Ponape Federation of Cooperative Associations v Federated States of Micronesia [1985] FMSC 21; 2 FSM Intrm. 124 (Pon. 1985) (21 November 1985)

THE SUPREME COURT OF THE
FEDERATED STATES OF MICRONESIA
Cite as Ponape Federation of Coop. Ass’ns v. FSM[1985] FMSC 21; ,
2 FSM Intrm. 124 (Pon. 1985)

[1985] FMSC 21; [2 FSM Intrm. 124]

PONAPE FEDERATION OF COOPERATIVE ASSOCIATIONS,
Plaintiff,

vs.

FEDERATED STATES OF MICRONESIA,
Defendant.

CIVIL 1985-026
Cite as [1985] FMSC 21; 2 FSM Intrm. 124

OPINION

Edward C. King, Chief Justice
FSM Supreme Court
November 21, 1985

APPEARANCES:

For the Plaintiff: Douglas F. Cushnie
Attorney-at-Law
P.0. Box 949
Saipan, CM 96950

Martin F. Mix
Attorney-at-Law
Kolonia, Pohnpei 96941

For the Defendant: W. Alan Lautanen
Assistant Attorney General
Attorney General's Office
Federated States of Micronesia
Kolonia, Pohnpei 96941

* * * *

HEADNOTES

Constitutional Law-general
Statutes
Tax
The tax on gross revenues falls squarely within the constitutional authorization given to Congress by Article IX, Section 2(e) to tax income. Ponape Federation of Coop. Ass'ns v. FSM,

[2 FSM Intrm. 125]

[1985] FMSC 21; 2 FSM Intrm. 124, 126 (Pon. 1985).

Constitutional Law-general
Constitutional interpretation must start and end with the words of the provision when the words themselves plainly and unmistakably provide the answer to the issue posed. The Court may not look to constitutional history nor to United States interpretations of similar constitutional language in this circumstance. Ponape Federation of Coop. Ass'ns v. FSM, [1985] FMSC 21; 2 FSM Intrm. 124, 126-27 (Pon. 1985).

Constitutional Law-general
Statutes
Taxation
That Congress may tax "gross income" is plainly and unmistakably provided for in the words of Article IX, Section 2(e) of the Constitution. Ponape Federation of Coop. Ass'ns v. FSM, [1985] FMSC 21; 2 FSM Intrm. 124, 126 (Pon. 1985).

Taxation
The gross revenue tax levied by the national government under 51 F.S.M.C. §§ 141-44 is distinguishable from a sales tax in several ways. Ponape Federation of Coop. Ass'ns v. FSM, [1985] FMSC 21; 2 FSM Intrm. 124, 127 (Pon. 1985).

* * * *

COURT'S OPINION

EDWARD C. KING, Chief Justice:

Ponape Federation of Cooperative Associations (PFCA) here contends that the gross revenue tax on businesses imposed by 54 F.S.M.C. §§ 141-44 does not "impose taxes on income" and is outside of the power granted to Congress by the Constitution of the Federated States of Micronesia.

This is another instance, like Tammow v. FSM, 2 FSM Intrm. 53 (App. 1985), in which plaintiffs assert that governmental actions of the Federated States of Micronesia are unconstitutional because those actions differ from the United States model. The paradigm proposed by plaintiffs in this case is the United States federal income tax system, under which taxes are applied only to net income, that is, gross income reduced by the cost of goods sold and other specified deductions.

Here too it is the Constitution of the Federated States of Micronesia, rather than the actions of the United States government, to which we look to determine the legal propriety of governmental activities here. The Constitution of the Federated States of Micronesia provides no support for PFCA's attack, and the government's motion to dismiss must be granted.

[2 FSM Intrm. 126]

I.

Unlike the Major Crimes Clause under consideration in Tammow, the power to impose "taxes on income" granted Congress in Article IX, Section 2(e) of the Constitution is similar to, and perhaps drawn from, a comparable provision in the United States Constitution. 1 PFCA assumes that, because the clauses in the two Constitutions are similar, the Court should look to United States decisions and practice under the Sixteenth Amendment to assist in determining whether Article IX, Section 2(e) authorizes the gross revenue tax on business.

On numerous occasions this Court has looked to decisions of United States courts under their Constitution to assist in interpreting similar provisions in the FSM Constitution. However, those cases involved clauses and fact situations where the constitutional language, standing alone, did not supply a compelling answer. See, for example, Alaphonso v. FSM, [1982] FMSC 22; 1 FSM Intrm. 209 (App. 1982) (whether "due process" requires proof beyond a reasonable doubt); Ludwig v. FSM, 2 FSM Intrm. 27 (App. 1985)(whether police actions constituted "unreasonable search and seizure") ; Laion v. FSM, [1984] FMSC 9; 1 FSM Intrm. 503 (App. 1984) (whether one convicted of two crimes for one act has been "twice put in jeopardy").

This case falls into a third category, different both from Tammow and the cases cited above. Here, the constitutional language is plainly sufficient to authorize the system of taxation which PFCA is challenging. Section 2(e) of Article IX of the Constitution expressly delegates to Congress the power "to impose taxes on income." PFCA concedes, as it must, that "gross revenue" has the same meaning as "gross income."

It follows that the various forms of revenue subject to the tax are also income. The term "gross revenue" is defined in the FSM Income Tax Law as including, among other things "gross receipts...derived from trade, business, commerce, or sales and... interest, rentals, royalties, fees, or other emoluments." 54 F.S.M.C. 112(5).

Thus, the tax is imposed on various forms of income and falls squarely within the constitutional authorization given to Congress by Article IX, Section 2(e). The Income Tax Clause brings all income within the sweep of the congressional taxing power. The clause contains nothing suggesting that deductions must be allowed.

This having been recognized, our search may go no further. Constitutional interpretation must start and end with the words of the provision when the words themselves plainly and unmistakably provide the answer to the issue posed. FSM v. Tipen, 1 FSM Intrm. 79, 82 (Pon. 1982). The Court may not look to constitutional history nor to United States

[2 FSM Intrm. 127]

interpretations of similar constitutional language in these circumstances. Those external sources may be employed only to solve, issues raised by constitutional language of unsettled application, not to cast doubt on a solution plainly provided by clear constitutional language.

PFCA's contention that Congress may only tax "net income," not "gross income," is utterly unsupported, indeed is foreclosed, by the constitutional clause relied upon by PFCA, and must be rejected for that reason alone. 2

II.

PFCA also errs in contending that the gross revenue tax is actually a sales tax rather than an income tax. The tax imposed on businesses by 54 F.S.M.C. §§ 141-44 is superficially like a sales tax in that when there is a sale of goods, the FSM Income Tax Law, like a sales tax, bases the tax on the sales price of the goods.

There the similarity ends. A sales tax is imposed on the buyer, or customer, and is generally separately identified so that the buyer is aware he or she is paying the tax. The sales tax is added to the price which the customer must pay to acquire the goods. The seller merely collects the tax from the buyer and turns it over to the government. In contrast, the gross revenue tax is imposed directly on the businesses, not upon customers.

Second, a sales tax is oriented toward individual transactions, not total income, and is tied to the price of the goods sold rather than the overall success of the taxpayers. The FSM Income Tax law, 54 F.S.M.C. 141, provides an exemption for small businesses and rates are based on the total income of the enterprise. A sales tax is applied uniformly to the transactions it covers, not allowing for variable rates or exemptions based on income.

Third, a sales tax is triggered only by sales of goods, while the gross revenue tax applies to all business income, even income realized through transactions other than sales. Thus the 54 F.S.M.C. 112(5) definition of gross revenue extends the tax to nonsale income such as compensation for personal services, interest, rentals, royalties, fees, and returns on capital. Businesses which provide services only, and sell no goods at all, are subject to the gross revenue tax, but would not be reached by a sales tax.

[1985] FMSC 2; [2 FSM Intrm. 128]

III.

The government has requested a 54 F.S.M.C. 902 penalty be imposed against PFCA for the taxes it has withheld while litigating this action. PFCA's gross revenue taxes from the first and second quarters of 1985 have not yet been paid, creating a delinquency of a few months before this suit was adjudged. I confess reluctance to impose penalties on taxpayers who make timely, good faith challenges to the right of the government to collect the tax at issue. Judgment is reserved on this point. The government should file a motion if it still feels entitled to the penalty.

Conclusion

The gross revenue tax imposed by 54 F.S.M.C. §§ 141-44 is a tax on income within the constitutional power of the national government.

PFCA must remit to the government the sums of $24,498.22 and $24,910.20 in unpaid back taxes from the first and second quarters of 1985, respectively, together with interest at the rate of six percent (6%) per annum as mandated by 54 F.S.M.C. 155(5). An order to that effect shall issue.

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Footnotes:
1. "The Congress shall have power to lay and collect taxes on income...." U.S. Const. amend. XVI.

2. If we were to have looked at United States decisions, we would have found recognition there that constitutional power to tax "income" is not subject to any requirement that the taxpayer be permitted to deduct expenses.