WASHINGTON - The Supreme Court yesterday began refereeing a dispute over whether states may impose a sales tax on the lease of cargo containers used in foreign commerce.

The petitioner, Itel Containers International Corp., claims Tennessee's imposition of such a tax violates international treaties and the Constitution's commerce clause, thereby interfering with the federal government's ability to conduct foreign policy.

But the federal government says the tax is consistent with the national interest, and Tennessee says the levy is merely "a garden-variety sales tax."

What the court has to say is of keen interest to state officials. The justice's decision could open, or slam shut, a potentially lucrative revenue opportunity for cash-strapped states.

At the heart of the controversy are cargo containers used exclusively in international trade. The containers, which are large metal boxes that may be carried on trucks, railroads, and ships, have become ubiquitous in shipping goods. In 1990, the value of U.S. goods exported in such containers exceeded $84 billion, according to the U.S. Census Bureau.

Itel Containers International Corp. is challenging a 5.5% tax on container leases imposed by Tennessee. Philip W. Collier, a lawyer with Stites & Harbison in Louisville, Ky., told the justices yesterday that international treaties that were adopted to promote the use of containers prohibit import duties or taxes on them.

Collier added that the Tennessee levy "creates a substantial and genuine threat of international retaliation and multiple taxation."

But Justice Antonin Scalia said the wording of the treaties suggests only that taxes may not be imposed on containers simply because they are imported. Noting Tennessee's position that the levy in dispute is a general tax that in this instance was applied to transactions involving containers, Scalia said, "That seems quite reasonable to me."

Justice Sandra Day O'Connor, normally a staunch defender of states, appeared troubled by the tax, saying the levy seems to be a functional equivalent of a customs duty. As a result, the international treaties would ban the tax.

But Tennessee Attorney General Charles W. Burson disagreed, calling the tax a "generally applicable, nondiscriminatory sales tax."

However, Collier pointed to a legal brief filed by the United Kingdom, which support Itel's contention that the treaties meant to prohibit the type of taxes Tennessee has imposed. The United Kingdom warned in the brief that it "and other nations of similar persuasion are not likely to tolerate a situation in which they refrain from imposing taxes while U.S. political subdivisions impose theirs."

Collier said most, of the international governments that signed the container treaties also believe the Tennessee tax violates the agreements.

But Scalia said that if nine out of 10 parties to a contract agree on one interpretation, that interpretation is not automatically legally enforceable.

In the end, Itel's claim that the tax violates international treaties will depend solely on how Scalia and his colleagues interpret the language of those accords.

If the court decides the tax is preempted by the treaties, its ruling would be relatively narrow because the international treaties in question cover only containers.

However, the court could issue a broad constitutional ruling that could significantly affect taxpayers and revenue collectors.

Currently, the court looks at four areas to determine whether a state tax violates the Constitution's commerce clause. The court asks whether the tax is applied to an activity with a substantial link to 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, which the Itel case does, the court also examines whether there is a risk of multiple taxation and whether the tax interferes with the federal government's ability to conduct foreign, policy.

Burson yesterday said the foreign commerce clause "does not tell Tennessee it has to follow the dictates of foreign governments."

Moreover, Burson said, the state's tax is "not at variance with any international taxing practice recognized by the United States."

Tennessee's argument was bolstered by the federal government.

Edwin S. Kneedler, assistant to the solicitor general, told the justices that a ruling upholding the tax would serve the national interest because it would "protect the rights of the sovereign states to tax activities within their borders and make sure that [businesses] pay their share for state and local services."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.