Skip to content

Montana Corporate Tax Disclosure Lawsuit is Built on Shaky Foundations

12 min readBy: Chris Atkins

Fiscal Fact No. 22

Corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. collections in Montana are up 50 percent in the most recent year, but evidently that’s not enough for State Senator Jim Elliott. He wants more revenue and he wants to find it by examining the tax return of every company filing in Montana.1

Senator Elliott has filed a lawsuit to force the Montana Department of Revenue to disclose corporate tax returns for those corporations with over $1 million in Montana sales. Apparently he does not trust the Montana Department of Revenue to do its job, because he wants to use this information to determine whether corporations are evading or avoiding Montana tax and then draft legislative remedies to increase Montana tax collections.

Government should respect the privacy of corporate tax records. Any lawsuit seeking disclosure of private records should have compelling reasons. Senator Elliott’s lawsuit rests on four shaky foundations that ultimately collapse when scrutinized:

  • First, actual data on corporate tax collections in Montana indicate that the corporate license tax is healthy.
  • Second, lawmakers do not need access to private taxpayer information to make sound tax policy.
  • Third, a corporation’s sales in a state do not necessarily translate into taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. .
  • Fourth, Senator Elliott’s analysis does not take into account the vast number of deductions, credits and exemptions that Montana corporate taxpayers can legitimately claim, all of which reduce corporate tax payments to the state.

Even if the lawsuit succeeds in its objective of forcing companies to disclose private corporate tax records, Montana will gain nothing but more litigation, complexity and controversy over its corporate tax policy.

Legal Basis for the Controversy
A Montana Supreme Court decision on the privacy rights of corporations set the stage for the current lawsuit. In Great Falls Tribune v. Montana Public Service Commission,2 the Montana Supreme Court ruled that corporations were not subject to the privacy protections of the Montana constitution because the constitution only protected the privacy rights of individuals. The court defined individuals as “natural human beings,” which did not, in the court’s judgment, include corporations.3

Thus, because the Montana Constitution also contains a “right to know” provision providing broad public access to all sorts of governmental information, Sen. Elliott is demanding to see the tax returns that corporations have submitted to the Montana Department of Revenue. This information, he says, would allow the public and their elected representatives to more accurately craft corporate tax policy.4

Senator Elliott has publicized some information he received from the Department of Revenue. This data indicates that, of the top 500 companies with over $5 million in sales to Montana, 196 of them paid $500 or less in corporate tax in 2002.5 Despite the common knowledge that 2002 was an unprofitable year for many U.S. firms, Elliott insists these collections were too low. He claims that the public needs to know this information because it “affects their investment decisions, it affects their taxes, and it affects the level of service they get from government.”6

Montana’s Corporate Tax is Healthy
The first faulty assumption of Sen. Elliott’s lawsuit is that Montana corporate tax7 collections are somehow stagnating or that corporations are not paying their “fair share” to Montana. Table 1 shows the most recent four years of data from the National Association of State Budget Officers, which include an estimate for FY 2004. Although Montana’s collections dove in FY2002 and 2003 when the nationwide trend was stagnation or slow recovery, Montana collections have been closing the gap quickly for the last 21 months. The most recent year, FY2004 (July 1, 2003 to June 30, 2004), shows collections up over 50 percent in one year, hardly a cause for alarm about low collections.

Table 1: Montana Corporate Tax Collections Compared to All States (FY 2001-2004)

Fiscal Year

MT Corporate Tax Collections (millions)

Percentage Increase or (Decrease)

Nationwide Increase or (Decrease)















Source: National Association of State Budget Officers (NASBO)

A longer historical series from the Census Bureau does not yet include FY2004, but it shows that Montana’s collections are following the same pattern after the recent recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. as they did after the recession of the early nineties (see Table 2).

Table 2: Montana Corporate Income TaxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. Collections During the Boom and Bubble Years (FY 1994-2001)

Fiscal Year

MT Corporate Income Tax Collections (millions)

Percentage Increase or (Decrease)
























Source: Bureau of the Census

Collections reached $69 million in FY1994, almost exactly the same amount as the $67 million estimated for 2004, and the same length of time after the recession. They grew steadily throughout the boom and bubble years of the late 1990s and through FY2001, reaching a peak in that year of more than $100 million. Nothing in the recent NASBO data or the historical Census data permit a conclusion that corporations are not paying their fair share of taxes to Montana, particularly since many corporations were struggling to turn a profit during this period.

An equally telling refutation of Sen. Elliott’s accusation is the comparison of dollars collected with the revenue forecasts used in adopting the state budget. Table 3 compares actual Montana corporate tax collections from FY2001 to FY2004 with the revenue forecasts for the same fiscal years. Table 3 shows that, overall, recent corporate tax collections in Montana have causes relatively mild budget problems.

Table 3: Montana Corporate Tax Collections Compared to Revenue Forecasts (FY2001-2004)

Fiscal Year

Corporate Tax Revenue Forecast (millions)

Actual Corporate Tax Collections (millions)

Forecast Error





















Source: NASBO

As the table shows, Montana received a sizeable corporate tax windfall in FY 2001, an excess of 57.6 percent over the revenue estimate. Total collections over the last four years were only 4.4 percent below forecasted estimates, with FY 2001 and 2004 almost making up the slack from FY 2002 and 2003. This is hardly sufficient to charge Montana corporations with evading Montana’s corporate tax.

Lawmakers Should Not Usurp the Department of Revenue by Demanding Tax Returns
The second faulty assumption underlying the lawsuit is that lawmakers need access to the private and confidential tax returns of corporate taxpayers to make sound decisions on corporate tax policy. Lawmakers make broad decisions about how to structure the state’s tax system, i.e. what transactions to include in the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , what transactions to specifically exempt from the tax base, and what rate to levy on taxable income. Taxpayers then file a return based on the tax system and submit it to the Department of Revenue.It is, as it should be, the responsibility of the Department of Revenue to determine whether taxpayers are paying their “fair share” or taking illegitimate deductions under state law. Revenue departments have a vast array of options to enforce the law, including seizing assets and assessing fines.8 Thus, no legitimate reason exists to violate taxpayer privacy and allow public access to tax returns. If some lawmakers in Montana are concerned about corporate tax erosion or corporate tax sheltering, they should demand that the Department of Revenue use all its available tools to enforce the tax law or explain to legislators what additional tools are needed.9

Sales Not a Reliable Indicator of Tax Liability
The third faulty assumption underlying the suit is the claim that a corporation with large sales should also be paying large amounts of corporate tax. A corporation’s taxable income in Montana is a result of a number of factors, including:

  • whether the corporation has a sufficient connection to Montana to warrant Montana’s levy of corporate tax (called nexus);
  • the amount of sales, property and payroll the corporation has in Montana10;
  • the profit or loss of the corporation in a given year, and;
  • the profit or loss of affiliates that may or may not have nexus with Montana.

A corporation with significant sales in Montana will most likely have Montana taxable income but if the corporation’s losses exceed its income (as was the case with many corporations in the past few years) the corporation will probably not owe taxes to Montana no matter how much it sells. Also, the presence of a corporation’s property and payroll in Montana will lower the weight of its sales in the apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. formulas and lower its taxable income. Apportionment formulas are used to determine how much tax a corporation pays to each state in which it has operations, with the corporation paying tax based on its proportion of property, payroll and sales in each state.

Montana uses the classic “three factor” apportionment formula to determine taxable income in Montana.11 For example, if a corporation with nexus in Montana has $200 million in taxable income, it will apportion that income to Montana based on its property, payroll and sales in Montana. If 20% of its sales, 20% of its payroll, and 20% of its property is in Montana, then Montana will tax [(.2+.2+.2)/3] * $200 million, or $40 million of the corporation’s income. If a corporation’s Montana sales remained constant, but its Montana property and payroll decreased, then Montana taxable income would go down. Thus, one must look at sales, property and payroll—and not just sales alone—when trying to determine how much tax a corporation will pay in Montana.

Furthermore, since Montana uses mandatory worldwide combined reporting,12 with a water’s edge election for multinational corporations,13 a corporation’s income in Montana from Montana sales might be offset by losses of its affiliates operating in other states or countries. In this scenario, a corporation with $20 million in Montana sales could have millions of dollars in losses suffered by its affiliates located in other states. In a unitary reporting system like Montana’s, the income from Montana would be offset by the losses elsewhere, leading to little or no tax paid to Montana.

All of these factors must lead us to the conclusion that sales in Montana, even hundreds of millions of dollars in sales, do not necessarily lead to significant amounts of tax owed to Montana.

Looking at Sales Ignores Tax Breaks
Finally, the charge that corporations are evading Montana taxes, based on looking at sales only, fails to take into account all the legitimate deductions and credits against Montana corporate tax liability. The Montana Department of Revenue website lists 23 separate credits and exemptions that offset corporate tax liability.14 Senator Elliott’s comparison of total sales and total tax paid fails to take these legally legitimate (though questionable as a matter of policy) incentives into account. This is a common mistake made by other corporate tax analyses that purport to show that corporations are evading state tax liability.15

IV. Conclusion
The movement to force mandatory disclosure of private and confidential corporate tax returns in Montana rests on four shaky foundations: first, that Montana corporate taxes are dwindling; second, that lawmakers and the public need this information to make sound decisions about corporate tax policy; third, that the information already released, showing corporations with millions of dollars in Montana sales but little corporate income tax paid, means that corporations are not paying their “fair share” to Montana, and; fourth, it fails to take into account legitimate credits, deductions and exemptions available to Montana corporate taxpayers. These rationales, as shown above, are insufficient to force corporations to turn over their private and confidential tax records.

Since this lawsuit rests on shaky foundations, it cannot expect to increase Montana’s share of corporate tax collections, especially since the state Department of Revenue is already charged with examining taxpayer returns and enforcing the tax law against wayward corporate taxpayers. If Montana lawmakers are truly concerned about maintaining a healthy corporate tax base, they need to ensure that their tax code makes the state competitive in attracting business investment in the international economy. Honey attracts more flies than vinegar, in corporate taxation as well as life.


1. See Jim Elliott, “Big Business is Our Business” (hereinafter “Big Business”), October 25 th, 2004, located at
2. 2003 MT 359.
3. See Id. at ¶ 36.
4. See “Big Business”, supra note 1.
5. See Id.
6. Id.
7. “Corporate tax” means corporate income tax collections in Montana (called the corporate license tax in that state). It is important to note that corporations pay more than just taxes on their corporate income: they also pay sales taxes, property taxes, and other taxes and fees as well. See generally Robert Cline, William Fox, Tom Neubig and Andrew Phillips, Total State and Local Business Taxes: A 50-State Study of the Taxes Paid by Business in FY 2003, Council on State Taxation (January, 2004), available at
8. See generally Montana Revised Statutes § 15-1-202(1) (2003) (“The department may direct proceedings, actions, and prosecutions to be instituted to enforce the laws relating to the penalties, liabilities, and punishment of public officials and persons or their agents for failure or neglect to comply with the provisions of the statutes…”).
9. The Montana Department of Revenue did recently ask the legislature to approve LC 973 (sponsored by Senator Jim Elliott) and LC 974 which would “assure the accurate determination and collection of Montana taxes” and “revise taxes by providing backup withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. for exchange of real property.”
10. Montana’s corporate license tax allows a corporation with less than $100,000 in sales, and no physical connection to the state, to elect to pay a tax of ½ of 1% on the gross sales made into the state, in lieu of the corporate license tax.
11. See Montana Revised Statutes § 15-31-305 (2003) (“All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor and the denominator of which is 3.”).
12. See Id. at § 15-31-141.
13. “Water’s edge election” basically means that a corporation can choose whether or not it wants to include offshore affiliates in the income report.
15. See generally Robert S. McIntyre, State Corporate Income Taxes 2001-2003, Citizens for Tax Justice (February 2005), located at This analysis claims that “By 2003… 252 companies had slashed their state income tax payments to an average of only 2.3 percent of their U.S. profits. Since the average statutory state corporate tax rate is about 6.8 percent (weighted by gross state product), that means that in 2003, two-thirds of their profits escaped state taxes entirely.” What the analysis fails to do is point out that completely legitimate credits, deductions and exemptions lower a corporations effective tax rate below the statutory rate. You cannot claim that a corporation is evading or avoiding tax merely because its effective rate is below the statutory rate. Similarly, Senator Elliott cannot claim that a corporation is avoiding Montana tax merely by comparing a corporation’s Montana sales and its total tax paid without taking into account legitimate credits, deductions and exemptions that lower the corporation’s tax liability.