevertheless, we will address it because jurisdictional issues are always
subject to review. Walsh v Taylor, 263 Mich App 618, 622; 689 NW2d 506 (2004); see also
MCR 2.116(D)(3). The existence of jurisdiction is a question of law, which we review de novo
on appeal. Trostel, Ltd v Dep't of Treasury, 269 Mich App 433, 440; 713 NW2d 279 (2006).
Circuit courts are courts of general jurisdiction with original jurisdiction over all civil
claims and remedies, except when the constitution or a statute confers exclusive jurisdiction on
another court. MCL 600.601; MCL 600.605. Pursuant to MCL 205.22(1), "[a] taxpayer
aggrieved by an assessment, decision, or order of the department may appeal the contested
portion of the assessment, decision, or order to the tax tribunal . . . or to the court of claims . . . ."
This Court has held that under MCL 205.22, exclusive jurisdiction over such determinations lies
with either the Tax Tribunal or the Court of Claims because "an appeal from either forum is
made directly to this Court [; therefore], the circuit court never acquires jurisdiction over such
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determinations." Kostyu v Dep't of Treasury, 170 Mich App 123, 128; 427 NW2d 566 (1988).
However, "the circuit court continues to have jurisdiction to entertain constitutional issues
concerning the validity of tax laws . . . ." Id.
In Kostyu, the plaintiff appealed a final assessment to the Tax Tribunal under MCL
205.22 and brought a concurrent action in the circuit court seeking a declaration that a certain
Department of Treasury policy be declared unconstitutional as a violation of due process. Id. at
126. We held that the circuit court did not have jurisdiction over the plaintiff 's declaratory
judgment action because although the plaintiff "couched his complaint in the circuit court as one
for declaratory judgment of purely legal issues, a review of the relief sought by [the plaintiff]
reveals that he sought much more than a declaration of his legal rights." Id. at 129. We
concluded "that the issues raised are squarely within the Tax Tribunal's jurisdiction" and that
because the plaintiff 's "claims involve the methodology employed by the department in arriving
at a taxpayer's final income tax liability, the circuit court correctly ruled that it lacked subject
matter jurisdiction." Id. at 130.
In contrast to the complaint in Kostyu, plaintiff 's action for declaratory judgment in this
case is accurately characterized as a purely legal issue concerning the constitutional validity of a
state tax law as applied to plaintiff. Unlike the plaintiff in Kostyu, plaintiff in the instant case
was not seeking a review of a department determination or methodology "couched" in
constitutional terms. Furthermore, plaintiff was not raising an issue that fell "squarely" within
the jurisdiction of the Tax Tribunal. Indeed, "the Tax Tribunal does not have jurisdiction over
constitutional questions and has no authority to hold statutes invalid. . . . Rather, the circuit
court has jurisdiction to consider such matters." WPW Acquisition Co v City of Troy (On
Remand), 254 Mich App 6, 8; 656 NW2d 881 (2002). We therefore hold that the circuit court
had jurisdiction over plaintiff 's claims against defendant.
C. Preemption
Defendant next argues that the state of Michigan is not preempted from imposing state
motor fuel and sales tax on plaintiff 's sale of gasoline and diesel fuel at plaintiff 's duty-free retail
facility. In Docket No. 260049, the trial court held that application of Michigan's motor fuel tax
to plaintiff 's sale of motor fuel at its duty-free store was preempted by the federal government's
extensive statutory and regulatory scheme governing customs bonded warehouses. Similarly, in
Docket No. 265936, the trial court also concluded that federal law preempted defendant's ability
to impose state sales tax on motor fuel sold from plaintiff 's duty-free store. We concur with the
trial court.
Under the Supremacy Clause of the United States Constitution, the laws of the United
States are the supreme law of the land, regardless of anything in the constitution or laws of any
state to the contrary. US Const, art VI, cl 2; LaVene v Winnebago Industries, 266 Mich App
470, 478; 702 NW2d 652 (2005). The Supremacy Clause provides Congress with the power to
preempt state law. Duprey v Huron & Eastern R Co, Inc, 237 Mich App 662, 665; 604 NW2d
702 (1999). However, there is a strong presumption against preemption. LaVene, supra at 478.
Furthermore,
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[p]reemption occurs only under certain conditions: (1) when a federal statute
contains a clear preemption provision; (2) when there is outright or actual conflict
between federal and state law; (3) where compliance with both federal and state
law is in effect physically impossible; (4) where there is implicit in federal law a
barrier to state regulation; (5) where Congress has legislated comprehensively,
thus occupying an entire field of regulation and leaving no room for the states to
supplement federal law; or (6) where the state law stands as an obstacle to the
accomplishment and execution of the full objectives of Congress. [Id.]
In this case, there is no specific preemptive provision in the federal scheme regulating
customs bonded warehouses. In addition, there is no outright or actual conflict between federal
and state law, and compliance with both federal and state law is not in effect physically
impossible. Furthermore, the United States Supreme Court has clearly held that the federal
scheme regulating customs bonded warehouses does not evince a congressional intent to preempt
state regulation by occupying the entire field. Itel Containers Int'l Corp v Huddleston, 507 US
60, 71; 113 S Ct 1095; 122 L Ed 2d 421 (1993). Thus, in order to conclude that federal law
preempts Michigan's state motor fuel tax and state sales tax, this Court must conclude that "the
state law stands as an obstacle to the accomplishment and execution of the full objectives of
Congress" or that "there is implicit in federal law a barrier to state regulation." LaVene, supra at
478.
1. Applicable Federal and State Law
"Pursuant to its powers under the Commerce Clause, Congress established a
comprehensive customs system which includes provisions for Government-supervised bonded
warehouses . . . ." Xerox Corp v Harris Co, Texas, 459 US 145, 150; 103 S Ct 523; 74 L Ed 2d
323 (1982). The federal customs warehouse scheme is "pervasive" and "provides for continual
federal supervision of warehouses, strict bonding requirements, and special taxing rules . . . ."
Itel, supra at 71. "Detailed regulations control every aspect of the manner in which the
warehouses are to be operated." Xerox Corp, supra at 150. Under the federal scheme, imports
may be stored in customs bonded warehouses duty-free for prescribed periods. 19 USC 1555; 19
USC 1557(a). At any time during the prescribed period, goods stored in customs bonded
warehouses may be withdrawn from the warehouse and reexported without payment of duty. 19
USC 1557(a). However, if the goods are withdrawn for domestic sale or stored beyond the
prescribed period, a duty becomes due. 19 USC 1557(a). The goods stored in a bonded
warehouse are in the joint custody of the United States Customs Service and the warehouse
proprietor. 19 USC 1555(a).
Customs bonded warehouses are designated by class, and a duty-free store, which is used
for selling duty-free merchandise for exportation, is designated as a Class 9 customs bonded
warehouse. 19 CFR 19.1(a)(9). A "'duty-free sales enterprise' . . . sells, for use outside the
customs territory, duty-free merchandise that is delivered from a bonded warehouse to an airport
or other exit point for exportation by, or on behalf of, individuals departing from the customs
territory." 19 USC 1555(b)(8)(D). "'[D]uty-free merchandise'" is "merchandise sold by a dutyfree sales enterprise on which neither Federal duty nor Federal tax has been assessed pending
exportation from the customs territory." 19 USC 1555(b)(8)(E). A duty-free sales enterprise is
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required to "establish procedures to provide reasonable assurance that duty-free merchandise
sold by the enterprise will be exported from the customs territory." 19 USC 1555(b)(3)(A). In
addition, a duty-free sales enterprise is required to
display in prominent places within its place of business notices which state clearly
that any duty-free merchandise purchased from the enterprise—
(i) has not been subject to any Federal duty or tax,
(ii) if brought back into the customs territory, must be declared and is
subject to Federal duty and tax, and
(iii) is subject to the customs laws and regulation of any foreign country to
which it is taken. [19 USC 1555(b)(3)(C).]
In 1988, Congress amended 19 USC 1555(b), adding significant regulations to the
customs bonded warehouse scheme. In findings regarding duty-free sales enterprises that
accompanied the amendment, Congress found that "duty-free sales enterprises play a significant
role in attracting international passengers to the United States and thereby their operations
favorably affect our balance of payments" and that "concession fees derived from the operations
of authorized duty-free sales enterprises constitute an important source of revenue for the State,
local and other governmental authorities that collect such fees." PL 100-418, § 1908(a)(1), (2),
102 Stat 1315.
The state motor fuel tax act in force at the relevant time provided:
(1) A specific tax at a rate of cents per gallon determined under subsection
(2) is imposed on all gasoline and diesel motor fuel sold or used in producing or
generating power for propelling motor vehicles used upon the public roads and
highways in this state. The tax shall be paid at those times, in the manner, and by
those persons specified in this act. It is the intent of this act to impose a tax upon
the owners and drivers of motor vehicles using an internal combustion type of
engine upon the public roads and highways of this state by requiring them to pay
for the privilege of using the public roads and highways of this state, in addition
to the motor vehicle license tax. [MCL 207.102, repealed by 2000 PA 403.]
"The purpose of the act is to 'prescribe a privilege tax for the use of the public highways by
owners and drivers of motor vehicles.'" Ammex, supra at 459, quoting Roosevelt, supra at 685.
"Although the tax is intended to be imposed on the ultimate consumer of gasoline or diesel fuel,
it is collected by the supplier at the time of distribution." Ammex, supra at 459. In this case,
plaintiff, as the retailer of the motor fuel, prepaid the tax to the supplier, and the supplier
remitted the tax to the state. "[P]laintiff, in turn, had the ability to pass on the economic burden
of the tax by including the amount of the tax in the price of the gasoline and diesel fuel sold to its
customers." Id.
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The General Sales Tax Act, MCL 205.51 et seq., imposes a tax on "all persons engaged
in the business of making sales at retail . . . ." MCL 205.52(1); By Lo Oil Co v Dep't of
Treasury, 267 Mich App 19, 50; 703 NW2d 822 (2005). "[S]ales tax is imposed on the seller for
the privilege of engaging in the business of making retail sales of tangible personal property in
Michigan." Ammex, supra at 460. "Although the legal incidence of the sales tax falls on the
retailer, the retailer is authorized to pass the economic burden of the tax onto the purchaser by
collecting an equal amount at the point of sale." Id. The act requires gasoline retailers to prepay
sales tax to their supplier at the time of "purchase or shipment." MCL 205.56a(1); By Lo Oil Co,
supra at 48.
2. The Preemptive Effect of the Federal Customs Bonded Warehousing Scheme
The United States Supreme Court has specifically recognized that the federal regulatory
scheme governing customs bonded warehouses preempts most state taxes on goods stored in
such warehouses. Itel, supra at 69. On two occasions, the United States Supreme Court has
specifically addressed the issue whether the federal bonded warehousing scheme preempts the
imposition of state taxes on goods stored in a customs bonded warehouse and destined for
exportation. In both cases, McGoldrick v Gulf Oil Corp, 309 US 414; 60 S Ct 664; 84 L Ed 840
(1940), and Xerox, supra, the Supreme Court held that state taxes were preempted by the
comprehensive federal bonded warehousing scheme.
In McGoldrick, the city of New York sought to impose sales tax on fuel oil that was
manufactured in a Class 6 customs bonded warehouse from imported petroleum and then sold to
"foreign bound vessels in New York City which purchased the oil as ships' stores for
consumption as fuel in propelling them in foreign commerce." McGoldrick, supra at 422. The
Court found that the purpose of the federal exemption from the tax normally laid upon the
importation of crude oil was "to encourage importation of the crude oil for such use and thus to
enable American refiners to meet foreign competition and to recover trade which had been lost
by the imposition of the tax." Id. at 427. In ruling that the state tax was preempted, the Supreme
Court stated:
In furtherance of that end Congress provided for the segregation of the
imported merchandise from the mass of goods within the state, prescribed the
procedure to insure its use for the intended purpose, and by reference confirmed
and adopted customs regulations prescribing that the merchandise, while in
bonded warehouse, should be free from state taxation. It is evident that the
purpose of the Congressional regulation of the commerce would fail if the state
were free at any stage of the transaction to impose a tax which would lessen the
competitive advantage conferred on the importer by Congress, and which might
equal or exceed the remitted import duty. The Congressional regulation, read in
the light of its purpose, is tantamount to a declaration that in order to accomplish
constitutionally permissible ends, the imported merchandise shall not become a
part of the common mass of taxable property within the state, pending its
disposition as ships' stores and shall not become subject to the state taxing power.
. . . The state tax in the circumstances must fail as an infringement of the
Congressional regulation of the commerce. [Id. at 428-429 (citations omitted).]
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Although customs regulations at the time specifically exempted imported goods in
bonded warehouses from state taxation, the Supreme Court explicitly declined to rely on the
regulations and instead concluded that the regulations "state[] only what is implicit in the
Congressional regulation of commerce presently involved."9 Id. at 429.
In Xerox, the Supreme Court similarly struck down a state property tax on goods stored
in a customs bonded warehouse and destined for foreign markets, concluding that such a tax was
"pre-empted by Congress' comprehensive regulation of customs duties." Xerox Corp, supra at
154. In Xerox, the city of Houston and Harris County assessed ad valorem personal property
taxes on photocopiers stored in a Class 3 customs bonded warehouse. Id. at 148. Xerox
manufactured the copiers for sale in Latin America, and all printing on the machines and
operating instructions were in Spanish or Portuguese. Id. at 147. In addition, the machines as
constructed would not operate on the electrical current standard in the United States. Id. It
would have cost approximately $100 to convert each copier for domestic sale, and none of the
copiers was ever sold to a customer for domestic use. Id. at 147-148.
In Xerox, the United States Supreme Court first reviewed the comprehensive federal
bonded warehousing scheme and noted that by enacting the scheme, "Congress created secure
and duty-free enclaves under federal control in order to encourage merchants here and abroad to
make use of American ports." Id. at 151. The Supreme Court framed the question before it as
"whether it would be compatible with the comprehensive scheme Congress enacted to effect
these goals if the states were free to tax such goods while they were lodged temporarily in
Government-regulated bonded storage in this country." Id. In concluding that the state property
tax was preempted by the comprehensive federal regulation of customs bonded warehouses, the
Supreme Court stated:
The analysis in McGoldrick applies with full force here. First, Congress
sought, in the statutory scheme reviewed in McGoldrick, to benefit American
industry by remitting duties otherwise due. The import tax on crude oil was
remitted to benefit oil refiners employing labor at refineries within the United
States, whose products would not be sold in domestic commerce. Here, the
remission of duties benefited those shippers using American ports as
transshipment centers. Second, the system of customs regulation is as pervasive
for the stored goods in the present case as it was in McGoldrick for the refined
petroleum. In both cases, the imported goods were segregated in warehouses
9
In Xerox, supra at 152 n 8, the United States Supreme Court noted that the provision exempting
imported goods in bonded warehouses from state taxation referenced in McGoldrick was located
in a footnote of the regulations governing customs bonded warehouses. However, the Supreme
Court further observed that "[a] recent amendment to the regulations deleted this footnote on
November 1, 1982, effective December 1, 1982. 47 Fed. Reg. 49370. The Treasury Department
offered no explanation for the amendment. The deletion of footnote 11 without explanation does
not alter our conclusion that the ad valorem taxes here are pre-empted by the statutory scheme."
Id. at 152-153 n 8.
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under continual federal custody and supervision. Finally, the state tax was large
enough in each case to offset substantially the very benefits Congress intended to
confer by remitting the duty. In short, freedom from state taxation is as necessary
to the congressional scheme here as it was in McGoldrick. [Id. at 153.]
Despite the Supreme Court's recognition that the federal regulatory scheme governing
customs bonded warehouses preempts most state taxes on goods stored in such warehouses, Itel,
supra at 69, the Supreme Court has not always concluded that state taxes on goods stored in
customs bonded warehouses are preempted. In RJ Reynolds Tobacco Co v Durham Co, North
Carolina, 479 US 130, 152; 107 S Ct 499; 93 L Ed 2d 449 (1986), the Supreme Court held that
the federal customs bonded warehousing scheme did not preempt the state of North Carolina
from imposing a "nondiscriminatory ad valorem property tax on imported goods [tobacco] stored
in a customs-bonded warehouse and destined for domestic manufacture and sale." R.J. Reynolds
Tobacco Company (Reynolds) imported foreign tobacco into a customs bonded warehouse
where it allowed the tobacco to age for two years before withdrawing it from the warehouse to
process for use in the United States. Id. at 133-134. Reynolds paid the required customs duties
upon withdrawal of tobacco from the bonded warehouses. Id. at 134. However, Reynolds
objected to North Carolina's imposition of property taxes on the imported tobacco stored in
bonded warehouses, arguing that it was immune from state taxation based on the Supreme
Court's ruling in Xerox. Id. at 134-135.
In RJ Reynolds, the Supreme Court framed the issue as follows: "the crucial issue is
whether Congress has exercised its power under the Supremacy Clause to pre-empt ad valorem
state taxation of imported goods that are stored in customs-bonded warehouses and that are
destined for domestic markets." Id. at 140 (emphasis added). The Supreme Court concluded that
the federal scheme of customs bonded warehouses did not preempt a state property tax on
imported tobacco stored in customs bonded warehouses, reasoning that the bonded warehousing
scheme did not evince a congressional intent to occupy the field completely because "the current
regulations, while detailed, appear to contemplate some concurrent state regulation and,
arguably, even state taxation." Id. at 149. Critical to the Supreme Court's holding was the fact
that the tobacco in that case was "destined for domestic manufacture and sale" and not intended
for exportation. Id. at 152. In reaching its holding, the Supreme Court rejected the conclusion
that the holding in Xerox "precludes state taxation of any goods in a customs warehouse,
regardless of their destination." Id. at 143 (emphasis in original). According to the Supreme
Court, Xerox's holding that "'state property taxes on goods stored under bond in a customs
warehouse are pre-empted by Congress' comprehensive regulation of customs duties'" was
"limited to the factual situation presented in that case, that is, where the goods are intended for
transshipment." Id. at 143-144, quoting Xerox, supra at 154. Furthermore, the Supreme Court
also expressly limited its holding in RJ Reynolds, stating, "[w]e make no determination with
respect to warehoused goods that are not, as are those here, destined for the domestic market."
Id. at 148 n 17.
3. Applying the Preemption Doctrine to Michigan's Motor Fuel Tax Statutes
In light of the United States Supreme Court's decisions in McGoldrick and Xerox, we
conclude that imposition of the state motor fuel tax and the state sales tax are preempted by the
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comprehensive federal regulation of customs bonded warehouses because "the state law stands
as an obstacle to the accomplishment and execution of the full objectives of Congress[.]"
LaVene, supra at 478.
The legal analysis used by the Supreme Court in McGoldrick and Xerox applies to the
facts of this case. As recognized in McGoldrick and Xerox, the federal regulatory scheme for
customs bonded warehouses evinces a congressional intent "to benefit American industry by
remitting duties otherwise due." Xerox, supra at 153. The remission of import taxes on motor
fuel benefited American industry by remitting duties otherwise due on gasoline and diesel fuel.
Furthermore, the system of customs regulation is equally pervasive for the stored goods in the
present case as it was in McGoldrick and Xerox. Id. As in McGoldrick and Xerox, the motor
fuel was segregated in a Class 9 customs bonded warehouse "from the mass of goods within the
state." McGoldrick, supra at 428-429. Furthermore, the gasoline, diesel fuel, and other
merchandise sold at plaintiff 's duty-free store at the Ambassador Bridge were under the
continuous control and supervision of the United States Customs Service from the time they
entered the bonded warehouse until they were sold as duty-free merchandise to consumers
leaving the country. Finally, the amount of state sales tax and motor fuel tax were "large enough
. . . to offset substantially the very benefits Congress intended to confer by remitting the duty."
Xerox, supra at 153. Just for the period from January 1, 2001, through March 31, 2001, plaintiff
paid $204,158.95 in state gasoline taxes and $178,769.27 in state diesel fuel taxes. Furthermore
the amount of sales tax defendant asserted that plaintiff owed for the 2001 tax year, according to
the letter of inquiry issued pursuant to MCL 205.21(2)(a), was $872,768.59 (excluding penalty
and interest). These amounts are substantial and were large enough to substantially offset the
benefits Congress intended to confer by remitting the duty.10
Defendant argues that the application of Michigan's sales tax to plaintiff does not conflict
with the purposes of the customs bonded warehousing scheme and that United States Supreme
Court precedent is distinguishable because the sales tax here is imposed on the retailer, not on an
importer or exporter storing an inventory of goods destined for foreign commerce. We reject
defendant's attempts to distinguish this case from McGoldrick and Xerox on this basis. In
McGoldrick, the United States Supreme Court concluded that the bonded warehousing scheme
preempted the application of New York state sales tax on fuel oil that was purchased by foreign
bound ships "as ships' stores for consumption as fuel in propelling them in foreign commerce."
McGoldrick, supra at 422. In McGoldrick, the Supreme Court stated: "It is evident that the
purpose of the Congressional regulation of commerce would fail if the state were free at any
10
The conclusion that state sales and motor fuel taxes are preempted by the comprehensive
federal scheme regulating customs bonded warehouses is also underscored by Congress' findings
in amending 19 USC 1555(b) in 1988. Duty-free enterprises encourage the use of "American
ports," here duty-free enclaves, by importers and international passengers and improve the
balance of trade by encouraging the purchase of goods for export. Such "duty-free sales
enterprises play a significant role in attracting international passengers to the United States and
thereby their operations favorably affect our balance of payments[.]" PL 100-418, § 1908(a)(1),
102 Stat 1315.
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stage of the transaction to impose a tax which would lessen the competitive advantage conferred
on the importer by Congress, and which might equal or exceed the remitted import duty." Id. at
429 (emphasis added). Regardless of whether plaintiff is characterized as a retailer or an
exporter, imposition of the sales tax would lessen the advantage conferred by remission of the
duty on motor fuel. Furthermore, in Itel, the Supreme Court noted that the bonded warehousing
scheme encourages importers to use American facilities by allowing the importer flexibility with
regard to whether the goods are ultimately placed in domestic markets or exported. Itel, supra at
70. The Court noted that "[t]his federal objective would be frustrated by the imposition of state
sales . . . taxes on goods not destined for domestic distribution . . . ." Id. Here, the federal
objectives behind duty-free enterprises, while not identical to those outlined by the Supreme
Court, are analogous. In addition to attracting the use of American facilities by importers
seeking to have their goods sold duty-free, the duty-free enterprises attract "international
passengers" and improve the balance of trade by encouraging the purchase of goods for export.
PL 100-418, § 1908(a)(1), 102 Stat 1315. Here, the gasoline at issue is imported under bond,
stored under bond, and then sold for immediate export. The application of tax "at any stage of
the transaction" lessens the benefits Congress sought to confer on importers and international
travelers. Moreover, unlike the tobacco in RJ Reynolds, the gasoline is not "destined for
domestic markets." RJ Reynolds, supra at 148.
Defendant argues that imposition of the motor fuel tax in this context does not conflict
with the congressional objectives outlined in Xerox because a portion of the duty-free gasoline or
diesel fuel is necessarily used domestically when purchasers of the duty-free motor fuel travel
from plaintiff 's duty-free store to the Canadian border. Thus, defendant argues, the state taxes
do not conflict with the stimulation of foreign commerce. However, we reject defendant's
contention that this brief domestic use of a small quantity of the duty-free motor fuel within the
United States and the stimulation of foreign commerce are mutually exclusive propositions.11
Moreover, because plaintiff 's duty-free facility, as a sterile facility, is located beyond the exit
point for travelers leaving the United States and is physically designed to ensure that anyone
who enters the facility has no alternative but to depart from the United States and enter Canada,
11
We observe that in Ammex, supra at 465, this Court stated that "[b]ecause a portion of the fuel
purchased by each of plaintiff 's customers was necessarily used within the United States, the
transactions at issue in this case did not involve exportation." However, we reached that
conclusion in the context of holding that gasoline and diesel fuel did not constitute "exports"
within the meaning of the Import-Export Clause of the United States Constitution. The holding
in Ammex does not affect our decision here because that case was decided before the United
States Customs Service authorized plaintiff to sell duty-free gasoline and diesel fuel from its
customs bonded warehouse and the preemption issue, which is the core issue in the instant case,
was therefore not at issue in that case. Moreover, given the extensive federal regulation of
customs bonded warehouses and the fact that items purchased from plaintiff 's duty-free store are
necessarily exported to Canada given its designation as a "sterile" store, the conclusion in
Ammex that motor fuel is not an "export" within the meaning of the Import-Export Clause is not
necessarily inconsistent with the conclusion that the duty-free motor fuel at issue in this case was
destined for exportation to Canada and not intended for domestic use.
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the fuel in this case, unlike the tobacco in RJ Reynolds, is destined "for exportation by . . .
individuals departing the customs territory." 19 USC 1555(b)(8)(D). Given the sterile design of
plaintiff 's duty-free store, motor fuel purchased by plaintiff 's customers is therefore necessarily
exported to Canada. The brief use of such a small quantity of the fuel within Michigan is
incidental to its exportation by the international traveler and is not inconsistent with the
attraction of "international passengers" and the improvement of the balance of trade by
encouraging the purchase of goods for export. Indeed, many items sold in a duty-free shop, such
as cigarettes or perfume, for example, could also be partially consumed before their actual
exportation. This does not alter the fact that the purchase of such items stimulates foreign
commerce even if a small portion of the products are consumed in the United States in the short
time after purchase at plaintiff 's duty-free facility and before exportation to Canada because the
goods are necessarily exported to Canada given the sterile design of plaintiff 's duty-free store.
We decline to address defendant's remaining arguments regarding preemption because
those arguments would require this Court to consider issues that are not properly before this
Court or were not adequately briefed or preserved for appeal.
III. CONCLUSION
In sum, we conclude that the comprehensive federal scheme regulating customs bonded
warehouses preempts the imposition of Michigan's motor fuel tax and sales tax on gasoline and
diesel fuel stored in a Class 9 customs bonded warehouse and sold as duty-free because the
imposition of these particular taxes is an obstacle to the accomplishment and execution of the
full objectives of Congress. In light of our conclusion, we need not address defendant's
arguments that application of the sales tax violated the Commerce Clause and the Import-Export
Clause of the United States Constitution.
Affirmed.
/s/ Stephen L. Borrello
/s/ Henry William Saad
/s/ Kurtis T. Wilder
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