No. 91-208
IN THE SUPREME COURT OF THE STATE OF MONTANA
1992
THE MONTANA DEPARTMENT OF REVENUE,
Petitioner and Appellant,
-VS-
UNITED PARCEL SERVICE, INC., a corporation,
Respondent and Respondent.
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis and Clark,
The Honorable Dorothy McCarter, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Geralyn Driscoll, Department of Revenue, Helena,
Montana.
For Respondent:
James P. Sites, Crowley, Haughey, Hanson, Toole &
Dietrich, Billings, Montana: Richard D. Birns and
Joan E. Kreider Bradwell, Schnader, Harrison, Segal
& Lewis, Philadelphia, Pennsylvania.
Submitted on Briefs: November 21. 1991
3 N 14199%
W Qecided: January 14, 1992
Filed:
L.2 S2,tPL
CLERK OF SLIPREME COURT
b
STATE OF MONTANA
Justice R. C. McDonough delivered the Opinion of the Court.
The Department of Revenue appeals from an order of the First
Judicial District, Lewis and Clark County, affirming an order of
the State Tax Appeal Board. We affirm.
The issues on appeal are:
1. Whether the District Court erred in concluding that the
mileage method of computing United Parcel Service's Montana revenue
overstated the actual amount of such revenue.
2. Whether the District Court erred in concluding that 5 15-
31-312, MCA, authorized the State Tax Appeal Board to determine a
method used in the apportionment formula results in an unfair
representation of UPS'S business activity in Montana.
United Parcel Service, Inc. (UPS) is an authorized motor
carrier, specializing in a nationwide small package pick-up and
delivery service. Under UPS'S operating authorities (Interstate
Commerce Commission and Montana Public Service Commission), it is
required to treat each package as a separate and distinct shipment,
with a size and weight limit on each package. The charge per
package is based on 1) the weight of the package, 2) the rate zone
to which each package is sent (based on United States Postal
Service rate zones), and 3) a package service charge. UPS'S
primary competition is the United States Postal Service.
UPS has developed a unique operating system in order to
provide its specialized, nationwide small package pick-up and
delivery service. UPS divides the United States into "operating
areas. Within each operating area, an "operating center"
2
headquarters the brown vans, and initial and final package sorting
takes place.
Each morning, the brown vans set out from the operating center
for delivery within the operating area. After the packages are
delivered, the driver becomes a pick-up driver. At the end of the
day the pick-up packages are returned to the operating center. The
packages are sorted into two groups. One group consists of
packages remaining within the operating area, the other group
consists of packages destined for addresses within another
operating area. These packages are delivered to larger sorting
centers termed "hubs." Due to this method, vehicle miles may be
quite different from the distance between origin and destination.
Reports prepared by UPS indicate that Montana has a population
of 5.4 people per square mile. UPS'S operating statistics revealed
that UPS'S Montana miles per driver were 148 miles compared to
between 47 and 89 miles in other districts in the northwest region.
Further, UPS transported 1.71 packages per mile in Montana as
compared with 4.68 to 9.10 packages per mile in the other districts
in the northwest region. During the audit period (1977-1982)
Montana package van drivers carried fewer packages per van than
drivers in any other state, and had the lowest pounds of packages
transported.
UPS is a multi-state, unitary corporation and therefore
calculates Montana taxable income using formula apportionment. In
1983, the Department of Revenue (the Department) audited the
corporate license tax returns UPS filed for 1977 through 1982. The
3
Department calculated Montana taxable income using the mileage
method based on § 42.26.264, ARM. In 1985, the Department assessed
an additional tax to UPS. UPS appealed the assessment to the State
Tax Appeal Board (STAB).
Prior to the audit, UPS used a "gross billed method" to
calculate taxable income. STAB issued findings of fact,
conclusions of law, and order, which ruled that the Department's
"mileage method" of calculating the sales factor is an
inappropriate method and ordered the Department to use the
"adjusted revenue method.
The District Court affirmed STAB'S findings of fact,
conclusions of law and order. However, the District Court found
STAB confused the "adjusted revenue method" with the "state-to-
state method" and remanded to STAB to correct the terminology.
This appeal followed.
The standard of review used by this Court in reviewing agency
(STAB) findings of fact is clearly erroneous in view of the
reliable, probative, and substantial evidence on the whole record.
Section 2-4-704, MCA (1991). In reviewing conclusions of law, we
will determine if the agency's (STAB) interpretation of the law is
correct. Steer, Inc. v. Dept. of Revenue (1990), 245 Mont. 470,
803 P.2d 601.
I
Whether the District Court erred in concluding that the
mileage method of computing United Parcel Service's Montana revenue
overstated the actual amount of such revenue.
4
Recently this Court reviewed Montana’s Corporation License
Tax. We said:
Every corporation engaged in business in the State of
Montana must pay annually to the state treasurer as a
license fee for the privilege of carrying on business in
this state a percentage of its total net income.. .In the
case of corporations having income from business activity
which is taxable both within and without this state, the
license fee is measured by the net income derived from or
attributable to Montana sources as determined under the
Corporation License Tax Act. Section 15-31-101 (3), MCA.
Montana, to overcome the difficulty, when a corporation
engages in a unitary business in more than one state, of
determining the corporation’s income and expenses
generated from its activities in Montana, has adopted the
Uniform Division of Income for Tax Purposes Act (UDITPA).
Under the UDITPA method, business income is apportioned
to each jurisdiction based on a three-factor apportion-
ment formula. The factors are property, payroll and
sales. ...
Am. Tele. & Tele. v. State Tax Appeal Board (1990), 241 Mont.
440, 443, 787 P.2d 754, 756.
Section 15-31-305, MCA (1991), sets forth the formula for
apportioning business income under the UDITPA. “All business
income shall be apportioned to this state by multiplying the income
by a fraction, the numerator of which is the property factor plus
the payroll factor plus the sales factor and the denominator of
which is 3.” Sections 15-31-306 to 15-31-311, MCA, provide the
definitions for the property, payroll and sales factor and
guidelines for the proper formulas used in the equations.
Only the sales factor is in dispute here. Sections 15-31-310
and 15-31-311, MCA, are the definitional sections for the sales
factor within the apportionment formula:
The sales factor is a fraction, the numerator of which is
the total sales of the taxpayer in this state during the
5
tax period and the denominator of which is the total
sales of the taxpayer everywhere during the tax period.
Section 15-31-311, MCA, provides in part:
(2) Sales, other than sales of tangible personal
property, are in the state if:
(a) the income-producina activity is performed in the
state: or
(b) the income-producinq activity is performed both in
and outside this state and a greater proportion of the
income-producing activity is performed in this state than
in any other state, based on costs of performance.
(Emphasis added.)
The term "sales1'is defined in 5 15-31-302 (5), MCA, as "all
gross receipts of the taxpayer". . . Thus, since is all
gross receipts of the taxpayer, under 5 5 15-31-310 and 311, MCA,
the sales factor must be based on the revenue received by the
taxpayer.
The Department used the "mileage method" in determining the
sales factor for the apportionment formula. The Department argues
that UPS must prove the "mileage method" distorts its income prior
to invoking the relief provision of 5 15-31-312, MCA, relying on
Trinova Corp. v. Michigan Dept. of Treasury (1991), - U.S. -,
111 S.Ct. 818, 112 L.Ed.2d 884.
However, Trinova involved constitutional claims relating to
Michigan's apportionment formula as applied to Trinova. Trinova at
-, 111 S.Ct. at 829, 112 L.Ed.2d at 904. UPS does not challenge
Montana's identical three-factor apportionment formula. Rather,
UP5 argues that under Montana law the mileage method utilized by
the Department does not fairly represent the extent of its business
activity within the State.
Section 15-31-312, MCA, is the relief provision under UDITPA.
6
It provides in part:
If the allocation and apportionment provisions of
this part do not fairly represent the extent of the
taxpayer's business activity in this state, the taxpayer
may petition for or the tax administrator may require, in
respect to all or any part of the taxpayer's business
activity, if reasonable
( 4 ) the employment of any other method to effectuate
an equitable allocation and apportionment of the
taxpayer's income.
We find no authority for the State's argument that UPS must prove
the mileage method distorts its Montana income prior to invoking
the relief provision under 5 15-31-312(4), MCA.
In Am. Tele. & Tele. v. State Tax Appeal Board (1990), 241
Mont. 440, 448, 787 P.2d 754, the tax administrator invoked the
relief provision under 5 15-31-312, MCA. In AT&T we held the
Department properly invoked 5 15-31-312, MCA, because the inclusion
in gross receipts of returns on temporary cash investments in the
sales factor did not fairly represent the extent of the taxpayer's
business activity within the state. Am. Tele. & Tele. at 448, 787
P.2d at 759.
UPS put forth substantial evidence to show the mileage method
did not fairly represent its business activity within Montana.
Evidence before STAB revealed that UPS drivers in Montana drive
more miles to deliver fewer packages than drivers in any other
state, and that average revenue per mile varies substantially from
state to state. Further, STAB found that expert testimony
presented by UPS revealed the underlying differences between UPS
and other freight carriers, and that the mileage method for
calculating revenue was less precise for UPS.
7
The mileage method is calculated by dividing the number of
miles traveled by U P S in Montana by the total miles traveled by UPS
nationally, and multiplying the percentage by the total revenue
received by UPS. STAB ordered that the sales factor be calculated
by the Itadjusted revenue method," that is, using numbers of
packages of an average weight (10-11 pounds), at the rate for the
furthest zone in each state. Fifty percent of the interstate pick-
ups and deliveries are attributed to Montana, and one hundred
percent of the Montana intrastate pick-ups and deliveries are
attributed to Montana.
The District Court correctly found STAB's discussion of the
"adjusted revenue method" to be a misnomer, which was really the
"state-to-state" revenue analysis method. The "adjusted revenue
method" allocates revenue between two UPS corporations. Wholly
intrastate packages must be assessed at fifty percent to avoid
double counting. The District Court found that STAB's use of the
"adjusted revenue method1' referred to an adjustment under the
state-to-state method to avoid double counting of packages both
picked up and delivered in Montana.
We therefore conclude that reliable, probative, and
substantial evidence existed to support STAB's findings of fact and
that STAB's interpretation of the law was correct. For the
foregoing reasons we affirm the District Court on the first issue.
11
Whether the District Court erred in concluding that 5 15-31-
312, MCA, authorized the State Tax Appeal Board to determine a
8
method used in the apportionment formula results in an unfair
representation of UPS'S business activity in Montana.
Section 2- 4- 102, MCA, is a definitional section. Part (11)
provides :
(11) "Substantive rules" are either:
(a) legislative rules, which if adopted in
accordance with this chapter and under expressly
delegated authority to promulgate rules to implement a
statute have the force of law and when not so adopted are
invalid; or
(b) adjective or interpretive rules, which may be
adopted in accordance with this chapter and under express
or implied authority to codify an interpretation of a
statute. The interpretation lacks the force of law.
The Department maintains that 5 42.26.264, ARM, has the force
of law. It is true that the Department promulgated rules to
implement Title 15, Chapter 31 under MAPA. See § 15-31-313, MCA
(1991). The Department promulgated rules in § 42.26.264, ARM,
related to freight and passenger carriers which is the basis of the
"mileage method." Section 42.26.264 provides:
SPECIAL COMPUTATIONS RELATED TO FREIGHT AND
PASSENGER CARRIERS (1) A portion of the net income of
taxpayers engaged in the transportation of freight or
passengers within and without Montana may be attributed
to the movement of revenue-producing equipment, drivers,
train crews, or other operating personnel across the
state.
( 2 ) The percentage of miles traveled within Montana
to total miles traveled everywhere shall be the
percentage used in determining the amount of income
attributable to this state. The apportionment formula
for such transportation companies shall be computed as
follows:
(a) Fixed properties, such as buildings and land
used in the business, terminal facilities, shop
equipment, and cars and trucks used in gathering or
delivering local freight, shall be assigned to the state
in which such properties are located. The value of
equipment used in interstate transportation shall be
assigned to this state on the mileage basis.
(b) The wages and salaries of employees assigned to
9
fixed locations as officers or clerical, administrative,
pick-up and delivery, or terminal personnel within this
state shall be included in the Montana payroll factor.
The wages of personnel operating transportation equipment
within and without this state shall be assigned to this
state upon the basis of miles. The wages of such
personnel shall be assigned to Montana in proportion that
miles traveled within this state bear to the total miles
traveled everywhere.
(c) Revenues will be assigned to this state in the
proportion that the miles traveled within the state bear
to the total miles traveled everywhere. All other
revenue shall be assigned in accordance with the
provisions of 15-31-310 and 15-31-311, MCA, and ARM
42.26.151 through 42.26.253 and 42.26.257.
The District Court found that the Department's authority to
promulgate regulations to carry out UDITPA does not insulate it
from challenges to the validity and breadth of its regulations.
The District Court held that under Bick v. State Department of
Justice (1986), 224 Mont. 455, 457, 730 P.2d 418, 420,
administrative agencies enjoy only powers specifically conferred
upon them by the legislature, and agency rules must be strictly
confined within the applicable legislative guidelines. Further,
the rule must be reasonably necessary to effectuate the purpose of
the statute. sick at 458, 730 P.2d at 421.
The District Court further found that although the legislature
left it up to the Department to develop a method of calculating
"income producing activity" for the sales factor portion of the
three-factor formula, the method must be based on revenue received
by the taxpayer under the statutory definition of "sales."
Further, 5 15-31-312, MCA, requires an equitable representation of
the taxpayer's business activity within the State. UPS put forth
substantial evidence to show the "mileage method" did not equitably
10
represent its business activity within the State. We conclude
above that UPS may petition for an alternative method of
apportionment under 5 15-31-312(4), MCA.
Additionally, 5 42.26.264, ARM, also sets forth the "mileage
method" in determining both the property and payroll factors of the
three-factor formula. The Department chose not to use the milage
method to calculate property and payroll for UPS. Yet, the
Department insists it must use the mileage method for the sales
factor. The Department's application of the regulation to the
three-factor formula is inconsistent. Its argument, therefore,
fails.
We conclude that the District Court's interpretation that 5
15-31-312, MCA, authorized STAB to find the mileage method results
in an inequitable representation of UPS'S business activity within
Montana is correct. We therefore affirm the District Court.
We Concur:
11
January 14, 1992
CERTIFICATE OF SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the following
named:
Geralyn Driscoll, Legal Counsel
Dept. of Revenue
Mitchell Bldg.
Helena, MT 59620
James P. Sites
Crowley, Haughey, Hanson, Toole & Dietrich
P.O. Box 2529
Billings, MT 59103
Richard D. Birns
Schnader, Harrison, Segal & Lewis
Ste. 3600, 1600 Market St.
Philadelphia, PA 19103
ED SMITH
CLERK OF THE SUPREME COURT
STATE OF MONTANA