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Dulles Duty Free, LLC v. County of Loudoun

Supreme Court of Virginia

August 24, 2017

DULLES DUTY FREE, LLC
v.
COUNTY OF LOUDOUN

         FROM THE CIRCUIT COURT OF LOUDOUN COUNTY Burke F. McCahill, Judge

         PRESENT: All the Justices

          OPINION

          STEPHEN R. McCULLOUGH JUSTICE.

         Dulles Duty Free, LLC, challenges Loudoun County's imposition of a Business, Professional, and Occupational License ("BPOL") tax on a substantial portion of its sales. It argues that the Import-Export Clause of the Constitution of the United States, U.S. Const. art. I, § 10, cl. 2, bars the County from imposing the tax. The circuit court ruled in favor of the County. For the reasons noted below, we reverse the judgment of the circuit court and remand this action for a computation of the refunds for the relevant tax years that are due to the taxpayer.

         BACKGROUND

         Duty Free is a retailer of duty free merchandise at Dulles Airport in Loudoun County, where it operates several stores.[1] Every aspect of the duty free business is highly regulated. As required by federal law, Duty Free holds the alcohol, tobacco, fragrances, luxury goods, bags, watches, and other products it sells in bonded warehouses in Florida and Texas. Bonded carriers transport the goods to a secure warehouse at Dulles Airport which, in turn, distributes the merchandise to retail stores inside the airport.

         The merchandise is sold in a restricted area of the airport. Only passengers with boarding passes may enter and these passengers must first go through security. Duty Free can sell items to both domestic and international passengers. For domestic travelers, Duty Free charges a Virginia sales tax and the purchaser takes immediate possession of the item. When the sale involves a bonded imported item, the domestic passenger pays an import duty. Duty Free does not challenge the imposition of the BPOL tax to such domestic sales.

         International travelers, on the other hand, must present a passport and boarding pass to the cashier in the Duty Free shop. The cashier will swipe the boarding pass on the register to record the information that is on the boarding pass. Duty Free does not charge a Virginia sales tax for international export sales and does not collect any import duty, i.e. the sales are "duty free." Instead of receiving the item immediately, the traveler is given a receipt or ticket. A duty free runner delivers the item to the buyer at the jetway immediately prior to boarding and the customer hands the ticket to the runner. See 19 U.S.C. § 1555(b)(3)(F)(i)(II). If a passenger does not appear to collect the item, Duty Free voids the sale and returns the merchandise to the store.

         Duty Free is able to track which sales are domestic and which sales are international. International sales represent over ninety percent of Duty Free's sales. Duty Free established that the following gross receipts were attributable to international travelers: for tax year 2009, $18, 827, 494; for tax year 2010, $13, 747, 954; for tax year 2011, $15, 162, 747; for tax year 2012, $18, 203, 469; and for tax year 2013, $20, 151, 691.

         Duty Free does not dispute that it owns inventory and other personal property in Loudoun County. There is also no question that it employs a large number of personnel in the County to run its retail operations. Duty Free uses County roads, and benefits from the protection of County fire and rescue, law enforcement, the court system, and other County services.

         Loudoun County requires every person "engag[ed] in a business" in Loudoun County to obtain a business license. Loudoun County Ordinance § 840.03(a). Accordingly, Duty Free has obtained a business license to operate in Loudoun County. Code § 58.1-3702 permits "the governing body of every county, city and town" to impose a "tax on the gross receipts or the Virginia taxable income of the business." Code § 58.1-3703.1(A)(3)(a) provides that "[w]henever the tax imposed by this ordinance is measured by gross receipts, the gross receipts included in the taxable measure shall be only those gross receipts attributed to the exercise of a privilege subject to licensure." The tax does not target imports or exports; it applies across the board to all sales.

         Loudoun County has chosen to collect the tax based on the measure of gross receipts. See Loudoun County Ordinance § 840.14(o). Loudoun County defines "gross receipts" as "the whole, entire, total receipts attributable to the licensed privilege, without deduction." Id.; Loudoun County Ordinance § 840.01(k). The tax is calculated based on the prior year's gross receipts. Id.; see also Loudoun County Ordinance §§ 840.01(m); 840.03(d); 840.04(a); 840.14(o). For businesses with sales not more than $200, 000 per year, the County levies a flat $30 fee. Loudoun County Ordinance § 840.13(c). For businesses with sales above the $200, 000 threshold, the County collects 17 cents for every $100 in retail sales for all sales, not just those above $200, 000. Loudoun County Ordinance § 840.14(o).

         In 2014, Duty Free filed an application for correction of its BPOL taxes for the years 2009, 2010, 2011, 2012, and 2013. Duty Free does not challenge the imposition of the BPOL tax on its domestic sales. It argues, however, that applying the BPOL tax on the gross receipts of its international sales violates the Import-Export Clause of the Constitution of the United States.

         Following a hearing, the circuit court issued a detailed memorandum opinion. The court canvassed the cases from the United States Supreme Court and concluded that "[t]he BPOL tax of Loudoun County does not violate the Import Export Clause of the U.S. Constitution." Consequently, the court held that Duty Free "is not entitled to relief from the assessments complained of in its Application." Duty Free appeals from this ruling.

         ANALYSIS

         "Arguments challenging the constitutionality of a statute or regulation are questions of law that this Court reviews de novo on appeal." DiGiacinto v. Rector & Visitors of George Mason Univ., 281 Va. 127, 133, 704 S.E.2d 365, 368 (2011).

         This case presents an "as applied" challenge rather than a challenge to the facial constitutionality of the BPOL tax. Volkswagen of Am., Inc. v. Smit, 279 Va. 327, 336, 689 S.E.2d 679, 684 (2010) ("Because our jurisprudence favors upholding the constitutionality of properly enacted laws, we have recognized that it is possible for a statute or ordinance to be facially valid, and yet unconstitutional as applied in a particular case."). We accord every legislative act a presumption of constitutionality, including laws subject to an as applied challenge. Id. A party which alleges a statute is being unconstitutionally applied bears the burden of proving that the statute is unconstitutional under a particular set of facts. See FFW Enters. v. Fairfax County, 280 Va. 583, 590, 701 S.E.2d 795, 800 (2010).

         The Import-Export Clause provides, in relevant part, that "[n]o State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws." U.S. Const. art. I, § 10, cl. 2.

         The problems that led to the inclusion of this Clause in the Constitution are well known. "One of the major defects of the Articles of Confederation, and a compelling reason for the calling of the Constitutional Convention of 1787, was the fact that the Articles essentially left the individual States free to burden commerce both among themselves and with foreign countries very much as they pleased." Michelin Tire Corp. v. Wages, 423 U.S. 276, 283 (1976). In an introduction to the Debates of the Constitutional Convention, James Madison noted that New Jersey was likened to a "cask tapped at both ends" by New York and Philadelphia; and North Carolina as the "patient bleeding at both arms" - with Virginia and South Carolina happily serving as phlebotomists. 2 The Papers of James Madison 691-92 (Henry D. Gilpin, ed., Washington, D.C.: Langtree & O'Sullivan, 1840). These taxes on imported and exported goods "nourish[ed] unceasing animosities" and, if left unchecked, Madison thought, would likely end "in serious interruptions of the public tranquility." The Federalist No. 42, at 264 (J. Madison) (Clinton Rossiter ed., 2003). The Import-Export Clause, along with the Commerce Clause and the Export Clause, was designed to suppress fratricidal trade policies and thus "provide for the harmony and proper intercourse among the States." Id. at 263.

         I. Overview of the United States Supreme Court's Import-Export Clause jurisprudence.

         Resolution of the constitutional propriety of the BPOL tax to Duty Free's in-transit export sales hinges on the applicability, and ongoing validity, of the decision in Richfield OilCorp. v. State Bd. of Equalization, 329 U.S. 69 (1946). Duty Free argues that Richfield Oil controls. ...


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