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Government Revenues Will Take a Hit with Personal-Use Tax Overturned

July 27, 2007 — A U.S. District Court decision this week appears to have far-reaching implications for the local government's coffers.
U.S. District Judge Harvey Bartle III ruled that the four-percent personal-use tax on items valued at more than $1,000 and shipped to the territory was unconstitutional. He ordered the government to stop collecting the tax.
Bartle also ruled Wednesday that the government must return to Robert Anthony Molloy the $2,365 in personal-use tax he was forced to pay when he shipped two of his cars and some floor tile for a basketball court to St. Croix.
Molloy filed suit against the government. He could not be located for comment.
V.I. Internal Revenue Bureau spokeswoman Tammy Smalls referred questions to the Justice Department. No one from Justice returned a call, and Smalls did not return a subsequent call. Government House spokesman Jean Greaux was out of the territory and could not be reached.
In 2003 the Legislature passed a bill, signed into law by then-Gov. Charles Turnbull, mandating that the tax be paid. When the senators discussed the issue in conjunction with other revenue-enhancing measures, they estimated it would bring in $3 million a year.
Bartle cited several cases in his opinion. He notes that only the U.S. Congress has "the power to regulate commerce with foreign nations, and among the several states and with the Indian tribes."
The V.I. law interfered with commerce, according to the judge’s ruling.
"This clause not only contains an affirmative grant of power to Congress but also limits the power of the states,” Bartle wrote. “The so-called dormant-commerce clause prohibits the states from unduly burdening or discriminating against interstate or foreign commerce.”
Bartle went on to write that while not all constitutional provisions apply to the territory, the U.S. Court of Appeals ruled that the commerce-clause principles are equally applicable to the Virgin Islands.
"The tax favors local businesses by sparing their merchandise sold within the territory and interferes with the free flow of goods across territorial boundaries," Bartle wrote. “The Legislature of the Virgin Islands, in enacting this tax, was engaging in prohibited economic protectionism.”
Sen. Celestino White, who opposed the passage of the tax when his senatorial colleagues discussed it in 2003, said Friday that he tried twice to get the law repealed without success.
Echoing Bartle's remarks about protectionism, he said the law was an attempt to get people to buy from local businesses.
"Businesses weren't forced to be competitive with their prices," he said.
While he said he was glad about the judge's decision, White said that it no doubt would harm the local government's finances. He suggested that many people forced to pay the tax during its four years on the books might go to court to get their money back. With collections estimated at $3 million a year when the bill passed, that could cost the government $12 million.
White suggested that the Internal Revenue Bureau could issue a credit on future taxes owed to those who paid the personal-use tax. The ruling will also take an estimated $3 million a year out of the government's revenue stream.
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