INTRIGUE TRADING, INC., Claimant-Appellant, v. 4,432 MASTERCASES OF CIGARETTES, MORE OR LESS, Defendant. UNITED STATES OF AMERICA, Plaintiff-Appellant, v. INTRIGUE TRADING, INC., Claimant-Appellee, v. 4,432 MASTERCASES OF CIGARETTES, MORE OR LESS, Defendant. UNITED STATES OF AMERICA, Plaintiff-Appellant, v. INTRIGUE TRADING, INC., Claimant-Appellee, v. 4,432 MASTERCASES OF CIGARETTES, MORE OR LESS, Defendant. UNITED STATES OF AMERICA, Plaintiff-Appellee.
Nos. 04-55354, 04-55356, 04-56350
United States Court of Appeals, Ninth Circuit
June 2, 2006
452 F.3d 1168
Brian M. Hoffstadt, Assistant United States Attorney, and Pio S. Kim, Assistant United States Attorney, Los Angeles, CA, argued the case and were on the briefs for the appellants/cross-appellees.
Eric Honig, Law Office of Eric Honig, Marina del Rey, CA, argued the case and was on the briefs for the appellees/cross-appellants.
Before PROCTER HUG, JR. and KIM McLANE WARDLAW, Circuit Judges, and JAMES K. SINGLETON,* District Judge.
WARDLAW, Circuit Judge:
This appeal and cross-appeal arise from the search and seizure by the United States Customs Service of over 44 million cigarettes, contained in 4,432 mastercases, for nonpayment of California cigarette taxes. The appeals require us to determine the extent of immunity from state and federal regulatory and taxing power that businesses can expect when they operate in foreign trade zones. We hold that an importer of goods destined for domestic consumption is not exempt from state excise taxes and administrative searches by federal Customs officials simply because it stores its merchandise in a foreign trade zone.
I. FACTS AND PROCEDURAL HISTORY
Between 1998 and 2000, Intrigue Trading, Inc. (“Intrigue“), a California corporation, was licensed by the Bureau of Alcohol, Tobacco, and Firearms to import gray market cigarettes into the United States for domestic sale. The term “gray market
Intrigue is ninety percent owned by Andy Lee, who is also the majority shareholder of two other corporations that dealt in gray market cigarettes, National Trade Industry, Inc. (“NTI“) and Ampac, Inc. (“Ampac“). The companies were similarly structured and shared storage facilities, but each company served a particular purpose. For instance, only NTI was licensed to sell cigarettes in California. The companies are separately incorporated.
Between 1998 and April 2001, Intrigue regularly stored gray market cigarettes, including the 4,432 mastercases at issue here, in a storage space rented under Ampac‘s name at the Port Services Foreign Trade Zone in Carson, California. Foreign trade zones (“FTZs“) are discrete areas located adjacent to ports of entry and authorized by Congress to receive preferential treatment under United States customs laws. BMW Mfg. Corp. v. United States, 241 F.3d 1357, 1359 n. 1 (Fed.Cir.2001). Merchandise from foreign countries stored within an FTZ is not subject to United States customs duties so long as it remains in the FTZ.
Intrigue purchased the 4,432 mastercases of Marlboro brand cigarettes between August 2000 and January 2001 from three different companies that had imported them through Miami, Florida. Importation documents indicated that the ciga-
Customs Service agents began searching FTZs in the Los Angeles and Long Beach area in early April 2001 as part of an investigation into counterfeit and contraband cigarettes they suspected were being stored there. Customs Inspector Rudolfo Villacana visited the Carson FTZ on April 3 or 4, 2001, but was informed by Zone Operator John Yeskel that there were no cigarettes on-site. A day or two later, additional Customs Service agents visited the Carson FTZ and a different zone employee, in response to the agents’ questioning, led them to Intrigue‘s space. There, they found a fenced-in, locked storage area covered with black tarp that obscured the contents of the pallets. Zone employees did not have a key to the storage space, nor could they locate documents detailing Intrigue‘s admissions and removals of cigarettes from the FTZ. When the Customs inspectors threatened to cut the lock, an Intrigue employee, Nick Choi, was summoned. He had a key to the space and opened it for the inspectors to enter. During this initial search, the inspectors found mastercases of cigarettes wrapped in opaque black plastic. This combination of circumstances made one senior Customs inspector “very suspicious” of the nature of the cigarettes.
Customs Service officials returned to the FTZ again on April 5 and seized twelve sample cartons of cigarettes for testing. The next day, April 6, four officials at a Customs warehouse performed a series of field tests on the cigarettes. Those tests indicated that the cigarettes were “likely counterfeit,” “possibly counterfeit,” or at least “appeared to be counterfeit.” Based on the field test results and the suspicious circumstances of the cigarettes’ storage, the Customs Service decided to seize all the cigarettes in Intrigue‘s storage area and move them to a secure Customs warehouse.
The following Monday, April 9, 2001, Customs Specialist Trevor Rudalevige performed another test on packs of cigarettes from the sample cartons. The results of this second test (the “Rudalevige test“) were inconclusive. Officer Rudalevige recommended forwarding some of the samples to Phillip Morris for further analysis. That same day, Customs officials began a detailed, week-long inventory of the cigarettes. On April 10, in the course of the inventory, agents found two boxes of cigarettes that bore Customs notations indicating that they had previously been denied importation into the United States. Sometime between April 10 and April 17, Customs officials also discovered evidence of country-of-origin violations: some of the inventoried cigarettes were not from Switzerland, as Intrigue had claimed, but rather from the Czech Republic, Germany, Holland, and Malaysia.
Phillip Morris responded to the Customs Service‘s inquiry on April 19. Its tests established that the cigarettes in fact were not counterfeit, but it confirmed that three of the four cartons it reviewed were incorrectly labeled as manufactured in Switzerland. The Customs Service retained control of the cigarettes, asserting that it now had probable cause to believe that a large number of the cigarettes were imported in violation of country-of-origin rules or imported despite having been previously denied entry. All but 408 mastercases ultimately were sold at a court-or-
In December 2001, the United States filed this civil forfeiture complaint against the cigarettes as goods entered into the country in violation of law. See
Intrigue moved to suppress the cigarettes as fruits of an illegal search and seizure in violation of the Fourth Amendment. The district court denied the suppression motion, holding that “there is no legitimate expectation of privacy in imported merchandise located in [an FTZ],” and that “imports released from Customs’ custody may still be subject to Customs sampling or additional examination after they are released.”
After the government withdrew five of its eight original claims, the parties filed cross-motions for summary judgment. The district court denied summary judgment to Intrigue on the country-of-origin and unlawful importation claims but granted summary judgment in its favor on the CCTA claim. The district court held that California cigarette taxes were not due on Intrigue‘s mastercases because such taxes are preempted by a provision of the Foreign Trade Zones Act (“FTZ Act“) that prohibits the imposition of state and local ad valorem taxes against goods stored in FTZs. See
The parties entered into a consent judgment in December 2003. In return for the government‘s agreement to drop its remaining country-of-origin claims, Intrigue agreed that the government preserved its right to appeal the CCTA judgment. In turn, Intrigue preserved its right to appeal the denial of its motion to suppress. Thereafter, the district court awarded Intrigue $491,000 in attorney fees. The government appeals that award, arguing only that if we reverse the grant of summary judgment on the CCTA claim, Intrigue will not be a “prevailing party” and the fee award should be vacated. We consolidated these timely appeals.
II. MOTION TO SUPPRESS
We review the denial of a motion to suppress de novo, see United States v. Willis, 431 F.3d 709, 713 n. 3 (9th Cir. 2005), although we accept the district court‘s underlying findings of fact in the absence of clear error, see id. We hold that the district court properly denied Intrigue‘s motion to suppress the 4,432 mastercases of cigarettes as fruits of an illegal search and seizure.
Intrigue argues that the warrantless search of its locked cage and sealed cigarette cases on April 4 or 5, 2001, and the related seizure of twelve sample cartons of cigarettes for testing, violated the Fourth Amendment. It further contends that the United States lacked probable cause when it seized all 4,432 mastercases of cigarettes on April 6. Lastly, Intrigue contends that the government‘s continuing retention of the mastercases after the inconclusive Rudalevige test on April 9 was unconstitutional, because any probable cause that
A. Initial Search
It is undisputed that Customs agents searched Intrigue‘s storage area within the Port Services FTZ and seized twelve sample cartons of cigarettes without a warrant. We conclude, however, that this initial search and sampling was a constitutional administrative search.3
As a general rule, searches and seizures violate the Fourth Amendment unless they are based on probable cause and executed pursuant to a valid search warrant. See Katz v. United States, 389 U.S. 347, 357 (1967). The protection against unreasonable searches and seizures extends to commercial premises, see Tucson Woman‘s Clinic v. Eden, 379 F.3d 531, 550 (9th Cir.2004), and it also applies in the context of civil forfeiture proceedings, see One 1958 Plymouth Sedan v. Pennsylvania, 380 U.S. 693, 696 (1965).
The United States Supreme Court, however, has carved out a limited number of contexts within which a warrant is not required. Administrative searches of “closely regulated” industries are one such exception and may be conducted without a warrant, so long as they meet certain standards of reasonableness. See, e.g., New York v. Burger, 482 U.S. 691, 702-03 (1987). We do not require a warrant in such situations because “the federal regulatory presence is sufficiently comprehensive and defined that the owner of the commercial property cannot help but be aware that his property will be subject to periodic inspections undertaken for specific purposes.” Donovan v. Dewey, 452 U.S. 594, 600 (1981). Industries deemed “closely regulated” under this doctrine include liquor distribution, Colonnade Catering Corp. v. United States, 397 U.S. 72 (1970); sale of sporting weapons, United States v. Biswell, 406 U.S. 311, 316 (1972); stone quarrying and mining, Donovan, 452 U.S. at 606; and automobile junkyards, Burger, 482 U.S. at 703-04. See also United States v. Argent Chem. Labs., Inc., 93 F.3d 572, 575 (9th Cir.1996) (veterinary drugs); United States v. V-1 Oil Co., 63 F.3d 909, 911 (9th Cir.1995) (transportation of hazardous materials). The Supreme Court, in Burger, upheld a warrantless search and inspection regime for automobile junkyards that allowed police officers to inspect not only a company‘s business records but also the cars and auto parts stored on its property. In reaching its determination that automobile junkyards are closely regulated, the Court focused on “the pervasiveness and regularity of the federal regulation and the effect of such regulation upon an owner‘s expectation of privacy.” Burger, 482 U.S. at 701; see also Tucson Woman‘s Clinic, 379 F.3d at 550.
The United States contends that FTZs are a “closely regulated” industry and that Customs Service regulations sufficiently authorize warrantless searches. As a result, those who store property within FTZs have a diminished expectation of privacy and adequate notice of the likelihood of warrantless inspections. We agree that, given the closely regulated nature of FTZs, a warrant is not required, so long as the search is otherwise reasonable.
Therefore, we consider the initial search and sampling together.
We first note that the regulation of FTZs is pervasive. An FTZ may be established only with the consent and authorization of a federal agency, the Foreign Trade Zones Board.
To properly enforce the laws and regulations, Customs officers are given considerable authority to conduct searches, arrest suspected violators, and seize merchandise and articles. . . . Merchandise may be seized by any Customs officer who has reasonable cause to believe that any law or regulation enforced by Customs has been violated, by reason of which the merchandise has become subject to seizure or forfeiture.
United States Customs & Border Protection, Foreign Trade Zones Manual 197-98 (2003) (citing
The duration and regularity of this scheme also supports our conclusion that the commercial activity of storing merchandise in FTZs is “closely regulated.” Customs supervision has been part of the scheme for FTZs since they were conceived in 1934. Section 146.10, which enables warrantless searches of merchandise in FTZs by Customs Service agents, has been in place since 1969,5 and was not modified during the period of Intrigue‘s operations. Moreover, the Carson FTZ zone operator testified that Customs officials inspected Intrigue‘s inventory and manipulation activity “two to three times a year” during the thirty months Intrigue rented space there.
Intrigue correctly points out that “domestic status” goods, like Intrigue‘s cigarettes, which have come through Customs and on which duties have been paid, are subject to less scrutiny and regulation than goods in international transshipment or domestic goods bound for export. That fact, however, does not relieve Intrigue from most of the FTZ regulations, including especially the search provisions of sections 146.4 and 146.10. In Burger, the Supreme Court held that a regulatory scheme far less comprehensive and enacted more recently nonetheless rendered automobile junkyards “closely regulated.” The New York statute, less than five years old when the warrantless inspection occurred, Burger, 482 U.S. at 705, was comparatively limited in scope. It required junkyard owners to obtain a license and keep records of vehicles coming into and leaving their possession, and allowed police officers to examine the records or the vehicles during normal business hours. Id. at 694 nn. 1 & 3. The regulatory regime for “domestic status” goods in FTZs is at least as pervasive and well-established.
Next, we disagree with Intrigue that the FTZ regulations fail to clearly authorize warrantless searches. In support of its contention, Intrigue cites a statutory provision detailing obligations for Customs Service officers:
If any officer or person authorized to make searches and seizures has probable cause to believe that-(A) any merchandise . . . which has been otherwise brought into the United States unlawfully . . . is in any dwelling house, store, or other building or place, he may make application, under oath, to any [authorized judge], and shall thereupon be entitled to a warrant to enter . . . and to search for and seize such merchandise or other article described in the warrant.
We also reject Intrigue‘s similar argument that the statute and regulations do not authorize a “warrantless search and seizure” because they do not use those particular terms. Neither of the statutes held to authorize administrative searches in Burger and V-1 Oil used the words “warrantless search and seizure.” In Burger, the statute allowed “any police officer . . . to examine” vehicle records, vehicles, and vehicle parts. Burger, 482 U.S. at 694 n. 1 (citing
Even though we conclude that the FTZ regulations clearly authorize inspections without warrants and that the storage of goods in FTZs is “closely regulated” commercial activity, to satisfy the Fourth Amendment, the administrative search must also be reasonable. In Burger, the Supreme Court held that a warrantless search is nevertheless reasonable if three conditions are satisfied: 1) the underlying regulatory scheme advances a substantial government interest; 2) warrantless inspections are “necessary” to further the regulatory scheme; and 3) the inspection program provides a “constitutionally adequate substitute for a warrant.” Burger, 482 U.S. at 702-03; V-1 Oil, 63 F.3d at 911. Each of these conditions is met here.
First, the underlying regulatory scheme for FTZs advances the government‘s substantial interest in ensuring that duties are paid, that consumers are protected from counterfeit or adulterated cigarettes, and that country-of-origin labels are reviewed. Second, it is plain that a warrantless inspection program is necessary to further the regulatory scheme, because here, as in V-1 Oil, advance notice of inspections could permit those violating American customs laws “to temporarily correct violations and frustrate enforcement efforts.” V-1 Oil, 63 F.3d at 912. This is particularly the case for so-called “domestic status” goods, like Intrigue‘s cigarettes, because they can be moved in and out of FTZs without permits. See
Third, the FTZ regulations provide a “constitutionally adequate substitute for a warrant.” As the Supreme Court explained in Burger, the regulatory statute must perform the two basic functions of a warrant: it must advise the owner of the commercial
Although the FTZ regulations place few limits on the discretion of searching officers, we are confident that they are sufficient. The Supreme Court‘s opinion in Burger instructs that we should review the scheme‘s limitation on officer discretion in context. The Burger Court upheld the New York vehicle-dismantling statute, even though it did not indicate how often searches would occur, provided virtually no limitation on the scope of the search within automobile junkyards, and failed to “provide[] limits or guidance on the selection” of businesses for inspection. Burger, 482 U.S. at 722-23 (Brennan, J., dissenting). The Court instead relied on the restriction of the searches to certain types of businesses and certain types of items that could be inspected. Id. at 711 (majority opinion). The same basic limitations are present in the FTZ statute and regulations.
Moreover, because companies operating in FTZs do not have the expectation of privacy one would have in a private home or business, we require fewer safeguards to satisfy us that the search is reasonable. In Rush v. Obledo, we struck down as unconstitutional a regulation that enabled warrantless searches of family-home day care facilities because it failed to place any limits on the time of searches, the area that could be searched, or the regularity of searches. Id. at 721. The overbroad search provision would have authorized searching anywhere within day care providers’ private residences, even in areas unconnected to the provision of day care, at any time of day. As we explained, constitutionally adequate searches “must be directly connected with the environment the Legislature seeks to regulate-i.e., the areas of the home used by children when the children are present.” Id. Similarly, in Argent Chemical Laboratories, we concluded that a statute authorizing warrantless FDA searches of veterinary drug manufacturers was reasonable, because notice was furnished at the time, the statute limited the scope of what could be inspected and what could be seized, and most seizures required approval from a district office before items could be seized. Argent Chem. Labs., 93 F.3d at 576-77. In that case, allowing searches of pharmaceutical plants without those limitations would have far exceeded the FDA‘s interest in regulating the “safety and effectiveness” of veterinary drugs. Id. at 576. Here, unlike the situation in Rush, the area in which searches are authorized (FTZs) is the same area subject to regulation. There is minimal risk that Customs Service officers will go beyond the scope prescribed by the FTZ regulations, because virtually all the activities that take place within an FTZ fall within the scope of Customs inspection
Finally, we note the settled expectations that surround the use and control of FTZs. It is long-established and well understood that, in exchange for the benefits afforded to users of FTZs, those who store merchandise in FTZs must keep Customs apprised of their activities and afford Customs officials the right to inspect their operations. Intrigue was well aware of this trade-off when it decided to run its operations out of an FTZ.
We therefore hold that the Customs Service searches authorized by the FTZ regulations are “directly connected with the environment the Legislature seeks to regulate,” Rush, 756 F.2d at 721, and the FTZ regulatory scheme provides a constitutionally adequate substitute for a warrant. The warrantless search of Intrigue‘s storage area and the initial sampling constituted a valid and reasonable administrative search.
B. Probable Cause for Seizure of all 4,432 Mastercases
We next conclude that, under the “totality of the circumstances” confronting the Customs Service, probable cause supported the government‘s seizure of all 4,432 mastercases of cigarettes on April 6, 2001. As we held in United States v. One 1978 Piper Cherokee Aircraft:
The standard for probable cause in forfeiture proceedings resembles that required to support a search warrant. The determination of probable cause is based upon a “totality of the circumstances” test, and the government‘s evidence must be more than that which gives rise to a mere suspicion, although it need not rise to the level of prima facie proof.
Piper Cherokee Aircraft, 91 F.3d at 1208 (citations omitted).6 Thus, probable cause to seize property does not require absolute certainty, but only a “fair probability” that the property is contraband. See United States v. Sokolow, 490 U.S. 1, 7 (1989); United States v. Alaimalo, 313 F.3d 1188, 1193 (9th Cir. 2002). Because judicial constructs like “probable cause” and “reasonable suspicion” are “fluid concepts that take their substantive content from the particular contexts in which the standards are being assessed,” Ornelas v. United States, 517 U.S. 690, 696 (1996), we give reasonable deference to the inferences and judgments of experienced agents in the field, see id. at 700; United States v. $129,727.00 U.S. Currency, 129 F.3d 486, 489 (9th Cir. 1997).
The Customs Service agents encountered the following combination of circumstances when they inspected the Carson FTZ. The FTZ operator initially indicated that there were no cigarettes on-site, but an FTZ employee queried the next day led Customs officers to Intrigue‘s cigarette storage space. The FTZ operator could not immediately produce records for Intrigue‘s cigarettes, records the zone operator generally maintains and must have “readily available for Customs review.”
Intrigue‘s contention that the field test results were not sufficiently certain to support a finding of probable cause lacks merit. The Supreme Court has upheld probable cause determinations that are based on ambiguous or inconclusive field tests, even in the absence of other evidence supporting a finding of probable cause. For example, in Illinois v. Caballes, the Supreme Court upheld the search of a car based on a dog-sniff detection of narcotics, 543 U.S. 405, 410 (2005), even though evidence in the record indicated that Illinois drug dogs return false positives anywhere from 12.5% to 60% of the time, id. at 412 (Souter, J., dissenting). Here, moreover, the “likely counterfeit“/ “possibly counterfeit” field test results did not stand alone. They were one of a combination of circumstances giving rise to probable cause for the seizure.
Once Customs officers had probable cause to believe the merchandise was counterfeit, it was within their discretion to seize all of the cigarettes. “Property may be seized, if available, by any Customs officer who has reasonable cause to believe that any law or regulation enforced by the Customs Service has been violated, by reason of which the property has become subject to seizure or forfeiture.”
C. Retention of the Mastercases
Intrigue contends that even if probable cause existed for the seizure of the 4,432 mastercases, the Customs Service lacked probable cause to retain them once the Rudalevige test returned inconclusive results on April 9, 2001. Intrigue is correct as a matter of law that when there ceases to be probable cause for continuing a search or seizure, it must end immediately. See Jacobs v. City of Chicago, 215 F.3d 758, 772 (7th Cir.2000). However, because Intrigue mischaracterizes the import of the Rudalevige test, we cannot agree that probable cause evaporated with its failure to reach conclusive results. Probable cause existed at each step in the Customs Service‘s investigation of the cigarettes.
By April 19, 2001, when Phillip Morris definitively established that the cigarettes were not counterfeit, the Customs Service had developed new bases for probable cause, as its inventory of the cigarettes had turned up country-of-origin and re-importation violations. Intrigue does not dispute this fact but instead contends that
We disagree. Intrigue asserts that the Rudalevige test “proved wrong” the initial field tests indicating that the cigarettes might be counterfeit. That is not correct. The Rudalevige test report identifies a number of characteristics of the tested cigarettes that were similar to genuine gray market cigarettes, including “the filter holes, the glue, the printing, the cigarette packing, the control number, the folding pattern of the foil, the lack of fluorescence, the placement of the material codes, and the statement ‘Blend of USA.‘” However, the report also notes that the lack of codes on the filter paper, the misspelling of Switzerland on two of the sample packs, and a number of “signs of poor quality control,” such as uneven folds, poorly aligned bands on the filters, and loose tobacco in the packages, raised red flags about their genuineness. Due to these potentially troubling factors, the Rudalevige test report stated, “We cannot draw any conclusion based on these observations.” The report recommended sending the cigarettes to Phillip Morris for further testing. The Rudalevige test results did not dispute, or even address, the findings of the initial field tests. They merely indicated that additional testing would be required to determine with any certainty whether the cigarettes were counterfeit or not.
The inconclusive Rudalevige test did not extinguish probable cause. Indeed, the test report noted several additional factors that would have supported a probable cause determination. Rudalevige found these elements troubling enough that he sought further testing from the supposed manufacturer. Furthermore, virtually all of the factors that had generated support for the initial seizure, including the suspicious circumstances of Intrigue‘s storage and the field tests indicating that the cigarettes were “possibly” or “likely” counterfeit, remained in play and supported probable cause.
Intrigue points to one out-of-circuit district court case to support its argument that an inconclusive test result nullifies probable cause to continue seizure. See United States v. One DLO Model A/C, 30.06 Mach. Gun, 904 F.Supp. 622 (N.D.Ohio 1995). One DLO Model dealt with the arcane issue of whether a
III. CONTRABAND CIGARETTES TRAFFICKING ACT
Next we consider the United States’ cross-appeal, challenging the district court‘s decision that the Contraband Cigarettes Trafficking Act (“CCTA“) was inapplicable to Intrigue‘s cigarettes because the California cigarette tax is an ad valorem tax, expressly precluded by the FTZ Act from application to goods stored in FTZs. We agree with the United States that the district court misapprehended the nature of the California cigarette tax.
This dispute arises at the intersection of two federal laws: the CCTA, which authorizes the federal forfeiture of cigarettes found in a state without the appropriate state tax stamps, and the FTZ Act, which specifically limits the application of state and local taxes. The CCTA makes it unlawful “for any person knowingly to ship, transport, receive, possess, sell, distribute, or purchase contraband cigarettes,”
a quantity in excess of 60,000 cigarettes, which bear no evidence of the payment of applicable State cigarette taxes in the State where such cigarettes are found, . . . in the possession of any person other than [a permitted manufacturer, common carrier, entity licensed to pay cigarette taxes by other means, or federal or state agency or employee].
A. Nature of Cigarette Tax
We hold, contrary to the district court, that the California cigarette tax is an excise tax, not expressly precluded by the FTZ Act.
The California cigarette tax makes no reference to value, instead calculating the tax solely according to the number of cigarettes distributed within the state. The statute provides: “Every distributor shall pay a tax upon his or her distributions of cigarettes at the rate of . . . [$0.006 per cigarette distributed] on and after 12:01 a.m. on January 1, 1994.”
On its face, the California tax is not imposed ad valorem, but rather is an excise tax. See Cal. State Bd. of Equalization v. Chemehuevi Indian Tribe, 474 U.S. 9, 10-11 (1986) (repeatedly describing California‘s cigarette distribution tax as an excise tax). The tax does not in any way correlate to value, and it is imposed only once, when the cigarettes are “distributed.” See
That conclusion is consistent with our case law and the language of the California statute. We have previously determined that a tax on the storage of goods for out-of-state sale may nonetheless be an excise tax. Mount Tivy Winery v. Lewis, 134 F.2d 120 (9th Cir.1943). In Mount Tivy, a California-based winery challenged a federal tax on wine stored for future sale as an unconstitutional direct tax. Id. at 122. The outcome of the case similarly turned on whether the tax at issue was an excise tax or an ad valorem property tax. After reviewing the Supreme Court‘s definition of an excise tax, “a tax imposed upon a particular use of property or the exercise of a single power over property incidental to ownership,” we held that the liquor tax was indeed an excise tax. Id. at 124-25 (quoting Bromley v. McCaughn, 280 U.S. 124, 136 (1929)).
The language of California‘s cigarette tax, which is imposed on “the exercise of any right or power” over cigarettes,
B. CCTA Application to Cigarettes Stored for Out-of-State Sale
Intrigue also argues that even if the California cigarette tax is an excise tax, by its terms, it does not reach the storage of cigarettes to be sold in another state. Because the district court found that the California tax was an ad valorem tax, it did not reach this question. We reject Intrigue‘s argument and hold that California law requires unlicensed distributors like Intrigue to pay cigarette taxes on cigarettes stored in California for out-of-state sale.
The plain language of the statute compels this reasoning. See United States v. Daas, 198 F.3d 1167, 1174 (9th Cir.1999) (“The first step in ascertaining congressional intent is to look to the plain language of the statute.“). We follow the plain meaning of a statute unless it is ambiguous or its application would lead to unreasonable results. Id.
California taxes “distributions” of cigarettes, requiring “distributors” to either affix a pre-paid stamp on the pack of cigarettes or make direct payment to the state.
the exercise of any right or power over cigarettes or tobacco products incident to the ownership thereof, other than the sale of the cigarettes or tobacco products or the keeping or retention thereof by a licensed distributor for the purpose of sale.
We agree with the United States that California‘s use of the term “the exercise of any right or power over cigarettes . . . incident to [] ownership” is intended to include the act of storage. A number of courts and statutes have recognized or approved this interpretation. For example, in D.H. Holmes Co. v. McNamara, the United States Supreme Court upheld against a Commerce Clause challenge a Louisiana use tax that defined “use” as “the exercise of any right or power over tangible personal property incident to ownership, and includes consumption, distribution, and storage.” 486 U.S. 24, 27 (1988). Similarly, in Mount Tivy Winery, we held that the “activity of holding wine intended for sale” could be taxed under a statute that imposed taxes on the “exercise of a single power over property incidental to ownership.” 134 F.2d at 124 (internal quotation marks omitted). See also Dept. of Revenue of State of N.M. v. United States, 408 F.2d 574, 576-77 (10th Cir.1969) (describing New Mexico excise tax which defined “use” as “exercise of any right or power over tangible personal property incident to . . . ownership” and laid the tax on “personal property stored, used or consumed in state“); Texas Co. v. Siefried, 60 Wyo. 142, 147 P.2d 837, 844 (Wyo.1944) (holding that a tax on “use” reached the storage and withdrawal from storage of gasoline).
Given the definition of “distribution” in
Our interpretation of the California statute is reinforced by the exception built into
The legislative history of the “use or consumption” definition in
Unlicensed distributors have been known to obtain cigarettes and sell them directly to consumers without the cigarette tax having been paid. However, under current law, unlicensed distributors cannot be held liable for the cigarette tax on unstamped cigarettes that are seized because they can claim that a large portion of their inventory is being held for purposes of resale, rather than for direct sale to consumers.
This bill would draw a distinction between licensed and unlicensed distributors. Unlicensed distributors would be liable for tax on all unstamped cigarette or tobacco products found in their possession. The presumption would be that the unlicensed distributor is really in the business of selling cigarettes to consumers. Licensed distributors would not be liable for unstamped products in their possession.
California Bill Analysis, Senate Floor, 1997-1998 Regular Session, Senate Bill 2230 (May 6, 1998).
Unlicensed distributors, like Intrigue, were precisely the target of the 1998 amendment. Indeed, Intrigue‘s owner Andy Lee testified that Intrigue kept the cigarettes in an FTZ because he believed that, by doing so, Intrigue could avoid paying California taxes. The clear implication of the statute, as amended in 1998, is that an unlicensed distributor like Intrigue owes taxes when it stores cigarettes within the state of California.
The distinction between licensed and unlicensed cigarette distributors also has practical merit. As the United States, and amicus California Board of Equalization (“BOE“), contend, the statutory scheme intentionally creates an “either/or” system that balances fairness to distributors with
Intrigue argues that our reading of the statute would enable a system of double taxation, because it would be taxed for storing cigarettes in California and then taxed again when it sells the cigarettes in another state. We find this argument unavailing. First, any risk of double taxation would apply only to the small number of distributors who neglect to obtain a California license. Second,
Intrigue also asserts that, because the legislative history of the CCTA indicates that its purpose was to combat organized crime and bootlegging, Intrigue, as a legitimate business, should not be subject to the law. Even assuming, as we do, that Intrigue is a legitimate business, this argument lacks merit. The explicit language of the statute does not limit the CCTA to organized crime or bootlegging operations; any knowing possession, sale, or receipt of contraband cigarettes exposes one to liability under the statute. See
For similar reasons, we reject Intrigue‘s argument that the CCTA is inapplicable to Intrigue because its operations were closely monitored by state and federal officials and because the United States offered no proof that it “evaded” tax laws. The CCTA does not require an intentional evasion of the law to prompt forfeiture of cigarettes. Compare
Finally, we reject as factually unfounded Intrigue‘s argument that it owed no taxes because the cigarettes were in “joint possession” with NTI, Intrigue‘s sister corporation that was licensed to distribute cigarettes in California. Even Intrigue‘s CEO Andy Lee conceded during his deposition that, “Well, legally . . . Intrigue Trading, Inc. owned the product,” agreeing that Intrigue “always had possession” of the cigarettes once they entered the FTZ. Intrigue offered no evidence indicating that it conveyed joint ownership rights over the cigarettes to NTI in a written document, as California law requires to establish joint ownership. See Donovan v. Donovan, 223 Cal.App.2d 691, 697 (1964) (citing California Trust Co. v. Bennett, 33 Cal.2d 694, 697 (1949)). Nor did NTI demonstrate “possession” by exerting any control over or taking any action with regard to the 4,432 mastercases, other than paying the rent on the storage space where they were located. See Black‘s Law Dictionary 1201 (8th ed.2004) (defining possession as “the exercise of dominion over property” or “[t]he right under which one may exercise control over something to the exclusion of all others“). Furthermore, there is no indication in the record that NTI reported the acquisition of the cigarettes to the California BOE, as it would have been required to do as a licensed distributor that believed itself to be a rightful owner. See
C. Preemption
Having concluded that California‘s cigarette tax applies to the storage of cigarettes in California destined for future out-of-state sale, we must reach the broader question whether the FTZ Act preempts all state and local efforts to impose taxes on merchandise stored within FTZs. We hold that it does not.
Federal law may preempt state law under the Supremacy Clause of the Constitution.
The FTZ Act does not expressly preempt all state regulation and taxation. “Express preemption occurs when Congress enacts a statute that expressly commands that state law on the particular subject is displaced.” Gadda v. Ashcroft, 377 F.3d 934, 944 (9th Cir.2004). The only express preemption in the FTZ Act is the prohibition on state and local ad valorem taxes.
Nor do we find that Congress has expressed an intent to occupy the entire field of activity around FTZs, such that state law should be preempted, or that state regulation creates an irreconcilable conflict with the FTZ Act and federal regulation. As the Supreme Court has explained:
[Field preemption] may be inferred from a scheme of federal regulation . . . so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it, or where an Act of Congress touch[es] a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.
English v. Gen. Elec. Co., 496 U.S. 72, 79 (1990) (internal quotation marks omitted). State law may also be preempted where it would be impossible for a party to comply with both state and federal requirements or where the state law would “stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Id. (internal quotation marks omitted).
As discussed above, supra at pp. 1177-1178, there is significant federal control over the “field” of FTZs. However, several factors militate against applying field preemption in this arena. First, the federal regulations implementing the CCTA, which Congress enacted forty-five years after the passage of the FTZ Act, envision that certain activities within an FTZ would remain subject to state cigarette taxes. Those regulations exempt from the CCTA both cigarettes in the stream of international commerce and domestic cigarettes destined for export, but not those like Intrigue‘s that have been entered into the United States for domestic consumption. In defining parties exempted from the CCTA,
Second, the Supreme Court itself has indicated that the federal interest in domestic-bound goods stored in FTZs is not so dominant as to completely preclude state activity in this field. In a pair of cases from the 1980s, Xerox Corp. v. Harris County, Texas, 459 U.S. 145 (1982) and R.J. Reynolds Tobacco Co. v. Durham County, North Carolina, 479 U.S. 130 (1986), the Supreme Court addressed this same preemption question in the context of customs-bonded warehouses. Customs-bonded warehouses (“CBWs“) and FTZs are functionally quite
In Xerox, the Supreme Court struck down an ad valorem property tax the Texas county sought to impose on copiers that had been built in Mexico and were being stored in a CBW until they could be sent to distributors in Latin America. The Court‘s reasoning combined elements of field preemption and conflict preemption. The Court first pointed to “the continuous control and supervision” of Customs officials over CBWs and the “[d]etailed regulations control[ling] every aspect of the manner in which the warehouses are to be operated,” 459 U.S. at 150, which demonstrated a “pervasive” system of regulation, id. at 153. Then, after reviewing the legislative history of the Warehousing Act of 1846 and Congress‘s purpose in establishing CBWs, the Court also held that the state tax would “offset substantially the very benefits Congress intended to confer” in creating CBWs. Id.
Four years later, in R.J. Reynolds, the Supreme Court clarified its preemption reasoning. The R.J. Reynolds Court held that a county was not preempted from imposing an ad valorem tax on foreign tobacco that R.J. Reynolds was storing and aging in CBWs, because Reynolds ultimately intended to enter the tobacco into the United States for domestic manufacturing and consumption. At the beginning of its analysis, the Court explicitly pulled back from any “field preemptive” language in Xerox. R.J. Reynolds, 479 U.S. at 142 (“[The Xerox Court] limited its pre-emption analysis to whether taxation would impede the congressional objectives.“); see also id. at 149 (“[T]he [customs] regulations, while detailed, appear to contemplate some concurrent state regulation and, arguably, even state taxation.“). Then, after reviewing the same legislative history of the Warehousing Act of 1846 that it had examined in Xerox, the Court found that local taxes on imports destined for domestic consumption would not obstruct congressional objectives. Id. at 142-43 & n. 10, 148. Seven years later, the Court reiterated that Congress had not occupied the entire field of taxation with regard to CBWs:
[W]e have not held that state taxation of goods in bonded warehouses is preempted by Congress’ intent to occupy the field of bonded warehouse regulation. In fact, in R.J. Reynolds we specifically held that the bonded warehouse statutes and regulations did not evidence such a purpose.
With respect to conflict preemption, we read Xerox and R.J. Reynolds as drawing a clear distinction between goods within the stream of international commerce and goods destined for domestic consumption. In the former case, where federal duties are not even due, local taxation would inhibit the use of American ports; in the latter, federal duties will already be required and an exemption from local taxation would provide a windfall for foreign manufacturers that domestic manufacturers do not receive, hardly the aim of the statute. R.J. Reynolds, 479 U.S. at 144-46. As the Court explained: “There is no indication in the legislative history of the Warehousing Act that one of the goals of the [CBW] system was to benefit imported goods in their competition with domestic goods.” Id. at 145 n. 14. Therefore, “[p]ermitting imposition of a tax . . . leads to equal treatment for imported and domestic tobacco.” Id. at 147. This bifurcated approach to CBWs, treating goods differently depending on whether they are in foreign transshipment or destined for domestic consumption, is also consistent with the approach taken by California‘s courts. See Am. Smelting & Refining Co. v. Contra Costa County, 271 Cal.App.2d 437, 474 (1969) (concluding that “the laws and regulations relating specifically to [CBWs] do not . . . confer an immunity from a non-discriminatory tax on property of foreign origin being processed for domestic consumption“).
The reasoning of the R.J. Reynolds opinion applies with equal force to FTZs. Intrigue cites dicta in a footnote to the R.J. Reynolds opinion to argue that the holding of that case should not extend from CBWs to FTZs. In its opinion at footnote 22, the R.J. Reynolds Court sought to explain why the then-recently passed
Foreign trade zones are valued because they actually promote domestic industry and create jobs [citing 129 Cong. Rec. 14501 (1983) (remarks of Sen. Bentsen)]. Given that the taxation of goods in foreign trade zones could arguably harm domestic industry, while exemption from taxation of the imported goods in the present case would serve to discriminate against domestic producers, there appears to be a sufficient justification for the difference in state taxation with respect to these customs entities.
R.J. Reynolds, 479 U.S. at 151 n. 22. We are unpersuaded that the dicta in footnote 22 compels the result Intrigue seeks.
We conclude that, outside the context of ad valorem taxes (which Congress expressly prohibited for property in FTZs), there is no reason to treat the two facilities differently. FTZs and CBWs serve almost identical roles in our system of interstate commerce. The legislative history of the Warehousing Act of 1846, which enabled the creation of customs-bonded warehouses, indicates that the aim of CBWs was twofold: granting flexibility to importers as to when they pay their duties (duties need only be paid when the goods are removed from the CBW and entered into the United States); and encouraging shippers to utilize American ports as a way station in international commerce (because duties are never required if the goods are re-exported directly from the CBW). See
Foreign trade zones were created by Congress for the same basic purposes. Although there is no formal legislative history for the 1934 FTZ Act, its stated purpose was “to expedite and encourage foreign commerce, and for other purposes.” Act of June 18, 1934, 48 Stat. 998, 998. Congress‘s twin aims in passing the FTZ Act, further encouraging use of United States ports in the flow of interstate commerce and enabling manipulation of foreign goods before they are imported, are apparent from the face of the statute. See
Moreover, the reasons given in R.J. Reynolds for distinguishing FTZs from CBWs are inapplicable here. When goods like cigarettes are bound for domestic use already, as Intrigue‘s were, exempting them from state cigarette taxes because they are stored in an FTZ will not adversely affect domestic industry or job creation. Indeed, like the local tobacco growers in R.J. Reynolds, domestic cigarette distributors would be disadvantaged by allowing Intrigue a tax exemption not afforded to unlicensed distributors storing cigarettes elsewhere in California. Allowing California to impose its tax on domestic-bound cigarettes would lead to “equal treatment for imported and domestic” cigarettes. R.J. Reynolds, 479 U.S. at 147.
The Eleventh Circuit similarly has found the Xerox / R.J. Reynolds dichotomy relevant in the context of FTZs. See 3M Health Care, 908 F.2d 918. The court in 3M Health Care blocked Florida‘s effort to apply its Drug and Cosmetic Act to foreign pharmaceuticals being stored in an FTZ for eventual transshipment to Latin American countries. Id. at 919. Performing a similar preemption analysis, the Eleventh Circuit held that allowing Florida to regulate products that would never actually enter the domestic market would “encumber the ease of transshipment through the zones . . . [and] frustrate[] the goal of the Foreign Trade Zones Act.” Id. at 921. In doing so, the Eleventh Circuit relied on the Supreme Court‘s Xerox/R.J. Reynolds distinction between goods that are in transshipment and those destined for domestic sale. Id. at 922 n. 6.
We find distinguishable the state and federal cases cited by Intrigue that have limited state taxing authority within FTZs. See Hostetter v. Idlewild Bon Voyage Liquor Corp., 377 U.S. 324, 333-34 (1964) (holding that New York lacked power to regulate duty-free liquor shops, which are technically FTZs, in airports); McGoldrick v. Gulf Oil Corp., 309 U.S. 414, 428-29 (1940) (holding that New York did not have the power to tax oil imported into a customs-bonded warehouse that was then reprocessed and sold to vessels in foreign commerce); During v. Valente, 267 A.D. 383, 46 N.Y.S.2d 385, 387 (1944) (holding that sale of alcohol in an FTZ “was not subject to local regulation or tax“). All of these cases addressed state regulation or taxation of goods that were
We therefore hold that state excise taxes on merchandise stored in FTZs for eventual domestic consumption are not expressly preempted by federal law. Nor has the federal scheme for FTZs so occupied the field as to prohibit state taxation. Finally, imposition of California‘s cigarette tax does not create an irreconcilable conflict with the FTZ laws, at least when the goods taxed are already duty-paid and bound for domestic consumption.10
IV. ATTORNEYS’ FEES
The district court awarded attorneys’ fees based on its grant of summary judgment to Intrigue. Because we reverse that judgment, we vacate the fee award. Baffert v. Cal. Horse Racing Bd., 332 F.3d 613, 617 (9th Cir.2003); Lovell v. Poway Unified Sch. Dist., 90 F.3d 367, 373-74 (9th Cir.1996).
V. CONCLUSION
California has made the decision to impose its cigarette tax on unlicensed distributors who store cigarettes within the state for future sale in another state, including those cigarettes stored in FTZs. That decision is not preempted by the express language of the Foreign Trade Zones Act, nor does it conflict with the general purpose or intent of Congress in establishing foreign trade zones. Though Intrigue‘s motives may have been pure, and it may simply be the victim of bad legal advice or a poor gamble on the outcome of unsettled law, Intrigue‘s cigarettes were ultimately found in California without California tax stamps. That was sufficient, under the CCTA, to allow the federal government to seize and forfeit them.
The storage of goods in foreign trade zones is “closely regulated,” and Customs officials are empowered by statute to search and inspect merchandise in foreign trade zones without a warrant. Customs officials had probable cause to believe that Intrigue‘s cigarettes were counterfeit, and it lawfully seized them. Probable cause for the seizure never dissipated, because the Rudalevige test was not conclusive and because, by the time the cigarettes were demonstrated to be genuine, the Customs Service had developed probable cause to believe that the cigarettes otherwise violated importation laws. The search and seizure both comported with the Fourth Amendment.
We therefore AFFIRM the denial of the motion to suppress, REVERSE the grant of summary judgment, VACATE the award of attorneys’ fees, and REMAND with instructions that summary judgment be granted to the United States.
KIM McLANE WARDLAW
UNITED STATES CIRCUIT JUDGE