Westmoreland Resources, Inc. v. Montana Department of Revenue , 51 State Rptr. 67 ( 1994 )


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  •                             NO.     93-290
    IN THE SUPREME COURT OF THE STATE OF MONTANA
    1994
    WESTMORELAND RESOURCES, INC.,
    Petitioner and Appellant,
    V.
    MONTANA DEPARTMENT OF REVENUE,
    Respondent and Respondent.
    APPEAL FROM:   District Court of the Thirteenth Judicial District,
    In and for the County of Big Horn,
    The Honorable Robert W. Holmstrom, Judge presiding.
    COUNSEL OF RECORD:
    For Appellant:
    W. Anderson Forsythe, Moulton, Bellingham,
    Longo & Mather, Billings, Montana
    For Respondent:
    David L. Nielsen, Tax Counsel, Office of Legal
    Affairs, Department of Revenue, Helena, Montana
    Submitted on Briefs:        December 2, 1993
    Decided:   February 4, 1994
    Filed:
    d
    Clerk
    Justice Terry N. Trieweiler delivered the opinion of the Court.
    In 1989, Westmoreland     Resources, Inc., petitioned the State
    Tax Appeal Board (STAB) to review the Montana Department of
    Revenue's     (DOR)   assessment   of   additional   taxes    imposed   on
    Westmoreland for revenue received due to adjustment formulas found
    in four of its contracts for the sale of coal.             After the STAB
    ruled in the DORIS favor,      Westmoreland   petitioned     the   District
    Court for the Thirteenth Judicial District in Big Horn County
    pursuant to 5 15-2-303, MCA,       for review of this decision.         The
    District Court concluded that the STAB correctly interpreted the
    applicable law and that its findings were not clearly erroneous.
    Therefore,   by order dated April 15, 1993, the court affirmed the
    decision of the STAB.     Westmoreland appeals from the order of the
    District Court.
    We affirm.
    On appeal, Westmoreland raises the following issues:
    1.      Did the District Court err when it found that revenue
    received by Westmoreland pursuant to an adjustment formula in its
    sales contracts is part of the l'contract sales price" for purposes
    of the assessment of coal severance and gross proceeds taxes?
    2.      Did the District Court err when it found that revenue
    received pursuant to the adjustment formula is properly considered
    in the assessment of the resource indemnity trust tax?
    3.      Does the taxation of this revenue violate the Commerce
    Clause of the United States Constitution?
    2
    Westmoreland    produces    coal   in   Rosebud   County,    Montana,   and
    sells this coal to various midwest              electric utility companies. At
    issue in this appeal are four sales contracts which Westmoreland
    negotiated in        1972 with Northern States Power in Minnesota,
    Dairyland Power and Light in Wisconsin, Wisconsin Power and Light
    in Wisconsin, and Interstate Power in Iowa.
    The four contracts have a similar pricing structure and
    include a formula which is used to adjust the price of the coal to
    compensate     for     variations   in its BTU content.             BTU refers to
    British Thermal Units and is a measure of the heat energy contained
    in the coal.
    The contract with Northern States Power (NSP) was the only
    contract entered into evidence and will be used as an example in
    this discussion.         Each contract establishes a base price for the
    coal, which is $2.30 per ton in the NSP contract.               This base price
    is   "f.0.b.    railroad cars"       at Westmoreland's mine           in   Montana.
    F.o.b. is a commercial acronym commonly defined as "free on board."
    In this instance, where the contract establishes the price of coal
    f.o.b.    railroad cars,     it means that delivery to the customer is
    complete when the coal is loaded onto the railroad cars at the
    mine.    The customer then independently negotiates with the railroad
    company for transportation of the coal to its electric utility
    sites.
    The contracts also provide for various adjustments to the base
    price of the coal.          First, certain       adjustments   are    periodically
    made for changes in the cost of producing the coal.                  For example,
    3
    the NSP contract provides        for the base price to be adjusted
    periodically to reflect changes in administrative expenses, wages
    paid for labor, and cost of equipment.
    Second,   the contracts include a price adjustment to reflect
    variations in the quality of coal.      Each contract includes a target
    rate or "warranted rate" for the BTU content of the coal that is
    sold.     In the NSP contract, the warranted rate is 8450 BTU.   If the
    weighted average BTU content is between 8350 BTU and 8550 BTU, no
    adjustment is made in the sale price.      However, if the average BTU
    content is either higher or lower than these figures, the following
    calculation is made in order to standardize the price that the
    customer is paying for the coal based on its energy content:
    (P + T) x fas received BTU - Warranted BTU)
    (Warranted BTU)
    P = base price, as adjusted, per ton
    T = transportation rate, per ton
    This formula establishes a fraction (the "BTU fraction") which
    represents a comparison of the "as received BTU" to the "warranted
    BTU."     The BTU fraction is then multiplied by the sum of the base
    price per ton of coal and the average transportation rate per ton
    of coal, to yield an "adjustment factor.'*     To determine the amount
    by which the price of the coal which was purchased is adjusted, the
    adjustment factor is multiplied by the number of tons shipped to
    the respective customer annually.
    The contracts provide that after the adjustment is calculated,
    V*seller will issue a debit or credit."        In other words, if the
    customer overpaid for the coal because the BTU content was lower
    4
    than the warranted rate, Westmoreland is responsible for issuing
    that customer a credit.       However,   if the customer did not pay
    enough for the coal because its BTU content was higher than the
    warranted    rate, the customer must pay Westmoreland an additional
    amount of money for the higher quality coal that was purchased.
    It is important to note that the adjustment formula results in
    either a transfer of money from Westmoreland to the customer, or
    from the customer to Westmoreland.       Even though the formula takes
    into account an average transportation rate to arrive at the
    adjustment factor, the money the customer pays to the railroad is
    not affected by the adjustment formula.     The cost of transportation
    remains the same for each ton of coal that is shipped regardless of
    its BTU content.
    During the years in question, Westmoreland was able to achieve
    a higher average BTU content for the coal it produced and sold than
    what was warranted in the four contracts.           This resulted in
    Westmoreland's    receipt of additional revenue from these four
    customers due to the adjustment formula.
    Westmoreland negotiated these four contracts prior to the
    enactment of Montana's current tax structure for the production of
    coal.
    Three separate taxes are now imposed on coal produced in this
    state:    the gross proceeds tax found at §§ 15-23-701through -716,
    MCA; the coal severance tax found at §§ 15-35-101 through -122,
    MCA;     and the resource    indemnity trust tax (RITT) found at
    frfr 15-38-101 through -136, MCA.
    5
    The taxes assessed pursuant to the gross proceeds tax and the
    coal severance tax are calculated on the basis of what is termed
    "the contract sales price" of the coal.               Contract sales price is
    defined in § 15-35-102(5), MCA, as follows:
    "Contract sales price" means either the price of
    coal extracted and prepared for shipment f.o.b. mine,
    excluding that amount charged by the seller to pay taxes
    paid on production, or a price imputed by the department
    under 15-35-107.
    The RITT is computed on the gross value of the coal at the
    time it is extracted from the ground.             The DCR determines the gross
    value at the point of extraction by deducting from the contract
    sales price f.o.b railroad cars at the mine, the costs of hauling,
    crushing and preparing the coal for shipment.
    In     1986,    the ECR audited Westmoreland's gross proceeds,
    severance,     and RITT tax returns for tax years 1981 through 1984.
    The   DCIR   determined       that     payments   received      pursuant    to    the
    adjustment formula had been improperly excluded from Westmoreland's
    calculation     of    the "contract sales price" for the assessment of
    severance and gross proceeds taxes, and from the calculation of
    V'gross    value"    for the assessment of RITT taxes.             Based on this
    determination, the DCR imposed additional taxes on Westmoreland for
    the tax years 1981 through 1984.                  Westmoreland appealed this
    assessment of         additional taxes to the STAB.                Following an
    evidentiary hearing, the STAB ruled that the revenue received by
    Westmoreland pursuant to the adjustment formula was properly
    included      by     the   LICR   in   the   computation   of    taxes     owed   by
    Westmoreland.         The STAB found that,        for the years 1981 through
    6
    1984, Westmoreland had received additional revenue because the BTU
    content of the coal it had sold exceeded the rate warranted in the
    sales contracts.      It noted that Westmoreland had paid taxes on the
    revenue it received due to the "price component" of the adjustment
    formula,    but not on revenue received due to what Westmoreland
    called the       "transportation component" of the formula.       After
    considering the adjustment formula, the STAB found:
    10. All freight or shipping costs from the mine to
    the various destinations of the coal are negotiated and
    paid by the purchasers, and not by [Westmoreland]. The
    freight rate is a per ton rate. The quality of the coal
    being shipped has no effect on the determination of the
    rate.    Anv adiustments made usins the contractual
    formula, resultincr in either an increase or decrease in
    the vrice of the coal would not result in a vavment to,
    or from, the railroad.      The transaction is entirelv
    between the vurchaser of the coal and rwestmorelandl.
    [Emphasis added].
    In Finding No. 19, the STAB found that "the adjustment is seen
    as a protection of quality.        The adjustment has no effect on the
    amount paid to the hauler."       Finally, the STAB found that there is
    "nothing done to the coal during transportation that modifies in
    any way, positively or negatively, the BTU content.      Once loaded in
    the railcar, the BTBs contained in the coal are set."
    In its conclusions of law, the STAB concluded that, under the
    contracts   in    question,   the final price per ton of coal is not
    established until all of the adjustments provided for in the
    contracts are made.      It stated the following:
    13.  It is the opinion of this Board that the
    adjustment formula, in its entirety, found in the coal
    purchase contracts, as it affects the "contract sale
    price," is a recognized contract modifier to the base
    price of the coal f.o.b. mine. As such, it is a proper
    7
    ISSUE 1
    Did the District Court err when it found that revenue received
    by Westmoreland pursuant to an adjustment formula in its sales
    contracts is part of the %ontract sales price" for purposes of the
    assessment of coal severance and gross proceeds taxes?
    Westmoreland contends that both the STAB and the District
    Court made erroneous conclusions of law and fact when they held
    that the      definition of       contract   sales   price   includes   the
    transportation portion of the BTU adjustment formula.
    The crux of Westmoreland's argument is that the adjustment
    formula found in the four relevant contracts contains a price
    related     component   and   a    transportation    related    component.
    According to Westmoreland, the formula adjusts not only the mine
    head price of the coal but also the cost per ton of transporting
    the coal.
    Westmoreland asserts that, during the years in question, it
    paid taxes on the additional revenue attributable to the price or
    llPIV component of the formula, but not on revenue received pursuant
    to the transportation or "TV' component.        Taxes were paid on only
    part of the additional revenue because, according to Westmoreland,
    the transportation related revenue was not part of the contract
    sales price, which is the basis for the computation of taxes owed.
    This assertion is based on § 15-35-102(5), MCA, which defines
    contract sales price as "the price of coal extracted and prepared
    for shipment f.o.b. mine."    Consequently, Westmoreland asserts that
    transportation    costs,   which occur after the coal is delivered
    9
    f.o.b. railroad cars at the mine, should not be included in the
    contract sales price.
    In response, the DOR contends that the STAB and the District
    Court    correctly    found that     revenue   resulting     from     the   BTU
    adjustment     formula, which takes into account both the base price
    per ton and the average transportation rate per ton, constitutes
    the final contract price which each customer pays to Westmoreland
    for the coal it purchases.        The DOR asserts that it was proper to
    find that the adjustment formula does nothing to alter actual
    transportation costs, but rather determines the final amount owed
    to Westmoreland for the purchase of coal.
    The DOR further contends that there was substantial evidence
    to support the STAB's finding that both the BTU content and the
    actual freight costs of each shipment of coal are known prior to
    shipment.      Therefore,   all the formula components are "known*' and
    fixed at the time the coal is loaded for shipment.           The DOR argues
    that     the   STAB   correctly    concluded    that,      although    it   is
    Westmoreland's and its customers'          choice to calculate price
    adjustments only annually, the adjusted cost of each shipment of
    coal, payable by .the customer to Westmoreland, is ascertainable at
    the time the coal is loaded for shipment f.o.b. railroad cars and
    does not change after shipment.
    It is DORIS assertion that the contract sales price, as the
    term implies, includes every component of the contract that is used
    to determine the price which the buyer pays for the coal.
    Furthermore, the DOOR contends that taxes are to be assessed on this
    10
    final purchase price (the "contract sales price") rather than on
    selective, internal components of a formula used to calculate that
    final price.
    We note first that Westmoreland contends that the STAB made
    clear     errors   of     both   law   and    fact.       When     reviewing      an
    administrative agency's findings of fact, this Court will defer to
    the agency's findings unless they are clearly erroneous.                  Findings
    of fact are clearly erroneous               if they are      not supported by
    substantial    credible    evidence.   Steer, Inc. v. Department of Revenue ( 1990) ,
    
    245 Mont. 470
    , 
    803 P.2d 601
    .           Our    standard    for    reviewing    legal
    conclusions of an agency or a district court is simply to determine
    whether they are correct.         
    steer, 803 P.2d at 603
    .
    In this instance, Westmoreland contends that the STAB erred
    factually when it found that all revenue received pursuant to the
    adjustment formula was part of the "contract sales price" for
    assessment of the coal severance and gross proceeds taxes.                       The
    alleged error of law is based on the STAB's and the District
    Court's conclusions that the statutory definition of contract sales
    price could include this revenue.
    After considering the evidence in the record and reviewing the
    findings and conclusions entered by the STAB and affirmed by the
    District Court, we conclude that there was substantial evidence to
    support the STAB's         factual determinations.              Furthermore, we
    conclude that the STAB's and the District Court's conclusions of
    law were correct.
    11
    The     record    contains      sufficient      evidence    that   each    customer
    negotiates       solely       with      the      railroad       company        regarding
    transportation       costs.    Westmoreland is not responsible for paying
    any transportation costs and all of the revenue received after
    adjusting the contract price goes solely to Westmoreland, whose
    business is the sale of coal, rather than to the railroad.
    Furthermore, the evidence demonstrated that the freight rate
    charged by the railroad is a constant rate per ton, the BTU content
    of the coal which is being shipped has no effect on the
    determination of that rate, and the BTU content of the coal does
    not change during shipping.             Thus, the year-end adjustment, which
    takes into account the particular customer's negotiated base price
    per ton and average transportation rate per ton, adjusts the
    cumulative sales price of the coal purchased during that year, but
    does nothing to alter the actual cost that was paid to the railroad
    to transport that coal.           Instead, the year-end adjustment sets the
    final price of the coal to properly reflect the quality of the coal
    which was shipped as compared to that which was warranted in the
    contract.
    A review of the record also supports the contention that,
    although     price    adjustments     are     made   annually,    which   necessarily
    occurs after shipping, the adjusted cost of each shipment of coal,
    payable by the customer to Westmoreland, is ascertainable at the
    time the coal is loaded for shipment f.o.b. railroad cars, and does
    not change after shipment.
    12
    The evidence is undisputed that Westmoreland is not paid to
    transport the coal.         Therefore,     we conclude that the revenue in
    question     does     not   constitute        transportation      costs        incurred
    subsequent to delivery of the coal f.o.b. mine.                  In this case, the
    revenue    received    by   Westmoreland      represents   the    final,       adjusted
    contract price of the coal which is determined by considering its
    BTU content and applying the formula agreed upon by the parties.
    Although a transportation rate is included in the formula, the
    formula adjusts the price payable to Westmoreland for the coal, and
    not the costs payable to the railroad for the transportation of
    that coal.    The formula adjusts the final price of the coal at the
    time it is delivered to the customer f.o.b. railroad cars at the
    mine.
    According to the STAB's findings, application of the formula
    as provided for in the contract would result in an increased
    contract sales price when the BTU content of the coal is above the
    target rate, or conversely, a lower contract sales price when the
    BTU content is below the target rate.                   Therefore,        if    revenue
    decreases due to lower quality coal, the taxes assessed on the
    contract sales price would correspondingly decrease.                  We conclude
    that this would be the correct outcome.               If Westmoreland or other
    coal producers had to reimburse their customers because the coal it
    extracted had a lower BTU content, the computation of taxes should
    consider this loss of revenue and the contract sales price should
    be adjusted accordingly.
    13
    We hold that there was sufficient evidence to support the
    STAB's findings that the BTU adjustment formula in its entirety is
    part of the contract sales price, and that revenue resulting from
    the application of this formula represents the actual price paid by
    the   customer    for     the    coal    it    purchases    from    Westmoreland.
    Furthermore,     we conclude that the STAB and the District Court
    properly    interpreted    the   statutory      and   regulatory   definitions   of
    contract sales price and f.o.b. mine price to include the final,
    adjusted price of the coal pursuant to these contracts.                Therefore,
    we hold that the DOR properly included revenue resulting from the
    BTU adjustment formula in the assessment of coal severance and
    gross proceeds taxes.
    ISSUE 2
    Did the District Court err when it found that revenue received
    pursuant to the adjustment formula is properly considered in the
    assessment of the resource indemnity trust tax?
    Westmoreland contends that the RITT tax is imposed on the
    gross value of the product at the time of extraction from the
    ground, and therefore, all transportation related revenue which is
    incurred after extraction from the ground should be excluded from
    the value of the coal for purposes of assessing the taxes due
    pursuant to the RITT.
    The DOR agrees that the coal is to be valued at the point of
    extraction for the purposes of the RITT.                To arrive at this gross
    value,     the DOR starts with the contract sales price and then
    deducts the costs associated with hauling the coal from the mine to
    14
    the railroad cars,   and crushing and preparing it for shipment.
    Because the contract sales price is         the starting point for
    assessing the RITT tax, the WR contends that the STAB and the
    District Court correctly held that the adjusted contract sales
    price, which takes into account revenue received pursuant to the
    adjustment formula, is the starting point for determining the value
    of the coal for the assessment of the RITT taxes.
    We have already decided that the adjustment formula yields a
    final contract sales price,    which is the price paid for the
    purchase of coal exclusive of transportation costs incurred after
    the coal is delivered f.o.b. railroad cars.    Thus, we conclude that
    the gross value of the coal is properly determined by deducting
    from the adjusted contract sales price the costs associated with
    preparing the coal for shipment and transporting it from the mine
    head to the railroad cars.     Therefore,     to the extent that the
    adjusted contract sales price is the starting point for calculating
    the gross value of the coal produced by Westmoreland, we hold that
    the court did not err when it upheld the STAB's conclusion that
    revenue received pursuant to the adjustment formula is properly
    considered by the WR for the purposes of assessing the RITT taxes.
    ISSUE 3
    Does the taxation of this revenue violate the Commerce Clause
    of the United States Constitution?
    Westmoreland contends that the DORIS taxation of the revenue
    received from the adjustment formula results in discriminatory
    taxation of transportation costs and that this violates the
    15
    commerce clause of the United States Constitution.                   U.S.C.A.     Const
    Art. I, § 8, cl. 3.       We note that this constitutional challenge is
    based upon Westmoreland's interpretation of the holdings in
    Commonwealth Edison Company v. Montana (1981),      
    453 U.S. 609
    , 101 S. ct.
    2946, 
    69 L. Ed. 2d 884
    , and CommonwealthEdison                Companyv. state (1980),
    
    189 Mont. 191
    , 
    615 P.2d 847
    ,     and its contention that the BCR is
    taxing transportation costs rather than the value of the coal.
    The U.S.      Supreme Court upheld the constitutionality of
    Montana's coal severance tax in 
    CommonwealthEdison, 453 U.S. at 609
    ,
    on the basis that the severance tax does not discriminate against
    interstate commerce and is apportioned to activities occurring
    within the State, i.e., the production of coal, taxed at its value
    f.o.b.   mine.   In CTS Corporation v. Dynamics Corporation of America ( 19 a 7 ) , 4 8 
    1 U.S. 69
    , 
    107 S. Ct. 1637
    , 
    95 L. Ed. 2d 67
    , the Court reemphasized
    the principle that a state statute does not violate the commerce
    clause if it is evenhandedly applied without regard to whether the
    activity is interstate or intrastate in nature.
    We have held that the BTU adjustment formula adjusts the
    contract sales price of the coal,                  and that revenue received
    pursuant    to     this     adjustment         formula    does     not     constitute
    transportation related revenue.            The Montana coal production taxes
    are assessed uniformly on the basis of the Vontract                    sales price,"
    as determined by the parties' contracts, without regard to whether
    the coal is to be shipped interstate or intrastate, and are not
    based on transportation costs.            Therefore, taxation of the revenue
    16
    received due to the BTU adjustment formula, which is part of the
    contract sales price, is nondiscriminatory and does not violate the
    commerce clause of the United States Constitution.                 We hold that
    the   District       Court   correctly        concluded   that   Westmoreland's
    constitutional challenge was without merit.
    For    these   reasons,   the judgment of the District Court is
    affirmed.
    We concur:
    17
    

Document Info

Docket Number: 93-290

Citation Numbers: 263 Mont. 303, 51 State Rptr. 67

Judges: Harrison, Nelson, Trieweiler, Turnage, Weber

Filed Date: 2/4/1994

Precedential Status: Precedential

Modified Date: 8/6/2023