WASHINGTON -- Tennessee calls it a tax on the privilege of doing business in the state. But Itel Containers International Corp. says the levy violates international treaties and the U.S. Constitution.

What the U.S. Supreme Court decides could open, or slam shut, a potentially lucrative revenue opportunity for cash-strapped states.

The case, Itel Containers v. Huddleston, centers on whether Tennessee may impose a 5.5% tax on the lease of cargo containers that are used exclusively in foreign commerce. Oral arguments are set for Oct. 14.

"Since states are so hard-pressed for money, I'm sure they would jump if the Supreme Court decides they can tax these types of containers," said Charles Rothfeld, of counsel in the Washington office of Chicago-based Mayer, Brown & Platt, which is helping represent Itel in the case.

The cargo containers in question are large steel boxes that have become ubiquitous in shipping goods. They stack neatly for transport by boat, can ride piggy-back on train flatbeds, or may have wheels attached and be hauled by truck. In 1990, the value of U.S. goods exported in such containers exceeded $84 billion.

Tennessee is the only state that imposes a sales tax on the lease of cargo containers.

Itel leases containers for use in foreign commerce. In 1986, Tennessee assessed the company $348.571 in back sales taxes, penalties, and interest on proceeds earned from the leasee of containers it delivered in Tennessee to international carriers.

Itel paid the tax in protest, challenging the validity of the levy under two international treaties and several constitutional provisions. The Tennessee Supreme Court rejected the claims.

The treaties, adopted primarily to promote the use of containers, prohibit import duties or taxes on containers.

Tennessee's lawyers argued, and the state high court agreed, that the sales tax was not levied on the containers themselves.

"It is a privilege tax," said a lawyer in the state attorney general's office. "The tax is not on the containers at all. This is a general tax that in this instance just happened to be applied to transactions involving containers."

But Itel's lawyers see the tax differently. "That's just a semantic distinction," Mr. Rothfeld said of Tennessee's argument. "The reality is that the containers are being taxed."

Lawyers involved in the case said they are uncertain how the court will resolve the case.

"It's impossible to know why the court agreed to hear this case," said Philip W. Collier, with Stites & Harbison in Louisville, Ky., lead counsel for Itel in the case.

"It may be that they want to change or modify the way they analyze foreign commerce clause cases, or any other of a variety of reasons that would not necessarily be beneficial to my client," Mr. Collier said. "But this is one of a number of cases involving the constitutionality of state taxes the court has reviewed recently, so it's an issue the justices are interested in."

Lawyers said the court has a number of options in deciding the case. The court could decide the Tennessee tax is preempted by the international treaties, in which case the significance of the decision would be relatively narrow, Mr. Collier said.

For example, under such a ruling states would be free to tax leased aircraft or vessels, since the international treaties in question cover only containers.

On the other hand, the court could issue a broad constitutional ruling that would significantly affect taxpayers and state revenue collectors alike.

Currently, the court looks at four areas to determine whether a state tax violates the Constitution's commerce clause. The test asks whether the tax is applied to an activity with a substantial link with the taxing state, whether the tax is fairly apportioned, whether the tax discriminates against interstate commerce, and whether the tax is related to services provided by the state.

When the case involves foreign commerce, the court also looks at whether there is a risk of multiple taxation and whether the tax gets in the way of the federal government's ability to conduct foreign policy.

Lawyers for Itel said that under that test, the Tennessee tax appears to be unconstitutional. But they said that once a case gets before the Supreme Court, anything is possible.

"At a minimum, this case will settle the legality of taxing cargo containers," Mr. Rothfeld said. "Beyond that, it's hard to say."

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