Opinion
No. 8336.
Submitted January 20, 1943.
Decided January 22, 1943.
License Taxes — Conveyance of Natural Gas by Pipe lines Beyond State Lines — Statute Imposing Tax Unconstitutional — Interstate Commerce. License Taxes — Burden upon Interstate Commerce — Invalidity of Statute. 1. A state statute which imposes a direct tax burden upon interstate commerce is void. Same — State License Tax upon Conveyance of Natural Gas Beyond State Lines — Tax Unconstitutional as Burden upon Interstate Commerce. 2. Held, in an action by the state against a public utility engaged in the intra- and interstate business of distributing natural gas through a pipe line, to recover a license tax of 3/8 of one cent for each 1,000 cubic feet of gas under section 2408.2, Revised Codes, providing for such tax on gas produced within the state and conveyed for use "outside the state" i.e. across state lines, that, aside from the fact that the tax is discriminatory in that it burdens the interstate and not the intrastate business of defendant company, the statute is void as imposing a direct tax burden upon interstate commerce in violation of the commerce clause of the federal Constitution. Same — Failure of Congressional Action with Reference to Regulation of Natural Gas Moving Interstate Insufficient to Warrant License Tax on Interstate Commerce. 3. Contention that, in the absence of congressional action with reference to regulation of natural gas moving interstate, a state tax thereon is not objectionable may not be upheld, since such a tax must fall in face of the commerce clause of the federal Constitution regardless of federal legislation.
Appeal from District Court, Lewis and Clark County; George W. Padbury, Jr., Judge.
Mr. Howard M. Gullickson, Attorney General, and Mr. I.W. Choate, Counsel for the State Board of Equalization, for Appellant, submitted a brief; Mr. Fred Lay, and Mr. George S. Smith, Assistant Attorneys General, argued the cause orally.
Messrs. Hildebrand Warren, Mr. Edmond G. Toomey, Mr. Edgar M. Hall, Messrs, Toomey, McFarland Hall, and Messrs. Faegre Benson, of the Bar of Minneapolis, Minnesota, of Counsel for Respondent, submitted a brief; Mr. Wendell O. Rogers, representing the latter firm, argued the cause orally.
Only one determinative question is involved in this appeal: Is that part of section 2408.2, Revised Codes of 1935, which imposes a license tax on persons and corporations engaged in the business of conveying, through a pipe line, natural gas produced within the state of Montana, for use outside the state, a valid and constitutional enactment, or is the Act void as in violation of the commerce clause of the Federal Constitution? Defendant concedes the validity of the tax as applied to distribution of gas within the state but denounces the tax as applied to gas transmitted outside of the state. The realistic effect of adopting this position is to say: The consumer in the Dakotas may purchase the gas free of the tax, but the Montana consumer must pay the tax as reflected in higher rates. This application discriminates against the Montana consumer.
As we will subsequently show, the controlling tests now applied by the United States Supreme Court on a tax of this nature are: (1) Does the tax discriminate against interstate commerce, and (2) Has Congress enacted controlling legislation? If both questions may be answered in the negative the tax should be upheld. Both questions may be answered in the negative in the case at bar.
(a). The Commerce Clause operates primarily to prevent discrimination. No more terse or lucid explanation of the very foundation of the Commerce Clause than that contained in Webber v. Virginia, 103 U.S. 344, 350, 26 L.Ed. 565, can be found. There Mr. Justice Field stated with reference to a state tax discriminating against foreign articles: "It was against legislation of this discriminatory kind that the framers of the Constitution intended to guard when they vested in Congress the power to regulate commerce among the several states." (See, also, Ozark Pipe Line v. Monier, 266 U.S. 555, 569, 69 L.Ed. 439.)
Reading the decisions of the United States Supreme Court chronologically reveals that until 1938 there grew into being a distinction between imposition by the states of direct and indirect burdens on interstate commerce. The former were universally condemned and the latter upheld in the absence of action by Congress. This distinction was in many cases fine-spun and depended on the facts of the particular case. Realizing that many forms of legitimate taxation by the states were really a burden on interstate commerce, nevertheless the burden was deemed "indirect" and in reaching such conclusion, the absence of discrimination often was the controlling factor. And even now, no one can dispute the unconstitutional aspect of taxation or regulation upon interstate commerce discriminating in favor of intrastate trade. We have read many cases on the subject, but none have seemed to approach the whole problem with a more masterful review of authorities and sound doctrine than the recent case of McGoldrick v. Berwind-White Co., 309 U.S. 33, 60 S.Ct. 388, 84 L.Ed. 584, decided January 29, 1940.
Defendant certainly cannot contend that the tax here discriminates against interstate commerce. As a corollary to the proposition that the tax should not discriminate against interstate commerce, the Supreme Court has now stressed the importance of equality, that is, equality of operation both as to intrastate and interstate commerce. Illustrative is the terse statement from McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33, 60 S.Ct. 388, 84 L.Ed. 584: "Equality is its theme."
The old "direct" and "indirect" tests as to burdens interstate commerce have long proved inadequate. By way of illustration let us take the case of Coverdale v. Pipe Line Co., 303 U.S. 604, 58 S.Ct. 736, 82 L.Ed. 1043, where a tax on horse power capacity of engines used in connection with gas compressors was sustained. There it appeared that to send the natural gas out of the state it was necessary to use compressor units and that 96% of the gas so transmitted was sent out of the state. This tax, except for the fact that it was construed to be slightly removed from a "direct" tax, at least bore the earmarks of discrimination against interstate commerce. That tax was sustained as valid. Yet, in the case at bar, we have what defendant contends is a "direct" tax on interstate commerce which does not discriminate in any sense of the word against interstate commerce. It is obvious that, tested by the fundamental doctrine of absence of discrimination and equality, a greater burden was imposed in the Coverdale Case than is sought to be imposed here.
The substance of the authorities is to the effect that the old mechanical tests of "direct" and "indirect" burdens on interstate commerce have been shown to be impractical and demonstrates that the present United States Supreme Court is exhibiting a well-defined tendency to condemn a tax only when it actually discriminates against interstate commerce and leaves the matter of potential interstate trade barriers to Congress, thus affording the states a wide latitude where Congress has not acted. Fortunately, a crystalization of this position took place when the Supreme Court decided Illinois Natural Gas Co. v. Central Illinois Public Service Co. (decided January 5, 1942), 62 U.S. Sup. Ct. 384, 86 L.Ed. 322.)
(b) Congress has not acted with reference to this matter. It was said in the case last cited that: "In the absence of any controlling act of Congress we should now be faced with the question whether the interest of the state in the present regulation of the sale and distribution of gas transported into the state balanced against the effect of such control on the commerce in its national aspect, is a more reliable touchstone for ascertaining state power than the mechanical distinctions on which appellee relies."
Applying this test then, to the case at bar, it appears that Congress has not acted with reference to distribution at retail of natural gas moving interstate. It has only acted with reference to wholesale distribution to public service companies of natural gas moving interstate. (15 U.S.C.A., sec. 16 et seq. Natural Gas Act of June 21, 1938). The stipulated facts in the case at bar show that the gas involved here is sold at retail.
We believe that even if it can be said that the tax objected to is one on interstate commerce, it can and should be sustained as a non-discriminatory tax on a subject over which Congress has not yet exercised control.
All pertinent decisions of the Supreme Court of the United States hold unconstitutional statutes of the kind here under consideration.
They are unanimous in holding that states cannot tax the privilege of doing interstate commerce.
Cases dealing with taxation of privilege of transporting oil or gas by pipe line in interstate commerce: In Eureka Pipe Line Co. v. Hallanan, 257 U.S. 265, 42 S.Ct. 101, 66 L.Ed. 227 and United Fuel Gas Co. v. Hallanan, (1921) 257 U.S. 277, 42 S.Ct. 105, 66 L.Ed. 234, companion cases before the United States Supreme Court dealing with privilege taxes imposed on those engaged in the business of transporting oil or gas by pipe line arose under a West Virginia statute which forbade engaging in the business of transporting petroleum in pipe lines without the payment of a tax of two cents for each barrel of oil transported. In both cases plaintiffs owned a system of pipe lines in West Virginia connecting with pipe lines in other states. Oil, much of it produced in West Virginia, moved through these lines in a continuous stream. As to oil produced in West Virginia and transported outside the state the situation was the same as in the case at bar as respects gas produced in Montana and transported outside the state, except for two things: (1) The West Virginia statute made no distinction between interstate and intrastate transportation. Both were taxed. Under the Montana statute only interstate transportation is taxed. (2) The plaintiff owned and operated an extensive gathering system of pipe lines. The state claimed the transportation in this gathering system was intrastate commerce which could be taxed. Under the Montana statute no intrastate commerce is taxed. Both points of distinction are obviously factors giving more support to the alleged validity of the West Virginia Act than can be given the Montana Act. Nevertheless, the Supreme Court held the West Virginia statute invalid. The court apparently considered the matter so clear as to require no citation of authorities. The court said in the first case: "As has been repeated many times, interstate commerce is a practical conception, and as remarked by the court of first instance, a tax, to be valid, `must not, in its practical effect and operation, burden interstate commerce'."
Both of the above opinions were delivered by Mr. Justice Holmes. They clearly establish the proposition that a tax imposed on the privilege of doing what is admittedly interstate commerce in oil or gas by pipe line is invalid, even if intrastate business carried on through the same pipe line is subject to tax. In the case at bar the statute involved does not even purport to tax intrastate commerce. (See, also, Ozark Pipe Line Corp. v. Monier, 266 U.S. 555, 45 S.Ct. 184, 69 L.Ed. 439; State Tax Commission v. Interstate Natural Gas Co., 284 U.S. 41, 52 S.Ct. 62, 76 L.Ed. 156).
The rules announced in the decisions cited above are also applied without exception to taxes sought to be imposed by states on the privilege of engaging in interstate commerce in other commodities and services. To avoid unduly burdening this brief with authorities as to which we find no exception, we refer to only one decision in which many other cases are cited. Cooney v. Mountain States Tel. Tel. Co., 294 U.S. 384, 55 S.Ct. 477, 79 L.Ed. 934, involved Montana statutes which purported to impose "a license tax" on persons engaged in furnishing telephone service. The plaintiff telephone company brought suit to enjoin the enforcement of the tax on the ground that it was violative of the Commerce Clause of the Constitution of the United States. The Supreme Court affirmed the judgment of the lower court enjoining enforcement of the act. The state contended that the tax was imposed on intrastate commerce only, apparently recognizing that if it was imposed also on interstate commerce it would be invalid. The court said: "The tax is a privilege, or occupation, tax. * * * No distinction is made between interstate and intrastate service. * * There is no question that the State may require payment of an occupation tax from one engaged in both intrastate and interstate commerce. But a State cannot tax interstate commerce; it cannot lay a tax upon the business which constitutes such commerce or the privilege of engaging in it. * *
In passing, it should be noted that the Supreme court in the above case referred to and in part relied on the decision of this court in State v. Northern Pacific Express Co., 27 Mont. 419, 71 P. 404, in which this court held invalid a statute attempting to impose an occupation tax on the business of transporting goods "from one place to another" on the ground that the tax was imposed on interstate commerce and therefore offended against the Commerce Clause of the Federal Constitution.
On the basis of the above authorities it is submitted that a tax imposed on persons for the privilege of engaging in interstate commerce is invalid. We find no decision anywhere to the contrary, nor have counsel for appellant cited any. These authorities should dispose of this case without further argument.
Appellant argues that Congress has not acted with reference to distribution at retail of natural gas moving interstate, and relies on the Natural Gas Act of June 21, 1938. It is true that under that Act distribution at retail is not regulated by the Federal Government, but it is equally true that the Natural Gas Act applies to the transportation of natural gas in interstate commerce. Section 1 (b) of that Act provides: "The provisions of this chapter shall apply to the transportation of natural gas in interstate commerce, to the sale in interstate commerce of natural gas for resale for ultimate public consumption for domestic, commercial, industrial, or any other use, and to natural gas companies engaged in such transportation or sale." This Act indicates the congressional intent to exercise the right of Congress to regulate interstate transportation of natural gas. Although no taxes are imposed under the Act, it is clear that Congress does not intend to permit the states to regulate this commerce. Respondent is required to and does comply with the provisions of the Natural Gas Act. The lines in question in this case are under the jurisdiction of the Federal Power Commission. Any attempt to regulate this commerce, by taxation or otherwise, by the states would be a usurpation of the power of the Federal Government which it has already delegated under the Natural Gas Act to the Federal Power Commission.
The state appeals from a judgment declaring section 2408.2, Revised Codes, void in so far as it purports to impose a license tax on persons engaged in or carrying on the business of conveying through a pipe line gas produced within this state for the purpose of use outside the state.
By this action the state sought to collect from defendant the sum of $5,379.18, which, it is agreed, is the amount of the tax sought to be imposed by the Act in question upon the amount of gas conveyed by defendant during the first quarter of 1941 through its pipe lines to points outside the state of Montana, and the sole question is the validity of the tax. The cause was submitted on an agreed statement of facts and the trial court made clear and complete findings of fact and conclusions of law, and rendered judgment for defendant accordingly.
Section 2408.2, Revised Codes, was enacted as section 2 of Chapter 180 of the Laws of 1933, the material part of the title of which is as follows: "An Act requiring every person, firm, co-partnership, association, joint stock company, syndicate and corporation engaging in or carrying on the business of distributing natural gas within this state or conducting natural gas produced within this state through a pipe line to a point outside the State; to pay to the State Treasurer for engaging in carrying on such business certain license fees for the exclusive use and benefit of the State of Montana; * * *."
With certain exceptions and other provisions not material for the purposes of this suit, section 2 of that chapter, as amended by Chapter 52, Extra Session of 1933-34, and now appearing as section 2408.2, Revised Codes, provides: "Every person engaged in or carrying on the business of distributing to the public within this state, natural gas, produced, or not produced within this state, or conveying through a pipe line gas produced within this state for the purpose of use outside this state, or engaged in or carrying on the business of owning, controlling, managing, leasing or operating within this state, any system or plant for the distribution of natural gas, produced, or not produced within this state, to the public within this state, must, for the year 1934, and each year thereafter when engaged in carrying on such business in this state, pay to the State Treasurer for the exclusive use and benefit of the State of Montana, a license tax for engaging in and carrying on such business, an amount equal to three-eighths (3/8) of one (1) cent for each one thousand (1000) cubic feet of such natural gas, produced within this state, or not produced within this state, and distributed by such person to the public within this state, during such year, or conveyed through a pipe line to a point outside this state during such year, * * *."
Thus, enumerating first the license tax in question here, the statute imposes license taxes upon those engaged in either of the following two businesses: First, "the business of * * * conveying through a pipe line gas produced within this state for the purpose of use outside this state," and, second, "the business of distributing to the public within this state, natural gas, produced, or not produced within this state" or "owning, controlling, managing, leasing or operating within this state, any system or plant for" such public distribution.
The first is manifestly a license tax imposed on the business of engaging in certain interstate commerce, since it relates solely to the conveying of gas produced within the state for use outside of the state and therefore across state lines.
The second relates, not to the corresponding business of conveying gas in pipe lines for use within the state, but to the business of distributing natural gas to the public within the state (or controlling a plant therefor). That this is not a distinction without a difference is shown by the fact that the state does not claim a tax upon all the natural gas conveyed through defendant's pipe lines. The defendant is engaged in four allied businesses so far as its pipe lines are concerned.
First, the business of conveying natural gas in interstate commerce, on which the state by this action seeks to collect the license tax.
Second, the business of distributing natural gas to the public within the state (and controlling a plant for that purpose). Upon this business defendant pays the license tax imposed upon it by the second provision of section 2408.2 mentioned above, and no question is raised concerning it.
Third, the business of conveying through its pipe lines and selling natural gas to other distributors for distribution to the public within the state. The law does not require, and the defendant does not pay, a license tax upon this business; but the distributor to which it sells pays a license tax upon the business of distributing the gas to the public under the second provision of section 2408.2 mentioned above.
Fourth, the business of conveying through its pipe lines and selling natural gas to the United States government for the latter's use at Fort Peck. The statute imposes and the state claims no tax upon this business.
Thus the license tax imposed, or sought to be imposed upon [1, 2] defendant by the Act is not upon both the interstate and intrastate transportation of natural gas. It is imposed only upon the interstate transportation and upon the entirely different business of intrastate distribution of gas to the public. Therefore so far as the business of transporting natural gas is concerned, the tax burdens the interstate and not the intrastate business and therefore discriminates directly against the former. It has seemed necessary to consider this point since plaintiff admits that a tax upon interstate business is objectionable where it is discriminatory.
Nevertheless plaintiff contends that the tax upon the business of distributing gas to the public constitutes to that extent a tax upon the intrastate transportation of natural gas used for that purpose, and that to that extent the tax constitutes a non-discriminatory tax upon both intrastate and interstate commerce and is therefore valid. However, even if the tax upon the intrastate distribution of gas to the public (the second business of defendant mentioned above) is considered as a tax upon the intrastate transmission of the gas so distributed, there is still a discrimination, since no tax is imposed upon the other two intrastate businesses (the third and fourth businesses of defendant mentioned above), nor upon the intrastate transmission of the gas used in those businesses.
Furthermore, without regard to the question of discrimination within the state, it is generally held that a state tax which imposes a direct burden upon interstate commerce is void ( State v. Northern Pacific Express Co., 27 Mont. 419, 71 P. 404, 94 Am. St. Rep. 824); for if each of the states concerned in certain interstate commerce imposes nondiscriminatory taxes upon both intrastate and interstate business, the result is at least to double or triple the burden on interstate commerce as compared to the intrastate commerce in any one of the states. ( Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 58 S.Ct. 546, 82 L.Ed. 823, 115 A.L.R. 944; Gwin, White Prince Case ( Gwin, White Prince v. Henneford), 305 U.S. 434, 59 S.Ct. 325, 83 L.Ed. 272.) Even a nondiscriminatory tax cannot be sustained if it directly burdens interstate commerce. ( Adams Mfg. Co. v. Storen, 304 U.S. 307, 58 S.Ct. 913, 82 L.Ed. 1365, 117 A.L.R. 429; Cooney v. Mountain States Telephone Telegraph Co., 294 U.S. 384, 55 S.Ct. 477, 480, 79 L.Ed. 934.) In the latter case, affirming a federal court judgment which enjoined the enforcement of a Montana license tax law, the court said in a decision written by Mr. Chief Justice Hughes:
"Appellants contend that the taxes are imposed solely upon intrastate commerce and do not burden interstate commerce. They insist that the taxes are laid upon the intrastate business measured by the number of telephones in intrastate use. Appellants challenge the findings that all of appellee's telephones in Montana are instrumentalities of interstate and foreign commerce, and that appellee could not discontinue its intrastate business without being compelled to withdraw from its interstate and foreign business, as being unsupported by the evidence. * * *
"The tax is a privilege, or occupation, tax. * * * The business is the maintaining of telephone lines and the furnishing of telephone service in the state. No distinction is made between interstate and intrastate service. * * * The tax is thus laid simply by reason of the fact that the company is furnishing telephone service and is based upon the number of telephone instruments used in that service without regard to its character whether intrastate or interstate. * * *
"The evidence supports the findings that these telephone instruments are available for interstate and foreign communications. * * * More than 10,000 of these instruments have actually been used in interstate and foreign commerce since the tax was laid. * * *
"There is no question that the state may require payment of an occupation tax from one engaged in both intrastate and interstate commerce. But a state cannot tax interstate commerce; it cannot lay a tax upon the business which constitutes such commerce or the privilege of engaging in it. And the fact that a portion of a business is intrastate and therefore taxable does not justify a tax either upon the interstate business or upon the whole business without discrimination. ( Leloup v. Mobile, 127 U.S. 640, 8 S.Ct. 1380, 32 L.Ed. 311.) There are `sufficient modes' in which the local business may be taxed without the imposition of a tax `which covers the entire operations.' (Id., page 647 of 127 U.S. 8 S.Ct. 1380, 1383. See Williams v. Talladega, 226 U.S. 404, 419, 33 S.Ct. 116, 57 L.Ed. 275.) Where the tax is exacted from one doing both an interstate and intrastate business, it must appear that it is imposed solely on account of the latter; that the amount exacted is not increased because of the interstate business done; that one engaged exclusively in interstate commerce would not be subject to the tax; and that the one who is taxed could discontinue the intrastate business without also withdrawing from the interstate business. ( Sprout v. South Bend, 277 U.S. 163, 171, 48 S.Ct. 502, 72 L.Ed. 833, 62 A.L.R. 45; East Ohio Gas Co. v. Tax Commission, 283 U.S. 465, 470, 51 S.Ct. 499, 75 L.Ed. 1171.)
"A privilege or occupation tax which a state imposes with respect to both interstate and intrastate business, through an indiscriminate application to instrumentalities common to both sorts of commerce, has frequently been held to be invalid. [Citing cases.] * * *
"In the instant case, the tax, being indivisible and indiscriminate in its application, necessarily burdens interstate commerce. We do not pass upon the other question presented."
Plaintiff contends further that such tax is not objectionable [3] in the absence of federal legislation relating to the same subject; but the rule is otherwise. In State of Missouri v. Kansas Natural Gas Co., 265 U.S. 298, 44 S.Ct. 544, 545, 68 L.Ed. 1027, the court said:
"The line of division between cases where, in the absence of congressional action, the state is authorized to act, and those where state action is precluded by mere force of the commerce clause of the Constitution, is not always clearly marked. In the absence of congressional legislation, a state may constitutionally impose taxes, enact inspection laws, quarantine laws and, generally, laws of internal police, although they may have an incidental effect upon interstate commerce. ( Pennsylvania R. Co. v. Hughes, 191 U.S. 477, 488-491, 24 S.Ct. 132, 48 L.Ed. 268.) But the commerce clause of the Constitution, of its own force, restrains the states from imposing direct burdens upon interstate commerce. In Minnesota Rate Cases [ Simpson v. Shepard], 230 U.S. 352, 396, 33 S.Ct. 729, 739 ( 57 L.Ed. 1511, 48 L.R.A. (n.s.), 1151, Ann. Cas. 1916A, 18), Mr. Justice Hughes, speaking for the court, said: `If a state enactment imposes a direct burden upon interstate commerce, it must fall, regardless of federal legislation. The point of such an objection is not that Congress has acted, but that the state has directly restrained that which in the absence of federal regulation should be free.' The question is so fully discussed in that case, that nothing beyond its citation is required."
It is well settled that license taxes of this kind, which impose burdens upon interstate commerce, are void as in conflict with the interstate commerce clause (Art. I. sec. 8) of the Constitution of the United States. ( Eureka Pipe Line Co. v. Hallanan, 257 U.S. 265, 42 S.Ct. 101, 66 L.Ed. 227; Ozark Pipe Line Corporation v. Monier, 266 U.S. 555, 45 S.Ct. 184, 69 L.Ed. 439; State Tax Commission v. Interstate Natural Gas Co., 284 U.S. 41, 52 S.Ct. 62, 76 L.Ed. 156.)
It is unnecessary to consider the other constitutional provisions claimed to have been contravened by the Act.
The judgment of the trial court is affirmed.
ASSOCIATE JUSTICES ERICKSON, MORRIS, ANDERSON and ADAIR concur.