Interlott Technologies, Inc. v. ADOR

• Decision Date: 22 July 2003
• Docket Number: No. 1 CA-TX 02-0020.,1 CA-TX 02-0020.
• Parties: INTERLOTT TECHNOLOGIES, INC., a Delaware corporation, Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an Agency of the State of Arizona, Defendant-Appellee.
• Court: Arizona Court of Appeals

72 P.3d 1271

205 Ariz. 452

INTERLOTT TECHNOLOGIES, INC., a Delaware corporation, Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an Agency of the State of Arizona, Defendant-Appellee.

No. -0020.

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

July 22, 2003.

Lieberman, Dodge, Gerding, Kothe & Anderson, Ltd. By David D. Dodge and Marc R. Lieberman, Phoenix, Attorneys for Plaintiff-Appellant.

Janet Napolitano, Former Attorney General, Terry Goddard, Attorney General By Michael P. Worley, Assistant Attorney General, Phoenix, Attorneys for Defendant-Appellee.

OPINION

EHRLICH, Judge.

¶ 1 This is an appeal from a summary judgment holding Interlott Technologies liable for assessments of the transaction privilege tax, a tax akin to a business privilege tax based upon gross receipts from taxable activity. ARIZ.REV.STAT. ("A.R.S.") § 42-5008 (Supp.2002); see Southern Pac. Transp. Co., Inc. v. Ariz. Dep't of Revenue, 202 Ariz. 326, 333 ¶ 25, 44 P.3d 1006, 1013 (App.2002). Finding no error, we affirm the judgment.

FACTS AND PROCEDURAL BACKGROUND

¶ 2 Interlott leases and sells instant-winner lottery-ticket vending machines ("ITVMs"). The Arizona Lottery awarded the company a contract in 1993, and leased 200 Interlott ITVMs between January 1994 and December 1998. The parties renewed the ITVM lease ("Lease Agreement") for twelve-month periods through 1997 and for two six-month periods in 1998.

¶ 3 Interlott installed the ITVMs at retail locations throughout Arizona, and, during the relevant time, had at least two employees living and working in the state. Those employees delivered and installed the ITVMs, performed preventive maintenance on the machines, responded to service calls, trained store personnel in ITVM operation, and removed and relocated the machines. Eighty-nine percent of the ITVMs remained in the same location during the entire lease term.¹

¶ 4 After the Arizona Department of Revenue ("ADOR") conducted a state privilege tax audit of Interlott, it determined that Interlott had not paid this tax on the gross revenues from leasing ITVMs to the Lottery. Accordingly, the agency issued a privilege tax assessment of $192,388.21, consisting of the tax, penalties and interest through March 31, 1999.

¶ 5 At the same time, ADOR performed privilege tax audits on behalf of fifteen Arizona cities and towns ("Cities").² These audits showed that Interlott had received $370,230 from leasing ITVMs to the Cities but that it had not paid any privilege taxes to them. Thus, ADOR, on behalf of the Cities, issued fifteen proposed assessments consisting of privilege taxes, interest and penalties totaling $8619.76.

¶ 6 ADOR mailed the notices of proposed assessments for the State and the Cities to Interlott in one envelope. The company received the notices on March 22, 1999, and responded with a Notice of Protest contesting the amount of $192,388.21. It filed no other notices challenging additional amounts or asserting alternative grounds for relief within the time allowed by law, i.e., forty-five days following its receipt of the proposed assessments. Model City Tax Code ("Code"), A.R.S. § 42-6051 et seq., § 570(b)(1)(A). It did, though, on May 19, 1999, write ADOR that the "appeal of the Transaction Privilege Tax Audit findings ... constitutes an appeal of the entire audit assessment. It is our intent that any assessments, imposed by an[y] taxing jurisdiction, are to be included."

¶ 7 At the administrative hearing, Interlott maintained that it had no business presence in Arizona apart from the Lease Agreement. In addition, it argued that the audit should be vacated because the contract and bid documents had no mention of transaction privilege taxes and because there would be no tax if the Arizona Lottery had purchased the ITVMs instead of leasing them. The administrative law judge reviewed and affirmed the State's and Cities' assessments, and the ADOR director upheld that ruling.

¶ 8 Interlott appealed to the tax court. ADOR successfully moved for summary judgment on the issues of nexus and the applicability of the tax. The agency also successfully urged the court that Interlott had failed to timely protest the municipal assessments, and this appeal followed.

DISCUSSION

A. Tax Court Jurisdiction of Claimed Protest of Cities' Assessments

¶ 9 We view the facts in the light most favorable to the party against which summary judgment was granted, Valencia Energy Co. v. Ariz. Dep't of Revenue, 191 Ariz. 565, 568 ¶ 2, 959 P.2d 1256, 1259 (1998), but we review de novo the tax court's ruling. Wilderness World, Inc. v. Ariz. Dep't of Revenue, 182 Ariz. 196, 198, 895 P.2d 108, 110 (1995). This standard applies as well to determinations of jurisdiction and the timeliness of a complaint for judicial review. Guminski v. Ariz. State Veterinary Med. Examining Bd., 201 Ariz. 180, 182 ¶¶ 9-10, 33 P.3d 514, 516 (App.2001).

¶ 10 The threshold issue is whether the tax court had jurisdiction of the claimed protest against the Cities' assessments. Interlott contends that its protest incorporated the Cities' assessments, that the protest was timely, that the protest was amended via correspondence and that, even if it did not make a timely protest, ADOR is estopped to assert a lack of jurisdiction because the agency failed to challenge jurisdiction during the administrative proceedings. We reject these arguments.

¶ 11 A party must contest the applicability or amount of a tax within forty-five days of the receipt of the assessment. Code § 570(b)(1)(A). The petition must "be in writing and shall set forth the reasons why any correction, abatement, or refund should be granted, and the amount of reduction or refund requested." Id. at § 570(b)(3)(A). "The provisions of this Section are exclusive, and no petition seeking any correction, abatement, or refund shall be considered unless the petition is timely and properly filed under the Section." Id. at § 570(b)(3)(C). ¶ 12 Approximately forty days after having received the sixteen assessments, Interlott filed a Notice of Protest. It contested the amount of $192,388.21, exactly the amount of the State assessment, and its arguments included:

1. Interlott had no place of business in Arizona, meaning that only a use tax could be imposed;

2. the Lease Agreement was a financing mechanism; if the State had bought the ITVMs, there would be no tax;

3. the State's assessment was a breach of the Lease Agreement, which set forth all applicable provisions and costs;

4. it was inappropriate for the State to attempt to impose penalties and interest in addition to a retroactive tax; and

5. Interlott did not understand that the lease was subject to the Arizona privilege tax and asked that "the entire audit assessment be vacated."

¶ 13 Fifty-nine days after having received the notices of the Cities' proposed assessments, on May 19, 1999, Interlott had a telephone conversation with an ADOR employee, followed by a letter of confirmation. It was in that letter that Interlott stated that it protested "any assessments, imposed by an[y] taxing jurisdiction."

¶ 14 We conclude that Interlott timely protested the State assessment, but not the Cities' assessments. Not only was the stated amount that of the State assessment alone, but its Notice of Protest did not cite any municipal activities or assessments, or even mention the Cities. Rather, while Interlott challenged the "entire audit assessment," its protest was simply as follows:

In view of the above, it is particularly inappropriate for the State of Arizona to attempt to impose penalties and interest on top of the attempt to retroactively impose a transaction privilege tax.

For the above reasons, we believe that the lease agreement between the State of Arizona and Interlott Technologies does not involve the kind of commercial transaction, which incurs a liability for a transaction privilege tax in Arizona. We therefore request that the entire audit assessment be vacated.

In its historical context, the reference in the letter to the "entire audit assessment" pertains to the imposition of penalties and interest as well as "a transaction privilege tax." It does not relate to the assessments on behalf of the fifteen Cities.

¶ 15 Nor did Interlott file or seek to file a written amendment or make or try to make an oral amendment to its Notice of Protest as the Code at § 570(b)(3)(A) permits. Although an amendment may be made "at any time prior to the time the taxpayer rests his case" if a hearing is held, id., a telephone call with and letter to the opposing party is insufficient to constitute a formal amendment. Thus, Interlott failed to protest the Cities' assessments.

¶ 16 Interlott maintains that ADOR waived this contention. However, a jurisdictional argument cannot be waived, and a failure to protest municipal assessments and the resulting finality of the assessments creates a jurisdictional issue. A.R.S. § 42-1251(B) (1999)(failure to meet ADOR appeal deadline requires payment of all taxes, penalties and interest); see McNutt v. Ariz. Dep't of Revenue, 196 Ariz. 255, 265 ¶ 35, 995 P.2d 691, 701 (App.1998)("A party's failure to resort to and exhaust administrative remedies deprives the [tax] court of jurisdiction to hear the party's claim."); Estate of Bohn v. Waddell, 174 Ariz. 239, 245-46, 848 P.2d 324, 330-31 (App.1992)("[I]f parties have statutory recourse to an administrative agency that has authority to grant appropriate remedies, they must scrupulously follow the statutory procedures."), cert. denied, 509 U.S. 906, 113 S.Ct. 3000, 125 L.Ed.2d 693 (1993). ADOR's challenge is not barred.

¶ 17 Equally unavailing is Interlott's alternative contention that ADOR somehow is estopped to raise jurisdiction because a party cannot create jurisdiction by means of estoppel. See Swichtenberg v. Brimer, 171 Ariz. 77, 82, 828 P.2d 1218, 1223 (App.1991)

(jurisdiction over claim cannot be conferred by court or be based upon estoppel of party to deny it...