Cooney v. Mountain States Telephone & Telegraph Co.

Background

A Colorado telephone company that runs a statewide system in Montana sued to stop two Montana laws that imposed annual license taxes per telephone instrument. The company provides both local and long-distance service; its Montana phones are part of a larger system reaching other states and foreign countries. The 1933 law taxed each telephone instrument used in providing telephone service in Montana, with narrow exemptions for very low-rate residence or business phones. A 1934 amendment changed the tax amount, payment date, and other details but kept the tax on instruments not excepted. A three-judge federal district court found the taxes invalid under the Constitution’s limit on state interference with interstate commerce and permanently enjoined enforcement.

Reasoning

The Court addressed whether Montana could apply an occupation tax to telephone instruments used for both local and interstate calls. The laws taxed each instrument indiscriminately, without separating intrastate from interstate service, and the evidence showed thousands of Montana phones actually handled interstate or foreign communications and that the same equipment and personnel served both kinds of calls. The Court explained that while a State may tax purely local business, it cannot tax interstate commerce or apply a tax to facilities common to both kinds of service when it is impracticable to separate them. Because the tax was indivisible and would burden interstate communications, the Court affirmed the injunction against enforcing the statutes.

Real world impact

Montana may not collect the challenged per-phone license fees where the devices are part of interstate telephone operations; telephone companies that use the same instruments for local and long-distance service are protected. The ruling limits states’ ability to impose blanket device-based occupation taxes that reach into interstate commerce. The decision leaves states free to tax clearly separable local services, but not to tax instrumentalities indiscriminately used for interstate trade.