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Thursday, October 25, 2012

Export Clause: Limitation on Congress’s Taxing Power

Erika K. Lunder
Legislative Attorney

The Export Clause, found in Article I, Section 9, Clause 5 of the U.S. Constitution, directly states “No Tax or Duty shall be laid on Articles exported from any State.” The Clause represents one of the few restrictions on Congress’s otherwise broad taxing power. Examples of taxes that have been found unconstitutional as applied to exports include the harbor maintenance tax and the excise tax on domestically mined coal.

The Clause prohibits taxes and duties that are targeted at exports or imposed on goods during “the course of exportation.” It also protects those services and activities that are “closely related” to the export process. Importantly, pre-export goods and services are not exempt from otherwise generally applicable taxes.

The Export Clause only prohibits the imposition of taxes and duties. It does not prohibit user fees. Congress’s choice to call something a tax or a fee will not be determinative in assessing the provision’s constitutionality; rather, a court will likely examine the provision’s substantive characteristics to determine if it is a fee or tax. According to the Supreme Court, the primary characteristics of a user fee are that it, unlike a tax, is (1) proportional to the government services or benefits received by the payor and (2) not determined solely on an ad valorem basis (i.e., not based solely on the quantity or value of the goods or services on which it is placed). Thus, it is possible that a charge referred to in statute as a “fee” could be recharacterized by a court to be a “tax” if it failed to meet these criteria, and vice versa.

When a government charge has been imposed in violation of the Export Clause, one issue that arises is the remedy for persons who paid the unconstitutional amount. Typically, taxpayers who overpay a tax are required to seek a refund using the process found in the Internal Revenue Code (IRC). In the event that a “fee” was recharacterized as an impermissible tax, there might be a similar administrative refund procedure. The question here is whether it is possible to bring suit in the Court of Federal Claims under the Tucker Act seeking damages from the government in the amount of unconstitutional amounts paid. Taxpayers may prefer the Tucker Act because it has a longer statute of limitations than the IRC—six years from the time the tax is paid versus three years—and, in some situations, might allow parties farther down the supply chain (e.g., exporters) to bring claims alleging they deserve damages because they bore the economic burden of the tax through higher prices.

A threshold issue has been whether the Court of Federal Claims can hear these suits. In order for a claim to be permissible under the Tucker Act, two things must be true: (1) the Export Clause must provide a right to monetary damages when the government violates it, and (2) it must be permissible to make such a claim independent of an IRC (or other administrative) refund claim. In 2008, the Supreme Court held that taxpayers must comply with the IRC procedures when seeking refunds for the unconstitutionally imposed coal excise tax. It appears the Court’s holding would apply to any tax covered by the IRC refund process. The Court did not address whether the Export Clause provides a right to monetary damages, finding that the IRC refund process applies regardless. Because these issues are matters of statutory construction, Congress has the option to modify the refund procedures for taxes imposed in violation of the Export Clause, if it so chooses. For example, after the 2008 Supreme Court case, Congress provided an alternative refund process for the coal excise tax that extended the statute of limitations and expanded the opportunity for exporters to seek refunds.

Date of Report: October 18, 2012
Number of Pages: 10
Order Number: R42780
Price: $29.95

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