Appellants Brief — Commonwealth Edison Co. v. Montana

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No. 80-581

Office-Supreme Court, U.S.

IN THE JAN 22 1981

Supreme Court of the Wnited | tates... revs

OCTOBER TERM, 1980 CLERK

COMMONWEALTH EDISON COMPANY, CENTRAL ILLINOIS LIGHT COMPANY, DAIRY-

LAND POWER COOPERATIVE, DETROIT EDISON COMPANY, INTERSTATE POWER

COMPANY, LAKE SUPERIOR DISTRICT POWER COMPANY, LOWER COLORADO

RIVER AUTHORITY/CITY OF AUSTIN, MINNESOTA POWER & LIGHT COMPANY,

NORTHERN STATES POWER COMPANY, UPPER PENINSULA GENERATING COM-

PANY, WISCONSIN POWER & LIGHT COMPANY, DECKER COAL COMPANY,

PEABODY COAL COMPANY, WESTMORELAND RESOURCES, INC. and WESTERN

ENERGY COMPANY,

Appellants,

—against—

STATE OF MONTANA, TED SCHWINDEN, GOVERNOR OF MONTANA, HELEN J.

FEAVER, DIRECTOR OF THE STATE DEPARTMENT OF REVENUE, and MAURICE

L. BRUSETT, DIRECTOR OF ADMINISTRATION AND STATE TREASURER,

Appellees.

ON APPEAL FROM THE SUPREME COURT OF THE STATE OF MONTANA

BRIEF OF APPELLANTS

: WILLIAM J. CARL WILLIAM P. ROGERS

40 East Broadway Counsel of Record

Butte, Montana 59701 WILLIAM R. GLENDON

(406) 723-5421 STANLEY GODOFSKY

Attorney for Appellant STEPHEN PROLING

JAMES N. BENEDICT

Rogers & Wells

200 Park Avenue

Western Energy Company

Of Counsel:

New York, New York 10166

GEORGE J. MILLER (212) 972-7000

Dechert Price & Rhoads

717 Seventeenth Street PATRICK F. HOOKS

Denver, Colorado 80202 THOMAS A. BUDEWITZ

(303) 623-1777 218 Broadway

Attorney for Appellant Townsend, Montana 59644

(406) 266-3476

Westmoreland Resources, Inc.

Attorneys for Appellants

January, 1981

except Western Energy Company

IN THE

Supreme Court of the United States

OCTOBER TERM, 1980

COMMONWEALTH EDISON COMPANY, ef al.,

Appellants,

—against—

STATE OF MONTANA, ef al.,

Appellees.

ON APPEAL FROM THE SUPREME COURT OF THE STATE OF MONTANA

BRIEF OF APPELLANTS

QUESTIONS PRESENTED

This action, challenging the constitutionality of a 30%

severance tax imposed by the State of Montana on coal

mined in the state, presents the following questions:

1. Did the state court err in holding that the State of

Montana may, without violating the Commerce Clause,

tax without limit the severance of coal which is largely

federally owned and destined for immediate shipment to

other states?

2. Did the state court err in holding, without any

factual examination whatsoever, that the 30% severance

tax is “fairly related” to the services and protection

provided by the state to the taxpayer merely because

Montana affords the benefits of a civilized society?

3. Did the state court err in rejecting plaintiffs’ claim

that the Montana Coal Severance Tax discriminates

against interstate commerce notwithstanding the fact that

the tax was manifestly “tailored” to fall principally on

persons in states other than Montana?

4. Did the state court err in rejecting plaintiffs’ claim

that the Montana Coal Severance Tax violates the Su-

premacy Clause of the United States Constitution, despite

plaintiffs’ allegation and proffer of proof that the tax

substantially frustrates the effectiveness of federal stat-

utes intended to encourage the production and use of coal

in general, and particularly western coal, and despite

defendants’ admission, for purposes of the present pro-

ceeding, of the truth of the underlying facts?

5. Did the state court err in denying plaintiffs an

opportunity to prove at a trial their claim that the

Montana Coal Severance Tax violates the Supremacy

Clause of the United States Constitution, despite plain-

tiffs’ allegation and proffer of proof that the tax substan-

tially frustrates the national policy embodied in the

Mineral Lands Leasing Act of 1920 which reserved fe-

derally-owned coal to the federal government and allo-

cated the revenues, as between the states and the federal

government, in a fixed proportion?

PARTIES TO THE PROCEEDINGS BELOW

All of the parties appearing in the Supreme Court of

the Stare of Montana are listed in the caption, except

that, pursuant to Supreme Court Rule 40.3, Ted Schwin-

den, Helen J. Feaver and Maurice L. Brusett have been

substituted as defendants for Thomas L. Judge, Mary

Craig and David M. Lewis, respectively.

TABLE OF CONTENTS

REAPER BMSEOE WIMMEEEEU SIGE) ccc ccccecsccccccces

PARTIES TO THE PROCEEDINGS BELOW ....

MERE MIE MAPS EEIT ED cc ccccaercccsccccceoses

JURISDICTIONAL BASIS OF THIS APPEAL ..

CONSTITUTIONAL PROVISIONS AND STAT-

IEEE oA cob bib esveracinccvdte dene

ECM IIIS Gad Ga winvoiqgicin stvisie's 00 tne

PEO PROCOPEIES BEIOW onc cc cc vcctccnvece

SUMMARY OF ARGUMENT..................

EE ee ee

I ale a i a oak ad Wave s5.4 ob ea eek

I. A STATE TAX ON AN ACTIVITY WHICH

“SUBSTANTIALLY AFFECTS” INTER-

STATE COMMERCE, WHETHER OR NOT

“IN” INTERSTATE COMMERCE, IS NOT

IMMUNE FROM SCRUTINY UNDER AN

APPROPRIATE COMMERCE CLAUSE

MCRL AG Ree RCs ee OREO CUE ERE ORC ER OSD KS

THE APPROPRIATE COMMERCE

CLAUSE TEST HERE REQUIRES A

FACTUAL DETERMINATION WHETHER

THE TAX IS FAIRLY RELATED TO BEN-

EFITS PROVIDED BY THE STATE AND

WHETHER IT DISCRIMINATES AGAINST

INTERSTATE COMMERCE 2. .0cscccccess

A. Plaintiffs’ Claim that the Tax is Not Fairly

Related to Benefits and Services Provided

by the State Should Not Have Been Dis-

missed WithOUt © TT 665000 c be ewee soos

B. Plaintiffs’ Claim that the Tax Discrimi-

nates Against Interstate Commerce Should

Not Have Been Dismissed Without a Trial

THE TAX SUBSTANTIALLY FRUS-

TRATES NATIONAL POLICIES WITH RE-

SPECT TO THE PRODUCTION AND USE

OF COAL AND SHOULD BE DECLARED

INVALID UNDER THE SUPREMACY

CLAUEis.o cs ond vigedve tpi Se eeee eee:

A. National Energy Policy, as Reflected in

Federal Statutes and Regulations, Favors

the Increased Production of Coal Gener-

ally and of Low Sulphur, Western Coal in

POTION 06600483 ees ee

1. The National Policy to Encourage

Coml PYORMIION «. gi soars pexeabeeus

2. The National Policy to Encourage

Production of Western, Low Sulphur

PAGE

ill

PAGE

B. The Issue of “Substantial Frustration”

Raises Questions of Fact which Require a

ee ee es base ee bane 4]

IV. THE TAX SUBSTANTIALLY FRUS-

TRATES THE FEDERAL STATUTORY

DIVISION OF ROYALTIES FROM FED-

ERAL COAL DEPOSITS AND SHOULD

BE HELD INVALID UNDER THE SU-

CRIES 6 sos bv ectevace es tiaeus 46

CCR Cincy deccccectccatcvevces 50

TABLE OF AUTHORITIES

PAGE

Cases

Alaska v. Arctic Maid, 366 U.S. 199 (1961)....... 20

Arizona Public Service Co. v. Snead, 441 U.S. 141

CECE. ou Ce CUCU a haWORRE WSS EA UE NEY ECE e 19, 21

Austin v. New Hampshire, 420 U.S. 656 (1975)... 28

Budget Rent-a-Car of Washington-Oregon, Inc. v.

Multnomah County, 287 Or. 93, 597 P.2d 1232

ete cay cn 60 KA ORR SOY EMAC EN ECO M084 31

Buttrell v. McBride Land & Livestock, 170 Mont.

i ee Pe I AEP conceit ccs tseeeeszaes 46

Capitol Greyhound Lines v. Brice, 339 U.S. 542

Ne ae hs ei ned Kae bee On A 32

Carter v. Carter Coal Co., 298 U.S. 238

SG eC hed eG eatin eo ae Wee bo ek 4 0ke 8 17, 24

Clark v. Paul Gray, Inc., 306 U.S. 583 (1939)..... 32

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274

SPR an o's G4ne bien a eweanaae 13, 15, 24, 27-29, 32

Crow Tribe of Indians v. State of Montana, 469

F. Supp. 154 (D. Mont. 1979), appeal pending,

Ce ae Ss ED SG cin ak 0b o555 ces coed 25

Dayton Power & Light Co. v. Lindley, 58 Ohio St.

2 GES, SEe FA TIO LEGION oc cake vcteece aris 33

Dixie Ohio Express Co. v. State Revenue Commis-

ee Cs Fe Cee ahh Supe ea ceeetawess 32

PREVIOUS PAGE WAS BLANK

PAGE

Dunbar-Stanley Studios, Inc. v. Alabama, 393 U.S.

ee EE ena WKis stale ed we Hy 6 Xa BA bo 40s ons 20

Evansville Airport v. Delta Airlines, Inc., 405 U.S.

Es Pk o dk Soe oe SRS AAS be Chk e 00 wb on 32

Exxon Corp. v. Governor of Maryland, 437 U.S.

ES a irs ado ON kd CK aed Oe BER ae o 44

Exxon Corp. v. Wisconsin Department of Revenue,

Ps ee RE ks Pare bcd ea ewe eee eoees 28

H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525

NE te ae aia S Na'e 'd'0rg Bd wd DA ae de de ead 25, 26

Heart of Atlanta Motel, Inc. v. United States, 379

J Re. BADR Soar rene an Gomme 19

Heisler v. Thomas Colliery Co., 260 U.S. 245

SL et aikts gas b- a-ak hk o.0 8.064) 14, 15, 17, 18, 20-23

Hill v. Florida, 325 U.S. 538 (1945).......... 16, 43, 44

Hines v. Davidowitz, 312 U.S. 52 (1941)......... 42, 49

Hope Gas Co. v. Hall, 274 U.S. 284 (1927)....... 17

Hunt v. Washington Apple Advertising Commis-

Ee Was Be CET Os ose cxtnesdockescuss 19

Ingels v. Morf, 300 U.S. 290 (1937). .........0005 32

Japan Line, Ltd. v. County of Los Angeles, 441

ee os ne winae ab ahU ub nn'ale 6 mb ald We 28, 31

Jones v. Rath Packing Co., 430 U.S. 519

TL RAN aia WO kai k am ace oko Ko ike Rae 16, 42-44

Katzenbach v. McClung, 379 U.S. 294 (1964)..... 19

Lewis v. BT Investment Managers, Inc., 100 S. Ct.

EER ee Re YE nee ey a ae sae 19

Vii

PAGE

Maryland v. Louisiana, No. 83 Original (October

Te WONEED nse eie eh s be aedaaebaueuseeee 30

McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316

SON cab a do Se be HAs Ch eke pee eee ae 41

McGoldrick v. Berwind-White Coal Mining Co..,

FP Bs FR CR 0 xe Clickee 27

McGoldrick v. Gulf Oil Corp., 309 U.S. 414 (1940) 41

McLain v. Real Estate Board, 444 U.S. 232 (1980). 19

Merrion v. Jicarilla Apache Tribe, 617 F.2d 537

(10th Cir.) (en banc), cert. granted, 101 S. Ct. 71

RENEE ire 6-x bine oitcac A acbayk a os ates bean 25, 31

Michigan-Wisconsin Pipe Line Co. v. Calvert, 347

ese Re EE cic So 805 bbs cl bek eee 23

Mid-Northern Co. v. Montana, 268 U.S. 45 (1925) 49

Mobil Oil Corp. v. Commissioner of Taxes, 445

SD aie: MR EUOD 6. o's 5's ook'e v's be wee oe Meee 23, 28

Moe v. Salish & Kootenai Tribes, 425 U.S. 463

sso 0. wicw ite a 9 sd bw sc ac ae 41

Moorman Manufacturing Co. v. Bair, 437 U.S. 267

1s | PR Aen el LR Mas MAE II LT 32

NLRB vy. Jones & Laughlin Steel Corp., 301 U.S. 1

are hee Pe mam pape Rete rte) rs 18

Nash v. Florida Industrial Commission, 389 U.S.

a ERUUEED i kia wit wkied sn we aecenanebeasetae 43

National Geographic Society v. California Equal-

ization Board, 430 U.S. 551 (1977) ............ 28

New Jersey Insurance Co. v. Division of Tax Ap-

OGD, Fae Uh ee LOO 5 vin vo dae banwucoteki 41

Vili

PAGE

Nippert v. City of Richmond, 327 U.S. 416

ad Wie es 42 bakes bb eae Sas ee ets 20, 22, 33

Norfolk & W.R. Co. v. Tax Commission, 390 U.S.

ig ii ane 0-6 40a cA eeNs ee Renee bee 32

Oliver Iron Mining Co. v. Lord, 262 U.S. 172

|. eee eee error ee er ee 17

Parker v. Brown, 317 U.S. 341 (1943)............ 20

Perez v. Campbell, 402 U.S. 637 (1971).......... 42, 43

Philadelphia v. New Jersey, 437 U.S. 617 (1978)... 19

Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) . .20, 21

Ray v. Atlantic Richfield Co., 435 U.S. 151 (1978) = 42

Raymond Motor Transport, Inc. v. Rice, 434 U.S.

ER rae cb ds SSRs bw eee we ded Vek ep tie 28

United States v. Wrightwoc | Dairy Co., 315 U.S.

Sa sig ig cg Wake hid (6+ hea wae RS 18

Washington Revenue Department v. Stevedoring

Association, 435 U.S. 734 (1978)... ...ecccveee 28, 31

Weston v. The City Council of Charleston, 27 U.S.

eg. SE |. Sere Tee Te eee eee ee 41

Wickard v. Filburn, 317 U.S. 111 (1942)......... 18, 21

Constitutions, Statutes & Regulations

Clean Air Act of 1970, Pub. L. No. 91-604, 84 Scat.

1676 et seq., as amended, 42 U.S.C. (Supp. III

Se OE ON fo wine ads ce ee encu eens pews . ee

Pity OF is SES cc ccc tee tccess) beaeees 38

PAGE

Code of Federal Regulations:

Reet EE RENTED bn tuk % Oa ck ee te eeas 38

SO C.F.R. § GO.45(A ZN I972)-<. ccc ov ccoce 38

Energy Policy and Conservation Act of 1975, Pub.

L. No. 94-163, 89 Stat. 871, 42 U.S.C. §§ 6201 ef

SOG. TARTS GE OUD, TIN BUTE) ove cccccesvcvbes 5

§ 2(6), 89 Stat. 874, 42 U.S.C. § 6201(6)

EN sede sec eaawad¥eeens eink nebo cadue 36

Energy Reorganization Act of 1974, Pub. L. No.

eS BOD oo che ouch w bude ue 4s baaen 5

Energy Research and Development Administration

Act (Authorizations and Appropriations for

1977), Pub. L. No. 95-39, 91 Stat. 180......... 5

Energy Supply and Environmental Coordination

Act of 1974, Pub. L. No. 93-319, 88 Stat. 246, 15

U.S.C. §§ 791 et seq. (1976 & Supp. III 1979)... 5

Federal Coal Leasing Amendments Act of 1975,

PWO.. be 190, HOST, Ge weet. TORS. oc ieccviccedes 5, 46

Federal Land Policy and Management Act of 1976,

Pub. L. No. 94-579, 90 Stat. 2743 .............. 11

§ 317, 90 Stat. 2770, 30 U.S.C. § 191 (1976). 11

Federal Non-Nuclear Energy Research and Devel-

opment Act of 1974, Pub. L. No. 95-577, 88 Stat.

1878, 42 U.S.C. §§ 5901 et seq. (1976 & Supp. III

SEE i Oo Ok CEs Oy NES KK AMER SOLE ORES 5

PAGE

Mineral Lands Leasing Act of 1920, ch. 85, 41 Stat.

OF) i wkduas seek eee saonenaee eyed 5, 14, 16, 46-50

ch. 85, 8§ 1-2, 4) Stat. 437-36 occ ccecnecs 47

ch. 85, § 32, 41 Stat. 450, 30 U.S.C. § 189

CRN. oc waxes MRRP eee ete 48

Ce. Hay. Bes GR TR Gi ab vn cee ence reas 47

MONT. CODE ANN. (1979):

Bo SS Seer oe rer rrr ere 10

Be rer rrr yy ee Pere 10

SP is 6b 6s bao ereesnnebebereienee 12

G SR Sa wic ce x sone dalek pees eu 12

SS iva ks wean decenusay neuen 12

Oe Gaerne ee Oe Ms io nck vn shockekabeie 10

Oe Een Oe Oe 6 4b 5s dh eeeeceveee een 4

SS SemrnUn Dos au ny 005 Keb ee ere renee 30

5 RR dey 05 baked dh soees yee eee 7

S SSN a4 oss ocdnandeaecatenabanuenues 10

EA rr ere entire i re 10

MONT. CONST.::

WRG Riteks calcd e30s a eaeetane 1]

are DOOM. Ei, Ce. GOO. ca kkk rico odsaeeecass 12

PAGE

Natural Gas Policy Act of 1978, Pub. L. No. 95-

621, 92 Stat. 3350, 15 U.S.C. (Supp. III 1979)

eet hace ceeeb dsb eke ae 5

Powerplant and Industrial Fuel Use Act of 1978,

Pub. L. No. 95-620, 92 Stat. 3289, 42 U.S.C.

(Supp. III 1979) §§ 8301 ef seg. ..........0 00 ee a, 2

§102(6X(3), 92 Stat. 3291, 42 U.S.C.

(Supp. III 1979) §8301 (b)(3)............. 37

§201, 92 Stat. 3298, 42 U.S.C. (Supp III

ee hard ha aw geo sh ee eee aes 37, 44

§301, 92 Stat. 3305-6, 42 U.S.C. (Supp. III

ae aka 4 an eK MOO 0868's 37,44

PEED CESIG) ccc ce sec cccccescsvec’s 4

U.S. CONST.:

ee ee eee 4

EE en ee 4, 36

WYO. STAT. (1977 and Supp. 1980):

SN ee Le eee 9

ees, whe 605 KAN S rk deat en's 9

ee eee ee 9

ES eee 9

Legislative History

53 Cong. Rec. 980-81 (1916) (remarks of Rep.

ee eck hee eddsceces bes 46

58 Cong. Rec. 7646 (1919) (remarks of Rep. Mon- |

gE iW ie cnc tee wre sbeseene 48

Xli

H.R. Rep. No. 95-496 (Part IV), 95th Cong., 2d

Sess., reprinted in [1978] U.S. Code Cong. & Ad.

POE ER Cae back awhtede 6 cade be bac ORO See

H.R. Rep. No. 294, 95th Cong., Ist Sess., reprinted

in [1977] U.S. Code Cong. & Ad. News 1077-1577

H.R. Rep. No. 17 (Part 1), 64th Cong., Ist Sess. 3

SI. 5505'S Sikk oe REIL AE ea CR Es ee

H.R. Rep. No. 17 (Part 2), 64th Cong., Ist Sess. 8

CEDRGD TIOED WHUWED oon i oso o cach a cee uses

H.R. Rep. No. 668 (Part 2 ), 63d Cong., 2d Sess. 6

CP Rae Ce WIE ion Gk bees ch Cuixgiete bes

Remarks of Douglas M. Costle, Administrator of

the Environmental Protection Agency, [1978]

U.S. Code Cong. & Ad. News 8232............

S. Rep. No. 95-361, 95th Cong., 2d Sess., reprinted

in [1978] U.S. Code Cong. & Ad. News 8173 ...

Other Authorities

Brown, The Open Economy: Justice Frankfurter

and the Position of the Judiciary, 67 Yale L.J. 219

CRTs chen 065 ne CRe ORR Ns ees Rees ene aaa s

Bureau of Land Management of the Department of

Interior, Final Environmental Statement, Federal

Coal Management Program (April 1979) .......

T.O. Cohea, Coal Board Grants (January 11, 1978)

Developments in the Law: Federal Limitations on

State Taxation of Interstate Business, 75 Harv. L.

Bene, Fas CeWOEe picks o ciaxveseeuwe cobascebkends

PAGE

xiii

PAGE

Environmental Protection Agency, 7ables Relating

to New Standards for New Coal-Fired Power

Fre GH Bla COTO bei ve cbsan vi veaseabeses 39

R. Givens, Chief Justice Stone and the Developing

Functions of Judicial Review, 47 U. Va. L. Rev.

Se MED cdi wich vice beth vada soonvenensca nan’ 33

W. Hellerstein, Constitutional Constraints on State

and Local Taxation of Energy Resources, 31 Nat.

p eG fo. Serra errs 23; 33

James R. Schlesinger, Remarks before 61st Anniver-

sary Convention of the National Coal Association

(June 6, 1978) (unpublished Department of

Energy Release) ......ccsccerccccccscvcscvece 36

National Energy Plan IT (May 7, 1979)........++- 36

Kalispell Representative Says Coal Tax Too Low,

The Missoulian, January 11, 1975 ...........-.. 6

Posner, Economic Analysis of the Law (2d ed. 1977) = 23

President Carter, Statement on Signing National

Energy Bills (November 9, 1978), reprinted in

Weekly Compilation of Presidential Documents:

. a. Se . errr erry erry eee eee 36

Rand Corporation, Coal Development and Govern-

ment Regulation in the Northern Great Plains: A

Preliminary Report (August 1976) .........+5+- 5

Robinson, Office of the Montana Legislative Fiscal

Analyst, Coal Impact and Coal Board Grants

(September 20, 1977)... cccccccsvcvccvccscsses 11

C. Sands, Sutherland Statutory Construction (4th

ee th in akeh Kaee et ence ae eenes 38, 48

XiV

PAGE

Stern, The Commerce Clause and the National

Economy, 1933-1946, 59 Harv. L. Rev. 645 and

GREINER gr Re aU aS ee 19

Surface Mining Control and Reclamation Act of

1977: Hearings on S. 7 Before the Senate Sub-

committee on Public Lands and Resources of the

Senate Committee on Energy and Natural Re-

sources, 95th Cong., Ist Sess. (1977)........... 1]

Tribe, American Constitutional Law (1978)....... 32

Towe, Explanation of Reasons for Montana’s Coal

MU eh aes don tai cea be CEE e abe kes 34

U.S. Department of Energy, Energy Supply and

Demand in the Midterm: 1985, 1990, and 1995

NEES woun ada ea ob bce ess eb atalew aes 39

DECISION OF THE COURT BELOW

The decision of the Supreme Court of the State of

Montana, dated July 17, 1980, is reported at 615 P2d

847. It is also reprinted in the Appendix to the Jurisdic-

tional Statement at pages la-40a.*

JURISDICTIONAL BASIS OF THIS APPEAL

This is an appeal from a final judgment entered pur-

suant to the decision of the Supreme Court of the State of

Montana upholding the dismissal of Complaints challeng-

ing the constitutionality of the Montana Coal Severance

Tax. See MONT. CODE ANN. §§ 15-35-101 ef seq.

(1979). Judgment was deemed to have been entered on

July 17, 1980, when the decision of the court below was

docketed by the Clerk of the Supreme Court of the State

of Montana. Notices of Appeal were filed with the Clerk

of that court on October 2 and 6, 1980. This Court has

jurisdiction of this appeal by virtue of 28 U.S.C. § 1257

(2) (1976). Probable jurisdiction was noted at 49

U.S.L.W. 3428 (December 9, 1980).

CONSTITUTIONAL PROVISIONS AND

STATUTES INVOLVED

This case raises questions concerning the validity of the

Montana Coal Severance Tax under the Commerce and

Supremacy Clauses of the United States Constitution, art.

I, § 8, cl. 3 and art. VI, cl. 2, respectively, and many

federal statutes encouraging, mandating or regulating the

. “Apdx.” refers to the Appendix to the Jurisdictional Statement.

“J.A.” refers to the Joint Appendix.

use of coal.* The text of these authorities, insofar as

presently pertinent, is set out in the Appendix to appel-

lants’ Jurisdictional Statement.

STATEMENT OF THE CASE

In 1975, at the height of the energy crisis, Montana

increased its severance tax on coal to an unprecedented

30%. This case thus involves an attempt by one state,

having an abundant supply of a vital natural resource—

here low sulphur coal—to exact a tribute from the inhabi-

tants of her energy-poor sister states. Montana’s policy

has been described as one of “OPEC-like revenue max-

imization”, having no relationship to any legitimate needs

of the state.** As noted by one of its principal sponsors,

“fiJn the energy crunch today, Montanans should remem-

° E.g., Clean Air Act of 1970, Pub. L. No. 91-604, 84 Stat. 1676, as

amended, 42 U.S.C. (Supp. III 1979) §§ 7401 e¢ seq.; Energy Policy

and Conservation Act of 1975, Pub. L. No. 94-163, 89 Stat. 871, 42

U.S.C. §§ 6201 ef seq. (1976 & Supp. III 1979); Energy Reorganization

Act of 1974, Pub. L. No. 93-438, 88 Stat. 1233; Energy Research and

Development Administration Act (Authorizations and Appropriations

for 1977), Pub. L. No. 95-39, 91 Stat. 130; Energy Supply and

Environmental Coordination Act of 1974, Pu.o. L. No. 93-319, 88 Stat.

246, 15 U.S.C. §§ 791 et seq. (1976 & Supp. III 1979); Federal Coal

Leasing Amendments Act of 1975, Pub. ©. No. 94-377, 90 Stat. 1083;

Federal Non-Nuclear Energy Research and Development Act of 1974,

Pub. L. No. 95-577, 88 Stat. 1878, 42 U.S.C. §§ 5901 er seq. (1976 &

Supp. III 1979); Mineral Lands Leasing Act of 1920, ch. 85, 41 Stat.

437; Natural Gas Policy Act of 1978, Pub. L. No. 95-621, 92 Stat.

3350, 15 U.S.C. (Supp. III 197% §§ 3301 ef seq.; Powerplant and

Industrial Fuel Use Act of 1978, Pub. L. No. 95-620, 92 Stat. 3289, 42

U.S.C. (Supp. II] 1979) §§ 8301 ef seq.

o Rand Corporation, Coal Development and Government Regulation

in the Northern Great Plains: A Preliminary Report 148 (August 1976).

ber that the Arabs have the oil but Montana has the

es ea

Montana does not own any significant portion of this

coal. Indeed, three-quarters of the coal in Montana be-

longs to the federal government. Most of the remainder is

privately owned. What Montana here seeks to do is to

force the rest of the country to pay Montana an excessive

tax for the use of a vital natural resource fortuitously

located within its borders. While the tax is a severance tax

in form, it is in fact an export duty, since virtually all of

the coal subject to the tax is destined for interstate

shipment under long-term contracts which provide, in

effect, that the tax will be passed along to ultimate

consumers in other states.

Appellants have conceded from the outset that the

severance of natural resources within a state is an appro-

priate subject of that state’s taxation. They assert, how-

ever, that this state power is ultimately limited by both the

Commerce Clause and the Supremacy Clause, and that

the tax in question here must be struck down because it

imposes an undue burden on interstate commerce and

substantially frustrates the achievement of vital federal

policies.

Montana and its courts have taken the position that the

Constitution imposes no such limits on the power of that

state to impose such taxes. According to Montana, a tax

equal to 100%, or even 1,000% or 2,000%, of the value

of the coal may be imposed, and neither the Commerce

° Representative Ora Halvorson of Kalispell, Montana, Vice C hairman

of the Montana House Taxation Committee, quoted in Kalispell

Representative Says Coal Tax Too Low, The Missoulian, January 11,

1975.

Clause nor the Supremacy Clause can be invoked to

prevent it.

This case thus presents fundamental constitutional

questions of the state’s power to impose taxes in a factual

context of extreme importance. If ultimately upheld.

Montana’s Coal Severance Tax foreshadows a trend in

State taxation of energy resources which can only lead to

the Balkanization of this nation in the same way that

OPEC’s efforts have fragmented the world economy. The

far-reaching question presented by this appeal is whether

the United States Constitution limits the power of energy-

rich states to exact unlimited tribute in the form of taxes

from the rest of the country, where there is no legitimate

need for such taxes and the taxes, themselves, may have

adverse effects on interstate commerce and on national

policies designed to meet the energy needs of the nation.

The view of state power advanced by the court below

seriously jeopardizes the concept of a national free trade

area, the creation of which was the central purpose of the

Commerce Clause.

Statement of Facts

In 1975, in response to increased demand for low

sulphur coal generated largely by the Clean Air Act of

1970, and in the aftermath of the 1973 Arab oil embargo,

Montana increased its severance tax on coal to unprece-

dented levels. As a result, substantially all of the coal now

mined in the state is taxed at 30% of value.* This is, by

far, the highest rate in the nation. Coal taxed at the rate

° Value is defined as the “contract sales price,” i.e., the price of coal

after being extracted and prepared for shipment f.o.b. mine, less

production taxes. MONT. CODE ANN, § 15-35-102 (1979).

of 34 cents per ton prior to the 1975 amendment is now

typically taxed at the rate of $2.08 per ton, with some

taxpayers presently paying as much as $4.63 per ton. Ona

percentage basis, the increases from 1975 to date thus

amount to from 500% to 1,250%.

It is clear that the tax has a substantial effect on

interstate commerce and was always intended to do so. As

the Montana legislature well knew at the time this tax was

passed, the great bulk of coal mined in Montana is

immediately shipped out of state pursuant to long-term

coal purchase agreements which provide that the costs of

taxation will be passed along to the consuming utilities.

(Complaint 417; Apdx. 53a). These utilities, in turn,

adjust the price of electricity to their customers to reflect

increased fuel costs. In 1979, such out-of-state shipments

aggregated 28 million tons of coal, accounting for at least

90% of the value of Montana’s entire production. Plain-

tiffs paid severance taxes of about $60 million on these

shipments. Under the terms of existing contracts, they

estimate that the amount payable over the next two

decades will reach several billion dollars.

The fact that the tax would ultimately be borne by

consumers in other states loomed large in its adoption.

While the technical incidence of the tax is on the coal

producing plaintiffs in Montana, selection of coal as the

object of this extraordinary tax permitted the Montana

legislature to export the practical effect of the tax to

consumers in other states who are unable to vote in

Montana. For reasons such as these, the tax has enjoyed

unparalleled popularity within Montana. Since its pas-

sage, there has been no substantial opposition to it.

It is equally clear that the tax will have a substantial

adverse effect on the many efforts of Congress to shift

this nation’s energy reliance away from foreign petroleum

products and toward increased reliance upon coal. The

vast resources of coal found in the western United

States—much of it owned by the federal government—are

a cornerstone of these vital policies. The excessive costs

imposed by this tax manifestly tend to frustrate the

central purpose of the many statutes designed to en-

courage or mandate the use of coal.*

Montana finds itself able to exact taxes of this magni-

tude because of its unique position with respect to coal.

One-quarter of our entire national reserves, and over one-

half of our national reserves of low sulphur coal, are

located in Montana. Montana and Wyoming together

contain 40% of this nation’s coal and 68% of its low

sulphur reserves.** But this is not to say that the coal

“belongs” to Montana and Wyoming or comprises their

exclusive “birthright”. To the contrary, fully three-quar-

ters of these reserves have historically belonged to the

federal government and still belong to it.

Uninhibited by the sort of constituent pressure which

typically restrains excessive taxes, the Montana legislature

set the rate of the tax with an eye toward revenue-

maximization, in the mold of the OPEC nations, without

regard for any legitimate need. In fact, legislative findings

preceding the Montana statute clearly emphasize the in-

tent to appropriate most of the difference between the

° In this connection, the State of Texas appeared as amicus in the

court below in favor of plaintiffs. Texas and a number of other states

have already filed amicus briefs here, as well. Their representations to

this effect are compelling.

oe Wyoming and its subdivisions impose severance taxes which amount,

in the aggregate, to approximately 17%. See WYO. STAT. §§ 39-2-202,

39-2-402, 39-6-302(a)-(f), 39-6-303(a) (1977 and Supp. 1980).

market price and the cost of production (including a

reasonable profit),* rather than to meet the needs of the

state. See MONT. CODE ANN. § 15-35-101(1)(e) (1979);

Apdx. 62a-63a. When it adopted the severance tax in its

1974 and 1975 sessions, the legislature bypassed the usual

biennial budgeting process, in which needs are typically

balanced against revenues.

In this instance, the Montana legislature embarked on

an approach to state taxation which closely resembles the

approach taken by the OPEC nations and certain oil-rich

Canadian provinces. Montana went well beyond any

concept of its needs—looking instead to exploit the wind-

fall which might be available because of the existing

energy crisis—at the expense of its sister states.

Because the case was disposed of below on a motion to

dismiss, plaintiffs have never had an opportunity to make

a full factual record on this issue. Certain facts neverthe-

less show that the disparity between needs and revenues is

great.

1. Even without a severance tax, the costs of coal

mining which impact on the State of Montana would be

covered by other taxes** and by federal revenue programs

° This is referred to in the statute as the “economic rents.”

oe The State of Montana and its local subdivisions impose a number of

taxes on the mining of coal. For example, a resource indemnity trust

tax (MONT. CODE ANN. § 15-38-104 (1979)); a gross proceeds tax

(§ 15-6-132); a property tax on mining equipment (§ 15-6-138(b)); and

a corporate license tax (§ 15-31-101, e¢ seq.).

Moreover, all costs of reclamation must be borne by the coal

companies. In this regard, the state requires each company to purchase

a reclamation bond prior to the commencement of any mining opera-

tion in order to ensure that the land will be adequately reclaimed.

MONT. CODE ANN. § 82-4-338 (1979).

which predated the severance tax.* Thomas L. Judge,

then Governor of Montana, has testified that the state’s

share of the federal royalties alone was sufficient to cover

all of the state’s impact costs.** If any further confirma-

tion of this is necessary, it need only be noted that since

December 31, 1979, fully 50% of the entire severance tax

revenues have been deposited into a constitutional trust

fund for future generations which may not be used except

upon a three-quarters vote of both houses of future

legislatures. MONT. CONST. art. IX, § 5.

2. Experience now shows that legitimate needs have

already been met. This is confirmed by studies done by

the state, itself,*** and by the plaintiffs here. Moreover,

property tax rates in affected communities have been

reduced, not raised, since the onset of large-scale coal

mining, and the state, itself, has adopted general tax relief

° As noted, roughly 75% of the coal in Montana is actually owned by

the federal government. Under the Mineral Lands Leasing Act of 1920,

as amended, Montana is entitled to a direct rebate of 50% of all federal

royalties on mineral leases within its borders; additionally, the federal

government must use an additional 40% of such royalty revenues on

reclamation projects in the affected states. Federal Land Policy and

Management Act of 1976, Pub. L. No. 94-579, 90 Stat. 2743, 2770

(§ 317) (codified at 30 U.S.C. § 191 (1976)).

ned Surface Mining Control and Reclamation Act of 1977: Hearings on

S.7 Before the Senate Subcommittee on Public Lands and Resources of

the Senate Committee on Energy and Natural Resources, 95th Cong.,

Ist Sess. 629 (1977).

*** —T.O. Cohea, Coal Board Grants 15 (January 11, 1978); Robinson,

Office of the Montana Legislative Fiscal Analyst, Coal Impact and

Coal Board Grants 25-26 (September 20, 1977). Indeed, the Coal Board

has had a difficult time finding ways to spend all of the severance tax

revenues available, and has approved grants for projects which are

either well outside the coal-impacted areas or otherwise completely

unrelated to impact costs imposed on the state by coal mining. /d.

measures for its own citizens which were made possible

because of excessive severance tax revenues.*

In fact, while much has been made in public discussions

of the need for public funds for “boomtowns,” reclama-

tion and other legitimate costs, defendants have admitted

for purposes of the motion to dismiss that the tax is not

fairly related to the services and protections provided by

the state. (Complaint 4 26; Apdx. 55a). In support of this

allegation, plaintiffs expected to show through a compre-

hensive economic study they conducted that the legitimate

local impact costs—for schools, roads, police, fire and

health protection, and environmental protection and the

like—might amount to approximately 2¢ per ton, com-

pared to present average revenues from the severance tax

alone of over $2.00 per ton.

In sum, if they had had an opportunity for a trial

plaintiffs would have introduced evidence which would

have demonstrated that revenues expected from this tax

were grossly disproportionate to the services and protec-

tions provided by the state, however those services and

protections may be measured.

The Proceedings Below

In their Complaints, filed in June, 1978, plaintiffs

sought a refund of over $5.4 million in taxes paid under

protest, a declaration that the tax was invalid under the

Commerce and Supremacy Clauses of the United States

° E.g., 1979 Montana Laws, ch. 698; MONT. CODE ANN. §§ 15-30-

112, 15-30-114, 15-30-122, 15-30-142 (1979),

Constitution, and an injunction against its further collec-

tion.* (Complaint; Apdx. 45a-61a). Defendants moved to

dismiss all of the claims for failure to state claims upon

which relief could be granted, and the Montana trial

court granted defendants’ motion. (J.A. 30a-87a).

On appeal, the Montana Supreme Court passed on

these claims as follows:

1. The Montana Supreme Court rejected the conten-

tion that the tax constitutes an undue burden on interstate

commerce (Complaint 44 26, 27; Apdx. 55a), finding

“that the severance of coal here is a taxable event that

precedes entry into interstate commerce” and is “not an

interstate activity” and that, in such circumstances, the

Commerce Clause imposes no limit on the power of the

states to tax. (Opinion 15; Apdx. 18a).

In an alternative holding, the Montana Supreme Court

also found as a matter of law that the Montana tax meets

the “fairly-related” prong of the four-prong test set forth

in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274,

279 (1977), holding that the test was met in all cases

where the state provided the benefits of a civilized society,

(Opinion 19; Apdx. 22a-23a).

2. In Count Two, plaintiffs asserted that the Coal

Severance Tax substantially frustrates national policies

reflected in a variety of federal statutes intended to

° In each quarter since then, plaintiffs have filed additional Com-

plaints seeking a refund of successive quarterly tax payments. Addi-

tionally, Western Energy Company has filed separate Complaints. Ii

the aggregate, the total amount now in issue exceeds $135 million.

encourage the use of coal, and particularly western low-

sulphur coal, to meet national energy requirements.

(Complaint 44 30-32; Apdx. 55a-56a). The decision of the

Montana Supreme Court denied there was any such

policy or, alternatively, that existing policy favored east-

ern and midwestern coal. It further held, in effect, that a

tax could not be preempted unless it was expressly or by

necessary implication shown to be prohibited by federal

law.

3. In Count Three, plaintiffs asserted that the Coal

Severance Tax also substantially frustrates the national

policy reflected in the Mineral Lands Leasing Act of

1920, ch. 85, 41 Stat. 437, to effect a compromise which

channels the revenues from federally-owned minerals to

the federal government in the first instance, subject to

later division with the states in a fixed proportion. (Com-

plaint 44 34-44; Apdx. 56a-59a). The court below rejected

this interpretation on the basis of a proviso in the Act

which permitted state taxation of such minerals. (Opinion

33; Apdx. 38a-39a).

SUMMARY OF ARGUMENT

Count One

In reaching its decision, the Supreme Court of Mon-

tana relied on a series of decisions from the 1920’s dealing

with state taxation of the extraction of mineral resources,

especially Heisler v. Thomas Colliery Co., 260 U.S. 245

(1922). Under a broad reading of those older cases,

activities not “in” interstate commerce were a matter of

exclusive state concern which could not be reached by the

Commerce Clause.

As even the Supreme Court of Montana recognized,

the rationale of Heisler and like cases has been expressly

rejected by this Court in the last forty years in a wide

variety of contexts. (Opinion 8-10; Apdx. 10a-lla). A

new and more practical test has been adopted, looking to

the substantial effects on commerce of a particular tax or

regulation. However, the Montana court rejected applica-

tion of this modern test as mere dicta, and found it

inapplicable here. (Opinion 10-11; Apdx. 12a-13a). In-

stead, the court reaffirmed the continuing validity of

Heisler, although its rationale has surely long since been

discredited.

Under modern Commerce Clause tests which apply

here, state taxes which substantially affect interstate com-

merce may be held invalid if they are not fairly related to

the services and benefits provided by the state to the

taxpayer, or if they discriminate against interstate com-

merce. See, e.g., Complete Auto Transit, Inc. v. Brady,

430 U.S. 274 (1977). Appellants have alleged that the

present tax fails to pass muster on both of these counts.

They should not have been denied the opportunity to

prove their case.

Count Two

The Montana tax also raises substantial issues under

the Supremacy Clause. The Complaints allege the exist-

ence of a national policy to encourage the use and

production of coal generally, and of low sulphur western

coal in particular, to meet the nation’s energy needs.

(Complaint ¢§ 30-31; Apdx. 55a-56a). The Complaints

further assert that the excessive Montana tax substantially

frustrates those purposes. (Complaint ¢ 32; Apdx. 56a).

The Montana courts rejected these claims as a matter

of law, without the benefit of a trial, and in doing so

seriously misperceived both the applicable legal standard

and the basic thrust of the federal policy. Thus, the court

below denied the existence of a national policy to en-

courage the production of western low sulphur coal, and

also incorrectly held that a state tax statute may not be

preempted unless Congress expressly stated an intention

to do so. Under prevailing rules, however, state statutes

may be struck down where they “substantially frustrate”

the purposes and objectives of Congress, whether or not

Congress has expressly declared its intention to prohibit

the state action. E.g., Jones v. Rath Packing Co., 430

U.S. 519, 526, 540-41 (1977); Hill v. Florida, 325 U.S.

538, 542 (1945). Plaintiffs should have been given an

opportunity to establish both the existence of the national

policies and their frustration by the Montana Coal Sever-

ance Tax.

Count Three

Congress has also enacted statutes concerning the use

and disposition of western coal deposits, and of the

financial benefit flowing from such disposition. Some

75% of the coal in Montana belongs to the federal

government. As a result of compromises embodied in the

Mineral Lands Leasing Act of 1920, as amended, these

deposits were reserved to the federal government. Pur-

suant to the Act, the coal was to be leased to private

interests and the revenues from those leases were to be

divided, by statute, in fixed proportions between the

federal government and the states. By enacting a sever-

ance tax designed to absorb all of the economic rents

from those deposits, Montana has substantially frustrated

the central purpose of that Act. Thus, under the prevail-

ing preemption principles established by the Court, plain-

tiffs should have been allowed to prove that the tax is

invalid under the Supremacy Clause.

ARGUMENT

I. A STATE TAX ON AN ACTIVITY WHICH “SUB-

STANTIALLY AFFECTS” INTERSTATE COM-

MERCE, WHETHER OR NOT “IN” INTER-

STATE COMMERCE, IS NOT IMMUNE FROM

SCRUTINY UNDER AN APPROPRIATE COM-

MERCE CLAUSE TEST

The Montana Supreme Court arrived at its result prin-

cipally in reliance on the Heisler line of cases. Heisler v.

Thomas Colliery Co., 260 U.S. 245 (1922); Oliver Iron

Mining Co. v. Lord, 262 U.S. 172 (1923); Hope Gas Co.

v. Hall, 274 U.S. 284 (1927). Under those decisions, an

activity not “in” commerce was said to be wholly beyond

the reach of the Commerce Clause. From this, the court

below derived the conclusion that a state severance tax

falls on an activity which “precedes entry into interstate

commerce.” (Opinion 15; Apdx. 18a). As a result, it

concluded that such a tax, whatever its amount, is a

matter exclusively of state concern and cannot, in any

circumstances, be reached by the Commerce Clause.

(Opinion 15; Apdx. 18a-19a).

Under the broad rationale of the Heis/er line of cases—

adopted and applied here by the Montana Supreme

Court—all Commerce Clause questions could be decided

by a “mechanical test.” The test was expressed most

clearly in the Court’s decision in Carter v. Carter Coal

Co., 298 U.S. 238 (1936). There, the majority derived the

following rule from Heisler, Oliver Iron and other like

cases (page 303):

One who produces or manufactures a commodity, subse-

quently sold and shipped by him in interstate commerce,

whether such sale and shipment were originally intended

or not, has engaged in two distinct and separate activities.

So far as he produces or manufactures a commodity, his

business is purely local. So far as he sells and ships, or

contracts to sell and ship, the commodity to customers in

another state, he engages in interstate commerce. In re-

spect of the former, he is subject only to regulation by the

state; in respect of the latter, to regulation only by the

federal government. :

This mechanical test—the rule before 1937—is, we

submit, utterly inconsistent with constitutional doctrines

adopted since that time which clearly recognize the Com-

merce Clause implications of acts which “substantially

affect” interstate commerce, whether they are “in” or

“out” of such commerce. NLRB v. Jones & Laughlin

Steel Corp., 301 U.S. 1 (1937), clearly broke with the

Heisler test. It held (page 37):

Although activities may be intrastate in character when

separately considered, if they have such a close and

substantial relation to interstate commerce that their con-

trol is essential or appropriate to protect that commerce

from burdens and obstructions, Congress cannot be de-

nied the power to exercise that control. (Emphasis sup-

plied).

Wickard v. Filburn, 317 U.S. 111 (1942), underscored

the departure from the earlier rule, extending the com-

merce power to those “activities intrastate which so affect

interstate commerce . . . as to make regulation of them

appropriate. . . .” Jd. at 124, quoting United States v.

Wrightwood Dairy Co., 315 U.S. 110, 119 (1942). (Em-

phasis supplied). It made specific reference to Heisler and

related cases as “earlier pronouncements,” and made

clear that such cases no longer accurately reflected the

law, even in 1942. Jd. at 122, n. 21.

Since that time, this Court has consistently held in a

variety of ways and contexts that activities which “sub-

stantially affect” interstate commerce raise similar Com-

merce Clause concerns as those activities which are “in”

interstate commerce under the older rules. E.g., McLain

v. Real Estate Board, 444 U.S. 232, 241 (1980); Arizona

Public Service Co. v. Snead, 441 U.S. 141, 150 (1979);

Katzenbach v. McClung, 379 U.S. 294, 301-304 (1964);

Heart of Atlanta Motel, Inc. v. United States, 379 U.S.

241, 258 (1964).

The first cases applying the newer rule dealt specifically

with the power of Congress, but the Commerce Clause

principles they announced have by no means been con-

fined to that context. Instead, these new principles repre-

sented a fundamental change in the Court’s view of the

Commerce Clause derived from the proposition that the

older, mechanical view of the relationships between the

states and the federal government could no longer serve

the needs of our complex society and a modern national

economy. See generally Stern, The Commerce Clause and

the National Economy, 1933-1946, 59 Harv. L. Rev. 645

and 883, 845-47 (1946).

As the Court has recently reiterated, the principles for

determining the sweep and scope of the Commerce Clause

apply equally to its “negative implications”—i.e., its

restraints on the power of the states—as to its affirmative

grant of power to Congress. E.g., Lewis v. BT Investment

Managers, Inc., 100 S. Ct. 2009, 2015-17 (1980); Phila-

delphia v. New Jersey, 437 U.S. 617, 622-23 (1978). A

state’s tax or regulation is no longer immunized from

Commerce Clause scrutiny by a claim that it only attaches

to a “local” or intrastate activity. E.g., Hunt v. Washing-

ton Apple Advertising Commission, 432 U.S. 333, 350

(1977); Pike v. Bruce Church, Inc., 397 U.S. 137, 141-42

(1970); Nippert v. City of Richmond, 327 U.S. 416, 423-

24 (1946). See also Parker v. Brown, 317 U.S. 341, 362

(1943).

The modern view is pervasive. We are not aware of any

case decided by this Court in recent times—and appellees

have not cited any—which supports the view that a state

tax which substantially affects interstate commerce is

immune from scrutiny under the Clause.*

The Montana Supreme Court did not dispute—and, in

fact, tacitly conceded—that this Court’s opinions over the

years since 1937 have consistently rejected mechanical

tests such as that employed in Heisler in favor of Com-

merce Clause tests looking to the practical “substantial

effects” of particular activities on commerce. (Opinion 9-

10; Apdx. 1la-12a). It nevertheless brushed these cases

aside, holding that their rationale had not yet been

extended to the precise question of a state’s power to tax

natural resources and that it did not consider itself bound

° Two cases have been cited by appellees for the proposition that

“cases like Heisler have lost none of their controlling force.” (Motion

10-11). See Dunbar-Stanley Studios, Inc. v. Alabama, 393 U.S. 537,

541 (1969); Alaska v. Arctic Maid, 366 U.S. 199, 203-04 (1961). Both

of these decisions stop well short of supporting the conclusion appellees

assert in the context of this case. In both cases, a taxpayer argued that

an activity in which it was engaged was immune from state tax because

it was “in” interstate commerce. Both cases held that the activity was

not “immunized” from a state tax simply because a natural resource,

once extracted, was to be immediately shipped out of the state for

processing and sale.

Plaintiffs have no quarrel with that conclusion, since it simply

establishes the power of the state to tax. But it is a conclusion which ts

essentially irrelevant to the proposition for which Montana cites the

cases and which is equally irrelevant to the issues here. The issue in this -

case is not whether the activity is immune from tax, but whether the

tax, itself, is immune from scrutiny under the Commerce Clause.

by “dicta” in other cases decided by this Court. (Opinion

10-11; Apdx. 12a-13a).

This reasoning should be rejected for the following

reasons:

1. The Heisler decision is not based on any rationale

peculiarly applicable to state taxation. Instead, it was

based upon the then-prevalent restrictive reading of the

Commerce Clause, motivated by a concern that a broader

application would (260 U.S. at 259-60):

nationalize all industries, it would nationalize and with-

draw from state jurisdiction and deliver to federal com-

mercial control the fruits of California and the South, the

wheat of the West and its meats, the cotton of the South,

the shoes of Massachusetts and the woolen industries of

other States, at the very inception of their production or

growth, that is, the fruits unpicked, the cotton and wheat

ungathered, hides and flesh of cattle yet “on the hoof,”

wool yet unshorn, and coal yet unmined, because they are

in varying percentages destined for and surely to be

exported to States other than those of their production.

But, of course, that restricted view of the scope of the

Commerce Clause has been outmoded for over 40 years.*

The “fruits of California” and “the wheat of the West”

are now most certainly subject to the Commerce Clause.

Pike v. Bruce Church, Inc., 397 U.S. 137 (1970); Wickard

v. Filburn, 317 U.S. 111 (1942). With the disappearance

of the rationale for that view, any sensible argument for

continued application of the cases based upon it also

° Except in the State of Montana, whose Supreme Court persists in the

Startling view that taxes on the production of coal are “ahead of and

preliminary to the sweep of the power of Congress to regulate com-

merce”. (Opinion 22; Apdx. 25a). Compare Arizona Public Service

Co. v. Snead, 441 U.S. 141, 150 (1979). Even appellees acknowledge

that Congress’ power goes this far. (Motion 19-20).

vanished. The court below offered no reason why the

rationale of Heisler, which has been totally discredited

and rejected in every other context for more than 40

years, should nevertheless survive and be applied in a

context involving state taxation of natural resources. No

reason appears why such a distinction should be drawn

other than the parochial desire to sustain this tax. Indeed,

it would require a repudiation of over 40 years of Com-

merce Clause history for this Court to now accept Heisler

and its rationale as controlling here.

2. The Montana court’s reasoning also contravenes at

least one case, virtually ignored by the Montana court,

which expressly applied the modern rule to the question

whether the states and their subdivisions have unfettered

power to impose taxes which have a substantial economic

effect on interstate commerce when the tax itself is

imposed on an act which can be labeled a “local inci-

dent.” Nippert v. City of Richmond, 327 U.S. 416 (1946).

In that case, the City of Richmond asserted that its tax on

the solicitation of sales within the city was immune from

scrutiny under the Commerce Clause. This Court rejected

that claim, observing that (pages 423-24):

there is no known limit to the human mind’s capacity to

carve out from what is an entire or integral economic

process particular phases or incidents, label them as “sep-

arate and distinct” or “local,” and thus achieve its desired

result.

* * a” ™ *

[W]hether or not a “local incident” related to or affecting

commerce may be made the subject of state taxation

depends upon other considerations of constitutional pol-

icy having reference to the substantial effects, actual or

potential, of the particular tax in suppressing or burden-

ing unduly the commerce. (Emphasis supplied).

3. Distinctions such as those employed by the court

below are, in the end, artificial and unsatisfactory, and

have long been recognized as such.* They should be

rejected for that reason as well.

Consistent with the repudiation of Heisler, this Court

has enunciated a series of principles relating to the power

of states to tax aciivities which are in or affect interstate

commerce. This effort has been “an endeavor to establish

a consistent and rational method of inquiry” which fo-

cuses on “the practical effect of a challenged tax.” See

‘Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425,

443 (1980), and cases there cited. This principle should be

applied here.

The Montana Supreme Court relied heavily on its

conclusion that the “severance of coal .. . precedes

entry into interstate commerce.” (Opinion 15; Apdx.

18a). As we have shown above, the court below should

have examined the practical effects of the tax rather than

determining the case by this sort of delineation.**

? See W. Hellerstein, Constitutional Constraints on State and Local

Taxation of Energy Resources, 31 Nat. Tax J. 245, 248 (1979); Devel-

opments in the Law: Federal Limitations on State Taxation of Inter-

state Business, 75 Harv. L. Rev. 953, 970-71 (1962); Brown, The Open

Economy: Justice Frankfurter and the Position of the Judiciary, 67

Yale L. J. 219, 232-33 (1957); Posner, Economic Analysis of the Law,

510, 513-14 (2d ed. 1977). As all of these authorities show, severance

taxes are functionally indistinguishable from other forms of taxation

clearly subject to the Commerce Clause. See Michigan-Wisconsin Pipe

Line Co. v. Calvert, 347 U.S. 157 (1954).

sind Even if one accepts, for purposes of argument, the reasoning that

there must be a precise point at which coal “enters” interstate com-

merce, nothing in logic commends selection of a point following

severance for drawing this line. It would be equally logical to say that

coal starts its interstate journey at the very moment of severance since,

as soon as the coal is severed, it is picked up, cleaned, crushed and

delivered to a rail siding for loading onto rail cars and delivery to its

final destination in a continuous interstate movement. The selection of

any voint along this continuum to determine constitutional rules is a

fundamentally artificial exercise in line-drawing.

There is no point in the continuous process of taking

coal from a mine and delivering it for use at which it is

necessary or appropriate to prohibit state taxation abso-

lutely, even assuming that the process has become inter-

state commerce. See Complete Auto Transit Co., Inc. v.

Brady, 430 U.S. 274 (1977). Correspondingly, there is no

point at which the state’s power to tax activities which

substantially impact on that continuous process should be

entirely free of review concerning its Commerce Clause

implications. At each point along the entire continuum,

the issue should be posed as one of balancing and of

degree. Any other rule would return us to the antedilu-

vian concepts last expressed here over forty years ago in

Carter v. Carter Coal Co., 298 U.S. 238, 303 (1936).

4. Finally, the result announced by the court below

foreshadows grave practical consequences for this nation.

It can only lead to serious division between those states

which have access to energy resources and those which do

not. In essence, the Montana Supreme Court held that the

Commerce Clause imposes no limit whatsoever on the

power of the individual states to extract taxes based on

the severance of energy resources. This position came into

vivid focus when defendants conceded that it would make

no difference to their analysis of the case if the tax were

not 30%, but were raised to 1,000% or 2,000%. This

contention was tacitly accepted by the court below and

inevitably follows from its decision. Thus, in its view, the

only limitation on the rate of a state’s tax substantially

affecting commerce is that set by the state’s legislature.

(Opinion 18; Apdx. 22a). This is a dangerously divisive

view.

The availability of energy resources, and the price

which they command, is one of the most compelling

issues of our time. Armed with unfettered power and

freed from constitutional restraint,* the self-interests of

energy-rich states must come into conflict with those

which lack such resources, and with the national interest

in energy use and sufficiency. Any constitutional rule

which permits states to adopt “OPEC-like revenue max-

imization” policies clearly cuts across the balance between

state and federal power lying at the heart of the Com-

merce Clause and exposes the nation to Balkanization. It

offends the basic premise that this nation constitutes a

nationwide free trade area in which one state is not

permitted to throw up undue trade barriers at the expense

of its sister states. See, e.g., H.R Hood & Sons, Inc. v.

Du Mond, 336 U.S. 525, 538-39 (1949).

Montana’s tax is a prime example of the abuses which

may flow from any rule which leaves the states with

unfettered power to tax. It was designed to shift billions

of dollars to Montana directly from the citizens of other

States by the end of the century, and to use a substantial

° In Merrion v. Jicarilla Apache Tribe, 617 F.2d 537 (10th Cir.) (en

banc), cert. granted, 101 S. Ct. 71 (1980), the Tenth Circuit apparently

ascribed equivalent powers to an Indian tribe. One of the appellants in

this action, Westmoreland Resources, Inc., is particularly affected by .

that decision. Westmoreland mines coal in Montana owned by the

Crow Tribe. In addition to the 30% severance tax imposed by Montana

and substantial royalties payable to the Crow Tribe, the Tribe has

attempted to impose an additional 25% severance tax on the coal

mined by Westmoreland.

Both Montana and Westmoreland are involved in other proceedings

with the Crow Tribe relating to the Montana tax. Crow Tribe of

Indians v. State of Montana, 469 F. Supp. 154 (D. Mont. 1979), appeal

pending, (9th Cir., No. 79-4321). Westmoreland simply notes here that

any standard which permits application of a 30% and a 25% tax on the

same activity—where neither amount bears any fair relation to benefits

bestowed—must necessarily be viewed as an excessive burden on

commerce.

part of those billions to create a multi-billion trust fund

for future Montana citizens. It is well on its way to

achieving that goal. i

Continuance of this tax can only lead to the recrimina-

tion and retaliation among the states which was the

immediate concern of the Founding Fathers when they

wrote the Commerce Clause 194 years ago. As Madison

stated, the principal reason leading to the adoption of the

Constitution was that:

‘want of a general power over Commerce led to an

exercise of this power separately by the States, which not

only proved abortive, but engendered rival, conflicting

and angry regulations.’ 3 Farrand, Records of the Federal

Convention, 547.

H.P Hood & Sons, Inc. v. Du Mond, supra, 336 U.S. at

534.

* * * * *

For the foregoing reasons, we respectfully submit that

this Court should hold that a state does not have unlim-

ited power to tax an activity, such as the mining of coal,

which “substantially affects” interstate commerce, and

that such taxes are subject to scrutiny under an appropri-

ate Commerce Clause test. Such a holding would con-

form to the uniform decisions of this Court on related

issues over the past forty years and would be in accord

with both practical reality and the needs of the nation.

Il. THE APPROPRIATE COMMERCE CLAUSE

TEST HERE REQUIRES A FACTUAL DETER-

MINATION WHETHER THE TAX IS FAIRLY RE-

LATED TO BENEFITS PROVIDED BY THE

STATE AND WHETHER IT DISCRIMINATES

AGAINST INTERSTAVE COMMERCE

If ever there were a tax deliberately designed to impose

an unreasonable burden on non-residents of the taxing

jurisdiction, this tax is it. This fact brings into sharp

focus what this Court said in Complete Auto Transit, Inc.

v. Brady, 430 U.S. 274, 288-89 n.15 (1977):

Any tailored tax. . . creates an increased danger of error

in apportionment, of discrimination against interstate

commerce, and of a lack of relationship to the services

provided by the State. See Freeman v. Hewit, 329 U.S.., at

265-266, n. 13 (concurring opinion). A tailored tax, how-

ever accomplished, must receive the careful scrutiny of the

courts to determine whether it produces a forbidden effect

on interstate commerce. (Emphasis supplied).

Here, the burden of the tax “is not likely to be

alleviated by those political restraints which are normally

exerted on legislation where it affects adversely interests

within the state.” McGoldrick v. Berwind-White Coal

Mining Co., 309 U.S. 33, 46 n.2 (1940).* In such circum-

stances, where the political process may fail to work,

courts generally—and this Court in particular—have a

special burden to apply rigorous standards of review.

° The conclusion of the Montana Supreme Court that an adequate

political check exists (Opinion 22; Apdx. 26a)—based on “judicial

notice” of the number of coal industry lobbyists, rather than any

factual record in this case—is simply in error. The best evidence of the

relative political effectiveness of these lobbyists in the Montana legisla-

ture is the current 30% rate of the tax.

Raymond Motor Transportation, Inc. v. Rice, 434 U.S.

429, 446-47 (1978); Austin v. New Hampshire, 420 U.S.

656, 662-63 (1975).

Recognizing the dangers of a tailored tax, this Court

has articulated a well-defined, four-pronged factual test

to determine the constitutional validity of state taxes

which affect interstate commerce. Complete Auto Tran-

sit, Inc. v. Brady, 430 U.S. 274, 279 (1977). That test has

been reiterated not less than four times in the past three

years. Exxon Corp. v. Wisconsin Department of Reve-

nue, 100 S. Ct. 2109, 2122 (1980); Mobi! Oil Corp. v.

Commissioner of Taxes, 445 U.S. 425, 443 (1980); Japan

Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 444-

45 (1979); Washington Revenue Department v. Steve-

doring Association, 435 U.S. 734, 750 (1978). See also

National Geographic Society v. California Equalization

Board, 430 U.S. 551, 558 (1977).

As most recently articulated, that test requires the

Court to examine:

the “practical effect” of the tax to determine whether it

“is applied to an activity with a substantial nexus with

the taxing State, is fairly apportioned, does not discrimi-

nate against interstate commerce, and is fairly related to

the services provided by the State.’ ”

Exxon Corp. v. Wisconsin Department of Revenue, su-

pra, 100 S. Ct. at 2122, quoting Complete Auto Transit,

Inc. v. Brady, supra, 430 U.S. at 279.

The Montana Supreme Court readily assented to the

expansion of state powers articulated in Complete Auto

and like decisions (Opinion 13; Apdx. 15a-16a), but gave

short shrift to these corresponding limitations. In addi-

tion to rejecting the claim that the Commerce Clause

applies to a state severance tax, it also reached erroneous

conclusions concerning the appropriate construction of

the “fairly related” prong of the pertinent Commerce

Clause test. The construction given to the test by the

court below emasculates the test and leaves the state with

power to tax without limit.

A. Plaintiffs’ Claim that the Tax is Not Fairly Related

to Benefits and Services Provided by the State

Should Not Have Been Dismissed Without a Trial

The court below held that the “fairly related” branch

of the foregoing test may be determined as a matter of

law, without any factual inquiry, holding that the test was

satisfied simply because Montana provides governmental

services and “the advantages of a civilized society” uni-

versally afforded by each of the fifty states. (Opinion 19;

Apdx. 22a).* This disposition of the problem is much too

facile. In the first instance, it fails to give the tax the

“careful scrutiny” mandated by Complete Auto to deter-

mine whether it is, indeed, fairly related to the benefits

allegedly bestowed and thus ignores this Court’s concern

with the dangers to interstate commerce of a tailored tax.

In the absence of finding such a relationship, the tax

stands exposed for what it is, a naked attempt to export

the tax burdens of one state to the citizens of its sister

states.

° The Montana Supreme Court also discarded the “fair relation” test

in another way, holding that it did not come into force unless a tax

violates another branch of the four-part test as well (/.e., insufficient

nexus or faulty apportionment). (Opinion 19; Apdx. 22a-23a). There is

not the slightest indication in the opinions of this Court that the “fair

relation” test does not require a separate and independent factual

analysis of the relationship between the burdens of the tax and the

benefits allegedly bestowed.

Furthermore, if the “advantages of a civilized society”

satisfy the “fairly related” test repeatedly announced by

this Court in recent years in Commerce Clause cases

involving state taxes, the test has no real meaning, be-

cause it can be met by any state and under all circum-

stances. If the “fair relation” test is to have any meaning

at all, it requires a factual determination to be made in

appropriate cases.

If the test is ever to find application, this is the case.

This tax bears no relationship at all to the legitimate

needs of Montana. Contrary to the holding of the Mon-

tana court (Opinion 19; Apdx. 22a-23a), it is not “im-

posed for the general support of the government”. It was

enacted by a legislature which made no effort to balance

costs and benefits, and instead focused its attention on

revenue maximization. Reference to the Legislative Find-

ings and Declarations of Purpose of the tax (MONT.

CODE ANN. § 15-35-101 (1979); Apdx. 62a-63a) reveals

an overriding intent to exploit the taxability of coal

located in Montana, rather than an attempt to meet

legitimate impact costs. Far from being used for support

of the government, 50% of the massive tax revenues are

presently cached away in a trust fund for future genera-

tions. Thus, if the absence of a “fair relation” could be

shown as a factual matter in any case, it can be done here.

No case has yet come to this Court in which the

absence of a “fair relation” has been squarely raised in a

factual context.* The decisions of the Court nevertheless

° Maryland v. Louisiana, No. 83 Original (October 1979 Term), raises

similar claims in its pleadings. In apparent recognition of the factual

nature of this inquiry, the parties have initially pressed other issues

which, they believe, are dispositive without the necessity of a trial.

clearly suggest that the test is not an empty one, subject

to facile disposition. Instead, it is clear that a factual

analysis is intended and required. E.g., Washington Reve-

nue Department v. Stevedoring Association, 435 U.S.

734, 750-51 (1978); Complete Auto Transit, Inc. v. Brady,

430 U.S. 274, 287 (1977). Cases in lower courts so state.

Merrion v. Jicarilla Apache Tribe, 617 F.2d 537, 545 n.4

(10th Cir.) (en banc), cert. granted, 101 S. Ct. 71 (1980);

Budget Rent-a-Car of Wash. v. Multnomah County, 287

Or. 93, 597 P.2d 1232, 1239 (1979). Even the trial court in

‘this case squarely held that, if it reached this question, it

“would necessarily have to deny the motion to dismiss

and proceed to a factual determination.” (District Court

Opinion 5; J.A. 37a). The contrary holding of the Su-

preme Court of Montana was simply error.*

Appellees also attack the institutional competence of

the courts to apply the “fair relation” test to this and

other taxes. (Motion 16). The courts are fully competent

to apply such a test and it is vital that they do so here.

We do not contend that a “fair relationship” must be

determ. aed with dollar-for-dollar precision by either the

legislature or the Court. What must be determined is

whether a reasonable relationship exists. Unlike the or-

dinary case in which such questions might be closely

contested, here the Montana legislature grossly over-

reached, without any study or consideration of the costs

or benefits involved, thus making it unlikely that the

matter will be in serious dispute if remanded for trial.

° Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979), is

not to the contrary. The language from that case on which appellees

particularly rely (Motion 15) appears to be merely a restatement of one

of the arguments advanced by a party in that case, not a holding of the

Court.

Courts have frequently been called upon to apply

comparable tests. On several occasions, this Court has

determined whether specific state levies exacted more

than their “fair share” in relation to the benefits or

services provided by the state. E.g., Evansville Airport v.

Delta Airlines, Inc., 405 U.S. 707, 716-20 (1972); Clark v.

Paul Gray, Inc., 306 U.S. 583, 598-600 (1939); Dixie Ohio

Express Co. v. State Revenue Commission, 306 U.S. 72,

77-78 (1939); Ingels v. Morf, 300 U.S. 290, 296-97 (1937).

See also Capitol Greyhound Lines v. Brice, 339 U.S. 542,

548 (1950).

The other branches of the four-pronged Brady test also

provide examples of the competence of courts to apply

such tests. Here, too, the states have wide latitude to

fashion apportionment formulas but are nevertheless con-

strained by the outer limits of what is permissible under

the Constitution. These outer limits are enforced by the

courts. See, e.g., Moorman Manufacturing Co. v. Bair,

437 U.S. 267, 273-75 (1975); Norfolk & W.R. Co. v. Tax

Commission, 390 U.S. 317, 326-27 (1968). This same

judicial process should be applied here.

Such judicial restraints are particularly necessary in

cases, such as this, in which the normal political restraints

do not work to protect the vital interests of those who are

unrepresented in the state legislature. See discussion at

pages 27-29, supra. As Professor Tribe put the matter

(American Constitutional Law 319 (1978)):

Even judges and commentators ordinarily hesitant

about federal judicial intervention into legislative choice

tend to support a relatively active role for the federal

judiciary when the centrifugal, isolating or hostile forces

of localism are manifested in state legislation.

See also R. Givens, Chief Justice Stone and the Develop-

ing Functions of Judicial Review, 47 U. Va. L. Rev. 1321,

1345-46 (1961).

B. Plaintiffs’ Claim That the Tax Discriminates Against

Interstate Commerce Should Not Have Been Dis-

missed Without a Trial

The Montana Supreme Court nowhere expressly passed

on plaintiffs’ contentions that the tax was adopted be-

cause it would shift an extraordinary burden to other

states and thereby discriminates against interstate com-

merce. Plaintiffs’ theory of discrimination, however, has

been accepted elsewhere as having “considerable force”.

W. Hellerstein, Constitutional Restraints on State and

Local Taxation of Energy Resources, 31 Nat. Tax J. 245,

249 (1979). It is based on a proposition which has long

been clear—that a tax which is not discriminatory on its

face may nevertheless discriminate in fact. Nippert v. City

of Richmond, 327 U.S. 416, 431 (1946):

It is no answer, as appellee contends, that the tax is neither

prohibitive nor discriminatory on the face of the ordin-

ance....

See also Dayton Power & Light Co. v. Lindley, 58 Ohio

St. 2d 465, 391 N.E.2d 716 (1979) (Ohio coal tax, al-

though seemingly neutral on its face, invalidated on

Commerce Clause grounds because it discriminated in

practice against non-Ohio coal).

The history of the Montana tax makes it abundantly

clear that one of its primary purposes was to shift the tax

burden of Montana to the citizens of other states. The

principal sponsor of the tax prepared a memorandum to

the legislature which makes this point explicit. Towe,

Explanation of Reasons for Montana’s Coal Tax 4:

Most of Montana’s coal is shipped out of state to power

plants and utility companies in the Midwest. In reviewing

the [long-term] contracts betw_en the coal companies and

the utility companies who purchase the coal, all of the

contracts that were shown to our Legislative Committee

contain an escalation clause for taxes. In other words, the

local companies simply add the additional taxes to their

bill, and the entire cost is passed on to the purchasers in

the Midwest or elsewhere. Because most of the purchasers

are regulated utility companies, it is reasonable to assume

these companies will, in turn, pass on their extra costs to

their customers.

This prognosis has proved correct. Because of contracts

which shift the effects of the tax primarily to non-

Montana utility companies and thus directly to citizens of

other states, over 90% of the tax burden falls directly on

non-Montanans. In Montana, it is understandably a very

popular tax. In light of these facts, it is manifest that the

tax was “tailored” to fall on interstate commerce and on

out-of-state residents. Plaintiffs should have been allowed

to make the appropriate factual showing of discrimina-

tion.

Il, THE TAX SUBSTANTIALLY FRUSTRATES

NATIONAL POLICIES WITH RESPECT TO

THE PRODUCTION AND USE OF COAL AND

SHOULD BE DECLARED INVALID UNDER THE

SUPREMACY CLAUSE

A. National Energy Policy, as Reflected in Federal Stat-

utes and Regulations, Favors the Increased Produc-

tion of Coal Generally and of Low Sulphur, Western

Coal in Particular

In the courts below, plaintiffs asserted that there was a

national policy favoring the production and use of coal,

and particularly low sulphur western coal, over alternate

forms of energy. (Complaint 44 30-31; Apdx. 55a-56a).

Plaintiffs further alleged that the Montana Coal Sever-

ance Tax stood as an obstacle to and substantially frus-

trated these national policies. (Complaint 4 32; Apdx.

56a).

The Supreme Court of Montana also had difficulty in

dealing with this issue. In the course of its opinion it

found, variously, that (a) “no national policy can be

discerned as a matter of law” (Opinion 29-30; Apdx. 34a-

35a); (b) that there was a national policy which favored

the production and use of coal, but not of low sulphur

western coal (Opinion 29; Apdx. 34a); and (c) as an

apparent refinement of the foregoing, that Congress pre-

ferred that “eastern and midwestern plants used local

coal, even coal with higher sulfur content than western

low-sulfur coal” (Opinion 29; Apdx. 34a).

Having thus found that there was no national policy,

or, if it did exist, that it favored eastern and midwestern

coal in at least some circumstances, the court did not find

it necessary to squarely face the question whether the

Montana Coal Severance Tax substantially frustrated a

36.

national purpose. In thus denying plaintiffs a trial, the

Montana courts were plainly in error. Plaintiffs should

have had an opportunity to demonstrate, to the extent

necessary, both the existence and contours of the national

policy, and the adverse impact of the Montana Coal

Severance Tax on that policy.

1. The National Policy to Encourage Coal

Production

It is beyond doubt that, since the OPEC oil embargo of

1973, national policy has clearly favored the increased

production and use of coal to meet our nation’s energy

requirements. This policy is reflected in the express lan-

guage of statutes,* in legislative history and findings, and

in official pronouncements by the President and members

of his Cabinet.**

The district court’s opinion expressly recognized this

national policy (Opinion 20; J.A.), and its holding to this

effect was expressly recited by the Montana Supreme

Court (Opinion 26; Apdx. 30a).

In the face of explicit statutory materials such as those

cited, it would have been difficult to avoid the conclusion

° See statutes listed in the footnote at page 5, supra. Each of these

federal statutes is a “Law of the United States” which the Supremacy

Clause mandates “shall be the supreme Law of the Land.” U.S.

CONST.,, art. VI, cl. 2. Selected portions of these statutes are reprinted

in the Appendix to the Jurisdictional Statement at pages 7la-11 Sa.

o6 See, e.g., Energy Policy and Conservation Act of 1975, 89 Stat. 874

(§ 2(6)), 42 U.S.C. § 6201(6) (1976); National Energy Plan II (prepared

pursuant to 42 U.S.C. (Supp. III 1979) § 7321) at 12, Il-21 (May 7,

1979); President Carter, Statement on Signing National Energy Bills

(November 9, 1978), reprinted in Weekly Compilation of Presidential

Documents: Vol. 14, No. 45; James R. Schlesinger, Remarks before

6lst Anniversary Convention of the National Coal Association at 2

(June 6, 1978) (unpublished Department of Energy Release).

that national policy favors increased reliance on coal. For

example, the Powerplant and Industrial Fuel Use Act of

1978, Pub. L. No. 95-620, 92 Stat. 3289, 42 U.S.C.

(Supp. III 1979) §§ 8301 et seq., expressly states that one

of its purposes was:

to encourage and foster the greater use of coal and other

alternate fuels, in lieu of natural gas and petroleum, as a

primary energy source. ...

92 Stat. 3291 (§ 102(b)(3)), 42 U.S.C. (Supp. III 1979)

-§ 8301(b)(3). Among other things, that Act prohibits new

electric power plants from using oil or natural gas as a

primary fuel source, and prohibits the use of natural gas

in existing facilities after 1989. 92 Stat. 3298 (§ 201), 42

U.S.C. (Supp. III 1979) § 8311. Although existing plants

which used natural gas as a primary source during 1977

may continue to do so until January 1, 1990, they are

limited under the Act to their historical consumption. 92

Stat. 3305-6 (§ 301), 42 U.S.C. (Supp. III 1979) § 8341.

Although many details reflective of the statutory purpose

could be advanced, the manifest purpose of this Act to

favor the use of coal is clear.*

2. The National Policy to Encourage Production of

Western, Low Sulphur Coal

The statutes, regulations and other materials reflecting

the national energy policy to encourage the production of

low sulphur western coal are complex, and the Montana

courts’ examination of them—without the benefit of

° See, e.g., S. Rep. No. 95-361, 95th Cong., 2d Sess., reprinted in

[1978] U.S. Code Cong. & Ad. News 8173, 8179-80; H.R. No. 95-496

(Part IV), 95th Cong., 2d Sess., reprinted in [1978] U.S. Code Cong. &

Ad. News 8454, 8457; Remarks of Douglas M. Costle, Administrator

of the Environmental Protection Agency, [1978] U.S. Code Cong. &

Ad. News 8232.

testimony and documentary evidence—was notably cur-

sory. *

Plaintiffs asserted that the Clean Air Act, as amended

in 1970, Pub. L. No. 91-604, 84 Stat. 1676, showed a

national intent to maximize the production and use of

western low sulphur coal. Although the mechanisms by

which the Clean Air Act encouraged the use of low

sulphur coal are complex, the testimony of the users of

coal and others would have left no doubt that the Act was

directed to that end.

Under the 1970 Amendments, the Environmental Pro-

tection Agency (“EPA”) was authorized to establish stan-

dards regulating the maximum sulphur dioxide (SO,)

emissions that would be permitted from new facilities in

certain categories of industries. See generally 84 Stat.

1683 (§ 111). In 1971 the EPA promulgated its original

new source performance standards. These regulations

required a reduction of up to 75% of sulphur dioxide

emissions from power plants burning high sulphur coal,

but imposed no controls for plants burning low sulphur

coal. 40 C.F.R. §§ 60.43; 60.45(a)(2) (1972). See 36 Fed.

Reg. 24876 (1971). The direct result of these federal

statutes and regulations in existing market conditions was

a virtual mandate for the use of western, low sulphur

coal. Thus, there was a dramatic increase in demand for

such coal as evidenced by the sharp increase in Montana’s

coal production during the early 1970’s.** The effect of

the Act continues to be felt today.

° From the outset, plaintiffs have maintained that a trial was necessary

in order to set forth the contours of the national energy policy and its

practical effect. See 2A C. Sands, Sutherland Statutory Construction,

§ 45.13 at 44 (4th ed. 1973).

” Production of coal in Montana increased from 1,280,000 tons in

1970 to 27,393,000 tons in 1977, but has since leveled off. (Figures were

supplied to plaintiffs by the Safety and Health Division, Department of

(Footnote continued)

The court below ignored the essential thrust of this

statute. It looked, instead, to the 1977 Amendments

which were designed to alleviate some of the economic

distress in eastern and midwestern coal mining areas

caused by the earlier dramatic shift to western coal. Thus,

the 1977 Amendments made minor adjustments to the

overall federal policy to encourage modestly the produc-

tion of high sulphur eastern and midwestern coal. (See

Opinion 29; Apdx. 34a). The legislative history of the

1977 Amendments makes clear, however, that they did not

fundamentally change the vigorous national energy policy

to encourage the production of western coal, and that

Congress intended “continued strong demand for low-

sulphur coal in all regions of the Nation,” including the

west. H.R. Rep. No. 294, 95th Cong., Ist Sess., reprinted

in [1977] U.S. Code Cong. & Ad. News 1077-1577 at

1245. In no sense can the 1977 Amendments be read as a

reversal of the previous national policy to encourage the

production of western low sulphur coal.*

By focusing on a side issue—whether “Congress would

rather that eastern and midwestern plants used ‘local

coal,’ even coal with higher sulfur content than western

low sulfur coal” (Opinion 29; Apdx. 34a)—the Montana

courts missed an important additional aspect of the over-

(Footnote continued)

Worker’s Compensation of the State of Montana Department of

Labor. See also Opinion 4; Apdx. 6a).

° According to the EPA, even after the 1977 Amendments are taken

into account, production from the Northern Great Plains must grow

from 54 million tons in 1975 to 602 million tons in 1995, or more than

eleven times, to meet national goals; if the 1977 Amendments had not

been adopted, the growth would have been to 630 million tons. See

Table 4, EPA Tables Relating to New Standards for New Coal-Fired

Power Plants (May 25, 1979). See also Bureau of Land Management of

the Department of Interior, Final Environmental Statement, Federal

Coal Management Program at 2-31 (April 1979); U.S. Department of

Energy, Energy Supply and Demand in the Midterm: 1985, 1990, and

1995 at 106 (April 1979).

all national policy. In many regions of the country, the

only feasible source of coal is western coal; in those

regions, the choice between eastern and western coal does

not exist as a practical matter. If one accepts that there is

a federal policy to use coal generally, it must necessarily

mean the use of western coal.

For example, we call the Court’s attention to the

following representation of the State of Texas to the court

below (Brief Amicus Curiae of the State of Texas at 17-

18):

[F]or economic reasons, Western coal is the only practical

energy alternative for Texas and probably most of the

western United States. Texas would show at [a] trial on

the merits that the high cost of transportation of Eastern

coal to Texas precludes its use and use of Midwestern coal

is a break-even proposition only at Texas cities served by

barge. When the added costs of inland rail transportation

from dock to generating plants are added to the costs of

pollution and pollution control for the higher sulphur

content of the Midwestern coal, Western coal is clearly

seen as being the only feasible alternative to the use of

petroleum,

For Texas and perhaps most of the West, Western coal

is practically the only coal. The coal tax, however, frustra-

tes the use of that coal. (Emphasis supplied).

The fact is that for parts of the country western coal is

the only feasible alternative. Therefore, the policy to

encourage coal generally—apparently accepted by the

Montana courts— must mean encouragement of the use

of western coal.

At a minimum, if there were any question about this

policy it should have been resolved at a plenary trial

where the policy could have been explored through the

testimony of regulators, administrators, and expert wit-

nesses. The Montana courts’ parochial and cursory re-

view of this complex subject does not provide an objec-

tive answer to the issue of the contours of this national

policy. At a minimum, a trial was required. |

B. The Issue of “Substantial Frustration” Raises

Questions of Fact which Require A Trial

The Montana courts not only misperceived the con-

tours of our national energy policy, but also the basic

constitutional standards set forth by this Court. Although

the court below, at times, paid lip service to the “substan-

tial frustration” test, it basically held that the tax could

not be preempted under the Supremacy Clause unless it

was expressly or by necessary implication shown to be

prohibited by federal law. (Opinion 27; Apdx. 31a). This

is plainly wrong.

The paramount power of federal law under the Su-

premacy Clause with respect to state tax legislation was

firmly established over 150 years ago in the landmark

decision, McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316

(1819). Since that time, a number of other state taxes

have been struck down because their effect has substan-

tially frustrated a Congressional purpose or otherwise

conflicted with federal law. E.g., Weston v. The City

Council of Charleston, 27 U.S. (2 Pet.) 449 (1829). See

also Moe v. Salish & Kootenai Tribes, 425 U.S. 463

(1976); New Jersey Insurance Co. v. Division of Tax

Appeals, 338 U.S. 665 (1950); McGoldrick v. Gulf Oil

Corp., 309 U.S. 414 (1940).

As this Court has stated on numerous occasions, there

are three separate tests to determine the validity of a state

statute challenged on Supremacy Clause grounds. A state

statute is unconstitutional if:

1. Congress has expressly preempted the particu-

lar field of state regulation to the total exclusion of

the states; or if

2. The structure and purpose of federal regulation

with respect to a particular subject matter is so

pervasive as to “clearly and unmistakably” require

the conclusion that Congress intended to prohibit all

state action; or if

3. It conflicts with a federal enactment and stands

as an obstacle to its execution, either directly or by

frustrating the full effectiveness of the federal law.

Plaintiffs here relied on the third test of preemption,

from the outset. The Complaints allege (4 32; Apdx.

56a):

32. The Coal Severance Tax, on its face and as applied,

substantially frustrates and impairs fulfillment of the

foregoing national policies and, in particular, frustrates

and impairs the purpose of the aforementioned Acts of

Congress.

Under this preemption test, any state legislation which

“stands as an obstacle to the accomplishment and execu-

tion of the full purposes and objectives of Congress” or

“frustrates the full effectiveness of federal law” is invalid.

Ray v. Atlantic Richfield Co., 435 U.S. 151, 158 (1978);

Jones v. Rath Packing Co., 430 U.S. 519, 525-26 (1977),

quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941);

Perez v. Campbell, 402 U.S. 637, 652 (1971). This is so

irrespective of whether Congress specifically intended to

preempt the particular state statute.

The issue here is whether, in the absence of any specific

conflict apparent on the face of a federal statute, a state

statute which “substantially frustrates” the objectives of

federal legislation is preempted by the Supremacy Clause.

In this connection, it is well settled that a finding of

substantial frustration may be based on an interference

not apparent on the face of a statute. E.g., Jones v. Rath

Packing Co., 430 U.S. 519, 540-43 (1977); Nash v.

Florida Industrial Commission, 389 U.S. 235, 239 (1967);

Hill v. Florida, 325 U.S. 538, 542-43 (1945). Plaintiffs do

not contend—and do not need to show—that the Mon-

tana Coal Severance Tax creates a head-to-head conflict

with a federal statute,* something the Montana courts

seem to require. Indeed, on several occasions state laws

have been held unconstitutional even though no direct

conflict with federal law existed. The court below com-

pletely ignored these cases.

For example, in Nash v. Florida Industrial Commis-

sion, 389 U.S. 235 (1967), the Court struck down a state

statute prohibiting payment of unemployment compensa-

tion benefits where the unemployment was due to a labor

dispute. There, as here, the state statute was said not to

conflict on its face witn any federal statute. Nevertheless,

the Court invalidated the state statute under the Suprem-

acy Clause because it found that the effect of requiring a

worker to choose between collection of unemployment

benefits or filing an unfair labor charge had a direct

° In fact, this Court has held that a state statute may unconstitu-

tionally frustrate any Congressional enactment, even though the state

and federal statutes apply to entirely different areas or subject matters.

Thus, in Perez v. Campbell, 402 U.S. 637, 649-52 (1971), the Court

held invalid a state law which suspended drivers’ licenses of persons

who failed to pay judgments in law suits involving automobile acci-

dents because the suspension conflicted with federal legislation regulat-

ing discharge in bankruptcy.

tendency to frustrate a broad policy of Congress (as

reflected in the National Labor Relations Act) to en-

courage the filing of unfair labor practice charges. In so

doing, the Court stated (page 239):

Florida should not be permitted to defeat or handicap a

valid national objective by threatening to withdraw state

benefits from persons simply because they cooperate with

the Government’s constitutional plan. (Emphasis sup-

plied).

Accord, Jones v. Rath Packing Co., 430 U.S. 519, 540-43

(1977); Hill v. Florida, 325 U.S. 538, 542-43 (1945).*

For these reasons, the court below erred in holding that

the Montana Coal Severance Tax is not preempted be-

cause the federal statutes declaring it to be national policy

to encourage coal production do not also expressly and

specifically prohibit or limit state severance taxes. Carried

to its logical conclusion, this would mean that no tax or

° Exxon Corp. v. Governor of Maryland, 437 U.S. 117 (1978), which

was relied on by the court below (Opinion 30-31; Apdx. 35a-36a) for

the proposition that a state statute cannot be preempted by a broad

national policy, is readily distinguishable. First, the federal statutes

involved here are much more specific—the Montana Coal Severance

Tax not only frustrates Congressional objectives in enacting these laws,

but in some instances stands as a direct obstacle to the implementation

of specific statutory provisions. See, e.g., Powerplant and Industrial

Fuel Use Act of 1978, Pub. L. No. 95-620, 92 Stat. 3289, 3298 (§ 201),

3305-6 (§ 301), 42 U.S.C. (Supp. III 1979) §§ 8301, 8311, 8341.

Secondly, the Court’s determination in that case concerning the issue of

“substantial frustration” was made after a full trial and on the basis of

a printed record which was over 750 pages long and which included the

testimony of no less than five expert witnesses concerning the effect of

the state statute on competition. See Appendix to appellate briefs in the

Supreme Court of the United States, Dkt. Nos. 77-10, 77-11, 77-12, 77-

47, and 77-64, filed November 17, 1977.

other form of state legislation, not expressly or implicitly

prohibited or limited by Congressional legislation, would

ever be invalidated, regardless of the effect it may have

on federal policy.

This is not, and should not be, the law. In order for our

national government to function effectively, it is impera-

tive that the fifty individual states not be permitted to

enact separate laws which have the practical effect of

frustrating the effectiveness of federal law. Congress is

not, and should not be, required to anticipate all of the

myriad ways in which states may frustrate the effective-

ness of its laws. Given the wide scope of federal legisla-

tion today, this would be an impossible task and would

render the effectiveness of the Supremacy Clause a virtual

nullity.

Under the circumstances, it is apparent that a trial is

necessary here to explore the factual issues raised in

Count Two of the Complaint. At trial, plaintiffs would

prove, among other things, that the Montana Coal Sever-

ance Tax has already had, and will continue to have, a

substantial adverse effect on the Montana coal produc-

tion necessary to implement Congressional policies. In

this connection, they are prepared to proffer expert testi-

mony (based on extensive studies and computations)

designed to show (i) that without the tax, production of

Montana coal would rise an additional 20 million tons

annually by 1990, and (ii) because of the tax, planned

mines in Montana have not opened, existing mines are

operating below capacity, coal contracts have been can-

celled, and new contracts for Montana coal have dropped

off precipitously.

—_

—

Plaintiffs’ allegations that the Montana Coal Severance

Tax “substantially frustrates and impairs” fulfillment of

certain national energy policies raises questions of fact

which, for purposes of defendants’ motion to dismiss,

must be accepted as true. See generally Buttrell v.

McBride Land & Livestock, 170 Mont. 296, 553 P.2d 407

(1976). Consequently, Count Two of the Complaint states

a valid claim under the Supremacy Clause and the court

below erred in dismissing it prior to trial.

IV. THE TAX SUBSTANTIALLY FRUSTRATES THE

FEDERAL STATUTORY DIVISION OF ROYAL-

TIES FROM FEDERAL COAL DEPOSITS AND

SHOULD BE HELD INVALID UNDER THE SU-

PREMACY CLAUSE

In Count Three, plaintiffs assert that the Montana

Coal Severance Tax violates the Supremacy Clause of the

United States Constitution because the tax grossly distorts

the compromise between the federal government and the

states expressed in the Mineral Lands Leasing Act of 1920

(ch. 85, 41 Stat. 437) (the “1920 Act”), as amended by the

Federal Coal Leasing Amendments Act of 1975 (Pub. L.

No. 94-377, 90 Stat. 1083), and thus “substantially frus-

trates” the central purposes of these Acts. (Complaint

44 41-44, Apdx. 58a-59a). This federal legislation was the

culmination of more than a century-long, sometimes

divisive, debate concerning the ownership, disposition

and use of federally-owned mineral reserves in the west-

ern territories and states.*

° See, e.g., H.R. Rep. No. 17 (Part 1), 64th Cong., Ist Sess. 3 (1916);

H.R. Rep. No. 17 (Part 2), 64th Cong., Ist Sess. 8 (1916) (minority

views); H.R. Rep. No. 668 (Part 2), 63d Cong., 2d Sess. 6 (1914)

(minority views); 53 Cong. Rec. 980-81 (1916) (remarks of Rep.

Taylor—Colo.).

In the end, the federal government retained the

minerals for the people of the nation, subject to payment

of an agreed upon share of the mineral royalties to the

states in which the minerals were located. Ch. 85, §§ 1-2,

41 Stat. 437-38; ch. 85, § 35, 41 Stat. 450. On this basis, a

long-standing regional dispute was finally compromised

and resolved.

The court below did not dispute the district court’s

holding that the purpose of the 1920 Act was to share the

“economic rents” from federally-owned coal deposits

between the federal and state governments in the pre-

scribed proportion provided by the statute. (See District

Court Opinion 29-30; J.A. 84a). As noted above (pages 9-

10, supra), these “economic rents” are the difference

between the costs of production, including a reasonable

profit, and the market price of the coal. This difference is

normally available for payment of royalties or production

taxes.

Plaintiffs allege that the tax is so excessive in amount

that it seriously undercuts and disrupts this compromise

by explicitly appropriating directly to Montana a major

part of the “economic rents” attributable to the extrac-

tion of federally-owned coal, contrary to the mechanism

adopted by the Acts. MONT. CODE ANN. § 15-35-

101(e) (1979), Apdx. 62a-63a; Complaint 4 41, Apdx.

58a. This is so for the following reason: the higher the

proportion of economic rents appropriated for the sever-

ance tax, the less that will be available for payment of

royalties to the federal government. Potential coal pro-

ducers, in calculating the amount they are wiling to bid

in royalties for federal leases, will necessarily compute the

amount of state tax payable on production and must

naturally reduce the amounts they are willing to bid for

royalties accordingly.

The severance tax was expressly designed to absorb the

available economic rents in this fashion.* In doing so, it

directly conflicts with the scheme of the 1920 Act.

The reliance by the court below (Opinion 32-33; Apdx.

38a) on a proviso in the 1920 Act was misplaced. It held

that the tax was not preempted because the Act specifi-

cally provided that the states could impose taxes, and did

not impose any corresponding limitation on this right of

the states to tax. (Opinion 32-33; Apdx. 38a). The 1920

Act did recognize the right of the states to impose some

tax on coal, but that point is essentially irrelevant here.

The Act specifically provides (ch. 85, § 32, 41 Stat. 450,

30 U.S.C. § 189 (1976)):

Nothing in this chapter shall be construed or held to affect

the rights of the States or other local authority to exercise

any rights which they may have, including the right to levy

and collect taxes upon improvements, output of mines, or

other rights, property, or assets of any lessee of the United

States. (Emphasis supplied).

This proviso must be read in light of its purpose, and

not in a manner which violates the central purpose of the

Act. C. Sands, Sutherland Statutory Construction,

§§ 20.22 at 74-75, 47.12 at 92 (4th ed. 1972-73). The

proviso was included because Congress believed the roy-

alty and rental payments provided by the Act might not

necessarily be sufficient to cover legitimate impact costs.

E.g., 58 Cong. Rec. 7646, 7649 (1919) (remarks of Rep.

Mondell). There is no suggestion anywhere that Congress

° Thus, the statute provides (MONT. CODE ANN, § 15-35-101(e)

(1979)):

[Coal in Montana . . . is in sufficient demand that at least one-

third of the price it commands at the mine may go to the economic

rents of royalties and production taxes.

used a proviso of this type as a license to the states to pass

unwarranted taxes and thus upset the compromise which

was the basis of the Act.

Mid-Northern Co. v. Montana, 268 U.S. 45 (1925),

cited by the court below (Opinion 33, Apdx. 39a), does

not support the position that Montana has an unfettered

right to impose severance taxes on federal coal. In that

case, this Court merely held that lessees of the federal

government, such as plaintiffs here, were not immune

from state severance taxes, in that case a tax of 1%.

Neither the proviso in the 1920 Act nor the Mid-Northern

case speaks to the issue here. Neither should be read as a

license to a state to frustrate the central purposes of the

federal scheme by appropriating to itself the economic

rents from the mining of coal.

The preemption principles previously discussed in con-

nection with Count Two of the Complaint (pages 41-46,

supra) are equally applicable here. In this respect, the fact

that Congress did not specifically limit the amount of

State taxes is not controlling. Any state statute which

substantially frustrates the “accomplishment and execu-

tion of the full purposes and objectives of Congress” is

rendered invalid by the Supremacy Clause. Hines v.

Davidowitz, 312 U.S. 52, 67 (1941).

The purpose of these Acts was to divide the mineral

wealth owned by the federal government in accordance

with a prescribed formula. By enacting the Coal Sever-

ance Tax, Montana has in effect declared that the fe-

derally-owned coal which is mined there pursuant to the

provisions of the 1920 Act, as amended, belongs to the

people of Montana—not to the nation as a whole. By

collection of this tax, Montana has effectively appro-

priated to itself the economic rents from such coal devel-

opment and has thus far overstepped an exception de-

signed only to permit additional taxes necessary to cover

excess impact costs. Plaintiffs thus contend that the tax

substantially frustrates and impairs the important federal

policies set forth in the 1920 Act.

Under the circumstances, the court below erred in

affirming the district court’s dismissal of Count Three of

the Complaints.

CONCLUSION

For each of the reasons set forth above, the judgment

below dismissing the Complaints should be reversed and

the case remanded for trial.

Respectfully submitted,

WILLIAM J. CARL WILLIAM P. ROGERS

40 East Broadway Counsel of Record

Butte, Montana 59701 WILLIAM R. GLENDON

(406) 723-5421 STANLEY GODOFSKY

STEPHEN FROLING

JAMES N. BENEDICT

Rogers & Wells

200 Park Avenue

Attorney for Appellant

Western Energy Company

Of Counsel: New York, New York 10166

GEORGE J. MILLER (212) 972-7000

Dechert Price & Rhoads

717 Seventeenth Street PATRICK F. HOOKS

Denver, Colorado 80202 THOMAS A. BUDEWITZ

(303) 623-1777 218 Broadway

Townsend, Montana 59644

Attorney for Appellant (406) 266-3476

Westmoreland Resources, Inc.

Attorneys for Appellants

January, 1981 except Western Energy Company

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