Arizona Dept. of Revenue v. M. Greenberg Const.

• Citation: 182 Ariz. 397,897 P.2d 699
• Decision Date: 05 January 1995
• Docket Number: No. 1,CA-TX,1
• Parties: , 101 Ed. Law Rep. 1145 ARIZONA DEPARTMENT OF REVENUE, Plaintiff-Appellant, v. M. GREENBERG CONSTRUCTION, an Arizona corporation, Defendant-Appellee. 93-0007.
• Court: Court of Appeals of Arizona

Page 699

897 P.2d 699

182 Ariz. 397, 101 Ed. Law Rep. 1145

ARIZONA DEPARTMENT OF REVENUE, Plaintiff-Appellant, v. M. GREENBERG CONSTRUCTION, an Arizona corporation, Defendant-Appellee.

No. 1 CA-TX 93-0007.

Court of Appeals of Arizona,

Division 1, Department T.

Jan. 5, 1995.

Review Denied June 29, 1995.

[182 Ariz. 398] Grant Woods, Atty. Gen. by Patrick Irvine, Asst. Atty. Gen., Phoenix, for plaintiff-appellant.

O'Connor, Cavanaugh, Anderson, Westover, Killingsworth & Beshears, P.A. by Glenn M. Feldman, Frank W. Moskowitz, Phoenix, for defendant-appellee.

OPINION

TOCI, Judge.

This is an appeal by the Arizona Department of Revenue ("the Department") from a tax court judgment in favor of taxpayer, M. Greenberg Corporation ("Greenberg"). The tax court held that federal law preempted the Department's assessment of state prime contracting privilege taxes ¹ on Greenberg's gross receipts from contracts for construction work it performed on the Navajo Reservation for Chinle Unified School District No. 24 ("the Chinle District") and Ganado Unified School District No. 20 ("the Ganado District") (collectively, "both Districts").

In this case, we address two issues. First, does federal law preempt state transaction privilege taxes imposed on an Arizona corporation's gross receipts from construction contracts with a state school district on the Indian reservation? Second, after acquiescing in the corporation's exclusion of similar receipts from its taxable business income in previous taxable years, is the state now precluded from assessing taxes on such gross receipts? We conclude that the tax court erred. We hold that state taxation of non-Indian activity on an Indian reservation is proper if the tax does not frustrate tribal self-government or contravene a comprehensive and pervasive scheme of federal regulations. This tax does neither. Consequently, we reverse.

I. FACTUAL AND PROCEDURAL HISTORY

Greenberg is an Arizona corporation with its main office located in Phoenix, Arizona. None of the shares of stock in Greenberg are owned by Indians. And, none of Greenberg's shareholders or officers live on the Navajo Indian Reservation.

Although located on the Navajo Indian Reservation and serving mainly Navajo children, the Ganado District and the Chinle District are political subdivisions of the State of Arizona, organized pursuant to A.R.S. sections 15-101 through 15-1241 (1991 & Supp.1993). The Navajo Nation consented to the application of Arizona's compulsory school attendance laws and to the enforcement of such laws on any reservation land within an established school district. In the fiscal years 1986-87 and 1987-88, the percentages of the Chinle District's pupils who were Indians were 97 percent and 96 percent, respectively. For fiscal years 1986-87 and 1987-88, 98 percent of the students in the Ganado District were Indian.

During the years in question, the State of Arizona provided substantial support to public school districts on Indian reservations. Both Districts received funds from the state and from Apache County. Also, the Arizona Department of Education provided services in reviewing each school district's budget and notifying it when budget limits were exceeded, allocating federal monies, providing technical assistance to implement state programs, providing training for new programs, and providing assistance for school improvement. Additionally, the Arizona Auditor General's Office performed audits for Arizona public school districts, including both Districts, until 1986. After 1986, the Auditor General performed services specifically for both Districts in approving public school district contracts with outside auditors and the audits generated under such contracts.

Pursuant to the Federal Impact Aid Act, 20 United States Code ("U.S.C.") sections 236 through 246, Federal Impact Aid is paid to school districts that have within their boundaries government owned lands that produce no tax revenues. Both Districts are within the fifteen Arizona public school districts that are located on Indian reservations and receive funds from the United States government in the form of Federal Impact Aid. There are eighteen other Arizona public school districts that serve portions of Indian reservations and receive Federal Impact Aid. At least twenty more Arizona public school districts receive Federal Impact Aid because of the presence of military bases or other significant tracts of federal land within school district boundaries.

During fiscal year 1986-1987, the Chinle District received 26 percent of its total combined state, county, and federal funding from Federal Impact Aid. During the same fiscal year, the Ganado District received 40.3 percent of its total combined state, county, and federal funding from Federal Impact Aid. For the 1987-88 fiscal year, the corresponding percentage for the Chinle District was 48.4 percent, and for the Ganado District was approximately 35.3 percent.

Federal law did not require that Federal Impact Aid received by either the Chinle District or the Ganado District in fiscal years 1986-87 or 1987-88 be used for construction purposes. Revenue control and budget limits imposed under the provisions of Title 15, A.R.S., determined the manner in which both Districts allocated aid received from the State of Arizona and from Federal Impact Aid between expenses for maintenance and operations and expenses for capital improvements.

Both Districts obtained funds for construction of school improvements pursuant to state laws. The Chinle District issued school improvement bonds in 1985, and the Ganado District issued school improvement bonds in 1987, 1988, 1989, and 1991. These bonds were issued in part to raise funds for constructing, improving, and renovating school facilities. Additionally, A.R.S. section 15-962(F) (1991) permitted any school district to petition the State Board of Education for authority to budget and accumulate for school construction purposes a portion of the prior year's "ending cash balance." The amount so budgeted and accumulated was not to exceed the amount of Federal Impact Aid monies the district was entitled to receive in the prior year. Both Districts petitioned the State Board of Education for such approval, and obtained it. Both Districts have used monies accumulated under A.R.S. section 15-962(F) to finance school construction expenses.

In 1982, the United States Supreme Court decided Ramah Navajo School Board, Inc. v. Bureau of Revenue of New Mexico, 458 U.S. 832, 102 S.Ct. 3394, 73 L.Ed.2d 1174 (1982). Prior to this decision, Greenberg paid state transaction privilege taxes on its gross receipts from on-reservation construction work. After Ramah, Greenberg treated on-reservation school construction work as non-taxable.

In 1985, the Department examined Greenberg's books for the period of December 1981 through November 1984. The audit covered a number of on-reservation school construction projects, many of which were governed by contracts between Greenberg and the Bureau of Indian Affairs of the United States Department of the Interior ("BIA"). The Department's auditor agreed with Greenberg's position that its proceeds from these construction contracts were not subject to transaction privilege taxation. Additionally, on July 16, 1985, the Department refunded to Greenberg $31,221.32 it had previously paid as transaction privilege taxes on the proceeds of reservation contracting work after Ramah.

In 1987 and 1988, Greenberg executed the two contracts at issue here. The contract with the Chinle District for the construction of improvements at Chinle Elementary School, Chinle Junior High School, and Many Farms Elementary School was entered into on July 9, 1987. On May 10, 1988, the Ganado District signed a contract with Greenberg for additions and remodeling at Ganado Middle School. Greenberg asserts, supported by affidavits of district personnel, that the funds used for payments under the 1987 and 1988 construction contracts with both Districts can be traced exclusively to Federal Impact Aid payments. Greenberg did not report its gross receipts from those contracts to the Arizona Department of Revenue.

In 1988, the Department audited Greenberg for the period of December 1984 through July 1988. On Greenberg's gross receipts from both Districts' contracts, the Department issued a notice of deficiency in the amount $46,762.00 with interest. Greenberg protested the assessment before the Department. The Department's hearing officer sustained the assessment, holding that the Supreme Court's decision in Ramah did not compel the conclusion that federal law preempted the state's transaction privilege taxation of Greenberg's receipts from both Districts' contracts. On appeal, Division Two of the State Board of Tax Appeals disagreed and reversed.

The Department appealed to the Arizona Tax Court. On cross-motions for summary judgment, the tax court ruled in favor of Greenberg. The court reasoned, in part:

There are ... some attributes of these two school districts which distinguish them from most school districts in Arizona. 1) The student body consists almost entirely of Indians who are members of the Navajo Tribe. 2) These children reside on the Navajo Reservation. 3) The facilities constructed are on the Navajo Reservation. 4) The two school districts, though part of the Arizona school system, are largely funded by federal funds. All of these elements are cited in Ramah in support of its holding that the federal government has preempted the field of education of Indian children on Indian Reservations.

....

... For the reasons set forth in Ramah, and by virtue of the authority of Ramah, the Court finds that the federal government has preempted the field of the education of Indian children on Indian Reservations.

These two school districts receive both state and federal funds. The parties do not seem to be in agreement as to exactly which source of funds...