Ebasco Services Inc. v. Arizona State Tax Commission

• Decision Date: 17 October 1969
• Docket Number: Nos. 9652,9657,s. 9652
• Citation: 459 P.2d 719,105 Ariz. 94
• Parties: EBASCO SERVICES INCORPORATED, a New York corporation, Appellant, v. ARIZONA STATE TAX COMMISSION, a body corporate and politic, et al., Appellees.
• Court: Arizona Supreme Court

Page 719

459 P.2d 719

105 Ariz. 94

EBASCO SERVICES INCORPORATED, a New York corporation, Appellant, v. ARIZONA STATE TAX COMMISSION, a body corporate and politic, et al., Appellees.

Nos. 9652, 9657.

Supreme Court of Arizona, In Banc.

Oct. 17, 1969.

Snell & Wilmer, by Edward Jacobson, Phoenix, for appellant.

Darrell F. Smith, Former Atty. Gen., Gary K. Nelson, Atty. Gen., by James D. Winter, Asst. Atty. Gen., Phoenix, for appellee.

HAYS, Justice.

The Court is herein concerned with two separate actions which involve the same litigants and essentially the same issues. For purposes of the opinion, we shall consider them together and unless otherwise noted, our decision applies to both causes.

The appellant, plaintiff below, Ebasco Services, Incorporated, hereinafter referred to as Ebasco, is a corporation engaged in the construction of large power generating plants. These cases are concerned with two projects contracted for between Ebasco and Arizona Public Service, a public utility company, hereinafter referred to as APS, for the engineering, design and construction of such facilities.

As a consequence of an audit, the Arizona State Tax Commission, hereinafter referred to as the Commission, levied a tax assessment against Ebasco for additional Transaction Privilege and Education Excise taxes in the amount of some.$390,000. The levy was paid under protect and the instant actions were brought for the recovery of said tax.

There being no factual dispute, the cases were tried by cross motions for summary judgment. Ebasco herein appeals from the judgments of the trial court which deny in part and grant in part its motions.

Ebasco does not contest its taxability as a 'contractor' within the meaning of the statute. The heart of the issue is the inclusion in the tax base of certain equipment supplied to the contractor (Ebasco) by the owner (APS) for incorporation into the projects. These items of equipment, valued at over 40 million dollars were purchased in the name of APS by Ebasco as purchasing agent.

A.R.S. § 42--1309 is the statutory authority for the levy of the taxes in question. This section provides:

'Levy of tax; purposes; distribution: A. There is levied and there shall be collected by the commission * * * annual privilege taxes measured by the amount or volume of business transacted by persons on account of their business activities, and in the amounts to be determined by the application of rates against values, gross proceeds, of sales, or gross income, as the case may be in accordance with the schedule as set forth in §§ 42--1310 through 42--1315.'

A.R.S. § 42--1310, subsec. 2(i) states that the tax imposed by subsection A of § 42--1309 shall be levied and collected at the following rate:

'2. At an amount equal to one per cent of the (gross proceeds of sale or) gross income from the business upon every person engaging or continuing within this state in the following businesses:

(i) Contracting, but payments paid by the contractor for labor employed in construction, improvement or repairs shall not be subject to such tax.' (parentheses added.)

It was stated in the uncontradicted record of the Tax Commission hearing, that when a utility, such as APS, undertakes to build a new plant, it is common practice to deal through a purchasing agent for the acquisition of the specialized equipment that is required in such projects. This practice comes about as a result of many factors. There has been presented for the Court's consideration a list of significant business reasons, unrelated to tax avoidance, which we find to be persuasive on the issue of the business justification for the purchasing agent relationship.

Ebasco has several divisions under its corporate umbrella performing a complete range of services within this industry. For example, in addition to the construction division, there is a division which specializes in the engineering and design of steam-electric generating facilities; and being a large concern, it has, others in the field, a department which officers the purchasing services referred to above.

The record shows that these corporate divisions and their functions are separate and distinct. While it is probable that a firm awarded the engineering contract will also do the construction contracting, it was stated that it is not unusual in this industry for a principal to hire one firm to do the engineering and another to do the construction. Like the engineering and construction phases, the record indicates that the construction and purchasing may or may not be handled by the same firm.

The Commission, in assessing the tax, has taken the position that the purchasing agency is in substance a financing arrangement entered into for the benefit of Ebasco. It is argued that the agency ceases to exist once the purchase is complete and that ownership in the equipment shifts into the hands of Ebasco at the instant when it is received by Ebasco, as contractor, for use in the project. This ownership is only temporary however, and it is urged by the Commission that this title reverts to APS when the equipment technically becomes a fixture. Under the Commission's theory of the case, this brief ownership is tantamount to a 'gross receipt' in the hands of Ebasco and is therefore sufficient for the attachment of tax liability.

It is Ebasco's position that there has been an affirmative showing of the bona fides of the purchasing agency and that nothing has not pointed out which raises any suspicion of a tax avoidance motive. Under the agency theory, materials and equipment are furnished by the owner for use by the contractor. Since there is no purchase by the contractor with an ultimate reimbursement by, or resale to, the owner, there is nothing received by the contractor in the nature of a 'gross receipt' either in an accounting or in a tax sense. See, Arizona State Tax Comm. v. Parsons-Jurden Corp., 9 Ariz.App. 92, 449 P.2d 626 (1969), petition for review by the Supreme Court denied.

We cannot accept the Commission's argument. To say that there has been a change of ownership under these facts is an erroneous statement of the law. See 17A C.J.S. Contracts § 516, pp. 937--938, wherein the subject of ownership in materials is discussed.

'When the builder is to furnish the materials and labor for the performance of a contract requiring the erection of structures on the land of the owner, the materials generally remain the property of the builder until they are affixed to the land of the owner of are delivered to, and accepted by, him is his property. A transfer of title is not sufficiently shown by the mere fact that the materials are purchased by the builder with the intention of working them into the structure * * *.

Materials furnished by the owner which the builder is merely to use in the performance of the work remain the property of the owner, and the same is true of materials purchased by the builder as the agent of and on the credit of the owner. * * *' (Emphasis added.)

There has been no change of ownership and this Court will not create such a legal fiction for the sole purpose of attaching tax liability.

The second argument of the Commission is more to the point. The Commission urges a theory of 'constructive' gross receipts based on principles similar to those which, for tax purposes, hold for the recognition of income by individuals who have not actually received any payments. In support of this theory, the Commission has correctly stated several valid principles of 'income' tax law. It has been stated that gross income may include amounts which are never received by a taxpayer where such amounts have been used to reduce an obligation of the taxpayer. Anders v. State Board of Equalization, 82 Cal.App.2d 88, 185 P.2d 883, 885 (1947). Also, that amounts received may constitute gross income to the recipient even though such amounts are received by the recipient as an offset against obligations owed by the recipient to the one against whom the offset was made. This is true even though the recipient realizes no net profit as a result of the transaction. Walgreen Co. v. Gross Income Tax Div., 225 Ind. 418, 75 N.E.2d 784, 786, 1 A.L.R.2d 1014 (1947).

Applying these principles to the instant cases, the Commission reasons that the materials and equipment which were acquired under the agency constituted a part of APS's advance payment to Ebasco under the contract. It is urged that the agreement by APS to furnish the equipment constitutes a part of the consideration agreed upon between the parties.

This argument is unsupported either in law or in fact. There is no inherent or common law contractual obligation on the part of the contractor requiring him to supply the materials. In the absence of such an obligation, this...