United States v. International Business MacHines Corp.

1996-06-10

Headline: Ruling blocks federal tax on insurance for exported shipments, holding the Constitution’s Export Clause forbids nondiscriminatory federal taxes on goods while they are in export transit, protecting exporters.

Holding: The Court held that the Export Clause bars the federal government from imposing generally applicable, nondiscriminatory taxes on goods in export transit, so the tax on insurance for exported shipments cannot be applied to the exporter.

Real World Impact:

Blocks federal tax on insurance tied directly to exported goods in transit.
Affirms that exported goods are immune from nondiscriminatory federal taxes while in transit.
Leaves open how close a service must be to exports to be immune.

Topics: export taxes, insurance premiums, federal taxation, exporters' protections

Summary

Background

A U.S. company that ships goods abroad insured many shipments through foreign insurers and paid no Section 4371 tax, which applies to premiums paid to foreign insurers. After an IRS audit the company paid assessments, sought refunds, and sued, arguing the tax could not apply to export shipments. Lower courts agreed, and the case reached the Court to decide whether an older ruling about taxing insurance on exports should be overturned.

Reasoning

The central question was whether the Constitution’s Export Clause allows generally applicable, nondiscriminatory federal taxes to fall on goods while they are being exported. The Court explained that past decisions protect goods and closely related services during export transit but do not free pre-export activities from ordinary taxes. Because the Export Clause says “No Tax or Duty,” and differs in wording from the Import-Export Clause (which bars “Imposts or Duties”), the Court declined to adopt the narrower state-tax tests from later cases. The Government had asked the Court to overrule the 1915 Thames & Mersey precedent, but it did not press a challenge to the idea that the insurance tax was effectively a tax on exported goods. Following stare decisis, the Court refused to overrule Thames & Mersey and held the Export Clause bars such federal taxes on goods in export transit.

Real world impact

Exporters and insurers are protected from federal taxes that fall directly on goods while those goods are in the export stream. The IRS must not apply Section 4371 to insurance that the Court treats as a tax on exports. The Court left open when a tax on a service or activity is so closely tied to goods that it becomes an unconstitutional tax on exports, saying that question must wait for another case.

Dissents or concurrances

Justice Kennedy (joined by Justice Ginsburg) dissented, arguing the tax targets insurance as a distinct service and is nondiscriminatory. He urged upholding the statute, citing early congressional practice and warning of administrative burdens from exempting many insurance premiums.