Arizona Dept. of Rev. V. Central Newspapers

• Decision Date: 03 November 2009
• Docket Number: No. 1 CA-TX 07-0016.,1 CA-TX 07-0016.
• Citation: 218 P.3d 1083,222 Ariz. 626
• Parties: ARIZONA DEPARTMENT OF REVENUE, Plaintiff/Appellee, v. CENTRAL NEWSPAPERS, INC., Phoenix Newspapers, Inc., Central Newsprint Co., Inc., Bradley Paper Co., Topics Newspapers, Inc., Indianapolis Newspapers, Inc., Muncie Newspapers, Inc., Vincennes Sun Commercial, Vincennes Newspapers, Inc., McCormick & Co., Inc. aka Alexandria Newspapers, Inc., McCormick Graphics, Inc., McCormick Newspapers, Inc., Lee Fulton, Inc., Westech Expo Corp., Career Services, Inc., Homebuyer's Fair, Inc., National School Reporting Services, Inc., Indiana Newspapers, Inc., Fas Hotline, Center for Mobility Resources, Inc., Caratine & Co., Inc., CNE Corp., CNT Corp., CNF Corp., Defendants/Appellants.
• Court: Arizona Court of Appeals

218 P.3d 1083

222 Ariz. 626

ARIZONA DEPARTMENT OF REVENUE, Plaintiff/Appellee, v. CENTRAL NEWSPAPERS, INC., Phoenix Newspapers, Inc., Central Newsprint Co., Inc., Bradley Paper Co., Topics Newspapers, Inc., Indianapolis Newspapers, Inc., Muncie Newspapers, Inc., Vincennes Sun Commercial, Vincennes Newspapers, Inc., McCormick & Co., Inc. aka Alexandria Newspapers, Inc., McCormick Graphics, Inc., McCormick Newspapers, Inc., Lee Fulton, Inc., Westech Expo Corp., Career Services, Inc., Homebuyer's Fair, Inc., National School Reporting Services, Inc., Indiana Newspapers, Inc., Fas Hotline, Center for Mobility Resources, Inc., Caratine & Co., Inc., CNE Corp., CNT Corp., CNF Corp., Defendants/Appellants.

No. 1 CA-TX 07-0016.

Court of Appeals of Arizona, Division 1, Department T.

November 3, 2009.

Terry Goddard, Attorney General By Kimberly J. Cygan, Assistant Attorney General, Phoenix, Attorneys for Plaintiff/Appellee.

Steptoe & Johnson LLP By Bennett Evan Cooper, Patrick Derdenger, Dawn R. Gabel, Randall T. Evans, Phoenix, Attorneys for Defendants/Appellants.

OPINION

IRVINE, Judge.

¶ 1 This corporate income tax case addresses whether Public Law 86-272 precludes the state from including an out-of-state partnership's revenues in the numerator of the apportionment formula of an Arizona consolidated return. The partnership's only nexus to Arizona is its shipment of newsprint to a buyer within the state. The partnership is partly owned by corporations that have elected to file a consolidated return with Arizona. Because the corporations included in the consolidated return are considered to be a single taxpayer for apportionment purposes, and a portion of the partnership's income was properly included in the consolidated income, we find that it was proper to include a share of the partnership's sales in the numerator of the sales factor. Therefore, we affirm the judgment of the Arizona Tax Court.

FACTS AND PROCEDURAL BACKGROUND

¶ 2 Central Newspapers, Inc. ("CNI"), a corporation based in Indiana, is the parent of a group of corporations. Its subsidiaries include Bradley Paper Company ("Bradley"), Central Newsprint Co., Inc. ("Central Newsprint"), Indiana Newspapers, Inc. ("INI"), and Phoenix Newspapers, Inc. ("PNI"). PNI publishes the Arizona Republic, a daily newspaper.

¶ 3 In 1985, a group of newspaper publishers formed Ponderay Newsprint Company ("Ponderay"), a Washington general partnership, to build and run a newsprint mill in the State of Washington. Ponderay's purpose was to provide a reliable source of newsprint to enable newspaper companies to meet their publishing demands.

¶ 4 During tax years 1995 to 1998 Central Newsprint and Bradley held general partnership interests in Ponderay of 10% and 3.5%, respectively. Central Newsprint is a wholly owned subsidiary of CNI, and Bradley is a wholly owned subsidiary of Central Newsprint. Following a business restructuring, between December 29, 1998 and the end of 1999, INI became the owner of the 13.5% interest in Ponderay. INI is a wholly owned subsidiary of CNI. Unrelated third parties held the remaining 86.5% of Ponderay. Central Newsprint, Bradley, and INI do not themselves engage in business activities in Arizona.

¶ 5 At all relevant times, Ponderay conducted no business activities in Arizona beyond the solicitation of orders for its newsprint sales to PNI. Ponderay accepted or rejected newsprint orders at its Washington offices, filled orders from inventories located outside Arizona, and shipped newsprint to PNI via common carrier. Ponderay did not maintain sales representatives or other employees in Arizona, nor did it maintain a sales office, store inventory, or other property here.

¶ 6 Between 1995 and 1999, CNI and its subsidiaries¹ (collectively, "CNI") filed Arizona consolidated corporate income tax returns in accordance with Arizona Revised Statutes ("A.R.S.") section 43-947 (2006).² Because Bradley, Central Newsprint, and INI were included in the consolidated group, CNI's consolidated income for each year included 13.5% of Ponderay's net income. As part of the process of apportioning CNI's multistate income, for tax years 1995 and 1996 CNI included a pro rata share of Ponderay's payroll, property and sales in the denominator of its apportionment formula, but not in the numerator. See generally Arizona's Uniform Division of Income for Tax Purposes Act ("UDITPA"), A.R.S. §§ 43-1131 to -1150 (2006 & Supp.2008). For 1997, 1998, and 1999, CNI did not include Ponderay's payroll, property or sales in either the denominator or numerator.

¶ 7 After auditing these returns, the Arizona Department of Revenue ("Department") determined that Ponderay's factors should have been included in both the numerator and denominator of CNI's apportionment formula. This determination resulted in small tax underpayments for 1995 and 1996, and larger overpayments for 1997, 1998, and 1999. The net result was a refund to CNI of slightly more than $500,000, excluding interest. CNI protested, arguing that its refund should have been greater because Ponderay's factors should have been excluded from the numerator of the apportionment formula. The Department denied the protest.

¶ 8 CNI appealed to the Arizona State Board of Tax Appeals (the "Board"). The issue was whether the Department properly calculated the numerator of the UDITPA sales factor. The Board ruled in CNI's favor, and in 2006 the Department appealed to the tax court in accordance with A.R.S. § 42-1254(A) (2006). After the parties briefed and argued cross-motions for summary judgment, the tax court ruled for the Department. The court reasoned that inclusion of the Ponderay receipts in the numerator necessarily followed from inclusion of its total receipts in the denominator. The tax court entered judgment, and this appeal followed.

DISCUSSION

¶ 9 This court reviews the tax court's summary judgment ruling de novo. Wilderness World, Inc. v. Ariz. Dep't of Revenue, 182 Ariz. 196, 198, 895 P.2d 108, 110 (1995). We likewise apply the de novo standard in reviewing the tax court's construction of statutes and findings that combine facts and law. Ariz. Dep't of Revenue v. Ormond Builders, Inc., 216 Ariz. 379, 383, ¶ 15, 166 P.3d 934, 938 (App.2007).

¶ 10 Our task is to ascertain statutory intent. Walgreen Ariz. Drug Co. v. Ariz. Dep't of Revenue, 209 Ariz. 71, 73, ¶ 12, 97 P.3d 896, 898 (App.2004). In doing so, we give effect to each pertinent portion of a statute. State Bd. of Dispensing Opticians v. Schwab, 93 Ariz. 328, 331, 380 P.2d 784, 787 (1963). In addition, we accord great weight to the Department's interpretation because it implements Arizona's UDITPA statutes. Walgreen, 209 Ariz. at 73, ¶ 12, 97 P.3d at 898.

¶ 11 Arizona has enacted an income tax on corporations with the purpose of imposing on "each corporation with a business situs in this state a tax measured by taxable income which is the result of activity within or derived from sources within this state." A.R.S. § 43-102(A)(5) (2006). Arizona law imposes a tax on every corporation's entire "Arizona taxable income." A.R.S. § 43-1111 (2006). "Arizona taxable income" is defined as federal taxable income subject to adjustments specified in A.R.S. §§ 43-1121 to -1130.01 (2006 & Supp.2008). "Every corporation subject to the tax imposed by this title shall make a return to the department" even if a corporation has no federal taxable income or a federal return is not required. A.R.S. § 43-307(A) (2006).

¶ 12 If a corporation conducts a multistate business, Arizona requires that its net income be allocated and apportioned under Arizona's version of UDITPA. A.R.S. § 43-1132(A). Under UDITPA, certain nonbusiness income is "allocated" to designated states, based on factors such as the location of property and the taxpayer's commercial domicile. A.R.S. §§ 43-1134 to -1138. Business income is generally "apportioned" between the states in which the corporation does business using a formula defined in the statutes. A.R.S. § 43-1139(A). Arizona's formula employs three factors—sales, property, and payroll—by which a taxpayer's Arizona sales, property, and payroll are compared to the taxpayer's operations in all states. A.R.S. § 43-1139 to -1147.³

¶ 13 The main dispute in this case is over the calculation of the sales factor. The sales factor is a fraction, the numerator of which represents "the total sales of the taxpayer in this state during the tax period." A.R.S. § 43-1145; Ariz. Admin. Code ("A.A.C.") R15-2D-803 (the sales factor numerator is "the gross receipts attributable to this state and derived by the taxpayer from transactions and activity in the regular course of its trade or business"). "Sales" are "all gross receipts of the taxpayer not allocated under this article" except as "the context otherwise requires." A.R.S. § 43-1131(5); see also A.A.C. R15-2D-801(A)(1). Sales of tangible personal property are generally considered to be in Arizona if the property is delivered or shipped to a purchaser in the state. A.R.S. § 43-1146. The denominator of the sales factor consists of the taxpayer's total sales. A.R.S. § 43-1145.

¶ 14 Generally, each corporation files a separate income tax return, but there are circumstances in which related corporations file a single return that includes the income of each included corporation. One example of this is when a group of commonly controlled corporations engaged in a single business files a combined report. See A.R.S § 43-942 (2006). As we explained in State ex rel. Arizona Department of Revenue v. Talley Industries, Inc., 182 Ariz. 17, 893 P.2d 17 (App.1994), a combined report is appropriate when "there is a substantial interdependence of basic operations among the various affiliates or branches of the business." Id. at 24, 893 P.2d at 24 (quoting I Jerome R. Hellerstein and Walter Hellerstein, State Taxation ¶ 8.11[5], at 8-92 (2d ed.1993)). Such a business, often referred to as being "unitary" because it...