                            NO.     93-290
          IN THE SUPREME COURT OF THE STATE OF MONTANA
                                  1994


WESTMORELAND RESOURCES, INC.,
          Petitioner and Appellant,
     V.

MONTANA DEPARTMENT OF REVENUE,
          Respondent and Respondent.



APPEAL FROM:   District Court of the Thirteenth Judicial District,
               In and for the County of Big Horn,
               The Honorable Robert W. Holmstrom, Judge presiding.


COUNSEL OF RECORD:
          For Appellant:
               W. Anderson Forsythe, Moulton, Bellingham,
               Longo & Mather, Billings, Montana
          For Respondent:
               David L. Nielsen, Tax Counsel, Office of Legal
               Affairs, Department of Revenue, Helena, Montana


                            Submitted on Briefs:        December 2, 1993

                                             Decided:   February 4, 1994
Filed:


                                    d
                                  Clerk
Justice Terry N. Trieweiler delivered the opinion of the Court.
     In 1989, Westmoreland     Resources, Inc., petitioned the State

Tax Appeal Board (STAB) to review the Montana Department of

Revenue's     (DOR)   assessment   of   additional   taxes    imposed   on

Westmoreland for revenue received due to adjustment formulas found
in four of its contracts for the sale of coal.             After the STAB

ruled in the DORIS favor,      Westmoreland   petitioned     the   District

Court for the Thirteenth Judicial District in Big Horn County
pursuant to 5 15-2-303, MCA,       for review of this decision.         The

District Court concluded that the STAB correctly interpreted the

applicable law and that its findings were not clearly erroneous.

Therefore,   by order dated April 15, 1993, the court affirmed the

decision of the STAB.     Westmoreland appeals from the order of the

District Court.
     We affirm.

     On appeal, Westmoreland raises the following issues:
     1.      Did the District Court err when it found that revenue

received by Westmoreland pursuant to an adjustment formula in its

sales contracts is part of the l'contract sales price" for purposes

of the assessment of coal severance and gross proceeds taxes?

     2.      Did the District Court err when it found that revenue

received pursuant to the adjustment formula is properly considered

in the assessment of the resource indemnity trust tax?

     3.      Does the taxation of this revenue violate the Commerce

Clause of the United States Constitution?



                                    2
        Westmoreland    produces    coal   in   Rosebud   County,    Montana,   and
sells this coal to various midwest              electric utility companies. At
issue in this appeal are four sales contracts which Westmoreland
negotiated in        1972 with Northern States Power in Minnesota,
Dairyland Power and Light in Wisconsin, Wisconsin Power and Light
in Wisconsin, and Interstate Power in Iowa.
        The four contracts have a similar pricing structure and
include a formula which is used to adjust the price of the coal to
compensate     for     variations   in its BTU content.             BTU refers to
British Thermal Units and is a measure of the heat energy contained
in the coal.
        The contract with Northern States Power (NSP) was the only
contract entered into evidence and will be used as an example in
this discussion.         Each contract establishes a base price for the
coal, which is $2.30 per ton in the NSP contract.               This base price
is   "f.0.b.    railroad cars"       at Westmoreland's mine           in   Montana.
F.o.b. is a commercial acronym commonly defined as "free on board."
In this instance, where the contract establishes the price of coal
f.o.b.    railroad cars,     it means that delivery to the customer is
complete when the coal is loaded onto the railroad cars at the
mine.    The customer then independently negotiates with the railroad
company for transportation of the coal to its electric utility
sites.
        The contracts also provide for various adjustments to the base
price of the coal.          First, certain       adjustments   are    periodically
made for changes in the cost of producing the coal.                  For example,

                                           3
the NSP contract provides        for the base price to be adjusted
periodically to reflect changes in administrative expenses, wages

paid for labor, and cost of equipment.

        Second,   the contracts include a price adjustment to reflect

variations in the quality of coal.      Each contract includes a target

rate or "warranted rate" for the BTU content of the coal that is

sold.     In the NSP contract, the warranted rate is 8450 BTU.   If the

weighted average BTU content is between 8350 BTU and 8550 BTU, no
adjustment is made in the sale price.      However, if the average BTU

content is either higher or lower than these figures, the following

calculation is made in order to standardize the price that the

customer is paying for the coal based on its energy content:

             (P + T) x fas received BTU - Warranted BTU)
                                 (Warranted BTU)

                        P = base price, as adjusted, per ton
                        T = transportation rate, per ton

        This formula establishes a fraction (the "BTU fraction") which

represents a comparison of the "as received BTU" to the "warranted

BTU."     The BTU fraction is then multiplied by the sum of the base

price per ton of coal and the average transportation rate per ton

of coal, to yield an "adjustment factor.'*     To determine the amount

by which the price of the coal which was purchased is adjusted, the

adjustment factor is multiplied by the number of tons shipped to

the respective customer annually.
        The contracts provide that after the adjustment is calculated,

V*seller will issue a debit or credit."        In other words, if the

customer overpaid for the coal because the BTU content was lower

                                    4
than the warranted rate, Westmoreland is responsible for issuing
that customer a credit.       However,   if the customer did not pay
enough for the coal because its BTU content was higher than the
warranted    rate, the customer must pay Westmoreland an additional
amount of money for the higher quality coal that was purchased.
        It is important to note that the adjustment formula results in
either a transfer of money from Westmoreland to the customer, or
from the customer to Westmoreland.       Even though the formula takes
into account an average transportation rate to arrive at the
adjustment factor, the money the customer pays to the railroad is
not affected by the adjustment formula.     The cost of transportation
remains the same for each ton of coal that is shipped regardless of
its BTU content.
        During the years in question, Westmoreland was able to achieve
a higher average BTU content for the coal it produced and sold than
what was warranted in the four contracts.           This resulted in
Westmoreland's    receipt of additional revenue from these four
customers due to the adjustment formula.
        Westmoreland negotiated these four contracts prior to the
enactment of Montana's current tax structure for the production of
coal.
        Three separate taxes are now imposed on coal produced in this
state:    the gross proceeds tax found at §§ 15-23-701through -716,
MCA; the coal severance tax found at §§ 15-35-101 through -122,
MCA;     and the resource    indemnity trust tax (RITT) found at

frfr 15-38-101 through -136, MCA.

                                    5
      The taxes assessed pursuant to the gross proceeds tax and the

coal severance tax are calculated on the basis of what is termed

"the contract sales price" of the coal.               Contract sales price is

defined in § 15-35-102(5), MCA, as follows:

            "Contract sales price" means either the price of
      coal extracted and prepared for shipment f.o.b. mine,
      excluding that amount charged by the seller to pay taxes
      paid on production, or a price imputed by the department
      under 15-35-107.

      The RITT is computed on the gross value of the coal at the

time it is extracted from the ground.             The DCR determines the gross
value at the point of extraction by deducting from the contract
sales price f.o.b railroad cars at the mine, the costs of hauling,

crushing and preparing the coal for shipment.

      In     1986,    the ECR audited Westmoreland's gross proceeds,

severance,     and RITT tax returns for tax years 1981 through 1984.

The   DCIR   determined       that     payments   received      pursuant    to    the
adjustment formula had been improperly excluded from Westmoreland's

calculation     of    the "contract sales price" for the assessment of

severance and gross proceeds taxes, and from the calculation of

V'gross    value"    for the assessment of RITT taxes.             Based on this

determination, the DCR imposed additional taxes on Westmoreland for

the tax years 1981 through 1984.                  Westmoreland appealed this

assessment of         additional taxes to the STAB.                Following an

evidentiary hearing, the STAB ruled that the revenue received by

Westmoreland pursuant to the adjustment formula was properly

included      by     the   LICR   in   the   computation   of    taxes     owed   by

Westmoreland.         The STAB found that,        for the years 1981 through

                                             6
1984, Westmoreland had received additional revenue because the BTU
content of the coal it had sold exceeded the rate warranted in the

sales contracts.      It noted that Westmoreland had paid taxes on the

revenue it received due to the "price component" of the adjustment

formula,    but not on revenue received due to what Westmoreland

called the       "transportation component" of the formula.       After

considering the adjustment formula, the STAB found:

           10. All freight or shipping costs from the mine to
     the various destinations of the coal are negotiated and
     paid by the purchasers, and not by [Westmoreland]. The
     freight rate is a per ton rate. The quality of the coal
     being shipped has no effect on the determination of the
     rate.    Anv adiustments made usins the contractual
     formula, resultincr in either an increase or decrease in
     the vrice of the coal would not result in a vavment to,
     or from, the railroad.      The transaction is entirelv
     between the vurchaser of the coal and rwestmorelandl.
     [Emphasis added].

     In Finding No. 19, the STAB found that "the adjustment is seen

as a protection of quality.        The adjustment has no effect on the

amount paid to the hauler."       Finally, the STAB found that there is

"nothing done to the coal during transportation that modifies in

any way, positively or negatively, the BTU content.      Once loaded in

the railcar, the BTBs contained in the coal are set."

     In its conclusions of law, the STAB concluded that, under the

contracts   in    question,   the final price per ton of coal is not

established until all of the adjustments provided for in the

contracts are made.      It stated the following:

          13.  It is the opinion of this Board that the
     adjustment formula, in its entirety, found in the coal
     purchase contracts, as it affects the "contract sale
     price," is a recognized contract modifier to the base
     price of the coal f.o.b. mine. As such, it is a proper

                                     7
                                   ISSUE 1
     Did the District Court err when it found that revenue received
by Westmoreland pursuant to an adjustment formula in its sales
contracts is part of the %ontract sales price" for purposes of the
assessment of coal severance and gross proceeds taxes?
     Westmoreland contends that both the STAB and the District
Court made erroneous conclusions of law and fact when they held
that the      definition of       contract   sales   price   includes   the
transportation portion of the BTU adjustment formula.
     The crux of Westmoreland's argument is that the adjustment
formula found in the four relevant contracts contains a price
related     component   and   a    transportation    related    component.
According to Westmoreland, the formula adjusts not only the mine
head price of the coal but also the cost per ton of transporting
the coal.
     Westmoreland asserts that, during the years in question, it
paid taxes on the additional revenue attributable to the price or
llPIV component of the formula, but not on revenue received pursuant
to the transportation or "TV' component.        Taxes were paid on only
part of the additional revenue because, according to Westmoreland,
the transportation related revenue was not part of the contract
sales price, which is the basis for the computation of taxes owed.
This assertion is based on § 15-35-102(5), MCA, which defines
contract sales price as "the price of coal extracted and prepared
for shipment f.o.b. mine."    Consequently, Westmoreland asserts that
transportation    costs,   which occur after the coal is delivered

                                      9
f.o.b. railroad cars at the mine, should not be included in the
contract sales price.
        In response, the DOR contends that the STAB and the District
Court    correctly    found that     revenue   resulting     from     the   BTU
adjustment     formula, which takes into account both the base price
per ton and the average transportation rate per ton, constitutes
the final contract price which each customer pays to Westmoreland
for the coal it purchases.        The DOR asserts that it was proper to
find that the adjustment formula does nothing to alter actual
transportation costs, but rather determines the final amount owed
to Westmoreland for the purchase of coal.
        The DOR further contends that there was substantial evidence
to support the STAB's finding that both the BTU content and the
actual freight costs of each shipment of coal are known prior to
shipment.      Therefore,   all the formula components are "known*' and
fixed at the time the coal is loaded for shipment.           The DOR argues
that     the   STAB   correctly    concluded    that,      although    it   is
Westmoreland's and its customers'          choice to calculate price
adjustments only annually, the adjusted cost of each shipment of
coal, payable by .the customer to Westmoreland, is ascertainable at
the time the coal is loaded for shipment f.o.b. railroad cars and
does not change after shipment.
        It is DORIS assertion that the contract sales price, as the
term implies, includes every component of the contract that is used
to determine the price which the buyer pays for the coal.
Furthermore, the DOOR contends that taxes are to be assessed on this

                                     10
final purchase price (the "contract sales price") rather than on
selective, internal components of a formula used to calculate that

final price.
        We note first that Westmoreland contends that the STAB made

clear     errors   of     both   law   and    fact.       When     reviewing      an

administrative agency's findings of fact, this Court will defer to

the agency's findings unless they are clearly erroneous.                  Findings

of fact are clearly erroneous               if they are      not supported by

substantial    credible    evidence.   Steer, Inc. v. Department of Revenue ( 1990) ,

245 Mont. 470, 803 P.2d 601.           Our    standard    for    reviewing    legal

conclusions of an agency or a district court is simply to determine

whether they are correct.         steer, 803 P.2d at 603.

        In this instance, Westmoreland contends that the STAB erred

factually when it found that all revenue received pursuant to the

adjustment formula was part of the "contract sales price" for

assessment of the coal severance and gross proceeds taxes.                       The

alleged error of law is based on the STAB's and the District

Court's conclusions that the statutory definition of contract sales

price could include this revenue.

        After considering the evidence in the record and reviewing the

findings and conclusions entered by the STAB and affirmed by the
District Court, we conclude that there was substantial evidence to

support the STAB's         factual determinations.              Furthermore, we

conclude that the STAB's and the District Court's conclusions of

law were correct.


                                       11
     The     record    contains      sufficient      evidence    that   each    customer
negotiates       solely       with      the      railroad       company        regarding
transportation       costs.    Westmoreland is not responsible for paying
any transportation costs and all of the revenue received after
adjusting the contract price goes solely to Westmoreland, whose
business is the sale of coal, rather than to the railroad.
     Furthermore, the evidence demonstrated that the freight rate
charged by the railroad is a constant rate per ton, the BTU content
of the coal which is being shipped has no effect on the
determination of that rate, and the BTU content of the coal does
not change during shipping.             Thus, the year-end adjustment, which
takes into account the particular customer's negotiated base price
per ton and average transportation rate per ton, adjusts the
cumulative sales price of the coal purchased during that year, but
does nothing to alter the actual cost that was paid to the railroad
to transport that coal.           Instead, the year-end adjustment sets the
final price of the coal to properly reflect the quality of the coal
which was shipped as compared to that which was warranted in the
contract.
     A review of the record also supports the contention that,
although     price    adjustments     are     made   annually,    which   necessarily
occurs after shipping, the adjusted cost of each shipment of coal,
payable by the customer to Westmoreland, is ascertainable at the
time the coal is loaded for shipment f.o.b. railroad cars, and does
not change after shipment.



                                            12
        The evidence is undisputed that Westmoreland is not paid to
transport the coal.         Therefore,     we conclude that the revenue in
question     does     not   constitute        transportation      costs        incurred
subsequent to delivery of the coal f.o.b. mine.                  In this case, the
revenue    received    by   Westmoreland      represents   the    final,       adjusted
contract price of the coal which is determined by considering its
BTU content and applying the formula agreed upon by the parties.
Although a transportation rate is included in the formula, the
formula adjusts the price payable to Westmoreland for the coal, and
not the costs payable to the railroad for the transportation of
that coal.    The formula adjusts the final price of the coal at the
time it is delivered to the customer f.o.b. railroad cars at the
mine.
        According to the STAB's findings, application of the formula
as provided for in the contract would result in an increased
contract sales price when the BTU content of the coal is above the
target rate, or conversely, a lower contract sales price when the
BTU content is below the target rate.                   Therefore,        if    revenue
decreases due to lower quality coal, the taxes assessed on the
contract sales price would correspondingly decrease.                  We conclude
that this would be the correct outcome.               If Westmoreland or other
coal producers had to reimburse their customers because the coal it
extracted had a lower BTU content, the computation of taxes should
consider this loss of revenue and the contract sales price should
be adjusted accordingly.



                                         13
      We hold that there was sufficient evidence to support the

STAB's findings that the BTU adjustment formula in its entirety is

part of the contract sales price, and that revenue resulting from

the application of this formula represents the actual price paid by

the   customer    for     the    coal    it    purchases    from    Westmoreland.

Furthermore,     we conclude that the STAB and the District Court

properly    interpreted    the   statutory      and   regulatory   definitions   of

contract sales price and f.o.b. mine price to include the final,
adjusted price of the coal pursuant to these contracts.                Therefore,
we hold that the DOR properly included revenue resulting from the
BTU adjustment formula in the assessment of coal severance and

gross proceeds taxes.

                                        ISSUE 2

      Did the District Court err when it found that revenue received

pursuant to the adjustment formula is properly considered in the

assessment of the resource indemnity trust tax?

      Westmoreland contends that the RITT tax is imposed on the

gross value of the product at the time of extraction from the

ground, and therefore, all transportation related revenue which is

incurred after extraction from the ground should be excluded from

the value of the coal for purposes of assessing the taxes due

pursuant to the RITT.

      The DOR agrees that the coal is to be valued at the point of

extraction for the purposes of the RITT.                To arrive at this gross

value,     the DOR starts with the contract sales price and then

deducts the costs associated with hauling the coal from the mine to

                                          14
the railroad cars,   and crushing and preparing it for shipment.
Because the contract sales price is         the starting point for
assessing the RITT tax, the WR contends that the STAB and the
District Court correctly held that the adjusted contract sales
price, which takes into account revenue received pursuant to the
adjustment formula, is the starting point for determining the value
of the coal for the assessment of the RITT taxes.
     We have already decided that the adjustment formula yields a
final contract sales price,    which is the price paid for the
purchase of coal exclusive of transportation costs incurred after
the coal is delivered f.o.b. railroad cars.    Thus, we conclude that
the gross value of the coal is properly determined by deducting
from the adjusted contract sales price the costs associated with
preparing the coal for shipment and transporting it from the mine
head to the railroad cars.     Therefore,     to the extent that the
adjusted contract sales price is the starting point for calculating
the gross value of the coal produced by Westmoreland, we hold that
the court did not err when it upheld the STAB's conclusion that
revenue received pursuant to the adjustment formula is properly
considered by the WR for the purposes of assessing the RITT taxes.
                              ISSUE 3
     Does the taxation of this revenue violate the Commerce Clause
of the United States Constitution?
     Westmoreland contends that the DORIS taxation of the revenue
received from the adjustment formula results in discriminatory
taxation of transportation costs and that this violates the

                                15
commerce clause of the United States Constitution.                   U.S.C.A.     Const

Art. I, § 8, cl. 3.       We note that this constitutional challenge is

based upon Westmoreland's interpretation of the holdings in

Commonwealth Edison Company v. Montana (1981),      453 U.S. 609, 101 S. ct.

2946, 69 L. Ed. 2d 884, and CommonwealthEdison                Companyv. state (1980),

189 Mont. 191, 615        P.2d 847,     and its contention that the BCR is

taxing transportation costs rather than the value of the coal.

      The U.S.      Supreme Court upheld the constitutionality of
Montana's coal severance tax in CommonwealthEdison, 453 U.S. at 609,

on the basis that the severance tax does not discriminate against

interstate commerce and is apportioned to activities occurring

within the State, i.e., the production of coal, taxed at its value

f.o.b.   mine.   In CTS Corporation v. Dynamics Corporation of America ( 19 a 7 ) , 4 8 1

U.S. 69, 107 S. Ct. 1637, 95 L. Ed. 2d 67, the Court reemphasized

the principle that a state statute does not violate the commerce

clause if it is evenhandedly applied without regard to whether the

activity is interstate or intrastate in nature.

      We have held that the BTU adjustment formula adjusts the

contract sales price of the coal,                  and that revenue received

pursuant    to     this     adjustment         formula    does     not     constitute

transportation related revenue.            The Montana coal production taxes

are assessed uniformly on the basis of the Vontract                    sales price,"

as determined by the parties' contracts, without regard to whether

the coal is to be shipped interstate or intrastate, and are not

based on transportation costs.            Therefore, taxation of the revenue


                                          16
received due to the BTU adjustment formula, which is part of the
contract sales price, is nondiscriminatory and does not violate the
commerce clause of the United States Constitution.                 We hold that
the   District       Court   correctly        concluded   that   Westmoreland's
constitutional challenge was without merit.
      For    these   reasons,   the judgment of the District Court is
affirmed.




We concur:




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