Apache County v. Atchison, T. & S. F. Ry. Co.

• Decision Date: 13 November 1970
• Docket Number: No. 9946,9946
• Parties: APACHE COUNTY et al., Appellants, v. The ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY, and Southern Pacific Company, Appellees.
• Court: Arizona Supreme Court

Page 657

476 P.2d 657

106 Ariz. 356

APACHE COUNTY et al., Appellants, v. The ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY, and Southern Pacific Company, Appellees.

No. 9946.

Supreme Court of Arizona, In Banc.

Nov. 13, 1970.

Gary K. Nelson, Atty. Gen., Phoenix, by Robert O. Lesher, Tucson, Stanley Z. Goodfarb, John M. McGowan, James D. Winter, Asst. Atty. Gen., Phoenix, for appellants.

Fennemore, Craig, von Ammon & Udall, Phoenix, for The Atchison T. & S.F. Ry. Co.

Evans, Kitchel & Jenckes, Phoenix, Robert L. Pierce, San Francisco, Cal., for Southern Pac. Co.

STRUCKMEYER, Vice Chief Justice.

The Atchison, Topeka and Santa Fe Railway Company and the Southern Pacific Company, the State's two principal railroads, brought similar actions to recover ad valorem property taxes paid under protest for the year 1968 and for one-half of the year 1969. The actions having the same issues were consolidated and as consolidated heard and decided. Judgments on amended and supplemental complaints were entered, favorable in part to the railroads, ordering that the assessed valuation of the railroad properties for tax purposes be reduced from 60% To 40% Of full cash value. From the judgments, the State has appealed and the railroads have cross-appealed.

In 1967, Arizona's Legislature, after a four-year study of all property within the State revised many of its tax laws. A legislative scheme assessing real and personal property by classes for taxation purposes was adopted, and, because taxes were reduced in some areas and because there was a need for increased revenues in aid to education, income, sales, luxury, and other excise taxes were increased.

By A.R.S. § 42--136, ¹ the Legislature for tax purposes placed all real and personal property in Arizona in four classes. The real and personal property of railroad companies used in the continuous operation of a railroad was placed in Class One. By A.R.S. § 42--227, subsec. B, par. 1, ² for tax purposes Class One properties are assessed at 60% Of their full cash value.

It is the State's position that the placing of railroad properties in a classification requiring their assessment at 60% Of full cash value is a constitutional exercise of legislative discretion and that the reduction from 60% To 40% Ordered by the Superior Court was a judicial reclassification wholly unauthorized by law. It is the railroad's position that the statute under which the 60% Assessment was levied was unconstitutional and that all taxes paid under protest, not simply the difference between 40% And 60% Of the full cash value of their properties, may be recovered.

In considering the respective positions of the parties, any notion that Arizona's exaction is confiscatory or grossly oppressive should immediately be dispelled. The record reveals that the Southern Pacific Company's property taxes in Arizona in 1968 were reduced from $6,216,721 to $4,801,222 by the legislative changes of 1967. In 1968 it earned $82,234,832 in its Arizona operations, paid $4,781,036 in ad valorem property taxes, and a total of $5,067,097 in all taxes. While the Southern Pacific Company paid a greater percentage of its Arizona derived income in real property taxes to Arizona than California derived income to California, comparison of excise taxes showed that the Southern Pacific Company paid to California $2,746,287 in sales taxes, but to Arizona only $127,837. In state income taxes, the Southern Pacific Company paid $1,107,595 to California, but only $114,280 to Arizona. While gross revenues from California income were nearly four times more than Arizona revenues, the sales taxes payments in California were thirty times more and the income taxes payments were nearly ten times more. The evidence concerning the Santa Fe Railroad is not as extensive, but it does establish that its total taxes system-wide were 4% Of its gross revenue in 1968. Its total taxes in California were 6.4% Of its California revenue, while in Arizona its taxes were 4.9% Of its Arizona revenue. By comparison, the evidence discloses that the total taxes in 1968 of the trucking companies operating in Arizona equaled 16 1/2% Of their Arizona gross revenue for the year 1968.

The railroads' arguments as to the unconstitutionality of §§ 42--136 and 42--227 fall basically into three categories: first, the statutes violate the uniformity clause, Article IX, § 1 of the Constitution of Arizona, A.R.S.; second, the classification to be found in § 42--136 imposes an undue burden upon and discriminates against interstate commerce; and third, the classification violates the due process clause of the Constitution of Arizona, Article II, § 4, and the due process and equal protection provisions of the Constitution of the United States.

The railroads urge that the statute violates the uniformity clause of the Constitution of Arizona because the real and personal property of railroads has been subjected to substantially higher rates of taxation than the rates applied to similar property owned by other taxpayers.

The uniformity clause, Article IX, § 1 of Arizona's Constitution in its pertinent part reads:

'All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax, * * *.'

This constitutional provision is not a counterpart of the equal protection clause of the Fourteenth Amendment to the Federal Constitution. The Supreme Court of the United States observed in Nashville, C. & St. L. Ry. v. Browning, 310 U.S. 362, 60 S.Ct. 968, 84 L.Ed. 1254:

'This Court has previously had occasion to advert to the narrow and sometimes cramping provision of these state uniformity clauses, and has left no doubt that their inflexible restrictions upon the taxing powers of the state were not to be insinuated into that meritorious conception of equality which alone the Equal Protection Clause was designed to assure. (Citation omitted)' 310 U.S. at 368, 60 S.Ct. at 971.

Since Article IX, § 1 is a restriction upon taxing power of the state, we will not extend its meaning beyond the strict demands of the language used.

Article IX, § 1 requires that taxes be uniform upon the same class of property. It does not itself classify property nor does it purport to embrace a scheme for the classification of property. The power to classify is legislative. Peoples Finance & Thrift Co. v. Pima Co., 44 Ariz. 440, 38 P.2d 643. It is a power inherent in the state, Daube v. Oklahoma Tax Commission, 194 Okl. 487, 152 P.2d 687, and the state may exercise a wide discretion in selecting the subjects of taxation, New York Rapid Transit Corp. v. New York, 303 U.S. 573, 58 S.Ct. 721, 82 L.Ed. 1024. The only restraint placed upon the legislature by this provision is that when property has once been classified the rate must be uniform upon all property of the same class. 508 Chestnut, Inc. v. City of St. Louis (Mo.), 389 S.W.2d 823, cert. denied, 382 U.S. 203, 86 S.Ct. 400, 15 L.Ed.2d 271; City of Cape Girardeau v. Fred A. Groves Motor Co., 346 Mo. 762, 142 S.W.2d 1040.

'The moment we concede the power to classify, we have disposed of the question of uniformity; for then all that is required by the constitution is that the taxes shall be uniform upon the members of a class.' Commonwealth v. Delaware Div. Canal Co., 123 Pa. 594, 16 A. 584, 590.

A close scrutiny of the language used by the Legislature in §§ 42--136 and 42--227 points to what superficially may be a source of confusion. A class may be the grouping together of persons or things for a common purpose or it may be a ranking of persons or things possessing the same attributes. Vol. 1 Bouv. Law Dict.3rd Rev. p. 502. It is in the former sense that the Legislature used the word 'class.' Four classes of properties were created by the grouping together of dissimilar things for the purpose of assessing different percentages of full cash value. The word 'class,' however, in Article IX, § 1 is obviously used in the latter sense, meaning the grouping of persons or things possessing common attributes. In this sense, all the real and personal property of railroads are a class and all the subjects of taxation, as, for example, flight property, the property of producing mines and standing timber, etc., are each separate classes.

The railroads urge that real property is itself a class and that personal property having the same characteristics, such as tractors and radios, are each a class which under Article IX, § 1 must be uniformly taxed. But the classifications of property as advanced by the railroads are not the classifications which the Arizona Legislature has chosen. The Legislature, by § 42--136 has classified all the real and personal property of railroad companies used in the continuous operation of a railroad separately from all other properties in Arizona. Separate classification by a state of railroad property has been held valid under both state and Federal constitutions. Rapid Transit Corp. v. New York, supra.

The railroads' argument as to real property was long ago laid to rest by the holding of the U.S. Supreme Court in Kentucky Railroad Tax Cases (Cincinnati, N.O. & T.P.R. Co. v. Com.), 115 U.S. 321, 6 S.Ct. 57, 29 L.Ed. 414:

'The discrimination against railroad companies and their property, which is the subject of complaint, as being unjust and unconstitutional, arises from the fact that, in the legislation of Kentucky on the subject, railroad property, though called real estate, is classed by itself as distinct from other real estate, such as farms and city lots, and subjected to different means and methods for ascertaining its value for purposes of taxation, and differing as well from those applied to the property of corporations chartered for other purposes, such as bridge, mining, street railway, manufacturing, gas and water companies.

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But there is nothing in the Constitution of Kentucky that requires taxes to be levied by a uniform method upon all...