872 P.2d 206 (Ariz.Tax 1994), TX 93-00277, Valencia Energy Co. v. Arizona Dept. of Revenue

Docket Nº:TX 93-00277.
Citation:872 P.2d 206, 178 Ariz. 251
Case Date:April 04, 1994
Court:Tax Court of Arizona

Page 206

872 P.2d 206 (Ariz.Tax 1994)

178 Ariz. 251




No. TX 93-00277.

Tax Court of Arizona.

April 4, 1994

Page 207

[178 Ariz. 252] Stephen C. Newmark, Phoenix, for plaintiff.

Attorney Gen. by James M. Susa, Phoenix, for defendant.



Tucson Electric Power Company (TEP) built a coal-fired electric plant in Springerville, Arizona which the Alamito Company runs. The Valencia Energy Company, a wholly owned subsidiary of TEP, contracted with Alamito to supply all the coal needed to operate Alamito's burner. The contract requires the coal to be a certain size and to have limited amounts of moisture, ash, and sulfur.

Valencia buys the coal from mines in New Mexico. It then ships it to Springerville where Valencia readies it for burning by Alamito. After the coal is burned, Valencia removes the ash left behind.

The Arizona Department of Revenue audited Valencia's books for the period of November 1985 through March 1990 and imposed an additional assessment of $4,979,216.85, plus interest. 1 During those years, Valencia paid transaction privilege taxes only on the activity of procuring the coal--not on the activities of transporting and then handling it before it was used by Alamito. Valencia thought (and argues here) it was conducting three separate businesses--procurement, transportation, and handling--not just one. After running the audit, the Department disagreed; it believed Valencia's sale of coal to Alamito (including all related activities) was one business. The issue then is whether, during that period, Valencia conducted one or three businesses.

Valencia also argues that whether or not it is conducting three businesses, the Department should be estopped from collecting the additional assessment because the Department led Valencia to believe only the activity of procuring the coal was taxable. Finally, Valencia argues that if the Department is not estopped, a portion of Valencia's receipts fall within an exemption from taxation. The Court disagrees with Valencia on all three points.

Page 208

[178 Ariz. 253]


The first question that should be answered is whether the Department is estopped from imposing the additional assessment. If it is, the Court need not decide whether Valencia conducts more than one business and whether it is entitled to an exemption.

  1. Estoppel

    Valencia's argument is based upon its reliance on the informal written opinion of Department employees, given in 1986, that only Valencia's activity of procuring the coal was subject to the transaction privilege tax. Valencia contends that because of its reliance it suffered damage and prejudice since it failed to collect the cost of the taxes from Alamito and cannot now go back and recoup that cost. The Department, therefore, should be estopped from collecting the tax for past years. 2 The Department does not dispute that Valencia relied upon representations of Department employees and that it did not collect the tax from Alamito. Nevertheless, the Department claims, it is not estopped.

    Even admitting Valencia relied on the representations and was damaged, its argument goes directly against both this Court's recent holding in PCS, Inc. v. Ariz. Dept. of Rev., 176 Ariz. 628, 863 P.2d 920 (Tax 1993), and well-settled law which refuses to apply estoppel to the Department in a situation such as this.

    Arizona courts have repeatedly found that estoppel will not be applied against taxing authorities except in rare and unique circumstances. The rule is clear:

    [T]here can be no estoppel involved against a sovereign state. The failure of the tax commission to attempt to collect taxes now sought to be collected from plaintiff for a period of years...

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