State can tax Boat's Business (but not the Boat)

In re Tax Appeal of Reel Hooker Sportfishing (ICA May 28, 2010)

Background. Reel Hooker Sportfishing, Exact Game Fishing, Inc., and Finest Kind, Inc. are corporations that run charter boats around Maui, Lanai, and Molokai. They had federal permits allowing them to travel through the navigable waters between the islands. They are in the charter fishing business and allow passengers to seek pelagic game fish like marlin, ono, ahi, and mahimahi. Their source of earnings come from the fares charged to passengers. These fares include the state's general excise tax, the GET. The boat companies filed complaints against the State in the Tax Appeal Court alleging that the GET tax was preempted by federal law. The Tax Appeal Court granted the State's motion for summary judgment. The boat companies appealed.

The Three Faces of Federal Preemption. The ICA addressed a single issue, whether the federal statute, 33 U.S.C. § 5(b) preempts Hawai'i's GET tax, HRS § 237-13(6)(A). Party benefitting from the preemption has "the considerable burden of overcoming the starting presumption that Congress does not intend to supplant state law." De Buono v. NYSA-ILA Med. And Clinical Serv. Fund, 520 U.S. 806, 814 (1997). The ICA discussed three types of preemption. First, there is express preemption, when the federal statute explicitly preempts state action in a particular area. English v. Gen. Elec. Co., 496 U.S. 72, 79 (1990); Wardair Canada, Inc. v. Florida Dep't of Revenue, 477 U.S. 1, 6 (1986). When the preemption clause is ambiguous, courts usually disfavor preemption. Bates v. Dow Agrosciences, LLC, 544 U.S. 431, 449 (2005). There are also two kinds of implied preemption: conflict preemption, which arises when it is impossible to comply with both federal and state regulations. Gade v. Nat'l Solid Waste Mgmt. Ass'n, 505 U.S. 88, 98 (1992), and field preemption, where the federal legislative scheme is so pervasive that it "occupies the field" leaving no room for states to supplement the federal law. Id. at 98, 115. Interestingly, the ICA did not quote these U.S. Supreme Court cases and provided no examples of these preemptions in action.

State Taxes Versus Federal Regulation. The GET tax is levied upon "every person engaging or continuing within the State in any service business or calling including professional services not otherwise specifically taxed." HRS § 237-13(6)(A). The GET tax "is a privilege tax." Tax Appeal of Baker & Taylor, Inc. v. Kawafuchi, 103 Hawai'i 359, 365, 82 P.3d 804, 810 (2004). A privilege tax is "based on the fact that the party chose to engage in [a] business activity within the State. Such a tax is justified on the ground that companies conducting business enjoy the protections and benefits given by the state." Id. The boat companies, however, argued that 33 U.S.C. § 5(b), preempted the GET tax. The federal statute stated that "No taxes . . . shall be levied upon or collected from any vessel . . . or from its passengers or crew. . . by any non-Federal interest, if the vessel . . . is operating on any navigable waters subject to the authority of the United States[.]"

No Express Preemption Because the Federal Statute is Limited to Things, not the Business Revenues. According to the ICA, the federal statute prohibits anyone other than the federal government "from taxing a vessel, its passengers or crew, while that vessel is operating on navigable waters." But the GET is a tax on businesses for the privilege of doing business in Hawai'i. The GET, reasoned the ICA, taxes the revenues and gross receipts of the business, not the individual vessels, passengers, or crew. In other words, the federal statute prohibits taxes on individual vessels, passengers, and crew members. It does not expressly preempt the GET tax on the business operating the vessels, employing the crews, and holding passengers. The ICA specifically rejected the notion that a tax on the business' gross receipts was a tax on the vessel and passenger. Because of the strong presumption against preemption, the ICA refused to construe the word "vessel" to include the income derived from the use of the vessel.

So what Taxes Would be Prohibited? The ICA's construction of the federal law seems to indicate that any "tax" on any particular vessel, crewmember, or passenger would be preempted. So taxes on vessels--kind of like motor-vehicle taxes--would be preempted. Counties often tax individual vessels. This could spell trouble for counties.

No Conflict with Federal Law Because Practice of Forcing Customers to pay for the GET does not Alter Fact that the tax is still a tax on Revenues. The boat companies argued that state tax laws are violated if they refuse to pay; but if they do pay it, "they violate federal law by collecting it on behalf of the state." The argument is based on the widely-used practice of collecting the GET tax from customers and passengers. The ICA called this argument "a faulty premise." Just because companies "fund their payment of the GET through a pass-through charge to their customers/passengers does not change the nature of the GET from a tax on their businesses to a tax on their passengers." The ICA went on to note that the federal legislation was not intended to broadly prohibit state and local taxes on maritime businesses. According to the ICA, the federal prohibition was meant to "prohibit fees and taxes on a vessel simply because that vessel sails through a given jurisdiction" and it did not mean to "affect whether sales or income taxes are applicable with respect to vessels." H. R. Rep. No. 108-334 at 180 (2002).

Feds don't Occupy this Particular Field. Finally, the ICA--without citing any authority--flatly rejected the contention that the federal government occupied the field. According to the ICA, the federal government may loom large in "the broad scope of federal maritime legislation." But imposing the GET tax on the gross receipts of a charter fishing business hardly interferes with the federal regulation of maritime commerce.

Okay, so you can't Regulate when the Field has been Occupied. But how big is the Field? At first blush, it seems to make sense. The ICA's preemption analysis did not allow the boat companies to designate a field broadly. The ICA wanted something more specific. But how specific? The field could be nothing more than the regulation of gross receipts and revenues of fishing businesses. Is that too narrow? Is there anything in the middle--something between the "gross receipts of a charter fishing business" and "marine commerce"? The regulation of commercial fishing perhaps. No one knows. The ICA did not cite any authority on this issue and offered no guidance as to how courts are supposed to limit or even determine the field that may or may not be occupied.

In fact, the HSC approved of this formulation:

[I]n the absence of express pre-emptive language, Congress' intent to preempt all state law in a particular area may be inferred where the scheme of federal regulation is sufficiently comprehensive to make reasonable the inference that Congress left no room for supplementary state regulation. Pre-emption of a whole field also will be inferred where the field is one in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.

Casumpang v. ILWU, Local 142, 94 Hawai'i 330, 339 n. 12, 13 P.3d 1235, 1244 n. 12 (2000). So it may be that, under Hawai'i's formulation of this preemption, there are further distinctions: the federal legislative scheme and the federal interest. But that was not part of the ICA's analysis.

And Another Thing . . . This opinion is also noteworthy because the ICA did not cite a single Hawai'i case in its discussion on preemption. Hawai'i appellate courts have discussed preemption several times over the decades. The HSC has discussed preemption as recently as Williams v. Aona, 121 Hawai'i 1, 210 P.3d 501 (2009), and there are discussions on preemption under Hawai'i law going as far back as the early days of statehood. In re Island Airlines, Inc., 44 Haw. 634, 361 P.2d 390 (1961). Hawai'i courts have applied the principles and doctrines of federal preemption to a host of federal legislation including the Airport and Airway Improvement Act, Office of Hawaiian Affairs v. State, 96 Hawai'i 388, 31 P.3d 901 (2001), the Labor Management Relations Act, Casumpang, supra, ERISA, Garcia v. Kaiser Foundation Hospitals, 90 Hawai'i 425, 978 P.2d 863 (1999), the Federal Insecticide, Fungicide, and Rodenticide Act, Kawamata Farms, Inc. v. United Agri Products, 86 Hawai'i 214, 948 P.2d 1055 (1997), and the Poultry Products Inspection Act, Pacific Meat Co. v. Otagaki, 47 Haw. 652, 394 P.2d 618 (1964).

Then again, these Hawai'i cases themselves rely heavily on federal authorities (just not exclusively) and, as the HSC once stated, when it comes to federal preemption, "there is no unerring test[.]" Gouveia v. Napili-Kai, Ltd., 65 Haw. 189, 192, 649 P.2d 1119, 1122 (1982). So does it matter if the ICA didn't rely on any Hawai'i cases? Perhaps not. It's just odd.