Mid-Northern Oil Co. v. Walker

Background

An oil company sued to stop Montana from enforcing an annual license tax equal to one percent of the gross value of oil produced in the state. The company had leases, by assignment, to produce oil on public lands that were entered as homesteads but not yet patented, and it relied on the federal Leasing Act of February 25, 1920. The company argued it was effectively a federal lessee or instrumentality and therefore immune from state taxation. The Montana courts disagreed, and the case reached the Supreme Court.

Reasoning

The Court focused on section 32 of the Leasing Act, which says the Act should not be read to affect state rights, “including the right to levy and collect, taxes upon improvements, output of mines, or other rights, property, or assets of any lessee of the United States.” The Court rejected the company’s narrow reading that the clause only confirmed previously existing rights and rejected a limiting construction based on similarity of items. The justices concluded Congress intended that persons and corporations contracting with the United States under the Act remain subject to ordinary state taxation.

Real world impact

The result lets Montana keep its one-percent license tax and confirms that companies producing oil on federal leases can be taxed by states on production, improvements, and related assets. The decision removes a broad claim of immunity for lessees under the Leasing Act and makes clear states may tax such business activity when otherwise lawful.