Hawaii’s Intermediate Court of Appeals just published an opinion regarding the applicability of Hawaii’s General Excise Tax to charter vessels. The case is Reel Hooker Sportfishing, Inc. v. State of Hawaii – Department of Taxation and can be viewed here.
The main legal issue in this case is to what extent Hawaii’s state taxes can reach commercial operations in the federal domain. Ben Lowenthal has a great post on the legal issues here.
Federal law (33 U.S.C. s. 5(b)) provides:
No taxes, tolls, operating charges, fees, or any other impositions whatever shall be levied upon or collected from any vessel or other water craft, or from its passengers or crew, by any non-Federal interest, if the vessel or water craft is operating on any navigable waters subject to the authority of the United States, or under the right to freedom of navigation on those waters, except for (1) fees charged under section 2236 of this title; (2) reasonable fees charged on a fair and equitable basis that (A) are used solely to pay the cost of a service fo the vessel or water craft; (B) enhance the safety and efficiency of interstate and foreign commerce; and (C) do not impose more than a small burden on interstate or foreign commerce; or (3) property taxes on vessels or watercraft, other than vessels or watercraft that are primarily engaged in foreign commerce if those taxes are permissible under the United States Constitution.
When you read the statute, it seems to be explicit in its prohibition on what taxes a non-Federal interest may assess against vessels. The ICA disagreed with this position and upheld the GET on these vessel operators.
My take on this case is from a broader context. Under U.S. Constitutional law, the state’s ability to regulate commerce on navigable waters stems solely from the Submerged Lands Act. Absent some delegated authority in the Submerged Lands Act, the State does not have the authority to regulate commerce. To be sure, however, this principle is honored in the breach with states pushing their enforcement authority beyond their territorial land mass and into the ocean. See my posts on shark tour bans (Honolulu here, Maui here).
This issue formed the crux of the argument in the UFO Chuting case (see my post here – and the amicus brief we filed sets out the Submerged Lands Act issue).
Conceptually, this case makes sense: a Hawaii business, collecting revenue on Hawaii’s land mass, receiving the benefits of Hawaii’s legal system and government should pay taxes on the revenues obtained therein. But, the revenue they are collecting are for services provided outside the State of Hawaii and outside of the authority delegated to it by the Congress in the Submerged Lands Act. Has the Congress stated what ability states have to tax these vessel operations? Yes, in the the statute excerpted above.
It’ll be interesting to see what happens next. An application for certiorari to the Hawaii Supreme Court? U.S. Supreme Court cert petition? Stay tuned.