Baker v. Arizona Dept. of Revenue

• Decision Date: 03 February 2005
• Docket Number: No. 1 CA-TX 03-0006.,1 CA-TX 03-0006.
• Citation: 209 Ariz. 561,105 P.3d 1180
• Parties: Richard L. BAKER and Shira S. Baker, husband and wife, Plaintiffs-Appellants, v. ARIZONA DEPARTMENT OF REVENUE; State of Arizona; Department of Commerce; Department of Administration, Defendants-Appellees.
• Court: Arizona Court of Appeals

105 P.3d 1180

209 Ariz. 561

Richard L. BAKER and Shira S. Baker, husband and wife, Plaintiffs-Appellants, v. ARIZONA DEPARTMENT OF REVENUE; State of Arizona; Department of Commerce; Department of Administration, Defendants-Appellees.

No. -0006.

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

February 3, 2005.

Morrill & Aronson, P.L.C., by K. Layne Morrill, Scott D. Larmore, Phoenix, for Plaintiffs-Appellants.

Gallagher & Kennedy, P.A., by Mark C. Dangerfield, John E. Lundin, Mark A. Fuller, Phoenix, for Defendants-Appellees.

OPINION

THOMPSON, Presiding Judge.

¶ 1 Richard L. and Shira S. Baker appeal the trial court's grant of summary judgment on their claims that the alternative fuel statutes enacted in December 2000 violated the Contract Clauses of the United States and the Arizona Constitutions and deprived them of due process. For the reasons that follow, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 2 The important facts are not in dispute. Beginning in the early 1990s, the Arizona Legislature authorized a variety of tax and grant incentives designed to encourage the purchase of or conversion to alternative fuel vehicles (AFVs). These incentives were part of a broad tax and regulatory program to improve Arizona's air quality. The legislature has continuously modified the program, with significant changes occurring in 1994, 1996, 1998, and 1999.

¶ 3 On April 28, 2000, Governor Jane D. Hull signed Senate Bill 1504 (the April Law). See 2000 Ariz. Sess. Laws, ch. 405. This statute enhanced tax credits and other benefits for persons who owned vehicles powered by alternative fuel, defined as a fuel source other than gasoline or a combination fuel using no more than 30 percent petroleum. Ariz.Rev.Stat. (A.R.S.) § 1-215(4) (Supp.2002); see 2000 Ariz. Sess. Laws, ch. 405, §§ 1-47. Pursuant to amendments of A.R.S. § 43-1086 of the Arizona Tax Code, taxpayers could obtain a new 100 percent tax credit for the cost of AFV conversions, in addition to 30 to 50 percent credits for the price of the vehicle. The April Law also provided tax credits for "bi-fuel" AFVs, which are capable of operating on either gasoline or an alternative fuel such as propane. Finally, the April Law amended A.R.S. § 43-1086 to allow a minimum $30,000 tax credit for the conversion of a vehicle over 12,000 pounds in weight, regardless of its cost.

¶ 4 The Bakers purchased two used motor homes in September 2000 for $6500 and $7250, respectively. By late September 2000, the governor had announced that the unforeseen cost of the program would require changes in the law, including paying out the tax credit over five years for those acquiring AFVs after October 11, 2000. Shortly before October 11, 2000, the Bakers purchased two more used motor homes for $7000 and $6500.

¶ 5 On October 20, 2000, the legislature imposed a moratorium on the April Law while it considered a long-term solution, and the governor asked those who had not yet completed their conversions to consider canceling their orders "for the good of the state." Although Mr. Baker was contemporaneously aware of these events, the Bakers nevertheless had all four motor homes converted to bi-fuel AFVs, at the combined cost of $31,000, on November 7 and 8, 2000.

¶ 6 In December 2000, the legislature enacted Senate Bill 1004 as an amendment to the April Law and capped the Bakers' tax credit benefits at 100 percent of their costs (the December Law). See 2000 Ariz. Sess. Laws, 7th Sp. Sess., ch. 1. Under this law, the tax credits under the program could be recaptured by the State if the participants did not comply with some additional requirements, such as:

(1) the taxpayer must have had possession of the vehicle before December 1, 2000;

(2) the taxpayer could not transfer the vehicle's title for 36 months after receipt of the credit;

(3) the taxpayer was required to keep the vehicle registered in Arizona for 36 months after receipt of the credit;

(4) the taxpayer was required to demonstrate actual use of alternative fuel to power the vehicle, with different requirements depending on the type of alternative fuel used; and

(5) the vehicle was required to meet certain emission requirements.

A.R.S. § 43-1086(E) (Supp.2003).

¶ 7 In 2001, Arizona issued affidavits of $58,250 tax credits to the Bakers that covered all their costs in buying and "converting" the four vehicles. The Bakers then filed their income tax return and asked for and received the full cash value of those tax credits. They later amended their return to request an additional $92,750 that would have been available under the April Law. An Arizona Department of Revenue (ADOR) hearing officer denied that claim, ADOR's director sustained the denial, and the Bakers appealed to the tax court.

¶ 8 The Bakers contended that the denial of the additional credit violated the Contract Clauses of the Arizona and the United States Constitutions. See U.S. Const. art. I, § 10; Ariz. Const. art. II, § 25. Their complaint further alleged that the State had deprived them of their due process rights under Article II, § 4 of the Arizona Constitution. The State denied the claims and asserted that allowing the additional credit would violate the anti-gift clause of the Arizona Constitution, art. 9, § 7.

¶ 9 The State then filed a motion for summary judgment accompanied by a forty-eight paragraph statement of undisputed facts. Acknowledging that they did not dispute these facts, the Bakers cross-moved for summary judgment. The tax court granted the State's motion and denied the Bakers' cross-motion. This appeal followed.

DISCUSSION

A. As a Matter of Law, the December Law Did Not Unconstitutionally Impair a "Contract" Created by the April Law.

¶ 10 On appeal from a grant of summary judgment on undisputed facts, we review de novo "whether the trial court correctly applied the law." Tenet Healthsystem TGH, Inc. v. Silver, 203 Ariz. 217, 219, ¶ 5, 52 P.3d 786, 788 (App.2002). In the case of a constitutional challenge, the "burden of establishing that [the] statute is unconstitutional rests on the party challenging its validity." Hall v. A.N.R. Freight Sys., Inc., 149 Ariz. 130, 133, 717 P.2d 434, 437 (1986). We presume that statutes are constitutional and attempt to construe statutes in a constitutional manner when possible. Phoenix Newspapers, Inc. v. Superior Ct., 180 Ariz. 159, 163, 882 P.2d 1285, 1289 (App.1993).

¶ 11 The United States and Arizona Constitutions prohibit the passage of any law impairing the obligation of contracts.¹ To prove the unconstitutional impairment of a contract, the Bakers must prove: (1) the existence of a contract, and (2) an unconstitutional impairment of that contract. They fail on both counts.

1. The April Law Did Not Create a Contract Between the State and the Bakers.

¶ 12 The Bakers contend that the April Law created a contract between them and the State. In general, "statutes do not create contract rights." Proksa v. Ariz. State Schs. for the Deaf and the Blind, 205 Ariz. 627, 629, ¶ 11, 74 P.3d 939, 941 (2003) (emphasis in original). As the Arizona Supreme Court has explained:

[A]bsent some clear indication that the legislature intends to bind itself contractually, the presumption is that "a law is not intended to create private contractual or vested rights but merely declares a policy to be pursued until the legislature shall ordain otherwise."

Id. (quoting Nat'l R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry., 470 U.S. 451, 465-66, 105 S.Ct. 1441, 84 L.Ed.2d 432 (1985)).

¶ 13 Proksa arose out of a statute stating that certain state school employees "shall be granted permanent employment status" after completing probation. Id. at 628, ¶ 3, 74 P.3d at 940 (citing A.R.S. § 15-1326(B) (1986)). The plaintiffs were hired by a school and completed probation, thereby gaining permanent employee status. Id. The legislature then amended the statute and deleted the "permanent employment" language for certain employees, including the plaintiffs. Id. at ¶¶ 4-5. When the school later declined to continue their employment, the plaintiffs sued on the grounds that the State had violated a contract right arising under the statute. Id. at 628-29, ¶¶ 6-7, 74 P.3d at 940-41. The supreme court upheld the termination, finding that the "permanent employment status" language in the statute had not created a contract and that the plaintiffs had no "existing property interest under Arizona law in continued employment." Id. at 632, ¶ 23, 74 P.3d at 944.

¶ 14 Proksa emphasizes the important public purpose served by the presumption against statutorily created contract rights. A contrary rule, the court explained, would "enormously curtail the operation of democratic government" because statutes would become one-way "ratchets, creating rights that could never be retracted or even modified" without buying off those upon whom rights had been conferred. Id. at 629, ¶ 12, 74 P.3d at 941. Likewise, the United States Supreme Court has stated that the "principal function of a legislature is not to make contracts, but to make laws that establish the policy of the state." Nat'l R.R. Passenger, 470 U.S. at 466, 105 S.Ct. 1441 (citation omitted). "Policies," the Court stated, "unlike contracts, are inherently subject to revision and repeal, and to construe laws as contracts when the obligation is not clearly and unequivocally expressed would be to limit drastically the essential powers of a legislative body." Id.

¶ 15 Far from expressing a clear and unequivocal intent to form a contract, the April Law modified the tax code to offer a "credit against taxes" to one who "purchases or leases" an AFV from a private party. This was part of the State's evolving policy efforts to improve air quality. In National Railroad Passenger, the Supreme Court similarly held that "pervasive prior regulation" of the railroads left "no legitimate expectation" that "regulation would cease after 1971." 470 U.S. at 469-470, 105 S.Ct. 1441; ac...