Commonwealth Edison Co. v. Montana
453 U.S. 609 (1981)

Annotate this Case

U.S. Supreme Court

Commonwealth Edison Co. v. Montana, 453 U.S. 609 (1981)

Commonwealth Edison Co. v. Montana

No. 80-581

Argued March 30, 1981

Decided July 2, 1981

453 U.S. 609

APPEAL FROM THE SUPREME COURT OF MONTANA

Syllabus

Montana imposes a severance tax on each ton of coal mined in the State, including coal mined on federal land. The tax is levied at varying rates depending on the value, energy content, and method of extraction of the coal, and may equal, at a maximum, 30% of the "contract sales price." Appellants, certain Montana coal producers and 11 of their out-of-state utility company customers, sought refunds, in a Montana state court, of severance taxes paid under protest and declaratory and injunctive relief, contending that the tax was invalid under the Commerce and Supremacy Clauses of the United States Constitution. Without receiving any evidence, the trial court upheld the tax, and the Montana Supreme Court affirmed.

Held:

1. The Montana severance tax does not violate the Commerce Clause. Pp. 453 U. S. 614-629.

(a) A state severance tax is not immunized from Commerce Clause scrutiny by a claim that the tax is imposed on goods prior to their entry into the stream of interstate commerce. Any contrary statements in Heisler v. Thomas Colliery Co.,260 U. S. 245, and its progeny are disapproved. The Montana tax must be evaluated under the test set forth in Complete Auto Transit, Inc. v. Brady,430 U. S. 274, 430 U. S. 279, whereby a state tax does not offend the Commerce Clause if it

"is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to services provided by the State."

Pp. 453 U. S. 614-617.

(b) Montana's tax comports with the requirements of the Complete Auto Transit test. The tax is not invalid under the third prong of the test on the alleged ground that it discriminates against interstate commerce because 90% of Montana coal is shipped to other States under contracts that shift the tax burden primarily to non-Montana utility companies, and thus to citizens of other States. There is no real discrimination, since the tax is computed at the same rate regardless of the final destination of the coal and the tax burden is borne according to the amount of coal consumed, not according to any distinction between in-state and out-of-state consumers. Nor is there any merit to

Page 453 U. S. 610

appellants' contention that they are entitled to an opportunity to prove that the tax is not "fairly related to the services provided by the State" by showing that the amount of the taxes collected exceeds the value of the services provided to the coal mining industry. The fourth prong of the Complete Auto Transit test requires only that the measure of the tax be reasonably related to the extent of the taxpayer's contact with the State, since it is the activities or presence of the taxpayer in the State that may properly be made to bear a just share of the state tax burden. Because it is measured as a percentage of the value of the coal taken, the Montana tax, a general revenue tax, is in proper proportion to appellants' activities within the State, and, therefore, to their enjoyment of the opportunities and protection which the State has afforded in connection with those activities, such as police and fire protection, the benefit of a trained workforce, and the advantages of a civilized society. The appropriate level or rate of taxation is essentially a matter for legislative, not judicial, resolution. Pp. 453 U. S. 617-629.

2. Nor does Montana's tax violate the Supremacy Clause. Pp. 453 U. S. 629-636.

(a) The tax is not invalid as being inconsistent with the Mineral Lands Leasing Act of 1920, as amended. Even assuming that the tax may reduce royalty payments to the Federal Government under leases executed in Montana, this fact alone does not demonstrate that the tax is inconsistent with the Act. Indeed, in § 32 of the Act, Congress expressly authorized the States to impose severance taxes on federal lessees without imposing any limits on the amount of such taxes. And there is nothing in the language or legislative history of the Act or its amendments to support appellants' assertion that Congress intended to maximize and capture through royalties all "economic rents" (the difference between the cost of production and the market price of the coal) from the mining of federal coal, and then to divide the proceeds with the State in accordance with the statutory formula. The history speaks in terms of securing a "fair return to the public" and if, as was held in Mid-Northern Oil Co. v. Walker,268 U. S. 45, the States, under § 32, may levy and collect taxes as though the Federal Government were not concerned, the manner in which the Federal Government collects receipts from its lessees and then shares them with the States has no bearing on the validity of a state tax. Pp. 453 U. S. 629-633.

(b) The tax is not unconstitutional on the alleged ground that it frustrates national energy policies, reflected in several federal statutes, encouraging production and use of coal, and appellants are not entitled to a hearing to explore the contours of these national policies and to adduce evidence supporting their claim. General statements in federal statutes reciting the objective of encouraging the use of coal do not

Page 453 U. S. 611

demonstrate a congressional intent to preempt all state legislation that may have an adverse impact on the use of coal. Nor is Montana's tax preempted by the Powerplant and Industrial Fuel Use Act of 1978. Section 601(a)(2) of that Act clearly contemplates the continued existence, not the preemption, of state severance taxes on coal. Furthermore, the legislative history of that section reveals that Congress enacted the provision with Montana's tax specifically in mind. Pp. 453 U. S. 633-636.

___ Mont. ___, 615 P.2d 87, affirmed.

MARSHALL, J., delivered the opinion of the Court in which BURGER, C.J., and BRENNAN, STEWART, WHITE, and REHNQUIST, JJ., joined. WHITE, J., filed a concurring opinion, post, p. 453 U. S. 637. BLACKMUN, J., filed a dissenting opinion, in which POWELL and STEVENS, JJ., joined, post, p. 453 U. S. 638.

Page 453 U. S. 612

JUSTICE MARSHALL delivered the opinion of the Court.

Montana, like many other States, imposes a severance tax on mineral production in the State. In this appeal, we consider whether the tax Montana levies on each ton of coal mined in the State, Mont.Code Ann. § 15-35-101 et seq. (1979), violates the Commerce and Supremacy Clauses of the United States Constitution.

I

Buried beneath Montana are large deposits of low-sulfur coal, most of it on federal land. Since 1921, Montana has imposed a severance tax on the output of Montana coal mines, including coal mined on federal land. After commissioning a study of coal production taxes in 1974, see House Resolutions Nos. 45 and 93, Senate Resolution No. 83, 1974 Mont. Laws 1619-1620, 1653-1654, 1683-1684 (Mar. 14 and

Page 453 U. S. 613

16, 1974); Montana Legislative Council Fossil Fuel Taxation (1974), in 1975, the Montana Legislature enacted the tax schedule at issue in this case. Mont.Code Ann. § 15-35-103 (1979). The tax is levied at varying rates depending on the value, energy content. and method of extraction of the coal, and may equal, at a maximum, 30% of the "contract sales price." [Footnote 1] Under the terms of a 1976 amendment to the Montana Constitution, after December 31, 1979, at least 50% of the revenues generated by the tax must be paid into a permanent trust fund, the principal of which may be appropriated only by a vote of three-fourths of the members of each house of the legislature. Mont. Const., Art. IX, § 5.

Appellants, 4 Montana coal producers and 11 of their out-of-state utility company customers, filed these suits in Montana state court in 1978. They sought refunds of over $5.4 million in severance taxes paid under protest, a declaration that the tax is invalid under the Supremacy and Commerce Clauses, and an injunction against further collection of the tax. Without receiving any evidence, the court upheld the tax and dismissed the complaints.

On appeal, the Montana Supreme Court affirmed the judgment of the trial court. ___ Mont. ___, 615 P.2d 847 (1980). The Supreme Court held that the tax is not subject to scrutiny under the Commerce Clause [Footnote 2] because it is imposed on the severance of coal, which the court characterized as an intrastate activity preceding entry of the coal into interstate

Page 453 U. S. 614

commerce. In this regard, the Montana court relied on this Court's decisions in Heisler v. Thomas Colliery Co.,260 U. S. 245 (1922), Oliver Iron Mining Co. v. Lord,262 U. S. 172 (1923), and Hope Natural Gas Co. v. Hall,274 U. S. 284 (1927), which employed similar reasoning in upholding state severance taxes against Commerce Clause challenges. As an alternative basis for its resolution of the Commerce Clause issue, the Montana court held, as a matter of law, that the tax survives scrutiny under the four-part test articulated by this Court in Complete Auto Transit, Inc. v. Brady,430 U. S. 274 (1977). The Montana court also rejected appellants' Supremacy Clause [Footnote 3] challenge, concluding that appellants had failed to show that the Montana tax conflicts with any federal statute.

We noted probable jurisdiction, 449 U.S. 1033 (1980), to consider the important issues raised. We now affirm.

II

A

As an initial matter, appellants assert that the Montana Supreme Court erred in concluding that the Montana tax is not subject to the strictures of the Commerce Clause. In appellants' view, Heisler's "mechanical" approach, which looks to whether a state tax is levied on goods prior to their entry into interstate commerce, no longer accurately reflects the law. Appellants contend that the correct analysis focuses on whether the challenged tax substantially affects interstate commerce, in which case it must be scrutinized under the Complete Auto Transit test.

We agree that Heisler's reasoning has been undermined by more recent cases. The Heisler analysis evolved at a time when the Commerce Clause was thought to prohibit the States from imposing any direct taxes on interstate commerce.

Page 453 U. S. 615

See, e.g., Helson Randolph v. Kentucky,279 U. S. 245, 279 U. S. 250-252 (1929); Ozark Pipe Line Corp. v. Monier,266 U. S. 555, 266 U. S. 562 (1925). Consequently, the distinction between intrastate activities and interstate commerce was crucial to protecting the States' taxing power. [Footnote 4]

The Court has, however, long since rejected any suggestion that a state tax or regulation affecting interstate commerce is immune from Commerce Clause scrutiny because it attaches only to a "local" or intrastate activity. See Hunt v. Washington Apple Advertising Comm'n,432 U. S. 333, 432 U. S. 350 (1977); Pike v. Bruce Church, Inc.,397 U. S. 137, 397 U. S. 141-142 (1970); Nippert v. Richmond,327 U. S. 416, 327 U. S. 423-424 (1946). Correspondingly, the Court has rejected the notion that state taxes levied on interstate commerce are per se invalid. See, e.g., Washington Revenue Dept. v. Association of Wash. Stevedoring Cos.,435 U. S. 734 (1978); Complete Auto Transit, Inc. v. Brady, supra. In reviewing Commerce Clause challenges to state taxes, our goal has instead been to "establish a consistent and rational method of inquiry" focusing on "the practical effect of a challenged tax." Mobil Oil Corp. v. Commissioner of Taxes,445 U. S. 425, 445 U. S. 443 (1980). See Moorman Mfg. Co. v. Bair,437 U. S. 267, 437 U. S. 276-281 (1978); Washington Revenue Dept. v. Association of Wash. Stevedoring

Page 453 U. S. 616

Cos., supra, at 435 U. S. 743-751; Complete Auto Transit, Inc. v. Brady, supra, at 430 U. S. 277-279. We conclude that the same "practical" analysis should apply in reviewing Commerce Clause challenges to state severance taxes.

In the first place, there is no real distinction -- in terms of economic effect -- between severance taxes and other types of state taxes that have been subjected to Commerce Clause scrutiny. [Footnote 5] See, e.g., Michigan-Wisconsin Pipe Line Co. v. Calvert,347 U. S. 157 (1954); Joseph v. Carter & Weekes Stevedoring Co.,330 U. S. 422 (1947); Puget Sound Stevedoring Co. v. State Tax Comm'n,302 U. S. 90 (1937), both overruled in Washington Revenue Dept. v. Association of Wash. Stevedoring Cos., supra. [Footnote 6] State taxes levied on a "local" activity preceding entry of the goods into interstate commerce may substantially affect interstate commerce, and this effect is the proper focus of Commerce Clause inquiry. See Mobil Oil Corp. v. Commissioner of Taxes, supra, at 445 U. S. 443. Second, this Court has acknowledged that "a State has a significant interest in exacting from interstate commerce its fair share of the cost of state government," Washington Revenue Dept. v. Association of Wash. Stevedoring Cos., supra, at 435 U. S. 748. As the Court has stated, "[e]ven interstate business must pay its way.'" Western Live Stock v. Bureau of Revenue,303 U. S. 250, 303 U. S. 254 (1938), quoting Postal Telegraph, Cable

Page 453 U. S. 617

Co. v. Richmond,249 U. S. 252, 249 U. S. 259 (1919). Consequently, the Heisler Court's concern that a loss of state taxing authority would be an inevitable result of subjecting taxes on "local" activities to Commerce Clause scrutiny is no longer tenable.

We therefore hold that a state severance tax is not immunized from Commerce Clause scrutiny by a claim that the tax is imposed on goods prior to their entry into the stream of interstate commerce. Any contrary statements in Heisler and its progeny are disapproved. [Footnote 7] We agree with appellants that the Montana tax must be evaluated under Complete Auto Transit's four-part test. Under that test, a state tax does not offend the Commerce Clause if it

"is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to services provided by the State."

430 U.S. at 430 U. S. 279.

B

Appellants do not dispute that the Montana tax satisfies the first two prongs of the Complete Auto Transit test. As the Montana Supreme Court noted, "there can be no argument here that a substantial, in fact, the only, nexus of the severance of coal is established in Montana." ___ Mont. at ___, 615 P.2d at 855. Nor is there any question here regarding apportionment or potential multiple taxation, for as the state court observed, "the severance can occur in no other state" and "no other state can tax the severance." Ibid. Appellants do contend, however, that the Montana tax is invalid under the third and fourth prongs of the Complete Auto Transit test.

Appellants assert that the Montana tax "discriminate[s] against interstate commerce" because 90% of Montana coal is shipped to other States under contracts that shift the tax burden primarily to non-Montana utility companies, and thus

Page 453 U. S. 618

to citizens of other States. But the Montana tax is computed at the same rate regardless of the final destination of the coal, and there is no suggestion here that the tax is administered in a manner that departs from this evenhanded formula. We are not, therefore, confronted here with the type of differential tax treatment of interstate and intrastate commerce that the Court has found in other "discrimination" cases. See, e.g., Maryland v. Louisiana,451 U. S. 725 (1981); Boston Stock Exchange v. State Tax Comm'n,429 U. S. 318 (1977); cf. Lewis v. BT Investment Managers, Inc.,447 U. S. 27 (1980); Philadelphia v. New Jersey,437 U. S. 617 (1978).

Instead, the gravamen of appellants' claim is that a state tax must be considered discriminatory for purposes of the Commerce Clause if the tax burden is borne primarily by out-of-state consumers. Appellants do not suggest that this assertion is based on any of this Court's prior discriminatory tax cases. In fact, a similar claim was considered and rejected in Heisler. There, it was argued that Pennsylvania had a virtual monopoly of anthracite coal, and that, because 80% of the coal was shipped out of State, the tax discriminated against and impermissibly burdened interstate commerce. 260 U.S. at 251-253 [argument of counsel -- omitted]. The Court, however, dismissed these factors as "adventitious considerations." Id. at 260 U. S. 259. We share the Heisler Court's misgivings about judging the validity of a state tax by assessing the State's "monopoly" position or its "exportation" of the tax burden out of State.

The premise of our discrimination cases is that "[t]he very purpose of the Commerce Clause was to create an area of free trade among the several State." McLeod v. J. E. Dilworth Co.,322 U. S. 327, 322 U. S. 330 (1944). See Hunt v. Washington Apple Advertising Comm'n, 432 U.S. at 432 U. S. 350; Boston Stock Exchange v. State Tax Comm'n, supra, at 429 U. S. 328. Under such a regime, the borders between the States are essentially irrelevant. As the Court stated in West v. Kansas Natural Gas Co.,221 U. S. 229, 221 U. S. 255 (1911), "in matters of foreign

Page 453 U. S. 619

and interstate commerce, there are no state lines.'" See Boston Stock Exchange v. State Tax Comm'n, supra, at 429 U. S. 331-332. Consequently, to accept appellants' theory and invalidate the Montana tax solely because most of Montana's coal is shipped across the very state borders that ordinarily are to be considered irrelevant would require a significant and, in our view, unwarranted departure from the rationale of our prior discrimination cases.

Furthermore, appellants' assertion that Montana may not "exploit" its "monopoly" position by exporting tax burdens to other States cannot rest on a claim that there is need to protect the out-of-state consumers of Montana coal from discriminatory tax treatment. As previously noted, there is no real discrimination in this case; the tax burden is borne according to the amount of coal consumed, and not according to any distinction between in-state and out-of-state consumers. Rather, appellants assume that the Commerce Clause gives residents of one State a right of access at "reasonable" prices to resources located in another State that is richly endowed with such resources, without regard to whether and on what terms residents of the resource-rich State have access to the resources. We are not convinced that the Commerce Clause, of its own force, gives the residents of one State the right to control in this fashion the terms of resource development and depletion in a sister State. Cf. Philadelphia v. New Jersey, supra, at 437 U. S. 626. [Footnote 8]

Page 453 U. S. 620

In any event, appellants' discrimination theory ultimately collapses into their claim that the Montana tax is invalid under the fourth prong of the Complete Auto Transit test: that the tax is not "fairly related to the services provided by the State." 430 U.S. at 430 U. S. 279. Because appellants concede that Montana may impose some severance tax on coal mined in the State, [Footnote 9] the only remaining foundation for their discrimination theory is a claim that the tax burden borne by the out-of-state consumers of Montana coal is excessive. This is, of course, merely a variant of appellants' assertion that the Montana tax does not satisfy the "fairly related" prong of the Complete Auto Transit test, and it is to this contention that we now turn.

Appellants argue that they are entitled to an opportunity to prove that the amount collected under the Montana tax is not fairly related to the additional costs the State incurs because of coal mining. [Footnote 10] Thus, appellants' objection is to

Page 453 U. S. 621

the rate of the Montana tax, and even then, their only complaint is that the amount the State receives in taxes far exceeds the value of the services provided to the coal mining industry. In objecting to the tax on this ground, appellants may be assuming that the Montana tax is, in fact, intended to reimburse the State for the cost of specific services furnished to the coal mining industry. Alternatively, appellants could be arguing that a State's power to tax an activity connected to interstate commerce cannot exceed the value of the services specifically provided to the activity. Either way, the premise of appellants' argument is invalid. Furthermore, appellants have completely misunderstood the nature of the inquiry under the fourth prong of the Complete Auto Transit test.

The Montana Supreme Court held that the coal severance tax is "imposed for the general support of the government." ___ Mont. at ___, 615 P.2d at 856, and we have no reason to question this characterization of the Montana tax as a general revenue tax. [Footnote 11] Consequently, in reviewing appellants' contentions, we put to one side those cases in which the Court reviewed challenges to "user" fees or "taxes" that were designed and defended as a specific charge imposed by the State for the use of state-owned or state-provided transportation or other facilities and services. See, e.g., 405 U. S. S. 622

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