Amicus Brief — Commonwealth Edison Co. v. Montana

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re eee ge ne

No. 80-581 | nen

Iu the Supreme Court of the Huited States ——-

OCTOBER TERM, 1980 ~

_— |

COMMONWEALTH EDISON COMPANY, ET AL., APPELLANTS

Vv.

STATE OF MONTANA, ET AL.

ON APPEAL FROM THE SUPREME COURT

OF THE STATE OF MONTANA

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

WADE H. MCCREE, JR.

Solicitor General

ANTHONY C. LIOTTA

Acting Assistant Attorney General

Louts F.. CLAIBORNE

Deputy Solicitor General

EDWIN S. KNEEDLER

Assistant to the Solicitor General

EDWARD J. SHAWAKER

CHRISTOPHER KIRK HARRIS

RICHARD J. LAZARUS

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

SS A LET CT EE ESTO EASIEST

Iu the Supreme Court of the United States

OCTOBER TERM, 1980

No. 80-581

COMMONWEALTH EDISON COMPANY, ET AL., APPELLANTS

Vv.

STATE OF MONTANA, ET AL,

ON APPEAL FROM THE SUPREME COURT

OF THE STATE OF MONTANA

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

QUESTIONS PRESENTED

1. Whether, conceding that the Mineral Lands Leasing

Act of 1920 permits a state to impose some tax on a lessee

who severs coal from federal lands, the Montana Coal

Severance Tax, as applied to the mining of federally

owned coal in that State, is nevertheless inconsistent

with the Mineral Lands Leasing Act and therefore in-

valid under the Supremacy Clause of the Constitution

because of the amount of the tax.

2. Whether, conceding that federal legislation govern-

ing the development and use of energy resources does not

bar states from imposing some tax on the severance of

coal, the Montana Coal Severance Tax is nevertheless in-

consistent with federal energy legislation and therefore

invalid under the Supremacy Clause of the Constitution

because of the amount of the tax.

38. Whether, conceding that the Interstate Commerce

Clause of the Constitution does not, of its own force, bar

(I)

a state from imposing some tax on the severance of coal

within its borders, the rate of the Montana Coal Sever-

ance Tax is impermissible under the Commerce Clause

either because it is not “fairly related” to the services

furnished to coal producers by the State of Montana or

because most of the coal mined in Montana is shipped out

of the State.

TABLE OF CONTENTS

Argument: Page

Introduction and summary .....................---.-----------+-------+++- 1

I. As applied to the mining of federally owned coal,

the Montana Coal Severance Tax is authorized

by and therefore is not preempted by the Min-

eral Lands Leasing Act of 1920............................ 5

II. The Montana Coal Severance Tax is not pre-

empted by the federal policy favoring the use of

BEE NAR ARRON OSE ei TE RAR CNC Ser TOO rs eels Ret TO 14

III. The Montana Coal Severance Tax is not uncon-

stitutional under the Commerce Clause .............. 21

en 1 ranhaibanddiendinninbaaudsaiinisaniets 31

TABLE OF AUTHORITIES

Cases:

Arizona Public Service Co. v. Sneed, 441 U.S. 141.. 2

Ass’n of American Railroads v. Costle, 562 F.2d

RRR IE sire Se EWR eae ea Oe ae 15

Bissette v. Colonial Mortgage Co., 477 F.2d 1245.... 15

Boston Stock Exchange v. State Tax Comm., 429

aes Coa areeenininge a enoanionn 24

Budget Rent-A-Car of Washington v. Multnomah

Cama TE FP TI asinine tttinencopeees 29

Carmichael v. Southern Coal & Coke Co., 301 U.S.

RR aR vu eo A glee cri tp Ree ne OO. rrr 5, 27, 30

Carter v. Carter Coal Co., 298 U.S. 238 .................. 15

Colonial Pipeline Co. v. Traigle, 421 U.S. 100 ........ 28

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

IIR sens MONO NSA PEO om RINE De PORT ENO! re 5, 21, 28

Connecticut General Life Ins. Co. Vv. Johnson, 303

I a cca cacdeileademeaied 29

Evansville Airport v. Delta Airlines, 405 U.S. 707.. 30-31

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

NES LOE PL IS Fo LC LAER WOT RAR, RAD 7

Cases—Continued v Page

Exxon Corp. Vv. Wisconsin Dep’t of Revenue, No.

70-500 (June 16, 1960): ....................-......... 22, 23, 27, 30

General Motors Corp. Vv. Washington, 377 U.S.

GP shee POE ES IN UD PS OT 28, 29

Heisler v. Thomas Colliery Co., 260 U.S. 246 ........ 4, Zi,

23, 24, 26

Hines v. Davidowitz, 312 U.S. 52 ......................-...---- 17

H. P. Hood & Sons, Inc. v. DuMond, 336 U.S. 525.... 22

Hughes v. Oklahoma, 441 U.S. 322 ...............-...--- 22, 23, 24

Hughes Tool Co. v. Meier, 486 F.2d 598 .................. 15

Hunt v. Washington State Apple Advertising

a: Te is i hence chine eienmwctingsorninesiizes 24

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

es I iia a an aieninaiie 27, 30

Lauf v. E. G. Shinner & Co., 303 U.S. 328 .............. 15-16

Lehigh & New England Ry. v. ICC, 540 F.2d 71,

cert. Genied, 459 U.S. BOGE <u... cccsics-ss..-.-......-..... 15

Lewis v. B T Investment Managers, Inc., No. 79-45

Ee IN ask pits apaieinteinseamcciaianekansecetoionneisene 23, 24

McLain V. Real Estate Board of New Orleans, Inc.,

rg SERA SDAIN ST Nit ri a ee er 22

McLeod V. J. E. Dilworth Co., 322 U.S. 327 ............ 24

Mid-Northern Oil Co. v. Montana, 268 U.S. 46 ...... 8, 9,

10, 14

Mobil Oil Corp. v. Commissioners of Taxes, 445

TERRES SR RIA crease kere neat en a CO 27

Nat’l Bellas Hess, Inc. v. Illinois Revenue Dep’t,

I TI eich catincdGeicudaie peice sihcaclanntbenniaetescatTotts 29

Nat’l Geographic Society v. California Board of

Equalization, 480 U.S. 561 ..................-....----- 27, 28, 29

Nippert v. Richmond, 327 U.S. 416 .................--..----- 29

Oliver Iron Mining Co. v. Lord, 262 U.S. 172 ........ 24

Philadelphia v. New Jersey, 487 U.S. 617 ........ 23, 24, 25

Pittsburgh v. Alco Parking Corp., 417 U.S. 369 ...... 27

Ray v. Atlantic Richfield Co., 435 U.S. 151 .......... 17

Reeves, Inc. v. Stake, No. 79-677 (June 19, 1980) .. 25

Schlesinger v. Reservists Committee To Stop The

FR Be Ts Te ciwctni hi enatesrenrsntisencnnenpirennens coeberes 8

Sinclair Refining Co. v. Atkinson, 370 U.S. 195...... 15

Standard Pressed Steel Co. v. Wash. Revenue

Daa, BED TBR. DD onesies snscncesevncwcsenipinannsnesncencenes 29

Cases—Continued Page

Train V. City of New York, 420 U.S. 35 .....00000000..... 16

United States v. Richardson, 418 U.S. 166 .............. 8

Ventura County v. Gulf Oil Corp., 601 F.2d 1080,

gE Ee Ran” AI eee ES 10

Washington Revenue Dep’t v. Ass’n of Washing-

ton Stevedoring Cos., 485 U.S. 734 .....0...000.0002..... 27, 30

West v. Kansas Natural Gas Co., 221 U.S. 229 ...... 24

Western Livestock v. Bureau of Revenue, 303 U.S.

STUD "scsi capcschchncanlpielcdaalalsbcaetaclllaccieh Salk eds iA ndpenmisoatclaliib 26, 28

White Mountain Apache Tribe v. Bracker, No.

yb ee BRE | ae eane ane oe en eeranee 14

Wickard Vv. Filburn, 817 U.S. 111 .200..0002002. 23

Wisconsin V. J. C. Penney Co., 311 U.S. 485 .......... 28, 29

Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S.

a ee 15

Yazoo & Mississippi Valley R.R. v. Thomas, 1382

LSU RICE RE Mean i Sas UU oe SA Bea Ns Deha 15

Constitution, statutes and regulations:

United States Constitution :

NE IESE i LA SE ee le ee 3

Art. I, § 8, cl. 8 (Commerce Clause) ............ 1,4

22, 23, 27

Art. VI, cl. 2 (Supremacy Ciause) .................. 1, 15

Fourteenth Amendment (Due _ Process

ID. siicdeica Dice scam beidneitnicaetatnindinas ieee ihaglaeee 27

Clean Air Act, 42 U.S.C. (& Supp. III) 7401 et

OS naciididss crcidiatictiascaih ealdmanacententiatescssiaiabienaiabilees 21

42 U.S.C. (Supp. III) 7411, (as amended by

Pub. L. No. 95-190, Section 14(a) (7)-(9},

ae Remover ararrne roms Sameera 21

42 U.S.C. (Supp. III) 7421, (as amended by

Pub. L. No. 95-95, Section 120(a), 91 Stat

, PRE Seren Rua one nL aN Sree ORR oo © Tt eSE 21

Energy Policy and Conservation Act of 1975, Pub.

L. No. 94-168, Section 2(6), 89 Stat. 871, 42

Was MI sicnicecneligdieilsplg enka cbantecuticmahieaiCia 15

Constitution, statutes and regulations—-Continued Page

Federal Coal Leasing Amendments Act of 1976,

Pub. L. No. 94-377, 90 Stat. 1083 et seq.:

Re ME, BOD noc ccccesecncnsecnsncececcceseseeee 7

oo sscennsevenecesesnccccceces 7

ON - q

Section 9(a), 90 Stat. 1089 ...........................-.... 6

Beste 26, Se went. 2001 ...................-....-..-.------- 7

Federal Land Policy and Management Act of 1976,

Pub. L. No. 94-579, Section 317, 90 Stat. 2770.... 6

Indian Mineral Leasing Act of 1938, ch. 198, 52

Stat. 8347, 25 U.S.C. 396a-396g .........................-.--- 14

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

EB | a een nee 3

Section 32, 30 U.S.C. 189 .............. 3,8, 9, 12, 13, 14

Section 35, 30 U.S.C. (1970 ed.) 191 -............. 6

EE, are 6, 12,13

Section 2, 30 U.S.C. (1970 ed.) 201 ............ 7

Section 2(a), 30 U.S.C. (1970 ed.) 201(a).. 7,18

Section 2(b), 30 U.S.C. (1970 ed.) 201(b).. 7

Section 7, 30 U.S.C. (1970 ed.) 207 ........ 6, 18, 14

Section 39, 30 U.S.C. (1970 ed.) 209, as

added by ch. 845, 47 Stat. 798, and amended

by ch. 916, Section 10, 60 Stat. 957 ............ 6, 7

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

621, 92 Stat. 3352, 15 U.S.C. (Supp. III) 3301

ail eneaienepasveeevsl dhaqessosoereceansorsensescsscocsors 18

Section 101-110, 15 U.S.C. (Supp. III) 3311-

a seonegpentneopecesccovecose 18

Section 110(a)(1), 15 U.S.C. (Supp. III)

IID a ccsiccccecascecseercscercssevscenccomecearorecccses 18

Powerplant and Industrial Fuel Use Act of 1978

(PIFUA), Pub. L. No. 95-620, 92 Stat. 3289,

42 U.S.C. (Supp. ITI) 8301 et seg. -.................. 4

Section 102(b) (3), 42 U.S.C. (Supp. III)

BHG1 (BD) (GB) -..---.---0200---..00ecnce-cccoveqenccseeccooeccoesee 15

VII

Constitution, statutes and regulations—Continued Page

Section 201(1), 42 U.S.C. (Supp. III)

NE a rallies chseanapanereeiteeenotna 16

Section 202(a), 42 U.S.C. (Supp. III)

ae iid 16

Sections 211-212, 42 U.S.C. (Supp. III) 8321-

a i ane 17

Section 211(a)(1), 42 U.S.C. (Supp. III)

ES TEAR Bc copes Rte ROU Sere 17

Section 211(a) (3), 42 U.S.C. (Supp. IIT)

coos ipeicebimeneateinreeconens 18

Section 211 (e) (2) (A), 42 U.S.C. (Supp. IIT)

I i ete 17

Section 212(a) (A), 42 U.S.C. (Supp. III)

sc a cacsutvecinscteaenmire tons 17

Section 212(a)(C), 42 U.S.C. (Supp. IIT)

a ci scccoswrsetlincennsanncnieticinedén 18

Section 212(b), 42 U.S.C. (Supp. III)

EBL EE EE aR ae GEA POTS SCLIN Nee 18

Sections 301-308, 42 U.S.C. (Supp. III) 8341-

IR A Le PRI Ree cn ok ee Dee 16

Sections 301-312, 42 U.S.C. (Supp. III) 8341-

ee ae 17

Section 801(b) (3), 42 U.S.C. (Supp. III)

ia ales Uelenaaeoainien 17

Section 302(a) (3), 42 U.S.C. (Supp. III)

SSIS ANE SR OE ne OEE 9 AONE 17

Section 311(a)(1), 42 U.S.C. (Supp. III)

cree HE Reeth Sede ages Ly Nedle ae 17

Section 311(h)(2)(A), 42 U.S.C. (Supp.

Se IN CE GRD So caceiehcectnnncpeencctbnvertcesvns 17

Section 312(a) (A), 42 U.S.C. (Supp. IIT)

Ne ON gains tots ccsew cc acheatarnsirenardies seh are 17

Section 312(a)(C), 42 U.S.C. (Supp. IIT)

as icles eaienieenasiond 18

Section 312(b), 42 U.S.C. (Supp. III)

REE aR TIER Eee dent en eNO Oe 18

Section 601(a)(1), 42 U.S.C. (Supp. III)

ER Bt ce... insahudeetetansaisidomucenia beable 4,19

Section 601(a) (2), 42 U.S.C. (Supp. III)

II, cetcrasicasnomehtebibidechiasdpleckcietorianea nies 19, 20

Vilt

Constitution, statutes and regulations—Continued Page

Reclamation Act of 1902, ch. 1098, Section 1, 32

i es Se Be BIE: doitnccsecstteeccnsnebinisinaseainnses 6

42 U.S.C. (Supp. II) 7152(b) and 7158 ................ 13

40 C.F.R. § 60.40 (a) -60.49 (2) (a) -.......----2-----22ee---- 21

43 C.F.R.:

I EID, saseincbubeieguneninn 13

I I a acs gesecutnneiehqinmiinn 7

I i eeeieebibeinenenion 7

Miscellaneous:

Coal Severance Taxes: Hearings on H.R. 6625,

H.R. 6654, and H.R. 7163 before the Subcomm.

on Energy and Power of the House Comm. on

Interstate and Foreign Commerce, 96th Cong.,

Gl ne: ERRIIOD, -sicectinscsttspenccstessipstoseereimstiasiennsstesoinns 2

Comment, The Powerplant and Industrial Fuel

Use Act of 1978: Fuel Replacement, 3 Harv.

Bret Tn, TG. TG CABG O) vicicnessndncennentensecis<.-. 17

51 Cong. Rec. (1914):

i II deiccsie sieksinenpinbcnaesocanst in sncnvendcaminaetipviiianedtoe 10

DO. LABECE-LAGEG ....-.2..-2-.000cnc0cereceneenvcencensessevenssses 10

Wi, III casncnactiecsstcdaressnisshepnbinecopeatinpetieahibittpseetuodios 10

ie PIII actin sctcicesiveseenecenconatdbasnsendinstnaqeconeesosnnnuntesinn 10

Wi SII coaiccicicirsntsnsepasascenespancenntsattsieonhonnnestinanitiortien 10

53 Cong. Rec. (1916) :

Ot, OE nian nencececcnsetanscacadasmsntssesacninsecinhonncicns 10

58 Cong. Rec. (1917):

Si FTG BOW ciesnsusssonsnnensenseshatootonesasnsneststoastnennens 10

122 Cong. Rec. (1976) :

WA NBII scccccisiiccsinatctnsarinsnehciinenssheecuntlantbapienmnencpaminasiine siege 11

Os TD aatlavitiunhsessnsentensniansnnstoniecsenilaiipecsidaiidedaamiiasien 11

Bs RIE ancien iniisincsisnensnscsapoiieinmenpeipnscipslicslventanmivetunieces 11

Developments in the Law, Federal Limitations on

State Taxation of Interstate Business, 75 Harv.

Bo, Ba, Be GUI © ccicesinntinttnivnccosvtecenacenbylenuictinnioente 25, 30

Miscellaneous—Continued Page

48 Fed. Reg. 42160 (1978) .........-.....--..-----ce--cesecceseeee 21

44 Fed. Reg. (1979) :

Oe EE ii dpttcisinesncereencoteremnemenrennecanintnnteasiiaeseiie 21

i I cscs carcerteecnentnnienepiccensnenteiotnetiennaest 21

45 Fed. Reg. (1980) :

i I nnn nnn nnsc enn scnemnecsnsnneceenenennansseweccnene 21

9 I sweets icanserscnnennasecenesesmenananpance 7

p. 84988 (10 C.F.R. 378.111) ...........-.------------- 13

P. Gates, History of Public Land Law Develop-

Ca EI isn wesisieee tn petinsenncins neritic 10

Hellerstein, Constitution Constraints on State and

Local Taxation of Energy Resources, 31 Nat'l

- fe) 6 6S)... ee 25, 26

H.R. 16136, 63d Cong., 2d Sess. (1914) .................. 10

H.R. Conf. Rep. No. 95-1749, 95th Cong., 2d Sess

RII wiiiscdaragennciectncerteenecsiceseceneeneteieaesonseninenenmmenitis 18, 19

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

I itso ncn aniecelceachansntnapaiietonstninetninlaenimmeneits 10

H.R. Rep. No. 95-299, 95th Cong., 1st Sess.

I sicceecascscipertandpchsseanaticitovekalanininielbicanenenentcaipansielie 21

H.R. Rep. No. 96-1527 (Pt. 1), 96th Cong., 2d

a} | a CL en, Cen oc NSO Nn OEE 2,12

Oversight on Federal Coal Leasing: Oversight

Hearings Before the Subcomm. on Mines and

Mining of the House Comm. on Interior and In-

sular Affairs, 94th Cong. 2d Sess. (1976) -......... 11-12

R. Posner, Economic Analysis of Law (2d ed.

|, IORI RR Sere ermesence Redness rovers 8, 25

S. 2775, 66th Cong., ist Sess. (1919) ...............-..-... 10

S. 4898, 68d Cong., 2d Sess. (1914) ...............--..---.--. 10

S. Rep. No. 985, 75th Cong., Ist Sess. (1938) ........ 14

Secretarial Issue Document; Fair Market Value

and Minimum Acceptable Bids on Federal Coal

Leases C-1 (May 28, 1960) <...............-...---.<-------0-+ 13

1A C. Sands, Sutherland Statutes and Statutory

Construction (4th ed. 1972) ...........----------:-1-0+ 15

Miscellaneous—Continued Page

U.S. Department of Energy, Legislative History of

the Powerplant and Industrial Fuel Use Act,

TI a recnssikctetbioncenntbieiprrepecanendcianeensnsese 20

U.S. Dept. of the Interior, Final Environmental

Statement: Federal Coal Management Program

IID civsccntininacaeniinincicetnessiniipssieansjertiovstensiiatitebnmsnaichmnepnaien 13

U.S. Department of Justice, Antitrust Division,

Competition in the Coal Industry (1980) ............ 8,13

This brief is submitted in response to the Court’s

invitation of December 8, 1980.

ARGUMENT

INTRODUCTION AND SUMMARY

Appellants assert that the Montana Coal Severance

Tax, imposed at a rate of up to 30 percent, is in con-

flict with federal legislation and therefore invalid under

the Supremacy Clause of the Constitution, Art. VI, cl. 2,

and that it discriminates against and creates an undue

burden on interstate commerce in violation of the Inter-

state Commerce Clause of the Constitution. Art. I, § 8,

cl. 8. They do not argue that federal legislation and the

Commerce Clause prohibit the State of Montana from im-

posing any severance tax on the mining of coal within its

borders. Indeed, appellants conceded in the Montana

Supreme Court that the State may levy some tax, perhaps

12% to 15% of the value of the coal (J.S. App.

9a). As that Court observed, appellants argue only “that

at some point not specified, between fifteen to thirty per-

cent of the value of the coal, Montana’s coal severance -

tax butts into the lintel of federal impermissibility”

(ibid.).

Thus, under each of their arguments, appellants ask

this Court to fashion a test for the validity of state taxes

that would require state and federal courts, as a matter

of federal constitutional law, to calculate acceptable rates

or levels of taxation of property or activities that ap-

pellants concede have traditionally been regarded as

legitimate subjects of state taxation. It may be doubted

whether a legal test can be fashioned that would ade-

quately take into account the myriad—and competing—

economic, geographic, demographic, social and political

considerations that must inform a determination of an

acceptable rate or level of state taxation, and yet be

reasonably capable of application in a broad range of in-

dividual cases. But the difficulty of the judicial under-

taking to one side, the nature of the fact-finding and

(1)

judgment that would be entailed only reinforces the con-

clusion that the appropriate level of state taxation is,

under our federal system, fundamentally a political mat-

ter for legislative resolution—by the states in the first

instance and, if necessary, by Congress, when particular

state levies are thought to be contrary to federal in-

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

141, 150 (1979).

The present controversy has not escaped the atten-

tion of Congress. Several bills were introduced during

the 96th Congress to limit the rate of state severance

taxes (S. 2695, H.R. 5294, H.R. 6625, H.R. 6654 and

H.R. 7163), and one was introduced to limit the rate

applied to energy resources extracted from federal and

Indian lands (S. 1778). On December 4, 1980, the House

Committee on Interstate and Foreign Commerce reported

on H.R. 6625, which would have limited state coal sev-

erance taxes to a rate of 1214%. The bill was recom-

mended with the Montana tax specifically in mind. See

H.R. Rep. No. 96-1527 (Pt. 1), 96th Cong., 2d Sess. 3-8,

14 (1980). Similar bills have been introduced in the

97th Congress (S. 178, H.R. 1313).

Appellants have urged the passage of such legislation,’

but, failing that, they ask the courts tc impose a com-

parable limitation. Judicial intervention is necessary, they

argue, because if the Montana tax ultimately is upheld,

it “foreshadows a trend in state taxation of energy re-

sources which can only lead to the Balkanization of this

Nation in the same way that OPEC’s efforts have frag-

mented the world economy” (Br. 7; see also id. at 5-6,

9-10, 25). They also see in the tax a threat to a na-

tional policy favoring the use of domestic coal to meet

the nation’s energy needs (Br. 35-46).

We must, of course, be apprehensive of any tendency

toward the Balkanization of the nation according to the

relative wealth or scarcity of energy resources in the

1 See Coal Severance Taxes: Hearings on H.R. 6625, H.R. 6654,

and H.R. 7163 before the Subcomm. on Energy and Power of the

House Comm. on Interstate and Foreign Commerce, 96th Cong.,

2d Sess. 93-182 (1980) (hereinafter “Hearings”).

various regions or states. We must be concerned as well

that the nation meet its energy needs and that it do so

without imposing unwarranted burdens on consumers

or bestowing undue windfalls on those who might seek

to profit from shortage. But the issue in this case is

not the economic or political wisdom of the state taxing

measure under review. More is needed for a court to

strike down a state statute as repugnant to the Federal

Constitution than a conviction that the statute will cause

disharmony among the states or is contrary to the welfare

of the nation, even if it is assumed that appellants would

make such a showing in this case. The focus of constitu-

tional analysis must be on the terms of the specific con-

stitutional and statutory provisions through wh’ch the

Framers and Congress have sought to “form a more per-

fect Union” and “promote the general Welfare.” United

States Constitution, Preamble. We are unable to conclude

that Montana’s Coal Severance Tax is repugnant to the

Commerce Clause and the specific statutory provisions

upon which appellants rely or that appellants must be

given an opportunity to make a factual showing before

the tax may be sustained.

1. Appellants contend that the Montana tax, as applied

to the mining of federally owned coal, is inconsistent

with the Mineral Lands Leasing Act of 1920, ch. 85,

41 Stat. 437, 30 U.S.C. 181 et seg., because it has the

effect of diverting to the State of Montana a major

portion of the revenues that would otherwise be cap-

tured by the United States. However, in Section 32 of

the 1920 Act, Congress provided that “nothing in this

chapter shall be construed or held to affect the rights

of the States * * * to levy and collect taxes upon * * *

output of mines, * * *.” By virtue of Section 32, federal

lessees are not “exempt from any form of state taxation

otherwise lawful.” Mid-Northern Oil Co. v. Montana,

268 U.S. 45, 50 (1925). The 1920 Act therefore has no

independent preemptive force. In any event, the Mineral

Lands Leasing Act of 1920 is intended to ensure only

a “fair return” from leasing, not to maximize the re-

covery of “economic rents,” with which the Montana tax

could be said to interfere.

2. Appellants assert that the Montana tax is pre-

empted because it frustrates a national “policy” favoring

the use of coal. But the only specific statutory provisions

—other than general prefatory language in several acts—

cited by appellants are those in the Powerplant and In-

dustrial Fuel Use Act (PIFUA) of 1978, 42 U.S.C.

(Supp. III) 8801 et seg. But although that Act man-

dates the use of coal instead of oil and natural gas,

it cannot, without more, be thought to manifest a clear

congressional purpose to preempt state law merely be-

cause that law may make the use of coal more ex-

pensive. In any event, Section 601(a)(2) of PIFUA

expressly contemplates the existence, not preemption, of

severance taxes by providing that such taxes will be

“taken into account” in allocating certain impact aid to

the states. The legislative history reveals that this meas-

ure was drafted with the Montana tax specifically in

mind.

3. We agree with appellants’ argument that the coal

severance tax is not immune from Commerce Clause

scrutiny on the theory that mining is “local”, not inter-

state commerce. But it does not follow that Heisler v.

Thomas Colliery Co., 260 U.S. 245 (1922), was incor-

rectly decided or that the Montana tax is invalid, given

a state’s strong interest in taxing the extraction of its

depletable resources.

Appellants’ contention that the Montana tax discrimi-

nates against interstate commerce because its burden

is borne primarily by out-of-state consumers must be

rejected. The tax is imposed at the same rate whether

or not it is shipped out of state and is therefore non-

discriminatory. Moreover, appellants’ argument that a

tax such as this can be found to be discriminatory de-

pends on an assertion that the state is exploiting a

“monopoly” position that enables it to export the tax

burden. Proof of this assertion would entail a complex

economic analysis of market demand and the economic

incidence of taxation and would infuse foreign principles

of antitrust law into the Commerce Clause.

Finally, appellants err in arguing that the tax is not

“fairly related to the services furnished by the State”

under the fourth prong of the test set out in Complete

Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).

Contrary to appellants’ assertion, this test does not re-

quire that the amount of the state tax must be roughly

equivalent to the value of services the taxpayer receives

in return. This Court made clear in Carmichael v. South-

ern Coal & Coke Co., 301 U.S. 495, 521-522 (1987),

that the Due Process Clause of the Fourteenth Amend-

ment does not require that taxes be assessed only in

return for services furnished to the taxpayer, and

the Commerce Clause does not require a different re-

sult merely because there is a nexus to interstate com-

merce. The “fairly related” test requires only that the

tax be measured by or levied in “proper proportion”

to the taxpayer’s activities or presence in the state. The

Montana tax, measured as a percentage of the value of

the coal taken, plainly is in “proper proportion” to the

activities of coal producers in the State.

AS APPLIED TO THE MINING OF FEDERALLY

OWNED COAL, THE MONTANA COAL SEVERANCE

TAX IS AUTHORIZED BY AND THEREFORE IS

NOT PREEMPTED BY THE MINERAL LANDS

LEASING ACT OF 1920

Appellants contend (Br. 45-50; Comp. {ff 34-44, J.S.

App. 56a-59a) that the Montana Coal Severance Tax,

as applied to the mining of federally owned coal, is in-

consistent with the Mineral Lands Leasing Act and

therefore is invalid under the Supremacy Clause of the

Constitution. They argue that under the Leasing Act of

1920, the “economic rents” attributable to the extraction

of federally owned coal—i.e., the difference between the

market price of the coal and the cost of its production (in

cluding a reasonable profit for the producer) —are to be

captured by the federal government in the form of pay-

ments made by coal producers pursuant to leases issued

under the Act. The payments thus received are then to

be divided between the states and the federal govern-

ment according to a statutory formula that, at present,

provides for the states in which the mining occurs to

receive 50% of the revenues, the reclamation fund to

receive 40%, and the Treasury of the United States to

retain the remaining 10%. 30 U.S.C. 191."

Appellants contend that Montana’s coal severance tax

is so excessive in amount that it seriously undercuts and

disrupts the “compromise” reflected in this division of

revenues between the federal government and the states

by appropriating directly to the State of Montana a

major portion of the “economic rents.” This is so, it is

argued, because potential coal producers, “in calculating

the amount they are willing to bid in royalties™! for

2 Section 35 of the Mineral Lands Leasing Act, ch. 85, 41 Stat.

450, 30 U.S.C. (1970 ed.) 191, as originally enacted in 1920, pro-

vided that all money received from the leasing of public lands

pursuant to the Act was to be paid into the United States Treasury

and then divided as follows: 3712% to the state in which the

leased lands are located to be used for roads and education; 52'.%

to the reclamation fund created by the Reclamation Act of 1902

(ch. 1093, Section 1, 32 Stat. 388, 43 U.S.C. 391); and the re-

maining 10% to miscellaneous receipts in the Treasury.

Section 35 was amended by Section 9(a) of the Federal Coal

Leasing Amendments Act (FCLAA) of 1976 (Pub. L. No. 94-377,

90 Stat. 1089) to provide for the division of royalties set forth

in the text. Section 35 was further amended by Section 317 of

the Federal Land Puiicy and Management Act of 1976 (Pub. L.

No. 94-579, 90 Stat. 2770) to delete the requirement that the

states’ share of revenues be devoted to schools and road con-

struction and to direct the states, instead, to give priority in

spending the proceeds to facilities and services in those areas of

the state that would experience an economic or social impact

from leasing activities:

3 The federal government receives revenues in three principal

forms: bonuses, royalties, and an annual rental charge for the

acreage leased. At present, bidders compete according to the

amount of bonus they will pay; the royalty is fixed. Section 7 of

the Mineral Lands Leasing Act of 1920 (ch. 85, 41 Stat. 439, 30

U.S.C. (1970 ed.) 207) originally provided for payment of a

royalty on federally owned coal of at least five cents per ton and

an annual rental of not less than 25 cents per acre in the first

year and not less than one dollar per acre after five years. (In

Section 39 of the 1920 Act, 30 U.S.C. (1970 ed.) 209, as added in

1983 (ch. 45, 47 Stat. 798), and amended in 1946 (ch. 916, Sec-

federal leases, will necessarily compute the amount of

state tax payable on production and must naturally re-

duce the amounts they are willing to vid for royalties

accordingly” (Br. 47; footnote omitted).

The factual premise implicit in this argument—that

the principal effect of the tax is to shift a major portion

of the relatively fixed “economic rents” attributable to

the extraction of federally owned coal from the Federal

Treasury to the State of Montana—is inconsistent with

the premises underlying their other arguments, which we

address in Points II and III, infra. There, appellants

argue that the efiect of the tax is to increase the cost of

Montana coal, thereby increasing the total amount of

tion 10, 60 Stat. 957), Congress authorized the Secretary to waive,

suspend, or reduce the rental or minimum royalty, and reduce

the production royalty, whenever necessary to promote develop-

ment or whenever leases cannot be operated successfully under

the terms provided). Section 2(a) of the 1920 Act (ch. 85, 41

Stat. 438, 30 U.S.C. (1970 ed.) 201(a)) provided for leasing

by competitive bidding—which would yield a bonus at the outset

of the lease—or by such other method as the Secretary adopted.

Section 2(b), ch. 85, 41 Stat. 438, 30 U.S.C. (1970 ed.) 201(b),

also authorized the Secretary to issue prospecting permits where

exploration was necessary to determine the existence or work-

ability of coal deposits on particular tracts; if the permittee dem-

onstrated the existence of coal, he was entitled to lease the tract on

a noncompetitive basis. Under the original Act, then, land was not

always leased on a competitive basis and, therefore, did not always

yield the bonus attributable to competitive bidding.

In Section 7 of FCLAA (90 Stat. 1087), Congress increased

the royalties on coal to a minimum of 12!2% of markeé value

and provided for the Secretary to establish per acre rental charges

by regulation. See 43 C.F.R. 3473.3-1(a). Sections 2 and 4 of

the FCLAA, 90 Stat. 1083 and 1085, amended Section 2 of the

1920 Act (30 U.S.C. (1970 ed.) 201) to require competitive bidding

in all cases, see 45 Fed. Reg. 84928 (1980), and to replace the

prospecting permit-leasing system with a system of exploration

under licenses issued by the Secretary that give no right or pref-

erence to a subsequent lease. See 43 CFR. 3430.0-7. The FCLAA

also retained the authority of the Secretary in Section 39 of the

Mineral Lands Leasing Act of 1920 to waive, suspend, or reduce

rental or royalty payments, but, in Section 14 of the FCLAA

(90 Stat. 1091), added a proviso barring the Secretary from waiv-

ing advance royalties.

“economic rents,” and that the burden of the tax is borne

by out-of-state consumers, not the Federal Treasury. In-

deed, appellants allege that the existing contracts be-

tween the 11 appellant utility companies and the four

appellant coal producers require that the utility com-

panies reimburse the coal producers for their severance

tax payments and that the ultimate burden of the tax

falls upon the utilities’ customers (Comp. {If 17, 18; J.S.

App. 53a-54a). As to these contracts, then, the federal

government’s revenues presumably will be substantially

unaffected by the tax, particularly because the bonuses,

royalties, and rentals to be paid to the federal govern-

ment would have been established in leases entered into

before the coal producers commenced mining to satisfy

their contracts with the utilities.

However, even if it is conceded that the Montana Coal

Severance Tax may have some impact on the total in-

come received by the federal government under leases

entered into in Montana, this hardly proves that the

tax is inconsistent with the Mineral Lands Leasing Act.*

Indeed, the most basic obstacle to any such conclusion is

that, in Section 32 of the 1920 Act (30, U.S.C. 189),

Congress authorized the states to collect severance taxes

4 On new leases, it does seem likely that the burden of the sever-

ance tax will be shared among the Federal Treasury, coal pro-

ducers, and ultimate consumers. As the Montana Supreme Court

observed (J.S. App. 24a), it cannot be assumed that all of the tax

would be passed on to consumers, through utilities, because Mon-

tana does not have a monopoly in the production of coal. Its coal

must compete with that produced in Wyoming, North Dakota, and

elsewhere. See also U.S. Dep’t of Justice, Antitrust Division, Com-

petition in the Coal Industry, 25-31 (1980). Therefore, the state’s

tax might well diminish to some extent the amount a coal pro-

ducer is prepared to pay to the federal government. R. Posner,

Economic Analysis of Law 267 (2d ed. 1977). It is not clear, how-

ever, what cause appellants have to complain about an asserted

distortion in the division of “economic rents.” That would appear

to be a matter between the United States and the State of Montana.

Cf. United States v. Richardson, 418 U.S. 166 (1974) ; Schlesinger

v. Reservists Committee To Stop The War, 418 U.S. 208 (1974).

9 ~

without imposing any express limitation on the amount

of such taxes.

Section 32 provides, in pertinent part:

Nothing in this act shall be construed or held to

affect the rights of the States or other local au-

thority to exercise any rights which they may have,

including the right to levy and cc"ect taxes upon

improvements, output of mines, or other rights,

property, or assets of any lessee of the United States.

In construing Section 32 soon after its enactment, this

Court stated:

Congress, having provided for leasing the public

lands to private corporations and persons whose

property, income, business and occupations ordi-

narily were subject to state taxation, meant by the

proviso to say in effect that, although the act deals

with the letting of public lands and the relations of

the government to the lessees thereof, nothing in it

shall be so construed as to affect the right of the

states, in respect of such private persons and cor-

porations, to levy and collect ta.:es as though the

government were not concerned.

* + ” os *

* * * We think the proviso plainly discloses the

intention of Congress that persons and corporations

contracting with the United States under the act,

should not, for that reason, be exempt from any

form of state taxation otherwise lawful.

Mid-Northern Oil Co. v. Montana, 268 U.S. 45, 48-50

(1925) (emphasis added). It is plain, then, that for

purposes of a state’s power to tax, the lessees of federal

lands are to be treated the same as lessees of private

lands.’ It necessarily follows that if the Montana Coal

5 Treating the lessees of federally owned lands, for taxing pur-

poses, as if they were lessees of privately owned lands is consistent

with the background of the 1920 Act, which reflects a compromise

between those Members of Congress who believed the lands should

Severance Tax is “otherwise lawful” (Mid-Northern Oil

Co. v. Montana, supra, 268 U.S. at 50)—.e., in the pres-

ent case, if the tax does not conflict with federal energy

legislation or the requirements of the Commerce Clause—

those appellants who are “contracting with the United

States under the [Leasing Act], should not, for that

reason, be exempt” from the severance tax. 268 U.S. at

50.°

be retained in public ownership and those who believed the lands

should be sold into private hands.

Mineral lands leasing legislation was first introduced in 1914.

H.R. 16136, S. 4898, 63d Cong., 2d Sess. (1914). Controversy

over the loss of state revenues was a major obstacle to the bill’s

passage. Representatives of the western states in which the min-

eral lands were located claimed that retention of the lands in fed-

eral ownership was a violation of the Equal Footing Doctrine be-

cause, in their view, the states had entered the Union upon a

solemn compact that lands would be “allowed to go into private

ownership to help maintain the State government * * *.” H.R. Rep.

No. 668 (Pt. 2), 63d Cong., 2d Sess. 6 (1914) (minority views).

They complained that their states would lose large amounts of real

estate tax revenues that royalties would not replace, and they ques-

tioned whether states had the authority to receive revenue from

output taxes instead. See 51 Cong. Rec. 14953, 14954-14955, 15039,

15055, 15060 (1914). Sponsors of the legislation responded that

the royalties would compensate the states for loss of real estate

tax revenues and that, of course, the states possessed the power

to tax the output of the mines in the same manner as minerals

taken from private lands. See id. at 15064-15065, 15558-15559.

See also 53 Cong. Rec. 980-981 (1916).

In 1919, the legislation which was eventually to become the Min-

eral Lands Leasing Act of 1920 was introduced. S. 2775, 66th

Cong., 1st Sess. (1919). The debates between supporters and

opponents of the bill were similar to those that had occurred five

years earlier. See, e.g. 58 Cong. Rec. 7770-7774 (1919); see

generally P. Gates, History of Public Land Law Development 738-

745 (1968) (published by the Public Land Law Rev. Comm.).

6 This conclusion is fully compatible with the decision in Ventura

County v. Gulf Oil Corp., 601 F.2d 1080 (9th Cir. 1979), aff’d, 445

U.S. 947 (1980). There, the Ninth Circuit found that the Mineral

Lands Leasing Act preempted county zoning ordinances that re-

quired oil and gas operators on federal lands to obtain county

drilling and exploration permits. Montana is not purporting to

In the Federal Coal Leasing Amendments Act of 1976,

Congress amended the Mineral Lands Leasing Act in

a number of respects, by, e.g., increasing the royalty

rate, allocating a greater portion of royalties to the

states, and providing for competitive bidding under all

circumstances. See note 2, supra. The legislative history

reveals that Congress was aware of Montana’s severance

tax. For example, Senator Metcalf, the floor manager

of the bill, stated in response to criticism of the increase

in the royalty rate:

There is no evidence to support the allegation that

a 12.5-percent minimum royalty would preclude coal

development on Federal lands. On the contrary, this

proposed rate is entirely commensurate with royal-

ties and taxes already on the books. The State of

Montana recently enacted coal taxes above 20 to 30

percent—depending on the quality of the coal—with

no significant reduction to coal production evident.

122 Cong. Rec. 19376 (1976) (emphasis added).? Con-

gress’ failure, in these circumstances, to amend Section

prohibit or regulate the manner of leasing that Congress has spe-

cifically authorized. Furthermore, in contrast to the express au-

thorization of state taxation contained in Section 32 of the 1920

Act, the federal statutory scheme for oil and gas leasing contains

no explicit provision allowing state permit systems such as that

involved in Ventura County.

7 See also 122 Cong. Rec. 515 (1976) (Rep. Mink) (noting that

severance taxes are paid in Montana on the mining of federally

owned coal and that the legality of such taxes will be litigated, but

that the matter of states taxes “is not covered” by the 1976 legis-

lation); id. at 519 (Rep. Myers) (“[a]lthough coal is mined on

Federal land leases, the States still can inflict whatever taxes they

want on the corporation for the coal that comes out of the Federal

Lands”).

In House oversight hearings on the federal coal leasing program

held in the Spring of 1976, before the 1976 amendments were

passed, an Interior Department witness informed the subcommittee

of the Department’s view that Montana’s authority to impose the

30% tax was “expressly reserved in the Mineral Leasing Act’

and that “barring a finding by the courts that it might be

unconstitutional, that is clearly within the State’s authority.”

Oversight on Federal Coal Leasing: Oversight Hearings Before

32 of the Mineral Lands Leasing Act of 1920 reinforces

the view that the Montana tax is valid. This same view

is reflected in the recent House committee report on the

bill to limit the Montana severance tax to a rate of

1214% (see page 2, supra), which concludes that “the

States are given the right to tax [production of fed-

eral coal] in the same manner and to the same extent

as if Federal lands were not included.” H.R. Rep. No.

96-1527 (Pt. I), supra, at 8. We therefore do not find

in the language, legislative history, or legislative, execu-

tive, and judicial interpretation of the Mineral Lands

Leasing Act of 1920 and the 1976 amendments to that

Act any basis for concluding that Montana’s coal sever-

ance tax cannot be applied to the extraction of federally

owned coal in the State.

Nor do we find any support for such a conclusion in

appellants’ largely theoretical proposition that Congress

intended to maximize and capture (through bonuses,

royalties, and rents) all “economic rents” attributable to

extraction of federally owned coal and then to distribute

the proceeds according to the formula set forth in Section

35 of the 1920 Act, 30 U.S.C. 191. Appellants cite nothing

in the language or legislative history of the Act or the

1976 amendments to support their argument, and we

are aware of nothing. The House Report on the 1976

amendments, for example, expresses a congressional in-

tent to secure only a “fair return to the public” (H.R.

Rep. No. 94-681, 94th Cong., 1st Sess. 17-18 (1975) ), not

whatever return the federal government’s dominant posi-

tion in the western coal market might command. This

purpose is reflected as well in regulations recently issued

the Subcomm. on Mines and Mining of the House Comm. on In-

terior and Insular Affairs, 94th Cong., 2d Sess. 65 (1976). See

also id. at 91. The Department did note, however, that in some

circumstances, courts have found that legislative measures “set

forth as exercises of the taxing authority have in fact had as their

principal purpose the prohibition of the activity so regulated” and

that it “would be assumed that the same legal principles and test

would be applicable to the State severance taxes imposed upon the

mining of coal.” Jd. at 91.

by the Department of Energy that identify the “purposes

and policies” that Department will consider in determin-

ing whether to disapprove certain terms and conditions

in leases to be issued by the Secretary of the Interior.

See 42 U.S.C. (Supp. II) 7152(b) and 7153. These

“purposes and policies” include providing a “fair re-

turn” to the federal government, as well as fostering

production and minimizing coal prices. Although the

Department notes that it will consider the “relationship

between economic rent and government revenue,” this is

only one of 21 factors that will be taken into account.

See 10 C.F.R. 378.111, as added, 45 Fed. Reg. 84933

(1980) .*

Even if we were able to agree, however, that Congress

sought in general to maximize the return from federal

leases, we still could not agree with appellants’ argu-.

ment that Montana’s tax may not be applied to federally

owned coal. That argument necessarily depends on in-

ferences to be drawn from Sections 7 and 35 of the 1920

Act (30 U.S.C. 207 and 191), which, as amended, provide

for increased bonuses and royalties and a more favorable

allocation of those proceeds to the states. Comp. {J 38-41;

J.S. App. 57a-58a. Yet Section 32 of the 1920 Act pro-

8Section 2(a) of the Act, 30 U.S.C. 201(a), also provides

that no lease shall be issued for less than “fair market

value.” This term is defined in a regulation issued by the Secre-

tary, 43 C.F.R. 3400.0-5(s), and further elaborated upon in Secre-

_tarial Issue Document; Fair Market Value and Minimum Accept-

able Bids on Federal Coal Leases, C-1 (May 28, 1980). It is clear

from the latter that the Interior Department does not seek to

obtain the maximum revenue. See Competition in the Coal Indus-

try, note 4, supra, at 8-10 & n.24.

The government has established production projections for west-

ern coal regions. U.S. Dept. of the Interior, Final Environmental

Statement: Federal Coal Management Program 2-32 (1979).

In establishing its production targets, however, the Department

takes into account that Montana and other western states impose

severance taxes. See International Consulting Firm, Inc., Final

Report, the Demand for Western Coal and Its Sensitivity to Key

Uncertainties 15 (1978) (used by the Department to set coal pro-

duction goals).

14 :

vides that “[n]Jothing in this Act’”—which must include

Sections 7 and 32—“shall be construed or held to affect

the rights of the States * * * to levy and collect taxes

upon * * * output of mines.” 30 U.S.C. 189 (emphasis

added). And if, as this Court has held, the states are

authorized “to levy and collect taxes as though the gov-

ernment were not concerned” (Mid-Northern Oil Co, V.

Montana, supra, 268 U.S. at 49), it necessarily follows

that the particular manner in which the federal govern-

ment collects payments from its lessees and then shares

them with the states has no more bearing upon the

validity of the state tax than does the manner in which

a private lessor collects and spends his proceeds.”

THE MONTANA COAL SEVERANCE TAX IS NOT

PREEMPTED BY THE FEDERAL POLICY FAVOR-

ING THE USE OF COAL

Appellants argue (Br. 35-46) that, as applied to both

federally and nonfederally owned coal, the Montana Coal

® Different considerations are raised in the application of the tax

to coal owned by Indian tribes in Montana. As we have pointed

out in our brief in Merrion v. Jicarilla Apache Tribe and Amoco

Production Co. and Marathon Oil Co. v. Jicarilla Apache Tribe

(Nos. 80-11 and 80-15), at 22-23 n.16, and as amicus Crow Tribe

of Indians points out in its brief in this case, the Indian Mineral

Leasing Act of 1938 (ch. 198, 52 Stat. 347, 25 U.S.C. 396a-396g)

does not contain an express authorization of state taxation similar

to that in Section 32 of the Mineral Lands Leasing Act. Moreover,

the legislative history of the 1938 Act, unlike that of the 1920

Act and amendments thereto, reflects an intent to maximize the

return from the leasing of Indian lands. S. Rep. No. 985, 75th

Cong., 1st Sess. 2-3 (1937); H.R. Rep. No. 1872, 75th Cong., 3d

Sess. 1-3 (1938). Finally, this Court has made clear that the

standards of preemption applicable to federal laws regulating In-

dian affairs are different from those that have been applied in

other areas. See, e.g., White Mountain Apache Tribe v. Bracker,

No. 78-1177 (June 27, 1980), slip op. 6-7. The validity of the

Montana tax as applied to mining of coal owned by the Crow

Tribe is in issue in Crow Tribe of Indians v. State of Montana,

No. 79-4821 (9th Cir., argued on Jan. 14, 1980), which has been

argued and is under submission to the court of appeals. We have

appeared amicus curiae in support of the Tribe in that case.

Severance Tax “[s]ubstantially [f]rustrates” national

policy favoring the use of coal. But, of course, only so far

as that “policy” is translated into congressional legisla-

tion can it have the effect of preempting state laws under

the Supremacy Clause. Statements and reports by Ex-

ecutive Branch officials (see Br. 86 & n.**), have no

independent preemptive force. Youngstown Sheet & Tube

Co. v. Sawyer, 343 U.S. 579, 587 (1952).

Appellants do observe (Br. 36 n.**), correctly, that

Section 2(6) of the Energy Policy and Conservation Act

of 1975 (Pub. L. No. 94-168, 89 Stat. 871, 42 U.S.C.

6201(6)) declares it to be one of the purposes of that

Act “to reduce the demand for petroleum products and

natural gas through programs designed to provide greater

availability and use of this Nation’s abundant coal re-

sources.” Appellants are also correct (Br. 37, 44 n.*)

that Section 102(b) (8) of the Powerplant and Industrial

Fuel Use Act (PIFUA) of 1978 (Pub. L. 95-620, 92

Stat. 8289, 42 U.S.C. (Supp. III) 8301(b) (3)) recites

a like objective “to encourage and foster the greater use

of coal and other alternative fuels, in lieu of natural gas

and petroleum, as a primary energy source.” But surely

these general statements, standing alone, cannot be

thought to have preempted all state legislation that may

have an adverse impact on the use of coal. Like pre-

ambles to statutes, such declarations ordinarily “do not

constitute an exertion of the will of Congress which is

legislation, but a recital of considerations which in the

opinion of that body existed and justified the expression

of its will” in other portions of the legislation. Carter

v. Carter Coal Co., 298 U.S. 238, 290 (1936). It is

10 See also Yazoo & Mississippi Valley R.R. v. Thomas, 132 U.S.

174, 188 (1889); Ass’n of American Railroads v. Costle, 562 F.2d

1310, 1316 (D.C. Cir. 1977) ; Bissette v. Colonial Mortgage Co., 477

F.2d. 1245, 1246 n.2 (D.C. Cir. 1973); Lehigh & New England Ry.

v. ICC, 540 F.2d 71, 79 (8d Cir. 1976), cert. denied, 429 U/S.

1061 (1977); Hughes Tool Co. v. Meier, 486 F.2d 593, 596 (10th

Cir. 1973); 1A C. Sands, Sutherland Statutes and Statutory Con-

struction, §§ 20.02, 20.09 (4th ed. 1972) ; cf. Sinclair Refining Co. v.

Atkinson, 370 U.S. 195, 201-208 (1962); Lauf v. E. G. Shinner &

therefore necessary to look beyond such general expres-

sions of “national policy” to specific provisions of federal

statutes with which the state law is said to conflict.

Exxon Corp. v. Governor of Maryland, 487 U.S. 117,

133-134 (1978).%! The only specific statutory provisions

favoring the use of coal cited by appellants are those in

PIFUA.

PIFUA prohibits any new electric powerplant or new

major fuel-burning installation (MFBI) consisting of a

boiler from using natural gas or petroleum as a primary

energy source. 42 U.S.C. (Supp. III) 8311(1), 8312(a).

The Act also prohibits all existing electric powerplants

from using natural gas as a primary energy source after

January 1, 1990, and gives the Secretary of Energy

discretionary authority to prohibit existing powerplants

from burning natural gas or oil if he determines (1)

that the plants are technically and financially capable

of using coal or another alternate fuel as a primary

energy source and (2) that such substitution of fue’s

will not require substantial physical modification of the

facility or cause a substantial decrease in the facility’s

capacity. 42 U.S.C. (Supp. III) 8341-8343. Because

PIFUA, where it applies, mandates the use of coal,

we do not believe that an increase in the price of coal

occasioned by the severance tax can be said to “stand[]

Co., 303 U.S. 323, 330 (1938). As this Court stated in another

context, “legislative intention, without more, is not legislation.”

Train Vv. City of New York, 420 U.S. 35, 45 (1975).

11JIn Exxon Corp., the Court rejected an analogous argument

that the “basic national policy favoring free competition” reflected

in the Sherman Act preempted a state statute governing the retail

distribution of gascline. Contrary to appellants’ suggestion (Br.

44 n.*), this aspect of the holding was not dependent on a factual

determination that the Maryland statute did not substantially frus-

trate that “policy.” Rather, the Court held that the broad policy

did not have a preemptive force, irrespective of whatever factual

showing might have been made about the state law’s anticompeti-

tive effect. Elsewhere in the opinion the Court considered the

more focused allegations of conflict with specific provisions of the

Robinson-Patman Act. 487 U.S. at 129-133.

as an obstacle to the accomplishment and execution of the

full purposes and objectives of Congress” merely because

it may make conversion to coal more expensive. See Br.

42, quoting Ray v. Atlantic Richfield Co., 485 U.S. 151,

158 (1978), and Hines v. Davidowitz, 312 U.S. 52, 67

(1974). Appellant utilities, for example, continue to burn

coal; they have not substituted oil or natural gas.

There are, to be sure, a number of temporary and

permanent exemptions from PIFUA’s requirements. 42

U.S.C. (Supp. III) 8321-8822, 8841-8352. See Comment,

The Powerplant and Industrial Fuel Use Act of 1978:

Fuel Replacement, 3 Harv. Envt’l L. Rev. 214, 229

(1979). Temporary and permanent exemptions are avail-

able to both existing and new electric powerplants and

MFBI’s if the Secretary determines that an adequate

and reliable supply of coal or other alternate fuel is

available only at a cost substantially exceeding the cost

of petroleum. 42 U.S.C. (Supp. III) 8821(a) (1), 8821

(e) (2) (A), 8322(a) (1) (A), 8851(a) (1), 8351 (h) (2)

(A), 8352(a) (1) (A). Moreover, the Secretary’s authority

to mandate fuel replacement for existing powerplants and

MFBI’s is limited, because he must first determine that

“it is financially feasible to use coal or another alternate

fuel as a primary energy source * * *.” 42 U.S.C. (Supp.

III) 8341(b) (3) and 8342(a) (3). Because of these ex-

ceptions that take cost into account in certain respects,

it is conceivable that an increase in the price of coal

occasioned by severance taxes imposed by Montana or

other states might result in excusing a powerplant or

MFBI from using coal.” But the Act does not regulate

or prohibit price increases imposed by coal prwducers

12 As the Montana Supreme Court observed, however (J.S. App.

23a-24a), because of high transportation charges, the severance

tax—although imposed at a rate of 30% of market value in Mon-

tana—constitutes a far smaller percentage of the value of the coal

when delivered to an out-of-state utility. The portion of the ulti-

mate cost of electricity to the consumer that is attributable to the

Montana tax is estimated by Montana officials to be even lower,

amounting to no more than 2% (Table Il) )of a customer’s elec-

tricity bill. See Hearings, note 1, supra, at 38.

themselves, which could have a similar effect; we there-

fore cannot find in these provisions that expressly accom-

modate price increases an implicit congressional intent to

prohibit those particular increases that are caused by

severance taxes." Much less, can discern in the Act

a standard for determining a particular amount which

such taxes may not exceed.”

Whatever the potential for the Montana tax to slow

the increase in the use of coal by powerplants and

18 The statute reveals in other respects a congressional reluctance

to override state and local laws even though they might discourage

utilization of coal. Temporary and permanent exemptions are avail-

able for new and existing powerplants and MFBIs if “the prohibi-

tions * * * could not be satisfied without violating applicable

environmental requirements.” 42 U.S.C. (Supp. III) 8821(a) (8),

8822(a)(1)(C), 8851(a) (8), 8852(a)(1)(C). The term “appli-

cable environmental requirements” is defined to include require-

ments of state law. 42 U.S.C. (Supp. III) § 8802(a) (17) (A). In

addition, the statute provides for permanent exemptions in certain

circumstances if the Secretary determines that operation of the

facility would be infeasible because of state and local require-

ments. 42 U.S.C. (Supp. III) 8822(b), 8852(b). See H.R. Conf.

Rep. No. 95-1749, 95th Cong., 2d Sess. 76-77 (1978).

4 This is in sharp contrast to state tax measures which intrude

into pervasive federal control of the distribution and price of

natural gas, such as Louisiana’s “‘irst use” tax, at issue in Mary-

land v. Lousiana, No, 88 Original (argued Jan. 19, 1981). See also,

New England Power Co. Vv. New Hampshire Public Utilities

Comm'n, No, 80-1208 (pending on appeal).

In the Natural Gas Policy Act of 1978, Pub. L. No. 95-621, 92

Stat. 8352, which was enacted together with PIFUA, Congress

imposed controls on the wellhead price of natural gas. 15 U.S.C.

(Supp. III) 8811-8820. However, in Section 110(a) (1) of the Act,

15 U.S.C, (Supp. III) 8820(a) (1), Congress provided that the

price for the first sale of natural gas may exceed the maximum

lawful price where necessary to recover “State severance taxes

attributable to the production of such natural gas and borne by

the seller,” although any such tax enacted after December 1, 1977,

must treat natural gas destined for interstate commerce and that

destined for intrastate sale alike. Thus, even where Congress has

sought to regulate the price of natural resources, it likewise has

accommodated, not prohibited, state severance taxes.

MBFIs, however, we believe it is clear from the face

of the Act that Congress did not intend PIFUA to pre-

empt the Montana tax. Section 601(a) (1) of PIFUA,

42 U.S.C. (Supp. III) 8401(a) (1), provides for the fur-

nishing of financial assistance to those areas of a state

that are adversely affected by increased coal or uranium

mining if the governor of the state finds that increases

in employment have required or will require substantial

increases in housing or public facilities and services and

that the state or local government lacks the financial and

other resources to satisfy those needs within a reasonable

time. Section 601 (a) (2) then provides that

increased revenues, including severance tax revenues,

royalties, and similar fees to the State and local

governments which are associated with the increase

in coal or uranium development activities and which

are not prohibited from being used under provisions

of law in effect on the date of the enactment of the

Act shall be taken into account in determining if a

State or local government lacks financial resources.

42 U.S.C. (Supp. III) 8401(a) (2) (emphasis added). On

its face, this Section contemplates the continued existence,

not preemption, of state severance taxes on coal.

Appellants may argue that Section 601(a) (2) does

not demonstrate a congressional intent to tolerate state

severance taxes of any amount, no matter how disrup-

tive of the coal conversion program. But at least as re-

gards the particular tax in suit, that argument is dif-

ficult to square with the notoriety of the Montana tax,

enacted only a few years earlier and the subject of con-

tinuing controversy. Moreover, as it happens, the legis-

lative history of Section 601(a) (2) reveals that it was

framed with Montana’s tax specifically in mind.

The PIFUA bill that passed the Senate contained an

impact aid section, but the House bill did not. H.R. Conf.

Rep. No. 95-1749, 95th Cong., 2d Sess. 93 (1978). The

transcript of the meetings of the Joint Conference on

Energy reveals that the Senate’s impact aid section met

with resistance on the part of the House conferees, who

believed that the states would be able to satisfy the de-

mand for facilities and services occasioned by increased

coal production through imposition of severance taxes

and, in the western states, through their share of royal-

ties received under the Mineral Lands Leasing Act from

the extraction of federally owned coal. See Transcript

of the Joint Conference on Energy, at 1822, 1824, 1832,

1834-1837, 1839 (Nov. 9, 1977), reprinted in U.S. De-

partment of Energy, Legislative History of the Power-

plant and Industrial Fuel Use Act, Vol. Il, 777, 779, 787,

789-792, 794 (1978). Representative Eckhardt noted that

the western states receive a share of royalties under the

Mineral Lands Leasing Act, increased in 1976, for im-

pacted areas of the states and that

* * * in addition to that, the western states may

collect severance taxes on that coal.

As I pointed out [see Tr. 1822; Legislative His-

tory at 777], Montana already collects $3 a ton on

severance taxes on coal and still enjoys a 50 percent

royalty return. As the price of coal goes up, just as

the price of oil went up, those severance taxes in ad-

dition go up.

This is a percentage tax, not a flat tax in most

instances,

If we are going to merely determine on the basis

of impact on a particular community in a state how

much money is going to go to that community, with-

out taking into account how much that community

is enriched, I think that we are going to have

people who are so angry at us in Congress * * *.

Tr. 1835; Legislative History at 790. Section 601(a) (2),

which provides that severance taxes and royalties shall be

“taken into account” in distributing impact aid, obviously

was drafted to meet the objections of Representative

Eckhardt and other conferees. The understanding of the

conferees therefore underscores what seems evident from

the face of Section 601(a)(2)—that Montana’s sever-

ance tax is not preempted by PIFUA. Because PIFUA

is the only statute seriously relied upon by appellants

as setting forth a preemptive policy favoring the use

of coal, appellants’ preemption argument must fail.”

III

THE MONTANA COAL SEVERANCE TAX IS NOT

UNCONSTITUTIONAL UNDER THE COMMERCE

CLAUSE

Appellants argue, finally, that the Montana Coal Sever-

ance Tax is invalid under the Interstate Commerce

Clause. They contend (Br. 17-26) that the Montana

Supreme Court erred in concluding (J.S. App. 8a-18a)

that the tax does not violate the Commerce Clause be-

cause, under this Court’s decision in Heisler v. Thomas

Colliery Co., 260 U.S. 245 (1922), the severance of coal

is a taxable event that precedes entry of the coal into

interstate commerce. Instead, it is argued (Br. 27-34),

the severance tax should be scrutinized under the four-

part test this Court articulated in Complete Auto Transit,

Inc. Vv. Brady, 430 U.S. 274, 279 (1977) —whether the tax

15 Appellants also contend (Br. 37-41) that the Montana tax is

preempted by the Clean Air Act, 42 U.S.C. (& Supp. III) 7401

et seq. But the Clean Air Act does not mandate the use of coal;

it merely establishes standards for the emission of sulfur dioxide

when coal is used. Any affect those standards might have on the

market for high and low sulfur coal is incidental and not a matter

of affirmative congressional intent. Indeed, when it amended the

Act in 1977 (see Pub. L. No. 95-190, Section 14(a) (7)-(9), 91

Stat. 1399, amending Section 111 of the Clean Air Act, 42

U.S.C. (Supp. III) 7411), Congress made clear its intent to remove

any special incentives previously created by the Act to prefer low

sulfur coal mined in the west. See, e.g., H.R. Rep. No. 95-299, 95th

Cong., Ist Sess. 166 (1977); see also Pub. L. No. 95-95, Section

120(a), 91 Stat. 720, 42 U.S.C. (Supp. III) 7421. Accordingly, in

promulgating new source performance standards (40 C.F.R.

60.40 (a)-60.49a(a)), EPA has taken into account the economic

impact the standards might have on regional coal markets and

has followed the congressional intent not to discourage the use of

high sulfur coal. See, e.g., 438 Fed. Reg. 42160 (1978); 44 Fed.

Reg. 33583, 33596 (1979); 45 Fed. Reg. 8213 (1980). We would

be reluctant in any event to ascribe to Congress an intent implicitly

to divest Montana of the power to impose a tax on its coal while,

under appellants’ argument, an eastern state would remain free to

impose the very same tax on its high sulfur coal.

“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.”

Appellants do not dispute that the first two prongs of

the Complete Auto test are satisfied. As the Montana

Supreme Court observed, “there can be no argument

here that a substantial, in fact, the only nexus of the

severance of coal is established in Montana” (J.S. App.

20a). Nor can there be any question of apportionment

or potential for multiple taxation, for again, as the state

court observed, “the severance can occur in no other state”

and “no other state can tax the severance” (ibid.). See

also Exxon Corp. v. Wisconsin Dep’t of Revenue, No. 79-

509 (June 10, 1980), slip op. 19-20 n.12. Appellants do

argue, however, that the tax discriminates against in-

terstate commerce because over 90% of the coal mined

in Montana is shipped out of state and, consequently,

out-of-state customers bear most of the burden of the

tax. They also argue that the tax is not “fairly related”

to the services coal producing companies receive from

the State of Montana.

These arguments are not without force in a time of

scarce energy resources, particularly in view of the un-

even distribution of those resources among the states.

And, at least on first impression, the rivalry among the

states appellants portray does seem to be of the kind that

the Commerce Clause was intended to prevent. See, ¢.g.,

Hughes v. Oklahoma, 441 U.S. 322, 325-326 (1979) ;

H. P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 532-

535 (1949). In the end, however, we conclude that ap-

pellants’ arguments should be rejected. |

1. As an initial matter, we agree with appellants

(Br. 17-26) that Montana’s severance tax is not alto-

gether immune from Commerce Clause scrutiny on the

theory that mining is a purely “local” activity. Wholly

intrastate activities are subject to the reach of Congress’

authority under the Commerce Clause where those ac-

tivities affect interstate commerce, see, e.g., McLain v.

Real Estate Board of New Orleans, Inc., 444 U.S. 2382,

241 (1980); Wickard v. Filburn, 317 U.S. 111, 124

(1942), and we see no reason why, in appropriate cases,

the “negative implication” of the Commerce Clause can-

not likewise reach activities formerly regarded as pe-

culiarly “local” in nature. See Lewis v. B T Investment

Managers, Inc., No. 79-45 (June 9, 1980), slip op. 8-11;

Hughes v. Oklahoma, supra, 441 U.S. at 326 n.2; Phila-

delphia v. New Jersey, 487 U.S. 617, 622-623 (1978).

Accordingly, we agree that the reasoning in Heisler and

its progeny has been eroded.

It does not follow, however, that Heisler itself was

wrongly decided or that the deference owed to a state’s

compelling interest in taxing mining activities within its

borders, which underlay the Heisler decision (260 U.S.

at 258-259), is entitled to any less weight if the formal-

istic and categorical approach of the Heisler decision is

abandoned. In the present case, for example, the entire

value of the resource, before transportation, originates

in Montana, and the mining of coai depletes the re-

source base and wealth of the State, thereby diminishing

a source of taxes and economic activity in the future.

Indeed, in many respects, a severance tax is akin to a

real property tax, which it has never been doubted is a

legitimate means of raising revenue by a situs state—

quite apart from the distinct right of that or other states

to tax income derived from the use of property or produc-

tion of natural resources. See, e.g., Exxon Corp. v. Wis-

consin Dep’t of Revenue, supra, slip op. 19-20 n.12.

2. Appellants argue (Br. 33-34), however, that be-

cause most coal mined in Montana is shipped out of state,

the effect of the tax is to shift the tax burden to con-

sumers in other states and, thereby, to discriminate

against interstate commerce. But the Montana tax is

computed at the same rate whether the coal is destined

for consumption inside or outside the state, and appel-

lants do not argue that this even-handed approach is not

followed in practice. We are, therefore, not presented

here with the type of unequal treatment of goods shipped

into or out of the state, or of persons residing in other

states, that the Court has found in other cases to be

“discriminatory” for Commerce Clause purposes. See,

e.g., Lewis v. B T Investment Managers, Inc., supra;

Hughes v. Oklahoma, supra; Philadelphia v. New Jersey,

supra.

The premise of the Court’s prior discrimination cases

is that the Framers intended, through the Commerce

Clause, to create a “national common market” (Hunt v.

Washington State Apple Advertising Comm'n, 432 U.S.

333, 350 (1977)) and “an area of free trade among the

several States” (McLeod v. J. E. Dilworth Co., 322 U.S.

327, 330 (1944)). Under such a regime, the borders

between states are essentially irrelevant. See, e.g., Boston

tock Exchange v. State Tax Comm’n, 429 U.S. 318, 331-

32 (1977); West v. Kansas Natural Gas Co., 221 U.S.

229, 255 (1911). It would therefore constitute a consid-

erable departure from the rationale of prior discrimina-

tion cases to hold the facially neutral Montana tax in-

valid solely by attaching significance to the fact that

most coal mined in Montana crosses the very state bor-

ders that’ordinarily are to be regarded as irrelevant.

Further, the argument that a tax is discriminatory

because its burden is borne primarily by consumers in

other states is precisely that advanced by the amici states

in Heisler. There it was argued that Pennsylvania had

a virtual monopoly on anthracite coal and that, because

80% of the coal was shipped out of state, the tax

discriminated against and impermissibly burdened inter-

state commerce. 260 U.S. at 251-253; see also Oliver

Iron Mining Co. v. Lord, 262 U.S. 172, 177-179 (1923).

The Court was singularly unimpressed with these fac-

tors, terming them “adventitious considerations.” 260

U.S. at 259. Although we believe that the basis of the

Court’s rejection of these arguments in Heisler—that

mining is not interstate commerce—should not be fol-

lowed, the Court’s evident misgivings about judging the

validity of a state tax by assessing the state’s “monopoly”

position or the “exportation” of the burden out of state

are equally valid today.

The threshold questions whether the state in fact has

a “monopoly” position and whether the burden of the

levy is shifted forward principally to out-of-state con-

sumers, rather than borne by in-state producers or others,

would themselves entail a complex factual inquiry, in-

cluding a consideration of alternate sources of supply

for the product and the elasticity of demand. Heller-

stein, Constitutional Constraints on State and Local Tax-

ation of Energy Resources, 31 Nat’l Tax J. 245, 248-249

(1978); R. Posner, Economic Analysis of Law 367, 510-

514 (2d ed. 1977); Developments in the Law, Federal

Limitations on State Taxation of Interstate Business, 75

Harv. L. Rev. 9538, 968-970 (1962). But even if the

“formidable evidentiary difficulties” did not “make the

Court’s inquiry futile’ (Developments, supra, 75 Harv.

L. Rev. at 970; see also Hellerstein, supra, 31 Nat’l Tax

J. at 249), it is not apparent that the Commerce Clause

was intended to impose this additional condition on the

constitutionality of facially non-discriminatory taxes.

Nor is it apparent that the Clause was intended to in-

fuse principles of antitrust law into relations between

the states by reference to such vague standards as

whether one state is “exploiting” a “monopoly” of a

natural resource or other commodity where the flow of

commerce among them is not otherwise impeded.”*

It should be noted, finally, that appellants’ argument

that the tax discriminates against interstate commerce

because its burden is “exported” to out-of-state is not

16 Indeed, at bottom, appellants’ argument that Montana may

not exploit its “monopoly” position by exporting a tax burden to

out-of-state customers is not that the Commerce Clause shields

them from discriminatory treatment, for there is no true discrimi-

nation present in this case. Rather, it is that the Commerce Clause

operates as a sword to give persons residing in one state a right

of access at reasonable rates to natural resources located in another

state that has a wealth of such resources, irrespective of whether

or on what terms the residents of the resource-rich state have

access to the resources. See Developments, supra, at 970; Hel-

lerstein, supra, 31 Nat’l Tax J. at 250-251. Cf. Reeves, Inc. V.

Stake, No. 79-677 (June 19, 1980), slip op. 14-15. We doubt that

the Commerce Clause, of its own force, was intended to allow one

state, or its residents, to control the terms of resource development

and depletion in a sister state in this fashion. Cf. Philadelphia v.

New Jersey, supra, 437 U.S. at 626.

logically dependent on the amount of the tax. In Heisler,

for example, the claim was that no special severance tax

could be imposed on coal primarily destined for inter-

state commerce. But the Court has since made clear

that even interstate commerce must pay its way. Western

Livestock v. Bureau of Revenue, 303 U.S. 250-254

(1938). Accordingly, it must be conceded, as appellants

have done, that Montana may impose some severance tax

on the mining of coal. See Hellerstein, supra, 31 Nat’l

Tax J. at 249. Appellants therefore apparently ask the

court to adopt a new and more complex test of discrimi-

nation: a state’s severance tax that is borne by out-of-

state consumers may not substantially exceed the amount

necessary to recoup the state’s costs associated with the

mining. IJbid., cited at Br. 33. But this is merely a

variant of appellants’ argument that the Montana tax

is not fairly related to the services provided by the State.

It is to this argument that we now turn.

8. Appellants contend (Br. 29-33; Comp. { 26, J.S.

App. 55a) that the Montana tax is not “fairly related

to the benefits and services provided by the State” within

the meaning of the fourth prong of the Complete Auto

test and that they were entitled to a trial on the issue.

They assert (Br. 12) that they expected to show at trial

that the “legitimate local impact” costs of coal mining—

additional schools, roads, and police, fire, health, and en-

vironmental protection—might amount to 2¢ per ton, as

compared to average revenue of over $2 per ton realized

under the severance tax.'7 Because of this alleged dis-

parity, appellants argue that the Montana legislature

“grossly overreached” in imposing a tax at a rate of up

to 30% (Br. 31). In our view, however, appellants

misapprehend the nature of the “fairly related” prong of

the Complete Auto test.

17 If the “legitimate local impact” costs of mining (which appel-

lants contend must be the measure of the state’s severance tax)

amount to only 2¢ per ton of coal taken, it is not clear how

appellants could concede in the Montana Supreme Court that a

severance tax at a rate of between 1242 and 15% would not

violate the Commerce Clause. See J.S. App. 9a.

Contrary to appellants’ apparent suggestion, the Court

did not state or even intimate in Complete Auto that the

amount of a state tax having some impact on interstate

commerce must itself be fairly related or roughly equiva-

lent to the value of the services provided by the state;

the words “amount” and “value” were not even used.

430 U.S. at 279.1 And. at least in the context of the

present case, a rule requiring an equivalence between

benefits and burdens would constitute a radical departure

from the Court’s traditional view of a state’s taxing

power:

Nothing is more familiar in taxation than the im-

position of a tax upon a class or upon individuals

who enjoy no direct benefit from its expenditure,

and who are not responsible for the condition to be

remedied.

A tax is not an assessment of benefits. It is, as

we have said, a means of distributing the burden

of the cost of government. The only benefit to which

the taxpayer is constitutionally entitled is that de-

rived from his enjoyment of the privileges of living

in an organized society, established and safeguarded

by the devotion of taxes to public purposes.

Carmichael v. Southern Coal & Coke Co., 301 U.S. 495,

521-522 (1937); see also Pittsburgh v. Alco Parking

Corp., 417 U.S. 369, 373 (1974).

We do not believe that the latitude afforded the states

under the Due Process Clause of the Fourteenth Amend-

ment to decline to assess taxes on the basis of the benefits

conferred is implicitly divested by the Commerce Clause

merely because the person or activity taxed has a nexus

to interstate commerce. And we do not read the “fairly

related” language in Complete Auto to accomplish this

extraordinary result. As this Court has observed, “ ‘[i]t

18 See also Exxon Corp. Vv. Wisconsin Dep't of Revenue, supra,

slip op. 19; Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S.

425, 448 (1980); Japan Line, Ltd. v. County of Los Angeles, 441

U.S. 484, 444-445 (1979); Washington Revenue Dep’t v. Ass'n

of Washington Stevedoring Cos., 435 U.S. 734, 750 (1978); Nat'l

Geographic Society v. California Board of Equalization, 430 U.S.

551, 558 (1977).

was not the purpose of the commerce clause to relieve

those engaged in interstate commerce from their just

share of state tax burden even though it increases the

cost of doing the business.’” Colonial Pipeline Co. V.

Traigle, 421 U.S. 100, 108 (1975), quoting Western

Livestock v. Bureau of Revenue, supra, 303 U.S. at 254.

In our view, where, as here, the state tax does not dis-

criminate against interstate commerce and is fairly ap-

portioned to activities occurring within the state, the

“just share of state tax burden” for those engaged in

interstate commerce is essentially a matter for the legis-

lature of the state to determine in “pursu[ing] its own

fiscal policies” (Colonial Pipeline Co. v. Traigle, supra,

421 U.S. at 108 n.6, quoting Wisconsin v. J.C. Penney

Co., 311 U.S. 485, 444 (1970). As the Court stated in

Traigle (421 U.S. at 108-109, quoting General Motors

Corp. v. Washington, 377 U.S. 436, 440-441 (1964) ):

[T]he validity of the tax rests upon whether the

State is exacting a constitutionally fair demand for

that aspect of interstate commerce to which it bears

a special relation. For our purposes the decisive is-

sue turns on the operating incidence of the tax. In

other words, the question is whether the State has

exerted its power in proper proportion to appel-

lant[s’] activities within the State and to appel-

lant[s’] consequent enjoyment of the opportunities

and protections which the State has afforded. * * *

As was said in Wisconsin v. J.C. Penney Co., 311

U.S. 485, 444 (1940), ‘[t]he simple but controlling

question is whether the state has given anything for

which it can ask return.’

The fourth prong of the Complete Auto test—whether

the tax is “fairly related to the services furnished by

the State”—is derived from General Motors, J. C. Pen-

ney, and similar cases. See 430 U.S. at 279 n.8; see also

Nat’l Geographic Society v. California Board of Equali-

zation, 480 U.S. 551, 558 (1977). In practical effect,

it is an elaboration upon the first prong of the Complete

Auto test. See, e.g., Budget Rent-A-Car of Washington

v. Multnomah County, 597 P.2d 1232, 1239 n.6 (1979).

Under the first prong, the interstate business must sat-

isfy a threshold test of some minimum contact—a sub-

stantial nexus—with the state. Nat’l Bellas Hess, Inc. V.

Illinois Revenue Dep’t, 386 U.S. 753 (1967). If that

threshold test is satisfied, the fourth prong requires only

that the tax be related in some fashion to the extent of

the contact, for it is the activities or presence in the state

that may properly be made to bear a “just share of state

tax burden.”

For example, in Nat’l Geographic Society v. California

Board of Equalization, supra, the Court sustained against

challenges under the Due Process and Commerce Clauses

the imposition of use-tax-collection liability on the Society

for its mail order business within the state. The presence

of two officers within the state and the solicitation there

of $1 million annually for advertising furnished a suffi-

cient nexus to render constitutional the Society’s tax

liability, as measured by the volume of mail order sales

in California. See also Standard Pressed Steel Co. v.

Washington Revenue Dep’t, 419 U.S. 560 (1975).

The Montana Coal Severance Tax stands on far

stronger ground. The “operating incidence” of the tax

(General Motors Corp. v. Washington, supra, 877 U.S.

at 440-441) is the severance of coal within Montana. The

tax, measured as a percentage of the value of the coal

taken, plainly is in “proper proportion” to appellants’

activities within the State and, therefore, to their “con-

sequent enjoyment of the opportunities and protections

which the State has afforded” in connection with those

activities. Jd. at 441."° Compare Nippert v. Richmond,

327 U.S. 416, 427 (1946) ; Connecticut General Life Ins.

Co. v. Johnson, 303 U.S. 77, 82 (19388). When the tax is

levied in proportion to the taxpayer’s activities or pres-

ence in the state, the taxpayerf is shouldering his fair

19 As the Court stated in Wisconsin v. J. C. Penney Co., supra,

“the incidence of the tax as well its measure [must be] tied to the

earnings which the State * * * has made possible, insofar as

government is the prerequisite for the fruits of civilization for

which, as Mr. Justice Holmes was fond of saying, we pay taxes.”

811 U.S. at 446 (emphasis added).

burden of supporting that state’s police and fire protec-

tion and other “advantages of a civilized society.” Exxon

Corp. v. Wisconsin Dep’t of Revenue, supra, slip op. 19,

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

U.S. 434, 445 (1979); see also Washington Revenue

Dep’t v. Ass’n of Washington Stevedoring Cos., supra,

435 U.S. at 764 (Powell, J., concurring) .”°

This is not to suggest that the “fairly related” test

is an empty one. In many cases, particularly those in-

volving a tax on an aspect of interstate transportation,

that test will furnish a useful supplement to the inquiry

whether the tax is fairly apportioned to that portion of

interstate activities taking place in the state. For when

the measure of a state tax is out of all proportion to the

activities occurring within the state, the Court may

properly conclude that the state is seizing upon the oc-

easion of a relatively minor contact with the state to

impose an undue burden on interstate commerce, not

merely requiring a company engaged in interstate com-

merce to bear its “just share of state tax burden.” See,

e.g., our Complaint in intervention (at 3) in Maryland

v. Louisiana, No. 88 Orig. (argued Jan. 19, 1981).” But

20 Thus, the reference in the cases to police and fire protection

and benefits of a civilized society is not, as appellants suggest

(Br. 30), a disingenuous incantation designed to avoid a more

searching analysis of whether the value of the benefits the taxpayer

actually receives is in fact roughly equivalent to the amount of

taxes he pays. If the tax is related to the taxpayer’s activities

or presence in the state (for which it receives some benefit, e.g.,

the substantial privilege of mining coal), the taxpayer will realize,

in proper proportion to the taxes it pays, “(t]he only benefit to

which [it] is constitutionally entitled * * * [—] that derived from

his enjoyment of the privileges of living in an organized society,

established and safeguarded by the devotion of taxes to public

purposes.” Carmichael v. Southern Coal & Coke Co., supra, 301

U.S. at 522.

21 This, and the Framers’ special concern with the question of

tolls imposed by states in a position to obstruct the interstate

movement of goods and persons (see Developments, supra, 75 Harv.

L. Rev. at 969-970), may explain the Court’s closer scrutiny of

“user” fees and comparable charges imposed for the purpose of

maintaining facilities used in interstate transportation. See Evans-

whatever the result in other contexts, we believe that the

Montana Coal Severance Tax, measured by the value of

coal taken, is in proper proportion to the activities of the

appellant coal producers in the State and is, as a conse-

quence, “fairly related to the services provided by the

State” within the meaning of the fourth prong of the

Complete Auto test.

CONCLUSION

The judgment of the Montana Supreme Court should

be affirmed.

Respectfully submitted.

WADE H. MCCREE, JR.

Solicitor General

ANTHONY C, LIOTTA

Acting Assistant Attorney General

Lou!Is F’. CLAIBORNE

Deputy Solicitor General

EDWIN S. KNEEDLER

Assistant to the Solicitor General

EDWARD J. SHAWAKER

CHRISTOPHER KIRK HARRIS

RICHARD J. LAZARUS

Attorneys

FEBRUARY 1981

ville Airport v. Delta Airlines, 405 U.S. 707 (1972), and other cases

cited by appellants (Br. 32). Moreover, in such cases, the nexus of

the goods or passengers to the taxing state is more transitory than

that of appellants in the present case such that it might be unfair

to burden them unduly with support of the “civilized society” in

the state generally.

ov. &. GOVERNMENT PRINTING OFFice, 1961 336592 269

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