Arizona Dept. of Revenue v. Daniel
| Decision Date | 27 June 1996 |
| Docket Number | CA-TX,No. 1,1 |
| Citation | 938 P.2d 62,189 Ariz. 13 |
| Parties | ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona, Plaintiff-Appellant, v. Warren and Ann DANIEL, husband and wife; Bingo West, Inc., an Arizona corporation, Defendants-Appellees. 95-0009. |
| Court | Arizona Court of Appeals |
The Arizona Department of Revenue (DOR) assessed delinquent transaction privilege (sales) taxes against Warren Daniel, Ann Daniel and Bingo West, Inc., (taxpayers) on their sales of bingo paper 1 to licensed operators of bingo games in Arizona. The appeal presents these questions:
1. Whether the taxpayers' sales of bingo paper to bingo licensees constituted retail sales under A.R.S. section 42-1310.01;
2. Whether DOR could validly impose late filing and late payment penalties against the taxpayers under A.R.S. section 42-136(A) and (D) for periods before that statute became effective; and
3. Assuming the taxpayers' bingo paper sales were taxable, whether the tax court should have abated DOR's assessment of late filing and late payment penalties against the taxpayers.
Because our ruling on the first issue is dispositive of this appeal, we need not consider the second and third issues.
From 1983 to 1987, taxpayers Warren and Ann Daniel engaged in the business of selling bingo-related supplies and equipment. In 1987, they incorporated taxpayer Bingo West, Inc., and continued in the same business.
The taxpayers' customers are bingo licensees who conduct bingo games to generate funds as permitted by Arizona law. For a patron to play any given bingo game and thus have a chance to win a prize, the patron must obtain from the bingo licensee a bingo paper or papers that are color-coded or numbered to correspond to that particular game. A bingo patron obtains bingo paper by paying a price specified by the bingo licensee. Without paying this price, the patron will receive no bingo paper and will be unable to play any bingo game.
The patron who obtains bingo paper may use it to play only the bingo games to which it relates. Although a patron may not give or sell bingo paper to another person to use in play, he is otherwise free to do anything with it that is not prohibited by law. Bingo paper becomes useless once the corresponding game or series of games have been concluded.
This litigation concerns the audit period January 1983 through May 1990. In October 1990 DOR issued transaction privilege tax assessments against Warren and Ann Daniel for January 1983 through October 1987, and against Bingo West, Inc., for November 1987 through May 1990. The taxpayers protested the assessments unsuccessfully before DOR but prevailed on appeal to the Arizona Board of Tax Appeals, Division Two. Daniel and Bingo West v. Arizona Dep't of Revenue, 2 Ariz. St. Tax. Rptr. (CCH) p 400-074 (BTA Div. 2, July 13, 1993).
The DOR appealed from the Board's ruling by filing this action in the tax court. See Arizona Revised Statutes Annotated (A.R.S.) section 42-124(B). The tax court ruled for the taxpayers on cross-motions for summary judgment, relying on Shamrock Foods Co. v. City of Phoenix, 157 Ariz. 286, 757 P.2d 90 (1988). DOR timely appealed. We have jurisdiction pursuant to A.R.S. section 12-2101(B).
Arizona Revised Statutes Annotated section 42-1306(A)(1991) imposes privilege taxes at fixed rates measured by the gross proceeds of sales or income derived from specified business activities in Arizona. Arizona Revised Statutes Annotated section 42-1310.01(Supp.1995) imposes this tax on the business of selling tangible personal property at retail, subject to a number of deductions and qualifications.
For all transaction privilege tax purposes, A.R.S. section 42-1301(13)(Supp.1995) defines "sale" as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatever, ... for a consideration...." Arizona Revised Statutes Annotated section 42-1310.01(P)(3)(Supp.1995) defines "selling at retail" as "a sale for any purpose other than for resale in the regular course of business in the form of tangible personal property...."
The DOR assessed retail transaction privilege taxes on the taxpayers' gross proceeds from bingo paper sales. It thereby found that those sales were not for resale. In the tax court and on appeal, DOR has contended that bingo licensees, the taxpayers' customers, do not "sell" bingo paper to their patrons within the meaning of section 42-1301(13). DOR points out that a bingo patron cannot play the game without bingo paper and that bingo paper has no value other than as scratch paper apart from the right to play the game. The DOR asserts that bingo licensees do not sell their patrons "a few sheets of brightly colored paper" but rather sell the right to play the game along with essential information.
The DOR also contends that it is bingo licensees themselves who put bingo paper to use. It argues they do so in the same way that other service businesses use consumable supplies like cash register tape, stationery, paper clips, invoice forms, and staples, all of which may also be physically transferred to the business's customers. DOR asserts that licensees do not sell bingo paper as tangible personal property but give it away with the proffering of the game fee. Under this view the taxpayers' sales of bingo paper to their licensee customers are therefore taxable retail sales.
In response, the taxpayers contend that bingo licensees "sell" bingo paper to their patrons as provided by section 42-1301(13) because each licensee transfers both title and possession of bingo paper to its patron and receives money in return. The taxpayers point to DOR's stipulation filed in the tax court that bingo paper is "tangible personal property" and that the regular course of business of the bingo licensee is conducting bingo games. The taxpayers contend that their own sales of the same bingo paper to licensees constitute sales for resale under section 42-1310.01(P)(3). They contend that those sales accordingly are not taxable under the retail classification.
In the tax court the taxpayers relied on the Arizona Supreme Court's decision in Shamrock Foods Co. The taxpayer in Shamrock sold disposable paper and plastic products such as cups, napkins, straws and paper bags to restaurants. The restaurants in turn made those items available to their customers with the meals they purchased.
The City of Phoenix assessed privilege license (sales) taxes on Shamrock's sales of these items. In ruling for Shamrock, the trial court held that all such items were sold for resale and hence were not taxable. On appeal, this court affirmed as to paper and plastic items necessary to contain food or beverages sold by restaurants and reversed as to non-container items. On review, the supreme court disagreed. It stated:
... Whether an item is a "critical element" of the product sold is not the dispositive issue under the City's ordinance. Code § 14-2 only applies to retail sales which are sales "for any purpose other than resale thereof." The relevant factor is not whether the product is used as a container, but whether the product is transferred or possessed by the restaurant's customer for a consideration. So long as we find that the products are transferred to or possessed by the restaurant customer for consideration, a sale has occurred. City Code § 14-1.
Id. at 288-89, 757 P.2d at 92-93. The taxpayers here make a similar argument: Licensees transfer bingo paper which bingo players possess for a fee. They contend that this court should find that a sale took place if it determines that the transaction occurred for a consideration.
The DOR asserts that applying Shamrock to the facts of this case would stretch Shamrock beyond its proper scope and contravene the legislative intent behind the transaction privilege tax on retail sales. DOR distinguishes Shamrock primarily on the ground that bingo licensees transfer bingo paper as evidence of a bingo patron's right to play the game for a bingo fee.
The DOR fails to distinguish Shamrock from this case on any legally significant ground. Nothing suggests that the Shamrock court would have viewed the disposable paper and plastic products in question as "resold" if restaurants transferred those products for a price other than in connection with the sale of food and beverages. The relevant factor in Shamrock was whether the restaurant transferred the product "for a consideration." The paper and plastic products in that case met that test. So also does the bingo paper the taxpayers provide to bingo licensees.
The DOR also fails in its attempt to disqualify bingo licensees' transfers of bingo paper as resales "in the form of tangible personal property" under section 42-1310.01(P)(3). 2 Bingo paper evidences intangible gaming rights and information for which the patron pays. We cannot agree with DOR's assertion that these intangibles are all the patron has bought.
Bingo paper has a dual nature. It evidences the patron's right to play a particular game with a chance to win a prize. It is also tangible personal property which the patron possesses and necessarily uses in playing the game and through which he acquires some of the information about how to play.
The taxpayers urge us to rely on Aladdin's Castle, Inc. v. Director of Revenue, 916 S.W.2d 196, 198 (Mo.1996), which held that prizes at an arcade fell outside a Missouri use tax. The Aladdin court reasoned that arcade owners received consideration for the prizes in the form of the fees they charged patrons for game tokens. The prizes...
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