J. C. Penney Co., Inc. v. Arizona Dept. of Revenue, 1

• Court: Arizona Court of Appeals
• Writing for the Court: O'CONNOR; EUBANK, P. J., and HAIRE
• Citation: J. C. Penney Co., Inc. v. Arizona Dept. of Revenue, 610 P.2d 471, 125 Ariz. 469 (Ariz. App. 1980)
• Decision Date: 10 April 1980
• Docket Number: No. 1,CA-CIV,1
• Parties: J. C. PENNEY COMPANY, INC., a Delaware Corporation, Appellant, v. ARIZONA DEPARTMENT OF REVENUE, and Great Northern Investment Company, a co- partnership, Appellees. 4156. Department B

Page 471

610 P.2d 471

125 Ariz. 469

J. C. PENNEY COMPANY, INC., a Delaware Corporation, Appellant, v. ARIZONA DEPARTMENT OF REVENUE, and Great Northern Investment Company, a co- partnership, Appellees.

No. 1 CA-CIV 4156.

Department B.

Court of Appeals of Arizona, Division 1,

April 10, 1980.

Brown & Bain, P. A. by Neil S. Cumsky and Giora Ben-Horin, Phoenix, for appellant.

John A. LaSota, Jr., Atty. Gen. by Ian A. MacPherson, Asst. Atty. Gen., Phoenix, for appellee Dept. of Revenue.

Snell & Wilmer by Robert C. Bates, Phoenix, for appellee Great Northern Inv. Co.

OPINION

O'CONNOR, Judge.

Appellant, J. C. Penney Company, has appealed from the summary judgment granted to appellees by the trial court upholding the constitutionality of the Arizona rental occupancy tax, A.R.S. § 42-1701 to § 42-1729, and from the denial by the trial court of appellant's cross motion for summary judgment.

The parties stipulated to the relevant facts. Appellant, hereinafter referred to as "Penney", brought the action for recovery of $5.63 in Arizona rental occupancy tax and education excise tax paid under protest to appellee Arizona Department of Revenue, hereinafter referred to as "the Department." Penney had leased premises in Globe, Arizona, in 1955 from Main-Globe Corporation. Appellee, Great Northern Investment Company, hereinafter referred to as "Great Northern", is the successor in interest as landlord under the lease. The lease was not amended thereafter by the parties, and they stipulated that it was a "pre-existing lease" as that term is defined in A.R.S. § 42-1701(5). The Department and subsequently the Arizona State Board of Tax Appeals denied Penney's protest of the collection of the tax. Penney then filed this action in the Maricopa County Superior Court against the Department. Appellee Great Northern intervened in the action in Superior Court.

Appellant argues that the imposition of the rental occupancy and education excise taxes is in violation of the equal protection clauses of the fourteenth amendment to the United States Constitution and of article II, section 13 of the Arizona Constitution.

The Arizona rental occupancy tax became effective on January 1, 1975 (Laws 1974, Ch. 149, § 1), and is imposed by A.R.S. § 42-1711(A), which provides:

There is levied and shall be collected . . . a tax upon every tenant of a pre-existing lease for the privilege of occupancy at a rate equal to two per cent of the rent for such occupancy.

A.R.S. § 42-1701(5) defines "pre-existing lease" as follows:

"Pre-existing lease" means any written lease or rental agreement entered into prior to December 1, 1967, except for the following:

(a) Any bilateral amendment of such written lease or rental agreement entered into subsequent to December 1, 1967, wherein the length of the term of the lease or the size of the premises leased is changed, or both.

As previously indicated, the parties stipulated that the lease in question is a "pre-existing" lease within the meaning of the statute and that the lease was not amended in respect to length of the term or size of the premises.

A.R.S. § 42-1712(2) also exempts from the application of the rental occupancy tax:

Occupancy under any pre-existing lease which the constitution or laws of the United States or this state would prohibit this state from taxing were the landlord to be the tenant.

Appellant contends that the quoted statutes are unconstitutional in that Penney is not afforded the exemption available to tenants whose lessors could not be subject to the taxes under the constitution or laws of the United States or Arizona if those lessors were the tenants. Appellant also contends the statutes are unconstitutional in that the tax is imposed on Penney based solely on the fact that Penney's lease was executed prior to December 1, 1967, and it was not subsequently amended. Penney further argues that the education excise tax imposed by A.R.S. § 42-1361 to § 42-1362 is invalid for the same reasons the rental occupancy tax is invalid. The education excise tax is imposed at a rate equal to 50% of the rental occupancy tax rate. A.R.S. § 42-1361(A)(3).

LEGISLATIVE HISTORY

The legislative background of the taxes at issue is significant in resolving the issues raised. Arizona has had a transaction privilege tax since the enactment of the Excise Revenue Act of 1935. Alvord v. State Tax Commission, 69 Ariz. 287, 289, 213 P.2d 363, 364 (1950). It is an excise tax on the privilege of engaging in certain activities primarily involving retail sales of tangible personal property. Tower Plaza Investments, Ltd. v. DeWitt, 109 Ariz. 248, 250, 508 P.2d 324, 326 (1973), appeal dismissed, 414 U.S. 1118, 94 S.Ct. 853, 38 L.Ed.2d 746 (1974). In 1967, the Legislature amended the transaction privilege tax to add a 2% tax on the business of "leasing or renting for a consideration the use or occupancy of real property." A.R.S. § 42-1314(A)(3) (Laws 1967, Third Special Session, Ch. 3, § 1(a)(3)). The amendment became effective December 1, 1967.

The legal incidence of the transaction privilege tax is on the seller, or in the case of leases, on the landlord, even though it may be passed on to the customer or tenant. Tower Plaza Investments, Ltd. v. DeWitt, 109 Ariz. at 250, 508 P.2d at 326. Landlords with leases which had been executed before the enactment of the transaction privilege tax on leases were unable to pass on the new tax to their tenants unless the leases contained an appropriate provision for such a "pass through." Apparently in recognition of the problem of such pre-existing leases, the Legislature exempted pre-existing leases from the transaction privilege tax until December 1, 1972. A.R.S. § 42-1314 B.

After the expiration of the moratorium on December 1, 1972, an action was filed to determine whether the imposition of the transaction privilege tax on pre-existing leases was unconstitutional. The Arizona Supreme Court upheld the constitutionality of the tax in Tower Plaza Investments, Ltd. v. DeWitt, 109 Ariz. at 254, 508 P.2d at 330.

In 1974 the Legislature passed the rental occupancy tax which is the subject of this appeal. The rental occupancy tax places the legal incidence of the tax on tenants rather than landlords, and it applies only to leases entered into prior to December 1, 1967. The Legislature also provided in A.R.S. § 42-1314 B that the transaction privilege tax on leases is not to be levied on income from leases on which the rental occupancy tax is paid.

GENERAL PRINCIPLES

Article II, section 13 of the Arizona Constitution and the fourteenth amendment of the United States Constitution each contain clauses which guarantee to their citizens equal protection of the law. The Arizona Supreme Court has held that the "equal protection" clause of the Arizona Constitution and the fourteenth amendment are "for all practical purposes" equivalent. Valley National Bank of Phoenix v. Glover, 62 Ariz. 538, 554, 159 P.2d 292, 299 (1945). A classification for tax purposes must be reasonably related to the purpose of the tax statute. F. S. Royster Guano Co. v. Virginia, 253 U.S. 412, 40 S.Ct. 560, 64 L.Ed. 989 (1920); Gulf, C. & S. F. Ry. Co. v. Ellis, 165 U.S. 150, 17 S.Ct. 255, 41 L.Ed. 666 (1897).

The tax is presumed to be constitutional, and the court must be satisfied beyond a reasonable doubt that it is unconstitutional in order to so hold. Shaw v. State, 8 Ariz.App. 447, 447 P.2d 262 (1968). The appellant has the burden of overcoming the presumption that the classifications rest upon some reasonable basis and are not purely arbitrary. Uhlmann v. Wren, 97 Ariz. 366, 401 P.2d 113 (1965).

THE CLASSIFICATION BASED ON EXEMPT STATUS OF LANDLORD

Appellant argues that the apparent purpose of the Legislature in classifying tenants under A.R.S. § 42-1712(2) based on whether the lessor would be exempt from direct taxation was to avoid an unconstitutional indirect taxation of immune sovereign governments. Appellant contends that the identity of the landlord exemption of the rental occupancy tax is not reasonably related to the legislative purpose of honoring the principle of sovereign immunity from taxation because the Legislature was mistaken in its belief that the tax in question would be tantamount to unconstitutional indirect taxation of governmental entities.

The state may not tax directly the federal government or any of its instrumentalities. Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110, 74 S.Ct. 403, 98 L.Ed. 546 (1954); McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579 (1819); Arizona State Tax Commission v. Garrett Corporation, 79 Ariz. 389, 291 P.2d 208 (1955); O'Neil v. Valley National Bank of Phoenix, 58 Ariz. 539, 121 P.2d 646 (1942). The Arizona Constitution, art. 9, § 2, also exempts "from taxation all federal, state, county and municipal property." The state exemption refers only to property taxation, however, and not to excise taxes. City of Phoenix v. Bowles, 65 Ariz. 315, 180 P.2d 222 (1947).

It is well established that a state may impose an excise tax on private persons doing business with a governmental entity even though the economic burden of the tax is shifted by contract to the tax-immune governmental entity. Detroit v. Murray Corp., 355 U.S. 489, 78 S.Ct. 458, 2 L.Ed.2d 441 (1958); United States v. Township of Muskegon, 355 U.S. 484, 78 S.Ct. 483, 2 L.Ed.2d 436 (1958); United States v. Detroit, 355 U.S. 466, 78 S.Ct. 474, 2 L.Ed.2d 424 (1958). Furthermore, it is presumed that the legislature is aware of the cases interpreting statutes. Altamirano v. Industrial Commission, 22 Ariz.App. 379, 527 P.2d 1096 (1974).

If a rational basis for the rental occupancy tax can be conceived, the classification is not in violation of the equal protection clause. State v. Levy's, 119 Ariz. 191, 580 P.2d 329 (1978); Flagstaff Vending Co. v. City of Flagstaff, 118 Ariz. 556, 578 P.2d 985 (1978). In determining whether a rational basis for a particular tax can be conceived,...