Powder River County v. State

Decision Date21 November 2002
Docket Number No. 00-227, No. 00-226, No. 00-340.
Citation2002 MT 259,312 Mont. 198,60 P.3d 357
PartiesPOWDER RIVER COUNTY; Big Horn County; Phillips County; Rosebud County; Bud Fletcher, a taxpayer in Powder River County; and James V. Schiffer, a taxpayer in Rosebud County, Plaintiffs and Appellants, v. The STATE of Montana and the Department of Revenue of the State of Montana, Defendants and Respondents, and Western Energy Company, et al., Intervenors and Respondents.
CourtMontana Supreme Court

For Appellants: Larry G. Schuster (argued), Attorney at Law, Great Falls, Montana.

For Respondents: Stephen R. McCue (argued) and David Woodgerd, Tax Counsel, (Department of Revenue), Elizabeth S. Baker (argued), Hughes, Kellner, Sullivan & Alke, Helena, Montana (Intervenors).

Justice JIM RICE delivered the Opinion of the Court.

¶ 1 Plaintiffs, four counties and two individual taxpayers, instituted two declaratory judgment actions in 1993, challenging the validity of the local government severance tax on net proceeds of oil and natural gas and of the coal gross proceeds tax established by House Bill 28 (HB 28), passed by the Legislature in Special Session in June 1989. The two actions, one filed in Rosebud County (Supreme Court Cause No. 00-226) and the other in Powder River County (Supreme Court Cause No. 00-340), contained identical parties and verbatim Complaints, and the Sixteenth Judicial District Court, Powder River County, consolidated both actions. Venue was subsequently changed to Rosebud County. In 1996, the identical Plaintiffs filed the third action in Rosebud County (Supreme Court Cause No. 00-227), challenging on similar grounds the validity of Senate Bill 412 (SB 412), enacted as the Montana Oil and Gas Production Tax Act of 1995, § 15-36-301, et seq., MCA (1995), asserting that the 1995 legislation carried forth the same tax discrimination commenced under HB 28. The District Court did not consolidate the third action with the previous two.

¶ 2 The District Court in Rosebud County entered three judgments in consolidated actions 00-226/00-340. It granted partial summary judgment in favor of the Defendants and against the Plaintiff Counties on numerous issues in September 1996. In March 2000, after a bench trial, the District Court entered judgment in favor of the Defendants and against Big Horn County on the County's impairment of obligation of contract claim. It subsequently granted summary judgment on all remaining issues in favor of the Defendants and against the Individual Plaintiffs in May 2000. In the 1996 action (00-227), the District Court granted summary judgment in favor of Defendants on all issues in March 2000.

¶ 3 The above actions are consolidated for purposes of disposition on appeal as the named parties and counsel are identical, because each action challenges the Legislature's constitutional authority to change the type and amount of taxes collected to fund local governments, and each action arose out of the system of taxation for coal, oil and gas adopted by the Legislature in HB 28 and SB 412.

ISSUES

¶ 4 We restate the issues on appeal as follows:

¶ 5 1. Did the District Court err in concluding that classification of property for taxation is not statutorily or constitutionally mandated in Montana?

¶ 6 2. Did the District Court err in concluding that HB 28 and SB 412 did not violate the Appellants' rights to equal protection and due process of the law?

¶ 7 3. Did the District Court err in its Findings of Fact and Conclusions of Law regarding Big Horn County's impairment of obligation of contract claim?

¶ 8 4. Did the Department of Revenue's activities in "Project 95" constitute legislation in contravention of the Separation of Powers Doctrine?

BACKGROUND

¶ 9 In 1989, this Court decided Helena Elementary School Dist. No. 1 v. State (1989), 236 Mont. 44, 769 P.2d 684. In Helena we held that Montana's system of public school funding then in effect violated Article X of the Montana Constitution because it did not provide an equal educational opportunity to public school students.

¶ 10 In response to our ruling, the Legislature met in special session in June 1989, to revise the State's system for public school funding. Various bills were considered and the Legislature eventually enacted HB 28 into law as Chapter 11, June Special Session Laws of 1989. The Legislature amended various parts of HB 28 in the May 1990 Special Session and in regular session in 1991. The tax laws that the Plaintiffs now challenge were an integral part of HB 28.

¶ 11 Prior to the passage of HB 28, annual coal gross proceeds were classified as Class Two property under Montana's statutory classification scheme and taxed at 45 percent of value in addition to being subject to local mill levies. The coal gross proceeds tax, therefore, varied from year to year and from county to county.

¶ 12 Prior to HB 28, net proceeds of oil and natural gas were classified as Class One property. The net proceeds tax on oil and natural gas wells drilled prior to June 30, 1985, were also subject to local mill levies. This net proceeds tax also varied from year to year and from county to county. The net proceeds on wells drilled after June 30, 1985, were not subject to local mill levies and were taxed at a flat rate of 7 percent for oil and 12 percent for natural gas, regardless of the county in which the well was located.

¶ 13 HB 28 imposed numerous tax changes in support of state equalization aid funding. Among these changes, HB 28 imposed a 40 mill statewide levy on each county on all taxable property within the state. It also increased county elementary levy from 28 mills to 33 mills and increased the levy for high schools from 17 to 22 mills, for a total statewide increase on all taxable property of 50 mills.

¶ 14 HB 28 exempted coal gross proceeds and oil and gas net proceeds from the 50 mill statewide levy and from local mill levies. In lieu of the net proceeds tax on oil and gas, HB 28 imposed a new local government severance tax (LGST) on the gross taxable value of oil and natural gas, other than on new production1 a LGST of 8.4 percent on oil and a LGST of 15.25 percent on gas regardless of the county in which the well was located.

¶ 15 HB 28 also removed the power of counties to levy or assess any mills against the reported coal gross proceeds. Rather, HB 28 imposed a statewide levy of 5 percent against the value of reported coal gross proceeds. The taxes collected from the new LGST on oil and natural gas and from reported coal gross proceeds were to be distributed in the same manner as property taxes in support of school funding equalization aid.

¶ 16 In 1993, the Plaintiffs filed identical complaints, one in Powder River County and the other in Rosebud County, challenging HB 28. The Plaintiffs specifically challenged the Legislature's decision to tax coal gross proceeds and oil and gas net proceeds in support of school equalization funding via a lower fixed tax rate than the statewide 50 mill increase imposed on all other taxable property in the state. The County Plaintiffs focused their efforts in Rosebud County, challenging the new tax system as an unconstitutional impairment of the obligation of contract related to the 1984 Big Horn County General Obligation Bonds (Bond Claim). The Individual Plaintiffs focused their efforts in Powder River County, challenging the new taxation, as applied to them, on equal protection and due process grounds. The District Court, Judge Rapkoch presiding, consolidated the two matters and, on December 14, 1993, granted leave for eight producers of oil and gas and six producers of coal to intervene in the action (Intervenors).

¶ 17 In the Complaint, the Plaintiffs requested that the District Court declare unconstitutional the LGST on oil and gas production and the fixed tax rate on coal gross proceeds, and, in lieu of these taxes, requested that the District Court extend the newly enacted statewide and school mills to include all oil and gas production properties and coal gross proceeds for the tax years of 1990 through the time of filing the Complaint. The Plaintiffs also requested that the District Court, as a remedial measure, order that the repealed tax statutes for net proceeds of oil and natural gas and for coal gross proceeds be enforced anew for the same tax years at issue.

¶ 18 The 1995 Legislature, in regular session, repealed both the state and local government severance taxes on oil and natural gas, § 15-36-101, et seq., MCA (1993), as well as the oil and gas net proceeds tax, §§ 15-23-601 through -631, MCA (1993), among other oil and gas taxes similarly repealed. The Legislature enacted SB 412 and replaced these various repealed taxes with the Oil and Gas Production Tax Act (Production Act) a single production tax based on the type of well and type of production which became effective on January 1, 1996. Section 15-36-301, et seq., MCA (1995).

¶ 19 In February 1996, the same plaintiffs who initiated the first two actions filed a third action against the same defendants, alleging that the Production Act did nothing to remedy the flaws in HB 28 regarding oil and gas production, but carried forth the same "flat tax" discrimination and unconstitutional tax exemptions for oil and gas as originally enacted in HB 28.

¶ 20 The Department of Revenue and the Intervenors filed motions for summary judgment, and the District Court, on September 11, 1996, entered partial summary judgment against the Counties on all but one of the Counties' constitutional claims. The District Court preserved for trial only the Big Horn County's obligations of contract claims and preserved for later ruling the constitutional challenges of the Individual Plaintiffs.

¶ 21 The District Court held a bench trial on September 14 and 15, 1999, and entered its Findings and Conclusions on March 1, 2000, concluding that the enactment of HB 28 was a valid and...

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