Exporters due harbor maintenance tax refunds.

Enacted in the Water Resources Development Act of 1986 (effective April 1, 1987), Sec. 4461 has imposed a tax on the value of commercial cargo (including passenger transportation) connected with any port use of Federally maintained navigable waters. This harbor maintenance tax (HMT) rate was originally set at 0.04% of the value of the cargo or passenger transportation charges. Effective Jan. 1, 1991, the rate was increased to 0.125%. Shippers, importers and exporters are liable for the tax. The U.S. Customs Service, rather than the IRS, collects the revenue.

Congress enacted the HMT out of concern that U.S. port development was lagging behind other nations and contributing to the U.S. trade imbalance. Congress saw the fee as a way to finance port development without drawing on Federal government general funds. As applied to exporters, however, the tax has run afoul of the Export Clause of the U.S. Constitution, which provides that: "No Tax or Duty shall be laid on Articles exported from any State."

Litigation Reaches Supreme Court

As a test case, the Court of International Trade selected a suit by United States Shoe Corporation, seeking a refund of HMT paid during the third quarter of 1994, from 2,400 similar suits that challenged the HMT's constitutionality as it applied to exports. The issue centered on whether the HMT, in essence, constitutes a fee for use of a Federally maintained navigable waterway port, or a tax levied on a percentage of the value of goods loaded or unloaded at a port. The lower court had agreed with the taxpayer that the HMT was not a fee for use, but an export tax; accordingly, the court granted summary judgment to the corporation. The court also enjoined Customs from collecting the tax; however, a motion to stay the decision pending appeal was granted.

On appeal, the Federal Circuit affirmed the lower court's decision. Reasoning that a user fee would be levied on the direct user of the harbor, and not on the exporter, the court pointed out that the HMT was based solely on the value of the cargo loaded for export and bore no reasonable relationship to the cost or the use of port facilities; therefore, the court held that the HMT cannot be viewed as a fair approximation of use. In addition, the court noted that the statute refers to the HMT as a tax, it is in the tax code and the Sec. 4461 exemptions indicate that the HMT is a tax.

In its petition to the Supreme Court, the Service argued that the appellate decision conflicted with the Court's prior approval of an ad valorem user fee and ignored the Court's statement that a constitutionally permissible fee need not "be precisely calibrated to the use that a party makes of government services." In addition, the IRS argued that the Federal Circuit failed to honor the Supreme Court's reasoning, in a 1972 case involving a fiat-fee service charge on passengers enplaning certain flights that it is "not particularly important whether the charge is imposed on the passenger himself, to be collected by the airline, or on the airline, to be passed on to the passenger if it chooses."

Supreme Court Strikes Down Tax

In a unanimous decision, on March 31, 1998, the Supreme Court affirmed the Federal Circuit's decision that the HMT is a tax, and, thus, violates the Constitution's Export Clause as applied to exports. Citing its ruling in International Business Machines Corp. (IBM), 517 US 843 (1996), the Court stated that the HMT bears the indicia of a tax: it is described as such by Congress and was enacted as part of the Code. Contrary to the government's argument, the Court held that the HMT is not a user fee; it bears no relationship to the use of the port services and facilities.

In IBM, the Supreme Court held that application of Sec. 4371 to insurance premiums remitted by U.S. businesses to foreign insurers (not subject to Federal income tax) to cover shipments of goods to their foreign subsidiaries violates the Constitution's Export Clause. The Court concluded in that case that the Export Clause did not permit assessment of generally applicable, nondiscriminatory Federal taxes on goods in export transit.

Technically, taxpayers should have been paying the HMT until April 25, 1998, the date that the Court of International Trade's stay lapsed. The court will establish the procedure for claiming refunds. Issues to be decided include the statute of limitations for refund claims and whether interest is payable on refunds.

HMT revenues are deposited in the Harbor Maintenance Trust Fund (Trust Fund),, from which Congress appropriates amounts to pay for harbor maintenance and development projects and related expenses. Revenues from domestic shipping imports and passengers, the remainder of the HMT, will not be sufficient to maintain the Trust Fund at current expenditure levels. Accordingly, it is anticipated that the Administration will propose an alternative funding source, which presumably would seek to meet the requirements of a true user fee (i.e., a charge levied on port users in accordance with their use of the ports). Questions remain about when and if Congress would enact a new funding source for the Trust Fund.