Arizona Lotus Corp. v. City of Phoenix, KOOL-R

Decision Date24 March 1983
Docket NumberKOOL-R,No. 1,CA-CIV,1
Citation663 P.2d 1013,136 Ariz. 22
CourtArizona Court of Appeals
Parties, 40 A.L.R.4th 1103 ARIZONA LOTUS CORP.; Arizona Television Company; B & D Broadcasting, Inc.; Grand Canyon Broadcasters, Inc.; ITC Communications of Arizona, Inc.; KASA, Inc.;adio Television, Inc.; KTAR Broadcasting Company and KXIV, Inc., Arizona corporations, and Doubleday Broadcasting Company, Inc.; Eller Outdoor Advertising Co. of Arizona; Harte-Hanks Southern Communications, Incorporated; KIFN Radio, Inc.; Meredith Corporation; Harold S. Schwartz and Associates, Inc.; and Southern Broadcasting Company, foreign corporations, Plaintiffs-Appellants, Cross Appellees, v. CITY OF PHOENIX, a municipal corporation of the State of Arizona, Defendant-Appellee, Cross Appellant. 5494.
City of Phoenix by Andy Baumert, City Atty. and Philip M. Haggerty, Asst. City Atty., Phoenix, for defendant-appellee, cross appellant

HAIRE, Presiding Judge.

Appellants, a group of Phoenix broadcasters and a billboard company, challenge in several respects the legality of taxes assessed by the City of Phoenix (City) pursuant to its privilege tax on advertising. The issues involved in this appeal include:

(1) whether the City properly taxed revenues generated by national advertising from November 1, 1977 through December 19, 1978;

(2) whether the City properly taxed revenues generated by spot religious announcements; and

(3) whether the City properly taxed revenues generated by the production of commercials (production revenues). 1

The general facts necessary to the resolution of these issues are as follows.

Until November 1977, appellants paid privilege taxes on revenues generated by local advertising only. In October 1977, the City directed a letter to all Phoenix businesses engaged in the business of advertising indicating that all revenue received by local firms for advertising, including national advertising, would be subject to the privilege tax, effective November 1, 1977. This letter constituted a non-retroactive interpretation of the City's privilege tax code based upon recent United States Supreme Court cases which lessened the restrictions imposed on local taxation by the commerce clause. The City sent a second letter to taxpayers on December 28, 1977 which (1) outlined procedures for paying the tax while preserving the right to protest and (2) indicated that production revenues were subject to the privilege tax.

Pursuant to stipulation with the City, the appellants filed a consolidated petition for hearing to protest this tax treatment. A hearing on the petition was conducted which resulted in findings against the appellants. Appellants then filed an action against the City in the Maricopa County Superior Court to challenge the rulings of the City's hearing officer. The trial court subsequently held that revenues derived from national advertising and spot religious announcements were taxable, and that production revenues were not taxable. Appellants timely appealed and the City cross-appealed. More specific facts will be incorporated into the discussion of each issue.


In general, the advertising portion of the appellants' broadcasting format has two components. Local advertising is contracted for between the station and the local advertiser or its agency. National advertising is contracted for and originates elsewhere. Most frequently, radio and television stations employ a national representative firm, located outside Phoenix, that solicits and sells advertising time to national advertisers. 2

While the superior court action was pending, the Phoenix City Council amended the city code to add a definition of "local advertising" and to restrict the advertising privilege tax to revenues derived from "local advertising" only. This amendment excluding national advertising from taxation by the City was effective December 19, 1978. Thus, appellants seek the recovery of taxes paid on national advertising prior to amendment of the city code, during the period from November 1, 1977, to December 19, 1978.

The City claimed the right to tax national advertising pursuant to City Code Section 14-2(a)(15), 3 which imposed the privilege tax on:

"Advertising by billboards, direct mail, radio, television, or by any means calculated to appeal to prospective purchasers."

Appellants argue that the City's expanded interpretation of the code provision constituted an unlawful imposition of a new tax on revenues derived from national advertising. In support of this contention, appellants make three arguments:

(1) the treatment of national advertising revenues from 1956 until 1977 established a conclusive administrative practice to exempt such revenues from the privilege tax;

(2) national advertising was not taxed prior to 1977 because of the questionable constitutionality of such a tax; and

(3) the City could not tax national advertising revenues without first complying with Section 14-44 which requires that the City Council approve an interpretative rule or regulation.

We proceed to address each of these arguments.

To establish a previous administrative practice of interpreting the code as exempting national advertising revenues, appellants cite: (1) a 1956 letter from the city assessor as limiting the scope of privilege taxes to revenues generated by local advertising; (2) the City's auditing history indicating a practice of not taxing revenues generated by national advertising; and (3) the previously referred-to October 1977 letter to the appellants from the City. The letter expressly refers to the imposition of the tax on national advertising revenues as a "review" of the City's interpretation, making the new interpretation prospective only. The appellants also point out that the October 1977 letter indicated the City's intention to draft a new regulation concerning the imposition of the tax on national advertising revenues.

From the foregoing we find a history of administrative interpretation and practice restricting the application of the City's privilege tax to local advertising revenues. However, even where there is a clear administrative practice of applying the taxing statutes in a certain manner, that practice does not mandate continued adherence where the taxing statute is clear and requires a different result. See Southern Pacific Co. v. Cochise County, 92 Ariz. 395, 406, 377 P.2d 770, 778 (1963); DeWitt v. Magma Copper Co., 16 Ariz.App. 305, 308, 492 P.2d 1243, 1246 (1972). Furthermore, continued failure to collect a tax does not preclude eventual taxation. See Miami Copper Co. v. State Tax Commission, 121 Ariz. 150, 153, 589 P.2d 24, 27 (App.1978), cert. denied, 441 U.S. 932, 99 S.Ct. 2053, 60 L.Ed.2d 660 (1979).

In this case, the language of Section 14-2(a)(15) is clear. It imposes a tax on revenues generated by "advertising" without distinguishing between "local" and "national." We note that the subsequent act of amending the ordinance to restrict the privilege tax to "local advertising" suggests that the pre-amendment version of the ordinance was broad enough to include national advertising. Appellants cite, however, Section 14-8 of the city code which provides:

"Sec. 14-8. Exemptions in accordance with constitutional prohibitions.

"The taxes herein levied shall not be construed to apply to transactions in interstate commerce which, under the Constitution of the United States, the state is prohibited from taxing or upon any sales made to the United States Government, its departments or agencies, nor to business or transactions exempted from taxation under the Constitution of the United States or the constitution of the state."

Appellants contend that this code section has adopted by reference art. I, § 8, cl. 3 of the United States Constitution, commerce clause. They urge that Section 14-8 incorporates the meaning of the commerce clause as interpreted when the section was adopted initially in 1949. This is the so-called "snapshot" rule.

Appellants maintain that until the United States Supreme Court's decision in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977), the taxation by the City of revenues derived from national advertising would have been unconstitutional as a direct burden on interstate commerce. They cite several cases to illustrate that the interpretations of the commerce clause prevailing in 1949 prohibited the imposition by a city or state of a privilege tax on revenues derived from national advertising. Appellants then urge that this was the interpretation adopted through Section 14-8 and incorporated into Section 14-2(a)(15). They argue that any subsequent judicial modifications of the interpretation of the commerce clause, including the Brady sanctioning of privilege taxes placed on interstate commerce, can be a part of Section 14-8 only if expressly intended by the City Council.

The cardinal rule in statutory interpretation is to determine the intent of the legislative body. E.g., Mardian Construction Co. v. Superior Court, 113 Ariz. 489, 492, 557 P.2d 526, 529 (1976); Sandblom v. Corbin, 125 Ariz. 178, 182, 608 P.2d 317, 321 (App.1980). In construing a statute, the court need not resort to rules of construction or interpretation if the language is plain. Continental Casualty Co. v. Industrial Commission, 113 Ariz. 116, 118, 547 P.2d 470, 472 (1976). We have previously found that Section 14-2(a)(15) applies the privilege tax to revenues generated by "advertising." This broad language distinguishes this case from those cited by appellants in which courts struck down attempts to expand the scope of taxing statutes without legislative action. See, e.g., Ex Parte Louisville & Nashville Railroad Co., 398 So.2d 291 (Ala.1981); Illinois Bell Telephone Co. v....

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