Spring 2003-06 Circuit affirms ruling against
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Spring 2003-06 Circuit affirms ruling against

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Number 51
Spring 2003
Follow up

Circuit affirms ruling against
Puerto Rico excise tax law

The Puerto Rico law that prohibits private carriers to deliver packages until the excise tax is paid was annulled in United Parcel Service, Inc. v. Flores Galarza, 318 F.3d 323 (1st Cir. 2003).

In 2002 the U.S. District Court for the District of Puerto Rico declared said law, and the Treasury Department regulations and practices that implement it, to be invalid and unenforceable under the Supremacy Clause of the United States Constitution. Please refer to the Summer 2002 issue of Puerto Rico Business Law Developments. Treasury appealed the judgment to the U.S. Court of Appeals for the First Circuit. In a two-to-one vote, the Court of Appeals stayed the decision pending resolution of the appeal. It has now resolved the appeal, and has affirmed the ruling of the District Court.


Puerto Rico law


Treasury does accept excise tax prepayment from the carriers, who must then be reimbursed by the recipients of the packages. 13 P.R. Laws Ann. § 9077. In order to use this surrogate process, the carrier must:

provide to Treasury a commercial invoice stating a complete description and the actual cost of the goods in the package,

separate for inspection certain merchandise, based on value and relative weight,

provide to Treasury a shipment manifest, segregating packages by various categories, and

permit Treasury agents access to shipping operations to supervise the process of introduction, imposition and payment of the excise tax.

If a carrier cannot obtain all this information, it must stop the delivery process until it does. The carrier must return the package to the shipper if its efforts turn out to be unsuccessful. The package must also be returned if the recipient refuses to reimburse a prepaid tax. The carrier must then request a rebate from Treasury.

Treasury Department officials also can change tax assessments of packages retroactively, after they have been delivered, forcing the carrier to pay the difference without any real possibility of reimbursement from the recipient.

Unlike the case of commercial carriers, recipients of packages delivered by the United States Postal Service have two business days to pay the excise tax.


Federal law


On the other hand, the Federal Aviation Administration Authorization Act of 1994, 49 U.S.C. § 41713, bars any state, territory or possession of the United States from “enacting or enforcing a law . . . related to a price, route, or service of an air carrier . . . when such carrier is transporting property by aircraft or by motor vehicle.” Congress intended that carrier service options be dictated by the marketplace, not by “an artificial regulatory structure.”


Butler Act


In order to support its case, Treasury brought the Butler Act, 48 U.S.C. § 872, to the attention of the court. Under this federal law “no suit for the purpose of restraining the assessment or collection of a tax imposed by the laws of Puerto Rico shall be maintained in the United States District Court for the District of Puerto Rico.” But UPS’s suit did not seek to enjoin collection of the excise tax, said the Court of Appeals, as it only pretended to enjoin those provisions that interfere with the delivery of packages. “The relief sought by UPS leaves the Secretary [of the Treasury] free to collect the tax from those who owe it.”


Federal Relations Act


Section 3 of the Federal Relations Act (48 U.S.C. § 741a) was also raised by Treasury: any excise tax imposed by Puerto Rico may be levied and collected as soon as the items are brought into the island.

Faced with two different statutes, neither of which specifically address the issues raised in the case, the Court of Appeals ruled that both may “co-exist harmoniously.” “We do not interpret the [Federal Relations Act] as conferring a broad authority to regulate the flow of packages in interstate commerce that conflicts with the FAA Authorization Act. To do so would be to manufacture a statutory conflict where none exists.” n

© 2003 Goldman Antonetti