Karbal v. Arizona Dept. of Revenue

• Decision Date: 24 May 2007
• Docket Number: No. 1 CA-TX 06-0010.,1 CA-TX 06-0010.
• Citation: 215 Ariz. 114,158 P.3d 243
• Parties: Steven KARBAL, individually and in a representative capacity, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, a political subdivision of the State of Arizona; Vanguard Car Rental USA, Inc., dba National Car Rental, an Oklahoma corporation, individually and in a representative capacity; Four Seasons Hotels Limited, a Canadian corporation, individually and in a representative capacity, Defendants/Appellees, and Arizona Sports & Tourism Authority, a political subdivision of the State of Arizona, Defendant-in-Intervention/Appellee.
• Court: Arizona Court of Appeals

158 P.3d 243

215 Ariz. 114

Steven KARBAL, individually and in a representative capacity, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, a political subdivision of the State of Arizona; Vanguard Car Rental USA, Inc., dba National Car Rental, an Oklahoma corporation, individually and in a representative capacity; Four Seasons Hotels Limited, a Canadian corporation, individually and in a representative capacity, Defendants/Appellees, and Arizona Sports & Tourism Authority, a political subdivision of the State of Arizona, Defendant-in-Intervention/Appellee.

No. 1 CA-TX 06-0010.

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

May 24, 2007.

Kickham Hanley, P.C. By Gregory D. Hanley, Royal Oak, MI, Attorneys pro hac vice for Plaintiff/Appellant.

Hebert Schenk, P.C. By Shawn K. Aiken, Richard M. Gerry, Phoenix, Co-Counsel for Plaintiff/Appellant.

Terry Goddard, Attorney General By Elizabeth S. Hill, Assistant Attorney General, Kimberly J. Cygan, Assistant Attorney General, Phoenix, Attorneys for Defendant/Appellee Arizona Department of Revenue.

Fennemore Craig, P.C. By Paul J. Mooney, Jim L. Wright, Phoenix, Attorneys for Defendant-in-Intervention/Appellee Arizona Sports & Tourism Authority.

OPINION

PORTLEY, Judge.

¶ 1 Steven Karbal ("Karbal") appeals the dismissal of his refund claim because the tax court lacked subject matter jurisdiction. For the following reasons, we affirm.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 2 Beginning March 1, 2001, Arizona imposed a transaction privilege tax on car and hotel room rentals pursuant to Arizona Revised Statutes ("A.R.S.") sections 5-839 and 5-840 to fund projects sponsored by the Arizona Sports and Tourism Authority ("AZ-STA"). See, e.g., Long v. Napolitano, 203 Ariz. 247, 252, ¶ 7, 53 P.3d 172, 177 (App. 2002) (discussing taxes collected to fund construction of a professional football stadium).

¶ 3 Karbal, a Michigan resident, rented a car from National Car Rental ("National")¹ and a hotel room at the Four Seasons Hotels Ltd. ("Four Seasons") during his visit to Arizona in May 2005. Michael Devine ("Devine"), also a Michigan resident, rented a car from Enterprise Leasing Co. of Phoenix ("Enterprise") and a hotel room from KSL Biltmore Resort, Inc. ("Biltmore") during his March 2003 visit. Pursuant to A.R.S. §§ 5-839 and 5-840, the car rental companies collected amounts equal to 3.25% of their car rental prices, and the hotels collected amounts equal to 1% of their hotel rates.

¶ 4 Devine filed a refund claim with the Arizona Department of Revenue ("ADOR") challenging the validity of the taxes collected by Enterprise and Biltmore. ADOR denied the claim, and Devine unsuccessfully appealed to the Office of Administrative Hearings. After the appeal, Devine filed this action in tax court.² The complaint was amended in July 2005 to add Karbal as a plaintiff. Three days later, Devine voluntarily dismissed his individual claims.³

¶ 5 ADOR moved to dismiss the complaint because (1) the tax court lacked subject-matter jurisdiction because Karbal and other members of the putative class had not exhausted the available administrative remedies, and (2) Karbal did not have standing to challenge the taxes because they fell on the vendors, not on their customers. The tax court dismissed the claim because Karbal had not filed a refund claim, and this appeal followed. We have jurisdiction pursuant to A.R.S. § 12-2101(B) (2003).

DISCUSSION

¶ 6 The parties contest whether Karbal has standing to bring this action.⁴ Standing is a question of law that we review de novo. Robert Schalkenbach Found. v. Lincoln Found., Inc., 208 Ariz. 176, 180, ¶ 15, 91 P.3d 1019, 1023 (App. 2004). A putative class representative who does not have standing cannot maintain a class action on behalf of others who could allege standing. See Fernandez v. Takata Seat Belts, Inc., 210 Ariz. 138, 141, ¶¶ 12-13, 108 P.3d 917, 920 (2005).

¶ 7 The question of standing in Arizona does not raise constitutional concerns because, unlike the United States Constitution, Arizona's constitution contains no case or controversy requirement. Armory Park Neighborhood Ass'n v. Episcopal Cmty. Servs. in Ariz., 148 Ariz. 1, 6, 712 P.2d 914, 919 (1985). Nevertheless, standing generally requires an injury in fact, economic or otherwise, caused by the complained-of conduct, and resulting in a distinct and palpable injury giving the plaintiff a personal stake in the controversy's outcome. Aegis of Ariz., L.L.C. v. Town of Marana, 206 Ariz. 557, 562-63, ¶ 18, 81 P.3d 1016, 1021-22 (App. 2003) (quotations omitted). If there is no standing, courts generally decline jurisdiction. See Bennett v. Brownlow, 211 Ariz. 193, 195-96, ¶¶ 14-16, 119 P.3d 460, 462-63 (2005) (stating that standing raises prudential concerns and is only waived "on rare occasions").

A. The Hotel Tax and Car Rental Surcharge Are More Similar to Transaction Privilege Taxes Than to Sales Taxes.

¶ 8 In analyzing whether Karbal has standing, we must first determine the nature of the hotel tax and car rental surcharge. The tax imposed by A.R.S. § 5-839(C) is a surcharge applied "to the business of leasing or renting" vehicles. Its statutory twin, A.R.S. § 5-840(A), provides for "a tax on the gross proceeds of sales or gross income from the business of every person engaging or continuing in a [hotel] business."

¶ 9 The two taxes are akin to transaction privilege taxes, which are "an excise on the privilege or right to engage in particular businesses within the taxing jurisdiction." US West Commc'ns., Inc. v. City of Tucson, 198 Ariz. 515, 523, ¶ 24, 11 P.3d 1054, 1062 (App.2000). Transaction privilege taxes are levied on gross income or gross proceeds from specific business activities. See S. Pac. Transp. Co. v. State, 202 Ariz. 326, 333, ¶ 25, 44 P.3d 1006, 1013 (App.2002).

¶ 10 "[A]n excise tax on the privilege or right to engage in an occupation or business in the State of Arizona" is a tax paid by the business providing the service, "not a tax upon the sale itself." Ariz. Dep't of Revenue v. Mountain States Tel. & Tel. Co., 113 Ariz. 467, 468, 556 P.2d 1129, 1130 (1976); see also Tower Plaza Invs., Ltd. v. DeWitt, 109 Ariz. 248, 250, 508 P.2d 324, 326 (1973) (stating that "the tax is not upon sales . . . but upon the privilege or right to engage in business in the State, although measured by the gross volume of business activity"). Karbal concedes that the AZ-STA taxes are excise taxes, as opposed to sales taxes, because they are regulated as "local excise taxes" under A.R.S. Title 42, Chapter 6.⁵

B. Karbal Does Not Have Standing Because the Legal Incidence of the Taxes Falls on the Businesses, Not Their Customers.

¶ 11 Because Arizona imposes taxes on the business activity of renting cars and hotel rooms, Karbal is not liable for the payment of these taxes to the State. The taxpayers are the hotels and rental car businesses filing the returns and remitting the taxes. "The legal incidence of the transaction privilege tax is on the seller," even though the cost may be passed on to customers like Karbal. See J.C. Penney Co. v. Ariz. Dep't of Revenue, 125 Ariz. 469, 472, 610 P.2d 471, 474 (App.1980). Karbal lacks legal standing to bring this suit because he is not the actual taxpayer. See Twentieth Century Sporting Club, Inc. v. United States, 92 Ct. Cl. 93, 34 F.Supp. 1021, 1023 (1940) ("But even though the plaintiff had in fact borne the burden of the tax, it nevertheless was not the taxpayer; no taxes were exacted from it by the defendant and there is, therefore, no right given to it under the law to recover.").⁶

1. No Injury in Fact

¶ 12 Karbal, however, argues standing does exist, relying on Lujan v. Defenders of Wildlife, 504 U.S. 555, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992), a non-tax case. In Lujan, the United States Supreme Court, in a case challenging a regulation which impacted the Endangered Species Act, developed a three-part test for standing, requiring (1) an injury in fact, (2) a causal connection between the injury and the alleged conduct, and (3) the likelihood that a favorable decision would redress the plaintiff's injury. Id. at 560-61, 112 S.Ct. 2130. Karbal contends he meets the Lujan standard because he bears the economic burden of taxes allegedly passed through to him.

¶ 13 Lujan does not, however, support Karbal's argument. The Court, in examining whether the environmental groups had standing to challenge the regulation, explained that "[w]hen . . . a plaintiff's asserted injury arises from the government's allegedly unlawful regulation . . . of someone else, much more is needed." Lujan, 504 U.S. at 562, 112 S.Ct. 2130. The Court warned that "causation and redressability" are more difficult to prove where they "ordinarily hinge on the response of the regulated (or regulable) third party to the government action." Id.; see also ASARCO Inc. v. Kadish, 490 U.S. 605, 614-15, 109 S.Ct. 2037, 104 L.Ed.2d 696 (1989) (holding that an Arizona teachers' association did not have standing to challenge the State's procedure for granting mineral leases that finance educational trust funds because the State could offset any increase by reducing other funding sources or could use the increase for something other than teacher salaries or benefits).

¶ 14 Karbal maintains that the government's imposition of tax on the hotels and car rental agencies gave rise to his alleged grievance. But those entities, not the State, chose to pass the tax on to Karbal. Standing to challenge a tax does not exist merely because a customer pays a higher price for a product or service received from a taxpayer.

¶ 15 In an effort to find analogous authority applying Lujan, Karbal turns to Supreme Court cases examining sales and use taxes. See Gen. Motors Corp. v. Tracy, 519 U.S. 278, 117 S.Ct. 811, 136 L.Ed.2d 761 (1997) (addressing general sales and use taxes Ohio imposed on natural gas purchasers); Maryland v. Louisiana, 451 U.S. 725, 101 S.Ct. 2114, 68...