NO. 88-151 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1989 

PACIFIC POWER & LIGHT COMPANY, 

PUGET SOUND POWER & LIGHT COMPANY, 

PORTLAND GENERAL ELECTRIC COMPANY, 

WASHINGTON WATER POWER COMPANY, 

AND THE MONTANA POWER COMPANY, 

Plaintiffs and Appellants, 

MONTANA DEPARTMENT OF REVENUE, 

et a!.. , 

Defendants and Respondents. 

APPEAL FROM: District Court of the First Judicial District, 

In and for the County of Lewis and Clark, 

The Honorable Henry Loble, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Donald R. i4urray; Murphy, Robinson, et a1 . , Kalispell , JJT 

Thomas H. Nelson; Stoel, Rives, Boley, Jones & Grey, 

Portland, Oregon 

For ~ekpondent: 

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x--4 : 

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. + ' Larry Schuster, Montana Department of Revenue, Helena, r-I ' "kontana 

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i i .. - Filed: -- 

Submitted: February 21, 1989 

Decqided: April 17 , 1989 

Clerk 
Mr. Justice L. C. Gulbrandson delivered the Opinion of the 

Court. 

Appellants appeal the order of the First Judicial 

District Court, Lewis and Clark County, in a declaratory 

judgment action, upholding the validity of the Montana 

Department of Revenue ' s (DOR) assessment of beneficial use 

taxes for the year 1984 against the appellants pursuant to 

S 15-24-1203, MCA. These beneficial use taxes were assessed 

for the appellants' firm transmission demands upon certain 

Bonneville Power Administration (BPA) , 500 kilovolt (KV) 

transmission lines located between Townsend, Montana and 

Garrison, Montana. We affirm the order of the District 

Court. 

In the mid-1970s, two mine-mouth, coal-fired electric 

generating plants were built by Montana Power Company (MPC) 

and Puget Sound Power and Light Company (Puget), at Colstrip, 

Montana. Each of these plants produce 330 megawatts of 

electrical power consuming 30 megawatts internally at each 

plant. These plants have been operated and maintained by the 

Montana Power Company since being placed in service in 1975 

and 1976. 

To market the power produced by Colstrip Units I and 

11, two 230 KV electrical transmission lines were built to 

transmit the power from Colstrip to a point near Broadview, 

Montana. Other 230 KV lines moved the energy from Broadview 

to markets or "loads" located in western Montana and the 

Pacific Northwest. This system of 230 KV lines proved 

adequate for transmitting the energy generated from Colstrip 

Units I and 11. 

In the late 1970s and early 1980s, MPC and Puget, in 

conjunction with Portland General Electric Company (PGE), 

Washington Water Power Company (WWP) and Pacific Power and 

Light Company (PPL) foresaw an increased demand in the 
Pacific Northwest for electrical power. Consequently, they 

decided to build Colstrip Units IJI and IV. (Colstrip Units 

I11 and IV each have a generation capacity of 770 megawatts 

(MW) of electrical power with each plant consuming 

approximately 70 MW internally.) These five companies, the 

appellants in this case, were the owners of undivided 

j-nterests in Colstrip [Jnits I11 and IV at the time of the 

assessment of the beneficial use taxes which are the subject 

of this litigation. They shall hereinafter be collectively 

referred to as the Owners. 

Realizing that the existing system of 230 RV 

transmission lines would be insufficient to transmit the 

additional 1,400 MW produced by Colstrip Units I11 and IV in 

1977, the Owners entered into negotiations with the RPA to 

build two 500 KV transmission lines from Townsend to the 

BPA's existing 500 KV lines at Taft, Montana. 

The Owners would convert the existing 230 KV lines 

stretching from the Colstrip generating point to a substation 

located at Rroadview, Montana, into 500 KV lines. They then 

would construct new 500 KT7 lines from Rroadview, Montana. to 

the anticipated RPA 500 KV Lines beginning in Townsend. 

For its part, the RPA executed two primary agreements 

with the Owners. These agreements stated the BPA would 

construct and operate those 500 KV lines referred to as the 

Montana Intertie line, which runs from Townsend, Montana to 

Garrison, Montana, and the Garrison West line, which runs 

from Garrison, Montana, to a point designated as the Taft 

substation on the Montana-Idaho border. These lines would 

link with the RPA's currently existing 500 KV system at. the 

Taft substation. 

In preparation for Colstrip Unit 111 going on-line i.n 

January, 1984, the BPA completed construction of the 500 KV 

lines from Townsend, Montana to Garrison, Montana, i.n 1.983. 
There is no substation at the point where the RPA and Owners' 

lines meet near Townsend. The RPA completed the Garrison 

West line in 1986. This facilitated the transmission of 

Colstrip Unit IV power to the Taft substation and points to 

the west. 

In 1983, the Montana Legislature, realizing use of the 

proposed BPA 500 KV lines extending from Townsend to Taft 

would be exempt from state property taxes, passed an 

amendment to 5 15-24-1203, MCA, to close the loophole which 

provided this tax windfall. The amendment provides for the 

assessment of a beneficial use tax against users of exempt 

electrical transmission lines having a 500 KV or greater 

rating. After passage of this amendment, the DOR began 

meeting with the Owners, their representatives and the BPA to 

determine a value for the Montana Intertie line which wou1.d 

be placed in service in 1984. 

A definite value for the Montana Intertie line had not 

been established by early 1984. The DOR thus based its 

assessment on the average of the initial agreement's project 

value and estimates of the actual cost of constructing these 

lines. The resulting value for the Montana Intertie line was 

established at $92,000,000. The DOR then factored this value 

into the cost portion of the standard unitary method and 

assessed taxes to each owner based upon their firm 

transmission demands under the Montana Intertie Agreement. 

The Owners protested the imposition of these beneficial use 

taxes and this lawsuit resulted. 

In 1985 and each subsequent year, the DOR has assessed 

beneficial use taxes against the Owners for their use of the 

500 KV lines referred to in this opinion and in each case the 

Owners have protested and filed lawsuits seeking declaratory 

injunctive rel-ief from the imposition of those taxes. The 
individual facts of those cases are not dealt with in this 

opinion. 

The Owners present seven separate issues in this 

appeal : 

1. Whether the Owners' lacked that sufficient "Beneficial Use" of the subject facilities necessary 

for the imposition of beneficial use taxes under 

15-24-1203, MCA? 

2. Whether the chal.l.enged taxes violate the Commerce 

Clause of the United States Constitution? 

3. Whether the challenged taxes violate the Supremacy 

Clause of the United States Constitution? 

4. Whether the challenged taxes violate the guarantee 

of due process and equal protection found in the 

Fourteenth Amendment? 

5. Whether the challenged taxes violate the "Private 

Tnterests" clause of the Montana Constitution? 

6. Whether the challenged taxes violate the "Retrospective Laws" clause of the Montana Constitution? 

7. Whether the challenged taxes violate the "Impairment of Obligation of Contracts" c1.ause of the 

Montana Constitution? 

BENEFICIAL USE 

A stat.efs right to impose beneficial use taxes on a 

private citizen or corporation's possession or use of 

property owned by the United States is wel.1 established. 

United States v. County of Fresno (1977), 429 U.S. 452, 462, 

97 S.Ct. 699, 704, 50 L.Ed.2d 683, 692. However, these taxes 

must be imposed equally on others similarly situated. - Id. at 

462, 97 S.Ct. at 705, 50 L.Ed.2d at 692. The policy reason 

for allowing these taxes is to prevent the unfair trade 

advantage accruing to those private users of exempt 
properties over their competitors who must pay ad valorem 

taxes on similar, privately held properties. - Id. at 463, 97 

S.Ct. at 705, 50 L.Ed.2d at 692-693. 

The Owners maintain that the beneficial use taxes may 

not be imposed upon them as they do not have a beneficial.. 

interest in or receive a beneficial use from the 500 KV 

lines. They contend in order to impose beneficial use taxes 

the state must show that the Owners have possession of the 

exempt property and that this possession is exclusive, 

excluding other users of the lines an2 restricting physical 

access to the property. As evidence of their lack of 

possession or exclusive use, the Owners cite to the following 

facts. The maintenance and actual operation of the Townsend 

to Garrison 500 KV lines is controlled by the BPA. The BPA 

has reserved 185 MW of East to West transmission capacity 

unto itself and the Owners do not have access to the West to 

East transmission capacity over the Montana Intertie. 

Further, the testimony of experts at trial and in depositions 

established that it is impossible to identify the exact path 

that electrical power will follow when introduced into an 

integrated system such as exists between Colstrip and 

Garrison. In other words, one cannot identify whether the 

Owners' Colstrip power injected into the system at Colstrip 

flows over the 500 KV transmission lines or over other 

existing 230 KV transmission lines which interact with the 

500 KV lines at the Broadview and Garrison substations. 

We find, however, that the Owners do possess a 

sufficient beneficial use interest in the 500 KV lines, from 

Townsend to Garrison, which justifies the imposition of 

beneficial use taxes. 

The United States Supreme Court has defined "beneficial 

use," in a case arising out of Missoula County, Montana, as 

follows: 
The expression "beneficial use" or 

"beneficial ownership or interest" in 

property is quite frequent in the law, 

and means, in this connection such a 

right to its enjoyment as exists where 

the legal title is in one person and the 

right to such beneficial use or interest 

is in another, and where such right is 

recognized by law, and can be enforced by 

the courts, at the suit of such owner or 

of someone on his behalf. 

Montana Catholic Missions v. Missoula County (19061, 200 U.S. 

118, 127, 26 S.Ct. 197, 200, 50 L.Ed. 398, 402. See also 

Harrison v. City of Missoula (1965), 146 Mont. 420, 407 P.2d 

703. Further the U.S. Court of Appeals for the Ninth Circuit 

has recognized a state may tax those contract rights granting 

such a beneficial use interest. International Paper Co. v. 

County of Siskiyou (9th Cir. 1974), 515 F.2d 285. In the 

International Paper Co. case the counties attempted to tax 

the companies' interest in standing timber located in 

national forests. Under the sale contracts, title to the 

timber remained with the Forest Service until it had been 

cut, scaled and paid for. The Ninth Circuit held that the 

timber property, from which the company derived profit, was 

not exempt from taxation merely because the United States 

retained legal title to it as security. - Id. at 289, citing 

S.R.A., Inc. v. State of Minnesota (1946), 327 U.S. 558, 570, 

66 S.Ct. 749, 756, 90 L.Ed. 851, 860. 

In the present case, the Colstrip Owners have an 

enforceable contract interest which gives them the right to 

the beneficial use of firm (a guaranteed level of the 

available transmission capacity) megawatts of power 

transmitted over the Montana lntertie line. The Montana 

lntertie Agreement gave the Owners the right to inject 

electrical power into and remove electrical power from the 

lines up to specific maximum megawatts of power. This right. 
is subject only to the RPA's ability to transmit these 

amounts onward from the Garrison substation. We note the 

project scheduled power, (the amount of electric power each 

company schedules on an hour over the Montana Intertie up to 

the maximum allowed for each Company's East-West transmission 

demand) remained under the ownership of the Owners. 

The Owners have exercised this right and used these 

lines to transmit power for their own commercial profit 

-making activities. Further, absent the transmission of any 

RPA or non-firm energy, the Owners are responsible for the 

total annual cost of the lines. The total annual cost of the 

transmission lines includes the cost of the government's 

investment in the Montana Tntertie line and the Garrison 

substation, the annual cost of operating and maintaining the 

transmission line system, the BPA's administrative costs 

attributable to the lines and the cost to BPA of any 

impact-aid payments. The payment formula provides that the 

Owners receive a credit for RPA and non-firm transmission 

over the lines. The Owners are liable for these payments 

whether they use the lines or not. Under such an 

arrangement, we find the Owners clearly have a beneficial use 

interest in the Montana Intertie 500 KV lines. 

The Owners contend, however, that even if a beneficial 

use existed, the interest was not excl.usive, and thus it 

could not be taxed. The Owners assert they have no 

reservation of the remaining 185 MW of East to West 

transmission capacity nor to any of the West to EasC 

transmission capacity of the lines. Therefore, the 

imposition of beneficial use taxes resulted in the Owners 

being taxed on the full value of the property when they only 

had use of part of the lines. United States v. County of 

Allegheny (1944), 322 U.S. 174, 64 S.Ct. 908, 88 I,.Ed. 1209. 
This argument is without merit as the Montana Intertie 

Agreement provided that the BPA could not exercise its East 

to West reservation until the Garrison West 500 KV lines were 

operational. Thus, the BPA had no right to exercise its 

reservation in 1984, the year in which the taxes in this case 

were imposed. Secondly, testimony at trial established that 

the BPA would only allow reservation of a firm transmission 

demand on the West to East capacity of the lines if a 

requesting party showed a demonstrated need for use of the 

lines. Until such a demonstrated need was shown, the only 

firm transmission users of the lines were the Owners, for 

whom the lines were constructed, and the BPA. 

Testimony at trial established that the Montana 

Intertie line consisted of two bi-directional 500 KV 

electrical transmission lines. These bi-directional lines 

are capable of transmitting electrical power in either 

direction, however, they are not capable of transmitting 

power in both directions simultaneously. These lines are 

stability limited at approximately 2,000 MW, although a BPA 

employee testified that actual loading of the system at 

capacity would be lower. In negotiating the Montana 

Intertie, the Owners and BPA provided for maximum firm 

transmission demands, East to West, of 1,915 MW. Further, 

the Owners' intention has been to operate the Colstrip 

generating units as base loaded units. Base loaded 

generating units are intended to run at full capacity 

supplying constant power levels to the system. 

We find the Montana Intertie 500 KV lines were built to 

transmit base load power from East to West. No other parties 

could use the lines because of the Owners' reservation of 

more than the amount which could be transmitted beyond the 

Garrison substation. Until other parties are able to 

exercise reservations i.n the I.inesl transmission capacity in 
either direction, at which time the Owners will be credited, 

the Montana Intertie's total capacity was reserved 

exclusively to the Owners. Consequently, the State had the 

statutory right to tax the Owners based upon the full value 

of the facilities. 

COMMERCE CLAUSE 

Having found the Owners possessed a taxable beneficial 

use interest in the exempt facility, we now address the 

Owners' claims that the imposition of these taxes violated 

certain sections of the United States and Montana 

Constitutions. The Owners' first claim is that the 

imposition of beneficial use taxes on their use of the 

Montana Intertie line violated the Commerce Clause of the 

United States Constitution. The Owners contend that the 

Legislature intended to discriminate against interstate 

commerce by giving preferential treatment to Montana REA 

cooperatives and that the DOR has implemented the beneficial 

use statute in a discriminatory manner. 

It is well established that a state may raise revenues 

by taxing a private person or corporation's use of federal 

property within its jurisdiction, provided the state is 

taxing the possession or use of the property. United States 

v. County of Fresno (1977), 429 U.S. 452, 462, 97 S.Ct. 699, 

704, 50 L.Ed.2d 683, 692. However, the fact that such a tax 

mav have an impact on interstate commerce will subject the 

tax to commerce clause scrutiny. Commonwealth Edison Co. v. 

Montana (1981), 453 U.S. 609, 616, 101 S.Ct. 2946, 2952-2953, 

69 L.Ed.2d 884, 893. A state may exact its fair share of the 

cost of state government from interstate commerce activities 

within the state, so Long as the tax meets the test 

promulgated in Complete Autc Transit, Inc. v. Brady (1977), 

430 1J.S. 274, 97 S.Ct. 3076, 51 L.Ed.2d 326. 
Commonwealth Edison, 453 U.S. at 617, 101 S.Ct. at 2953, 69 

L.Ed.2d at 894. The Complete Auto Transit test requires, 

upon examination of the practical effect of the tax, that the 

tax be applied to an activity having a substantial nexus with 

the taxing state, be fairly apportioned, not discriminate 

against interstate commerce, and be fairly related to the 

services provided by the taxing state. Complete Auto 

Transit, 430 U.S. at 279, 97 S.Ct. at 1079, 51 L.Ed.2d at 

331. 

Applying this test to the facts in this case the 

Owners' activities, subject to the tax, had a substantial 

nexus to the State of Montana. They had exclusi~re contract 

rights to use approximately 90 miles of BPA 500 KV 

transmission lines across Montana. These lines were 

constructed for the purpose of transmitting the Ownersq 

electrical power generated at Colstrip, Montana to Garrison, 

Montana, and from there to the Owners' service loads. 

Further, as the Montana Intertie line is entirely within the 

state there is no potential for multiple state taxation of 

the use of the facilities. No other state would have 

jurisdiction to impose beneficial use taxes on these 

facilities. See, Commonwealth Edison, 453 U.S. at 617, 101 

S.Ct. at 2953, 69 L.Ed.2d at 894. 

Similar to the appellants in Commonwealth Edison, the 

Owners contend the tax assessed had a discriminatory effect 

on interstate commerce as the majority of the electrical 

power transmitted over these lines was destined for 

out-of-state consumers. These beneficial use taxes thus 

effectively exported the state's tax burden. However, as in 

Commonwealth Edison, the tax was computed at the same rate 

regardless of the destination of the power transmitted. MPC 

and Pacific used the power to service Montana customers and 

were assessed and taxed in the same manner as the other users 
of the lines. The fact the Legislature realized the brunt of 

the tax would fall upon out-of-state users of these lines 

would not invalidate the tax. 

As stated by the United States Supreme Court: 

[Mlotives alone will seldom, if ever, 

invalidate a tax that apart from its 

motives would be recognized as lawful. 

(Citations omitted.) Least of all will 

they be permitted to accomplish that 

result when equity and not preference is 

the end to be achieved. 

Henneford v. Silas Mason Co. (1937), 300 U.S. 577, 586, 57 

S.Ct. 524, 528, 81 L.Ed. 814, 820. 

The Owners also contend this amendment effectively 

discriminates against bulk transferors of power by benefiting 

local users of the federal transmission system and those 

utilities and cooperatives which use lower capacity 

transmission lines. In support of this contention the Owners 

point to the fact the amendment to the statute, § 15-24-1203, 

MCA, only applies to users of 500 KV and larger electricaltransmission lines. However, state legislatures have a wide 

range of choice when they classify or limit items subject to 

taxation. Henneford, 300 U.S. at 587, 57 S.Ct. at 529, 81 

L.Ed. at 821, citing Bell's Gap R. Co. v. Pennsylvania 

(1890), 134 U.S. 232, 237, 10 S.Ct. 533, 535, 33 L.Ed. 892, 

895; Ohio Oil Co. v. Conway (1930), 281 1J.S. 146, 159, 50 

S.Ct. 310, 313, 74 L.Ed. 775, 781-782. 

In the case at hand, the Legislature has identified a 

class of users of exempt property. This class consists 

solely of users of 500 KV and larger electrical transmission 

lines. These lines are used for the bulk transfer of 

electrical power. In this specific instance the Owners have 

contracted with the RPA to construct and operate 500 Rv 

lines. As a result of the Owners' contract with the RPA, the 

Owners have the use of these lines which they otherwise would 
have been forced to construct themselves. Absent the 

implementation of the beneficial use tax, the Owners would 

have received the use of the Montana Intertie transmission 

facilities, essential to the sale of Colstrip generated. 

power, free of the taxes they would be subject to if they had 

constructed the lines themselves. We do not find the effect 

of the legislation was 50 unfairly tax out-of-state users of 

the lines, rather the effect is to prevent all users of such 

exempt lines from unfairly reaping a tax windfall. 

The Owners point to cases where the United States 

Supreme Court and Federal courts have found that state taxes 

discriminate against interstate commerce in favor of local 

businesses or consumers. However, these cases are 

distinguishable. In Boston Stock Exchange v. State Tax 

Comm'n (1977), 429 U.S. 318, 97 S.Ct. 599, 50 L.Ed.2d 514, 

the Supreme Court found a transfer tax on out-of-state sales 

of stocks violated the commerce clause. The Court found that 

no state "may 'impose a tax which discriminates against 

interstate commerce . . . by provid.ing a direct commercia1. 

advantage to 1-ocal business.'" Boston Stock Exchange, 429 

U.S. at 329, 97 S.Ct. at 607, 50 L.Ed.2d at 524, citing 

Northwestern States Portland Cement Co. v. Minnesota (1959) , 

358 U.S. 450, 458, 79 S.Ct. 357, 362, 3 L.Ed.2d 421, 427. Tn 

the case at hand, however, the beneficial use tax has been 

imposed upon both local and interstate users of the 500 KV 

lines for the purpose of eliminating a tax windfall and 

competitive advantage which enure to the users of tax exempt 

federal property. This tax imposes no greater tax liability 

on interstate users of these lines than on instate users. 

See Boston Stock Exchange, 429 U.S. at 332, 97 S.Ct. at 608, 

50 L.Ed.2d at 526. 

Recently in the case of United States v. City of 

Manassas, Va. (4th Cir. 1987), 830 F.2d 530, the Fourth 
Circuit Court of Appeals dealt with a Virginia statute which 

taxed users of federally owned property, but exempted users 

of similar state owned property from taxation. There the 

court found the controlling case for discriminatory state use 

taxes is Phillips Chemical Co. v. Dumas School Dist. (1960), 

361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384. In Phillips, the 

Court held such taxes must be examined based on "how other 

taxpayers similarly situated are treated." requiring "'an 

examination of the whole tax structure of the state.' Cf. 

Tradesmens National Bank v. Oklahoma Tax Comrn'n, 309 U.S. 

560, 568." Phillips, 361 U.S. at 383, 80 S.Ct. at 479, 4 

L.Ed.2d at 389. The Phillips Court provided a two-part test 

for evaluating allegedly discriminatory state use taxes: 

1) Are the users of federal property 

treated less favorably than similarly 

situated users of state property; and 

2) If so, is that discrimination 

justified in light of the state and 

federal interest involved. 

City of Manassas, 830 F.2d at 534. The Fourth Circuit Court 

of Appeals in City of Manassas, interpreted the justification 

in part two of the test as requiring a determination of 

whether the user of federal exempt property is similarly 

situated to a user of state exempt property. City of 

Manassas. 830 F.2d at 534. 

At trial the only references to imposition of 

beneficial use taxes on state exempt property dealt with two 

short line railroads and the Great Falls Industrial Park. 

The Bureau Chief for the Intercounty Property Bureau 

testified that in 1986 the DOR determined these railroads 

qualified for imposition of beneficial use taxes under 

5 15-24-1203, MCA. She testified that those taxes were 

appealed to the State Tax Appeal Board, but that at the time 

of the trial, LTanua-ry 19, 1987, the railroads were still 
subject to beneficial use taxation. The Cascade County 

Assessor testified that the DOR had assessed beneficial use 

taxes on users of facilities at the Great Falls Industrial 

Park where the DOR found private parties' use met the 

requirements of S 15-24-1203, MCA. Neither party introduced 

any other beneficial use of similarly situated state exempt 

property, though several instances of beneficial use of other 

federal exempt properties were described. Based upon the 

above testimony we do not find the DOR discriminated against. 

users of federal property in favor of similarly situated 

users of state exempt property. 

Since the trial, the 1987 Legislature amended 

S 15-24-1203, MCA, to exempt the beneficial use of railroad. 

right-of-way and track acquired by the state through 

abandonment, provided the state retains ownership and the 

right-of-way and track are used exclusively for rail 

transportation. This amendment was not considered by the 

District Court in its order of December 21, 1987, and we find 

it is not properly before this Court on appeal. Hanley v. 

Dept. of Revenue (1983), 207 Mont. 302, 673 P.2d 1257. 

The fourth prong of the Complete Auto Transit test 

questions whether the tax is fairly related to the services 

provided by the taxing state. In Commontvealth Edison, the 

Court found the "operating incidence" of the tax was on the 

mining of coal in Montana. As the tax was measured. as a 

proportion of the value of the coal taken, it was in proper 

proportion to the appellant's activities in the state. The 

present case involves an "operating incidence" similar to 

Commonwealth Edison which falls upon the Owners' beneficial. 

use of exempt electrical transmission lines found within the 

state. This tax is measured as a percentage of the value of 

the property in which the Owners possess their beneficial use 
Because it is measured as a percentage of 

the value of the coal taken, the Montana 

tax is in "proper proportion" to 

appellants' activities within the State 

and, therefore, to their "consequent 

enjoyment of the opportunities and 

protections which the State has afforded" 

in connection with those activities. 

(Citations omitted. ) When a tax is 

assessed in proportion to a taxpayer's 

activities or presence in a State, the 

taxpayer is shouldering its fair share of 

supporting the State's provision of 

"police and fire protection, the benefit 

of a trained work force, and 'the 

advantages of a civilized society. ' " 

(Citations omitted. ) 

Commonwealth Edison, 453 U.S. at 626-627, 101 S.Ct. at 2958, 

69 L.Ed.2d at 900. As the appropriate level of that tax 

percentage is a legislative matter, we find the tax fairly 

reflects the taxpayer's activity in the state. -- Id. at 

626-627, 101 S.Ct. at 2958-2959, 69 L.Ed.2d at 901. 

SUPREMACY CLAUSE 

The Owners' second claim is that the imposition of 

beneficial use taxes violated the supremacy clause of the 

United States Constitution. The Owners correctly assert 

there are two means by which a state tax may be invalidated 

under the supremacy clause. The state statute may be 

preempted by federal action or the tax may improperly place 

the legal incidence of the tax upon the property of the 

federal government. 

The Owners contend that two federal statutes do in fact 

preempt Montana's imposition of beneficial use taxes upon 

private use of federally owned electrical transmission lines. 

The first is Section 2121(a) of the Tax Reform Act of 1976, 

15 U.S.C. 5 391 (Anti-Discrimination Act) (1982). This 

statute provides: 
No State, or political subdivision 

thereof, may impose or assess a tax on or 

with respect to the generation or 

transmission of electricity which 

discriminates against out-of -State 

manufacturers, producers, wholesalers, 

retailers, or consumers of that 

electricity. For purposes of this 

section a tax is discriminatory if it 

results, either directly or indirectly, 

in a greater tax burden on electricity 

which is generated and transmitted in 

interstate commerce than on electricity 

which is generated and transmitted in 

intrastate commerce. 

This statute has been examined in Arizona Public Service Co. 

v. Snead (1979), 441 U.S. 141, 99 S.Ct. 1629, 60 L.Ed.2d 106. 

There the Court examined New Mexico's tax on electrical 

generation and complimentary tax credit for electrical sales 

in New Mexico. The effect of this credit was to eliminate 

the 2 percent electrical generation tax for sales to New 

Mexico's electrical consumers, while taxing sales to 

out-of-state consumers. 1.5 U.S.C. $ 391 (1982) was passed 

specifical.ly to outlaw such taxes which place a greater tax 

burden upon electricity generated or transmitted in 

interstate commerce. The Court found that because the 

electrical energy tax indirectly discriminat.ed against 

electricity sold outside the state, it violated the federal 

statute. Arizona Public Service Co., 441 U.S. at ]50, 99 

S.Ct. at 1634, 60 L.Ed.26 at 113. The federal statute does 

not prevent a state from taxing the generation and 

transmission of electricity, but only requires that 

interstate and intrastate generation and transmission be 

treated equally. - Id. at 150-151, 99 S.Ct. at 1634, 60 

L.Ed.2d at 114. 

Initially, we note that no credit is provided under 

Montana's beneficial use tax to anyone affected by its 

imposition and none is alleged. Further, the beneficial use 
tax on 500 KV electrical transmission lines applies equally 

to intrastate and interstate users of these lines. Testimony 

at trial established that Montana Power Company removed all 

of its power from the system at the Garrison substation for 

transmission to its load customers. MPC as an intrastate 

user is taxed at the same rate as the other users of the 

facilities. Also, this tax falls neither upon the generation 

nor the transmission of electrical power, but upon the use of 

tax exempt facilities. As such, this tax does not violate 15 

U.S.C. § 391. 

The Owners next contend 16 D. S.C. S 839 (e) (m) preempts 

S 15-24-1203, MCA. This statute provides for the payment of 

impact-aid payments to offset the added cost to affected 

counties for the three construction phases of the Montana 

Intertie line. The three construction phases are 

pre-construction, which was complete before the Act was 

passed., construction, for which the three affected counties 

received over $150,000 in impact-aid payments, and 

post-construction. In the post-construction phase the 

counties may bill the BPA for any services provided as a 

result of the presence of the lines. The Owners' contention 

that these impact-aid payments were in lieu of taxes fails in 

light of testimony at trial. At trial, BPA's project 

information officer for the Colstrip transmission project 

testified that these impact-aid payments were not intended to 

be in lieu of taxes which the counties were losing as a 

result of federal ownership of the 500 KV lines. This 

statement is reinforced by U.S. Representative Dingell's 

statement contained in the environmental impact statement. 

48 Fed. Reg. 55765. ("This is not a payment-in-lieu of taxes 

provision. ") 

The Owners also advance an implied preemption argument 

based. upon a line of cases holding that preemption may he 
inferred when a scheme of federal regulation leaves no room 

for state regulation, or when the regulation is so dominant 

as to "preclude enforcement of state laws on the same 

subject." Hillsborough County v. Automated Medical 

Laboratories (1985), 471 U.S. 707, 105 S.Ct. 2371, 85 L.Ed.2d 

714. The argument fails, however, in light of our previous 

findings regarding statutory preemption. The impact-aid 

payments contained in 15 U. S.C. S 839 (e) (m) , do not preclude 

a state's right to levy taxes on a private party's beneficial 

use interest in exempt federal transmission facilities. 

Further, 15 U.S.C. S 391 only precludes the implementation of 

a state tax scheme which places a greater tax burden on 

generation or transmission of electricity placed in 

interstate commerce. As previously stated the Montana 

beneficial use tax is levied on the beneficial use of the 

facilities and is equally applied to interstate and 

intrastate users of the facilities. 

The Owners' last supremacy clause argument is that the 

legal incidence of the beneficial use tax falls on the 

federal government. In order to find a state tax on use of 

such exempt properties unconstitutional under a legal 

incidence argument, the taxed entity must be "'so intimately 

connected with the exercise of a power or the performance of 

a duty' by the Government that taxation of it would be 'a 

direct interference with the function of government itself.'" 

United States v. New Mexico (1982), 455 U.S. 720, 736, 102 

S.Ct. 1373, 1383, 71 L.Ed.2d 580, 593, citing James v. Dravo 

Contracting Co. (1937), 302 U.S. 134, 157, 58 S.Ct. 208, 219, 

82 L.Ed. 155, 171. Where the legal incidence of the tax 

falls on a private party, and they are independent entities 

from the United States, the tax cannot be considered a tax on 

the government itself. U.S. v. Mew Mexico, 455 U.S. at 738, 

102 S.Ct. at 1385, 71 L.Ed.2d at 594. In the New Mexico 
case, the government sought to show that beneficial use 

taxes, based upon management contracts which transferred 

payment of any state taxes imposed to the federal government, 

placed the legal incidence of the tax on the federal 

government. The United States Supreme Court found that the 

fact the federal property involved was being used for the 

government's benefit was irrelevant. - Id. at 739, 102 S.Ct. 

at 1385, 71 L.Ed.2d at 595. The Court found the contractors 

remained "distinct entities pursuing 'private ends,' and 

their actions remained 'commercial activities carried on for 

profit. " - Id. at 739-740, 102 S.Ct. at 1385, 71 L.Ed.2d at 

595, citing United States v. Boyd (1964), 378 U.S. 39, 44, 84 

S.Ct. 1518, 1521-1522, 12 L.Ed.2d 713, 718. Such a tax does 

not fall upon the federal government, but rather upon the 

contractor's independent commercial enterprise. 

In the instant case the tax is levied directly upon the 

Owners for their beneficial use of the federal government's 

facilities. There is no transfer of the tax liability to the 

government. In fact, the Montana Intertie Agreement provides 

any costs the government incurs by way of the Owners' use of 

these transmission lines are billable annually to the Owners. 

The "legal incidence" of the beneficial use tax in this case 

clearly falls upon the Owners and not upon the federal 

government. 

The Owners argue that the imposition of these taxes on 

the Owners' use of the Montana Intertie line would adversely 

affect the government's ability to secure adequate lease fees 

from these types of lines. This argument must fail for two 

reasons. First, the United States Supreme Court has upheld 

use taxes even where the government by contract agrees to pay 

the state use or excise tax. See, James v. Dravo Contracting 

Co. (19371, 302 U.S. 134, 58 S.Ct. ?08, 82 L.Ed. 155. 

Second, in the contracts which grant the use in this case, 
the Owners are obligated not only to pay the cost of 

operating and maintaining the lines each year, (less credits 

for BPA transmissions and non-firm transmissions), but the 

cost of constructing these lines as well. Under such an 

arrangement it is implausible that imposing these taxes upon 

the use of the exempt lines would adversely impact the 

government's ability to secure adequate lease values. 

FOURTEENTH AMENDMENT 

The Owners contend the imposition of beneficial use 

taxes in this case violates the Due Process Clause and the 

Equal Protection Clause under the Fourteenth Amendment to 

the United States Constitution. The Owners contend that the 

Due Process Clause requires that the amount of the tax must 

bear some relation to the value of the property assessed 

against the taxpayer. Norfolk & Western Railway Co. v. 

Missouri State Tax Commission (1968), 390 U.S. 317, 88 S.Ct. 

995, 19 L.Ed.2d 1201. The Owners allege that the defendant 

counties have conferred no benefit upon the Owners because of 

their use of the Townsend to Garrison facilities, that the 

defendant counties have already been fully compensated 

through the impact-aid portions of the Montana Intertie 

Agreement and that the taxes imposed are based on the full 

value of the facilities. Further, the Montana Intertie 

Agreement gives appellants rights which are fax less than 

full ownership. 

State tax statutes will not normally be set aside based 

upon Due Process Clause violations, except in rare and 

unusual circumstances. A. Magnano Co. v. Hamilton (19341, 

292 U.S. 40, 54 S.Ct. 599, 78 L.Ed. 1109. Further, to attack 

the tax statute, the appellants must show a failure to 

satisfy two tests. First, the object of the tax must lack a 

nexus with the state imposing the tax, and second, the tax 
must fail to fairly reflect the taxpayer's activity in the 

taxing state. 

Sufficient nexus with the state has already been 

established under the Commerce Clause section previously 

discussed. Additionally, we previously found under the 

fourth prong of the Complete Auto Transit test, that the tax 

is fairly related to the services provided by the state. 

Thus, there is no violation of the Due Process Clause. 

The Owners contend the Equal Protection Clause 

invalidates the beneficial use tax because the state has not 

equally administered the beneficial use taxes. Raymond TT. 

Chicago Union Traction Co. (1907), 207 U.S. 20, 28 S.Ct. 7, 

52 L.Ed. 78; and Larson v. State (1975), 166 Mont. 449, 534 

P.2d 854. The Owners claim that the Department has never 

attempted to apply the beneficial use tax in analogous 

situations, specifically referring to the Montana Rural 

Electrification Administration Cooperatives (MAS). 

These REAs, as preference customers, are entitled to 

purchase federal power at a preferred or "Priority Firm 

Rate." This rate is lower than the rate investor-owned 

utilities are entitled to when they purchase federal power. 

These REAs also have a right to first call on federal power, 

before investor-owned utilities. The Owners claim the 

beneficial use taxes would be applicable to RPA's preference 

customers based on their use of the BPA transmission system, 

including the BPA1s 500 KV lines. The Owners also contend 

this is the first attempt to apply the beneficial use tax 

upon any entity that did not have "exclusive use" of the 

subject facilities. The Owners equate exclusive use to a 

requirement that they have possession of the facilities and 

transmission lines. 

The standard which must be achie~~ed to invalidate the 

tax on equal protection grounds is one of invidious 
discrimination, as opposed to the existence of a rational 

relationship. Lehnhausen v. Lake Shore Auto Parts Co. 

(1973), 410 U.S. 356, 93 S.Ct. 1001, 35 L.Ed.2d 351. The 

existence of a rational relationship is met here by the 

intent to close the loophole which would have allowed these 

companies to avoid paying any taxes. In regard to the 

Owners' claims regarding the REAs, we note they do not use 

the Montana Intertie line, nor possess firm transmission 

demands in 500 KV lines which may be taxed in 1984, under 

§ 15-24-1203, MCA. 

We agree with the DOR that the Legislature was not 

required to tax all beneficial users before it could reach 

the beneficial users of 500 KV lines. (" [TI axation of 

certain objects need not be universal in nature.") Citing to 

Louisiana v. Pilsbury (1881), 105 U.S. 278, 26 L.Ed. 109. 

The 1,egislature in this case has identified benefj-cia1 users 

of 500 KV lines as a distinct tax classification. 

THE MONTANA CONSTITUTION 

Additionally, the Owners claim the imposition of 

beneficial use taxes in this case violates three provisions 

of the 1972 Montana Constitution. The Owners contend that 

while Art. VIII, sec. 5 (1) (a) allows "private interests" in 

exempt properties to be taxed separately, such a tax 

necessarily requires the user to have possession. The Owners 

base this requirement of possession upon statements made at 

the Constitutional. Convention that in closing an existing 

loophole the delegates provided for taxation of private 

interests in government-owned property, "things like 

right-of-ways and things like that . . . " Further, the 

Owners contend the Montana Supreme Court, in identifying an 

"interest" i.n real property as an estate, has implied one 

must have the right to possess and control property before 
beneficial use taxes may be imposed. Brown v. Hart (1.9841, 

213 Mont. 517, 692 P.2d 14. 

We disagree. What is involved here is a private 

contractual right to use a portion of the transmission 

capacity of the exempt Townsend-Garrison line. This private 

interest in exempt federal lands fits within the plain 

language employed by the 1972 Constitutional Convention 

delegates in closing this loophol-e contained i.n the prior 

constitution. 

(1) The 1egi.slature may exempt from 

taxation: 

(a) Property of the United States, the 

state, counties, cities, towns, school 

districts, municipal corporations, and 

public libraries, but any private 

interest in such property may be taxed 

separately. 

Art. VIII, sec. 5(l)(a), 1972 Montana Constitution. 

The Owners next claim that the imposition of beneficial 

use taxes on their use of t.he Montana Intertie line violates 

Art. XI11 , sec . 1 (3) , prohibiting retrospective laws. 

Specifically the Owners contend that since the Montana 

Intertie Agreement was entered in 1981 and S 15-24-1203, MCA, 

was not amended to specifically include 500 KV transmission 

lines until 1983, the effect of imposing these taxes is 

precisely the type of retrospective action the 1972 

Constitutional Convention was prohibiting. 

We find several problems with the Owners' argument. 

First, the argument ignores the ongoing nature of their use 

of these lines. Second, this contention is weakened by Art. 

VIII, sec. 5 (1) (a) which specifically allows for taxation of 

the interests conveyed to the Owners under the Montana 

Intertie Agreement. We agree with the District Court that 
the position the Owners advance would have the effect of 

prohibiting all new forms of taxation. "The imposition of a 

new tax, or an increase in the rate of an old one, is simply 

one of the usual hazards of the business enterprise." 

Westfield-Palos v. City of Rancho Palos Verdes (Cal.App. 

1977), 141 Cal.Rptr. 36, 42, citing John McShain, Inc. v. 

District of Columbia (D.C. Cir. 19531, 205 F.2d 882, 883. 

Only where the measuring formula 

for the tax draws upon such disparate or 

long past antecedents so as to have 

little relation to the volume of current 

business might a business license tax 

fall on retroactivity grounds. 

(Citations omitted. ) 

Westfield-Palos, 141 Cal.Rptr. at 42. We find that the 

beneficial use tax involved here, like the business license 

tax in Westfield-Palos applies to the ongoing, current 

business activity of the Owners. As such, the tax does not 

violate Art. XIII, sec. 1(3), of the 1972 Montana 

Constitution. 

The Owners1 final issue relies on Art. 11, sec. 31, of 

the 1972 Montana Constitution in contending the imposition of 

these beneficial use taxes constitutes an impairment of their 

contract with the BPA. This argument is without merit as it 

has long been established that "[a] contract between 

individuals cannot have the effect of depriving the state or 

any municipal subdivision of any power of taxation otherwise 

belonging to it." Forbes v. Mid-Northern Oil Co. (1935), 100 

Mont. 10, 22, 45 P.2d 673, 679, citing Newman v. Commercial 

Waterway District (Wash. 1923), 217 P. 9. As long as the 

state does not violate a fundamental right of the individual, 

the state is free to vary the existing mode of taxation. 

Forbes, 45 P.2d at 679. As Art. 11, sec. 31 of the 1972 

Montana Constitution is essentially identical to Art. 3, sec. 

11 of the 1889 Montana Constitution, under which the Forbes 
case was decided, we find the Owners have presented no reason 

to find there has been any impairment of their contract. 

CONCLUSION 

The Owners en:joyed a beneficial use interest in the 

Montana Intertie Agreement 500 KV lines, which use we hold 

was properly taxable under 5 15-24-1203, MCA. That use was 

evidenced by the Owners' contractual reservation of firm 

transmission demands in the lines and the fact the lines were 

constructed for the purpose of transmitting the Owners' 

electrical power generated at the Colstrip generating 

facilities. The State's levy of these beneficial use taxes 

did not violate the United States Commerce Clause, the United 

States Supremacy Clause, the Fourteenth Amendment to the 

United States Constitution, nor the cited sections of the 

Montana Constitution. Therefore we 

District Court. 

We concur: ,/