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HEADNOTES

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COURT'S OPINION

MARTIN G. YINUG, Chief Justice:

This matter comes before the court on the March 18, 2010 Motion for Partial Summary Judgment filed by plaintiff Genesis Pharmacy ("Genesis"). For the reasons below, this court grants the motion in part.

I. BACKGROUND

Genesis is a sole proprietorship with its main office in the State of Pohnpei. Genesis conducts wholesale and retail sales in pharmaceuticals and medical supplies, with both interstate and international customers and suppliers. Genesis entered into an agreement ("procurement contract") in August 2009 with the Chuuk State Government through the Department of Health ("Chuuk"). Under the agreement, Genesis would acquire on the international market certain pharmaceuticals and medical supplies, import them into the FSM to its office in Pohnpei, and deliver them to Chuuk. Procurement Contract para. 6. In return, Chuuk would make partial payment of 75% of the contract, and pay the remaining 25% once Chuuk has received and accepted the goods. Id. para. 5. The contract further stipulated that the risk of loss was to remain upon Genesis, id. para. 7, and that the contract was to be governed by Chuuk Law, id. para 16. Chuuk assessed itself a sales tax on the transaction. In October 2009, defendant Department of Treasury and Administration of the State of Pohnpei ("the Department" or "Pohnpei") advised that the transaction was a sale that took place in Pohnpei and was subject to the Pohnpei state sales tax, as defined in Title 12 of the Pohnpei Code, Chapter 2. On October 21, 2009, Genesis filed a formal written protest, and paid the assessed tax under protest.

On November 12, 2009, the Director of the Department conducted an administrative hearing of the dispute, pursuant to 12 Pon. C. § 1-160, which governs administrative procedure for review and appeal by taxpayers. On November 16, 2009, the Department issued its final decision, and upheld the assessment of the sales tax

because (1) Genesis owns and operates a business within Pohnpei State and does not own and operate a business within the State of Chuuk, (2) Genesis has employees in the State of Pohnpei and does not have any employees in the State of Chuuk, (3) the transaction occurred within the State of Pohnpei and (4) pursuant to the sales contract provided by Genesis the freight cost from sellers place of business to buyer's delivery point shall be borned [sic] by the buyer (para. 12 Contract). For these reasons I find that the transaction occurred within the State of Pohnpei and therefore Pohnpei State sales tax would apply to the transaction.

Director's Decision (Nov. 16, 2009). Genesis filed the complaint in this matter eleven (11) days later, on November 27, 2009, well within the thirty-day deadline as provided by 12 Pon. C. § 1-161.

Genesis's complaint also named Chuuk as a defendant, as part of its Second Cause of Action, for declaratory relief. In the First Count of its Second Cause of Action, Genesis seeks injunctive relief against all defendants to prevent future enforcement of the two states' sales tax in similar situations. In the Second Count, Genesis seeks declaratory relief on the issue of the enforcement of sales tax obligations by Pohnpei, and a declaration that 12 Pon. C. § 1-101 et seq., 2-101 et seq., and their

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subsequent amendments, are unconstitutional.

This court conducted a hearing on Genesis's Motion for Partial Summary Judgment ("Genesis Motion") on July 8, 2010, and thereafter took this matter under advisement. At the end of August, 2010, Genesis and Pohnpei submitted supplemental briefs to assist the court in making a ruling. Chuuk submitted its brief at the beginning of September, 2010. Since then, Genesis has filed one request for hearing or further proceedings, and three requests for expedited rulings.

On August 29, 2011, this court proposed to certify certain questions to the Appellate Division of the Pohnpei Supreme Court. After a protest from Genesis and a motion for reconsideration from Chuuk, the court reconsidered and withdrew its own notice of possible certification.

II. GENESIS'S MOTION FOR PARTIAL SUMMARY JUDGMENT

The Genesis Motion offers four issues for this court's consideration: (1) whether dual sales taxes are an unconstitutional burden on interstate commerce; (2) what exactly does each state tax; (3) what are the terms of the contract regarding location of the sale; and (4) which sales tax applies. Specifically, Genesis prays that the court issue a ruling on the administrative appeal of the Pohnpei state sales tax and the claim for declaratory relief pertaining thereto; a determination as to which sales tax would apply, if any, on this sale; and costs and attorney's fees for bringing the action under the private attorney general theory as espoused in Udot Municipality v. FSM, 10 FSM Intrm. 354 (Chk. 2001). Genesis also asserts that any decision affecting Pohnpei also affects defendant Nett Municipal Government ("Nett").

III. ANALYSIS

The court believes that all of Genesis's questions can be better presented by asking, first, whether the Pohnpei state sales tax is assessed against a buyer or a seller, and second, whether the terms and circumstances of the contract place the transaction beyond the application of the Pohnpei state sales tax.

A. Persons against Whom Pohnpei Assesses First Commercial Sales Tax

The first question must necessarily address whether Pohnpei assesses its first commercial sales tax against a buyer or a seller, because in this case, the buyer was another state, and assessment of a sales tax against a coequal sovereign would open a proverbial Pandora's box of Constitutional questions. The Pohnpei Code does not explicitly state whether the first commercial sales tax is assessed against the buyer or the seller in a transaction; however, it is clear that the tax is at least collected from the seller: "All taxes that have attached during a calendar month shall be paid by the first seller to the Division on or before the 15th day of the succeeding month . . . ." 12 Pon. C. § 2-104. A central principle of statutory interpretation is that, where a statute lends itself to two or more readings, a court shall choose the interpretation that is clearly constitutional. See, e.g., Rodriguez v. Bank of the FSM, 11 FSM Intrm. 367, 382 (App. 2003); FSM v. Edward, 3 FSM Intrm. 224, 230 (Pon. 1987); Suldan v. FSM (II), 1 FSM Intrm. 339, 357-58 (Pon. 1983); Tosie v. Tosie, 1 FSM Intrm. 149, 157 (Kos. 1982). In the circumstances of this matter, interpreting the statute to mean that the first commercial sales tax is assessed against the seller more clearly avoids constitutional questions.

For this reason, the court concludes that the Pohnpei first commercial sales tax is assessed against the seller.

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B. Geographical Reach of Pohnpei First Commercial Sales Tax

The next question is whether or not the Pohnpei first commercial sales tax may be assessed against a transaction whose terminus is outside the state. Specifically, because the statute assesses the tax under 12 Pon. C. § 2-104 at the time of "the first commercial sale as defined in 12 Pon. C. § 2-101," the issue is the precise meaning of the term "within the state" in the first sentence of the definition of "commercial sale": "a transaction in which any tangible personal property is sold commercially in the course of business operations within the state." 12 Pon. C. § 2-101(a) (emphasis added).

The term "within the state" may, due to the construction of the sentence, modify either "business operations" or "sold commercially." As stated above, where a statute lends itself to two or more readings, a court shall choose the interpretation that is clearly constitutional.

1. "Business operations" too vague.

In the Director's Decision, the Department clearly weighed the fact that Genesis was a business within Pohnpei as a factor in deciding to uphold the assessment of the first commercial sales tax. While this analysis is important to establishing the applicability of Pohnpei state law due to minimum contact analysis, the court cannot accept that operating a business within Pohnpei is, in and of itself, sufficient. To accept this interpretation would be to accept that a business whose task it is to act as an intermediary or broker between two clients-a producer and a consumer-who are both based outside the FSM would be assessed the Pohnpei first commercial sales tax, even if the tangible personal property never enters Pohnpei. This is the very heart and soul of international commerce. A variation in which both clients were FSM entities-but both clients are entirely outside the state of Pohnpei, and no tangible property ever enters Pohnpei-would be the very definition of interstate commerce. "State and local governments are prohibited from imposing taxes which restrict interstate commerce." FSM Const. art. VIII, § 3. Indeed, the better public policy may be to encourage the growth of such businesses, as a way of encouraging the growth of the private sector.

Pohnpei argues that if it could not assess such a tax against Genesis, Genesis will have benefitted from the business environment which the State of Pohnpei will have provided without compensation. Def. Pohnpei's Opp'n to Mot. for Partial Summ. J. ("Pohnpei Opp'n") at 6 (Mar. 29, 2010). The court notes, however, that a state may recoup the costs of providing infrastructure and business environment through a very familiar mechanism-the gross revenue tax. Moreover, Pohnpei's argument, like that in the Director's Decision, is tied to its description of the nexus between Genesis and Pohnpei-i.e., the minimum contacts analysis. This alone is not sufficient.

2. "Sold commercially" more appropriate for modification by "within the state."

On the other hand, if the term "within the state" modifies the term "sold commercially," the tax would attach only to those sales that are completed within the state. Although this may nevertheless have a negative impact on interstate commerce-e.g., when a buyer takes delivery in Pohnpei for later transport to Chuuk¹-nevertheless it encapsulates the common-sense presumption that tangible personal property sold within the state is meant to be consumed within the state. Indeed, this accords with the

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provision that "the burden of proof shall be upon the seller that he has not engaged in a commercial sale." 12 Pon. C. § 2-101. That is, the seller has the burden of demonstrating that the commercial transaction was not completed-that is, the tangible personal property had not been "sold commercially"-within the state. Because under such an interpretation the tax would attach only to in-state commercial transactions, the impact on interstate commerce would be minimal, and the statute therefore constitutional.

For these reasons, the court concludes that the term "within the state" modifies the term "sold commercially" rather than "business operations."

C. Locus of Transaction

Finally, the court addresses the question of where the transaction occurred. This question is in many ways the most important, because if the locus of transaction is in Pohnpei rather than Chuuk, then Chuuk's sales tax may not apply, but if the locus of transaction is in Chuuk rather than Pohnpei, then Pohnpei's sales tax may not apply.

Genesis argues that, under the terms of the contract, although Chuuk was to pay for the shipping,² delivery was to take place in Chuuk, Genesis's obligations continued until receipt in Chuuk and delivery is completed after verification, and the risk of loss remained with Genesis until acceptance of delivery. Genesis Mot. at 17. The Director's Decision relied on an unsupported assertion that "the transaction occurred within the State of Pohnpei" and the fact that the contract contemplated that Chuuk would bear the cost of delivery from Pohnpei to Chuuk. Director's Decision. Pohnpei describes the Director's Decision as "based on substantial evidence and a careful consideration of the facts and circumstances of the case." Pohnpei Opp'n at 4. Pohnpei then urges: "The decision that the transaction took place in Pohnpei should be upheld." Id.

The court need not rule whether the Director's Decision was based on "careful consideration"; however, with respect to the assertion that "the transaction occurred within the State of Pohnpei," the Director's Decision provided no record of the "substantial evidence" upon which the assertion was made.

Genesis's arguments are persuasive. The procurement contract clearly contemplates that the transaction would not be complete until Chuuk had had a chance to inspect, certify and verify the goods which are the subject of the contract, and thereby accept them. Indeed, the procurement contract secures this by withholding payment of the final 25% of the contract amount until acceptance. Procurement Contract para. 5.³ Moreover, the contract deems the goods received only when delivered and accepted in Chuuk. Id. para. 6.⁴ Further, risk of loss remained with Genesis until the goods were

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duly accepted by Chuuk. Id. para. 7.⁵ Finally, although Chuuk eventually paid for the shipping, Genesis took on the initial burden and risk by paying for it up front. See note 2 above. Based on these factors, the locus of performance of the contract was Chuuk.

Pohnpei framed its opposition to the Genesis Motion by asserting that the central issue is "whether the Chuuk State Government, when it purchases supplies from retail stores located in Pohnpei, can avoid the Pohnpei State sales tax by stating in its contract that it will pay Chuuk State sales tax instead." Pohnpei Opp'n at 1. This statement misrepresents the facts by implying a false analogy. Although the contract stipulates that Chuuk would pay any applicable Chuuk state sales taxes, it is the delivery, chance for inspection, and acceptance in Chuuk, along with the fact that Genesis bore the risk of loss until the goods were duly accepted in Chuuk, which render the performance complete in Chuuk. The transaction in no way resembles a normal, retail transaction, such as if a Chuuk official were to saunter into Genesis's building in Pohnpei, pick up an assorted inventory of pharmaceuticals and pay for only the pretax retail price of the inventory. Indeed, most retailers pass on sales taxes to their customers at the cash register, which is commonly and appropriately known as the point of sale. However, in such retail operations, a customer takes delivery of the goods-and perhaps even inspects them-at the point of sale. In the facts at hand, Chuuk neither inspected nor took delivery of the goods until they arrived at Chuuk.

Goods cannot be deemed properly to have been sold until both parties to the sale have performed. Performance on the part of the buyer requires payment in full or execution of some sort of instrument of credit which the seller is willing to accept in lieu of payment in full. Performance on the part of the seller requires delivery. Chuuk, the buyer, did not pay in full until it had a chance to inspect the goods at one of two specified warehouses in Chuuk. Genesis, the seller, did not complete performance until it had delivered the goods to Chuuk. Therefore, the court must conclude that the goods were not sold until both performances were completed. Because the locus of performance was Chuuk, the locus of the transaction was likewise in Chuuk-i.e., the goods were sold in Chuuk. Because the goods were sold in Chuuk, the Pohnpei state sales tax could not attach to the transaction at hand.

IV. DISPOSITION

Genesis prayed that the court issue a ruling on the administrative appeal of the Pohnpei state sales tax and the claim for declaratory relief pertaining thereto; a determination as to which sales tax would apply, if any, on this sale; and costs and attorney's fees.

A. Administrative Appeal

For the reasons given above in Part III, the court concludes that Pohnpei's first commercial sales tax is not unconstitutional, but that the Department was mistaken in determining that the tax attached to the transaction at hand. Therefore, the court shall issue judgment in favor of Genesis. The Department shall disgorge the amount of tax paid under protest, plus statutory interest. Because sales taxes paid to Nett under protest depend on the validity of the state tax, Nett and the Department, jointly and severally, are liable for the amount paid to Nett under protest, plus statutory interest. Because the court did not weigh evidence regarding sales to the Republic of the Marshall Islands, or any other transactions that occurred after Genesis filed the complaint in this matter, the court will not issue judgment as to those transactions, and will afford the parties an opportunity to confer as to those transactions.

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B. Declaratory Relief

Generally, the court avoids unnecessary constitutional adjudication. Louis v. Kutta, 8 FSM Intrm. 228, 229 (Chk. 1998). Here, because the court has resolved the underlying administrative appeal without the need to address the constitutionality of Pohnpei's tax statute, any declaratory relief as to the constitutionality of the tax statute would be inappropriate.

C. Costs and Attorney's Fees

Genesis asks the court to award it its attorney's fees based on the private attorney general theory as espoused in Udot Municipality v. FSM, 10 FSM Intrm. 354 (Chk. 2001). The Udot court did not determine whether this equitable rule was suitable for wholesale adoption in the Federated States of Micronesia, and only that the Udot case was suitable for its application. The elements for a private attorney general argument are that the prevailing party "has vindicated and enforced an important right affecting the public interest that will potentially benefit the general public and a large number of people, which required private enforcement, and which was of societal importance." Udot, at 361-62. Here, Genesis's pursuit of declaratory judgment in its favor-i.e., in procuring a declaratory judgment that the Pohnpei state sales tax is unconstitutional-would potentially have benefitted the general public and a large number of people, and may indeed have societal importance, if it might result in the growth of a Pohnpei market in intermediaries. However, in deciding against issuing a declaratory judgment in this case for the reasons outlined in Section B of this Part IV, the court has foreclosed that avenue. Genesis has prevailed only in its appeal of the Director's Decision, and has not yet prevailed in its pursuit of the declaratory judgment. Accordingly, the court must decline to award costs and attorney's fees at this time.

V. CONCLUSION

Now, therefore, the court hereby grants summary judgment in favor of Genesis on its administrative appeal of the Director's Decision of November 16, 2009, and denies the remainder of Genesis's motion. As part of the grant of summary judgment, the court hereby reverses the Director's Decision; orders Pohnpei to return the $24,431.45 in taxes which Genesis paid to Pohnpei under protest, plus statutory interest;⁶ and orders Pohnpei and Nett jointly and severally to return the $4,886.29 in taxes which Genesis paid to Nett under protest, including statutory interest.

Footnotes:

¹ The court notes that in this scenario, Chuuk's first sales tax would not apply either, as the first sale will have been completed in Pohnpei, and the buyer would be doing nothing more than transferring tangible personal property from one state to another, an activity not likely in itself to merit the term "commercial transaction," much less "sale."

² Nevertheless, Genesis asserts that it paid for the freight costs. Pl.'s Mot. for Summ. J. at 14. Although Genesis billed Chuuk for this amount, the distinction matters.

³ "Buyer shall release the remaining payment of 25% of the contract amount payment for the goods at time when, and at the place where, the goods are certified and verified by Chuuk State Supply Officials as such may be received and accepted by buyer."

⁴ "Goods and properties described above under paragraph 1 shall be deemed received by the buyer when delivered, received duly accepted by the buyer at the Department of Health Warehouse or Department of Administrative Services Supply Warehouse, or where ever as may be designated by the Director of the Department of Health Services."

⁵ "The risk of loss from any casualty to the goods, regardless of the cause, shall be on seller until the goods have been duly accepted by buyer as provided under paragraph 4 and 5 of this agreement."

⁶ The statutory interest rate is 9% per year. 6 F.S.M.C. 1401. The court may impose this interest rate prejudgment when the defendant knew precisely the amount to which he was potentially obligating himself, and the effect date of that commitment. Coca-Cola Beverages Co. (Micronesia) v. Edmond, 8 FSM Intrm. 388, 393 (Kos. 1998).