## Facts

- Montana enacted a severance tax in 1975 on each ton of coal mined in the state, including coal extracted from federal lands.
- The tax rate varied with coal characteristics and could reach 30% of the contract sales price.
- Montana adopted high rates in part to capture greater in-state benefit from exported natural resources and created a permanent trust fund to receive a large share of revenues.
- Roughly 90% of Montana coal was shipped to other states, and contracts often shifted the tax’s economic burden to out-of-state utilities and ultimately to nonresident consumers.
- Coal producers and out-of-state utility purchasers challenged the tax, arguing it violated the Commerce Clause and was preempted under the Supremacy Clause.
- The Montana trial court upheld the tax without taking evidence; the Montana Supreme Court affirmed.

## Issues

1. Whether Montana’s coal severance tax violated the Commerce Clause by discriminating against or unduly burdening interstate commerce, including whether the tax was “fairly related to services provided by the State.”
2. Whether the tax was invalid under the Supremacy Clause because it conflicted with federal statutes or federal energy policy, including the Mineral Lands Leasing Act, as applied to coal mined from federal lands.

## Decision

- The Supreme Court affirmed and upheld the severance tax.
- The Court held the tax was subject to Commerce Clause review even though imposed on extraction before interstate shipment.
- Applying the Complete Auto test, the Court found: substantial nexus (in-state mining), fair apportionment (tax applied only to Montana-mined coal), no discrimination (rate did not depend on destination), and a sufficient relation to state-provided benefits as understood under the fourth prong.
- The Court rejected the argument that the fourth prong requires the tax amount to approximate the value of particular services provided to the coal industry.
- The Court held the tax was not preempted; federal law permitted state taxation of federal lessees without imposing a ceiling, and no clear congressional intent barred high severance taxes.

## Legal Principles

- A state severance tax on in-state extraction is not immune from Commerce Clause scrutiny merely because the taxed event occurs before goods enter interstate commerce.
- Under Complete Auto Transit, a state tax affecting interstate commerce is valid if it: (1) applies to an activity with substantial nexus to the taxing state; (2) is fairly apportioned; (3) does not discriminate against interstate commerce; and (4) is fairly related to services provided by the state.
- For the “fairly related” prong, the Constitution does not require dollar-for-dollar equivalence between tax revenues and specific governmental services to the taxed industry; it requires a reasonable relationship between the tax measure and the taxpayer’s in-state activities or presence.
- A tax is not discriminatory merely because most of the taxed product is sold out of state or because private contracts shift the economic incidence to out-of-state purchasers.
- State taxation of activities conducted by federal lessees on federal lands is not preempted absent clear statutory limits or clear congressional intent to bar the tax level imposed.

## Conclusion

The Court upheld Montana’s coal severance tax, clarifying that the Complete Auto framework governs state severance taxes and that the “fairly related” requirement concerns the taxpayer’s in-state contacts rather than equivalence to specific services, while also holding that federal law did not preempt the tax.


Commonwealth Edison Co. v. Montana, 453 U.S. 609 (1981)