No. 91-208 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1992 

THE MONTANA DEPARTMENT OF REVENUE, 

Petitioner and Appellant, 

-VSUNITED PARCEL SERVICE, INC., a corporation, 

Respondent and Respondent. 

APPEAL FROM: District Court of the First Judicial District, 

In and for the County of Lewis and Clark, 

The Honorable Dorothy McCarter, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Geralyn Driscoll, Department of Revenue, Helena, 

Montana. 

For Respondent: 

James P. Sites, Crowley, Haughey, Hanson, Toole & 

Dietrich, Billings, Montana: Richard D. Birns and 

Joan E. Kreider Bradwell, Schnader, Harrison, Segal 

& Lewis, Philadelphia, Pennsylvania. 

Submitted on Briefs: November 21. 1991 

Qecided: January 14, 1992 3WN 14199% 

Filed: L.2 S2,tPL b 

CLERK OF SLIPREME COURT 

STATE OF MONTANA 
Justice R. C. McDonough delivered the Opinion of the Court. 

The Department of Revenue appeals from an order of the First 

Judicial District, Lewis and Clark County, affirming an order of 

the State Tax Appeal Board. We affirm. 

The issues on appeal are: 

1. Whether the District Court erred in concluding that the 

mileage method of computing United Parcel Service's Montana revenue 

overstated the actual amount of such revenue. 

2. Whether the District Court erred in concluding that 5 15- 

31-312, MCA, authorized the State Tax Appeal Board to determine a 

method used in the apportionment formula results in an unfair 

representation of UPS'S business activity in Montana. 

United Parcel Service, Inc. (UPS) is an authorized motor 

carrier, specializing in a nationwide small package pick-up and 

delivery service. Under UPS'S operating authorities (Interstate 

Commerce Commission and Montana Public Service Commission), it is 

required to treat each package as a separate and distinct shipment, 

with a size and weight limit on each package. The charge per 

package is based on 1) the weight of the package, 2) the rate zone 

to which each package is sent (based on United States Postal 

Service rate zones), and 3) a package service charge. UPS'S 

primary competition is the United States Postal Service. 

UPS has developed a unique operating system in order to 

provide its specialized, nationwide small package pick-up and 

delivery service. UPS divides the United States into "operating 

areas. Within each operating area, an "operating center" 

2 
headquarters the brown vans, and initial and final package sorting 

takes place. 

Each morning, the brown vans set out from the operating center 

for delivery within the operating area. After the packages are 

delivered, the driver becomes a pick-up driver. At the end of the 

day the pick-up packages are returned to the operating center. The 

packages are sorted into two groups. One group consists of 

packages remaining within the operating area, the other group 

consists of packages destined for addresses within another 

operating area. These packages are delivered to larger sorting 

centers termed "hubs." Due to this method, vehicle miles may be 

quite different from the distance between origin and destination. 

Reports prepared by UPS indicate that Montana has a population 

of 5.4 people per square mile. UPS'S operating statistics revealed 

that UPS'S Montana miles per driver were 148 miles compared to 

between 47 and 89 miles in other districts in the northwest region. 

Further, UPS transported 1.71 packages per mile in Montana as 

compared with 4.68 to 9.10 packages per mile in the other districts 

in the northwest region. During the audit period (1977-1982) 

Montana package van drivers carried fewer packages per van than 

drivers in any other state, and had the lowest pounds of packages 

transported. 

UPS is a multi-state, unitary corporation and therefore 

calculates Montana taxable income using formula apportionment. In 

1983, the Department of Revenue (the Department) audited the 

corporate license tax returns UPS filed for 1977 through 1982. The 

3 
Department calculated Montana taxable income using the mileage 

method based on § 42.26.264, ARM. In 1985, the Department assessed 

an additional tax to UPS. UPS appealed the assessment to the State 

Tax Appeal Board (STAB). 

Prior to the audit, UPS used a "gross billed method" to 

calculate taxable income. STAB issued findings of fact, 

conclusions of law, and order, which ruled that the Department's 

"mileage method" of calculating the sales factor is an 

inappropriate method and ordered the Department to use the 

"adjusted revenue method. 

The District Court affirmed STAB'S findings of fact, 

conclusions of law and order. However, the District Court found 

STAB confused the "adjusted revenue method" with the "state-tostate method" and remanded to STAB to correct the terminology. 

This appeal followed. 

The standard of review used by this Court in reviewing agency 

(STAB) findings of fact is clearly erroneous in view of the 

reliable, probative, and substantial evidence on the whole record. 

Section 2-4-704, MCA (1991). In reviewing conclusions of law, we 

will determine if the agency's (STAB) interpretation of the law is 

correct. Steer, Inc. v. Dept. of Revenue (1990), 245 Mont. 470, 

803 P.2d 601. 

I 

Whether the District Court erred in concluding that the 

mileage method of computing United Parcel Service's Montana revenue 

overstated the actual amount of such revenue. 

4 
Recently this Court reviewed Montana’s Corporation License 

Tax. We said: 

Every corporation engaged in business in the State of 

Montana must pay annually to the state treasurer as a 

license fee for the privilege of carrying on business in 

this state a percentage of its total net income.. .In the 

case of corporations having income from business activity 

which is taxable both within and without this state, the 

license fee is measured by the net income derived from or 

attributable to Montana sources as determined under the 

Corporation License Tax Act. Section 15-31-101 (3), MCA. 

Montana, to overcome the difficulty, when a corporation 

engages in a unitary business in more than one state, of 

determining the corporation’s income and expenses 

generated from its activities in Montana, has adopted the 

Uniform Division of Income for Tax Purposes Act (UDITPA) . Under the UDITPA method, business income is apportioned 

to each jurisdiction based on a three-factor apportion- ment formula. The factors are property, payroll and 

sales. . . . 

Am. Tele. & Tele. v. State Tax Appeal Board (1990), 241 Mont. 

440, 443, 787 P.2d 754, 756. 

Section 15-31-305, MCA (1991), sets forth the formula for 

apportioning business income under the UDITPA. “All business 

income shall be apportioned to this state by multiplying the income 

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.” Sections 15-31-306 to 15-31-311, MCA, provide the 

definitions for the property, payroll and sales factor and 

guidelines for the proper formulas used in the equations. 

Only the sales factor is in dispute here. Sections 15-31-310 

and 15-31-311, MCA, are the definitional sections for the sales 

factor within the apportionment formula: 

The sales factor is a fraction, the numerator of which is 

the total sales of the taxpayer in this state during the 

5 
tax period and the denominator of which is the total 

sales of the taxpayer everywhere during the tax period. 

Section 15-31-311, MCA, provides in part: 

(2) Sales, other than sales of tangible personal 

property, are in the state if: 

(a) the income-producina activity is performed in the 

state: or 

(b) the income-producinq activity is performed both in 

and outside this state and a greater proportion of the 

income-producing activity is performed in this state than 

in any other state, based on costs of performance. 

(Emphasis added.) 

The term "sales1' is defined in 5 15-31-302 (5), MCA, as "all 

gross receipts of the taxpayer". . . Thus, since is all 

gross receipts of the taxpayer, under 55 15-31-310 and 311, MCA, 

the sales factor must be based on the revenue received by the 

taxpayer. 

The Department used the "mileage method" in determining the 

sales factor for the apportionment formula. The Department argues 

that UPS must prove the "mileage method" distorts its income prior 

to invoking the relief provision of 5 15-31-312, MCA, relying on 

Trinova Corp. v. Michigan Dept. of Treasury (1991), - U.S. -, 

111 S.Ct. 818, 112 L.Ed.2d 884. 

However, Trinova involved constitutional claims relating to 

Michigan's apportionment formula as applied to Trinova. Trinova at 

-, 111 S.Ct. at 829, 112 L.Ed.2d at 904. UPS does not challenge 

Montana's identical three-factor apportionment formula. Rather, 

UP5 argues that under Montana law the mileage method utilized by 

the Department does not fairly represent the extent of its business 

activity within the State. 

Section 15-31-312, MCA, is the relief provision under UDITPA. 

6 
It provides in part: 

If the allocation and apportionment provisions of 

this part do not fairly represent the extent of the 

taxpayer's business activity in this state, the taxpayer 

may petition for or the tax administrator may require, in 

respect to all or any part of the taxpayer's business 

activity, if reasonable 

(4) the employment of any other method to effectuate 

an equitable allocation and apportionment of the 

taxpayer's income. 

We find no authority for the State's argument that UPS must prove 

the mileage method distorts its Montana income prior to invoking 

the relief provision under 5 15-31-312(4), MCA. 

In Am. Tele. & Tele. v. State Tax Appeal Board (1990), 241 

Mont. 440, 448, 787 P.2d 754, the tax administrator invoked the 

relief provision under 5 15-31-312, MCA. In AT&T we held the 

Department properly invoked 5 15-31-312, MCA, because the inclusion 

in gross receipts of returns on temporary cash investments in the 

sales factor did not fairly represent the extent of the taxpayer's 

business activity within the state. Am. Tele. & Tele. at 448, 787 

P.2d at 759. 

UPS put forth substantial evidence to show the mileage method 

did not fairly represent its business activity within Montana. 

Evidence before STAB revealed that UPS drivers in Montana drive 

more miles to deliver fewer packages than drivers in any other 

state, and that average revenue per mile varies substantially from 

state to state. Further, STAB found that expert testimony 

presented by UPS revealed the underlying differences between UPS 

and other freight carriers, and that the mileage method for 

calculating revenue was less precise for UPS. 

7 
The mileage method is calculated by dividing the number of 

miles traveled by UPS in Montana by the total miles traveled by UPS 

nationally, and multiplying the percentage by the total revenue 

received by UPS. STAB ordered that the sales factor be calculated 

by the Itadjusted revenue method," that is, using numbers of 

packages of an average weight (10-11 pounds), at the rate for the 

furthest zone in each state. Fifty percent of the interstate pickups and deliveries are attributed to Montana, and one hundred 

percent of the Montana intrastate pick-ups and deliveries are 

attributed to Montana. 

The District Court correctly found STAB's discussion of the 

"adjusted revenue method" to be a misnomer, which was really the 

"state-to-state" revenue analysis method. The "adjusted revenue 

method" allocates revenue between two UPS corporations. Wholly 

intrastate packages must be assessed at fifty percent to avoid 

double counting. The District Court found that STAB's use of the 

"adjusted revenue method1' referred to an adjustment under the 

state-to-state method to avoid double counting of packages both 

picked up and delivered in Montana. 

We therefore conclude that reliable, probative, and 

substantial evidence existed to support STAB's findings of fact and 

that STAB's interpretation of the law was correct. For the 

foregoing reasons we affirm the District Court on the first issue. 

11 

Whether the District Court erred in concluding that 5 15-31- 

312, MCA, authorized the State Tax Appeal Board to determine a 

8 
method used in the apportionment formula results in an unfair 

representation of UPS'S business activity in Montana. 

Section 2-4-102, MCA, is a definitional section. Part (11) 

provides : 

(11) "Substantive rules" are either: 

(a) legislative rules, which if adopted in 

accordance with this chapter and under expressly 

delegated authority to promulgate rules to implement a 

statute have the force of law and when not so adopted are 

invalid; or 

(b) adjective or interpretive rules, which may be 

adopted in accordance with this chapter and under express 

or implied authority to codify an interpretation of a 

statute. The interpretation lacks the force of law. 

The Department maintains that 5 42.26.264, ARM, has the force 

of law. It is true that the Department promulgated rules to 

implement Title 15, Chapter 31 under MAPA. See § 15-31-313, MCA 

(1991). The Department promulgated rules in § 42.26.264, ARM, 

related to freight and passenger carriers which is the basis of the 

"mileage method." Section 42.26.264 provides: 

SPECIAL COMPUTATIONS RELATED TO FREIGHT AND 

PASSENGER CARRIERS (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) Fixed properties, such as buildings and land 

used in the business, terminal facilities, shop 

equipment, and cars and trucks used in gathering or 

delivering local freight, shall be assigned to the state 

in which such properties are located. The value of 

equipment used in interstate transportation shall be 

assigned to this state on the mileage basis. 

(b) The wages and salaries of employees assigned to 

9 
fixed locations as officers or clerical, administrative, 

pick-up and delivery, or terminal personnel within this 

state shall be included in the Montana payroll factor. 

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 within this state bear to the total 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. All other 

revenue shall be assigned in accordance with the 

provisions of 15-31-310 and 15-31-311, MCA, and ARM 

42.26.151 through 42.26.253 and 42.26.257. 

The District Court found that the Department's authority to 

promulgate regulations to carry out UDITPA does not insulate it 

from challenges to the validity and breadth of its regulations. 

The District Court held that under Bick v. State Department of 

Justice (1986), 224 Mont. 455, 457, 730 P.2d 418, 420, 

administrative agencies enjoy only powers specifically conferred 

upon them by the legislature, and agency rules must be strictly 

confined within the applicable legislative guidelines. Further, 

the rule must be reasonably necessary to effectuate the purpose of 

the statute. sick at 458, 730 P.2d at 421. 

The District Court further found that although the legislature 

left it up to the Department to develop a method of calculating 

"income producing activity" for the sales factor portion of the 

three-factor formula, the method must be based on revenue received 

by the taxpayer under the statutory definition of "sales." 

Further, 5 15-31-312, MCA, requires an equitable representation of 

the taxpayer's business activity within the State. UPS put forth 

substantial evidence to show the "mileage method" did not equitably 

10 
represent its business activity within the State. We conclude 

above that UPS may petition for an alternative method of 

apportionment under 5 15-31-312(4), MCA. 

Additionally, 5 42.26.264, ARM, also sets forth the "mileage 

method" in determining both the property and payroll factors of the 

three-factor formula. The Department chose not to use the milage 

method to calculate property and payroll for UPS. Yet, the 

Department insists it must use the mileage method for the sales 

factor. The Department's application of the regulation to the 

three-factor formula is inconsistent. Its argument, therefore, 

fails. 

We conclude that the District Court's interpretation that 5 

15-31-312, MCA, authorized STAB to find the mileage method results 

in an inequitable representation of UPS'S business activity within 

Montana is correct. We therefore affirm the District Court. 

We Concur: 

11 
January 14, 1992 

CERTIFICATE OF SERVICE 

I hereby certify that the following order was sent by United States mail, prepaid, to the following 

named: 

Geralyn Driscoll, Legal Counsel 

Dept. of Revenue 

Mitchell Bldg. 

Helena, MT 59620 

James P. Sites 

Crowley, Haughey, Hanson, Toole & Dietrich 

P.O. Box 2529 

Billings, MT 59103 

Richard D. Birns 

Schnader, Harrison, Segal & Lewis 

Ste. 3600, 1600 Market St. 

Philadelphia, PA 19103 

ED SMITH 

CLERK OF THE SUPREME COURT 

STATE OF MONTANA