No. 8 5 - 4 3 5
IN THE SUPREME COURT OF THE STATE OF MONTANA
1986
NORTHWEST AIRLINES, INC.,
a corporation,
Plaintiff, Respondent,
and Cross-Appellant,
STATE TAX APPEAL BOARD, et al.
Defendants,
and
DEPARTMENT OF REVENUE OF THE STATE
OF MONTANA,
Defendant, Appellant and
Cross-Respondent.
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis & Clark,
The Honorable Gordon Bennett, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
David W. Woodgerd argued, Dept. of Revenue, Helena,
Montana
For Respondent:
Loble & Pauly; Lester H. Loble, 11, Tom K. Hopgood
argued, Helena, Montana
Submitted: April 3, 1 9 8 6
Decided: June 5, 1986
Honorable Frank I. Haswell, retired Chief Justice, delivered
the Opinion of the Court.
The District Court of Lewis and Clark County granted
summary judgment to Northwest Airlines in its action to
recover back a deficiency assessment on its Montana corpora-
tion license tax paid under protest. We affirm.
The background of this controversy indicates that
Northwest is an interstate air carrier of passengers and
freight. Some of its flights land and take-off from Montana
airports while others simply fly over the state. Northwest
Airlines has filed Montana corporation license tax returns
each year since 1963.
As the result of an audit, the Montana Department of
Revenue (DOR) levied a deficiency assessment against North-
west of $496,562.00 for the years 1973 thru 1978. Northwest
paid the deficiency assessment plus interest under protest
and filed an action in the District Court to secure a declar-
atory judgment that the deficiency assessment was illegal and
to recover it back. At about the same time, Northwest filed
an appeal of the deficiency assessment with the State Tax
Appeal Board (STAB) which was stayed pending the outcome of
the District Court action.
In September 1984, Northwest and DOR filed simultaneous
motions for summary judgment. Following briefs and oral
argument, the District Court granted summary judgment to
Northwest, holding in substance that DOR had no authority by
statute or under the Montana Administrative Procedures Act
(MAPA) to use an apportionment formula which includes nonstop
flyover miles in computing the Montana corporation license
tax owed, and that this violates constitutional requirements
of due process, equal protection and the Commerce Clause.
Thereafter, the District Court denied DOR1s motion to alter
or amend the judgment after striking the affidavits of three
DOR agents and empl-oyees which were filed by DOR to support
its motion.
DOR1s appeal followed. A cross-appeal by Northwest
concerning the interest rate has been settled by agreement of
the parties.
Although the parties define the issues on appeal in
diverse and varying manner and language, the basic contro-
versy is whether the apportionment formula used by DOR in
computing the corporation license tax owed by Northwest is
authorized under Montana statutes, MAPA, and state and feder-
al constitutional requirements. The remaining issues neither
control nor affect this basic controversy and need not be
discussed nor determined herein.
The Montana corporation license tax is imposed "for the
privilege of carrying on business - -
in this state" (emphasis
added) and, in the case of a unitary business such as North-
west having income from business activity both within and
without Montana, is "measured by the net income derived from
- attributable - Montana sources.
or to . ." (Emphasis added.)
Section 15-31-101 (3), MCA.
The statutory formula for this measurement is the
multiplication of total business income of the company 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." Section 15-31-305, MCA. The property,
payroll and sales factors are expressed as the proportion of
Montana property, payroll and sales to the total property,
payroll and sales of the company. Thus, the greater the
Montana shares of Northwest's property, payroll and sales,
the higher its taxable Montana. income will be.
DOR is empowered to alter this income apportionment
method where the formula outlined above does "not fairly
represent the extent of the taxpayer's business activity -
in
this state . . ." (Emphasis added.) Section 15-31-312, MCA.
DOR administratively determined that the general rules made
to carry out the statutory apportionment scheme did not
"fairly represent the extent of the taxpayer's business
activity in this state" as far as certain industries, such as
freight and passenger carriers, were concerned. Therefore,
it created special procedures for those industries. A.R.M.
42.26.264 applies to freight and passenger carriers and
states:
(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 appor-
tionment formula for such transportation
companies shall be computed as follows:
(a) ... The value of equipment used
in interstate transportation shall be
assigned to this state on the mileage
basis.
(b) ... The wages of personnel operat-
ing 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 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 ...
Under this rule, mileage is the basis for allocating
income to Montana for corporate license tax purposes. The
value of equipment used in interstate commerce (property
factor), the wages paid to personnel involved in interstate
commerce (payroll factor) and the revenue generated in inter-
state commerce (sales factor) are assigned to Montana in the
proportion that miles traveled within Montana compare to
miles traveled everywhere. By fiat of its auditor, DOR
included miles attributed to nonstop flyovers, ie. to air-
planes which fly over Montana but which do not land or take
off from Montana airports, as miles traveled within Montana
in computing the tax owed by Northwest.
The District Court concluded that the language of S
15-31-312, MCA, and A.R.M. S 42.26.264 do not encompass the
use of nonstop flyover miles in the numerator of the appor-
tionment formula. DOR contends that a formula which has all
of the miles Northwest flies in the denominator but ignores
80% of the miles Northwest flies in the numerator does not
fairly represent the extent of Northwest's business activity
in Montana. Each of the statutes explaining the factors to
be used in the apportionment formula refer to use, payment,
-
sale or performance "in this state." The relief provision of
§ -
15-31-312, MCA, refers to activity "in this state." DOR1s
administrative rule for freight and passenger carriers refers
to "miles traveled within Montana" for the formula's numera-
tor. The flyover flights of Northwest have no contact with
Montana. They do not land or take off here. DOR concedes
these flights do not even have radio contact with Montana.
The language of the statutes expresses no intent to consider
activity other than that in Montana. Construing this lan-
guage in favor of the taxpayer, as we must, Nice v. Montana
(1973), 161 Mont. 448, , 507 P.2d 527, 530, we find that
DOR had no statutory authority to include nonstop flyover
miles in the numerator of the apportionment formula.
The administrative decision of DOR's auditor to include
nonstop flyover miles in the numerator of the apportionment
formula was not an inconsequential matter. It increased
Northwest's tax 490% in 1973, 414% in 1974, 404% in 1976,
383% in 1977 and 505% in 1978 (there was no profit to tax in
1975). The inclusion of overflight mileage in the statutory
apportionment formula "implements, interprets or prescribes
law or policy" and thus qualifies as a rule by statutory
definition. Section 2-4-102 (lo), MCA. A rule to be valid
must be adopted after notice and hearing in conformity with
5 2-4-302, MCA. Here, there was no compliance with MAPA's
rulemaking requirements and the auditor's unilateral decision
to include overflight mileage in the numerator of the appor-
tionment formula fails for noncompliance with MAPA
requirements.
Accordingly, we hold that using nonstop flyover miles
in the numerator of the apportionment formula did not comply
with statutes or administrative rules and did not fairly
represent Northwest's business activity within Montana as
contemplated by statute. Lest we be misunderstood, we cau-
tion that nothing herein contained is intended to bar the use
of nonstop flyover miles in both the numerator and denomina-
tor of the apportionment formula under appropriate statutory
language and duly enacted administrative rule.
We neither reach nor decide the state or federal con-
stitutional objections to the deficiency assessment imposed
against Northwest in this case. Under the time honored rule
that a court will decide an appeal on nonconstitutional
grounds if possible and decide constitutional issues only if
necessary to the decision, we leave such issues for another
day.
Finally, DOR contends that the District Court should
have considered a proposed alternative formula. The issues
presented to the District Court concerned the particular
formula and tax used by DOR against Northwest. The District
Court's function was to decide whether the same was unlawful.
It did so in granting Northwest's motion for summary judg-
ment. To rule on DOR's proposed alternate formula which
would not used by them in computing the tax owed by Northwest
would exceed its jurisdiction, and this Court's as well.
Affirmed.
ono or able' Fr/ank ' .' Haswell,
I \
Retired Chief Justice, sitting
in place of Mr. Justice L. C.
Gulbrandson
We concur: /
Justices
Justice John C. Sheehy, concurring and specially concurring:
I concur in the above opinion.
After oral argument was had in this case, a few editors
in the State had some querulous comments to make concerning
the State's argument that airline overflights, not touching
in the State, should nevertheless be included in the
numerator of the mileage factor to determine a fair income
tax for the airline.
It will doubtless astound those editors to learn that
the State's proposal is not unique; that a number of states
use such overflight mileage in determining an airline's
income taxes; that this airline particularly suggested such a
method in lieu of another to the State of Minnesota; that the
method is neither illegal nor unfair; and that the
legislature and the department of revenue may well consider
such a factor as they revamp their laws and regulations to
cover the hole in the income tax law pointed out in this
Court's opinion.
The use of overflight mileage in the factor stems from
allocation of labor costs as one of the criteria to determine
a fair tax. When airplanes are flying over the State, the
labor force that put the plane there, and operates it, is
generating income for the airline, income that would
otherwise escape income taxation by the state overflown or by
any other state.
The establishment of a good business climate in this
state should not be clouded by poor income tax planning,
especially when the taxpayer has suggested the method as a
fair one.
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