NO. 88-151
I N THE SUPREME COURT OF THE STATE OF MONTANA
1989
P A C I F I C POWER & L I G H T COMPANY,
PUGET SOUND POWER & L I G H T COMPANY,
PORTLAND GENERAL E L E C T R I C COMPANY,
WASHINGTON WATER POWER COMPANY,
AND THE MONTANA POWER COMPANY,
P l a i n t i f f s and A p p e l l a n t s ,
MONTANA DEPARTMENT OF REVENUE,
e t a!.. ,
D e f e n d a n t s and R e s p o n d e n t s .
APPEAL FROM: D i s t r i c t C o u r t of t h e F i r s t J u d i c i a l D i s t r i c t ,
I n and f o r t h e C o u n t y of L e w i s and C l a r k ,
T h e H o n o r a b l e H e n r y L o b l e , Judge p r e s i d i n g .
COUNSEL O F RECORD:
For Appellant:
D o n a l d R. i4urray; Murphy, R o b i n s o n , e t a1 , K a l i s p e l l , JJT
T h o m a s H. N e l s o n ; S t o e l , Rives, B o l e y , J o n e s & G r e y ,
.
Portland, Oregon
F o r ~ekpondent:
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L a r r y S c h u s t e r , M o n t a n a D e p a r t m e n t of R e v e n u e , Helena,
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Submitted: February 2 1 , 1 9 8 9
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Decqided: A p r i l 1 7, 1 9 8 9
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Filed:
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Mr. Justice L. C. Gulbrandson delivered the Opinion of the
Court.
Appellants appeal the order of the First Judicial
District Court, Lewis and Clark County, in a declaratory
judgment action, upholding the validity of the Montana
Department of Revenue ' s (DOR) assessment of beneficial use
taxes for the year 1984 against the appellants pursuant to
S 15-24-1203, MCA. These beneficial use taxes were assessed
for the appellants' firm transmission demands upon certain
Bonneville Power Administration (BPA), 500 kilovolt (KV)
transmission lines located between Townsend, Montana and
Garrison, Montana. We affirm the order of the District
Court.
In the mid-1970s, two mine-mouth, coal-fired electric
generating plants were built by Montana Power Company (MPC)
and Puget Sound Power and Light Company (Puget), at Colstrip,
Montana. Each of these plants produce 330 megawatts of
electrical power consuming 30 megawatts internally at each
plant. These plants have been operated and maintained by the
Montana Power Company since being placed in service in 1975
and 1976.
To market the power produced by Colstrip Units I and
11, two 230 KV electrical transmission lines were built to
transmit the power from Colstrip to a point near Broadview,
Montana. Other 230 KV lines moved the energy from Broadview
to markets or "loads" located in western Montana and the
Pacific Northwest. This system of 230 KV lines proved
adequate for transmitting the energy generated from Colstrip
Units I and 11.
In the late 1970s and early 1980s, MPC and Puget, in
conjunction with Portland General Electric Company (PGE),
Washington Water Power Company (WWP) and Pacific Power and
Light Company (PPL) foresaw an increased demand in the
Pacific Northwest for electrical power. Consequently, they
decided to build Colstrip Units IJI and IV. (Colstrip Units
I11 and IV each have a generation capacity of 770 megawatts
(MW) of electrical power with each plant consuming
approximately 70 MW internally.) These five companies, the
appellants in this case, were the owners of undivided
j-nterests in Colstrip [Jnits I11 and IV at the time of the
assessment of the beneficial use taxes which are the subject
of this litigation. They shall hereinafter be collectively
referred to as the Owners.
Realizing that the existing system of 230 RV
transmission lines would be insufficient to transmit the
additional 1,400 MW produced by Colstrip Units I11 and IV in
1977, the Owners entered into negotiations with the RPA to
build two 5 0 0 KV transmission lines from Townsend to the
BPA's existing 500 KV lines at Taft, Montana.
The Owners would convert the existing 230 KV lines
stretching from the Colstrip generating point to a substation
located at Rroadview, Montana, into 5 0 0 KV lines. They then
would construct new 500 K 7 lines from Rroadview, Montana. to
T
the anticipated RPA 500 KV Lines beginning in Townsend.
For its part, the RPA executed two primary agreements
with the Owners. These agreements stated the BPA would
construct and operate those 500 KV lines referred to as the
Montana Intertie line, which runs from Townsend, Montana to
Garrison, Montana, and the Garrison West line, which runs
from Garrison, Montana, to a point designated as the Taft
substation on the Montana-Idaho border. These lines would
link with the RPA's currently existing 500 KV system at. the
Taft substation.
In preparation for Colstrip Unit 111 going on-line i.n
January, 1984, the BPA completed construction of the 500 KV
lines from Townsend, Montana to Garrison, Montana, i n 1.983.
.
There is no substation at the point where the RPA and Owners'
lines meet near Townsend. The RPA completed the Garrison
West line in 1986. This facilitated the transmission of
Colstrip Unit IV power to the Taft substation and points to
the west.
In 1983, the Montana Legislature, realizing use of the
proposed BPA 500 KV lines extending from Townsend to Taft
would be exempt from state property taxes, passed an
amendment to 5 15-24-1203, MCA, to close the loophole which
provided this tax windfall. The amendment provides for the
assessment of a beneficial use tax against users of exempt
electrical transmission lines having a 500 KV or greater
rating. After passage of this amendment, the DOR began
meeting with the Owners, their representatives and the BPA to
determine a value for the Montana Intertie line which wou1.d
be placed in service in 1984.
A definite value for the Montana Intertie line had not
been established by early 1984. The DOR thus based its
assessment on the average of the initial agreement's project
value and estimates of the actual cost of constructing these
lines. The resulting value for the Montana Intertie line was
established at $92,000,000. The DOR then factored this value
into the cost portion of the standard unitary method and
assessed taxes to each owner based upon their firm
transmission demands under the Montana Intertie Agreement.
The Owners protested the imposition of these beneficial use
taxes and this lawsuit resulted.
In 1985 and each subsequent year, the DOR has assessed
beneficial use taxes against the Owners for their use of the
500 KV lines referred to in this opinion and in each case the
Owners have protested and filed lawsuits seeking declaratory
injunctive rel-ief from the imposition of those taxes. The
individual facts of those cases are not dealt with in this
opinion.
The Owners present seven separate issues in this
appeal :
1. Whether the Owners' lacked that sufficient "Bene-
ficial Use" of the subject facilities necessary
for the imposition of beneficial use taxes under
15-24-1203, MCA?
2. Whether the chal.l.enged taxes violate the Commerce
Clause of the United States Constitution?
3. Whether the challenged taxes violate the Supremacy
Clause of the United States Constitution?
4. Whether the challenged taxes violate the guarantee
of due process and equal protection found in the
Fourteenth Amendment?
5. Whether the challenged taxes violate the "Private
Tnterests" clause of the Montana Constitution?
6. Whether the challenged taxes violate the "Retro-
spective Laws" clause of the Montana Constitution?
7. Whether the challenged taxes violate the "Impair-
ment of Obligation of Contracts" c1.ause of the
Montana Constitution?
BENEFICIAL USE
A stat.efs right to impose beneficial use taxes on a
private citizen or corporation's possession or use of
property owned by the United States is wel.1 established.
United States v. County of Fresno ( 1 9 7 7 ) , 4 2 9 U.S. 4 5 2 , 4 6 2 ,
9 7 S.Ct. 6 9 9 , 7 0 4 , 5 0 L.Ed.2d 6 8 3 , 6 9 2 . However, these taxes
must be imposed equally on others similarly situated. - at Id.
4 6 2 , 9 7 S.Ct. at 7 0 5 , 5 0 L.Ed.2d at 6 9 2 . The policy reason
for allowing these taxes is to prevent the unfair trade
advantage accruing to those private users of exempt
properties over their competitors who must pay ad valorem
taxes on similar, privately held properties. - at 463, 97
Id.
S.Ct. at 705, 50 L.Ed.2d at 692-693.
The Owners maintain that the beneficial use taxes may
not be imposed upon them as they do not have a beneficial..
interest in or receive a beneficial use from the 500 KV
lines. They contend in order to impose beneficial use taxes
the state must show that the Owners have possession of the
exempt property and that this possession is exclusive,
excluding other users of the lines an2 restricting physical
access to the property. As evidence of their lack of
possession or exclusive use, the Owners cite to the following
facts. The maintenance and actual operation of the Townsend
to Garrison 500 KV lines is controlled by the BPA. The BPA
has reserved 185 MW of East to West transmission capacity
unto itself and the Owners do not have access to the West to
East transmission capacity over the Montana Intertie.
Further, the testimony of experts at trial and in depositions
established that it is impossible to identify the exact path
that electrical power will follow when introduced into an
integrated system such as exists between Colstrip and
Garrison. In other words, one cannot identify whether the
Owners' Colstrip power injected into the system at Colstrip
flows over the 500 KV transmission lines or over other
existing 230 K V transmission lines which interact with the
500 K V lines at the Broadview and Garrison substations.
We find, however, that the Owners do possess a
sufficient beneficial use interest in the 500 KV lines, from
Townsend to Garrison, which justifies the imposition of
beneficial use taxes.
The United States Supreme Court has defined "beneficial
use," in a case arising out of Missoula County, Montana, as
follows:
The expression "beneficial use" or
"beneficial ownership or interest" in
property is quite frequent in the law,
and means, in this connection such a
right to its enjoyment as exists where
the legal title is in one person and the
right to such beneficial use or interest
is in another, and where such right is
recognized by law, and can be enforced by
the courts, at the suit of such owner or
of someone on his behalf.
Montana Catholic Missions v. Missoula County (19061, 200 U.S.
118, 127, 26 S.Ct. 197, 200, 50 L.Ed. 398, 402. See also
Harrison v. City of Missoula (1965), 146 Mont. 420, 407 P.2d
703. Further the U.S. Court of Appeals for the Ninth Circuit
has recognized a state may tax those contract rights granting
such a beneficial use interest. International Paper Co. v.
County of Siskiyou (9th Cir. 1974), 515 F.2d 285. In the
International Paper Co. case the counties attempted to tax
the companies' interest in standing timber located in
national forests. Under the sale contracts, title to the
timber remained with the Forest Service until it had been
cut, scaled and paid for. The Ninth Circuit held that the
timber property, from which the company derived profit, was
not exempt from taxation merely because the United States
retained legal title to it as security. - at 289, citing
Id.
S.R.A., Inc. v. State of Minnesota (1946), 327 U.S. 558, 5 7 0 ,
66 S.Ct. 749, 756, 90 L.Ed. 851, 860.
In the present case, the Colstrip Owners have an
enforceable contract interest which gives them the right to
the beneficial use of firm (a guaranteed level of the
available transmission capacity) megawatts of power
transmitted over the Montana lntertie line. The Montana
lntertie Agreement gave the Owners the right to inject
electrical power into and remove electrical power from the
lines up to specific maximum megawatts of power. This right.
is subject only to the RPA's ability to transmit these
amounts onward from the Garrison substation. We note the
project scheduled power, (the amount of electric power each
company schedules on an hour over the Montana Intertie up to
the maximum allowed for each Company's East-West transmission
demand) remained under the ownership of the Owners.
The Owners have exercised this right and used these
lines to transmit power for their own commercial profit
-making activities. Further, absent the transmission of any
RPA or non-firm energy, the Owners are responsible for the
total annual cost of the lines. The total annual cost of the
transmission lines includes the cost of the government's
investment in the Montana Tntertie line and the Garrison
substation, the annual cost of operating and maintaining the
transmission line system, the BPA's administrative costs
attributable to the lines and the cost to BPA of any
impact-aid payments. The payment formula provides that the
Owners receive a credit for RPA and non-firm transmission
over the lines. The Owners are liable for these payments
whether they use the lines or not. Under such an
arrangement, we find the Owners clearly have a beneficial use
interest in the Montana Intertie 500 KV lines.
The Owners contend, however, that even if a beneficial
use existed, the interest was not excl.usive, and thus it
could not be taxed. The Owners assert they have no
reservation of the remaining 185 MW of East to West
transmission capacity nor to any of the West to EasC
transmission capacity of the lines. Therefore, the
imposition of beneficial use taxes resulted in the Owners
being taxed on the full value of the property when they only
had use of part of the lines. United States v. County of
Allegheny (1944), 322 U.S. 174, 64 S.Ct. 908, 88 I,.Ed. 1209.
This argument is without merit as the Montana Intertie
Agreement provided that the BPA could not exercise its East
to West reservation until the Garrison West 500 KV lines were
operational. Thus, the BPA had no right to exercise its
reservation in 1984, the year in which the taxes in this case
were imposed. Secondly, testimony at trial established that
the BPA would only allow reservation of a firm transmission
demand on the West to East capacity of the lines if a
requesting party showed a demonstrated need for use of the
lines. Until such a demonstrated need was shown, the only
firm transmission users of the lines were the Owners, for
whom the lines were constructed, and the BPA.
Testimony at trial established that the Montana
Intertie line consisted of two bi-directional 500 KV
electrical transmission lines. These bi-directional lines
are capable of transmitting electrical power in either
direction, however, they are not capable of transmitting
power in both directions simultaneously. These lines are
stability limited at approximately 2,000 MW, although a BPA
employee testified that actual loading of the system at
capacity would be lower. In negotiating the Montana
Intertie, the Owners and BPA provided for maximum firm
transmission demands, East to West, of 1,915 MW. Further,
the Owners' intention has been to operate the Colstrip
generating units as base loaded units. Base loaded
generating units are intended to run at full capacity
supplying constant power levels to the system.
We find the Montana Intertie 500 KV lines were built to
transmit base load power from East to West. No other parties
could use the lines because of the Owners' reservation of
more than the amount which could be transmitted beyond the
Garrison substation. Until other parties are able to
exercise reservations i.n the I.inesltransmission capacity in
either direction, at which time the Owners will be credited,
the Montana Intertie's total capacity was reserved
exclusively to the Owners. Consequently, the State had the
statutory right to tax the Owners based upon the full value
of the facilities.
COMMERCE CLAUSE
Having found the Owners possessed a taxable beneficial
use interest in the exempt facility, we now address the
Owners' claims that the imposition of these taxes violated
certain sections of the United States and Montana
Constitutions. The Owners' first claim is that the
imposition of beneficial use taxes on their use of the
Montana Intertie line violated the Commerce Clause of the
United States Constitution. The Owners contend that the
Legislature intended to discriminate against interstate
commerce by giving preferential treatment to Montana REA
cooperatives and that the DOR has implemented the beneficial
use statute in a discriminatory manner.
It is well established that a state may raise revenues
by taxing a private person or corporation's use of federal
property within its jurisdiction, provided the state is
taxing the possession or use of the property. United States
v. County of Fresno (1977), 429 U.S. 452, 462, 97 S.Ct. 699,
704, 50 L.Ed.2d 683, 692. However, the fact that such a tax
mav have an impact on interstate commerce will subject the
tax to commerce clause scrutiny. Commonwealth Edison Co. v.
Montana (1981), 453 U.S. 609, 616, 101 S.Ct. 2946, 2952-2953,
69 L.Ed.2d 884, 893. A state may exact its fair share of the
cost of state government from interstate commerce activities
within the state, so Long as the tax meets the test
promulgated in Complete Autc Transit, Inc. v. Brady (1977),
430 1J.S. 274, 97 S.Ct. 3076, 51 L.Ed.2d 326.
Commonwealth Edison, 453 U.S. at 617, 101 S.Ct. at 2953, 69
L.Ed.2d at 894. The Complete Auto Transit test requires,
upon examination of the practical effect of the tax, that the
tax be applied to an activity having a substantial nexus with
the taxing state, be fairly apportioned, not discriminate
against interstate commerce, and be fairly related to the
services provided by the taxing state. Complete Auto
Transit, 430 U.S. at 279, 97 S.Ct. at 1079, 51 L.Ed.2d at
331.
Applying this test to the facts in this case the
Owners' activities, subject to the tax, had a substantial
nexus to the State of Montana. They had exclusi~recontract
rights to use approximately 90 miles of BPA 500 KV
transmission lines across Montana. These lines were
constructed for the purpose of transmitting the Ownersq
electrical power generated at Colstrip, Montana to Garrison,
Montana, and from there to the Owners' service loads.
Further, as the Montana Intertie line is entirely within the
state there is no potential for multiple state taxation of
the use of the facilities. No other state would have
jurisdiction to impose beneficial use taxes on these
facilities. See, Commonwealth Edison, 453 U.S. at 617, 101
S.Ct. at 2953, 69 L.Ed.2d at 894.
Similar to the appellants in Commonwealth Edison, the
Owners contend the tax assessed had a discriminatory effect
on interstate commerce as the majority of the electrical
power transmitted over these lines was destined for
out-of-state consumers. These beneficial use taxes thus
effectively exported the state's tax burden. However, as in
Commonwealth Edison, the tax was computed at the same rate
regardless of the destination of the power transmitted. MPC
and Pacific used the power to service Montana customers and
were assessed and taxed in the same manner as the other users
of the lines. The fact the Legislature realized the brunt of
the tax would fall upon out-of-state users of these lines
would not invalidate the tax.
As stated by the United States Supreme Court:
[Mlotives alone will seldom, if ever,
invalidate a tax that apart from its
motives would be recognized as lawful.
(Citations omitted.) Least of all will
they be permitted to accomplish that
result when equity and not preference is
the end to be achieved.
Henneford v. Silas Mason Co. (1937), 300 U.S. 577, 586, 57
S.Ct. 524, 528, 81 L.Ed. 814, 820.
The Owners also contend this amendment effectively
discriminates against bulk transferors of power by benefiting
local users of the federal transmission system and those
utilities and cooperatives which use lower capacity
transmission lines. In support of this contention the Owners
point to the fact the amendment to the statute, § 15-24-1203,
MCA, only applies to users of 500 KV and larger electrical-
transmission lines. However, state legislatures have a wide
range of choice when they classify or limit items subject to
taxation. Henneford, 300 U.S. at 587, 57 S.Ct. at 529, 81
L.Ed. at 821, citing Bell's Gap R. Co. v. Pennsylvania
(1890), 134 U.S. 232, 237, 10 S.Ct. 533, 535, 33 L.Ed. 892,
895; Ohio Oil Co. v. Conway (1930), 281 1J.S. 146, 159, 5 0
S.Ct. 310, 313, 74 L.Ed. 775, 781-782.
In the case at hand, the Legislature has identified a
class of users of exempt property. This class consists
solely of users of 500 KV and larger electrical transmission
lines. These lines are used for the bulk transfer of
electrical power. In this specific instance the Owners have
contracted with the RPA to construct and operate 500 R v
lines. As a result of the Owners' contract with the RPA, the
Owners have the use of these lines which they otherwise would
have been forced to construct themselves. Absent the
implementation of the beneficial use tax, the Owners would
have received the use of the Montana Intertie transmission
facilities, essential to the sale of Colstrip generated.
power, free of the taxes they would be subject to if they had
constructed the lines themselves. We do not find the effect
of the legislation was 50 unfairly tax out-of-state users of
the lines, rather the effect is to prevent all users of such
exempt lines from unfairly reaping a tax windfall.
The Owners point to cases where the United States
Supreme Court and Federal courts have found that state taxes
discriminate against interstate commerce in favor of local
businesses or consumers. However, these cases are
distinguishable. In Boston Stock Exchange v. State Tax
Comm'n (1977), 429 U.S. 318, 97 S.Ct. 599, 50 L.Ed.2d 514,
the Supreme Court found a transfer tax on out-of-state sales
of stocks violated the commerce clause. The Court found that
no state "may 'impose a tax which discriminates against
interstate commerce .. . by provid.ing a direct commercia1.
advantage to 1-ocal business.'" Boston Stock Exchange, 429
U.S. at 329, 97 S.Ct. at 607, 50 L.Ed.2d at 524, citing
Northwestern States Portland Cement Co. v. Minnesota (1959),
358 U.S. 450, 458, 79 S.Ct. 357, 362, 3 L.Ed.2d 421, 427. Tn
the case at hand, however, the beneficial use tax has been
imposed upon both local and interstate users of the 500 KV
lines for the purpose of eliminating a tax windfall and
competitive advantage which enure to the users of tax exempt
federal property. This tax imposes no greater tax liability
on interstate users of these lines than on instate users.
See Boston Stock Exchange, 429 U.S. at 332, 97 S.Ct. at 608,
50 L.Ed.2d at 526.
Recently in the case of United States v. City of
Manassas, Va. (4th Cir. 1987), 830 F.2d 530, the Fourth
Circuit Court of Appeals dealt with a Virginia statute which
taxed users of federally owned property, but exempted users
of similar state owned property from taxation. There the
court found the controlling case for discriminatory state use
taxes is Phillips Chemical Co. v. Dumas School Dist. (1960),
361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384. In Phillips, the
Court held such taxes must be examined based on "how other
taxpayers similarly situated are treated." requiring "'an
examination of the whole tax structure of the state.' Cf.
Tradesmens National Bank v. Oklahoma Tax Comrn'n, 309 U.S.
560, 568." Phillips, 361 U.S. at 383, 80 S.Ct. at 479, 4
L.Ed.2d at 389. The Phillips Court provided a two-part test
for evaluating allegedly discriminatory state use taxes:
1) Are the users of federal property
treated less favorably than similarly
situated users of state property; and
2) If so, is that discrimination
justified in light of the state and
federal interest involved.
City of Manassas, 830 F.2d at 534. The Fourth Circuit Court
of Appeals in City of Manassas, interpreted the justification
in part two of the test as requiring a determination of
whether the user of federal exempt property is similarly
situated to a user of state exempt property. City of
Manassas. 830 F.2d at 534.
At trial the only references to imposition of
beneficial use taxes on state exempt property dealt with two
short line railroads and the Great Falls Industrial Park.
The Bureau Chief for the Intercounty Property Bureau
testified that in 1986 the DOR determined these railroads
qualified for imposition of beneficial use taxes under
5 15-24-1203, MCA. She testified that those taxes were
appealed to the State Tax Appeal Board, but that at the time
of the trial, LTanua-ry 19, 1987, the railroads were still
subject to beneficial use taxation. The Cascade County
Assessor testified that the DOR had assessed beneficial use
taxes on users of facilities at the Great Falls Industrial
Park where the DOR found private parties' use met the
requirements of S 15-24-1203, MCA. Neither party introduced
any other beneficial use of similarly situated state exempt
property, though several instances of beneficial use of other
federal exempt properties were described. Based upon the
above testimony we do not find the DOR discriminated against.
users of federal property in favor of similarly situated
users of state exempt property.
Since the trial, the 1987 Legislature amended
S 15-24-1203, MCA, to exempt the beneficial use of railroad.
right-of-way and track acquired by the state through
abandonment, provided the state retains ownership and the
right-of-way and track are used exclusively for rail
transportation. This amendment was not considered by the
District Court in its order of December 21, 1987, and we find
it is not properly before this Court on appeal. Hanley v .
Dept. of Revenue (1983), 207 Mont. 302, 673 P.2d 1257.
The fourth prong of the Complete Auto Transit test
questions whether the tax is fairly related to the services
provided by the taxing state. In Commontvealth Edison, the
Court found the "operating incidence" of the tax was on the
mining of coal in Montana. As the tax was measured. as a
proportion of the value of the coal taken, it was in proper
proportion to the appellant's activities in the state. The
present case involves an "operating incidence" similar to
Commonwealth Edison which falls upon the Owners' beneficial.
use of exempt electrical transmission lines found within the
state. This tax is measured as a percentage of the value of
the property in which the Owners possess their beneficial use
Because it is measured as a percentage of
the value of the coal taken, the Montana
tax is in "proper proportion" to
appellants' activities within the State
and, therefore, to their "consequent
enjoyment of the opportunities and
protections which the State has afforded"
in connection with those activities.
(Citations omitted. ) When a tax is
assessed in proportion to a taxpayer's
activities or presence in a State, the
taxpayer is shouldering its fair share of
supporting the State's provision of
"police and fire protection, the benefit
of a trained work force, and 'the
advantages of a civilized society. ' "
(Citations omitted. )
Commonwealth Edison, 453 U.S. at 626-627, 101 S.Ct. at 2958,
69 L.Ed.2d at 900. As the appropriate level of that tax
percentage is a legislative matter, we find the tax fairly
reflects the taxpayer's activity in the state. -- at
Id.
626-627, 101 S.Ct. at 2958-2959, 69 L.Ed.2d at 901.
SUPREMACY CLAUSE
The Owners' second claim is that the imposition of
beneficial use taxes violated the supremacy clause of the
United States Constitution. The Owners correctly assert
there are two means by which a state tax may be invalidated
under the supremacy clause. The state statute may be
preempted by federal action or the tax may improperly place
the legal incidence of the tax upon the property of the
federal government.
The Owners contend that two federal statutes do in fact
preempt Montana's imposition of beneficial use taxes upon
private use of federally owned electrical transmission lines.
The first is Section 2121(a) of the Tax Reform Act of 1976,
15 U.S.C. 5 391 (Anti-Discrimination Act) (1982). This
statute provides:
N S t a t e , o r p o l i t i c a l subdivision
o
t h e r e o f , may impose o r a s s e s s a t a x on o r
with respect to the generation or
transmission of electricity which
discriminates against out-of - S t a t e
manufacturers, producers, wholesalers,
retailers, or consumers of that
electricity. For purposes of this
s e c t i o n a t a x i s d i s c r i m i n a t o r y i f it
results, either directly or indirectly,
i n a g r e a t e r t a x burden on e l e c t r i c i t y
which i s g e n e r a t e d and t r a n s m i t t e d i n
i n t e r s t a t e commerce t h a n on e l e c t r i c i t y
which i s g e n e r a t e d and t r a n s m i t t e d i n
i n t r a s t a t e commerce.
T h i s s t a t u t e h a s been examined i n Arizona P u b l i c S e r v i c e Co.
v. Snead ( 1 9 7 9 ) , 4 4 1 U.S. 1 4 1 , 99 S.Ct. 1629, 60 L.Ed.2d 106.
There the Court examined New Mexico's tax on electrical
g e n e r a t i o n and complimentary t a x c r e d i t f o r e l e c t r i c a l s a l e s
i n New Mexico. The e f f e c t o f t h i s c r e d i t was t o e l i m i n a t e
the 2 percent electrical generation tax for s a l e s t o New
Mexico's electrical consumers, while taxing sales to
out-of-state consumers. 1.5 U . S . C . $ 391 (1982) was p a s s e d
s p e c i f i c a l . l y t o o u t l a w such t a x e s which p l a c e a g r e a t e r t a x
burden upon electricity generated or transmitted in
interstate commerce. The Court found that because the
electrical energy tax indirectly discriminat.ed against
e l e c t r i c i t y sold outside the s t a t e , it v i o l a t e d t h e f e d e r a l
statute. Arizona P u b l i c S e r v i c e Co., 4 4 1 U.S. at ]50, 99
S.Ct. a t 1634, 60 L.Ed.26 a t 113. The f e d e r a l s t a t u t e d o e s
not prevent a state from taxing the generation and
transmission of electricity, but only requires that
interstate and intrastate generation and transmission be
treated equally. -.
Id at 150-151, 99 S.Ct. at 1634, 60
L.Ed.2d a t 114.
Initially, we n o t e t h a t no credit i s p r o v i d e d under
Montana's beneficial use tax to anyone affected by its
i m p o s i t i o n and none i s a l l e g e d . Further, t h e b e n e f i c i a l use
tax on 500 KV electrical transmission lines applies equally
to intrastate and interstate users of these lines. Testimony
at trial established that Montana Power Company removed all
of its power from the system at the Garrison substation for
transmission to its load customers. MPC as an intrastate
user is taxed at the same rate as the other users of the
facilities. Also, this tax falls neither upon the generation
nor the transmission of electrical power, but upon the use of
tax exempt facilities. As such, this tax does not violate 15
U.S.C. § 391.
The Owners next contend 16 D. S.C. S 8 3 9 (e)(m) preempts
S 15-24-1203, MCA. This statute provides for the payment of
impact-aid payments to offset the added cost to affected
counties for the three construction phases of the Montana
Intertie line. The three construction phases are
pre-construction, which was complete before the Act was
passed., construction, for which the three affected counties
received over $150,000 in impact-aid payments, and
post-construction. In the post-construction phase the
counties may bill the BPA for any services provided as a
result of the presence of the lines. The Owners' contention
that these impact-aid payments were in lieu of taxes fails in
light of testimony at trial. At trial, BPA's project
information officer for the Colstrip transmission project
testified that these impact-aid payments were not intended to
be in lieu of taxes which the counties were losing as a
result of federal ownership of the 500 KV lines. This
statement is reinforced by U.S. Representative Dingell's
statement contained in the environmental impact statement.
48 Fed. Reg. 55765. ("This is not a payment-in-lieu of taxes
provision. " )
The Owners also advance an implied preemption argument
based. upon a line of cases holding that preemption may he
inferred when a scheme of federal regulation leaves no room
for state regulation, or when the regulation is so dominant
as to "preclude enforcement of state laws on the same
subject." Hillsborough County v. Automated Medical
Laboratories (1985), 471 U.S. 707, 105 S.Ct. 2371, 85 L.Ed.2d
714. The argument fails, however, in light of our previous
findings regarding statutory preemption. The impact-aid
payments contained in 15 U. S.C. S 839 ( e )(m), do not preclude
a state's right to levy taxes on a private party's beneficial
use interest in exempt federal transmission facilities.
Further, 15 U.S.C. S 391 only precludes the implementation of
a state tax scheme which places a greater tax burden on
generation or transmission of electricity placed in
interstate commerce. As previously stated the Montana
beneficial use tax is levied on the beneficial use of the
facilities and is equally applied to interstate and
intrastate users of the facilities.
The Owners' last supremacy clause argument is that the
legal incidence of the beneficial use tax falls on the
federal government. In order to find a state tax on use of
such exempt properties unconstitutional under a legal
incidence argument, the taxed entity must be "'so intimately
connected with the exercise of a power or the performance of
a duty' by the Government that taxation of it would be 'a
direct interference with the function of government itself.'"
United States v. New Mexico (1982), 455 U.S. 720, 736, 102
S.Ct. 1373, 1383, 71 L.Ed.2d 580, 593, citing James v. Dravo
Contracting Co. (1937), 302 U.S. 134, 157, 58 S.Ct. 208, 219,
82 L.Ed. 155, 171. Where the legal incidence of the tax
falls on a private party, and they are independent entities
from the United States, the tax cannot be considered a tax on
the government itself. U.S. v. Mew Mexico, 455 U.S. at 738,
102 S.Ct. at 1385, 71 L.Ed.2d at 594. In the New Mexico
case, the government sought to show that beneficial use
taxes, based upon management contracts which transferred
payment of any state taxes imposed to the federal government,
placed the legal incidence of the tax on the federal
government. The United States Supreme Court found that the
fact the federal property involved was being used for the
government's benefit was irrelevant. - at 739, 102 S.Ct.
Id.
at 1385, 71 L.Ed.2d at 595. The Court found the contractors
remained "distinct entities pursuing 'private ends,' and
their actions remained 'commercial activities carried on for
profit. " - at 739-740, 102 S.Ct. at 1385, 71 L.Ed.2d at
Id.
595, citing United States v. Boyd (1964), 378 U.S. 39, 44, 84
S.Ct. 1518, 1521-1522, 12 L.Ed.2d 713, 718. Such a tax does
not fall upon the federal government, but rather upon the
contractor's independent commercial enterprise.
In the instant case the tax is levied directly upon the
Owners for their beneficial use of the federal government's
facilities. There is no transfer of the tax liability to the
government. In fact, the Montana Intertie Agreement provides
any costs the government incurs by way of the Owners' use of
these transmission lines are billable annually to the Owners.
The "legal incidence" of the beneficial use tax in this case
clearly falls upon the Owners and not upon the federal
government.
The Owners argue that the imposition of these taxes on
the Owners' use of the Montana Intertie line would adversely
affect the government's ability to secure adequate lease fees
from these types of lines. This argument must fail for two
reasons. First, the United States Supreme Court has upheld
use taxes even where the government by contract agrees to pay
the state use or excise tax. See, James v. Dravo Contracting
Co. (19371, 302 U.S. 134, 58 S.Ct. ?08, 82 L.Ed. 155.
Second, in the contracts which grant the use in this case,
the Owners are obligated not only to pay the cost of
operating and maintaining the lines each year, (less credits
for BPA transmissions and non-firm transmissions), but the
cost of constructing these lines as well. Under such an
arrangement it is implausible that imposing these taxes upon
the use of the exempt lines would adversely impact the
government's ability to secure adequate lease values.
FOURTEENTH AMENDMENT
The Owners contend the imposition of beneficial use
taxes in this case violates the Due Process Clause and the
Equal Protection Clause under the Fourteenth Amendment to
the United States Constitution. The Owners contend that the
Due Process Clause requires that the amount of the tax must
bear some relation to the value of the property assessed
against the taxpayer. Norfolk & Western Railway Co. v.
Missouri State Tax Commission (1968), 390 U.S. 317, 88 S.Ct.
995, 19 L.Ed.2d 1201. The Owners allege that the defendant
counties have conferred no benefit upon the Owners because of
their use of the Townsend to Garrison facilities, that the
defendant counties have already been fully compensated
through the impact-aid portions of the Montana Intertie
Agreement and that the taxes imposed are based on the full
value of the facilities. Further, the Montana Intertie
Agreement gives appellants rights which are fax less than
full ownership.
State tax statutes will not normally be set aside based
upon Due Process Clause violations, except in rare and
unusual circumstances. A. Magnano Co. v. Hamilton (19341,
292 U.S. 40, 54 S.Ct. 599, 78 L.Ed. 1109. Further, to attack
the tax statute, the appellants must show a failure to
satisfy two tests. First, the object of the tax must lack a
nexus with the state imposing the tax, and second, the tax
must fail to fairly reflect the taxpayer's activity in the
taxing state.
Sufficient nexus with the state has already been
established under the Commerce Clause section previously
discussed. Additionally, we previously found under the
fourth prong of the Complete Auto Transit test, that the tax
is fairly related to the services provided by the state.
Thus, there is no violation of the Due Process Clause.
The Owners contend the Equal Protection Clause
invalidates the beneficial use tax because the state has not
equally administered the beneficial use taxes. Raymond T T .
Chicago Union Traction Co. (1907), 207 U.S. 20, 28 S.Ct. 7,
52 L.Ed. 78; and Larson v. State ( 1 9 7 5 ) , 166 Mont. 449, 534
P.2d 854. The Owners claim that the Department has never
attempted to apply the beneficial use tax in analogous
situations, specifically referring to the Montana Rural
Electrification Administration Cooperatives (MAS).
These REAs, as preference customers, are entitled to
purchase federal power at a preferred or "Priority Firm
Rate." This rate is lower than the rate investor-owned
utilities are entitled to when they purchase federal power.
These REAs also have a right to first call on federal power,
before investor-owned utilities. The Owners claim the
beneficial use taxes would be applicable to RPA's preference
customers based on their use of the BPA transmission system,
including the BPA1s 500 KV lines. The Owners also contend
this is the first attempt to apply the beneficial use tax
upon any entity that did not have "exclusive use" of the
subject facilities. The Owners equate exclusive use to a
requirement that they have possession of the facilities and
transmission lines.
The standard which must be achie~~ed invalidate the
to
tax on equal protection grounds is one of invidious
discrimination, as opposed to the existence of a rational
relationship. Lehnhausen v. Lake Shore Auto Parts Co.
(1973), 410 U.S. 356, 93 S.Ct. 1001, 35 L.Ed.2d 351. The
existence of a rational relationship is met here by the
intent to close the loophole which would have allowed these
companies to avoid paying any taxes. In regard to the
Owners' claims regarding the REAs, we note they do not use
the Montana Intertie line, nor possess firm transmission
demands in 500 KV lines which may be taxed in 1984, under
§ 15-24-1203, MCA.
We agree with the DOR that the Legislature was not
required to tax all beneficial users before it could reach
the beneficial users of 500 KV lines. ( " [ T I axation of
certain objects need not be universal in nature.") Citing to
Louisiana v. Pilsbury (1881), 105 U.S. 278, 26 L.Ed. 109.
The 1,egislature in this case has identified benefj-cia1 users
of 500 KV lines as a distinct tax classification.
THE MONTANA CONSTITUTION
Additionally, the Owners claim the imposition of
beneficial use taxes in this case violates three provisions
of the 1972 Montana Constitution. The Owners contend that
while Art. VIII, sec. 5 (1)(a) allows "private interests" in
exempt properties to be taxed separately, such a tax
necessarily requires the user to have possession. The Owners
base this requirement of possession upon statements made at
the Constitutional. Convention that in closing an existing
loophole the delegates provided for taxation of private
interests in government-owned property, "things like
right-of-ways and things like that ... " Further, the
Owners contend the Montana Supreme Court, in identifying an
"interest" i n real property as an estate, has implied one
.
must have the right to possess and control property before
beneficial use taxes may be imposed. Brown v. Hart (1.9841,
213 Mont. 517, 692 P.2d 14.
We disagree. What is involved here is a private
contractual right to use a portion of the transmission
capacity of the exempt Townsend-Garrison line. This private
interest in exempt federal lands fits within the plain
language employed by the 1972 Constitutional Convention
delegates in closing this loophol-e contained i.n the prior
constitution.
(1) The 1egi.slature may exempt from
taxation:
(a) Property of the United States, the
state, counties, cities, towns, school
districts, municipal corporations, and
public libraries, but any private
interest in such property may be taxed
separately.
Art. VIII, sec. 5(l)(a), 1972 Montana Constitution.
The Owners next claim that the imposition of beneficial
use taxes on their use of t.he Montana Intertie line violates
Art. XI11 , sec . 1 (3), prohibiting retrospective laws.
Specifically the Owners contend that since the Montana
Intertie Agreement was entered in 1981 and S 15-24-1203, MCA,
was not amended to specifically include 500 KV transmission
lines until 1983, the effect of imposing these taxes is
precisely the type of retrospective action the 1972
Constitutional Convention was prohibiting.
We find several problems with the Owners' argument.
First, the argument ignores the ongoing nature of their use
of these lines. Second, this contention is weakened by Art.
VIII, sec. 5 (1)(a) which specifically allows for taxation of
the interests conveyed to the Owners under the Montana
Intertie Agreement. We agree with the District Court that
the position the Owners advance would have the effect of
prohibiting all new forms of taxation. "The imposition of a
new tax, or an increase in the rate of an old one, is simply
one of the usual hazards of the business enterprise."
Westfield-Palos v. City of Rancho Palos Verdes (Cal.App.
1977), 141 Cal.Rptr. 36, 42, citing John McShain, Inc. v.
District of Columbia (D.C. Cir. 19531, 205 F.2d 882, 883.
Only where the measuring formula
for the tax draws upon such disparate or
long past antecedents so as to have
little relation to the volume of current
business might a business license tax
fall on retroactivity grounds.
(Citations omitted. )
Westfield-Palos, 141 Cal.Rptr. at 42. We find that the
beneficial use tax involved here, like the business license
tax in Westfield-Palos applies to the ongoing, current
business activity of the Owners. As such, the tax does not
violate Art. XIII, sec. 1(3), of the 1972 Montana
Constitution.
The Owners1 final issue relies on Art. 11, sec. 31, of
the 1972 Montana Constitution in contending the imposition of
these beneficial use taxes constitutes an impairment of their
contract with the BPA. This argument is without merit as it
has long been established that "[a] contract between
individuals cannot have the effect of depriving the state or
any municipal subdivision of any power of taxation otherwise
belonging to it." Forbes v. Mid-Northern Oil Co. (1935), 100
Mont. 10, 22, 45 P.2d 673, 679, citing Newman v. Commercial
Waterway District (Wash. 1923), 217 P. 9. As long as the
state does not violate a fundamental right of the individual,
the state is free to vary the existing mode of taxation.
Forbes, 45 P.2d at 679. As Art. 11, sec. 31 of the 1972
Montana Constitution is essentially identical to Art. 3, sec.
11 of the 1889 Montana Constitution, under which the Forbes
case was decided, we find the Owners have presented no reason
to find there has been any impairment of their contract.
CONCLUSION
The Owners en:joyed a beneficial use interest in the
Montana Intertie Agreement 500 KV lines, which use we hold
was properly taxable under 5 15-24-1203, MCA. That use was
evidenced by the Owners' contractual reservation of firm
transmission demands in the lines and the fact the lines were
constructed for the purpose of transmitting the Owners'
electrical power generated at the Colstrip generating
facilities. The State's levy of these beneficial use taxes
did not violate the United States Commerce Clause, the United
States Supremacy Clause, the Fourteenth Amendment to the
United States Constitution, nor the cited sections of the
Montana Constitution. Therefore we
District Court.
We concur: ,
/