Herschel H. Rose, III, Esq.
Steven R. Broadwater, Esq.
Rose Law Office
Charleston, West Virginia
Steven Harlan Becker, Esq.
Paul A. Horowitz, Esq.
Suzanne Ina Offerman, Esq.
New York, New York
V. McGraw, Jr.
Senior Assistant Attorney General
Charleston, West Virginia
Attorneys for Appellee
P. Maroney, Esq.
R. Goodwin, Esq.
2. The coal production severance taxes contained in current and earlier versions of W.Va. Code, 11-12B-3 ; 11-13A-3 ; 11-13A-6 ; 22-3-11 ; and 22-3-32  do not offend the Import-Export Clause of the United States Constitution, art. I, sec. 10, cl. 2.
In the instant case we uphold a determination by the Circuit Court of Kanawha County that West Virginia's coal production severance taxes are constitutional.
According to the briefs, after the appellants separate coal from the adjoining earth and rocks at a coal mine site in West Virginia, the coal is typically transported to a nearby raw storage area, and then is taken to a preparation plant at or near the mine site where the raw coal is cleaned and sized (and may be otherwise processed, by freeze-proofing, etc.). Then the prepared coal that will be exported is typically loaded onto railroad hopper cars, which are hauled by railroad engines to a coastal port, where the coal is transferred from the railroad cars into a ship and transported to a foreign or export destination.
The appellee West Virginia State Tax Commissioner is responsible for collecting certain coal production severance taxes that are imposed on entities like the appellants that produce coal for sale or other commercial use. These taxes, generally referred to as coal severance taxes, are the subject of the instant case.
The current statutory provisions authorizing these coal severance taxes are found at W.Va. Code, 11-12B-3 ; 11-13A-3 ; 11-13A-6 ; 22-3-11  and 22-3-32 . (See footnote 1) The language of each severance tax statute is slightly different. Generally speaking, they impose a tax upon persons or entities exercising the privilege of severing, extracting, reducing to possession or producing coal for sale, profit, or commercial use. (See footnote 2)
Two of the taxes at issue in the instant case, codified at W.Va. Code, 11-13A-3  and 11-13A-6 , are calculated as a percentage of the value of the mined and processed coal. Three of the taxes, codified at W.Va. Code, 11-12B-3 , 22-3-11 , and 22-3-32 , are taxes that are calculated as fixed amounts of money assessed per ton mined.
In both cases, pursuant to the practice and regulations of the appellee Tax Commissioner, either the final sales price or the invoiced tonnage of the coal that is sold is used to calculate the taxes; even though this final price or tonnage measurement may in fact be determined only when the coal is delivered to the export carrier ship.
Notably, for purposes of establishing a sales price and value for severance tax calculation, any transportation costs from the preparation plant to the port and thereafter to the customer, if they are absorbed or paid by the seller, are deducted from the actual sales price. This adjusted sales price used as the coal's value for severance tax calculation purposes is referred to in industry parlance as the coal's F.O.B. ['Free on Board'] Mine price. (See footnote 3)
No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws. . . .
The instant case began when the appellants, in accordance with the foregoing statutes, for several years paid severance taxes based on their mining and processing of coal sold for export, and then applied to the appellee Tax Commissioner for refunds. The appellants asserted their claim of unconstitutionality before the Tax Commissioner, who denied the appellants' refund claims. The appellants appealed that decision to the Circuit Court of Kanawha County, which in an order dated May 27, 2004, upheld the Tax Commissioner's decision. The appellants have appealed the circuit court's decision to this Court.
to the Tax Commissioner, the current total refund liability for the taxes at
issue in the instant case (and other related pending cases) could be as high
as $360 million dollars, not including interest; additionally, $40 to $50 million
dollars annually in legislatively-mandated future severance tax revenue will
not be collected if West Virginia's coal severance taxes on mining and processing
coal for export are held to be constitutionally invalid.
the constitutionality of a statute is questioned every reasonable construction
of the statute must be resorted to by a court in order to sustain constitutionality,
and any doubt must be resolved in favor of the constitutionality of the legislative
enactment. Point 3, Syllabus, Willis v. O'Brien, 151 W.Va. 628 (153
In Richfield Oil, the State of California assessed a retail sales tax on a sale of oil by a California refinery to the government of New Zealand. The Supreme Court found that the California sales tax was imposed when the oil was delivered into the hold of the foreign purchaser's ship and into the control of a foreign purchaser; that the sales tax was therefore imposed on the oil while it was in the export transit process; and the tax was therefore an impost or duty that violated the Import-Export Clause. (See footnote 4)
In 1976 the focus of Import-Export Clause analysis took a sharp turn in Michelin Tire Corp. v. Wages, Inc., 423 U.S. 276, 96 S.Ct. 535, 46 L.Ed.2d 495 (1976).
Finding the terms impost and duty to be inherently ambiguous, and recognizing a longstanding difficulty in the case law in determining in a principled fashion when goods were or were not in a stream of export or import at the time of taxation so as to invoke the blanket tax exemption set by the Import-Export Clause, the Court created a regime in which those terms [impost and duty] are conclusions to be drawn from an examination into whether a particular assessment 'was the type of exaction that was regarded as objectionable by the Framers of the Constitution.' U.S. v. I.B.M. Corp., 517 U.S. 843, 858 116 S.Ct. 1793, 1802, 135 L.Ed.2d 124, 138 (1996) (internal citations omitted).
The Court in Michelin adopted an analysis based on the concerns that prompted the founding fathers to write the Import-Export Clause in the first place:
Framers of the Constitution thus sought to alleviate three main concerns by committing
sole power to lay imposts and duties on imports in the Federal Government, with
no concurrent state power: the Federal Government must speak with one voice when
regulating commercial relations with foreign governments, and tariffs, which
might affect foreign relations, could not be implemented by the States consistently
with that exclusive power; import revenues were to be the major source of revenue
of the Federal Government and should not be diverted to the State; and harmony
among the States might be disturbed unless seaboard States, with their crucial
ports of entry, were prohibited from levying taxes on citizens of other States
by taxing goods merely flowing through their ports to the other States not situated
as favorably geographically.
423 U.S. at 285-86, 96 S.Ct. at 540-41, 46 L. Ed. 2d at 503 (footnotes omitted).
The new policy-based Michelin approach was adopted and slightly modified to fit exports in Washington Dept. of Revenue v. Assoc. of Washington Stevedoring Cos., 435 U.S. 734, 758, 98 S.Ct 1388, 1403, 55 L.Ed.2d 682, 702 (1978) ([T]he Michelin approach should apply to taxation involving exports as well as imports.).
The first element of the Michelin analysis as applied to exports is whether the tax impinges on the federal government's ability to speak with one voice when regulating commercial relations with foreign governments. In Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 194, 103 S.Ct. 2933, 2955, 77 L.Ed.2d 545, 571-72 (1983), the Court stated:
conducting this inquiry, however, we must keep in mind that if a state tax merely
has foreign resonances, but does not implicate foreign affairs, we cannot infer, [a]bsent
some explicit directive from Congress, . . . that treatment of foreign income
at the federal level mandates identical treatment by the States. Thus,
a state tax at variance with federal policy will violate the one voice standard
if it either implicates foreign policy issues which must be left to the
Federal Government or violates a clear federal directive. The second of
these considerations is, of course, essentially a species of pre-emption analysis.
Id. (citations omitted, italics in original).
The appellants argue that West Virginia's coal production severance taxes adversely impact the level of U.S. coal exports, by increasing the price of that coal, and therefore reducing West Virginia coals' competitiveness in the world market. (See footnote 5)
But the same could be said with respect to any clearly legitimate state tax that is imposed in any fashion _ like a workers' compensation tax on the pay of factory workers in a plant that makes exports _ that has the effect of increasing the price of a good that was subsequently exported.
mere price increase is not the kind of adverse effect on foreign affairs _ like
causing retaliation by foreign governments _ that we think is required under
the Michelin/Washington Stevedoring approach. The appellants do not identify
any such effect. Nor do the appellants identify any substantial clear federal
directive (Container Corp., supra) that West Virginia's severance
The second element of the Michelin analysis, an effect on federal import revenues, is largely irrelevant in the case of exports; and in the instant case, the appellants do not demonstrate any such effect from West Virginia's severance tax on coal production.
element of the Michelin/Washington Stevedoring analysis, ensuring a fair
system of harmony in commerce among the states, coincides with the Commerce Clause
test that the tax fall upon a taxpayer with a nexus to the state, be properly
apportioned, not discriminate, and reasonably relate to the services provided
by the state. Washington Stevedoring, 435 U.S. at 754-55, 98 S.Ct. at
1401-1422, 55 L.Ed.2d at 700. This Commerce Clause test is presumptively met
in the instant case because the Supreme Court has already held that a coal severance
tax like those at issue in this case survives Commerce Clause
analysis. Commonwealth Edison Company v. Montana, 453 U.S. 609, 101
S.Ct. 2946, 69 L.Ed.2d 884 (1981) (discussed further infra). (See
We have fully reviewed the arguments of the appellants on the question of whether the severance taxes in the instant case are of a type that was regarded as objectionable by the Framers of the Constitution under the foregoing Michelin analysis. We conclude that they are not.
recognition that their Michelin-based arguments do not have compelling
force, the appellants also argue that the Michelin policy-based analysis
fully supplanted the more mechanistic in export transit approach
of earlier cases like Richfield Oil.
The appellants point to language in U.S. v. I.B.M., supra, 517 U.S. at 862, 116 S. Ct. at 1804, 135 L.Ed.2d at 140: The Court has never upheld a state tax assessed directly on goods in import or export transit. (See footnote 7)
appellants then point to the fact that West Virginia's percentage-of-value coal
severance taxes are calculated based on a valuation of the coal that includes
the cost of loading the coal into rail cars at the preparation plant under the F.O.B.
The loading process, argue the appellants, is a part of the coal's being in export transit; and including the coal loading process within the severance taxes' ambit means that the tax is being imposed on goods that are in export transit.
feature of the West Virginia coal severance tax system, according to the appellants,
therefore makes the entire coal severance tax unconstitutional when applied to
coal that is to be exported _ including the much larger portion of the tax that
is calculated based on the coal's value just before the beginning of the loading
process and after the coal has been mined and prepared. This
Court has recognized that coal severance taxes may include taxation of the value
added by the loading of the coal into rail cars by the coal's producer _ that
is, that the initial loading of coal at the preparation plant for shipment is,
at least when combined with mining and processing, one of the taxable events under
the statutes. Syllabus Point 4, Kanawha Eagle Coal, LLC v. Tax Comm'r,
216 W.Va. 616, 609 S.E.2d 877 (2004). (See
However, in Kanawha Eagle this Court rejected the Tax Commissioner's argument that further loading of coal that occurs away from the initial point of mining and processing could be used in calculating severance taxation.
Eagle thus stands for the proposition that the initial process of loading
of coal by the mining and processing company at a coal preparation facility is
properly viewed as a part of the coal production/mining and processing process;
and once the coal is initially loaded, and thereafter when the coal has begun
its movement or transit from the preparation
plant toward a final destination, the applicable statutes do not allow the
severance tax to be imposed on activity, value, or cost added during that movement
The holding of Kanawha Eagle is therefore consistent with the view that coal that is being initially loaded is at the tail end of the coal production process, and is properly amenable to valuation for severance taxation purposes; and that only once coal has been loaded can it enter into a transit process that is statutorily excluded from inclusion in severance taxation.
For this reason, the Kanawha Eagle decision is not supportive of the appellants' argument that coal being initially loaded at a preparation plant is clearly (much less merely) in export transit. See note 4 supra. (See footnote 9)
A helpful perspective on the severance taxes at issue in this case can be gained by examining the U.S. Supreme Court's opinion in Commonwealth Edison Company v. Montana, 453 U.S. 609, 101 S.Ct. 2946, 69 L.Ed.2d 884 (1981).
In Commonwealth Edison, a Commerce Clause/Supremacy Clause (United States Constitution, Art. I, Sec. 8, cl. 3 and Art. VI, cl. 2) challenge was brought to Montana's coal severance tax. The Montana coal severance tax at issue in Commonwealth Edison was very similar to the coal severance taxes at issue in the instant case. Montana's tax was calculated, at varying rates, on the value of the coal after it has been extracted and prepared for shipment f.o.b. mine, Commonwealth Edison, note 1, 453 U.S. at 613, 101 S.Ct. at 2951, 69 L.Ed.2d at 891. (Emphasis added.)
The United States Supreme Court held in Commonwealth Edison that Montana's coal severance tax was like a real property tax, 453 U.S. at 624, 101 S.Ct. at ___, 69 L.Ed.2d at 899; and was tied to the diminution of future sources of economic activity, the depletion of the resource base of the state, and the necessity of supporting the social infrastructure that is necessary to allow coal severance to occur. Id. (See footnote 10) One of the conclusions of the Montana Supreme Court in Commonwealth Edison v. State, 189 Mont. 191, 198, 615 P.2d 847 (1980) _ the decision under review by the U.S. Supreme Court in its Commonwealth Edison decision, supra _ was that the Montana coal severance tax was imposed before the coal had actually entered interstate commerce, and therefore, the Montana tax did not offend the Commerce Clause. 189 Mont. at 196-97, 615 P.2d at 851.
In response to this conclusion by the Montana court, the United States Supreme Court held that a state severance tax is not immunized from Commerce Clause scrutiny by a claim that the tax is imposed on the goods prior to their entry into the stream of interstate commerce. Commonwealth Edison, 453 U.S. at 617, 101 S.Ct. at 2953, 69 L.Ed.2d at 894. The Supreme Court in Commonwealth Edison thereby implicitly accepted as correct the Montana court's conclusion that the Montana coal severance tax was imposed on coal prior to its entry into the stream of interstate commerce. (See footnote 11)
Although Commonwealth Edison was a Commerce Clause case and not a case involving the Import-Export Clause, the Supreme Court's acceptance of the Montana court's conclusion _ that the events providing the basis for Montana's imposition of a coal severance tax occurred prior to the coal's entry into interstate commerce _ supports the analogous conclusion that severance taxes like West Virginia's are based upon and imposed upon activity that occurs prior to the mined and processed coal's entry into export transit.
The appellants cite to a decision of the Fifth Circuit, Louisiana Land & Exploration Company v. Pilot Petroleum Corporation, 900 F.2d 816 (5th Cir. 1990) in support of their contention that the Import-Export Clause prohibits the imposition of the coal severance taxes in the instant case.
In Louisiana Land, the State of Louisiana imposed a sales tax on jet fuel sold by a Louisiana company and pumped by that company into a tanker for shipment to Nova Scotia. The Louisiana Land court found that the tax was levied on the oil while the oil was undisputedly in export transit; and that the Michelin policies were offended when a port state imposed unfair taxes on goods coming from states having no ports. 900 F.2d at 820-21.
reasons, we find that the Louisiana Land case is not persuasive on the
issues in the instant case. First, the coal severance taxes in the instant case
are neither sales taxes nor excise taxes, and they are not imposed on goods that
are undisputedly in export
transit. Additionally, the Michelin-based policy relied upon by the Louisiana
Land court _ of preventing unfair port-state taxation of goods
that are clearly in export transit _ is not implicated by West Virginia's severance
tax, which is imposed in the goods' state of origin long before they reach
any port, and are applied even-handedly on all commercial coal production _
for export to foreign countries, export to other states, or to be used in-state. (See
Virginia's coal severance taxes are substantially similar to coal severance taxes
that have been found to be constitutional by the United States Supreme Court;
(2) West Virginia's coal severance taxes do not discriminate against coal exports;
(3) West Virginia's coal severance taxes do not offend the policies that the Supreme Court has said underlie the Import-Export Clause;
(4) West Virginia's coal severance taxes provide crucial revenue to the State that fairly reflects the costs to the State associated with coal production;
(5) No court in America has held that coal severance taxes like West Virginia's offend the Import-Export Clause;
(6) The specific tax-related activity that the appellants contend most clearly implicates the Import-Export Clause _ the initial loading of coal at coal preparation facilities into rail cars _ is not clearly a part of the export transit process. Moreover, this initial loading process comprises a de minimis portion of the value of the coal that is included in the calculation of some of West Virginia's severance taxes. Nor is the severed coal merely in transit through West Virginia; and, lastly,
(7) The standard of review applicable to the coal severance taxes in question in the instant case requires us to affirm the taxes as constitutional unless it appears beyond doubt that they offend the United States Constitution.
Numerous amici, including State, county, and municipal bodies, have filed briefs documenting the beneficial uses of the tax revenue at issue in the instant case. We need not detail their undisputed submissions that establish the great magnitude of importance attendant to our resolution of the issues in the instant case. Suffice it to say that the coal production severance taxes at issue in this case fund critical environmental reclamation and public welfare programs. Many of these programs are directly related to the effects of coal mining.
To uphold the refunds requested by the appellants and the resulting prospective loss of coal production severance tax revenue would be _ again undisputedly _ a body blow to the welfare and public fisc of West Virginia and her citizens.
If the severance taxes in question are clearly unconstitutional, they must of course be invalidated, without regard to the fiscal effect of such a ruling.
But for this Court to overrule the studied decision of the West Virginia Legislature to impose certain taxes _ to deny the people of the State the benefit of laws enacted by their representatives and of crucial revenue _ a strong and clear showing of the taxes' invalidity would be necessary.
No such showing has been made.
In consideration of the foregoing points and applying the proper standard of review, we conclude that the coal severance taxes in question pass constitutional muster.
therefore, that the coal production severance taxes contained in current and
earlier versions of W.Va. Code, 11-12B-3 ; 11-13A-3 ; 11-13A-6
; 22- 3-11; and 22-3-32  do not offend the Import-Export Clause
of the United States Constitution, art. I, sec. 10, cl. 2. (See
footnote 13) The
judgment of the Circuit Court of Kanawha County is affirmed.