UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C.

IN RE HAWAIIAN INSPECTION FEE ) PROCEEDING ) Docket DOT-OST-2010-0243 )

REPLY COMMENTS OF THE AIR TRANSPORT ASSOCIATION OF AMERICA, INC. IN SUPPORT OF THE PETITION FOR DECLARATORY ORDER

Roy Goldberg Sheppard Mullin Richter & Hampton, LLP 1300 I Street, N.W. Suite 1100 East Washington, D.C. 20005-3314 Tel. (202) 218-0007 Facsimile (202) 312-9425 Email: rgoldberg@sheppardmullin.com David A. Berg Doug Mullen Air Transport Association of America, Inc. 1301 Pennsylvania Avenue, N.W. Suite 1100 Washington, D.C. 20004-1278 Tel. (202) 626-4234 Facsimile (202) 626-4139 Email: dberg@airlines.org dmullen@airlines.org

Dated: November 16, 2010INTRODUCTION AND SUMMARY

The Air Transportation Association of America, Inc . (“ATA”), on behalf of itself and its air carrier members, hereby submits the fol lowing reply comments in connection with the Department’s investigation into the lawful ness of Hawaii Revised Statute § 150A, as amended by Act 173, S.B. No. 2523 (2010) ( hereafter the “Freight Fee Law”), as applied to air carriers. ATA specifically repli es herein to the “Comments of the State of Hawai’i Department of Agriculture” (the “State”) , filed November 1, 2010, in support of its Freight Fee Law (the “State Comments”). Not hing in the State Comments rebuts the showing by the ATA in its Opening Comments, fil ed November 1, 2010 (“ATA Opening Comments”), that the Freight Fee Law is pr eempted and prohibited by the AntiHead Tax Act, 49 U.S.C. § 40116 (“AHTA”), and the A irline Deregulation Act, 49 U.S.C. § 41713 (“ADA”). The issue before the Department is not whether it is appropriate for the State to inspect cargo transported into the State. The ATA does not question the legitimacy of that objective on the part of Hawaii. However, the desire of the State to guard against invasive pest species does not change the fact that the Freight Fee Law: (1) imposes a “charge” on the “sale of air transportation,” and t herefore is preempted by the AHTA; and (2) is “related to” the “price,” “service” and/ or “routes” of air carriers serving Hawaii, and therefore is preempted by the ADA. The State of Hawaii has multiple means at its disposal to fund inspections of cargo being shipped to the State, including, without limitation, sales taxes, property taxes and other t axes that are imposed on the population

as a whole. It is understandable that State offici als are wary of the political ramifications of levying a tax on the general population to fund inspections. However, even if it is-2-

more politically expedient for State officials to t arget the airline industry for revenue raising purposes, it is not lawful under the AHTA o r the ADA to do so. 1. With regard to the Anti-Head Tax Act, the State does not deny that the Act prohibits a “charge” on the “sale of air transport ation” (49 U.S.C. § 40116(b)(3)), or that the term “air transportation” includes the transpor tation of “property by aircraft” (49 U.S.C. § 40102(a)(5), (23), (25)). However, the Sta te insists that “property” does not include air freight; rather it is limited to the lu ggage and carry-on items accompanying an airline passenger. 1 This argument is contrary to the plain meaning of the term “property” – which is not restricted to baggage and carry-on i tems of passengers that are being transported. Such a limited construction of the te rm “property” also is entirely unsupported by any legislative history and is at od ds with the manner which the FAA uses the term “property” throughout its regulations (to include freight). The State’s alternative argument under the AHTA – that the Freight Fee is authorized by 49 U.S.C. § 40116(e)(1) 2 – disregards the fact that the Freight Fee is a “fee” rather than a “tax.” It is not imposed on th e general population but instead specifically targets shippers of freight into the S tate and their transportation service providers. Even assuming, arguendo , that the Freight Fee is a “tax,” it is not author ized by Subsection 40116(e)(1) because it is prohibited by Subsection 40116(b) as a tax on the “sale of air transportation.” The Freight Fee is a lso not the type of customary and usual tax that would be permitted under Subsection 40116( e)(1) (if not prohibited by Subsection 40116(b)).

1 State Comments, at 19-20.

2 Id . at 21-23.-3-

2. In arguing that the Freight Fee Law is not pree mpted by the ADA, the State contends that if the ADA applies to the Freig ht Fee then it would also prohibit airports from charging fees for the use of the airp ort. See State Comments, at 9 (“Under the ATA’s reasoning, any fee imposed by an airport would violate the Deregul ation Act”). This is fallacious because the ADA contains an exception for publicly owned airports that are carrying out their “proprietary p owers and rights,” which includes requiring airlines to pay reasonable fees for use o f the airport facilities ( e.g ., runways and terminal space). See 49 U.S.C. 41713(b)(3); ATA v. DOT, 613 F.3d 206, 216 (D.C. Cir. 2010). Notably, however, Congress did not create a similar exception in the ADA for states to impose fees when exercising other powers. Here, the State is not acting as an airport proprietor. The State also contends that the Freight Fee Law i s not preempted by the ADA because, according to the State, the Freight Fee La w is not related to the price charged for transportation of freight by air. This content ion ignores the obvious fact that the Freight Fee must either be paid by the shipper as a surcharge to the freight rate that the shipper owes for the transportation, or must be ass umed by the air carrier, in which case it will have to be passed on at some point to its cust omers. Either way the Freight Fee cannot be divorced from the price of the air transp ortation that is being sold. See Buck v. American Airlines, Inc. , 476 F.3d 29, 36 (1st Cir. 2007) (an “airline must account for the fees when setting its own rates”). The State raises a hollow argument when it asserts that Buck “did not address whether the imposition of the taxes and fees at iss ue were themselves preempted by the-4-

Deregulation Act.” 3 The taxes and fees at issue in Buck were not themselves subject to preemption because they were expressly authorized b y federal statute – e.g. , Customs fees, APHIS fees, passenger facility charges – or w ere imposed by a foreign government. The key aspect of Buck – namely, the recognition that fees are inextricabl y intertwined with the price charged for air transportation – app lies fully here.

The State fares no better with its contention that the Freight Fee Law is not preempted by the ADA because it bears no relation t o services provided by airlines. Nothing in the State’s Comments refutes the obvious fact that the Freight Fee Law

mandates that air carriers provide the service of billing, collecting and remitting the Freight Fee – as well as a periodic “written statem ent” of the Freight Fees over a given time period. 4 The State’s argument that the ADA does not apply to such state-mandated services cannot be squared with recent ADA preceden t such as Rowe v. New Hampshire Motor Transp. Ass’n , 552 U.S. 364 (2008). Just as the motor carriers in Rowe [which were protected by the same preemption language as i n the ADA] could not be forced to provide the service of verifying the age of the rec ipient of tobacco shipments, the air carriers subject to the Hawaii Freight Fee Law cann ot be forced to provide the service of billing, collecting and remitting the Freight Fee. In addition, the State does not refute the fact that the imposition of the Freight Fee Law on air carriers may affect their routes by impacting their decision whether to serve Hawaii (a nd expose themselves to significant financial penalties if they choose not to undertake the burden of billing, collecting and remitting the Freight Fees).

3 State Comments, at 9.-5- ARGUMENT

I. BECAUSE THE FREIGHT FEE IS IMPOSED ON THE SALE O F AIR TRANSPORTATION – WHICH INCLUDES TRANSPORTATION OF “PROPERTY” – THE FREIGHT FEE IS PREEMPTED AND PROHIBITED BY THE ANTI-HEAD TAX ACT

. In its Opening Comments, ATA demonstrated that the Anti-Head Tax Act preempts and prohibits the Freight Fee Law as appli ed to air carriers. Nothing in the State’s Comments refutes that showing. A. Application of the Anti-Head Tax Act to “Propert y” Transported by Aircraft is Not Limited to Passenger Luggage a nd Carry-On Items

. There is no merit to the State’s assertion that th e Anti-Head Tax does not apply to the Freight Fee Law because the Freight Fee Law tar gets solely air passengers and their luggage and carry-on items, and does not apply to a ny tax, fee or other charge levied upon the transportation of air freight. The Anti-H ead Tax Act prohibits a “charge” on the “sale of air transportation,” 49 U.S.C. § 40116(b) (3), and “air transportation” includes the transportation of “property by aircraft,” 49 U. S.C. § 40102(a)(5), (23), (25). “Property” includes “air freight.” The State ackno wledges, as it must, that “an argument can be made that the prohibition of charges on the sale of air transportation applies to freight.” 5 However, the State nevertheless asserts that the term “property” should not include “freight.” 6 Rather, according to the State, “property” should be limited to

4 Memorandum from C. Okada, Manager, Plant Quarantine Branch, July 7, 2010 (Exhibit 2 to Petition for Declaratory Order), at 3.

5 State Comments, at 19. Note also that in a case ci ted by the State – Burbank-Glendale-Pasadena Airport Auth. v. City of Burbank , 64 Cal. App. 4th 1217, 1221-22, n. 1., 76 Cal. Rp tr. 297 (2d Dist. 1998), the court looked to 49 U.S.C. § 40102( a)(3), (22) and (24), to define the term “air commerce” as used in the AHTA.

6 State Comments, at 19-20.-6-

“tangible things owned or possessed by air passenge rs, such as luggage or baggage to be transported by or with a passenger.” 7 The State’s proffered construction of the phrase “ sale of air transportation” and the term “property” – to restrict them to luggage o r other items accompanying a passenger – cannot be accepted. The plain meaning of the term “property” includes freight transported aboard an airline. The propert y belongs to either the shipper or the consignee, but it is property nonetheless. The Sta te points to nothing in the AHTA or the Federal Aviation Act of 1958 (which contains the de finition of “air transportation”), or their respective legislative histories, to support its theory that “property” does not include air freight. There is equally nothing to support t he State’s conjecture that, in enacting the AHTA, Congress was only guarding against fees impos ed on the sale of air transportation to passengers (as opposed to air transportation in general). If the State’s construction of the AHTA were adopted, it could open the floodgates for all 50 states to impose a surcharge to the transportation of air cargo. This would be directly contrary to the express purpose behind the AHTA. In addition, throughout its regulations, the FAA u ses the term “property” in a manner that clearly demonstrates that it is not def ined solely as the luggage or carry-on items of an airline passenger. See, e.g. , 14 C.F.R. § 1.1 (“Interstate air transportation means the carriage by aircraft of persons or property as a common carrier for compensation or hire, or the carriage of mail by ai rcraft in commerce”) (emphasis added); 14 C.F.R. § 216.1(a) (“Revenue traffic means person s, property or mail carried for compensation or hire”) (emphasis added); 14 C.F.R. § 296.3 (“An indirect cargo air

7 Id.-7-

carrier is any U.S. citizen who undertakes to engag e indirectly in air transportation of property . . .”); 14 C.F.R. § 297.3(a) (“Foreign air freigh t forwarder means a foreign indirect air carrier that is responsible for the tr ansportation of property from the point of receipt to point of destination . . .”) (emphasis a dded); 14 C.F.R. § 204.2(a) (“All-cargo

air carrier or section 41103 carrier means an air c arrier holding an all-cargo air transportation certificate issued under section 411 03 of the Statute authorizing the transportation by aircraft in interstate air transp ortation of only property or only mail, or both”) (emphasis added); 14 C.F.R. § 61.58(f) (“a p erson may act as pilot in command of a flight under day VFR conditions or day IFR condit ions if no person or property is carried, other than as necessary to demonstrate com pliance with this part”) (emphasis added); 14 C.F.R. § 91.313(c) (“No person may opera te a restricted category civil aircraft carrying persons or property for compensation or hire”) (emphasis added). Furthermore, excluding freight from the applicatio n of the AHTA is directly contrary to the result in Aloha Airlines, Inc. v. Director of Taxation of Haw aii , 464 U.S. 7 (1983). That case was filed by Aloha Airlines and Hawaiian Airlines as “commercial airlines that carry passengers, freight , and mail among the islands of Hawaii.” Id . at 10 (emphasis added). The air carriers challenged impo sition of a Hawaii four-percent tax on the “gross income each year from the airline busine ss.” Id . The Supreme Court ruled that the gross receipts tax violated the AHTA. The Court reasoned that the “manner in which the state legislature has described and categ orized [the tax] cannot mask the fact that the purpose and effect of the provision is to impose a levy upon the gross receipts of airlines,” which “constitutes at least an ‘indirect ’ tax on the gross receipts of airlines.” Id

. at 13-14. The Court did not limit its ruling to th e carriage of passengers. To the contrary,-8-

the Court stated that the AHTA “proscribes the impo sition of state and local taxes on gross receipts derived from air transportation or the carriage of persons in air commerce.”

Id . at 14-15 (emphasis added). Thus, the Court recog nized that the prohibition in the AHTA is “either/or” – either applicable to the carr iage of persons or the sale of air transportation. Accordingly, the prohibition in th e AHTA is not confined to taxes, fees or charges on the “carriage of persons.” Rather, the Supreme Court made it clear in Aloha

Airlines that the prohibition also applies to the sale of air transportation beyond merely the carriage of persons. Accordingly, the State of Hawaii’s effort to exempt air freight from the scope of the AHTA cannot succeed. The State’s argument that the AHTA does not apply to air freight is also contrary

to Tinicum Township Privilege Fee Proceeding , Order 2008-3-18, Docket OST-2007- 29341 (March 19, 2008), aff’d , 582 F.3d 482 (3rd Cir. 2009), where the Departmen t stated that the privilege fee at issue there was no t “a prohibited charge on the sale of air transportation, under the AHTA, because it [was] not imposed in connection with the sale of a ticket or waybill .” Id. at *3 (emphasis added). The flip side of this stat ement is that the AHTA applies to the sale of air transporta tion if an air waybill is issued in connection with the transportation. Here, it is un disputed by the State that the Freight Fee is “imposed in connection with the sale of a . . . waybill.” Indeed, the State even attached a copy of an air waybill to its Comments a nd expressly acknowledged that such waybills are used in connection with air transporta tion that is subject to the Freight Fee

Law.-9-

For the reasons set forth above, the State’s argum ent that “property” is restricted to passenger luggage or carry-on items is contrary to the plain meaning of the term “property” and has no support in the law or case pr ecedent.

B. Alaska Airlines Does Not Support Application of the Hawaiian Freight Fee Law to Air Carriers

. In its Comments, the State asserts that Alaska Airlines, Inc. v. Dep’t of Food and Agriculture , 33 Cal. App. 4th 506, 39 Cal. Rptr. 2d 426 (1995) , supports the State’s position that the AHTA does not preempt the Freight Fee Law. 8 In its Opening Comments, the ATA explained why Alaska Airlines does not preclude a finding that the Freight Fee Law is preempted by the AHTA. 9 In contrast to the situation here – where the Freight Fee is based on the net weight of each item of freight being shipped – the fee

in Alaska Airlines was a flat-fee “service charge” which “bore no rel ation” to the quantity of “cargo on the aircraft.” 10 Accordingly, the AHTA deemed not to apply. See 39 Cal. Rptr. 2d at 430 “(“[The] facts establish that the i nspection fee is not a direct head tax. It

bears no relation to the number of passengers or cargo on the aircraft ”) (emphasis added). In any event, the service charge in Alaska Airlines was subsequently deemed to be unconstitutional as applied to maritime and air car riers. 11 In its Comments, the State acknowledges that in Alaska Airlines the “flat fee of $85” “bore no relation to the numb er

8 State Comments, at 15-16.

9 See ATA Opening Comments, at 25-28.

10 Id . at 26-28.

11 Id.-10-

of passengers or cargo on the aircraft.” 12 And, although the State asserts that its Freight Fee “is unrelated to the number of passengers on a flight,” 13 it does not deny the direct correlation to the amount of the fees and the quant ity of cargo on the aircraft. Thus, clearly the decision in Alaska Airlines – a case in which the Department played no role – does not support the State’s posit ion here. 14 C. The Freight Fee Law Imposes a Financial and Admi nistrative Burden on Air Carriers Transporting Freight into Hawaii

. The State’s argument that the Freight Fee Law “shou ld not increase . . . the outof-pocket cost of the airline,” 15 and “does not significantly affect any aspect of the air carriers’ business,” 16 fails to accurately reflect the true nature of the freight billing systems and processes utilized by air carriers and the financial and administrative burden that the Freight Fee Law imposes on such systems an d processes. As set forth in the ATA Opening Comments (at 8-17), and the declaration s from United Air Lines and Federal Express provided in Exhibits A, B and C the reto, among other things:

• The metric that the Freight Fee Law requires air ca rriers to use to determine the Freight Fee raises overwhelming practical problems and imposes large financial burdens on the carriers shipping freight to Hawaii because the requirement to calculate the fee “on the basis of 50 cents for eve ry one thousand pounds of freight brought into the state, or part thereof” is not consistent with the industry practice throughout much of the world outside of th e United States -- whereby air carriers charge their cargo shippers based on the w eight of the shipment as measured by kilograms . This means that air carriers must incur consider able

12 State Comments, at 16.

13 Id . at 17.

14 The State also relies on Arizona v. Cochise Airlines , 128 Ariz. 432, 435, 626 P.2d 596, 599 (1980). State Comments, at 19-20. As set forth in the ATA Opening Comments, at 28-30, Cochise does not support the finding of no preemption here.

15 State Comments, at 17.

16 Id . at 7 (emphasis in original).-11- expense to modify their systems to process invoices for the Fees based on every thousand pounds, rather than kilograms.

• The imposition of a minimum charge 50 cents per 100 0 pounds is a completely non-standard way of pricing air cargo and is not ea sily meshed into carrier pricing systems that either price per pound, per kilo, or p er piece.

• The modifications to the airline internal systems w ill be extremely expensive.

• Different billing processes and systems exist for d omestic cargo transported in the United States, often billed directly to shippers, a nd international cargo, typically billed through individual country “Cargo Accounts S ettlement System” (“CASS”) processes.

• The FedEx Service Guide provides that where the dim ensional weight measure is used for FedEx Express packages, the dimensional we ight is determined by multiplying a package’s length by width by height i n inches and dividing by 194 (for shipments within the U.S. and shipments betwee n the U.S. and Puerto Rico) or 166 (for international shipments). This is obvi ously not consistent with the Freight Fee Law, that requires the fee to be based on the net weight in terms of 1,000 pound increments. The second method FedEx us es when it measures the weight of the packages is to capture the actual wei ght. This “actual weight” measure includes the weight of the packaging and it s contents and, in contrast to the Freight Fee Law, would not be the “net weight” of the goods being shipped.

• FedEx does not have any means of measuring the “net weight” of the packages that it transports and that measurement serves no r elevant business purpose. FedEx also does not measure any weight for some of the packages that it transports, including some of the packages that it transports to Hawaii. In such instances, FedEx relies upon the weight provided by the customer at time of shipment.

• The process for billing and collecting the Hawaiian Freight Fee becomes even more administratively complex, and for all practica l purposes, uncollectible, with regard to interline cargo into Hawaii. 17

See also “Supplemental Declaration of Jesse Cohen, United A ir Lines, Inc.” (“Cohen Suppl. Decl.”) Exhibit A hereto, ¶¶ 2-9.

17 See ATA Opening Comments, at 8-17 and Exhibits A, B and C thereto.-12-

The State’s contention that there is no measurable cost to air carriers to comply with the Freight Fee Law fails to recognize the fac t that air carriers must develop and utilize accounting and billing systems and processe s to collect the non-standard Freight Fee on a global basis. For example, United has fr eight customers all over the world and they are accustomed to being invoiced for the cost of shipping their freight to destinations around the world, including Hawaii. There is no pr ior system or process in place whereby United also bills these customers for the H awaiian Freight Fee based on a metric of 50 cents per 1,000 pounds of freight (net weight ). It is not as if United can merely press another button and have this information incl uded on each of the invoices. Rather, United would need to modify its accounting and invo icing systems and processes to create new fields to reflect these additional charg es, and to incur labor expenses to have personnel calculate the Freight Fees owed by the sh ippers. 18 The argument by the State that there is no burden to air carriers from having to modify their accounting and billing systems and pro cesses and to dedicate employees to these functions reflects a failure to appreciate th e global nature of the air carrier business. For example, during the last twelve-month period, U nited transported air freight into Hawaii from approximately thirty different countrie s . The air freight charges for these transactions were priced in either pounds or kilogr ams and in approximately 30 different currencies. It would be extremely burdensome for U nited to be required to use a nonstandard metric of 50 cents per 1,000 pounds across all of these different countries of origin and fluctuating currencies. To make these c alculations and use them to invoice customers for the Freight Fee would be an administr atively complex and expensive

18 Cohen Suppl. Decl. ¶¶ 3-4.-13-

service that United does not choose to perform on i ts own volition, and there is nothing in the Hawaiian freight fee provision which compensate s air carriers such as United for that

expense. 19

The burden to the airlines is not confined to bi lling, collecting and remitting the Freight Fees. The State also requires air carriers to provide a “written statement” to HDOA-PQ that reflects the collection period dates; port of entry for the freight for which the fees were collected; net weight of the freight for which each fee was collected, by flight/voyage; total net weight of all freight repo rted for the collection period; and the total fee amount paid.” 20 The State did not present any direct evidence whic h is contrary to the airlines’ demonstration that the Freight Fee Law imposes a si gnificant financial and administrative burden on them. The State did, however, attach an air waybill issued by United Air Lines in January 2010 for the shipment of produce from Lo s Angeles to Honolulu. Although the air waybill appears to list (in handwriting) th e gross weight and net weight of the shipment in pounds, it must be emphasized that this was a domestic shipment. Therefore it is not surprising that weight is listed in pound s. As stated in the ATA Opening Comments, the industry practice for air shipments f rom foreign countries to Hawaii is in kilograms rather than pounds. 21 Moreover, the fact that domestic waybills list fr eight in

19 The burden on air carriers from having to comply wi th the Freight Fee Law is further complicated by the fact that Hawaii requires that f ees be paid by check rather than electronic payments. This adds yet another layer of bureaucra tic detail and process cost that air carriers must attend to because of the Freight Fee Law. Id . ¶ 5.

20 Memorandum from C. Okada, Manager, Plant Quarantine Branch, July 7, 2010 (Exhibit 2 to Petition for Declaratory Order), at 3.

21 See ATA Opening Comments, at 8-9; Declaration of Jesse Cohen, United Air Lines, Exhibit A to Opening ATA Comments, ¶ 4.-14-

pounds is of no use to major cargo carrier Fedex, w hich “does not have the means of obtaining the weight data necessary to implement” t he Freight Fee. 22 The State’s contention that “each waybill should c ontain all the information required by” the Freight Fee Law 23 significantly underestimates the complexity that t he Freight Fee creates for air carriers in attempting to invoice shipper customers for the Freight Fee. 24 To begin with, the waybill is not the billing doc ument that United uses to invoice its shipper customers for the transportatio n of their air freight to Hawaii. Rather, United’s billing department prepares a separate doc ument that invoices the shipper customers for the cost of transporting the air frei ght. Significantly, the waybill does not even include a section for listing the Hawaiian fre ight fee charge based on increments of 1,000 pounds of net freight. 25 The State of Hawaii contends that “kilograms can e asily be converted to pounds .

. . .”. 26 However, in the case of United such a conversion would require revisions to its internal billing systems and the personal attention by an employee in the billing department. To have to do so for each shipment into Hawaii is a labor intensive service that United does not choose to provide and for whic h the Freight Fee Law provides United no compensation. 27 Moreover, Hawaii’s statement fails to reflect the common type of situation in which the freight weight is me asured in kilograms and the freight

22 Declaration of Thomas Parker, Federal Express Corpo ration, Exhibit A to ATA Opening Comments, ¶¶ 3-8.

23 State Comments, at 3.

24 Cohen Suppl. Decl. ¶ 7.

25 Id

. 26 State Comments, at 5.

27 Cohen Suppl. Decl. ¶ 8.-15-

charges are invoiced in a foreign currency, such as Japanese Yen or Korean Won. To make this further conversion requires yet another r evision to the billing systems and more personal attention of employees. There is no autom atic or easy way to translate such a weight measurement and foreign currency into the Ha waiian Freight Fee. 28

The State of Hawaii’s Comments do not address how United and the other air carriers would be compensated for modifying their b illing systems to arrange for collection of the Freight Fee. Nor do the Comments explain how the Freight Fee can be easily billed in connection with the individual “Ca rgo Accounts Settlement System” (“CASS”) processes. The Comments also do not expla in how air carriers will be able to

communicate the nature of the Fee to their customer s without incurring a major administrative expense. There also is no section o f the Hawaii Comments which addresses the complexities in trying to impose the Fee on shippers that are part of an interlining arrangement between carriers for the sh ipment of air freight to Hawaii. 29 Finally, if Hawaii is correct in asserting that th e Freight Fee can be collected costfree, and it has access to the air waybills at dest ination airports in Hawaii as demonstrated by its exhibit of an United air waybill, it should collect the Freight Fee on its own and not require air carriers to do so. D. Both the State and the Federal Government Inspe ct Cargo from Foreign Destinations for Agricultural Quarantine Purposes

. The State contends that its Freight Fee “does not duplicate any of the benefits derived from existing federal air transport taxes, and with inspections, the federal CBP/APHIS is responsible for enforcing regulations related to imports only from foreign

28 Id.-16-

countries, while the state of Hawai’i enforces regu lations related to foreign and domestic imports.” 30 This assertion ignores the fact that the Freight Fee Law applies not only to air shipments from the mainland United States to Hawaii , but also to air shipments from foreign countries to Hawaii . The State has not carved out such international shipments despite the fact that both APHIS/CBP and Hawaii are inspecting foreign-originating cargo that is being transported into Hawaii. E. The Freight Fee is Not Authorized by 49 U.S.C. § 40116(e)(1)

. The State argues that even if “property” includes a ir freight, the Freight Fee is nevertheless not preempted by the AHTA because it i s authorized under 49 U.S.C. § 40116(e)(1). 31 However, that is clearly not the case. Subsectio n 40116(e)(1) states that “Except as provided in subsection (d) of this secti on, a State or political subdivision of a State may levy or collect . . . taxes ( except those taxes enumerated in subsection (b) of

this section ), including property taxes, net income taxes, fran chise taxes, and sales or use taxes on the sale of goods or services . . . .” (E mphasis added) Subsection 40116(e)(1) does not apply to the Freight Fee for several reaso ns: First, the Freight Fee, as its name reflects, is a “fee” rather than a “tax.” “The

mere fact that a statute raises revenue does not im print upon it the characteristics of a law by which the taxing power is exercised.” State v. Block , 717 F.2d 874, 887 (4th Cir. 1983) (50 cent deduction on proceeds from sale of c ommercial sold milk was a fee rather than a tax because primary purpose of statute was t o “reduce overproduction of milk and

29 Cohen Suppl. Decl. ¶ 9.

30 State Comments, at 18.

31 State Comments, at 21-23.-17-

shift some of the financial burden of the price sup port program”). The Freight Fee is not imposed on the general population as a whole (like a typical tax) but instead is an inspection fee directed solely at shippers of freig ht into Hawaii (and the airlines and maritime companies that transport the freight). See Leggett v. Missouri State Life Ins.

Co. , 342 S.W.2d 833, 876 (Mo. 1961) (“It is generally held that an inspection fee does not constitute a tax”); Outdoor Amusement Business Ass’n, Inc. v. Massachus etts , 26 Mass. L. Rptr. 471 (Mass. Super. Ct. 2010) (charge imposed for inspection of amusement park rides was “fee” rather than “tax”). Second, even assuming, arguendo , that the Freight Fee is a “tax,” it is a tax “enumerated in subsection (b)” – and therefore not authorized by Subsection 40116(e)(1)) – because it is a tax “on the sale of air transportation.” As set forth above, the State imposes the Freight Fee each time that an air carrier sells the transportation of property by air into the State. Third, even assuming, arguendo , that the Freight Fee is a “tax” and is not a tax “enumerated in subsection (b)” (which it clearly is ), it is not authorized by Subsection 40116(e)(1) because it is not in the category of th e usual and unobjectionable “property tax[es],” “net income tax[es],” franchise tax[es],” or “sales or use tax[es]” described in Subsection (e)(1). In Tinicum the Department rejected Tinicum Township’s argumen t that its “privilege fee” was authorized by 49 U.S.C . 40116(e)(1). The Department stated that “the only taxes . . . permitted [under the AHT A] are in the category of the ‘usual’ and ‘unobjectionable’ property taxes, net income taxes, franchise taxes and sales taxes, encompassed in the ‘savings’ clause of subsection ( e)(1) of § 40116.” Tinicum , at *25 (citing Wardair Canada, Inc. v. Florida Dep’t of Rev. , 477 U.S. 1, 15-16 (1986), and-18-

Continental Air Lines v. Dep’t of Rev. , 12 Or. Tax. 349, 351 (Or. Tax. Ct. 1992)). Similarly here, the Freight Fee is not any of the t axes listed in Subsection (e)(1).

The State’s reliance on Burbank-Glendale-Pasadena Airport, supra (Comments, at 21-22) is misplaced. That case involved imposit ion of a ten-percent tax on cars that temporarily parked in parking lots in the city, inc luding parking lots proximate to the airport. The court ruled that the tax was “not a t ax on air commerce. It was a tax on the fee paid for short-term parking. The AHTA does not apply to taxes on airport ground transportation services, such as parking facilities .” 64 Cal. App. 4th at 1223. BurbankGlendale does not apply here because the Freight Fee Law is not a fee, tax or charge on “ground transportation services,” or on the use of “parking facilities.” In asserting that the AHTA does not preempt the Fre ight Fee Law, the State

asserts that the “AHTA was not intended to universa lly shelter air carriers from any and all state fees and charges . . . .” 32 This is not an accurate characterization of the A TA’s position. The ATA does not contend that airlines a re never subject to taxes, fees or charges imposed by a state. To the contrary, the A HTA does not prohibit the tax, fee or charge provided that it: (1) does not violate 49 U. S.C. § 40116(b) and (d); and (2) is the usual and customary type of universally applied fee , tax or charge, such as “property taxes, net income taxes, franchise taxes, and sales or use taxes on the sale of goods or services,” 49 U.S.C. § 40116(e). However, because the Freight Fee is imposed on the “sale of air transportation,” it is prohibited by t he express language of 49 U.S.C. § 40116(b).

32 State Comments, at 15.-19-

For all of the reasons set forth above, and in the ATA’s Opening Comments, the Department should conclude that the Anti-Head Tax A ct preempts and prohibits the Hawaii Freight Fee Law as applied to air carriers.

II. BECAUSE APPLICATION OF THE FREIGHT FEE LAW TO A IR CARRIERS RELATES TO THE PRICES, SERVICES AND ROUTES OF AIR CARRIERS, IT IS PREEMPTED BY THE AIRLINE DEREGULATION ACT

. As set forth in the ATA Opening Comments, the Freig ht Fee Law is also preempted and prohibited by the Airline Deregulatio n Act. Nothing in the State of

Hawaii’s Comments refutes this fact. A. The Term “Related to” in the Airline Deregulati on Act is to be Broadly Construed

. In asserting that the ADA does not preempt the Frei ght Fee Law, the State seeks a ruling from the Department that would adopt an unpr ecedentedly narrow interpretation of the phrase “related to” in the ADA. The State’s re quest for such a restricted construction of “related to” is contrary to the ordinary meaning of the phrase “related to” (or “relating to,” as the statute was formerly worded), which “is a broad one,” meaning “to ‘stand in some relation; to have bearing or concern, to perta in; refer; to bring into association with

or connection with.’” Morales v. Trans World Airlines, Inc. , 504 U.S. 374, 383 (1992) (citing B LACK ’ S L AW D ICTIONARY , at 1158). Accordingly, the words “related to” “express a broad pre-emptive purpose.” Id . The broad scope of “related to” was reinforced by the Supreme Court in Rowe v. New Hampshire Motor Transp. Ass’n , 552 U.S. 364 (2008), where the Court held that a federa l law applicable to the motor carrier industry but modeled on the language of the ADA pre empted a Maine law which required carriers to verify the age of recipients of tobacco shipments.-20-

The State nevertheless asserts that this case pres ents a situation in which the relationship between the state law at issue ( i.e. , the Freight Fee Law) and airline prices, services and routes is insignificant and “too tenuo us, remote or peripheral” to justify preemption. 33 However, the case law precedent under the ADA do es not support the State’s argument. The classic examples of state la ws that are too tenuous, remote or peripheral to be preempted by the ADA are those tha t prohibit gambling or prostitution. See, e.g., Rowe, 552 U.S. at 371; Morales , 504 U.S. at 390). In other words, the fact that airlines are deregulated does not mean that they ca n offer illicit activities. In practice, the cases where courts have determine d that a state law is “too tenuous, remote, or peripheral” have largely involv ed the application of general state laws against discrimination and the like that are being applied to industries throughout the jurisdiction. See, e.g., ATA v. City and County of San Francisco , 266 F.3d 1064, 1072-73 (9th Cir. 2001) (no preemption of municipal ordinan ce that prohibited discrimination in the provision of benefits to employees of city cont ractors; “no indication that when Congress passed the ADA, it intended to preempt sta tes and local governments from passing laws that forbid employers from discriminat ing in their provision of employment benefits”); and Abdu-Brisson v. Delta Air Lines, Inc. , 128 F.3d 77 (2d Cir. 1997) (New York’s law against age discrimination was not preem pted by the ADA and therefore could be applied to airline decisions regarding pil ot compensation following the hiring by Delta of former Pan Am pilots); Wellons v. Northwest Airlines, Inc., 165 F.3d 493 (6th Cir. 1999) (race discrimination claim not preempted ).

33 State Comments, at 7.-21-

The situation here is not similar at all because t he air carriers subject to the Freight Fee Law are not objecting to being the subj ect of a state civil rights or labor law that is applied to all industries throughout the st ate. Rather, the airline industry (with the maritime industry) was singled out to perform a sta te-function – namely to bill, collect and remit an inspection fee. See Rowe , 552 U.S. at 375-76 (Maine state law imposing recipient-age verification obligations on shipments of tobacco to Maine had a “significant impact” on motor carrier rates, routes and services [and therefore was not too tenuous, remote, or peripheral] because the state law was “n ot general, it [did] not affect truckers solely in their capacity as members of the general public”). B. The Freight Fee Law “Relates to” Air Carrier Pri ces, Services and Routes

. 1. The Freight Fee Law Relates to Air Carrier Pri ces . The State asserts that the Freight Fee Law “does no t relate to or significantly affect prices.” 34 However, this argument ignores the fact that eith er the air carrier will be forced to absorb the price of the Fee, or pass it o n to the shipper customer as part of the total amount paid by the shipper. Because of the F reight Fee Law air carriers must expend internal resources to bill, collect and remi t the Freight Fee, all of which goes to

the financial bottom line of the carrier and will u ltimately be passed on to customers (if not initially when the Fee is imposed).

The State contends that Buck v. American Airlines, Inc. , 476 F.3d 29 (1st Cir. 2007), has no application here because there the un derlying fees and taxes were not

34 State Comments, at 7.-22-

preempted by the ADA. 35 This assertion ignores the fact that Buck did not involve stateimposed fees or taxes. Rather, the subject fees an d taxes were authorized under federal law (passenger facility charges, customs fees, and APHIS) or a foreign government. Furthermore, the State fails to acknowledge the cri tical aspect of Buck as it relates to this case: namely, the court’s recognition that when an air carrier is required to collect government-imposed fees, such fees are “related” to the price charged by that carrier for air transportation. Specifically, the First Circu it emphasized that “[a]lthough the fees are in one sense separate from the base fare, the two a re inextricably intertwined” because

“an air traveler’s concern is with the overall cost of his or her ticket.” Id. at 35. Similarly here, a shipper of freight to Hawaii is concerned w ith the “overall cost” to transport the freight to Hawaii. How much of the charge is for t he air transportation – and how much for the State-imposed inspection fees – is of no mo ment. As in Buck , when air carriers serving Hawaii establish their prices, they “must t ake cognizance of any surcharges that will be imposed by operation of law.” Id . An “airline must account for the fees when setting its own rates.” Id. at 36. In trying to defend its Freight Fee Law the State attempts to conjure up a “parade of horribles” by contending that under “the ATA’s r easoning any fee imposed by an airport would violate the [ADA] by potentially impa cting the ‘overall cost’ of a ticket.” 36 The fallacy of this argument is patent. It does no t acknowledge the fact that a subsection of the ADA – 49 U.S.C. § 41713(b)(3) – authorizes a irports to impose reasonable fees on airlines for use of the airport ( i.e. , terminal rents and landing fees). Subsection

35 State Comments, at 9.

36 Id

.-23-

41713(b)(3) states that the prohibition against a S tate “enact[ing] or enforc[ing] a law . . . related to a price, route, or service of an air car rier . . . does not limit a State, or political authority of at least 2 States that owns or operate s an airport served by an air carrier . . . from carrying out its proprietary powers and rights .” This section permits States which own airports to impose reasonable airport-related f ees on air carriers for the use of that airport. ATA v. DOT, 613 F. 3d 206, 216 (D.C. Cir. 2010) (the ADA “conta ins an exception allowing an airport authority, notwithsta nding other provisions of the Act, to ‘carry[] out its proprietary powers and rights,” wh ich includes the ability “to charge” airlines “reasonable fees”). However, the “proprie tary powers and rights” exception in the ADA is expressly limited to airports: it does n ot apply to non-airport-related fees – such as the Hawaiian Freight Fee. 2. The Freight Fee Law Relates to Air Carrier Ser vices

. The State’s argument that its Freight Fee Law is n ot “related to” any service provided by airlines is especially meritless. Comm on sense alone demonstrates that the

State had decided to mandate that the airlines intr oduce and offer a new service : namely, the service of billing, collecting and remitting th e Freight Fee on behalf of Hawaii. The airlines that are subject to the Freight Fee Law ar e being required to perform a service by having to bill, collect and remit the Freight Fee f rom each shipper customer, or else face a per-transaction fine of at least $50.

The State contends that the term “service” in the ADA should be confined to “origins and destinations of the point-to-point tra nsportation of passengers, cargo, or

mail.” 37 For this narrow reading of “service” the State re lies on the Ninth Circuit

37 State Comments, at 12.-24-

decisions in Charas v. Trans World Airlines, Inc. , 160 F.3d 1259 (1998), and Duncan v. Northwest Airlines, Inc. , 208 F.3d 1112 (2000). Notably, both cases preced ed the Supreme Court’s decision in Rowe , 552 U.S. 364. Following Rowe , the Second Circuit Court of Appeals in 2008 rejec ted a similar argument as that made by the State here as to the d efinition of “services” under the ADA.

In ATA v. Cuomo , 520 F.3d 218, 223 (2d Cir. 2008), the court state d that a “majority of the circuits, to have construed ‘service’ have held that the term refers to the provision or anticipation provision of labor from the airline to its passengers and encompasses matters such as boarding procedures, baggage handling, and food and drink – matters incidental to and distinct from the actual transportation of p assengers.” The Second Circuit noted

that the Third and Ninth Circuits had defined “serv ice” more narrowly, but labeled that approach as “inconsistent with the Supreme Court’s recent decision in Rowe ,” where the Court “necessarily defined ‘service’ to extend beyo nd prices, schedules, origins, and

destinations.” Id .; see also Hanni v. American Airlines, Inc. , No. C 08-00732 CW, 2008 WL 1885794, *6 (N.D. Cal. April 25, 2008) (“As the Second Circuit recently noted, the

Ninth Circuit’s definition of ‘service’ in Charas does conflict with the Supreme Court’s subsequent opinion in Rowe , which ‘necessarily defined “service” to extend be yond prices, schedules, origins, and destinations’”). 38

38 The tort law context of Charas – in contrast to the economic regulation context h ere – also should be considered because it even further demons trates that the Charas case should have no application here. The key aspect of that decision was the Ninth Circuit’s ruling that the ADA does not “immunize the airlines from liability for personal injuries caused by their tortious conduct.” 160 F.3d at 1266. “It was in this conte xt that the Charas court held that ‘service’ does not refer to the pushing of beverage carts, keeping the aisles clear of stumbling blocks, the safe handling and storage of luggage, assistance to pass engers in need, or like functions.” Hanni, supra, at * 6. The issues presented by the Hawaiian Frei ght Fee have no relationship to the ability of an injured passenger to recover under to rt laws.-25-

In Rowe , the Maine law regarding delivery of tobacco produ cts was prohibited by the equivalent of the ADA for the trucking industry because the state law would “require carriers to offer a system of services that the mar ket does not now provide (and which carriers would prefer not to offer).” 552 U.S. at 372. Similarly here, the Freight Fee Law, as applied to air carriers, requires air carri ers to offer a service – namely the billing, collection and remittance of the Freight Fees – whi ch the market did not provide and which the carriers would prefer not to offer. Just as the Maine law substituted the state’s “own governmental commands for ‘competitive market forces’ in determining (to a significant degree) the services that motor carrier s will provide” ( id .), the Hawaii Freight Fee Law substitutes Hawaii’s governmental commands for competitive market forces in determining that air carriers must provide the serv ice of billing, collecting and remitting the Freight Fee from their customers. Thus, the im proper result in Rowe was that “carriers will have to offer tobacco delivery servi ces that differ significantly from those that, in the absence of regulation, the market migh t dictate.” Id . And similarly here, air carriers serving Hawaii must offer billing, collect ion and remittance services that differ significantly from that that which, in the absence of regulation, the market might dictate.

See also Tanen v. Southwest Airlines Co. , 187 Cal. App. 4th 1156, 1170, 114 Cal. Rptr. 3d 743, 753 (2010) (ADA preempted suit by airline c ustomer challenging expiration date of travel gift certificates because otherwise the a irline would be required by state law “to offer services that it did not provide, i.e. , travel certificates that could be used at any time”). The State also argues that ADA preemption should n ot apply here because, according to the State, the Freight Fee Law does no t impose a “broad and intrusive-26-

regulatory scheme” on the air carriers flying to Ha waii. 39 This argument should be rejected because it is contrary to the un-refuted r ecord evidence in the ATA Opening Comments (pp. 8-17) that the Freight Fee Law impose s an onerous financial and administrative burden on the carriers subject to th e Law. See also Suppl. Cohen Decl.,

Exhibit A hereto. Even assuming, arguendo , that the burden imposed on air carriers by the Fr eight

Fee Law was deemed to be de minimis that would not be determinative. The amount of the privilege fee in Tinicum was not particularly large ($.03 per 1,000 pounds o r part thereof of approved maximum landing weight). 40 But once the precedent was established for the township to impose that fee, there was no w ay to preclude an increase in the fee. Similarly here, if Hawaii is allowed to proceed wit h its requirement that airlines bill, collect and remit the Fee, there is nothing to stop the State from increasing the amount of the Fee or the penalty to be imposed on air carrier s that fail to bill, collect and remit the Fee. In addition, looking solely at the burden imp osed by the Hawaiian Freight Fee fails to consider the fact that the Department’s ruling u pholding the Freight Fee Law as applied to air carriers would give all 50 states (a nd municipal and county governments)

carte blanche to mandate that airlines perform one of their gover nmental functions. A Department ruling upholding the Hawaiian Freight Fe e Law would establish a dangerous precedent for states and local governments to oblig ate airlines to perform state and localgovernment functions for free.

39 State Comments, at 7.

40 582 F.3d at 484.-27-

Indeed, the argument by the State regarding the le vel of burden that the Freight Fee Law imposes on air carriers misses the point fo r the same reason that a similar argument was rejected by the Supreme Court in Rowe . In an important passage, the

Court in Rowe stated: Maine replies that the regulation will impose no si gnificant additional costs upon carriers. But even were that so (and th e carriers deny it), Maine’s reply is off the mark. As with the recipient-verification provision, the “deemed to know” provision would fre eze in place and immunize from competition a service-related system that carriers do not (or in the future might not) wish to provide . . .

. To allow Maine to insist that the carriers provide a special checking system would allow other States to do the same. And to interpret the federal law to permit these, and similar, state requirements could easily lead t o a patchwork of state service-determining laws, rules, and regulations. That state regulatory patchwork is inconsistent with Congress’ major legi slative effort to leave such decisions, where federally unregulated, to the competitive marketplace.

Id. at 373 (emphasis added). Similarly, Hawaii’s argument that the Freight Fee Law will impose no significant additional costs upon carriers, besides being factu ally incorrect, “is off the mark.” Retention of the Freight Fee Law will freeze in pla ce and immunize from competition a service-related system that carriers do not wish to provide. To allow Hawaii to insist that carriers provide a service in billing, collecting a nd remitting the fee would allow other states to do the same. And, to interpret federal law to permit such requirements could easily lead to a patchwork of state service-determi ning laws, rules and regulations which is inconsistent with Congress’ major legislative pu rpose to leave such decisions to the competitive marketplace.-28-

The State asserts that the Freight Fee Law helps t o protect Hawaii “from the unchecked spread of non-native invasive species.” 41 However, that is no different than

the State of Maine’s assertion in Rowe that the delivery-service requirements were critica l for protecting the health of state residents agains t the ills of tobacco. In neither case is

the state motivation relevant. See Rowe , at 374 (“Despite the importance of the public health objective, we cannot agree with Maine that t he federal law creates an exception on that basis”). It is merely an argument that the en d justifies the means.

The Court in Rowe pointed to the fact that the “state statutes requir e motor carrier operators to perform certain services, thereby limi ting their ability to provide incompatible alternative services; and they do so simply because the State seeks to enlist the motor carrier operators as allies in its enforc ement efforts .” 552 U.S. at 376 (emphasis added). “Given these circumstances, from the perspective of preemption, this

case is no more ‘borderline’ than was Morales .” Id. Similarly here, Hawaii is requiring that air carriers provide billing, collection and r emittance services “thereby limiting their ability to provide incompatible alternative service s; and they do so simply because [Hawaii] seeks to enlist [the air carriers] as alli es in its enforcement efforts.” Id . at 376.

The Second Circuit in Cuomo recognized that if New York State were allowed to impose its own state bill of passenger rights law, it would threaten to create “the same patchwork of state service-determining laws, rules, and regulations that concerned the

Court in Rowe .” 520 F.3d at 223-24. Similarly here, if Hawaii is allowed to require air carriers to bill, collect and remit freight inspect ion fees (under threat of significant monetary sanctions) it will threaten to create “the same patchwork of state-service

41 State Comments, at 1.-29-

determining laws, rules, and regulations” in the ar ea of inspections that each of the 50 states believes is important for the health and wel l being of its respective citizens. 42

3. The Freight Fee Law Relates to Air Carrier Route s . As set forth in the ATA’s Opening Comments, the Fr eight Fee and the associated

fines also relate to the “route” of the air carrier because the Freight Fee only applies to flights to Hawaii and the financial and administrat ive burden imposed by the new law will impact whether and how the carrier chooses to serve the Hawaiian market. 43 In its Comments, the State contends that ATA’s “as sertion that the Freight Inspection Fee Inspection Law will significantly im pact air carrier routes ignores the fact that airport fees already vary from airport to airp ort.” 44 Once again, this argument ignores the exception in the ADA for airports to charge rea sonable fees as part of their proprietary powers. Obviously, what is reasonable for one airport to charge may not be reasonable for another airport.

CONCLUSION For the reasons set forth above and in ATA’s Openi ng Comments, the ATA’s Petition for Declaratory Order should be granted an d the Department should and rule that the Hawaiian Freight Fee Law, as applied to air car riers, is preempted and prohibited by the Anti-Head Tax Act and the Airline Deregulation Act.

42 In United Parcel Services, Inc. v. Flores-Galarza , 318 F.3d 323 (1st Cir. 2003) , the court held that the ADA preempted a Puerto Rico law which requ ired air carriers to withhold delivery of packages unless the recipient produced a certificat e of compliance with obligation to pay state excise taxes. Just as Puerto Rico could not requir e that air carriers provide the service of verifying that their consignees had complied with s tate excise tax laws, Hawaii cannot mandate that air carriers provide the service of ensuring that shippers pay the inspection fees r equired by the State.

43 ATA Opening Comments, at 39-40.