Flagstaff Vending Co. v. City of Flagstaff

• Citation: 118 Ariz. 556,578 P.2d 985
• Decision Date: 25 April 1978
• Docket Number: No. 13569,13569
• Parties: FLAGSTAFF VENDING COMPANY, an Arizona Business Corporation, Appellant, v. CITY OF FLAGSTAFF, a Municipal Corporation, the Council of the City ofFlagstaff, said Municipal Corporation's Governing Body, the Clerk of the Cityof Flagstaff, Frank Abeyta, Individually, and as the Finance Director of theCity of Flagstaff,Charles K. McClain, Individually, and as City Manager of the City of Flagstaff,P. G. Bassler, Individually, and as Sales Tax Administrator and the Treasurerof the City of Flagstaff, Appellees.
• Court: Arizona Supreme Court

Page 985

578 P.2d 985

118 Ariz. 556

FLAGSTAFF VENDING COMPANY, an Arizona Business Corporation, Appellant, v. CITY OF FLAGSTAFF, a Municipal Corporation, the Council of the City ofFlagstaff, said Municipal Corporation's Governing Body, the Clerk of the Cityof Flagstaff, Frank Abeyta, Individually, and as the Finance Director of theCity of Flagstaff,Charles K. McClain, Individually, and as City Manager of the City of Flagstaff,P. G. Bassler, Individually, and as Sales Tax Administrator and the Treasurerof the City of Flagstaff, Appellees.

No. 13569.

Supreme Court of Arizona,In Banc.

April 25, 1978.

Shimmel, Hill, Bishop & Gruender, P. C. by Lawrence J. Lee, Phoenix, for appellant

Mangum, Wall, Stoops & Warden by Robert W. Warden, Fred W. Croxen, II, Flagstaff City Atty., Flagstaff, for appellees.

GORDON, Justice:

Following an audit of appellant's records, the City of Flagstaff, appellee, assessed the Flagstaff Vending Company $7,677.15. This amount reflected a one per cent business privilege tax plus accrued interest and a ten per cent penalty. Appellant paid the taxes under protest and then filed a complaint in the superior court seeking a refund. Following cross motions for summary judgment, the superior court found in favor of the City of Flagstaff. This finding was appealed and we have taken jurisdiction pursuant to 17A A.R.S. Rules of the Supreme Court, Rule 47(e).

Three issues have been raised:

(1) May the City of Flagstaff validly include sales consummated on the Northern Arizona University Campus within appellant's privilege tax basis?

(2) Does the application and enforcement of this tax amount to a denial of equal protection of the law and a denial of due process of law?

(3) Was there an adequate showing of negligence or intentional disregard of the ordinances by appellant to support the assessment of a penalty?

ON CAMPUS SALES

Appellant's vending machines are located throughout Flagstaff including the campus of Northern Arizona University. Since the sales from all the machines were included in appellant's tax base by the city, appellant has challenged Flagstaff's power to tax transactions occurring on the university campus.

The taxes at issue were assessed pursuant to Flagstaff City Ordinances Nos. 644 and 937. Ordinance Number 937 replaced Ordinance Number 644 on November 5, 1974. The two ordinances do not vary materially and will be considered together in this opinion. Both impose a privilege tax, which is "measured by the volume or amount of business transacted by persons on account of their business activities". Ord. No. 644, § 9; Ord. No. 937, § 9. The tax is levied "at an amount equal to one percent of the gross proceeds of sales or gross income from the business upon every person engaging or continuing within this City in the business of selling any tangible personal property whatever at retail". Ord. No. 644, § 11; Ord. No. 937, § 11.

It is settled law that a city may validly impose a tax on the privilege of engaging in a business as measured by the business' gross sales, even though a portion of the sales occur beyond the municipality's corporate limit. City of Phoenix v. Arizona Sash, Door & Glass Co., 80 Ariz. 100, 293 P.2d 438 (1956). By the terms of its ordinances, however, Flagstaff has specifically excluded sales consummated beyond the corporate limits from the tax basis of any retailer. City of Phoenix v. Borden Company, 84 Ariz. 250, 326 P.2d 841 (1958); See also, City of Phoenix v. Phoenix Newspapers, Inc.,100 Ariz. 189, 412 P.2d 693 (1966); Ordinance No. 644, § 11, § 18(A)(8); Ordinance No. 937, § 11(A)(13). Having relied on this exclusion appellant asserts that its sales on the university campus fall within the terms of the ordinances' exclusions.

An examination of Flagstaff Ordinance No. 436, which describes the corporate limits, demonstrates that the exterior boundary of Flagstaff completely surrounds Northern Arizona University. This geographical fact satisfies the "within" requirement of the ordinances. This conclusion comports with the ordinary meaning of "within" "on the innerside * * * inside the bounds of a region". Webster's Third New International Dictionary, 2627 (1965). We therefore reject appellant's theory of Northern Arizona University being a geographical entity not "within" the City of Flagstaff, as defined by the terms of the privilege tax ordinances.

Even though the terms of the ordinances include the on-campus sales within appellant's privilege tax basis, appellant contends the City of Flagstaff was without power to do so. Appellant relies on two theories, which could prevent Flagstaff from reaching the on-campus sales: (1) That a municipality may not impose a tax on the State of Arizona, and (2) That the field of taxation on state university land has been preempted by the state.

We agree that a municipality may not impose a tax on the State of Arizona or its subdivisions such as the Board of Regents. City of Tempe v. Arizona Board of Regents, 11 Ariz.App. 24, 461 P.2d 503 (1969). In order to determine whether the Flagstaff tax violates this prohibition, it becomes necessary to ascertain where the legal incidence of the tax falls. By comparing the language of the Flagstaff ordinances with the tax statute considered by Justice Struckmeyer in Arizona State Tax Commission v. Garrett Corporation, 79 Ariz. 389, 291 P.2d 208 (1955), it becomes clear that the legal incidence of the tax falls on the Flagstaff Vending Company. Since the legal incidence of the privilege tax does not fall on the State or the Board of Regents, the tax is not objectionable on the grounds that it either interferes with the functions of the State or imposes a tax on the State. City of Tempe v. Del E. Webb Corporation, 13 Ariz.App. 597, 480 P.2d 18 (1971).

Appellant's third argument attempts to draw an analogy between the tax sub judice and the privilege tax considered in Warren Trading Post Company v. Moore, 95 Ariz. 110, 387 P.2d 809 (1963), rev'd. sub nom., Warren Trading Post Company v. Arizona State Tax Commission, 380 U.S. 685, 85 S.Ct. 1242, 14 L.Ed.2d 165 (1965). In that case the United States Supreme Court struck down Arizona's privilege tax on traders selling to Indians residing on the Navajo Indian Reservation, because of the comprehensive scheme of Federal regulations which had the effect of preempting the area of sales on the Indian Reservation. Warren Trading Post Company v. Arizona State Tax Commission, supra. The Warren opinions are not here controlling because the doctrine of federal preemption is based on a conflict between sovereigns, whereas here we are concerned with the conflicting powers of the state and one of its subdivisions, ¹ which derives its powers from the laws of the state.

In Arizona:

"Both a city and a state may legislate on the same subject when that subject is of local concern or when, though the subject is not a local concern, the charter or particular state legislation confers on the city express power to legislate thereon; but where the subject is of statewide concern, and the legislature has appropriated the field by enacting a statute pertaining thereto, that statute governs throughout the state, and local ordinances contrary thereto are invalid". Phoenix Respirator & Ambulance Service, Inc. v. McWilliams, 12 Ariz.App. 186, 188, 468 P.2d 951, 953 (1970); Clayton v. State, 38 Ariz. 135, 297 P. 1037, rehearing denied, 38 Ariz. 466, 300 P. 1010 (1931).

We have previously held the securing of revenue by a city to be of a peculiarly local nature, and that both a city and the state may tax the same source. Barrett v. State, 44 Ariz. 270, 36 P.2d 260 (1934). Although the Legislature could exempt all on-campus retail sales from the reach of a surrounding municipality's privilege tax, it has not done so. " * * * (T)he mere fact that the state may seek revenue from the same source and in the same manner (as the city) does not make the common source of revenue so purely a subject of statewide concern that the city cannot also secure funds therefrom". Barrett v. State, 44 Ariz. at 273, 36 P.2d at 261; See also City of Phoenix v. Arizona Sash, Door & Glass Co., supra.

Despite the variety of objections which appellant has raised, we have concluded that the City of Flagstaff may validly include retail sales on the Northern Arizona University Campus within appellant's privilege tax basis. The campus is located "within" the City of Flagstaff for purposes of the tax. Since the legal incidence of the tax does not fall on the state, and the Legislature has not acted to "preempt" this means of raising revenue, the transaction privilege tax remains a valid exercise of the City of Flagstaff's taxing power.

EQUAL PROTECTION AND DUE PROCESS

Appellant also asserts that its constitutional right to equal protection of the law was violated by the City of Flagstaff taxing its operations, but not imposing a tax on others similarly situated. By attacking the taxing ordinance as being violative of the Fourteenth Amendment, appellant carries the burden of overcoming the presumption that the classifications rest upon some reasonable basis and are not purely arbitrary. Uhlman v. Wren, 97 Ariz. 366, 401 P.2d 113 (1965). See also Wittenberg v. Mutton, 203 Or. 438, 280 P.2d 359 (1955).

Appellant's theory rests on the fact that a limited number of exemptions to the tax exist. The sales which are excluded from the basis of the privilege tax include: the sale of books and supplies in the University bookstore; amusements, pool games and other recreational devices operated by bona fide religious, educational or nonprofit In determining whether the taxing ordinance violates the Fourteenth Amendment, we are guided by the early case of Southwestern Oil Company v. State of Texas, 217 U.S. 114, 30 S.Ct. 496, 54 L.Ed. 688 (1910). There the State of Texas imposed an occupation tax on the wholesale sellers of coal oil, naphtha, benzine or any other mineral oil but did not...