Argued and Submitted: September 25, 2013
APPEAL FROM: District Court of the Thirteenth Judicial District, In and For the County of Yellowstone, Cause No. DV-10-1312 Honorable Susan P. Watters, Presiding Judge
For Appellant: David R. Stewart, Courtney Jenkins (argued), Teresa G. Whitney, Special Assistant Attorney Generals, Montana Department of Revenue, Legal Services Office; Helena, Montana
For Appellee: Robert L. Sterup (argued), Kyle Anne Gray, Shane P. Coleman, Holland & Hart LLP; Billings, Montana
Brian Morris Justice
¶1 The State of Montana Department of Revenue (Department) appeals the order of the Thirteenth Judicial District, Yellowstone County, that determined that the Department lacked authority to impose retroactive assessments on Bresnan Communications, LLC (Bresnan). The Department also appeals the separate findings of fact, conclusions of law, and order that determined that Bresnan owns exclusively class eight cable television system properties under § 15-6-138(l)(k), MCA. We reverse and remand.
¶2 We address the following issues on appeal:
1. Whether the District Court properly determined that Bresnan owned exclusively class eight property?
2. Whether the District Court properly concluded that the Department lacked authority to impose retroactive property tax assessments?
PROCEDURAL AND FACTUAL BACKGROUND
¶3 Bresnan challenged the Department's decision to tax Bresnan as a single entity rather than allowing Bresnan to apportion unilaterally its assets among tax classifications. Bresnan is a Delaware Limited Liability Company that operates in Montana. Bresnan purchased the cable television network infrastructure in Montana that is at the center of this dispute in 2003.
¶4 Bresnan's 2003 network was typical of cable systems. The "headend" of that network received and broadcasted data that Bresnan chose. The headend broadcasted data over the "trunk cable, " the industry name for the networked cable system that connected Bresnan's data feed to each customer's neighborhood. Once the data reached a customer's neighborhood, the "feeder cable" transmitted data throughout the neighborhood. Each individual customer had a "drop cable" that connected the feeder cable to the customer's home. The drop cable connected to the customer's "terminal equipment." The terminal equipment, commonly known as the set-top box, interpreted which data to play on a television.
¶5 Bresnan began to upgrade the network's infrastructure to include new services shortly after the purchase. Bresnan sought to integrate services beyond basic television programming. Bresnan wanted to bundle expanded cable programming (cable), on-demand video services, high-speed internet data services (internet), and voice-over internet protocol telephony services (VoIP). Bresnan labels these services its "Triple Play" package. The upgrades necessary to include these services altered Bresnan's network from its 2003 form.
¶6 Bresnan's expert accounting and valuation report describes Bresnan's "significant investment in system engineering, costly new equipment, upgraded distribution plant, and installation labor" in order to expand its cable programming. Bresnan improved its satellite receiver dishes, installed signal combiners, optical laser transmission equipment, and added optical fiber between the headend and feeder cable distribution nodes. Bresnan invested in video-on-demand servers and upgraded distribution node equipment. Bresnan also distributed new set-top boxes to customers.
¶7 Bresnan made additional investments to prepare its system for internet services following its cable upgrade. Bresnan made business arrangements to provide connection to the internet and upgraded its physical system to affect the addition of internet services. Physical upgrades included data switches in each headend to interface with the internet connections in Seattle and Denver, local data servers in main headends, and a "Cable Modem Termination System" (CMTS).
¶8 The CMTS allowed Bresnan to combine the internet data with the cable data into a single electrical signal for transfer over Bresnan's system. Bresnan also provided cable modems to subscribers who purchased internet service. To achieve the transfer of internet service to its customers, Bresnan used both the CMTS and the recently-installed signal combiners, optical fiber between headends and distribution nodes, and existing drop cables.
¶9 Bresnan upgraded its network further to provide VoIP residential telephone services. Bresnan contracted with Net2Phone, a joint venture partner, to effect this upgrade. Net2Phone provided most of the necessary capital and software to bring about residential VoIP capabilities. Bresnan provided use of the CMTS to combine the residential VoIP data with the cable and internet data into a single electrical signal for transfer over Bresnan's network. Bresnan used both the CMTS and the recently-installed signal combiners, optical fiber between headends and distribution nodes, and existing drop cables to achieve the transfer of residential VoIP service to its customers.
¶10 Bresnan also engaged in the "[s]ystem [h]ardening" process for its network after upgrades to enable residential voice services. System hardening included further physical changes to Bresnan's network. Specifically, Bresnan installed battery backups and other unspecified equipment to identify and reduce interference for residential VoIP service. System hardening reduced interference that specifically would have affected the data and VoIP traffic on its network.
¶11 Bresnan made further upgrades to enable commercial VoIP. These upgrades included new switches in select headends and data servers for commercial subscriber voicemail services. Bresnan used the CMTS to combine the commercial VoIP data with residential VoIP, cable, and internet data into a single electrical signal for transfer over Bresnan's network. Bresnan used both the CMTS and the recently-installed signal combiners, optical fiber between headends and distribution nodes, and existing drop cables to achieve the transfer of commercial VoIP service to its customers.
¶12 Bresnan lastly began to provide the same terminal equipment to customers in 2010, without consideration of which services the customer had purchased from Bresnan. This new terminal equipment provided an integrated experience to customers. Regardless of which services the customer had purchased from Bresnan, all data arrived into a single piece of terminal equipment. The single terminal equipment processed that data and delivered the appropriate service to the customer.
¶13 Although Bresnan functionally had bundled its Triple Play services for consumers, Bresnan segregated each service for taxation purposes. Montana imposes an excise tax upon voice services, such as Bresnan's telephony operations. Section 15-53-128 et seq., MCA. Montana imposes no excise taxes upon cable television or high speed internet. Section 15-53-128 et seq., MCA. Bresnan paid separate franchise fees to local governments for the right to install its cable television system in public rights of way. Bresnan needed to pay no franchise fees, however, for high speed internet or telephony.
¶14 The Montana legislature amended the Montana tax code in 1999 to include language central to this dispute. The amendment specifically incorporated "telecommunications services" into the tax code when it created an assessment classification for "telecommunications services companies." Section 15-6-156(1)(d), MCA (2001). The Department would for the first time assess centrally allocations of "telecommunications services companies" under the new amendment. Section 15-6-156(1)(d), MCA (2001). Comments at the hearings on the bill show that the bill's sponsor intended to provide a tax decrease from the pre-1999 assessment and taxation rates for "the assets of telecommunications" in future telecommunications developments. Mont. Sen. Tax. Comm., Hearing on HB 174, 1999 Legis., Reg. Sess. 11-13 (Apr. 12, 1999).
¶15 Montana's administrative rules require the Department to value centrally reported property through the unit method of valuation. Admin. R. M. 42.22.111 (2011). Unit valuation considers the market value of the company as a functional whole instead of the value of individual components. Whether a taxpayer uses local filing, as compared to central filing, dictates the method that the Department uses to value property.
¶16 Bresnan unilaterally apportioned company assets when Bresnan made its tax reports in order to segregate its property. Bresnan used centralized, statewide reporting for its voice operations. Bresnan included roughly 10% of company assets in its voice operation tax declaration. Bresnan reported voice operations as "Bresnan Digital Services, LLC" doing business as "Montana Telephony" from 2007 to 2009. Bresnan also centrally reported its microwave satellite operations as a portion of the same 10% of company assets. The Department had classified Bresnan's voice operations as class thirteen property from 2007 to 2009 because the voice operations were "allocations of [a] centrally assessed telecommunications and services compan[y]." The class thirteen classification resulted in a 6% centralized assessment on Bresnan's voice property.
¶17 Bresnan included the remaining 90% of its assets in locally reported cable and internet properties assessments as "Bresnan Communications, LLC." Local communities assessed Bresnan's cable and internet properties from 2007 to 2009. Local assessments resulted in a 3% local assessment on cable and internet properties. The Department knew of Bresnan's decision to report its cable ...