DaimlerChrysler v. Arizona Dept. of Revenue

• Decision Date: 03 May 2005
• Docket Number: No. 1 CA-TX 04-0012.,1 CA-TX 04-0012.
• Parties: DAIMLERCHRYSLER SERVICES NORTH AMERICA, LLC, as successor to Chrysler Financial Company, LLC, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.
• Court: Arizona Court of Appeals

110 P.3d 1031

210 Ariz. 297

DAIMLERCHRYSLER SERVICES NORTH AMERICA, LLC, as successor to Chrysler Financial Company, LLC, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.

No. -0012.

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

May 3, 2005.

Steptoe & Johnson, LLP By Patrick Derdenger, Bennett Evan Cooper, Randall T. Evans, Phoenix, and Akerman Senterfitt By Peter O. Larsen, Kirby D. Oberdorfer, Jacksonville, FL, Attorneys for Plaintiff-Appellant.

Terry Goddard, Attorney General By John William Ranby, Assistant Attorney General, Steven R. Partridge, Assistant Attorney General, Phoenix, Attorneys for Defendant-Appellee.

OPINION

BARKER, Judge.

¶ 1 The question in this case is whether a bad debt deduction under Arizona Administrative Code R15-5-2011 is limited to the vendor of goods to which the debt applies. We hold that it is, unless the assignment of contract rights pertaining to the goods is made with recourse against the vendor. Accordingly, we affirm.

Facts and Procedural Background

¶ 2 DaimlerChrysler Financial Services North America, LLC ("DaimlerChrysler") purchased retail installment contracts from car dealers ("the Dealers") arising from consumer automobile purchases between 1997 and 1999.¹ In the scenario represented by this appeal, consumers purchased vehicles from one of the Dealers. At that same time, the consumers agreed to financing for their vehicles through DaimlerChrysler. The Dealers also simultaneously assigned rights to DaimlerChrysler. As part of the contractual arrangement, those portions of the purchase price for each vehicle, as well as the transaction privilege tax and any other items that the consumer did not directly pay, were funded through the monies provided by DaimlerChrysler.

¶ 3 DaimlerChrysler's representative described the financing process as follows:

Chrysler Financial Company [DaimlerChrysler] would cut a check to the dealership and essentially step into the shoes of the dealer with respect to this transaction and then at that point, the customer will be paying off the loan to Chrysler Financial.... [I]n determining the amount that Chrysler pays for the contract, what they do is take the purchase price of the car, they add the transaction privilege tax to it, any other miscellaneous things that the customer purchases at the dealership such as credit life insurance for example, and that's all added up and that's the amount that Chrysler pays the dealer for the contract. So what's happening is, the amount of the transaction privilege tax is reported, I agreed with respondent that it is recorded on the sales tax return of the automobile dealership, but the cash comes from Chrysler. Chrysler gives the cash to the dealership pursuant to its agreement with the dealer. The dealer takes that cash and reports it to the state on its transaction privilege tax return.

Thus, DaimlerChrysler did not separately pay or report any tax on the income from the assigned contracts. However, DaimlerChrysler provided monies to the Dealers to satisfy the Dealers' obligations for transaction privilege taxes that the Dealers had passed along to consumers. The Dealers then reported the tax in the month of the sale and paid it.

¶ 4 As to the assignment, DaimlerChrysler agreed to pay the face value for the contracts without recourse against the Dealers in the event that the consumer defaulted on the loan. The assignment from the Dealers was as follows:

Seller hereby assigns to the below designated Assignee under the terms and conditions of a Dealer Agreement ([]Recourse }Non-Recourse) previously entered into between Seller and Assignee, and in any event in accordance with the terms, conditions and warranties of the Seller's Assignment and Warranty on reverse side hereto.

Though the assignment references other terms, they are not in the record.²

¶ 5 Some of the consumers defaulted on the vehicle loans. The debts went uncollected notwithstanding enforcement efforts. As to these debts, DaimlerChrysler filed a claim for a bad debt deduction or refund with the Arizona Department of Revenue ("ADOR") pursuant to R15-5-2011. The total amount of the claim was $666,829.05. ADOR disallowed the claim. DaimlerChrysler protested the denial to the Office of Administrative Hearings. After adopting the parties' Joint Stipulation of Facts, the administrative law judge affirmed ADOR's decision.

¶ 6 In accordance with Arizona Revised Statutes ("A.R.S.") section 42-1254(C) (1999), DaimlerChrysler filed a complaint and notice of appeal with the Arizona Tax Court on August 16, 2002. It moved for partial summary judgment on the issue of its entitlement to a bad debt deduction or refund. The tax court denied the motion. Though ADOR did not cross-move for summary judgment, the parties agreed that the tax court's ruling entitled ADOR to summary judgment in its favor. Accordingly, the court entered judgment in favor of ADOR. This appeal followed.

Discussion

¶ 7 This court reviews de novo the tax court's ruling on the motion for summary judgment. Wilderness World, Inc. v. Dep't of Revenue, 182 Ariz. 196, 198, 895 P.2d 108, 110 (1995). Because the material facts are not disputed, our task is to determine whether the tax court correctly applied the substantive law to those facts. S. Pac. Transp. Co. v. Ariz. State Dep't of Revenue, 202 Ariz. 326, 329-30, ¶ 7, 44 P.3d 1006, 1009-10 (App. 2002).

¶ 8 DaimlerChrysler argues it is entitled to take the bad debt deduction on two different theories: first, that it is entitled to the bad debt deduction in its own right; second, that it is entitled to the bad debt deduction based on an alleged assignment of a dealer's right to the bad debt deduction to DaimlerChrysler. Additionally, DaimlerChrysler contends that the failure to allow it a bad debt deduction works an unlawful forfeiture. We address each issue in turn.

1. DaimlerChrysler Does Not Independently Satisfy the Bad Debt Deduction Requirements of R15-5-2011.

A. The Regulation and Principles of Regulatory Interpretation.

¶ 9 Under R15-5-2011, a bad debt deduction "shall be allowed" if certain conditions are met. First, section (A) provides that a bad debt deduction shall be allowed for a qualifying debt when taxes have been reported on the gross receipts from the transaction, and the debt is worthless, in whole or part.³ Second, section (E)(1) mandates a bad debt deduction when provisions applicable to conditional or installment sales are met. Finally, section (E)(2) allows a bad debt deduction on installment contracts sold to a third party with recourse. In that circumstance, section (E)(3) requires that the vendor remain liable to the third party assignee to make principal payments to the third party in the event of default by the original payor (the consumer).

¶ 10 DaimlerChrylser argues that sections (A) and (E)(1) allow it to take a bad debt deduction independent of any assignment. It maintains that sections (A) and (E)(1) are written in the passive voice and that the sections fail to specify who is entitled to the bad debt deduction. Specifically, DaimlerChrysler contends that none of the express provisions under sections (A) or (E)(1) require that only vendors of the goods in question (in this case the Dealers) are entitled to take the bad debt deduction. DaimlerChrysler argues that ADOR and the tax court inappropriately added this requirement to the language of an otherwise clear regulation.

¶ 11 On the other hand, ADOR argues, and the tax court found, that the intent of R15-5-2011 "is to give a deduction to the retailer that sells the car and receives its full purchase price from the customer at the time of the sale." The tax court concluded that the regulation "contemplates that the party claiming the deduction is the party who reported the original transaction as part of its gross receipts and paid the transaction privilege tax thereon."

¶ 12 The resolution of this issue turns on the construction we give R15-5-2011. Generally, the principles of construction that apply to statutes apply with equal force to administrative rules and regulations like R15-5-2011. Kimble v. City of Page, 199 Ariz. 562, 565, ¶ 19, 20 P.3d 605, 608 (App.2001); Marlar v. State, 136 Ariz. 404, 410, 666 P.2d 504, 510 (App.1983). Thus, "[i]n interpreting a statute [or regulation], we first look to the language of the statute [or regulation] itself. Our chief goal is to ascertain and give effect to the legislative [or regulatory] intent." Scottsdale Healthcare, Inc. v. Ariz. Health Care Cost Containment Sys. Admin., 206 Ariz. 1, 5, ¶ 10, 75 P.3d 91, 95 (2003) (citing Zamora v. Reinstein, 185 Ariz. 272, 275, 915 P.2d 1227, 1230 (1996)). Our law provides that "[i]n discerning legislative [or regulatory] intent, we look to the statute's [or regulation's] policy, the evil it was designed to address, its words, context, subject matter, and effects and consequences." Logan v. Forever Living Prods. Int'l, Inc., 203 Ariz. 191, 194, ¶ 10, 52 P.3d 760, 763 (2002). In particular, when construing a regulation "[w]e consider individual provisions in the context of the entire statute" as well as the statutory or regulatory scheme. Burlington N. & Santa Fe Ry. Co. v. Ariz. Corp. Comm'n, 198 Ariz. 604, 607, ¶ 15, 12 P.3d 1208, 1211 (App.2000).

¶ 13 For the reasons that follow, we are persuaded that applying these principles in this case to R15-5-2011(A) and (E)(1) does not allow DaimlerChrysler, as a purchaser of retail contracts, to take a bad debt deduction when it has purchased the contracts without recourse against the Dealers.

B. Application of the Pertinent Interpretive Principles.

¶ 14 We first look at the express language of R15-5-2011. As DaimlerChrysler points out, the language of neither R15-5-2011(A) nor (E)(1) makes an express reference to "vendor." However, the defined terms used within those provisions demonstrate that the regulation cannot be satisfied by a person other than a vendor. We...