Recent Arizona Court Decisions

A summary of recent court opinions issued by the Arizona Courts, with links to the full opinion.

6/5/07	Arizona Dep't of Revenue v. Action Marine, 1 CA-TX 06-0006- The Arizona Court of Appeals held that A.R.S. § 42-5028 does not impose personal liability for unpaid transaction privilege taxes upon corporate officers or directors whose duties include remitting such taxes to the Arizona Dep't of Revenue because the term "person," as defined in A.R.S. § 42-5001(8) and used in A.R.S. § 42-5028, does not include a corporation's officers or directors.  The court held that A.R.S. § 42-5028 imposes liability only upon the merchant/taxpayer who engages in the transactions that give rise to the tax, and not upon the officers, employees or agents of such a separate business entity.  Applying the principal that the Court interpret tax statutes strictly against the state and resolve all ambiguities in the taxpayer’s favor, the Court concluded that there was no basis to hold that the term “person” as used in A.R.S. § 42-5028 encompasses a corporate officer or director, because such office holders were not listed in A.R.S. § 42-5001(8), and because there is no Arizona statute that places an affirmative obligation on such individuals to pay a corporation's transaction privilege taxes.
5/24/07	Karbal v. Arizona Dep't of Revenue, 1 CA-TX 06-0010- The Arizona Court of Appeals held that the Plaintiff, a customer, did not have standing to challenge the transactional tax because the legal incidence of the tax fell on the vendors and not their customers.   The mere fact that taxable businesses may pass their taxes to customers does not shift the legal incidence of the tax to customers or confer standing to customers.  Citing Arizona Dep’t of Revenue v. Canyoneers, Inc., 200 Ariz. 139, 144, ¶¶ 20-23, 23 P.3d 684, 689 (App. 2001) (holding that the State cannot condition transaction privilege tax refunds upon subsequent customer repayment without clear statutory authority to do so), the Court also reasoned that Arizona law provides no mechanism requiring the vendors to return to Plaintiff any sum collected for the payment of taxes.  Consequently, although a favorable decision could lead to a refund for the rental car companies and hotels charged with the taxes, there is no requirement that they pass along the refund to the Plaintiff.  Standing is therefore lacking because a favorable decision would not redress Plaintiff’s alleged injury.
2/15/07	Copper Hills v. Arizona Dep't of Revenue, 1 CA-TX 05-0007- The Arizona Court of Appeals held that a transaction privilege tax collected by a city from a business located in an annexed area must be refunded when the subject annexation is found to be void.  The Court reasoned that the failure to satisfy the requirement of contiguity in A.R.S. § 9-471(A) was also a failure to meet a condition precedent, and thus the City of Phoenix never possessed jurisdiction to annex.  Because the City lacked the necessary jurisdiction to undertake the annexation, it was null and void and never empowered the City to levy taxes on businesses within the subject area.  The Court also rejected the City's argument that it need not refund the overpaid tax, holding "there is no justification to prevent a retroactive application of the decision and require a refund."
5/9/06	Freelance Interpreting Services v. State of Arizona, 1 CA-TX 05-005- The Arizona Court of Appeals held that Taxpayer failed to file a petition for reconsideration to the Arizona Dep't of Economic Security within the timely 15-day period provided by statute where Taxpayer filed the petition 17 days after receiving the ADES determination.  The Court was not persuaded by Taxpayer's argument that a rule of civil procedure extending filing deadlines by five days if notice is given by mail was applicable to the administrative process, especially where the statute specifically did not adopt such provision and there was no good cause for any exception to the filing deadline.
3/30/06	Ronald and Audrey Stearns v. Arizona Dep't of Revenue, 1 CA-TX 04-0006- The Arizona Court of Appeals held that the phrase "the taxpayer's entire income upon which the tax is imposed" for purposes of determining the credit for taxes paid to other states under Arizona Revised Statutes section 43-1071(A) refers to Arizona taxable income as argued by Taxpayers and not to Arizona adjusted gross income as argued by the Arizona Dep't of Revenue.  The credit for taxes paid to other states is calculated by multiplying the Arizona tax due by a fraction whose numerator equals the income subject to tax in the other state and also taxable in Arizona and whose denominator is the "taxpayer's entire income upon which the tax is imposed."  The Court reasoned that the phrase "taxpayer's entire income upon which tax is imposed" is clearly equivalent to a taxpayer's entire taxable income, which is the amount upon which tax liability is computed.  Thus, the denominator of the calculation was smaller, and the credit for tax paid to another state larger, than that argued by the Dep't of Revenue using the larger adjusted gross income denominator figure.
2/8/06	4501 Northpoint LP v. Maricopa County, CV-05-0124-PR- The Arizona Supreme Court held that a taxpayer who accepts an offer of judgment in the taxpayer's favor under Rule 68 of the Arizona Rules of Civil Procedure has prevailed by adjudication on the merits and is therefore eligible for a fee award under Arizona Revised Statutes section 12-348(B).  The Supreme Court reasoned that compelling policy reasons indicate that fees generally should be awarded under section 12-348(B) when taxpayers successfully challenge the government's wrongful imposition of taxes.  The Court further reasoned that that the term "adjudication" requires only the use of the legal process in resolving a case and includes all judgments that finally determine the claims invloved, whether or not the judgment follows an actual trial.
1/19/06	Arizona Dep't of Revenue v. Salt River Project, et. al., 1 CA-TX 04-0016 & 0021- The Arizona Court of Appeals held that the term "original plant in service cost" for purposes of valuing electric transmission and distribution property for property tax purposes does not properly include contributions in aid of construction ("CIAC").  CIAC are payments made by utility customers for the excess costs of installing non-standard transmission items, such as underground lines instead of standard overhead lines.  The Arizona Dep't of Revenue attempted to include these receipts in valuing Taxpayers' property.  The Court of Appeals reasoned that Arizona statute incorporate FERC Regulations that specifically instructs the utility to exclude CIAC from its costs.  Thus, these costs are not part of the original plant in service cost to the Taxpayers.
8/30/05	Cabezon Cable of America v. Arizona State Dep't of Revenue, 1 CA-TX 04-0002-In an unpublished MEMORANDUM DECISION, the Arizona Court of Appeals upheld the Tax Court's summary judgment determination that Taxpayer, an installer and repairer of cable television system equipment for cable service providers, was engaged in prime contracting and did not qualify as an exempt sub-contractor.  Applying the realty improvement test adopted in Brink Electric Construction Co. v. Arizona Dep't of Revenue, 184 Ariz. 354 (App. 1995) (defining a taxable contracting improvement to include the installation of items intended to remain affixed to real property until worn out, until the purpose to which the realty is devoted is accomplished or until the item is superseded by another more suitable for the purpose), the Court rejected Taxpayer's argument that it did not engage in contracting because, like the electrical equipment in Brink, the cable systems installed by Taxpayer were clearly intended to remain where installed until the purpose to which the realty is devoted is accomplished.  The Court also rejected Taxpayer's argument that it was a subcontractor because cable service providers did not fall within the definitional scope of a prime contractor for two reasons: (1) The cable service providers were not contractually liable to customers to install cable systems; and (2) The cable companies did not receive gross income for installation of customers' cable systems from which Taxpayer was paid.
5/3/05	Daimlerchrysler Serices North America v. ADOR, 1 CA-TX 04-0012.  The Arizona Court of Appeals held that a bad debt deduction under Arizona Administrative Code R15-5-2011 is limited to the vendor of goods to which the debt applies unless the assignment of contract rights pertaining to the goods is made with recourse against the vendor.
4/5/05	Qwest Dex v. ADOR, 1 CA_TX 03-0017.  The Arizona Court of Appeals held use tax does not apply to out-of-state printing services and that the out-of-state printers are not “retailers” for purposes of Arizona Revised Statutes (“A.R.S.”) section 42-5155(A).
3/18/05	Griffith Energy v. ADOR, 1 CA-TX 04-0007.  The Arizona Court of Appeals held the arbitrary-and-capricious standard of review is applicable in deciding whether ADOR properly adopted a property valuation table pursuant to Arizona Revised Statutes (“A.R.S.”) section 42-14156(A) and that A.R.S. Section 14156(A)(3) (which directed ADOR to adopt tables prescribing appropriate depreciation for valuing personal property used by electric generation facilities) does not violate the constitutional prohibition against delegating lawmaking authority to an administrative agency.
2/24/05	SFPP v. ADOR, 1 CA-TX 03-0015.  The Arizona Court of Appeals held that, for property tax valuation purposes, the term “original cost” as used in A.R.S. § 42-14204 means the original cost of placing the pipeline assets in service rather than the acquisition cost to the current owner.
2/8/05	4501 Northpoint v. Maricopa County, 1 CA-TX 02-0027.  The Arizona Court of Appeals held that a judgment, entered pursuant to Arizona Rule of Civil Procedure 68 (after an offer for judgment by a party to the action), was not an adjudication on the merits qualifying Taxpayer to receive attorneys’ fees under Arizona Revised Statutes (A.R.S.) section 12-348(B)(1) (2003).
2/3/05	Baker v. ADOR, 1 CA-TX 03-0006.  The Arizona Court of Appeals held that the alternative fuel statutes enacted in December 2000 did not violate the contracts clauses of either the United States or Arizona Constitution or deprive plaintiffs of due process where plaintiffs did not file for claims for the credit prior to the effective date of the legislation.
1/27/05	Lyons v. Board of Equalization, 1 CA-TX 04-0004.  The Arizona Court of Appeals held that the provisions of  A.R.S. §§ 42-16251 through -16258  authorize the Board of Equalization to decide whether a county assessor properly rejected a taxpayer's request for a real property tax exemption.
9/23/04	Walgreen v. ADOR, 1 CA-TX 03-009.  The Arizona Court of Appeals held that the return of principal from short-term investments is not includable in a corporation's "total sales" of its income tax sales factor pursuant to Arizona's version of the Uniform Division of Income for Tax Purposes Act.
7/13/04	Aileen H. Char Life Interest  et al v Maricopa County et al, CV-03-0348-PR.  The Arizona Supreme Court granted review to clarify the elements a taxpayer must prove to establish discriminatory property tax valuation in violation of Arizona’s Uniformity Clause (“all taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax.”  Ariz. Const. Art. IX, § 1).  The Taxpayers contented that the Maricopa County Assessor valued their apartment properties for 1997 in a discriminatory manner by valuing their properties using a cost method, but rolling over the value of other taxpayers’ properties from their 1996 valuation for more than the statutory rollover period of one year set forth by A.R.S. § 42-247(A) (Supp. 1997).  The tax court found in Taxpayer’s favor and the Court of Appeals reversed.  The Supreme Court clarified that to prove discriminatory valuation, a taxpayer must, by a preponderance of the evidence, establish: (1) that the taxing officials engaged in deliberate and systematic conduct; and (2) that such conduct resulted in great inequality.  The Supreme Court reasoned that despite the language of A.R.S. § 42-247(A), the County developed and implemented a policy to rollover property values on certain apartment parcels for more than the one-year statutory period.  The evidence before the tax court indicated that this program resulted in the County rolling over the values of approximately fifty percent of the apartment parcels, but valuing more than forty percent of the apartment parcels, including Taxpayers’ properties, using the cost model.  The Supreme Court held that Taxpayers therefore met their burden of establishing deliberate and systematic conduct. The Supreme Court then clarified that the appropriate class of property to use in evaluating claims of discriminatory valuation consists of those similarly situated properties possessing common attributes “based on the nature of the property or on some other real differences in its use, utility, or productivity.”  The Supreme Court held that the tax court properly found that the multi-family residential property classification is a valid classification to which an unlawful tax discrimination analysis can be applied.  The Court rejected the County’s argument that the legislature did not create such a classification because the classification came directly from the coding system of the County which was adopted from the Department of Revenue’s Property Use Code Manual.  The Court then clarified that to establish their claim of disproportionate valuation, the Taxpayers needed to present evidence to support their claim that the roll-over valuations differed from the full cash value of those properties.  The Court held that Taxpayers made this showing by introducing as evidence the values derived by applying the cost model to calculate the full cash value of the improvements of the roll-over properties; showing that the roll-over properties were values at 66% of their full cash values.  The Court also upheld the remedy of refund Taxpayers, stating that “to place the Taxpayers’ properties on par with the favored roll-over properties, we conclude that the appropriate remedy is that the County refund the difference between the amount the Taxpayers paid and the amount they would have paid had they been treated in the same manner as the roll-over properties.  Finally, the Court concluded that the $30K cap per level of court for attorney fees applied to each individual taxpayer of Taxpayers’ claims.
6/17/04	Pinal Vista v. Turnball, 1 CA-TX 03-0008.  The Arizona Court of Appeals held the transfer of real property to the State by issuance of a treasurer's tax deed does extinguish any privately held tax liens.  The Court made the distinction between state liens and liens held by private investors sighting A.R.S. § 42-17153(B)(3) which provides a tax lien “is prior and superior to all other liens and encumbrances on the property, except liens or encumbrances held by this state.”
4/29/04	Nordstrom v. Maricopa, 1 CA-TX 02-0021.  The Arizona Court of Appeals held that the taxpayers, Nordstrom, Inc. and Scottsdale Fashion Square Partnership, did not qualify as a “shopping center” because their store itself “is not an area comprised of three or more commercial establishments” as required by the statutory definition of "shopping center" set forth by A.R.S. § 42-13201.  It also agreed with the Tax Court’s decisions that: (1) applied the cost approach because there was lack of entrepreneurial profit and; (2) did not deduct functional obsolescence from the property tax valuation because the cost approach already used replacement cost appraisal figures and thus no additional reductions are necessary.
4/21/04	State of Arizona ex rel. The Arizona Department of Revenue v. Capitol Castings, Inc., CV-03-0250-PR.  The Arizona Supreme Court concluded the 1999 amendment of § 42-5159(C)(1) regarding “expendable materials” was specifically intended to overrule Arizona Dep't of Revenue v. Capitol Castings, Inc., 193 Ariz. 89, 970 P.2d 443 (App. 1998) (“Capitol I”) and the Court adopted the “ultimate function” and “integrated approach” tests set forth by the Court of Appeals in Duval Sierrita Corp. v. Arizona Dep't of Revenue, 116 Ariz. 200, 568 P.2d 1098 (App. 1977) in determining whether items should be exempt from use tax under § 42-5159(B)(1).  In interpreting the provision, the Court set forth broad language, stating that “there is no dispute about its underlying purpose.  The legislature enacted A.R.S. § 42-5159(B)(1) to stimulate business investment in Arizona” and that the “interpretation of the statute therefore should further, not frustrate, the policy of encouraging investment and spurring economic development”.  Although the Court made a clear decision as to the criteria to test an item for its qualification as exempt “machinery or equipment”, the Court did not make any decision in regarding whether an item qualifies as exempt “machinery or equipment” when it is used to manufacture a product that is then used in the manufacturing process of another product.  The Court vacated the opinion of the Court of Appeals, resolved the exemption status of several items as “machinery or equipment” as defined by A.R.S. § 42-5159(B)(1), and remanded the case for further proceedings regarding items used as refractory materials.
12/11/03	Kocher v. Arizona Department of Revenue, 1 CA-TX 03-0002.  The Arizona Court of Appeals held that the taxpayers, Joel J. and AnnMarie Kocher, were residents of Arizona for the subject tax year because Taxpayers failed to show they were not part-year residents in the prior year.  Thus Taxpayers were not allowed the deduction of income accrued prior to residency under A.R.S. § 43-1097(B) and were not entitled to deduct $5.6 million in stock option income from their Arizona income tax return.
9/4/03	University v. Pima County, 1 CA-TX 02-0006.  The Arizona Court of Appeals held that the taxpayer, University Physicians, Inc., as a whole could qualify for a property tax exemption as long as each of it’s individual properties qualified as a charitable institution for the “relief of the afflicted” as defined by A.R.S. § 42-11107.  The Court further clarified “afflicted” to mean an immanent risk that one is unable to reasonably take care of them self or function in society without periodic or continuous assistance.
8/26/03	Citizens v. Arizona Department of Revenue, 1 CA-TX 02-0017.  The Arizona Court of Appeals affirmed that Qwest Corporation was properly granted summary judgment by the tax court on its allegation that ADOR’s failure to apply the functional equivalency test from In re America West Airlines to value Qwest's class 3 property violated the Uniformity Clause.  The Court also affirmed that: (1) the tax court had jurisdiction to hear taxpayers' discrimination claim contrary to ADOR’s and 15 Arizona counties’ assertions that taxpayers lacked standing due to un-levied taxes not being paid; and (2) the tax court does not lack jurisdiction of cases in which the taxpayers failed to name all applicable counties as parties but that it does bar the taxpayer from seeking a refund from such unnamed county.  The Court reversed in part and remanded the matter to tax court for determination of whether Arizona Telephone, Valley Telephone, Southwestern Telephone, Copper Valley, Citizens Navajo, and Citizens White Mountains support similar service, were sufficiently similar to competitors, and whether the functional equivalency test is met.
8/14/03	Luther v. Arizona Department of Revenue, 1 CA-TX 02-0018.  The Arizona Court of Appeals applied the estoppel test set forth in Valencia Energy Co. v. Arizona Dep't of Revenue, wherein equitable estoppel may lie against a taxing authority under the following circumstances: (1) the taxing authority engaged in affirmative conduct inconsistent with a position it later adopted that is adverse to the taxpayer, (2) the taxpayer actually and reasonably relied on the taxing authority’s prior conduct, (3) the taxing authority’s repudiation of its prior conduct caused the taxpayer to suffer a substantial detriment because the taxpayer changed its position in a way not compelled by law, and (4) applying estoppel against the taxing authority would neither unduly damage the public interest nor substantially and adversely affect the exercise of government powers.  The Court held that the ADOR acted inconsistently in its position of assessing tax on United States Bureau of Indian Affairs (“BIA”) contracts when their earlier positions of exempting tax on these proceeds was evidenced by letter and subsequent audit and refund.  The Court determined that material issues of fact remained in dispute as to: (1) whether the Taxpayer actually and reasonably relied upon the ADOR’s change in position; (2) whether this reliance was reasonable; and (3) whether the Taxpayer was put on notice as to this prior position.  The Court reversed and remanded for further determination with regard to these issues of material fact.
7/22/03	Interlott v. Arizona Department of Revenue, 1 CA-TX 02-0020.  The Arizona Court of Appeals affirmed summary judgment holding Taxpayer liable for assessments of transaction privilege tax on gross receipts from taxable activities within in the state due to substantial nexus within the state and because it had failed to timely protest the municipal assessments by not citing any municipal activity or assessment within its protest or by amendment.
5/15/03	Arizona Department of Revenue v. Capitol, 1 CA-TX 01-0007 and 1 CA-TX 02-0017 (Consolidated).  The Arizona Court of Appeals denied ADOR’s motion to strike portions of the reply brief of Capitol Castings, Inc., held the tax court did not abuse its discretion in granting relief from the judgment on mandate, and held the tax court correctly determined that the materials claimed were not entitled to the exemption for “machinery, or equipment used directly in manufacturing, processing, fabricating, job printing, refining or metallurgical operations.”  As an issue of first impression and interest to the mining and manufacturing industries, it was determined and upheld that materials used to make molds were “expendable” and do not qualify as "machinery" or "equipment," and are not exempt from use taxation pursuant to A.R.S. § 42-5159(B)(1).
3/27/03	Arizona Department of Revenue v. Raby, No.1 CA-TX 01-0004. The Arizona Court of Appeals held that the taxpayers, Mr. And Mrs. Raby, who had equal community property interests in the sums that the Arizona State Retirement System paid as a result of Mr. Raby’s retirement, were not each enitled to exclude $2,500 of those payments under A.R.S. § 43-1022(2)(b) (1994) in computing their Arizona adjusted gross income, but were only entitled to a single maximum subtraction of $2,500.
2/25/03	Arizona Joint Venture v. Arizona Department of Revenue, No. 1 CA-TX 02-0010. The Arizona Court of Appeals held that: (1) The Arizona Department of Revenue did not exceed its statutory authority in adjusting taxpayers’ land deductions from the prime contracting classification subsequent to the issuance of the assessment; (2) The four-year statute of limitation did not bar the Department’s adjustments; and (3) Taxpayers failed to establish estoppel against the Department. Taxpayers protested a transaction privilege tax assessment under the prime contracting classification on the basis that the Department improperly concluded that taxpayers were liable for “off-site” prime contracting for which taxpayers issued prime contracting exemption certificates to the taxable contractors. The Department subsequently agreed that such contracting was not “off-site” prime contracting that subjected taxpayers to liability due to their issuance of exemption certificates, and conceded that the common areas at issue were “on-site” improvements that were sold to the condominium owners. Simultaneous to such concession, the Department re-examined taxpayers land deductions and decreased the allowed deductions. The Court of Appeals agreed with the Department’s position that taxpayers’ land deductions were properly adjusted because only raw land for the “on-site” common areas rather than improved land for the “off-site” common areas was qualified for the deduction. Because the adjustment was related to the disputed issue, it was not a new audit that triggered a new four-year statute of limitations. Because the adjustment did not increase the total tax liability of the taxpayers, it did not violate A.R.S. § 42-2059(B). Finally, with regard to estoppel, the Court of Appeals held that taxpayers did not establish that: (1) Prior assessments by the Department that accepted or failed to challenge taxpayers’ initial land deduction were inconsistent with the assessment at issue; (2) They reasonably relied upon these prior audits because they knew or should have known that their land deductions would necessarily be reduced if the lands were not valued as improved; and (3) They suffered “substantial detriment” because requiring a taxpayer to pay taxes it legitimately owes does not qualify as legal detriment.
12/26/02	U-Stor Bell v. Maricopa County, No.1 CA-TX 01-0013. The Arizona Court of Appeals issued its decision that the taxpayers’ manager apartments do not fall within the scope of the residential exception to the real property commercial classification of A.R.S. § 42-12004(A)(1) because taxpayers’ on-site managers did not use the apartments “solely for residential purposes” and taxpayers did not “lease or rent” the manager apartments to the managers, as required by the exemption. Each of taxpayers’ facilities incorporates an apartment in which the facility manager must live as a condition of employment for the purpose of both managing the storage facility and providing security for the premises. The Court reasoned that: (1) Because the manager apartments were a condition of employment, the apartments were not leased or rented within the meaning of the exemption; and (2) Because the use of the managers’ apartments is incidental to the performance of duties to their employers, they do not occupy their apartments solely for residential purposes.
10/24/02	Maricopa County et al. v. Kinko’s Inc. et al., No.1 CA-TX 01-0010. The Arizona Court of Appeals issued its decision on whether or not the Arizona Constitution Article 9, Section 2(6) does not authorize a legislative personal property exemption for each location of a taxpayer’s business. Arizona Revised Statutes § 42-11127 replaced A.R.S. §42-280 in 1999 and substituted the words “assessment account” in place of “Taxpayer.” Kinko’s argued that this change by the legislature in the tax statute allowed a personal property exemption for each location of business. The Court declared the changes in the replacement statute A.R.S. § 42-11127 unconstitutional because authority to broaden the scope of Article 9, Section 2(6) is not given to the legislature by the Arizona Constitution. The Court, therefore, reinstated the prior version, § 42-280, of that statute. The Court then relied on Circle K Stores, Inc. v. Apache County, 199 Ariz. 402, 18 p.3d 713 in interpreting the word “Taxpayer” as used in Article 9, Section 2(6) of the Arizona Constitution. The Court ruled that Article 9, Section limits taxpayers to a single statewide, exemption because the use of the word “Taxpayer” refers to the owner of the property who pays taxes.
10/24/02	Navajo County v. Property Tax Oversight Commission, No.1 CA-TX 01-0016. The Arizona Court of Appeals issued its decision, that a cash settlement paid by Navajo County, which resulted from a lawsuit brought by health care providers for medical care given to indigents of Navajo County, should be included within the County’s ad valorem property tax levy limit as set forth by Article 9, Section 19 of the Arizona Constitution. Navajo County cited Maricopa County v. Prop. Tax Oversight Comm’n, 188 Ariz. 214, 933 P.2d 1289 and contended the courts created an exception for involuntary payments resulting from judgments or prejudgment settlements that should be considered outside the levy limit. The Court of Appeals distinguished Maricopa County because tax refund obligation was involuntary incurred and could not have been reasonably foreseen or planned for and such costs may be excluded from the ad valorem property tax levy limit. In this case, however, the Court determined that the settlement paid by Navajo County, although involuntary, could have been reasonably foreseen or planned for because the settlement was for health care provided to the indigent of Navajo County and such health care costs are the County’s obligation. The Court ruled that settlement paid by Navajo County be included in the County’s ad valorem property tax levy limit.
10/24/02	Energy Squared, Inc. v. Arizona Department of Revenue, No.1 CA-TX 02-0004. The Arizona Court of Appeals issued its decision that tanning services offered by tanning salons do not constitute a rental of personal property taxable under Arizona Revised Statutes 42-5071(A). Energy Squared, Inc. provided tanning services to patients through the use of tanning beds. In providing this service Energy Squared retained total control of the length of time spent in the tanning bed and the degree or level of tanning. The only control given to customers is the ability to start and stop the tanning process. The Court cited State Tax Commission v. Peck, 106 Ariz. 394, 476 P.2d 849, in its decision stating that, the scope and application of A.R.S. § 42-5071(A) hinges on the degree of control over the property in question that is cede to its lessee or renter. The court determined that operation of the tanning equipment remained significantly within Energy Squared’s control and that the degree of control necessary to classify this transaction as a rental of personal property pursuant to A.R.S. § 42-5071(A) was not transferred to the equipment’s user.
5/23/02	People's Choice TV Corporation v. City of Tucson, No. CV-01-0156-PR (2001)- The Arizona Supreme Court issued its decision with regard to the city of Tucson's authority to tax ancillary services provided in connection with interstate telecommunication services when state law has precluded the taxation of interstate telecommunication services. People's Choice TV received television broadcast signals from sources primarily outside Arizona and provided television programming to its customers by subscription. Pursuant to Tucson City Code § 19-470, which imposes a two percent tax on the gross income derived from subscription or membership fees to a telecommunication network, the city of Tucson assessed transaction privilege tax on the gross income received by People's Choice TV for its subscription services. People's Choice TV argued that the subscription services were part of their interstate telecommunication services and Arizona Revised Statutes ("A.R.S.") § 42-6004 prohibits the city of Tucson from levying transaction privilege tax on the gross receipts derived from those services. A.R.S. § 42-6004 states, in part, that "[a] city, town or special taxing district shall not levy a transaction privilege, sales, use or other similar tax on ... interstate telecommunications services, which include that portion of telecommunications services, such as subscriber line service, allocable by federal law to interstate telecommunications service." Because the statute did not define interstate telecommunication services, the Court looked to the legislative intent of the statute and determined that the meaning of "interstate telecommunication services" includes interstate transmissions and services ancillary to providing interstate telecommunication services such as connection, access, subscription and membership fees. The Court, therefore, ruled that the subscription services provided by People's Choice TV were included within the definition of interstate telecommunication services and A.R.S. § 42-6004 precluded the city of Tucson from imposing transaction privilege taxes on gross income derived from those services.
4/25/02	Southern Pacific Transportation Company, Inc. v. Arizona Department of Revenue, No.1 CA-TX 00-0024 (App. 2002)- The Arizona Court of Appeals issued its determination on whether Arizona law authorizes the apportionment of state and local transaction privilege taxes on gross receipts from transportation services where a portion of the transportation route exits and enters the state. Southern Pacific Transportation delivered raw copper mined from within the town of Clifton's jurisdiction to smelters located within the state of Arizona. The transportation route used by Southern Pacific included a stop at their facilities in Lordsburg New Mexico. Arizona Revised Statutes § 42-5062(A) states, that "[t]he transporting classification is comprised of the business of transporting for hire persons, freight or property by motor vehicle, railroads or aircraft from one point to another point in this state." The Court first recognized that A.R.S. § 42-5062(A) does not include a provision authorizing the apportionment of tax applied to interstate transaction. The Court further interpreted the statutory language, "from one point to another point in this state," to mean a transportation route located entirely within the state of Arizona. The Court, therefore, ruled that the tax imposed by A.R.S. § 42-5062(A) cannot be applied to transportation business services performed within and without Arizona.
4/04/02	Arizona Department of Revenue v. Blue Line Distributing, Inc., No.1 CA-TX 01-0011 (App. 2002)- The Arizona Court of Appeals issued its decision on whether machinery and equipment used in the process of making pizza dough properly qualifies as machinery and equipment used directly in manufacturing and processing and, therefore would be exempt from transaction privilege tax pursuant to Arizona Revised Statutes § 42-5061(B)(1). A.R.S. § 42-5061(B)(1) defines "manufacturing and processing" to refer to operations and processes commonly understood within their ordinary meaning. Because there was no Arizona precedence on the application of A.R.S. § 42-5061(B)(1) to restaurants engaged in making pizzas, the Court relied upon to outside sources to hold that a pizzeria's business process of making pizza dough is not manufacturing and processing as commonly understood within their ordinary meaning. Furthermore, the Court stated that, the legislative purpose of A.R.S. § 42-5061(B)(1) is to encourage investment in the manufacturing industry not the restaurant industry.
3/07/02	Arizona Department of Revenue v. Arizona Outdoor Advertisers, Inc., No.1 CA-TX 99-0012 (App. 2002)- The Arizona Court of Appeals issued its determination on whether income from the rental of billboard space should be treated as income from the commercial leasing of real property where ownership of the billboards did not pass to the owner of the real property and upon lease termination the billboards were removed from the real property. In deciding this case the Court was required to determine whether the erected billboards become part of the real property as fixtures or if they remain personal property. The Court concluded that the three-part fixture test applied in Brink Electric Construction Co. v. Arizona Dep't of Revenue, 184 Ariz. 354, 909 P.2d 421 (App. 1995), does not accurately determine if personal property has become an improvement to the real property. The Court instead adopted a reasonable person test of whether, given the totality of the circumstances, a reasonable person would assume that the item in question belongs to and is a part of the real estate on which it is located. Upon applying the reasonable person test to the facts of this case, the Court ruled that the billboards remained personal property and income from the rental of those billboards are not taxable under the commercial lease classification. Note - The Appellate Court specifically adopted this reasonable person test for all cases that involve characterizing property as real or personal for tax purposes. As such, it is also applicable to the scope of real property improvement within the meaning of the prime contracting classification of A.R.S. § 42-5075.
1/29/02	Hurley Trucking Co. v. Arizona Department of Transportation, No.1 CA-TX 99-0020 (App. 2002) review denied May 23, 2002- The Arizona Court of Appeals issued its determination on whether the Arizona department of Transportation can impose use fuel tax and motor carrier tax for truckers' use of right of ways over lands owned by the federal government. Vehicle use fuel taxes and motor carrier taxes are imposed on the use of highways within the State of Arizona. A.R.S. § 28-5601 (formerly A.R.S. § 28-1551) states:      11. "Highway" means any way or place in this state of whatever nature, which is maintained by public monies or open to the use of the public, for purposes of vehicular travel, including highways under construction.      12. "In this state" means any way or place within the exterior limits of the state of Arizona but excludes all territory within these limits owned or ceded to the United States of America. Base upon those definitions, Hurley asserted that it was entitled to a refund of vehicle use fuel and motor carrier taxes paid as a result of its use of the highways that are within territories owned by the federal government. Although the plain language of the statute clearly excludes from the scope of the taxable activity all territory that is owned or ceded to the United States, and despite Arizona precedence that the scope of taxing statutes be construed in favor of the taxpayer, the Court determined that the phrase "any way or place" is ambiguous and looked for external clarification of the statute. The Court determined that the phrase "any way or place" means the actual right of way and not the underlying land. The Court, therefore, concluded that vehicle use fuel and motor carrier taxes may be imposed on the use of all public right of ways within the state of Arizona.