No. 85-435 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1986 

NORTHWEST AIRLINES, INC., 

a corporation, 

Plaintiff, Respondent, 

and Cross-Appellant, 

STATE TAX APPEAL BOARD, et al. 

Defendants, 

and 

DEPARTMENT OF REVENUE OF THE STATE 

OF MONTANA, 

Defendant, Appellant and 

Cross-Respondent. 

APPEAL FROM: District Court of the First Judicial District, 

In and for the County of Lewis & Clark, 

The Honorable Gordon Bennett, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

David W. Woodgerd argued, Dept. of Revenue, Helena, 

Montana 

For Respondent: 

Loble & Pauly; Lester H. Loble, 11, Tom K. Hopgood 

argued, Helena, Montana 

Submitted: April 3, 1986 

Decided: June 5, 1986 
Honorable Frank I. Haswell, retired Chief Justice, delivered 

the Opinion of the Court. 

The District Court of Lewis and Clark County granted 

summary judgment to Northwest Airlines in its action to 

recover back a deficiency assessment on its Montana corporation license tax paid under protest. We affirm. 

The background of this controversy indicates that 

Northwest is an interstate air carrier of passengers and 

freight. Some of its flights land and take-off from Montana 

airports while others simply fly over the state. Northwest 

Airlines has filed Montana corporation license tax returns 

each year since 1963. 

As the result of an audit, the Montana Department of 

Revenue (DOR) levied a deficiency assessment against Northwest of $496,562.00 for the years 1973 thru 1978. Northwest 

paid the deficiency assessment plus interest under protest 

and filed an action in the District Court to secure a declaratory judgment that the deficiency assessment was illegal and 

to recover it back. At about the same time, Northwest filed 

an appeal of the deficiency assessment with the State Tax 

Appeal Board (STAB) which was stayed pending the outcome of 

the District Court action. 

In September 1984, Northwest and DOR filed simultaneous 

motions for summary judgment. Following briefs and oral 

argument, the District Court granted summary judgment to 

Northwest, holding in substance that DOR had no authority by 

statute or under the Montana Administrative Procedures Act 

(MAPA) to use an apportionment formula which includes nonstop 

flyover miles in computing the Montana corporation license 

tax owed, and that this violates constitutional requirements 
of due process, equal protection and the Commerce Clause. 

Thereafter, the District Court denied DOR1s motion to alter 

or amend the judgment after striking the affidavits of three 

DOR agents and empl-oyees which were filed by DOR to support 

its motion. 

DOR1s appeal followed. A cross-appeal by Northwest 

concerning the interest rate has been settled by agreement of 

the parties. 

Although the parties define the issues on appeal in 

diverse and varying manner and language, the basic controversy is whether the apportionment formula used by DOR in 

computing the corporation license tax owed by Northwest is 

authorized under Montana statutes, MAPA, and state and federal constitutional requirements. The remaining issues neither 

control nor affect this basic controversy and need not be 

discussed nor determined herein. 

The Montana corporation license tax is imposed "for the 

privilege of carrying on business -- in this state" (emphasis 

added) and, in the case of a unitary business such as Northwest having income from business activity both within and 

without Montana, is "measured by the net income derived from 

- or attributable - to Montana sources. . . " (Emphasis added.) 

Section 15-31-101 (3) , MCA. 

The statutory formula for this measurement is the 

multiplication of total business income of the company by a 

fraction," the numerator of which is the property factor plus 

the payroll factor plus the sales factor and the denominator 

of which is 3." Section 15-31-305, MCA. The property, 

payroll and sales factors are expressed as the proportion of 

Montana property, payroll and sales to the total property, 

payroll and sales of the company. Thus, the greater the 
Montana shares of Northwest's property, payroll and sales, 

the higher its taxable Montana. income will be. 

DOR is empowered to alter this income apportionment 

method where the formula outlined above does "not fairly 

represent the extent of the taxpayer's business activity - in 

this state . . ." (Emphasis added.) Section 15-31-312, MCA. 

DOR administratively determined that the general rules made 

to carry out the statutory apportionment scheme did not 

"fairly represent the extent of the taxpayer's business 

activity in this state" as far as certain industries, such as 

freight and passenger carriers, were concerned. Therefore, 

it created special procedures for those industries. A.R.M. 

42.26.264 applies to freight and passenger carriers and 

states: 

(1) A portion of the net income of 

taxpayers engaged in the transportation 

of freight or passengers within and 

without Montana may be attributed to the 

movement of revenue-producing equipment, 

drivers, train crews, or other operating 

personnel across the state. 

(2) The percentage of miles traveled 

within Montana to total miles traveled 

everywhere shall be the percentage used 

in determining the amount of income 

attributable to this state. The apportionment formula for such transportation 

companies shall be computed as follows: 

(a) . . . The value of equipment used 

in interstate transportation shall be 

assigned to this state on the mileage 

basis. 

(b) . . . The wages of personnel operating transportation equipment within and 

without this state shall be assigned to 

this state upon the basis of miles. The 

wages of such personnel shall be assigned 

to Montana in proportion that miles 

traveled everywhere. 

(c) Revenues will be assigned to this 

state in the proportion that the miles 

traveled within the state bear to the 

total miles traveled everywhere . . . 
Under this rule, mileage is the basis for allocating 

income to Montana for corporate license tax purposes. The 

value of equipment used in interstate commerce (property 

factor), the wages paid to personnel involved in interstate 

commerce (payroll factor) and the revenue generated in interstate commerce (sales factor) are assigned to Montana in the 

proportion that miles traveled within Montana compare to 

miles traveled everywhere. By fiat of its auditor, DOR 

included miles attributed to nonstop flyovers, ie. to airplanes which fly over Montana but which do not land or take 

off from Montana airports, as miles traveled within Montana 

in computing the tax owed by Northwest. 

The District Court concluded that the language of S 

15-31-312, MCA, and A.R.M. S 42.26.264 do not encompass the 

use of nonstop flyover miles in the numerator of the apportionment formula. DOR contends that a formula which has all 

of the miles Northwest flies in the denominator but ignores 

80% of the miles Northwest flies in the numerator does not 

fairly represent the extent of Northwest's business activity 

in Montana. Each of the statutes explaining the factors to 

be used in the apportionment formula refer to use, payment, 

sale or performance "in - this state." The relief provision of 

§ 15-31-312, MCA, refers to activity "in - this state." DOR1s 

administrative rule for freight and passenger carriers refers 

to "miles traveled within Montana" for the formula's numerator. The flyover flights of Northwest have no contact with 

Montana. They do not land or take off here. DOR concedes 

these flights do not even have radio contact with Montana. 

The language of the statutes expresses no intent to consider 

activity other than that in Montana. Construing this language in favor of the taxpayer, as we must, Nice v. Montana 
(1973) , 161 Mont. 448, , 507 P.2d 527, 530, we find that 

DOR had no statutory authority to include nonstop flyover 

miles in the numerator of the apportionment formula. 

The administrative decision of DOR's auditor to include 

nonstop flyover miles in the numerator of the apportionment 

formula was not an inconsequential matter. It increased 

Northwest's tax 490% in 1973, 414% in 1974, 404% in 1976, 

383% in 1977 and 505% in 1978 (there was no profit to tax in 

1975). The inclusion of overflight mileage in the statutory 

apportionment formula "implements, interprets or prescribes 

law or policy" and thus qualifies as a rule by statutory 

definition. Section 2-4-102 (lo), MCA. A rule to be valid 

must be adopted after notice and hearing in conformity with 

5 2-4-302, MCA. Here, there was no compliance with MAPA's 

rulemaking requirements and the auditor's unilateral decision 

to include overflight mileage in the numerator of the apportionment formula fails for noncompliance with MAPA 

requirements. 

Accordingly, we hold that using nonstop flyover miles 

in the numerator of the apportionment formula did not comply 

with statutes or administrative rules and did not fairly 

represent Northwest's business activity within Montana as 

contemplated by statute. Lest we be misunderstood, we caution that nothing herein contained is intended to bar the use 

of nonstop flyover miles in both the numerator and denominator of the apportionment formula under appropriate statutory 

language and duly enacted administrative rule. 

We neither reach nor decide the state or federal constitutional objections to the deficiency assessment imposed 

against Northwest in this case. Under the time honored rule 

that a court will decide an appeal on nonconstitutional 
grounds if possible and decide constitutional issues only if 

necessary to the decision, we leave such issues for another 

day. 

Finally, DOR contends that the District Court should 

have considered a proposed alternative formula. The issues 

presented to the District Court concerned the particular 

formula and tax used by DOR against Northwest. The District 

Court's function was to decide whether the same was unlawful. 

It did so in granting Northwest's motion for summary judgment. To rule on DOR's proposed alternate formula which 

would not used by them in computing the tax owed by Northwest 

would exceed its jurisdiction, and this Court's as well. 

Affirmed. 

 ono or able' Fr/ank 'I .' Haswell, \ 

Retired Chief Justice, sitting 

in place of Mr. Justice L. C. 

Gulbrandson 

We concur: / 

Justices 
Justice John C. Sheehy, concurring and specially concurring: 

I concur in the above opinion. 

After oral argument was had in this case, a few editors 

in the State had some querulous comments to make concerning 

the State's argument that airline overflights, not touching 

in the State, should nevertheless be included in the 

numerator of the mileage factor to determine a fair income 

tax for the airline. 

It will doubtless astound those editors to learn that 

the State's proposal is not unique; that a number of states 

use such overflight mileage in determining an airline's 

income taxes; that this airline particularly suggested such a 

method in lieu of another to the State of Minnesota; that the 

method is neither illegal nor unfair; and that the 

legislature and the department of revenue may well consider 

such a factor as they revamp their laws and regulations to 

cover the hole in the income tax law pointed out in this 

Court's opinion. 

The use of overflight mileage in the factor stems from 

allocation of labor costs as one of the criteria to determine 

a fair tax. When airplanes are flying over the State, the 

labor force that put the plane there, and operates it, is 

generating income for the airline, income that would 

otherwise escape income taxation by the state overflown or by 

any other state. 

The establishment of a good business climate in this 

state should not be clouded by poor income tax planning, 

especially when the taxpayer has suggested the method as a 

fair one. 

Justice - 8 -