Alaska Upholds City of Valdez Tax on Large Vessels

By Joseph Gulant September 11, 2008

On April 25, 2008, the Alaska Supreme Court held that a City of Valdez property tax, apportioned based on days docked in the City over days docked everywhere and imposed on large vessels, did not violate the Due Process, Commerce or Tonnage Clauses of the U.S. Constitution. City of Valdez v. Polar Tankers, S-12218/12223, Supreme Court of Alaska (April 25, 2008).

In 2000, the City of Valdez (the "City") adopted a personal property tax (the "Vessel Tax") to compensate for its declining oil and gas property revenues. Revenues were declining as a result of a depreciation formula negotiated by the State of Alaska and the owners of the Trans Alaska Pipeline System (the "TAPS"), which included Conoco Phillips and Exxon Mobil, in the mid-1980s. The City imposed its Vessel Tax on vessels 95 feet or greater in length that docked at facilities in the City. The City apportioned the Vessel Tax base, the vessel's "full value," via a fraction the numerator of which was the number of days a vessel was docked in the City and the denominator the number of days the vessel was docked in any port (i.e., not necessarily 365 days). In the same year the City adopted the Vessel Tax, several tanker owners, including Polar Tankers (a Conoco Phillips tanker company) and SeaRiver (an Exxon Mobil tanker company), filed a suit attacking the validity of the Vessel Tax. Over the next three years, the City settled with all of the tanker owners except Polar Tankers and SeaRiver.

Procedural History

In its 2004 decision in the suit against the City brought by Polar Tankers and SeaRiver attacking the validity of the Vessel Tax, the Alaska Superior Court held that the Vessel Tax violated the Tonnage Clause of the U.S. Constitution without addressing the Due Process and Commerce Clauses. In 2005, after the City's motion, the Alaska Superior Court reconsidered and vacated its 2004 decision and ruled, without addressing the Tonnage Clause issue, that the Vessel Tax's apportionment method violated the Due Process and Commerce Clauses of the U.S. Constitution. In 2006, the Superior Court issued its final judgment and held that the Vessel Tax did not violate the Tonnage Clause but that its apportionment formula, as applied to Polar Tankers and SeaRiver, violated the Due Process and Commerce Clauses. The Court's final judgment allowed the City to levy the Vessel Tax following the adoption of a constitutionally compliant apportionment formula but required the City to repay all taxes that had been overpaid as a result of adopting the new apportionment formula. After denying the City's motion for clarification of the final judgment, the Superior Court ordered that the City could not "levy against Plaintiffs any amount of tax beyond the amount that would be due using this apportionment formula: Days in Valdez/365."

In their appeals to the Alaska Supreme Court, the City challenged the Due Process and Commerce Clause rulings of the Superior Court and Polar Tankers challenged the Superior Court's Tonnage Clause ruling. SeaRiver dropped its appeal after the Superior Court issued its final judgment.

The Alaska Supreme Court's Reasoning

The Alaska Supreme Court applied the four prong test set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). Complete Auto requires that a state tax: (1) be imposed upon a taxpayer with "substantial nexus"; (2) be fairly apportioned; (3) not discriminate against interstate commerce; and (4) be fairly related to the services the taxing jurisdiction provided.

The parties agreed that the Vessel Tax met the first prong of Complete Auto. The Alaska Supreme Court determined that Polar Tankers waived its right to argue that the Vessel Tax violated the third and fourth prongs of the test. The court then focused its decision on the second prong (fair apportionment) of the Complete Auto test and the Tonnage Clause issue.

Fair apportionment under the Due Process and Commerce Clauses

A tax apportionment formula must be both internally consistent (if applied by every jurisdiction the taxing scheme would not tax more than 100% of a taxpayer's property) and externally consistent (the apportionment formula must reasonably reflect the taxpayer's activity in the jurisdiction) to pass constitutional muster. See Container Corp. v. Franchise Tax Board, 463 U.S. 159 (1983). The parties agreed that the City's apportionment formula was internally consistent, which left the Court to decide whether the formula was externally consistent.

Polar Tankers argued that the "home port" doctrine permitted its commercial domicile (but no other jurisdiction) to tax the value of its vessels. The Alaska Supreme Court rejected this premise, citing Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979), as standing for the proposition that "the home port doctrine has yielded to a role of fair apportionment among situs states" and held that "an apportionment formula is fair if it apportions the full value of a ship between the taxing jurisdictions in which it is regularly present in proportion to the number of days during the tax year that the ship is present in each jurisdiction."

Polar Tankers also argued that the denominator of its apportionment formula should be 365 days. The Alaska Supreme Court rejected Polar Tankers' argument and analogized the City's apportionment formula to the formula the U.S. Supreme Court approved in Braniff Airways v. Nebraska State Bd. of Equalization & Assessment, 347 U.S. 590 (1954), and Ott v. Mississippi Valley Barge Line Co., 336 U.S. 169 (1949). The Braniff formula compared aircraft landings in the taxing jurisdiction to landings in all potential taxing jurisdictions. The Alaska Supreme Court found little difference between landings and dockings because both "measure the extent of activity in the taxing jurisdiction relative to the activity in all taxing jurisdictions" and, consequently, satisfy the fair apportionment. And in Ott, the U.S. Supreme Court approved an apportionment formula that compared the number of barge miles in the taxing state to the total number of barge miles in all state waters concerning the routes in question. The Alaska Supreme Court noted that the Braniff and Ott formulas gave no special consideration to the taxpayer's home port.

The Alaska Supreme Court ultimately concluded that the Vessel Tax apportionment method was fair because "a risk of multiple taxation exists only if we accept Polar's assertion that its domicile can tax its vessels for all time spent on the open seas" (i.e., in contravention of Japan Line).

The Tonnage Clause

Polar Tankers argued that the Vessel Tax violated the Tonnage Clause of the U.S. Constitution. The Tonnage Clause forbids a state from imposing any "duty of tonnage" without the consent of Congress. A duty of tonnage is any tax or duty that "operate[s] to impose a charge for the privilege of entering, trading in, or lying in a port" regardless of whether it is measured by the tonnage of the vessel. The Alaska Supreme Court observed that long-standing U.S. Supreme Court precedent stands for the proposition that a fairly apportioned property tax is not a tonnage duty. See In Re State Tonnage Tax Cases, 79 U.S. 204 (1870). Because the Alaska Supreme Court "concluded that the disputed Vessel Tax is a fairly apportioned ad valorem tax on personal property, [it] necessarily also [held] that it does not violate the Tonnage Clause."

According to the Alaska Supreme Court, the City prevailed with respect to the Vessel Tax because: (1) the Vessel Tax's apportionment method poses no risk of duplicative taxation and therefore is not in violation of the fair apportionment requirement of the U.S. Constitution's Due Process and Commerce Clauses; and (2) as such, the Vessel Tax is a fairly apportioned property tax, and consequently is not in violation of U.S. Constitution's Tonnage Clause.