Espinoza v. Mont. Dep't of Revenue

Decision Date12 December 2018
Docket NumberDA 17-0492
Citation2018 MT 306,435 P.3d 603,393 Mont. 446
Parties Kendra ESPINOZA, Jeri Ellen Anderson, and Jaime Schaefer, Plaintiffs and Appellees, v. MONTANA DEPARTMENT OF REVENUE, and Mike Kadas, in His Official Capacity as Director of the Montana Department of Revenue, Defendants and Appellants.
CourtMontana Supreme Court

For Appellants: Daniel J. Whyte (argued), Brendan Beatty, Nicholas J. Gochis, Special Assistant Attorneys General, Helena, Montana

For Appellees: William W. Mercer (argued), Holland & Hart LLP, Billings, Montana, Richard D. Komer (argued), Erica Smith, Institute for Justice, Arlington, Virginia

For Amicus American Civil Liberties Union, ACLU of Montana Foundation, Inc., Americans United for Separation of Church and State, and the Anti-Defamation League: Alex J. Luchenitser, American United for Separation of Church and State, Washington, District of Columbia, James Goetz, Goetz, Baldwin and Geddes, P.C., Bozeman, Montana, Heather L. Weaver, American Civil Liberties Union, Washington, District of Columbia, Alex Rate, ACLU of Montana Foundation, Missoula, Montana

For Amicus Montana Quality Education Coalition: Karl J. Englund, Karl J. Englund, P.C., Missoula, Montana, Jonathan McDonald (argued), McDonald Law Office, PLLC, Helena, Montana

For Amicus United States: John M. Gore, Acting Assistant Attorney General, Eric W. Treene, Thomas E. Chandler, Bethany Pickett, Department of Justice, Washington, District of Columbia, Kurt G. Alme, United States Attorney, Leif Johnson, First Assistant United States Attorney, Billings, Montana

For Amicus The Becket Fund for Religious Liberty: Charles A. Harball, Kalispell City Attorney, Kalispell, Montana, Eric C. Rassbach, Joseph C. Davis, The Becket Fund for Religious Liberty, Washington, District of Columbia

For Amicus Alliance for Choice in Education Scholarships: Anita Y. Milanovich, The Bopp Law Firm, PC, Bozeman, Montana

For Amicus Pride School Atlanta: Thomas Hydrick, Baker Botts L.L.P., Washington, District of Columbia, Chris J. Gallus, Gallus Law Firm, Helena, Montana

For Amicus EdChoice: Kristin Hansen, Kristin Hansen, PLLC, Helena, Montana, Russell Menyhart, Taft Stettinius & Hollister LLP, Indianapolis, Indiana, Leslie Davis Hiner, EdChoice, Indianapolis, Indiana

For Amicus Agudath Israel of America: Jennifer Wendt Bordy, Attorney at Law, Bozeman, Montana, Mordechai Biser, Agudath Israel of America, New York, New York

Justice Laurie McKinnon delivered the Opinion of the Court.

¶ 1 The Montana Department of Revenue (the Department) appeals from an order of the Eleventh Judicial District Court, Flathead County, granting Kendra Espinoza, Jeri Ellen Anderson, and Jaime Schaefer (collectively, Plaintiffs) summary judgment. The Department is responsible for administering § 15-30-3111, MCA (the Tax Credit Program), which provides a taxpayer a dollar-for-dollar tax credit based on the taxpayer’s donation to a Student Scholarship Organization (SSO). SSOs fund tuition scholarships for students who attend private schools meeting the definition of Qualified Education Provider (QEP). The Legislature instructed the Department to implement the Tax Credit Program in compliance with Article V, Section 11(5), and Article X, Section 6, of the Montana Constitution. Pursuant to that grant of authority, the Department implemented Admin. R. M. 42.4.802 (Rule 1), which it believed was necessary to constitutionally administer the Tax Credit Program. Rule 1 adds to the Legislature’s definition of QEP and excludes religiously-affiliated private schools from qualifying as QEPs.

¶ 2 Plaintiffs are parents whose children attend a religiously-affiliated private school. Because Rule 1 precludes religiously-affiliated private schools from the definition of QEP, SSOs cannot fund tuition scholarships at the school Plaintiffs’ children attend. Plaintiffs filed this proceeding challenging Rule 1. The Department responded, arguing Rule 1 was necessary because the Tax Credit Program as enacted by the Legislature violates Montana’s Constitution. The District Court determined the Tax Credit Program was constitutional without Rule 1 and accordingly granted Plaintiffs summary judgment. The Department now appeals, arguing that the Tax Credit Program is unconstitutional absent Rule 1. We address the following issue on appeal:

Does the Tax Credit Program violate Article X, Section 6, of the Montana Constitution ?

¶ 3 We conclude the Tax Credit Program violates Article X, Section 6, of the Montana Constitution and accordingly reverse the District Court’s order granting Plaintiffs summary judgment.


¶ 4 In 2015, the Legislature, through Senate Bill 410, enacted Title 15, chapter 30, part 31, MCA, entitled "Tax Credit for Qualified Education Contributions." Sections 15-30-3101 to -3114, MCA (Part 31); 2015 Mont. Laws 2165. Part 31 provides two types of dollar-for-dollar tax credits to taxpayers who donate to educational programs in Montana. Sections 15-30-3110 to -3111, MCA. A taxpayer may receive a tax credit for providing supplemental funding to public schools, § 15-30-3110, MCA, or for donating to the Tax Credit Program, § 15-30-3111, MCA. The only tax credit at issue in these proceedings is the credit a taxpayer receives based on her donation to the Tax Credit Program, § 15-30-3111, MCA.1 The Tax Credit Program provides a taxpayer a dollar-for-dollar tax credit of up to $150 based on her donation to an SSO. Section 15-30-3111(1), MCA.

¶ 5 An SSO is a charitable organization in Montana that is (1) "exempt from federal income taxation under [ I.R.C. § 501(c)(3) ]"; (2) "allocates not less than 90% of its annual revenue for scholarships to allow students to enroll with any [QEP]"; and (3) "provides educational scholarships to eligible students without limiting student access to only one education provider." Section 15-30-3102(9)(a)-(c), MCA ; see also § 15-30-3103, MCA (listing additional SSO requirements); §§ 15-30-3105 to -3106, MCA (setting forth SSO reporting requirements). The purpose of SSOs "is to provide parental and student choice in education with private contributions through tax replacement programs." Section 15-30-3101, MCA.

¶ 6 Taxpayer donors donate to SSOs generally; they "may not direct or designate contributions to a parent, legal guardian, or specific [QEP]." Section 15-30-3111(1), MCA. SSOs then use those donations to fund student tuition scholarships at private schools meeting the definition of QEP in § 15-30-3102(7), MCA. Section 15-30-3104(1), MCA. SSOs are responsible for maintaining "an application process under which scholarship applications are accepted, reviewed, approved, and denied." Section 15-30-3103(1)(h), MCA. After an SSO decides to grant a student a tuition scholarship, the SSO pays the scholarship directly to the scholarship recipient’s QEP. Section 15-30-3104(1), MCA. The Legislature defined QEP as "an education provider that":

(a) is not a public school;
(b) (i) is accredited, has applied for accreditation, or is provisionally accredited by a state, regional, or national accreditation organization; or
(ii) is a nonaccredited provider or tutor and has informed the child’s parents or legal guardian in writing at the time of enrollment that the provider is not accredited and is not seeking accreditation;
(c) is not a home school as referred to in 20-5-102(2)(e);
(d) administers a nationally recognized standardized assessment test or criterion-referenced test and:
(i) makes the results available to the child’s parents or legal guardian; and
(ii) administers the test for all 8th grade and 11th grade students and provides the overall scores on a publicly accessible private website or provides the composite results of the test to the office of public instruction for posting on its website;
(e) satisfies the health and safety requirements prescribed by law for private schools in this state; and
(f) qualifies for an exemption from compulsory enrollment under 20-5-102(2)(e) and 20-5-109.

Section 15-30-3102(7), MCA. Essentially, the Legislature’s definition of QEP means "a private school."

¶ 7 The Department is responsible for implementing and administering Part 31. Sections 15-30-3102(1), -3114, MCA. The Department must perform extensive administrative tasks to ensure Part 31 functions appropriately. Sections 15-30-3103, -3105, -3111 to -3113, MCA. The Legislature explicitly granted the Department rulemaking authority to "adopt rules, prepare forms, and maintain records that are necessary to implement and administer [Part 31]." Section 15-30-3114, MCA. The Legislature also instructed the Department to administer Part 31 in compliance with Article V, Section 11(5), and Article X, Section 6, of the Montana Constitution. Section 15-30-3101, MCA.

¶ 8 Beginning in fiscal year 2016, to accomplish these statutorily-mandated responsibilities, the Department required additional resources and personnel. Senate Bill 410’s Fiscal Note estimated one-time costs to the Department of $420,325 to develop new forms and add data processing systems. S. 410 Fiscal Note, 64th Reg. Sess., at 3 (April 21, 2015), (hereinafter Fiscal Note). Further, the Department required two additional full-time employees: one to process and verify credit applications and annual reports from SSOs and another to verify and audit the new tax credits. Fiscal Note, at 3-4.

¶ 9 Tasked with constitutionally implementing Part 31, the Department identified what it saw as a constitutional deficiency: the Tax Credit Program aided sectarian schools in violation of Article X, Section 6, of Montana’s Constitution. Under the Legislature’s definition of QEP, most QEPs were religiously-affiliated private schools. The Department examined how the Tax Credit Program operated and determined it unconstitutionally aided those religiously-affiliated QEPs. To combat the issue, and pursuant to the rulemaking authority granted by the Legislature...

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