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Full text of "Montana corporation income tax study : a report to Governor Forrest H. Anderson, Governor-Elect Thomas L. Judge, and the members of the Forty-Third Legislative Assembly"

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MONTANA CORPORATION 
INCOME TAX STUDY 

BY DENNIS M. BURR , REVENUE ANALYST 



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MONTANA S 



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MONTANA DEPARTMENT OF REVENUE 

Sarr W. A/A,tchell t»ldg. 
Helena, AAortano 




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004 5537 



MONTANA CORPORATION 
INCOME TAX STUDY 

BY DENNIS M. BURR , REVENUE ANALYST 



A REPORT TO 
GOVERNOR FORREST H . ANDERSON , 
GOVERNOR-ELECT THOMAS L . JUDGE , 

AND THE MEMBERS OF THE 
FORTY-THIRD LEGISLATIVE ASSEMBLY 



MONTANA DEPARTMENT OF REVENUE 

SAM W . MITCHELL BUILDING 

HELENA, MONTANA 59601 

DECEMBER 1, 1972 




DEPARTMENT OF REVENUE 

MITCHELL BUILDING 
HELENA. MONTANA 59601 



December 1, 1972 



TO: GOVERNOR FORREST H. ANDERSON 

GOVERNOR-ELECT THOMAS L. JUDGE 

MEMBERS OF THE FORTY-THIRD LEGISLATIVE ASSEMBLY 

Gentlemen: 

It gives me great pleasure to transmit to you this study of the Montana Corporation 
License Tax. In February of 1972, Governor Forrest H. Anderson ordered me as 
Director of Revenue to prepare this study to answer some of the questions sur- 
rounding the taxation of multistate corporations in Montana. The analysis was 
conducted by personnel of the Department of Revenue at no additional cost to the 
taxpayers of the state. Although this study is educational rather than analytical 
in many respects, I feel that it provides much of the information necessary for 
public officials to make rational decisions concerning the future of corporation 
taxes in Montana. The conduct and supervision of this study has been invaluable 
to me as Director of Revenue and I hope it proves of even more value to the Gov- 
ernor of Montana and the members of the Forty-Third Legislative Assembly. 



Very truly yours, 

Keith L. Colbo 
Director of Revenue 



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FORREST H. ANDERSON 
Governor 



^cUna 59B01 



November 27, 1972 



Mr. Keith L. Colbo, Director 
Department of Revenue 
Mitchell Building 
Helena, Montana 59601 

Dear Mr. Colbo: 

On February 15, 1972, I ordered you as Director of Revenue 
to conduct a complete study of the Montana Corporation. License Tax. 
As I indicated at that time, the public and the Legislature have 
long felt that there are corporations operating in Montana which 
do not pay their fair share of the cost of state and local govern- 
ment. A comprehensive study of corporate taxation in Montana is 
needed and statutory changes should be made to correct any inequities 
that exist in the present tax structure. 

In order that the scope of your study is not limited unneces- 
sarily by statutory restrictions, I am exercising my option as 
Governor under Section 84-1507, R.C.M. 1947, to authorize you to 
release information from the corporate files of the Department of 
Revenue. You may use whatever information you deem essential to 
provide me and the Forty-Third Legislative Assembly with a complete 
and factual analysis of the corporate tax structure of the State of 
Montana . 

Sincerely, 





FORREST H. ANDERSON 
Governor 



TABLE OF CONTENTS 

INTRODUCTION 1 

CHAPTER I. INTERSTATE COMPARISON OF BUSINESS TAXES 12 

CHAPTER II. FEDERAL AND STATE CORPORATION TAX LAWS 26 

CHAPTER III. THE TAXATION OF INTERSTATE COMMERCE IN MONTANA . . 32 

CHAPTER IV. AN ANALYSIS OF MONTANA CORPORATION TAX RETURNS . . 43 

CHAPTER V. ADMINISTRATION OF MONTANA'S CORPORATION TAX LAWS . . 65 

CHAPTER VI. CONCLUSIONS AND RECOMMENDATIONS 72 



LIST OF TABLES 



Table 

1. Number of Corporations Paying License Tax by Industry and by Type 

of Corporation. Returns Filed Fiscal 1969 6 

2. Montana Corporate License Tax Receipts by Industry and by Type of 

Corporation. Returns Filed Fiscal 1969 7 

3. Percentage Contribution to Domestic and Apportioned Montana Gross 

Income by Industry and by Type of Corporation. Return Filed in 

Fiscal 1969 . . . . ; 8 

4. Percentage of State - Local General Revenue from Corporation Income 

Taxes, by State, 1962, 1967, 1970 15 

5. State and Local Taxes with an Initial Impact on Business by Type of 

Tax, by State, 1967 18 

6. Relationship of State and Local Taxes with an Initial Impact on Business 

to Total State and Local Taxes, by State, 1957, 1962, 1967 21 

7. Selected Taxes Collected with an Initial Impact on Business, 9 Western 

States, 1967 23 

8. Financial Data from Tax Returns of the Largest Multistate Corporations 

Filing Returns in Montana, 1969-70 47 

9. Financial Data from Tax Returns of 48 Largest Domestic Corporations 

Filing Returns in Montana, 1969-70 48 

10. Corporation License Tax Paid, as a Percent of Gross Receipts for 

Domestic and Apportioning Corporations, 1969-70 50 

11. Non-Business Income Attributed to Montana and Total Non-Business 

Income Allocated to Montana 52 

12. Potential Refunds due to Retroactive Loss carry back Provision of 

Corporation License Tax 56 



INTRODUCTION 

The corporation license tax is probably the least understood of 
Montana's major sources of revenue. Eleven million four hundred thou- 
sand dollars were collected by the Department of Revenue from this source 
in fiscal year 1971-72 and divided between the state general fund, the 
school foundation program, and the long-range building program. Yet, 
few citizens in Montana are cognizant of the tax rate, what businesses the 
tax applies to, or any of the other statutory provisions concerning the 
corporation license tax . Politicians from both parties have criticized the 
law and its administration , but seldom has the criticism been followed by 
recommendations that have improved the taxation of corporations by the 
state. 

The Legislature has commissioned several studies of business tax- 
ation, the most recent published by the Legislative Council in 1968, and 
the Interim Committee on Fiscal Affairs in 1970. Both studies presented 
useful and informative data concerning the taxation of domestic and foreign 
corporations, but evidently neither were able to dispel the suspicion with 
which residents of the state regard the taxation of business. As a result. 
Governor Anderson requested a study of business taxation to be conduct- 
ed by the Director of Revenue and asked that the study together with 



any recommendations for statutory reform be presented to the 1973 session 
of the Montana Legislature. 

Since two studies of the corporation license tax have been conducted 
within the past five years , there is no need to duplicate past efforts in this 
report. Many areas and aspects of business taxation are examined in this 
report that were not discussed in earlier studies . A brief review of the 
Legislative Council report on the Montana Corporation License Tax (report 
number twenty-six) and the section in the Montana Fiscal Affairs study 
dealing with the corporation license tax should be helpful . 

MONTANA LEGISLATIVE COUNCIL REPORT NO. 26 
The Montana Legislative Council undertook a study of the corporation 
license tax as a result of Senate Resolution number thirty-six, and House 
Resolution number twenty-four of the Fortieth Legislative Assembly . Both 
resolutions called for a study of the methods of taxing corporations that do 
business in Montana. While both resolutions give adequate justification for 
conduct of the study, those found in the House Resolution remain timely 
and are worth repeating . House Resolution number twenty-four noted that: 

(1) There is a need to establish equity in taxation among all cor- 
porations doing business in the state of Montana. 

(2) Many large and small Montana corporations pay a significant 
tax to the state of Montana at this time but some large corporations do not 



appear to pay their fair share of corporate taxation based on the volume of 
their business and reported earnings . 

(3) There is a need to assure that non-resident corporations doing 
business in Montana who either do not file corporation license taxes or do 
not appear to pay an amount based equitably upon their earnings on volume 
of business are properly taxed . 



The resolution required the Legislative Council to present recom- 
mendations for improving both the collection and assessment of corporate 
license taxes in Montana to the 1969 Legislative Session. The same criti- 
cisms of the taxation of corporations are heard today as were evidenced by 
the House Resolution in 1967, 

The Legislative Council report on the corporation license tax contains 
a short history of business taxes both nationally and in Montana, an explana- 
tion of the current tax practices in Montana, and a detailed empirical study 
of corporation license returns filed in Montana in 1966. Pursuant to its main 
purposes, this study concentrated heavily on the relationship between taxes 
paid by multistate corporations and those paid by domestic corporations to 
determine which firms had the heavier tax burden. Additionally, statistical 
analysis was directed at the effect of changing the apportionment formulas 
for multistate corporations and to the effect of replacing the current tax on 
net income with a tax on the gross income of corporations. 



-4- 



The results of the Legislative Council's analysis were surprising to 
many. With respect to the division of the tax burden between multistate 
and domestic corporations, the Council report concluded that " . . .multi- 
state corporations share over twice the relative (tax) liability as that 
shared by domestic corporations . " It was determined that a proposed 
change in the method of apportioning the income of foreign corporations 
would result in a loss of revenue to the state of 134,000 dollars and would 
shift more of the tax burden from multistate to domestic corporations . And, 
finally, the Council concluded that replacing the current net income tax 
with a tax on the gross Income of corporations "would shift 10.92 percent 
of the present income tax liability from multistate to domestic firms ..." 
In summary, the Council did not recommend any major changes in the 
statutes relating to the corporation license tax because all of the changes 
that were investigated would have resulted in a shift in the tax burden 
away from multistate corporations to domestic corporations . The Council 
did recommend that money be appropriated to expand the corporation 
license tax staff. It also recommended that the state adopt a corporation 
net income tax to supplement the corporation license tax and it recommended 
that the state become a member of the Multistate Tax Compact . Both of the 
latter two recommendations were enacted by the Forty-First Legislative 
Assembly and will be discussed in a later chapter of this report. 



The Legislative Council report published in 1968, refuted many of 
the misconceptions held by Montanans concerning the corporation license 
tax. Yet, the same criticisms of corporation taxes embodied in House 
Resolution number twenty-four are revived prior to every Legislative 
Session. 

MONTANA FISCAL AFFAIRS STUDY 
The Montana Fiscal Affairs Study conducted a very intensive and 
complete empirical analysis of the corporation license tax . A few com- 
ments should be sufficient to point out that the conclusions drawn from 
the analysis in the Montana Fiscal Affairs Study are basically the same as 
those reported in Legislative Council Report number twenty-six . Three 
of the tables prepared by the Fiscal Affairs Study staff are presented here 
as a basis for the discussion that follows . 



TABLE 1 



NUMBERS OF CORPORATIONS PAYING LICENSE TAX 

BY INDUSTRY AND BY TYPE OF CORPORATION 

RETURNS FILED FISCAL 1969 











Percent 




Domestic 


Apportioning 




of 




Corporations 


Corporations 


Total 


Total 


Agriculture 


918 


16 


934 


14.33 


Forestry 


9 


1 


10 


.15 


Metal Mining 


35 


6 


41 


.63 


Coal 


3 


— 


3 


.05 


Crude Oil & Nat. Gas 


156 


74 


230 


3.53 


Other Mining 


16 


5 


21 


.32 


Construction 


364 


103 


467 


7.17 


Manufacturing 


306 


220 


526 


8.07 


Transportation 


104 


44 


148 


2.27 


Communication 


61 


6 


67 


1.03 


Electric, Gas, 










& Water 


16 


4 


20 


.31 


Wholesale Trade 


288 


75 


363 


5.57 


Retail Trade 


1,279 


117 


1,396 


21.43 


Finance, Insurance, 










& Real Estate 


665 


59 


724 


11.11 


Banks 


— 


— 


— 


— 


Bldg. & Loans 


8 


— 


8 


.12 


Credit Unions 


22 


— 


22 


.34 


Services 


609 


118 


727 


11.16 


Unallocable 


54 


2 


56 


.86 


Rentals 


574 


25 


599 


9.20 


Cooperatives 


147 


5 


152 


2.33 



Total 



5,634 



880 



6,514 



Source: Derived from data in The Montana Fiscal Affairs Study, Page 473. 



-7- 
TABLE 2 



MONTANA CORPORATE LICENSE TAX RECEIPTS 

BY INDUSTRY AND BY TYPE OF CORPORATION 

RETURNS FILED FISCAL 1969 











Percent 




Domestic 


Apportioning 




of 




Corporations 


Corporations 


Total 


Total 


Agriculture 


$ 354,844 


$ 2,856 


357,700 


4.6 


Forestry 


30,800 


10 


30,810 


.4 


Metal Mining 


507 


388.708 


389,215 


5.0 


Coal 


8,877 


— 


8,877 


.1 


Crude Oil & Nat. Gas 


37,593 


342,849 


380,442 


4.9 


Other Mining 


7,396 


2,887 


10,283 


.1 


Construction 


301,826 


46,128 


347,954 


4.5 


Manufacturing 


831,977 


677,009 


1,508,986 


19.4 


Transportation 


60,478 


299,299 


359,777 


4.6 


Communication 


69,218 


769,183 


838,401 


10.8 


Electric, Gas 










& Water 


27,538 


1,409,061 


1,436,599 


18.5 


Wholesale Trade 


179,029 


60,448 


239,477 


3.1 


Retail Trade 


665,487 


378,429 


1,043,916 


13.4 


Finance, Insurance, 










& Real Estate 


321,387 


29,641 


351,028 


4.5 


Banks 


— 


— 


— 


— 


Bldg. & Loans 


33,487 


— 


33,487 


.4 


Credit Unions 


3,608 


— 


3,608 


— 


Services 


174,447 


59,406 


233,853 


3.0 


Miscellaneous 


15,274 


111 


15,385 


.2 


Rentals 


158,951 


2,071 


161,022 


2.1 


Cooperatives 


24,752 


8,369 


33,121 


.4 


Total 


$3,307,476 


$4,476,465 


$7,783,941 




Percent of Total 


42.5 


57.4 







Source: Derived from data in The Montana Fiscal Affairs Study, page 474. 



TABLE 3 



PERCENTAGE CONTRIBUTION TO DOMESTIC 

AND APPORTIONED MONTANA GROSS INCOME 

BY INDUSTRY AND BY TYPE OF CORPORATION 

RETURNS FILED IN FISCAL 1969 









Percent 






Domestic 


Apportioning 


of 






Corporations 


Corporations 


Total 1 


Rank 


Agriculture 


2.31 


.02 


2.36 


10 


Forestry 


.17 


— 


.18 


15 


Metal Mining 


.01 


3.79 


3.80 


7 


Coal 


.02 


— 


.02 


20 


Crude Oil & Nat. Gas 


22.30 


3.66 


26.00 


1 


Other Mining 


.14 


.03 


.18 


15 


Construction 


4.72 


.73 


5.46 


5 


Manufacturing 


6.56 


14.40 


20.97 


2 


Transportation 


.92 


3.82 


4.77 


6 


Communication 


.18 


1.09 


1.28 


13 


Electric, Gas, 










& Water 


.12 


1.50 


1.63 


11 


Wholesale Trade 


6.64 


.81 


7.47 


4 


Retail Trade 


12.99 


3.95 


16.96 


3 


Finance, Insurance, 










& Real Estate 


1.25 


.12 


1.38 


12 


Banks 


— 


— 


— 


— 


Bldg. & Loans 


.U 


— 


.12 


17 


Credit Unions 


.02 


— 


.03 


19 


Services 


2.99 


.48 


3.56 


8 


Unallocable 


.07 


— 


.09 


18 


Rentals 


.37 


— 


.40 


14 


Cooperatives 


1.53 


1.75 


3.30 


9 


Total 


63.68 


36.29 


100.00 





1 Detail may not add to totals due to rounding. 

Source: Derived from data in The Montana Fiscal Affairs Study, page 478. 



Table one presents data on the number of foreign and domestic cor- 
porations filing returns in Montana. The data prepared by the Fiscal 
Affairs Study staff is more disaggregated than that prepared by the Leg- 
islative Council . It is also more detailed than the data presented later in 
this report. For purposes of comparison, our interest is confined to 
domestic corporations and foreign apportioning corporations . Foreign 
corporations using separate accounting are accounting for income and 
operating exactly as domestic corporations. Thus, in this study as in 
the Legislative Council Report, separate accounting firms are treated 
as domestic corporations . Combining the totals from Table One shows 
that 86.49 percent of the firms filing returns in Montana in 1969, were 
either domestic or separate accounting firms . Thirteen and fifty-one 
hundredths percent of the firms were apportioning foreign corporations . 
Table Two shows the percentage of total license tax revenue received 
from each type of firm. Combining the totals as was done, with data in 
Table One shows that 42.5 percent of the 1969 corporation license tax 
was collected from domestic and separate accounting firms and the re- 
maining 57.5 percent was collected from apportioning multistate firms. 
Thus, foreign corporations represented only 13.51 percent of all firms 
filing returns, but they paid 57.5 percent of the corporation license tax 
in 1969. This discrepancy can partly be explained by the fact that 
apportioning multistate firms are generally larger and have more 



■10- 



income than Montana corporations. However, Table Three indicates that 
the size of foreign corporations does not completely explain the discrep- 
ancy between the tax burden on foreign and domestic corporations. Table 
Three shows the percentage contribution to Montana gross income from 
each type of filing. Domestic corporations accounted for 63.68 percent 
of total gross income and apportioning multistate firms accounted for 
36.32 percent of total gross income. Therefore, the apportioning compa- 
nies comprise 13.51 percent of all corporations filing returns, account 
for 36.32 percent of gross income, and pay 57.5 percent of the corpora- 
tion license tax collected by the State of Montana. The conclusion drawn 
from this data is about the same as that reported by the Legislative Council, 
That is, multistate apportioning firms bear a heavier tax burden in rela- 
tion to their income than do domestic corporations. 

The Fiscal Affairs Study data also confirms the Legislative Council's 
contention that a gross income tax would shift part of the total tax burden 
from apportioning multistate firms to Montana based corporations . In 
short, multistate firms appear to be paying more than their fair share of 
the corporation license tax and there does not seem to be any acceptable 
modifications to the existing statutes that will allow Montana to export more 
of the corporation tax than it does under the present statutes. 



11- 



Desplte the statistical evidence presented in the two most recent cor- 
poration tax studies, the feeling still persists among legislators and citizens 
alike that some corporations, especially foreign corporations, are not paying 
their fair share of taxes to the State of Montana. Further analysis of the 
same type in this study would do little to change this attitude. This study 
takes a different approach to the problem of taxing corporations . Our 
objective is to illuminate the inequities in the tax structure, explain why 
they occur , and offer solutions where possible . We hope that a better 
understanding of the problems involved with state taxation of corporations 
will result from this study . 



-12- 



CHAPTER ONE 
INTERSTATE COMPARISONS OF BUSINESS TAXES 

People are interested In Interstate tax comparisons as a measure of 
the normalcy of their own state's tax system. Also, State Governments 
are hesitant to let their tax systems get out of line with those of other 
states because of the effect state taxes have on industrial locations . In 
ail likelihood , too much emphasis has been placed on the role that taxes 
play in industrial location. Businesses are more concerned with the 
availability of a good labor supply, access to markets and raw materials, 
transportation costs , and the quality of life in an area than they are in 
the state tax structure. In addition, the stability of a state's tax struc- 
ture is probably more important to businesses than current tax rates . A 
state with relatively high tax rates and a record of tax stability is gen- 
erally preferable to a state that currently has low tax rates and a history 
of frequent, major changes in its tax system. Still, interstate tax com- 
parisons are a valuable guide to policy makers if they are properly 
presented and used in conjunction with other important data to formulate 
changes in the state tax system . However , they should not be used in 
an attempt to normalize the state tax structure by forcing all state taxes 
to conform to someone's concept of the "national average." Economic data 



-13- 



can be, and has been, used to show that taxes in Montana are high, average, 
and low when compared to taxes in other states . This type of data is among 
the easiest to manipulate to prove a preconceived notion about the state tax 
system . 

All too often, interstate tax comparisons are confined to the compar- 
ison of revenue from one tax source. This type of analysis is misleading 
because of the diversity in tax systems among the states. For example, 
statistics that show that Montana's income tax is higher than average should 
be tempered with the knowledge that Montana has no general sales tax . 
When sales and income taxes are combined, Montana is shown to have 
lower than average taxes . Similarly , the corporation license taxes paid 
by a "typical" firm in Montana and other states are not a valid comparison 
because of the relative Importance of other business taxes in each state. 
Finally , the difference between services provided by state and local gov- 
ernments in the various states will affect many comparisons. For example, 
Hawaii has the lowest local property taxes in the Nation . This is not nec- 
essarily the result of more efficient and lower cost local government, but 
because education is financed by state, not local, taxes in Hawaii. Simi- 
larly, statistics that show Montana state taxes as being low do not account 
for the fact that local governments in Montana levy taxes to pay for services 
that are paid for by the State Government in many other states . The fact 



■14- 



that state taxes are low is often merely an indication that local taxes are 
high . All of these factors must be considered when making interstate tax 
comparisons if they are to be used as a factor in formulating policy . 

The most reliable source of information for interstate comparisons 
is "The Census of Governments" conducted every five years by the Depart- 
ment of Commerce. The latest year for which data is available is 1967. 
Some information is available for more recent years and is used occasion- 
ally in this study. It should be noted, however, that statistics for non- 
census years are partially estimated and based on a sample of government 
units, not a complete enumeration. Our analysis indicates that Montana's 
relative tax position has not changed drastically in the last few years so 
conclusions drawn from 1967 statistics should be representative of cur- 
rent conditions . 

Table Four shows the percentage of total state and local general 
revenue derived from corporation income taxes for 1962, 1967, and 1970. 
Montana received two percent of total state-local general revenue from this 
source in 1970 and ranked twenty-fourth among the fifty states. Montana 
was considerably below the national average of 2 . 9 percent of total general 
revenue derived from taxes on corporation income in 1970. Table Four is of 
interest for two reasons. First, it shows that Montana's rank among the 



■15- 



TABLE 4 

PERCENTAGE OF STATE-LOCAL GENERAL REVENUE 

FROM CORPORATION INCOME TAXES, 

BY STATE, 1962, 1967, 1970 

STATE 1962 1967 1970 

UNITED STATES, Total 2.3 2.5 2.9 

Alabama 

Alaska 

Arizona 

Arkansas 

California 

Colorado 

Connecticut 

Delaware 

Dist. of Columbia 

Florida 

Georgia 

Hawaii 

Idaho 

Illinois 

Indiana 

Iowa 

Kansas 

Kentucky 

Louisiana 

Maine 

Maryland 

Massachusetts 

Michigan 

Minnesota 

Mississippi 

Missouri 
Montana 

Nebraska 

Nevada 

New Hampshire 



1.3 


2.4 


1.8 


1.3 


1.2 


0.4 


1.1 


1.7 


1.8 


2.5 


3.6 


3.0 


4.1 


3.9 


3.5 


2.9 


2.4 


2.3 


4.3 


6.0 


6.1 


4.7 


4.5 


3.5 


3.5 


3.2 


4.5 


2.5 


3.8 


3.5 


2.7 


2.2 


2.1 


2.4 


2.9 


2.8 


- 


- 


1.9 


- 


0.7 


0.3 


0.5 


0.9 


1.4 


1.2 


2.2 


1.4 


2.9 


3.3 


2.4 


2.2 


2.1 


1.6 


- 


- 


1.5 


2.0 


2.2 


2.3 


1.8 


2.1 


5.7 


- 


- 


3.3 


2.9 


3.6 


3.1 


2.6 


2.0 


1.7 


1.0 


0.8 


0.9 


1.8 


2.1 


2.0 


- 


- 


0.9 



■16- 



TABLE 4 
Page 2 



STATE 



1962 



1967 



1970 



New Jersey 
New Mexico 
New York 
North Carolina 
North Dakota 

Ohio 

Oklahoma 
Oregon 
Pennsylvania 
Rhode Island 

South Carolina 

South Dakota 

Tennessee 

Texas 

Utah 



1.3 


1.6 


3.9 


1.1 


1.1 


1.1 


4.3 


3.9 


4.3 


5.3 


5.7 


4.7 


0.8 


0.9 


0.7 


1.9 


1.9 


1.9 


3.2 


3.1 


2.9 


4.8 


5.4 


8.0 


3.9 


4.5 


4.0 


3.5 


5.3 


3.8 


0.2 


0.2 


0.2 


2.6 


3.1 


3.2 



2.3 



2.1 



1.7 



Vermont 

Virginia 

Washington 

West Virginia 

Wisconsin 

Wyoming 

Montana Rank 



1.7 


2.3 


1.8 


3.2 


3.0 


2.8 


. 


_ 


0.4 


4.1 


4.9 


3.4 



26/50 



25/50 



24/50 



Note: Minor amounts of local corporation income taxes (other 
than D.C) included with individual income taxes. Sep- 
aration not available. 



1 Includes portion of the corporation excise taxes and surtaxes 
measured by corporate excess. Separation not available. 

Source: ACIR staff computations based on various reports of 
U.S. Bureau of the Census, Governments Division. 



•17- 



fifty states has not changed significantly during the period from 1962 to 
1970. Thus, 1967 statistics should be representative of current conditions. 
Second, it should be noted that table four relates to only one source of bus- 
iness taxation. As explained above, the relative position of a state's tax 
system cannot be based on an analysis of only one tax source. Montana 
ranks in the middle of the states in income taxes collected from corpora- 
tions and is considerably below the national average . However , Table 
Five shows all of the taxes businesses paid to state and local governments 
during 1967. Table Five was prepared by the Advisory Council on Inter- 
governmental Relations and it overcomes most of the common objections to 
interstate comparisons. It shows data for all major tax sources so the 
comparisons are not distorted by the relative importance of a single tax 
source in the different states . Also, the data is based on total state and 
local taxes so the relative importance of each level of government does not 
distort the comparisons . Corporation income taxes amounted to slightly 
less than ten percent of the total state and local taxes paid by businesses 
in Montana in 1967. Property taxes, mainly for the support of local govern- 
ment, totaled 54.5 million dollars compared to corporation income taxes of 
7 . 6 million dollars . The fact that government in Montana relies heavily on 
property taxes, and property tax payments are deductible on the corporation 
license tax return, helps explain why Montana can have a higher than average 



■18- 



TABLE 5 



STATE AND LOCAL TAXES WITH AN INITIAL IMPACT ON BUSINESS, 

BY TYPE OF TAX, BY STATE, 1967 

(In millions of dollars) 



States 



Total 



Property 



Corporation 

Net 

Income 



Gross Licenses 
Receipts 



Other 



United States 


17,853.4 


10,217.8 


2,478.6 


Alabama 


154.6 


50.6 


29.9 


Alaska 


23.5 


7.9 


3.5 


Arizona 


139.4 


103.7 


14.4 


Arkansas 


82.1 


34.5 


25.1 


California 


2,391.0 


1,626.1 


452.6 


Colorado 


190.8 


130.2 


25.8 


Connecticut 


308.2 


163.7 


80.1 


Delaware 


51.2 


8.9 


12.7 


Dist. of Columbia 


78.7 


41.3 


14.9 


Florida 


416.0 


220.7 


— 


Georgia 


256.3 


140.6 


64.6 


Hawaii 


48.0 


18.0 


10.5 


Idaho 


62.2 


41.6 


9.6 


Illinois 


804.2 


555.2 


— 


Indiana 


399.2 


297.7 


14.5 


Iowa 


170.0 


134.1 


12.0 


Kansas 


185.7 


134.9 


23.9 


Kentucky- 


136.4 


58.5 


46.3 


Louisiana 


488.8 


150.4 


34.4 


Maine 


63.4 


52.1 


— 


Maryland 


291.9 


180.4 


40.8 


Massachusetts 


530.5 


302.1 


56.0 


Michigan 


838.1 


522.7 


9.1 


Minnesota 


409.3 


250.6 


69.6 


Mississippi '• 


128.3 


69.2 


17.0 


Missouri 


285.9 


183.0 


21.0 


Montana 


76. a 


54.5 


7.6 


Nebraska 


77.1 


59.2 


— 


Nevada 


57.3 


33.2 


••T 


New Hampshire 


45.1 


37.6 






2,110.6 2,085.0 961.3 



20.5 


49.6 


40.0 


2.1 


5.9 


4.1 


12.2 


9.1 


— 


8.8 


9.2 


4.5 


146.3 


148.8 


17.2 


13.5 


20.2 


1.1 


47.9 


12.9 


3.6 


3.2 


24.6 


1.8 


12.7 


8.3 


1.5 


80.2 


87.1 


28.0 


20.3 


30.8 


— 


14.3 


5.1 


.1 


4.4 


6.4 


.2 


177.9 


71.1 


— 


72.2 


14.5 


.3 


12.4 


11.5 


— 


13.3 


12.8 


.8 


12.3 


18.2 


1.1 


29.7 


59.0 


215.3 


7.3 


4.0 


-- 


40.8 


29.8 


.1 


28.3 


142.3 


1.8 


35.0 


142.1 


129.2 


49.0 


17.8 


22.3 


10.7 


20.2 


11.2 


41.5 


40.4 


— 


5.2 


5.6 


3.5 


7.2 


10.0 


.7 


2.9 


21.2 


— 


3.9 


3.5 


.1 



-19- 







TABLE 


5 












Page 


2 
Corporation 








States 


Total 


Property 


Net 
Income 


Gross 
Receipts 


Licenses 


0:her 


New Jersey 


643.8 


362.6 


48.5 


142.7 


90.0 


.. 


New Mexico 


86.7 


31.9 


6.5 


6.9 


10.1 


31.3 


New York 


2,617.2 


1,408.3 


637.1 


241.6 


168.7 


161.5 


North Carolina 


316.5 


113.8 


98.5 


63.4 


40.8 


— 


North Dakota 


40.7 


25.2 


3.3 


2.9 


5.8 


3.5 


Ohio 


872.1 


625.7 


17.8 


106.6 


122.0 


'- 


Oklahoma 


200.3 


98.3 


21.5 


21.8 


13.2 


45.5 


Oregon 


201.8 


123.0 


32.2 


14.6 


31.2 


.8 


Pennsylvania 


915.6 


303.3 


244.5 


73.8 


269.7 


24.3 


Rhode Island 


75.5 


40.2 


17.5 


10.9 


6.0 


.9 


South Carolina 


147.3 


65.8 


43.4 


17.8 


18.1 


2.2 


South Dakota 


38.6 


27.2 


.6 


3.1 


7.5 


.2 


Tennessee 


210.4 


95.1 


43.3 


23.3 


46.2 


2.5 


Texas 


982.5 


573.1 


— 


96.8 


87.8 


224.8 


Utah 


86.9 


63.3 


11.0 


4.8 


4.5 


3.3 


Vermont 


32.2 


21.1 


4.9 


3.5 


2.7 


— 


Virginia 


285.0 


107.6 


49.3 


73.4 


48.8 


5.9 


Washington 


313.9 


127.3 


— 


154.0 


31.5 


1.1 


West Virginia 


145.1 


50.6 


— 


79.1 


14.6 


.8 


Wisconsin 


407.6 


251.5 


102.8 


31.8 


21.4 


.1 


Wyoming 


44.2 


39.7 


— 


1.8 


2.6 


.1 



1/ Excluding unemployment compensation. 2/ Insurance premium, utility, and general 
gross receipts taxes on business firms. 3/ Corporation franchise and miscellaneous 
business and occupational licenses. 



Source: Estimates prepared by ACIR staff from data published by the Governments 

Division, U. S. Bureau of the Census, and U. S. Department of Agriculture. 



-20- 



corporation tax rate and collect less than the average amount of revenue 
from this source. 

Table Six shows the percentage relationship between state and 
local taxes with an initial impact on business and total state and local 
taxes for 1957, 1962, and 1967. In 1967, 35.9 percent of all taxes col- 
lected by state and local governments in Montana were collected from 
business firms. This was 6.6 percentage points above the national average. 
Montana ranked fifth in the Nation in the percent of total state-local 
taxes collected from business . 

Although the preceding tables presented show that Montana is 
collecting more taxes from business than does the average state, it is 
also interesting to compare Montana to surrounding states with similar 
economic and demographic characteristics. To the extent that taxes 
are a factor in industrial location, a comparison of Montana's tax system 
to neighboring states is relevant. 

Table Seven shows the percentage each type of business tax bears to 
total business taxes in Montana and eight neighboring states . Although 
Montana collects an exceptionally large percentage of business tax revenue 
through the property tax, this is partly a result of circumstances peculiar 
to sparsely populated western states. All states in Table Seven, with the 



-21- 



TABLE 6 



TABLE 6.— RELATIONSHIP OF STATE AND LOCAL TAXES 

WITH AN INITIAL IMPACT ON BUSINESS TO TOTAL 

STATE AND LOCAL TAXES, BY STATE, 1957, 1962, 19671/ 

(Dollar amounts in millions) 

Taxes on business as 
% of total taxes 



STATES 



1957 



1962 



1967 



United States 


34.2 


32.1 


29.3 


Alabama 


26.0 


24.4 


22.8 


Alaska 


n.a. 


30.7 


27.4 


Arizona 


32.7 


30.0 


26.6 


Arkansas 


26.6 


23.0 


20.9 


California 


32.8 


31.8 


30.7 


Colorado 


31.4 


31.1 


28.2 


Connecticut 


32.6 


34.3 


31.4 


Delaware 


27.8 


30.5 


28.8 


Dist. of Col. 


31.0 


30.1 


28.6 


Florida 


32.4 


31.1 


25.6 


Georgia 


25.4 


26.7 


25.0 


Hawaii 


n.a. 


17.3 


16.0 


Idaho 


34.5 


33.7 


30.3 


Illinois 


30.0 


27.8 


24.7 


Indiana 


37.2 


38.2 


27.1 


Iowa 


19.9 


21.9 


18.5 


Kansas 


29.7 


28.8 


25.9 


Kentucky 


28.9 


23.8 


20.2 


Louisiana 


48.0 


53.3 


51.0 


Maine 


28.9 


26.2 


25.0 


Maryland 


28.7 


26.5 


24.9 


Massachusetts 


33.6 


31.0 


26.5 


Michigan 


35.3 


34.6 


30.9 


Minnesota 


39.7 


35.9 


32.6 


Mississippi 


32.5 


33.0 


27.8 


Missouri 


28.7 


26.8 


23.8 


Montana 


38.8 


37.4 


35.9 


Nebraska 


23.2 


21.5 


19.8 


Nevada 


36.9 


33.6 


34.5 


New Hampshire 


31.8 


28.0 


25.5 



1957-1967 

-13.6 

-12.3 

n.a. 

-18.7 

-21.4 

- 6.4 
-10.2 

- 3.7 
+ 3.6 

- 7.7 
-21.0 

- 1.6 
n.a. 

-12.2 
-17.7 
-27.2 

- 7.0 
-12.8 
-30.1 
+ 6.3 
-13.5 

-13.2 
-21.1 
-12.5 
-17.9 
-14.5 
-17.1 

- 7.5 
-14.7 

- 6.5 
-19.8 



-22- 



TABLE 6 
Page 2 



Taxes on business as 
% of total taxes 



STATES 


1957 


1962 


1967 


1957-1967 


New Jersey- 


40.8 


37.2 


28.7 


-29.7 


New Mexico 


28.0 


36.5 


31.9 


+13.9 


New York 


35.2 


32.2 


31.1 


-11.6 


North Carolina 


32.5 


29.4 


28.0 


-13.8 


North Dakota 


23.2 


23.5 


22.8 


- 1.7 


Ohio 


31.4 


34.7 


33.4 


+ 6.4 


Oklahoma 


34.0 


31.0 


31.8 


- 6.5 


Oregon 


35.4 


34.5 


32.0 


- 9.6 


Pennsylvania 


38.2 


29.5 


28.2 


-26.2 


Rhode Island 


33.2 


28.5 


28.3 


-14.8 


South Carolina 


28.4 


27.0 


28.8 


+ 1.4 


South Dakota 


18.5 


19.3 


18.9 


+ 2.2 


Tennessee 


26.5 


27.2 


25.6 


- 3.4 


Texas 


52.1 


45.2 


39.8 


-23.6 


Utah 


38.2 


33.7 


29.0 


-24.1 


Vermont 


26.8 


26.2 


24.0 


-10.4 


Virginia 


37.2 


34.2 


26.6 


-28.5 


Washington 


30.6 


29.6 


28.3 


- 7.5 


West Virginia 


41.5 


36.1 


36.2 


-12.8 


Wisconsin 


35.5 


29.9 


26.9 


-24.2 


Wyoming 


40.3 


35.4 


40.1 


- 0.5 


Montana Rank 


6/48 


4/50 


5/50 





n.a. Data not available. 



_!/ Excluding unemployment compensation. 

Source: Estimates prepared by ACIR staff from data published 
by the Governments Division, U.S. Bureau of the 
Census, and U.S. Department of Agriculture. 



■23- 



TABLE 7 



SELECTED TAXES ON BUSINESS AS A PERCENTAGE OF TOTAL TAXES COLLECTED 
WITH AN INITIAL IMPACT ON BUSINESS, 9 WESTERN STATES, 1967 



Corporation Gross 
Property Net Income Receipts License Other Total 



Colorado 


68.2 


13.5 


7.1 


10.6 


.6 


100.0 


Idaho 


66.9 


15.4 


7.1 


10.3 


.3 


100.0 


Montana 


71.3 


9.9 


6.8 


7.3 


a. 6 


100.0 


North Dakota 


61.9 


8.1 


7.1 


14.3 


8.6 


100.0 


Oregon 


61.0 


16.0 


7.2 


15.5 


.4 


100.0 


South Dakota 


70.5 


1.6 


8.0 


19.4 


.5 


100.0 


Utah 


72.8 


12.7 


5.5 


5.2 


3.8 


100.0 


Washington 


40.6 


— 


49.1 


10.0 


.3 


100.0 


Wyoming 


89.8 


— 


4.1 


5.9 


.2 


100.0 


U. S. Average 


57.4 


13.8 


11.8 


11.6 


5.3 


100.0 



Source: Derived from Estimates of State and Local Taxes Initially Paid By 
Business Firms: 1957-1962-1967: ACIR, March 4, 1970 



-24- 



exception of Washington, are well above the national average in the per- 
centage of total business taxes collected through property taxation . Six 
of the nine western states rely less heavily than average on corporation 
net income taxes and all states except Washington get a smaller than aver- 
age percentage of revenue from gross receipts taxes. Thus, Montana's 
business tax structure is quite different from the national average, but 
it is similar in most respects to other states in the same geographic region. 

While these interstate comparisons cannot provide evidence that 
Montana's, or any other state's, corporation income tax is too high or too 
low, several meaningful conclusions can be drawn from the data. First, 
Montana relies on business taxes for a larger share of state and local 
taxes than does the average state . More significantly , Montana relies on 
business taxes for a greater share of total tax revenue than all but one of 
the states in the same geographic region . This may have an adverse eif- 
fect on industrial location in Montana . Second , the property tax is used 
more intensively in Montana as a source of business tax revenue than it 
is in most other states . This is primarily a result of constitutional restric- 
tions on state-local revenue sharing which has necessitated almost total 
reliance on property taxes to finance local schools and local government. 
Third, while the statistics show that the corporation license tax contri- 
butes a smaller percentage of total state tax revenue in Montana than it 



-25- 



does in other states, this does not indicate that corporations are failing to 
pay their fair share of state and local taxes . The evidence indicates that 
the mix of business taxes in Montana is considerably different than that in 
other states. The heavy reliance on local property taxes paid by businesses 
in Montana is partial explanation and justification for lower than average 
receipts from the corporation license tax. Overall, the total tax burden on 
businesses operating in Montana seems to be higher than the tax burden in 
most other states . 

This analysis shows that, on the average, Montana is doing quite 
well in requiring businesses to pay their share of the costs of state and 
local government. However, the questions regarding business taxation 
that are continually asked do not relate to averages, but are directed at the 
taxable status of particular firms operating in the state. It does not answer 
the questions if we note that business taxes, on the average, are high in 
Montana without addressing the problem of large corporations that pay no 
tax or a negligible amount of tax to the state. Consequently, the remain- 
der of this study focuses on the Montana Tax Law, its inequities, and the 
particular companies that seemingly earn income in Montana and escape 
most state and local taxes . 



-26- 



CHAPTER TWO 
FEDERAL AND STATE CORPORATION TAX LAWS 

The taxation of domestic corporations (corporations doing business 
in only one state) does not present any particular problems in Montana. 
All such corporations are registered with the Secretary of State and the 
Department of Revenue. Consequently, they are easy to find, their fi- 
nancial records are readily available, and most of them understand and 
comply with state tax laws . The problems faced by Montana and all other 
states concerns the taxation of interstate corporations . This area is re- 
gulated by Federal laws and court interpretations of the Interstate Commerce 
Clause of the Federal Constitution. It has become increasingly difficult, over 
the years, for any state to achieve what it considers to be fair taxation of 
interstate firms without discriminating unfairly against domestic firms. Before 
discussing Montana's methods of taxing corporations, it is necessary to briefly 
review some of the Federal legislation and court decisions that affect the states' 
powers to tax interstate corporations . 

The Interstate Commerce Clause is regarded by many as one of the 
most important sections of the United States Constitution in promoting the early 
industrial growth of the country. This section gave Congress the power to 
"regulate commerce with foreign nations and among the several states, and 



-27- 



and with the Indian tribes . " Congress was able to provide protection for 
new industries by insuring that interstate commerce was not taxed by the 
states and by a tariff system that protected American firms from foreign 
competition. The protection and stimulation of interstate businesses by 
Congress and the courts was instrumental in establishing an economic 
system that bound the states together into a strong Nation . During this 
early period in American history, states were not allowed to levy any taxes 
that might be construed to inhibit the profits of interstate corporations . 
However, by the beginning of the twentieth century, interstate businesses 
did not need total protection from state taxes. On the contrary, the states 
were demanding tax money from firms engaged in interstate commerce which 
used state services . During this period , only indirect taxes could be levied 
on interstate commerce. This allowed a state to tax interstate commerce 
only if the firm had some intrastate business in the state. Firms engaged 
completely in interstate commerce could not be taxed. During the 1930s 
and 1940s, the courts started to change the philosophy of the Interstate 
Commerce Clause. The opinion emerged that the commerce clause was not 
designed to help multistate companies escape their share of state taxes . In 
1959, this new philosphy was fully implemented by the United States Supreme 
Court in two cases involving the Northwestern Portland Cement Co. and the 
Stockham Valves and Fittings Company. The majority opinion of the court 



-28^ 



held that "net Income from the interstate operations of a foreign corporation 
may be subjected to state taxation provided the levy is not discriminatory 
and is properly apportioned to local activities within the taxing state forming 
sufficient nexus (contact) to support the same. " This was the first time that 
a state tax was upheld where interstate commerce exclusively was involved . 
This decision upset the business community because of the multitude of state 
taxes to which interstate commerce would be subjected. Companies claimed, 
with some justification, that the cost of complying with the tax laws of fifty 
states would be prohibitive and the effect could be to tax interstate corpor- 
ations on more than one hundred percent of their income. Consequently, 
Congress passed, and the President signed. Public Law 86-272 on September 
19,1959. This law, in effect, reversed the Supreme Court's decision regard- 
ing the taxation of interstate commerce by the states. 

First, Public Law 86-272, prohibits states from taxing corporations 
whose only activity in the state is soliciting orders through the use of 
salesmen . Second , a corporation cannot be taxed if sales are made by an 
independent agent. That is, salesmen who are not strictly employees of the 
parent corporation . This law allows many corporations to sell their products 
in a state without being subject to state corporation income taxes. Thus, 
state tax laws invariably work a hardship on domestic firms producing and 
selling the same products as corporations engaged in interstate commerce. 



-29- 



The domestic company has the added burden of state taxes which must be 
reflected in the price of its products or in its profits . Foreign corporations 
that do not pay the state tax will either sell products at lower prices or 
realize a greater profit on activity in the state than the domestic corpora- 
tions . 

There are, basically, two methods that a state may use to tax the 
income of corporations . A state may impose a direct net income tax or a 
tax on the privilege of doing business in the state based on net income. 
While the effect of the two is basically the same, they each have certain 
legal advantages. Montana has used a privilege tax since 1917. The cor- 
poration license tax is a tax on the privilege of doing business in the state 
and the tax is assessed against the net income of corporations . The main 
advantage of the privilege tax is that it reaches some income that is not 
taxable under a direct income tax. For example, the interest earned from 
government bonds is not taxable under a direct income tax, but it can be 
taxed through the privilege tax. Thus, the privilege tax is advantageous 
for taxing financial organizations and other corporations that earn income 
from government bonds . This is a large source of income to many corpor- 
ations operating in Montana. 

The major disadvantage of the privilege tax is that it cannot be 
levied against the income of corporations engaged strictly in interstate 



-30- 



commerce. This was inconsequential until the Northwestern Portland Cement 
case because, until that time, no state taxes could be levied on interstate 
commerce. In 1971, Montana adopted a Corporation Net Income Tax to be 
applied to those companies not taxable under the Corporation License Tax. 
This so called "double barreled" corporation net income tax was enacted 
to allow Montana to tax those corporations that are taxable under Public 
Law 86-272, but are not taxable under the privilege tax. Obviously, the 
exclusions in 86-272, mentioned above, limit the number of firms that are 
liable for the net income tax. Still, experience during the first year of its 
operation indicated an increase in taxes collected by the state of more than 
one hundred thousand dollars . 

Montana's corporation tax laws are superior to those in most states. 
The double barreled tax allows the maximum number of foreign corporations 
to be subject to state taxes and the provisions for apportioning the income 
of foreign corporations are the same as those recommended by the Multi- 
state Tax Compact. In addition, Montana does not allow a deduction for 
Federal taxes paid , as is the practice in many states . This means that the 
state tax structure is proportional, rather than regressive as is the case 
when Federal taxes are deductible on the state return . 

Montana has gone about as far as it can in passing legislation des- 
igned to tax foreign corporations. Still, because of the provisions in Federal 



-31- 



laws and the courts interpretations of the Commerce Clause, many companies 
seem to escape Montana taxes. 



-32- 



CHAPTER THREE 
THE TAXATION OF INTERSTATE COMMERCE IN MONTANA 

The discussion in this chapter is quite different than any found in 
previous studies of corporation taxes in Montana. The basic reason is that 
while other studies have explained the laws that relate to the taxation of 
interstate commerce, they have not relieved the public or the Legislature 
of the feeling that poor state laws and bad administration are the reasons 
that many foreign corporations pay no income tax to the State of Montana . 
At the outset, it should be emphasized that the corporations discussed in 
this chapter are complying with all State and Federal Laws. Consequently, 
any criticism of the taxable status of various corporations or industry 
groups that result from this analysis should be directed principally at 
Public Law 86-272, not at the industries or corporations involved. 

Restrictions in the United States Constitution on the state's power to 
tax interstate corporations are found in Article 1, Section 8, the Commerce 
Clause; Article 4, Section 2, which prohibits a state from discriminating 
against citizens of another state; and the Fourteenth Amendment which 
protects the civil rights of individuals and corporations against the asser- 
tion of rights on the part of the states. Naturally, a state has the power to 
tax a corporation "doing business" within its jurisdiction, but a firm 



-33- 



definition of "doing business' has never been formulated. Public Law 
86-272, answered some of the questions by limiting the states' power to tax, 
but questions not specifically covered by 86-272 still must be decided in- 
dividually by the Federal Courts system. Thus, many of the guidelines 
which determine whether or not a state can tax a multistate corporation are 
found in court transcripts , not in Federal or State statutes . 

Two of the specific exclusions in 86-272 contribute to a tax system 
where all firms earning income in the state are not taxed . The first of these 
prohibits the taxation of corporations that merely solicit business from within 
a state . The corporations may have any number of full-time salesmen working 
and living in the state, but if the orders they solicit are not final until ap- 
proved by out-of-state offices of the corporation, the company cannot be taxed. 
Most companies that specialize in door-to-door sales campaigns are very care- 
ful not to violate the provisions of Public Law 86-272 that limit their tax liab- 
ility to their home state . The State of Montana has never received a corpor- 
ation license tax return from the Encyclopedia Britannica Corporation; the 
American Corporation, publishers of the Encyclopedia Americana; the Fuller 
Brush Company; or Avon Beauty Salons Inc. In fact, we are unable to find 
one major United States corporation which specializes in door-to-door sales 
campaigns that has ever filed a tax return in Montana. All such companies 



-34- 

are careful to have all sales that are written in Montana approved by an out- 
of-state office and they maintain no inventories, warehouses, or sales offices 
in the state that might make them liable for Montana's corporation income taxes. 
As such, they are protected by the solicitation exemption of Public Law 86-272. 

; Companies that depend on mail order solicitations are also immune 

from state corporation taxes. Thus, mail order houses, seed and plant 
dealers , and others who depend on solicitation through the mails are not 
liable for state taxes. The Time-Life Corporation, Newsweek Inc. , Readers 
Digest, and other major magazine corporations pay no income tax to the 
various states in which they solicit orders even though the majority of 
their products are sold in states other than the one in which their main 
offices are located . All of these firms are considered to be engaged exclu- 
sively in interstate commerce and not subject to state regulation or taxation. 

While the tax treatment of corporations that only solicit sales in the 
state may seem to be inequitable, the important point is that there is nothing 
the state can do to correct the situation . The exemption afforded to these 
companies is a part of Federal, not State law. 

The second major exemption in Public Law 86-272 involves independent 
collection agents . This exemption allows a corporation to have any number 
of dealers selling its products in a state as long as the dealers are not 



-35- 



technlcally employed by the parent company. These Independent dealers 
may maintain offices, advertise the product they sell, and keep an inventory 
of merchandise. Under normal circumstances, these actions would make the 
parent corporation subject to state taxes. However, as long as the dealers 
are independent of the parent corporation, the state may not tax the parent 
corporation. Naturally, the independent dealers must pay all pertinent 
state taxes. A few examples may clarify this provision of Public Law 86-272. 

Coca Cola and Pepsi Cola are both bottled and distributed in Montana 
by local bottling companies franchised by the parent companies. Pepsi Cola 
operates strictly through independent distributors, bottling companies that 
are not technically owned or controlled by the parent company. Consequently, 
the Pepsi Cola Company does not file a return or pay any corporation taxes 
to the State of Montana. The Coca Cola Company, on the other hand, has 
operations that exceed those allowable under Public Law 86-272. Although 
the operations of the two firms are parallel in most respects, the Coca Cola 
Company has a negligible amount of payroll and owns a small amount of 
property in Montana. This is sufficient to establish nexus in Montana for 
tax purposes. Thus, Coca Cola of Atlanta, Georgia, pays corporation taxes 
to Montana based on the total apportioned income of the parent corporation . 
Although the firms are seemingly identical, one is taxable in Montana and 
the other one is not. 



-36- 



The independent distributors exemption is utilized by many other 
corporations that sell products and earn income from operation in Montana. 
Anhauser Bush, producer of Budweiser Beer; the Olympia Brewery; Sicks 
Brewery, producer of Rainer Beer; and the Shasta Beverage Company are 
all examples of firms selling in Montana through independent distributors. 
None of these corporations file returns or pay corporation taxes in Montana. 

None of the major tobacco companies (R.J. Reynolds, American 
Tobacco Company, Liggett & Meyers) file returns in Montana. All ciga- 
rettes sold in Montana are imported, stored, and dispensed by independent 
distributors. None of the manufacturing companies have, as yet, established 
sufficient contact with the state to make them liable for state corporation 
taxes. Here again, the independent distributors are liable for all applicable 
state taxes. 

Perhaps the strangest twist in Public Law 86-272, as it applies to 
Montana, concerns the manufacture and sale of liquor. As far as we can 
ascertain, the only liquor producer that pays corporation taxes to Montana 
is Alpha Industries of Helena, Montana, producer of Lewis & Clark Gin and 
other products. All other liquors sold in Montana are imported, warehoused, 
and sold by an independent distributor . The parent corporations are engaged 
strictly in interstate commerce and may not be taxed by the state. 



-37- 



The interesting point with respect to liquor is that the independent 
distributor for these companies is the State Liquor Control Board. Thus, 
the state cannot tax the profits of the manufacturer or the independent dis- 
tributor. In addition, there are no property taxes collected on liquor ware- 
housing facilities, and there is no chance that the manufacturers will ever 
establish sufficient nexus to be liable for state corporation taxes. In fact, 
foreign corporations are prohibited by state law from establishing sufficient 
contact with the state for corporate tax purposes. 

The use of independent distributors to sell the products of foreign 
corporations is not unique to the tobacco and beverage industries. Most 
of the products appearing on supermarket shelves in Montana are produced 
by corporations that pay no income tax to the state regardless of the volume 
of their sales in Montana. In fact, if a corporation produced a product in 
Idaho and made one hundred percent of its sales in Montana through super- 
markets and other independent distributors, the provisions of Public Law 
86-272 would preclude any taxes from being levied against the manufacturer 
by the State of Montana. 

The solicitation and independent distributor exemptions are the main 
features of Public Law 86-272 that protect interstate commerce from state 
taxes. However, Public Law 86-272 is not the only Federal limitation on the 



-38- 



states' power to tax multlstate torporatiofts . Supreme Court interpretaticins 

of the United States Constitution are also limiting , if not as explicitly as Federal 

Law. 

One example of the courts influence on state corporation taxes involves 
occasional sales . The courts have held that a corporation making an occa- 
sional sale in a state or conducting business that can be construed to be an 
isolated act, is not subject to state taxes. Although no general rule is given 
as to how much business and how many acts constitute "an occasional sale" , 
the intentions of the corporation with respect to future operations in the 
state are usually considered by the court. In Pennsylvania vs. McKeever, 
the court said: "to be doing business in this state implies corporate con- 
tinuity of conduct in that respect; such as might be evidenced by the in- 
vestment of capital here, with the maintenance of an office for the transaction 
of business, and those incidental circumstances which attest the corporate 
intent to avail itself of the privilege to carry on business. In short, it 
would have to appear that the corporation and its officers intended to es- 
tablish a continuous business and not one of temporary character" ■'•. Thus, 
a large corporation may sell its products in Montana on an occasional basis, 
but if it does not clearly show intentions of carrying on a permanent business 
in the state, it is not liable for taxes on the income it earns in the state. 



1 (1905) 183 N.Y. 98,75NE935 



-39- 



We have no examples of such an occurrence in Montana, but it would appear 
that a firm could engage in sufficient activity in Montana to be taxable in 
spite of Public Law 86-272, but escape tax under the occasional sale ruling. 
For example, a foreign corporation could sell a multi-million dollar piece 
of industrial equipment to a Montana corporation and not pay tax to the 
state on the profits from the sale. This would be the case if the foreign 
corporation did not show an intent to engage in future business activities 
in the state . 

Despite the exemptions noted above and others, there are more than 
1,200 foreign corporations paying corporation taxes to the State of Montana. 
These firms have sufficient connections with the state to make them liable 
for state taxes. Generally, a firm is taxable in Montana if it (1) has a sales 
office in the state, (2) pays employees working in Montana that are not 
merely solicitors or salesmen, (3) owns property in Montana, or (4) main- 
tains a stock of goods or repair parts in the state. Considering the provi- 
sions of Public Law 86-272, it is surprising that so many corporations operate 
in a manner that makes them taxable in Montana. Of course, taxes paid to 
Montana are generally deductible from taxable income in other states and on 
the Federal corporation income tax return . 

In many cases , the Federal Law results in the state being able to tax 
one foreign corporation , but not another on the basis of relatively minor 



-40- 



differences in the business operations of the two firms. For example, 
automobile manufacturers are, generally, not taxable in Montana. The 
manufacturers produce and stockpile automobiles for sale to independent 
distributors throughout the Nation. The vehicles are shipped to dealers 
in interstate commerce and most manufacturers do not have sufficient 
operations in Montana to establish a taxable status . Of the leading manufact- 
urers, only General Motors is taxable in Montana. This is because General 
Motors maintains two warehouses in Montana. Since cars are brought into 
Montana by the parent company and then sold to distributors, General 
Motors is engaged in intrastate business in Montana. As a result, Montana 
is entitled to tax an apportioned share of the entire income of the General 
Motors Corporation. While our share is not large, it is sufficient to make 
General Motors one of the larger corporate taxpayers in the state. 

At the same time. Ford, Chrysler, and American Motors pay no cor- 
porate taxes to Montana. Their vehicles are sold directly to independent 
dealers from out-of-state and they are stored in warehouses which are 
not owned by the parent companies. None of these corporations have ever 
filed a corporation license tax return in Montana. The Department of Revenue 
is currently investigating whether or not these corporations are liable for 
taxes under the new corporation income tax law, but in all likelihood, 



j^Ta« ' -iBaaa:^na? r, 



-41- 



their activities are sufficiently limited to preclude state taxation under 
Public Law 86-272. 

This chapter has not covered all of the provisions in Federal Law 
and court decisions that affect the states' power to tax interstate commerce. 
However, the discussion should be sufficient to illustrate what a complicated 
and, at times, inequitable system of corporate taxation has emerged over 
the years . The confusing and conflicting rules governing interstate com- 
merce make it necessary for all states to employ highly qualified auditors, 
lawyers , and economists in an effort to deal fairly with both domestic and 
foreign corporations. The lack of clarity in the Federal Laws also contri- 
butes to the public distrust of both corporations and tax officials who are 
conscientiously attempting to comply with Federal and State laws . 

The solution to the problems faced by the states in attempting to 
raise revenue from interstate corporations and to the problems of the cor- 
porations dealing with tax laws of a large number of states would seem to 
be in good Federal legislation . The states and the corporations need a 
uniform set of regulations to follow that clearly define taxable status and 
insure that the aggregate burden placed on interstate businesses by the 
states is not excessive. At present, it is simply impossible to determine 
whether or not a corporation is liable for state taxes without a complete 



-42- 



and expensive investigation of its business conduct. This is unfair to both 
the corporations and the states. It is also nearly impossible for the public 
to evaluate the efficiency of tax agencies or the performance of corporations 
in paying their share of the cost of state and local governments. 



-43- 



CHAPTER FOUR 
AN ANALYSIS OF MONTANA CORPORATION TAX RETURNS 

The most valuable section of any tax study in generating new infor- 
mation is an analysis of recently filed tax returns. The Legislative Council 
report and the Montana Fiscal Affairs Study conducted extensive analysis 
of Corporation License Tax returns and some of the results of those studies 
are summarized in the introduction of this report. The Fiscal Affairs Study 
is reasonably current and contains data from an expensive and exhaustive 
enumeration of all returns. We have not attempted to duplicate this infor- 
mation, but have, instead, concentrated on several questions that can be 
answered with a more selective analysis of corporation tax returns. 

One of the major problems faced by researchers interested in cor- 
porate taxation in Montana is the lack of reliable data. Every time a new 
study is undertaken, a procedure for gathering data must be designed. In 
the past the desired information has been requested from the Board of 
Equalization and gathered by Department employees . This is an extremely 
time consuming process and, unfortunately, each study is slightly different 
from preceding studies, so the information supplied is not always comparable 
from one study to the next. Consequently, one purpose of this analysis was 
to investigate the feasibility of providing statistical data from corporation tax 



-44- 



returns on an annual basis . The returns are quite complicated and often 
contain many schedules (returns containing fifty pages or more are not a ' ■ 
rarity) . However, the information is of sufficient importance to justify 
data processing of corporation license tax returns. An attempt will be made 
to computerize corporate tax data during the next fiscal year . If this pro- 
gram is successful, the data needed by researchers and legislators to properly 
evaluate corporate taxation will be available annually . 

The chapter dealing with state taxation of interstate commerce ex- 
plained some of the ways that corporations escape state corporation taxes 
even though they earn income from their operations in Montana. This 
chapter discusses who pays the tax and some of the methods that corpor- 
ations may use to reduce their tax burden . The first section contains an 
analysis of the 100 largest corporate taxpayers in Montana. 

There are approximately 8,700 corporations in the files of the Depart- 
ment of Revenue that have paid, or are currently paying, the Corporation 
License Tax . Seven hundred of these firms are inactive and pay no tax; 
1,500 are inactive in Montana, but continue to file an information return 
and pay the fifty dollar minimum tax; 2,100 are small business corporations 
that pay a ten dollar filing fee; 1 , 400 are active corporations which pay the 
fifty dollar minimum tax; and 3,000 corporations pay more than fifty dollars 



-45- 

per year in corporation license taxes. In fiscal year 1970, the average 
tax paid by the 3,000 corporations paying more than the fifty dollars min- 
imum was 3,100 dollars. 

Nine million five hundred and ninety-five thousand nine hundred and 
four dollars were collected from the corporation license tax in fiscal year 1970. 
Of this amount, 5,968,357 dollars, or 62.2 percent of the total was collected 
from the 100 largest firms. Three million six hundred and sixty-four thousand 
five hundred and fifty-five dollars, or more than thirty-eight percent, of the 
total tax was collected from eight firms that pay taxes in excess of 100, 000 
dollars each . These statistics point out that the burden of the tax is not 
uniformly distributed among the corporations doing business in Montana. 
The 2,900 firms paying more than the minimum tax, but less than the 100 
largest firms, had an average tax liability of 1,250 dollars in fiscal year 197C. 
The 100 largest taxpayers had an average corporation tax burden of 59,684 
dollars . 

The number of domestic and multistate firms comprising this group 
is remarkably close. Fifty-two firms were multistate corporations that 
apportioned income to Montana and forty-eight corporations were domestic 
and conducted all of their business in the state. The forty-eight domestic 
corporations paid a total of 1,209,679 dollars in corporation license taxes 
while the multistate firms paid 4,758,678, or almost four times as much. 
The fifty-two apportioning firms in this group paid almost fifty percent of 
the total corporation license tax collected in fiscal year 1970. 



-46- 



Tdblcr, riqlit anc] Nine show financial data for the 100 largest foreign 
.uul domestic corporations paying taxes in Montana. The multistate power 
companies pay the most tax of any foreign or domestic corporations. The 
three apportioning firms in this group paid almost two million dollars in 
corporate license taxes in 1970. The greatest number of firms are In the 
wholesale-retail category . This category includes firms which would be 
considered manufacturers nationally, but whose main business In Montana 
consists of selling products either through wholesale or retail outlets . The 
twenty apportioning firms in this category paid 656,997 dollars in corporate 
taxes in fiscal year 1970. 

Interest is usually expressed in an alternative to Montana's system 
of taxing the income of corporations and a gross receipts tax is almost always 
suggested as the principal alternative . Table Ten presents data from the 
forty-eight domestic and fifty-two foreign corporations relating to a gross 
receipts tax . A gross receipts tax is one method Montana could use to tax 
the non-business income of foreign corporations. This income (dividends 
and interest) generally is not taxable except in the home state of corporations. 
Several states use this provision to encourage industrial location in their 
state. By passing laws that exempt interest and dividends from state taxes, 
a company that locates in the state escapes all state taxes on this income 
since it cannot be taxed by other states and is not taxed by the home state. 



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-48- 



TABLE 9 



FINANCIAL DATA FROM TAX RETURNS OF 48 LARGEST 
DOMESTIC CORPORATIONS FILING RETURNS IN MONTANA, 1969-70 





Number 


Total 


Taxable 






of 


Gross 


Income 


Tax 




Firms 


Receipts 


(Net Income) 


Liability 


Finance & Insurance 


4 


4,821,745 


912,086 


57,006 


Power 


1 


4,502,183 


484,402 


30,275 


Agriculture 


3 


1,219,789 


685,883 


42,868 


Forestry 


6 


37,607,070 


3,649,269 


228,078 


Construction 


5 


10,995,568 


1,023,095 


64,470 


Manufacturing 


8 


99,626,186 


5,323,525 


332,722 


Wholesale-Retail 


10 


69,890,594 


3,536,955 


221,047 


Services 


5 


6,150,819 


1,628,637 


101,790 


Communication 


1 


3,973,690 


419,363 


26,210 


Mining 


1 


2,852,483 


346,006 


21,625 


Oil and Gas 


4 


10,129,478 


1,337,386 


83,588 


Total 


48 


251,769,605 


19,346,607 


1,209,679 



-49- 



Table Ten indicates that on the average, a gross receipts tax would shift 
the burden from foreign corporations to domestic corporations. That is, 
the present method used to apportion corporate income to Montana results 
in a larger tax base from multistate corporations than could be obtained 
from a gross receipts tax even though the gross receipts tax would ap- 
portion some of the corporations non-business income to the state. Rather 
than changing Montana's tax system so that non-business income is taxed, 
it would be better to insist on federal legislation that would disallow any 
income earned by a corporation to be classified as non-business income. 
Table Ten points out that the current tax represents .53 percent of appor- 
tioning corporations gross receipts and .48 percent of the gross receipts 

... .4S>S .■ ■ 

of domestic corporations . Table Ten illustrates another disadvantage 
of gross receipts taxes. In order to maintain the current burden distri- 
bution , the state would have to adopt a variable rate schedule and tax 
industries at different rates. According to the table, the rates would have 
to vary from 3.51 percent of the gross receipts of domestic agricultural 
corporations to . 15 percent of the gross receipts of foreign oil corporations. 
(The tax on oil firms is a smaller percentage of gross receipts than that of 
other industries principally because of the depletion allowance available to 
the oil industry)'. A business tax system with different tax rates applied to 
different industries is unwise because it can be subject to strong political 



-50- 



TABLE 10 



CORPORATION LICENSE TAX PAID AS A PERCENT OF 
GROSS RECEIPTS FOR DOMESTIC AND APPORTIONING CORPORATIONS, 1969-70 









Tax as % 


of 


Tax as % of ' 




Gross Receipts 


Gross Receipts 


Gross Receipts 


Gross Receipts 




Apportioning 


Domestic 


Apportioning 


Domestic 1 




Corporations 


Corporations 
4,821,745 


Corporations 


Corporations ' 


Finance & Insurance 


1.18 1 


Power 


104,742,084 


4,502,183 


1.87 




.67 1 


Agriculture 


— 


1,219,789 


— 




3.51 


Forestry 


— 


37,607,070 


— 




.61 1 


Construction 


15,911,403 


10,995,568 


.47 




.59 1 


Manufacturing 


58,660,399 


99,626,186 


.33 




.33 


Wholesale-Retail 


297,328,627 


69,890,594 


.22 




.32 1 


Services 


460,790 


6,150,819 


2.42 




1.65 1 


Communications 


62,657,937 


3,973,690 


1.61 




.66 


Mining 


10,839,813 


2,852,483 


.66 




.76 1 


Oil & Gas 


110,803,497 


10,129,478 


.15 




.83 ' 


Transportation 

* 


96,380,581 


— 


.17 




~ 


Total 


898,610,394 


251,769,605 


.53 




.48 ' 



-51- 



influences . Those industries with the most political influence are likely to 
end up with the lowest tax rates . 

During the past year Montana and other states belonging to the Multi- 
state Tax Compact have been pressuring corporations to apportion more of 
their non-business income among the states in which they are taxable. It 
is intolerable for a corporation to claim that millions of dollars of dividends 
and interest income were not a direct result of the firm's total operations. 
In fiscal year 1970, one firm among the 100 largest reported non-business 
income in excess of 344 million dollars. This income, from dividends and 
interest, could not be taxed by any state other than the corporation's home 
state. This firm is headquartered in California, one of the states that exempts 
dividends or interest from taxation as an incentive to encourage corporations 
to locate in the state. Consequently, this 344 million dollars was not subject 
to any state taxes . If the non-business income of this firm had been ap- 
portioned and taxable in Montana, it would have increased the corporation's 
tax bill by 100,013 dollars. Table Eleven shows the effect of non-business 
income of the fifty-two largest multistate firms on the Montana Corporation 
License Tax. Column one is non-business income attributed to Montana and 
taxable as net income under the present tax laws . Column two shows the 
amount of money that would be taxable in Montana if all non-business income 
were apportioned to the states as is other income. Column four shows the net 



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-53- 



increase in tax to Montana if non-business income were apportioned rather 
than allocated to the state in which it is earned . Montana would have real- 
ized an additional 623,308 dollars in taxes if non-business income had been 
apportioned to the states in the 1970 Fiscal Year. Unfortunately, federal 
action is required if this income is to become taxable to the states . The 
largest increase would have been in taxes paid by the oil and gas producers 
who would have paid an additional 209, 363 dollars in corporation license 
taxes. At present, apportioning oil companies seem to pay the least taxes 
of any industry in relation to their gross receipts which could be allocated 
to Montana . 

Foreign corporations, on the average, pay higher taxes in relation 
to their gross receipts than do domestic corporations. In some cases, it 
would seem that tax equity would demand even more taxes from apportioning 
firms than they are now paying. However, it is beyond the states' legal 
authority to tax some income of these firms so the inequities will continue 
to exist until federal legislation is enacted which eliminates the concept of 
"non-business" income. 

One additional problem relating to the taxation of corporations that 
should be mentioned is the loss carry back deduction passed by the 1971 
Legislative Assembly. On the surface, the concept of a loss carry back 



-54- 



seems to be reasonable and fair to the corporations and to the state. The 
reasoning is as follows: 



NET INCOME NET INCOME NET INCOME 

Year 1 Year 2 Year 3 

Company A 50,000 50,000 50,000 

Company B (50,000) 50,000 100,000 



Without the loss carry back provision, each firm will pay the 
same amount of tax to the state (based on $150,000 of positive income 
over the three year period) even though firm B's net income over the 
period is only 100,000 dollars and firm A's total net income was 150,000 
dollars. A two year loss carry back provision allows firm B to deduct 
the loss incurred in year one from income earned in year two in comput- 
ing the corporation tax. The effect is to allow firm B to pay no tax in 
year one and year two and pay tax on 100, 000 dollars of income in year 
' three. Thus, both firms pay tax on the net income they earned over the 
three year period. 

Those who support the concept of the loss carry back argue that 
it produces a fairer distribution of the tax burden among corporations. 
Opponents of the loss carry back point out that it allows firm B to operate 
in Montana and enjoy the benefits of government services for two years 
without contributing anything in taxes towards the cost of government 



■55- 



services. In any event, the loss carry back will have a profound effect 
on state revenues and the distribution of taxes between domestic and 
multistate corporations, especially if the courts rule that the carry 
back applies retroactively. The initial impact of the loss carry back 
will be a loss in revenue from the corporation license tax of two 
million dollars or more. Most of this will be in the form of refunds of 
taxes already paid. After the initial adjustments the state will continue 
to collect approximately one million dollars less per year than it would 
have if the loss carry back provision had not been implemented. Since 
most of the state's major corporate taxpayers are multistate firms, the 
primary effect of the loss carry back will be to reduce the tax on for- 
eign corporations. 

Table Twelve shows the refunds that could be claimed by eight 
multistate firms with operations in Montana under retroactive loss carry 
back. The situation with these firms is similar to that of corporation B 
in the example discussed earlier. If firm B had paid tax on the 50,000 
dollars earned in year two and then a loss carry back law was passed 
retroactively, firm B could file an amended return deducting the loss in 
year one from income earned in year two. The state would then be re- 
quired to refund the tax paid on income earned in year two. The eight 
companies listed in Table Twelve are all multistate corporations and the 



-56- 



TABLE 12 



POTENTIAL REFUNDS DUE TO RETROACTIVE LOSS CARRY BACK 
PROVISION OF CORPORATION LICENSE TAX 



Corporation Refund 



1 
2 
3 
4 
5 
6 
7 
8 

Total 



$ 


69, 


,404 




386, 


,626 




59, 


,899 




61, 


,521 




218, 


,367 




173, 


,258 




20, 


,056 




56, 


,334 


$1 


,045, 


,465 



-57- 



total refunds that will be available to these corporations is in excess of one 
million dollars . 

Despite the problems involved with the corporation license tax , it 
is as good a system for collecting revenue from major corporations as the 
state could devise. In general, it is superior to a gross receipts tax and, 
coupled with the new corporation income tax, Montana is taxing th^ maximum 
number of corporations operating in the state. Most of the problem areas 
that exist in Montana are beyond state control and will only be corrected by 
federal legislation dealing with the taxation of interstate commerce. 

The remainder of this chapter is devoted to a discussion of small 
business corporations operating in Montana. This is one area that has not 
received individual attention in other tax studies even though small business 
corporations represent a sizeable portion of Montana's business activity. 

There are three requirements that a business must meet if it is to 
qualify for the small business option under Montana's corporation license 
tax laws. First, the company must have fewer than eleven stockholders; 
second, all stockholders must be residents of Montana; and third, the cor- 
poration must issue only one class of stock . Any business meeting these 
criteria may file tax returns as an electing small business corporation. 
There are several advantages to incorporation for small or family owned 



-58- 



businesses . A small business corporation enjoys all the legal benefits of 
a regular corporation, including access to the courts, limited personal 
liability for the shareholders , and the ability to raise larger amounts of capital 
by selling shares in the business . The emphasis in this report is on the 
effect the small business option has on state corporation tax revenue. 

Corporations that elect to be taxed under the small business option 
file a corporation tax return which gives all the financial information re- 
quired of a normal corporation. There is a ten dollar filing fee payable at 
the time the return is filed . The income that would normally be taxed under 
the corporation license tax is then distributed to the stockholders of the 
small business corporation on the basis of stock ownership. Each stock- 
holder must report this income on the individual income tax return and 
pay personal income taxes on the corporate profits the same as he would 
on other types of income. Thus, the net income of small business corpor- 
ations is taxed under the individual income tax law, not the corporation 
license tax law . Consequently , the total corporate tax collected in Montana 
is understated by the amount of the tax from snail business that is credited 
as individual income tax collections. 

There are 2, 100 small business corporations listed in the files of the 
Department. 1,473 of these firms were active and filed returns in fiscal year 1970, 



-59- 



The remainder are either new filings since 1970, or inactive corporations 
that no longer file returns. Financial information was taken from the returns 
of all corporations that filed returns in 1970 for an analysis of the impact of 
the small business option on state tax revenue. 

The 1,473 small business corporations that filed returns in 1970 reported 
total net (taxable) income of $17,946,353. Since the average effecMve rate o: 
taxation on Montana adjusted gross income was 2.18 percent in calendar year 
1969, approximately 391,230 dollars of corporate small business taxes was 
collected and reported as individual income tax. In addition, 14,730 dollars 
were collected from small business corporation filing fees . The total tax col- 
lected from these businesses was 405,960 dollars. 

It is interesting to compare the tax actually paid on the income earned 
by small business corporations with the amount they would pay if they were 
taxed as normal corporations. First, all small businesses pay a minimum tax 
of ten dollars rather than fifty dollars paid by normal corporations. There 
were 508 firms with income of less than 800 dollars in fiscal year 1970. 
These firms paid a total of 5,080 dollars in corporate taxes under the small 
business option, but would have paid 25,400 dollars if they were subject to 
the normal fifty dollar minimum tax that applies to other corporations . The 
remaining 1,235 small businesses had positive income of 17,946,353 dollars 



-60- 



which was taxed as personal income . The shareholders in these firms paid 
approximately 400,800 dollars in individual income taxes and in corporation 
filing fees. If these firms had been subject to the corporation license tax 
rate of 6.25 percent, they would have paid taxes amounting to 1,121,647 
dollars. Thus, the initial loss in tax revenue attributable to the small bus- 
iness option was 741,087 dollars in fiscal year 1970; but, this is only part 
of the cost of the small business option. 

Small business corporations that sustain a loss on operations also 
distribute this loss among the shareholders of the firm and the corporate 
loss many be deducted from any other income the shareholder may have. The 
508 firms with net income of less than 800 dollars showed a total loss on op- 
eration of 5,548,494 dollars. If these losses were used to offset other income 
earned by the shareholders of the corporations, it cost the state approximately 
231,650 in personal income taxes. Coupled with the losses discussed previ- 
ously, the total cost in tax revenue of the small business option amounted to 
more than 972,000 dollars . This is almost ten percent of the total corpor- 
ation tax collected in 1969-70. 

While it may be justifiable for the state to offer tax incentives to small 
businesses, it should be remembered that the size of the corporation has noth- 
ing to do with qualifying for the small business option and its tax advantages. 



-61- 



In fact, many small business corporations have greater total sales and income 
than many regular corporations that pay taxes under the higher corporation 
license tax structure. Tax neutrality demands that economic decisions be 
based on business conditions and circumstances, not on differences in the 
tax treatment of alternative business structures. The decision to form a cor- 
poration, a partnership, a small business corporation, or a sole proprietor- 
ship should be based on the type of organization that offers the best business 
advantages to the firm , not on the tax advantages available under one of the 
options. Montana's small business option is undoubtedly patterned after the 
federal tax provisions , but it should be noted that not all states with corporate 
taxes based on federal law allow the small business option. North Carolina, 
for instance, specifically excludes this provision in their state corporation 
tax system. 

There are several other advantages to persons who operate small bus- 
iness corporations . One of these is income splitting . This is probably most 
noticable in family farms and other family corporations. By making all family 
members shareholders in a family corporation, the profits on the business 
can escape the higher tax rates of the individual income tax. For example, 
a sole proprietor of a family business with taxable Income of 10,000 dollars 
would pay personal income taxes on this amount. If the business were incor- 
porated with five family members as stockholders, each member would pay 



-62- 



tax on only 2,000 dollars of income and, thus, remain in the lowest taxable 
bracket. Four hundred and fifty, or 30.5 percent of 1,473 small business 
corporations filing returns in 1970 were farms and ranches although less 
than seventeen percent of state employment and less than ten percent of 
total personal income in Montana is earned on farms . 

The deductibility of compensation paid to officers of small business 
corporations is also of interest. Compensation of officers is a legitimate 
business expense as is depreciation, salaries of employees, and the pur- 
chase of raw materials. The small business option, however, allows cor- 
porate losses to be deducted from individual income tax returns of corporate 
shareholders . Since shareholders are typically the officers of small business 
corporations , the deduction for compensation to officers seems to be allowed 
twice. For example, a small business corporation with one major shareholder 
owning ninety-nine percent of the stock, could end the taxable year in the 
following position. Business income after all deductions except for the com- 
pensation of officers is zero . The president and principle stockholder of the 
corporation is paid a salary of 10,000 dollars. The result is 10,000 dollars 
of personal income to the president and a 10,000 dollar loss on operations to 
the corporation . The loss on operations is distributed to the shareholders 
on the basis of stock ownership. The corporation president and major 
stockholder is credited with a 9,900 dollar loss on the business operations. 



-63- 



This loss is deductible on his individual income tax return. Thus, the 
president has received 10,000 dollars of income from the corporation and 
may deduct 9,900 dollars of corporate losses leaving him with 100 dollars 
of taxable income prior to all the other deductions allowed under the Indi- 
vidual Income Tax statutes. 

Not all of the small business corporations which operated at a loss 
in 1970 were able to pay compensation to officers. However, 231, or forty- 
five percent, of the 508 firms showing a corporate loss realized this loss 
partly because of the deduction of compensation to officers. These 231 
corporations recorded officers compensation of 2,610,723 dollars and corporate 
losses of 3,233,570 dollars, more than enough to insure that individual income 
taxes were not paid on the 2.6 million dollars of officers salaries. Seventy- 
six, or thirty-three percent, of these firms were small business corporation 
farms and ranches. 

The small business option may be a desirable feature of the corporation 
license tax law. It does impart a degree of progressivity into an otherwise 
proportional tax structure. Since small business corporations generally have 
smaller gross receipts and earnings than normal corporations and pay taxes 
at lower rates, the tax is rendered progressive. However, if progressivity 
were the goal of corporate taxation, it would be easier to make the system 



-64- 



progressive by establishing a progressive rate structure and subjecting 
all corporations to the same statutory rules and regulations. In any event, 
some of the features of the small business option appear to allow these cor- 
porations to reduce their tax well below what might be expected from a 
cursory review of the tax laws . This claim is often leveled at large cor- 
porations, but is seldom associated with domestic, small business 
corporations . 



-65- 



CHAPTER FIVE 
ADMINISTRATION OF MONTANA'S CORPORATION TAX LAWS 

The first question that comes to mind with respect to the administration 
of corporation taxes is how many corporations simply do not pay the tax that 
they owe to the state. This question places the tax administering agency in 
a delicate position. Obviously, if the administering agency were cware of 
tax evasion , it would be able to identify the guilty companies and assess the 
tax. Thus, the incidence of tax evasion is a question that cannot be answered 
at the state level because if it exists, it is unknown. Congress commissioned 
a study of the taxation of interstate commerce, which sheds some light on the 
problem of tax evasion. This study, published in 1964, dealt with all aspects 
of state taxation of interstate commerce including tax evasion. The study in- 
cluded a detailed examination of the business operations and taxable status 
of some 1,200 corporations engaged in business in more than one state. The 
general conclusion of the investigation is that companies pay their taxes in 
the states in which they have their principal offices. The more tenuous the 
company's contact with a state, the more likely that business taxes are not 
paid. More specifically, the study reported that: 

(1) Of 819 companies soliciting sales and accepting orders in vari- 
ous states , returns were being filed in less than three percent of the cases . 



-66- 



(2) Of 130 instances of corporations maintaining sales offices in var- 
ious states, returns were being filed in only about forty percent of the cases. 

(3) Of 234 cases where companies had goods warehoused in various 
states, returns were being filed in only about forty percent of the cases. 

These figures indicate that of 1, 183 firms which were legally taxable 
in various states during the survey, only 164 returns were filed. Thus, 
of the firms sampled, less than fourteen percent of the returns that should 
have been filed in the various states were actually filed . 

Since Montana is smaller in population than most other states, it is 
unlikely that compliance problems are as serious here as they are in more 
urban areas . Business activity is noticable in Montana and it is easier to 
identify and tax than activities in states with a high concentration of cor- 
porate activity. Still, it must be true that some firms owe taxes in Montana 
that are never paid . It is also true that some firms which do file returns 
do not pay as much tax as they should . Both of these problems could be 
alleviated somewhat by assigning additional staff to the corporation license 
tax bureau but, as the congressional study concludes, all states are de- 
pendent on the Federal Government for help in eliminating the problems 
involved in taxing multistate corporations. Currently, the corporation 
license tax bureau is staffed by six persons. The staff consists of a 



-67- 



bureau chief, one desk auditor, two field auditors and two clerk-typists. 
Both field auditors have been hired within the past year and two additional 
field auditors will be employed if the positions are funded by the 1973 Leg- 
islature. Still, without federal legislation to precisely define taxable status 
and some type of interstate cooperative agreements, corporations will 
escape taxes in states where they have only slight business cont.^cts. 

The Department of Revenue uses several sources to aid in identifying 
taxable corporations. The Secretary of State compiles a list of all new cor- 
porations registered with the state on a monthly basis . This is by far the 
main source of information on new firms doing business in Montana. It 
should be noted , however , that all firms registered with the Secretary of 
States office are not necessarily taxable in Montana . The department also 
receives copies of all corporation audits performed by the Internal Revenue 
Service on corporations operating in Montana. These reports are valuable 
in that a reassessment at the federal level will probably result in additional 
state taxes since Montana's tax laws closely resemble federal tax laws. 
The department is also aided by other state and federal agencies such as 
the Montana Highway Department which provides a list of all new highway 
contracts awarded. Several sources of information from other divisions of 
the Department of Revenue are also available. A list of all firms reporting 



-68- 



withholding taxes is compiled monthly by the Income Tax Division; public 
contractor licenses and recently issued store licenses are provided by the 
Miscellaneous Tax Division; and some information is available from the 
Property Tax Division. Exchange of information agreements are in effect 
with several neighboring states so that tax returns from corporations oper- 
ating in more than one state can be compared for accuracy and completeness. 
The Department of Revenue is using all available sources of information to 
locate and establish the taxable status of corporations which conduct business 
in the state. 

In addition to the sources of information available from within the state 
and from the Federal Government, Montana is a member of the Multistate Tax 
Compact. This is potentially a very useful organization for all states in 
arriving at fair taxation of interstate corporations . The Multistate Tax Com- 
pact was enacted by the Montana Legislature in 1969. There are nineteen 
member states in the Compact and the states share in the administrative 
costs of the Compact staff . Montana has contributed approximately 2 , 000 
dollars per year for the three years of active membership . The purposes 
of the Compact are to: 

(1) Facilitate proper determination of state and local tax liability of 
multistate taxpayers, including the equitable apportionment of tax bases and 
settlement of apportionment disputes . 



-69- 



(2) Promote uniformity or compatibility in significant components 
of tax systems . 

(3) Facilitate taxpayer convenience and compliance in the filing of 
tax returns and in other phases of tax administration . 

(4) Avoid duplicative taxation. 

The main advantage to Montana and most other states is in t'.e audit 
function performed by the Multistate Tax Compact staff. The staff solicits 
the approval of all member states in conducting audits of companies engaged 
in business in more than one state. The audit results are then available to 
the member states involved . This saves the states the administrative costs 
of nineteen audits by the individual states and results in a more complete 
audit since the multistate staff has information supplied to it by all of the 
member states. It also saves the corporations the expense of submitting to 
audit by all of the individual states. In fiscal year 1972, Montana realized 
almost 40,000 dollars from multistate audits of businesses operating in Montana. 
This is a good return on the 2 , 000 dollars invested by the state Department of 
Revenue in the form of annual dues to the Compact. The future value of the 
multistate organization is in jeopardy at the present time. Some corporations 
refuse to allow representatives of the Multistate Compact to audit their books 
for the member states . These firms maintain that they are only required to 
allow actual representatives of the various states to examine their books and 



■70- 



that the Multistate Tax Compact has no legal status to audit interstate corpor- 
ations unless it is recognized by Congress. A suit has been filed against the 
Compact and its members in a federal court to enjoin the Compact from conduct- 
ing audits of multistate corporations . This class action suit has been filed 
jointly by the United States Steel Corporation; Standard Brands, Incorporated; 
General Mills, Incorporated; and the Procter and Gamble Distributing Company 
on behalf of themselves and all other businesses in similar situations. The 
suit alleges that the Multistate Tax Compact violates: the U.S. Constitution, 
Article I, section ten, clause three which says "No state shall, without the 
consent of congress, . . .enter into any agreement or compact with another 
state, or with a foreign power. ..." If this suit is upheld by a panel of three 
federal judges, the Compact will be ineffective unless recognized by Con- 
gress. This would be a severe blow to the audit program of Montana and 
the eighteen other states which are members of the Compact. An association 
such as the Multistate Tax Compact is the only organization that can insure 
that a corporation pays taxes in the various states on 100 percent of the 
corporation's income. Individual state audits cannot verify this fact because 
a single state does not have access to the returns filed by corporations in 
all other states . It would be of great benefit to all states that tax the income 
of multistate corporations if Congress would formally recognize the Multistate 
Tax Compact and consent to allowing the states to join this compact for tax 



-71- 



administratlve purposes . This would eliminate the basis for the present 
lawsuit and it would encourage more states to become members of the 
Compact . 

Aside from the Multistate Tax Compact, the Department of Revenue 
has made significant advancement in the areas of administration and audit 
during the past fiscal year. The employment of two corporate field auditors 
has given the state the capability of examining the tax records of multistate 
corporations for the first time. During the first three months of this fiscal 
year, audits were completed on twelve multistate corporations and these 
companies were assessed additional taxes of $46,213.75. It is anticipated 
that audits now under way and those planned for this fiscal year will result 
in several hundred thousand dollars of additional assessments against multi- 
state corporations . Expansion of the field audit program during the next 
biennium should be highly productive for the state and well worth the money 
invested to hire qualified personnel. 



-72- 



CHAPTER SIX 
CONCLUSIONS AND RECOMMENDATIONS 

This study of corporation taxation on Montana was designed pri- 
marily to be educational rather than analytical. This is because it is 
our conviction that most of the criticism of the corporate tax structure 
and administration in Montana, is the result of lack of understanding 
of the powers of the state to tax interstate corporations. Most people 
believe that if a corporation is earning money from operations in Mont- 
ana that it must be liable for state corporate income taxes. We have 
explained that the legal definitions of "doing business", established 
primarily by federal laws, are not always based on the income a cor- 
poration has earned from operations within the state. Many firms are 
earning income from sales in Montana but they are not paying taxes to 
the state. This is not the fault of the legislature or the Department of 
Revenue. Neither organization can change the federal laws that allow 
this situation to exist. 

Our review of existing state laws indicates that the legislature 
has done a good job in passing laws that allow the state to tax the 
maximum number of multistate businesses. There is little more that 
can be done in so far as the basic tax structure is concerned . There 



-73- 



are minor changes to the law that the Department of Revenue will recommend 
to the 1973 Legislative Assembly. However, most of these modifications are 
technical and concern the day-to-day operations of the agency and are not 
pertinent to this report . 

The statistical analysis conducted in conjunction with this study and 
in previous studies, indicates that any of the popular alternatives to Montana's 
tax system would result in a greater tax burden on domestic corporations 
and a lesser burden on those corporations that do business in more than one 
state. Consequently, we recommend that no major changes to Montana's 
corporate tax structure be initiated . 

With respect to the taxation of multistate firms, our conclusions sim- 
ply reaffirm and enforce the conclusions reached by the Legislative Council 
in 1968 and the Interim Committee on Fiscal Affairs in 1970. However, this 
report discusses the tax treatment of small business corporations, a subject 
largely ignored in past studies. Small business corporations receive fav- 
orable tax treatment not available to normal corporations. We cannot judge 
the wisdom of such a policy, but it does result in lower corporate tax col- 
lections than would be obtained if these firms were taxed as regular cor- 
porations. On the other hand, all of the small business corporations are 
owned and operated by Montanans, not out-of-state interests and there may 



-74- 



be merit in providing tax incentives to small, Montana corporations. 

Many people feel that the state should be receiving considerably more 
tax revenue from corporations than it does at present. Our conclusion with 
respect to revenue is that the only viable way to increase revenue substan- 
tially is to increase the corporation license tax rate substantially . The 
Department of Revenue does not recommend an arbitrary increase in cor- 
porate tax rates . We have indicated that the corporate license tax is only a 
fraction of the total taxes paid by businesses in Montana. When all taxes 
paid by businesses are considered , Montana ranks fifth among the fifty 
states in reliance on business taxes to finance state and local government 
services . 

One substantive recommendation resulting from this study, is that 
the Montana Legislature adopt Article VIII of the Multistate Tax Compact. 
This is the audit article and it authorizes the state to utilize the audit 
capabilities of the compact to the maximum extent. Montana currently re- 
ceives the benefits of the multistate audit staff (40,000 dollars in additional 
assessments in 1972) , but full recognition of Article VIII would be in the 
state's interest. Of course, if the law suit initiated by United States Steel 
and others is upheld, the Multistate Tax Compact will be rendered ineffectual 
unless recognized by Congress. Nevertheless, Montana should take full 



-75- 



advantage of its membership in the Multistate Tax Compact and extend full 
recognition and support to the organization . It is a worthwhile effort by 
the states to initiate procedures to ensure that all states receive fair tax 
payments from corporations and it also strives to insure that corporations 
are treated fairly by the member states . 

We hope that this study is of value to the Legislative Assembly and 
the people of Montana in fostering a better understanding of the structure 
and administration of state business tax laws .