Carter Oil Co. v. Ariz. Dep't of Revenue

• Decision Date: 30 January 2020
• Docket Number: No. 1 CA-TX 19-0002,1 CA-TX 19-0002
• Citation: 460 P.3d 808,248 Ariz. 339
• Parties: CARTER OIL COMPANY, INC., Plaintiff/Appellee, v. ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellant.
• Court: Arizona Court of Appeals

248 Ariz. 339

460 P.3d 808

CARTER OIL COMPANY, INC., Plaintiff/Appellee,

v.ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellant.

No. 1 CA-TX 19-0002

Court of Appeals of Arizona, Division 1.

FILED January 30, 2020

Arizona Attorney General's Office, Phoenix, By Scot G. Teasdale, Rusty D. Crandell, Nancy K. Case, Counsel for Defendant/Appellant

Ballard Spahr LLP, Phoenix, By Brian W. LaCorte, Chase A. Bales, Co-Counsel for Plaintiff/Appellee

The Cavanagh Law Firm, Phoenix, By James G. Busby, Jr., Co-Counsel for Plaintiff/Appellee

Judge James B. Morse Jr. delivered the opinion of the Court, in which Presiding Judge Kenton D. Jones and Judge Diane M. Johnsen joined.

MORSE, Judge:

¶1 The Arizona Department of Revenue (the "Department") appeals from the tax court's entry of judgment in favor of Carter Oil Company, Inc. ("Carter Oil"). We hold that dyed diesel fuel used to power machinery involved in mining and processing operations is subject to the transaction privilege tax. Accordingly, we reverse the decision of the tax court and remand for entry of summary judgment in favor of the Department.

FACTS AND PROCEDURAL BACKGROUND

¶2 This case involves the application of Arizona's transaction privilege tax to Carter Oil's sale of dyed diesel fuel¹ to Hanson Aggregates Arizona, Inc. ("Hanson"). Hanson uses the dyed diesel to power dozers, loaders, haul trucks, and rock crushers in its gravel mining and processing operations in Arizona.² In addition to providing the chemical energy that powers the machinery, dyed diesel also acts as a lubricant for the components in the machinery's fuel systems. Without fuel, the machinery Hanson uses for mining and processing would not operate.

¶3 Carter Oil filed a refund claim for $11,769.45 in taxes it paid between January 2011 and June 2013 on the dyed diesel it sold to Hanson. Carter Oil asserted that the revenue from its sale of dyed diesel to Hanson was exempt from the transaction privilege tax under A.R.S. § 42-5061(B)(1) and (2) as "machinery or equipment" used in mining and processing operations.

¶4 The Department denied Carter Oil's refund claim. After exhausting its administrative remedies, Carter Oil filed a complaint in tax court pursuant to A.R.S. § 42-1254(C). The Department filed for summary judgment, and the tax court denied the motion, holding that the dyed diesel qualified as machinery or equipment when used directly in mining operations, and was therefore exempt from the transaction privilege tax. Ultimately, the tax court granted judgment in favor of Carter Oil. The Department timely appealed, and we have jurisdiction pursuant to A.R.S. § 12-2101(A)(1).

DISCUSSION

¶5 We review the tax court's ruling on a motion for summary judgment and its interpretation of Arizona's tax statutes de novo . SolarCity Corp. v. Ariz. Dep't of Revenue , 243 Ariz. 477, 480, ¶ 8, 413 P.3d 678, 681 (2018). Exemptions from the transaction privilege tax must be strictly construed, with "the presumption being against such exemption."

Tucson Transit Auth., Inc. v. Nelson , 107 Ariz. 246, 252, 485 P.2d 816, 822 (1971). Nonetheless, exemptions should "not be so strictly construed as to defeat or destroy the [legislative] intent and purpose." State ex rel. Ariz. Dep't of Revenue v. Capitol Castings, Inc. , 207 Ariz. 445, 447-48, ¶ 10, 88 P.3d 159, 161–62 (2004) (alteration in original) (quoting W.E. Shipley, Annotation, Items or Materials Exempt from Use Tax as Used in Manufacturing, Processing, or the Like , 30 A.L.R.2d 1439, 1442 (1953) ). Applying these standards, we consider whether the dyed diesel at issue was exempt from the transaction privilege tax under A.R.S. § 42-5061(B)(1) and (2).

A. Exemptions from the Transaction Privilege Tax.

¶6 Arizona's transaction privilege tax is "an excise tax on the privilege or right to engage in an occupation or business in the State of Arizona." Ariz. Dep't of Revenue v. Mountain States Tel. and Tel. Co. , 113 Ariz. 467, 468, 556 P.2d 1129, 1130 (1976). The retail classification imposes a tax on the gross proceeds of sales or the gross income derived from the "business of selling tangible personal property at retail." A.R.S. § 42-5061(A). The parties agree that dyed diesel is tangible personal property.

¶7 The legislature carved out numerous exemptions to the retail transaction privilege tax. See A.R.S. § 42-5061. The exemptions at issue in this case are for:

1. Machinery, or equipment, used directly in manufacturing, processing, fabricating, job printing, refining or metallurgical operations. The terms "manufacturing", "processing", "fabricating", "job printing", "refining" and "metallurgical" as used in this paragraph refer to and include those operations commonly understood within their ordinary meaning.

2. Mining machinery, or equipment, used directly in the process of extracting ores or minerals from the earth for commercial purposes, including equipment required to prepare the materials for extraction and handling, loading or transporting such extracted material to the surface. "Mining" includes underground, surface and open pit operations for extracting ores and minerals.

A.R.S. § 42-5061(B)(1) and (2) (the "mining and processing exemptions").³ The issue we must decide is whether the dyed diesel sold to Hanson is "machinery or equipment" used directly in mining and processing operations.⁴

¶8 " ‘Our primary goal in interpreting statutes is to effectuate the legislature's intent’ as expressed in the statute's text." Silver v. Pueblo Del Sol Water Co. , 244 Ariz. 553, 559, ¶ 22, 423 P.3d 348, 354 (2018) (quoting Rasor v. Nw. Hosp., LLC , 243 Ariz. 160, 164, ¶ 20, 403 P.3d 572, 576 (2017) ). If a statute is unambiguous, "we apply it without further analysis." Glazer v. State , 237 Ariz. 160, 163, ¶ 12, 347 P.3d 1141, 1144 (2015).

¶9 When this Court first addressed the mining and processing exemptions we found that "the legislative purpose for the exemption statute is to encourage mining in this state so that the end product of that mining and metallurgical activity (sales of copper

) is itself subject to taxation under the transaction privilege tax." Duval Sierrita Corp. v. Ariz. Dep't of Revenue , 116 Ariz. 200, 204, 568 P.2d 1098, 1102 (App. 1977). In Capitol Castings , our supreme court tracked this precedent and found that the exemptions lack "definitional specificity" but their underlying purpose is "to stimulate business investment in Arizona in order to improve the state's economy and increase revenue from other taxes, such as income and property taxes." 207 Ariz. at 448, ¶ 13, 88 P.3d at 162 (first citing Ariz. Dep't of Revenue v. Blue Line Distrib., Inc. , 202 Ariz. 266, 268, ¶ 11, 43 P.3d 214, 216 (App. 2002) ; then citing Duval Sierrita , 116 Ariz. at 204, 568 P.2d at 1102 ); see also Mesa v. Smith Co. , 169 Ariz. 42, 45, 816 P.2d 939, 942 (App. 1991) (recognizing that we are "bound by the construction of a statute given by the Arizona Supreme Court."). Thus, "applying [a] more expansive definition of machinery or equipment better serves the legislative goal." Capitol Castings , 207 Ariz. at 451, ¶ 24, 88 P.3d at 165 ; see also Empire Sw. LLC v. Ariz. Dep't of Revenue , 244 Ariz. 542, 546, ¶ 21, 422 P.3d 1082, 1086 (App. 2018) (review denied Oct. 30, 2018) (Beene, J., specially concurring) (explaining that Capitol Castings precludes us from applying "the ‘primary rule’ of statutory construction and giv[ing] the words in § 42-5061(B)(2) their ordinary meaning").

B. Capitol Castings Test for Determining Exemptions.

¶10 In Capitol Castings , our supreme court addressed the "machinery or equipment" exemptions and held that "silica sand, chemical binders, exothermic sleeves, mold cores, mold wash, and hot topping" are exempt from the transaction privilege tax when used directly in a "qualifying process." 207 Ariz. at 451, ¶ 26, 88 P.3d at 165. In reaching this conclusion, the supreme court relied on Duval Sierrita , where we "adopted two tests—the ultimate function and integrated rule tests—for determining whether items were machinery or equipment ‘used directly’ in qualifying operations" under the mining and processing exemptions. Capitol Castings , 207 Ariz. at 448, 451, ¶¶ 15, 24-25, 88 P.3d at 162, 165 (citing Duval Sierrita , 116 Ariz. at 205-07, 568 P.2d at 1103–05 ).

¶11 In Duval Sierrita , we held that spare and replacement parts, as well as a conveyor belt, pipes, and booster pumps, were exempt. Duval Sierrita , 116 Ariz. at 204-07, 568 P.2d at 1102–05. Our supreme court concluded that under the Duval Sierrita approach, when considering the spare and replacement parts, "rather than view each item at a fixed point in time, without reference to its function, [a court] should apply the ‘ultimate function’ test: that is, it should examine how the item functions in the industrial process at issue to see whether the item qualifies for" the exemption. Capitol Castings , 207 Ariz. at 450, ¶ 21, 88 P.3d at 164 (citing Duval Sierrita , 116 Ariz. at 204, 568 P.2d at 1102 ). The belt, pipes, and booster pumps were considered under an " ‘integrated approach’ that addresses how the item is used in the industrial processes described in [the statute] and considers the item's necessity to the process." Id. (citing Duval Sierrita , 116 Ariz. at 205, 568 P.2d at 1103 ). "The Duval Sierrita approaches allow some items that would not ordinarily be considered ‘machinery’ or ‘equipment’ to qualify for the ... exemption if they function as a necessary part of an integrated process." Capitol Castings , 207 Ariz. at 450, ¶ 21, 88 P.3d at 164.

¶12 The Department conceded the items at issue in Duval Sierrita were "machinery or equipment." 116 Ariz. at 203, 568 P.2d at 1101. But in other situations, "items not traditionally considered to be machinery or equipment may qualify as such depending on their function in the process." Capitol Castings , 207 Ariz. at 450, ¶ 22, 88 P.3d at 164 ; see CCI Europe, Inc. v. Ariz. Dep't of Revenue , 237 Ariz. 50, 53, ¶ 12, 344 P.3d 352, 355...