McElhaney Cattle Co. v. Smith

• Decision Date: 19 April 1982
• Docket Number: No. 15433-PR,15433-PR
• Citation: 645 P.2d 801,132 Ariz. 286
• Parties: McELHANEY CATTLE COMPANY, an Arizona corporation; S & V Cattle Company, an Arizona partnership; and Gary and Carol Oden, individually, Appellees, v. Alberta SMITH, in her capacity as Yuma County Assessor; Bill F. Walker, as Treasurer of Yuma County, Arizona; Yuma County, Arizona; and the Arizona Department of Revenue, Appellants.
• Court: Arizona Supreme Court

Page 801

645 P.2d 801

132 Ariz. 286

McELHANEY CATTLE COMPANY, an Arizona corporation; S & V Cattle Company, an Arizona partnership; and Gary and Carol Oden, individually, Appellees, v. Alberta SMITH, in her capacity as Yuma County Assessor; Bill F. Walker, as Treasurer of Yuma County, Arizona; Yuma County, Arizona; and the Arizona Department of Revenue, Appellants.

No. 15433-PR.

Supreme Court of Arizona, In Banc.

April 19, 1982.

Rehearing Denied May 25, 1982.

Robert K. Corbin, Atty. Gen. by James D. Winter, Asst. Atty. Gen., Phoenix, for appellants.

Rolle, Jones, Benton & Cole by F. Keith Benton, Yuma, Jennings, Strouss & Salmon by K. Layne Morrill, Charles R. Hoover, Neil Vincent Wake, Phoenix, for appellees.

HOLOHAN, Chief Justice.

This case presents the question whether cattle being fed at a commercial feedlot are "inventory" exempt from taxation under either the "wholesaler" exemption provided by Article IX, § 2 of the Arizona Constitution or the "manufacturer" exemption provided by Article IX, § 13. We conclude that neither exemption is applicable.

This action was filed by McElhaney Cattle Company (McElhaney), S & V Cattle Company (S & V) and Gary Oden and Carol Oden (Odens) (collectively referred to as the taxpayers) against the taxing authorities of Yuma County and the Arizona Department of Revenue. The action sought a determination that feeder cattle owned by the taxpayers during 1975 were exempt from ad valorem taxation, and in addition, sought a refund for additional taxes paid under protest because of the disallowance of their claimed exemption.

After trial, the superior court ruled that all three taxpayers were entitled to the claimed exemptions under either § 2 or § 13 of Article IX of the Arizona Constitution and that McElhaney and S & V were entitled to a refund of taxes paid under protest.

The taxing authorities appealed. The court of appeals, with one judge dissenting, affirmed, holding that the feeder steers owned by the taxpayers were exempt from taxation under the "wholesaler" exemption provided by Article IX, § 2. McElhaney Cattle Co. v. Smith, 132 Ariz. ---, 645 P.2d 821 (1 CA-CIV 4746, filed March 3, 1981). The court did not determine whether the taxpayers were also entitled to the Article IX, § 13 "manufacturers" exemption. We granted the taxing authorities' petition for review.

The facts necessary for the resolution of this case are that McElhaney is a corporation which operates a large commercial cattle feedlot in Yuma County, Arizona. Gary C. Oden is McElhaney's president and general manager. S & V Cattle Company is a partnership comprised of Sam McElhaney and his wife, Vennie McElhaney. S & V is separate and distinct from McElhaney Cattle Company, and was established to engage in owning and feeding cattle. The Odens also own and feed cattle in their individual capacities. The taxing authorities did not attempt to distinguish among the taxpayers as to the applicability of the exemptions, either before the court of appeals or before this court, so we will also treat all the taxpayers similarly.

The McElhaney feedlot was established approximately 30 years ago and at the time of trial had a capacity of approximately 55,000 head of cattle. The feedlot has a turnover of cattle approximately 1.3 times per year, so that if it operated at capacity year-round, approximately 70,000 head of cattle would be processed through the feedlot. Because of certain credit limitations, the taxpayers at any given time are limited to feeding 20,000 to 25,000 head of cattle owned by them. Because of the fixed costs of the operation, significant economic savings per head of cattle can be achieved by operating the feedlot at full capacity. The testimony indicated that, primarily to reduce the taxpayers' unit cost for feeding their own cattle, the taxpayers also feed cattle belonging to others at the McElhaney lot. The taxpayers are only claiming that the tax exemptions apply to the cattle that they themselves own.

During the 30 years McElhaney has been in the feedlot business, significant technological and scientific developments in the areas of nutrition and genetics have affected the way cattle are raised for slaughter. Scientists have determined the nutritional requirements of the cattle and have developed combinations of nutrients which when fed to calves produce rapid weight gain and develop desirable qualities in the meat. These highly technical diets are prepared using elaborate and sophisticated machinery, including mixers, weighing systems, metering devices, electrical control systems, grain flaking equipment, bins, and storage elevators. Genetic developments have allowed the feeder to select breeds of calf which will develop into cattle yielding the grade of meat the feeder desires. The feeder purchases "range" or "pasture" calves weighing from 250 to 400 pounds. Since 99% of these are bull calves, the feeders castrate them so that the calves will not develop the heavy front shoulders and neck characteristics of bulls, which produce undesirable cuts of meat. However, because castration reduces the potential rate of weight gain, female hormones are implanted in the steer to offset this loss of gain. These hormones also cause the growing steer to develop more heavily in the hindquarters, from which the most desired cuts of meat are obtained. The combined effects of diet, castration, and hormone treatments produce what the court of appeals described as "an animal with a heifer form on a bull frame." Id., at 824. Except for a minimal number of steers which are slaughtered for home and friend consumption, all of the "finished" steers are sold to meatpackers, which slaughter the animals and sell the carcasses to stores for resale to the ultimate consumer.

THE ARTICLE IX, § 2 "WHOLESALER" EXEMPTION

Article IX, § 2 of the Arizona Constitution provides in part:

Stocks of raw or finished materials, unassembled parts, work in process or finished products constituting the inventory of a retailer or wholesaler located within the state and principally engaged in the resale of such materials, parts or products, whether or not for resale to the ultimate consumer, shall be exempt from taxation.

Neither side contends that the taxpayers are "retailers." The trial court and the court of appeals held that the taxpayers' feeder cattle were "raw or unfinished materials, ... work in process or finished products constituting the inventory of a ... wholesaler ... principally engaged in ... resale" and thus exempt from taxation.

Although the taxing authorities argue that the taxpayers were not "principally engaged in ... resale" because they are "principally" cattle feeders, the evidence presented reasonably supports the trial court's conclusion that the taxpayers were "principally engaged" in the resale of the cattle. The entire feedlot operation was geared towards reselling the taxpayers' cattle at a profit. Although slightly less than half of the cattle fed at the feedlot were owned by the taxpayers, the evidence is clear that the sole purpose for feeding other cattle there was to lower the per-head cost of feeding the taxpayers' own animals. We are satisfied that the taxpayers have shown themselves to be "principally engaged in the resale" of cattle.

Next, the taxing authorities contended that the taxpayers were not "wholesalers." They argued that the ordinary meaning of "wholesaler" is "a merchant who buys and sells merchandise." The taxing authorities contended that live cattle are not "merchandise," and that, therefore, the taxpayers did not qualify as "wholesalers."

Additionally, the taxing authorities deny that cattle can be classed as the type of inventory described in the constitutional provision at issue.

The governing principle of constitutional construction is to ascertain and give effect to the intent and purpose of the framers of the constitutional provision and of the people who adopted it. County of Apache v. Southwest Lumber Mills, Inc., 92 Ariz. 323, 376 P.2d 854 (1962); State ex rel. Morrison v. Nabours, 79 Ariz. 240, 286 P.2d 752 (1955). Extrinsic evidence may be used to show the intent when the provision is not clear upon its face. Desert Waters, Inc. v Superior Court, 91 Ariz. 163, 370 P.2d 652 (1962). We may consider the interpretation in light of the history behind the provision, the purpose sought to be accomplished by its enactment, and the evil sought to be remedied. Ruth v. Industrial Commission, 107 Ariz. 572, 490 P.2d 828 (1971); State ex rel. Morrison v. Nabours, supra.

When the words of a constitutional provision are not defined within it, the meaning to be ascribed to the words is that which is generally understood and used by the people. Downs v. Sulphur Springs Valley Electric Coop., 80 Ariz. 286, 297 P.2d 339 (1956); Valley National Bank v. First National Bank, 83 Ariz. 286, 320 P.2d 689 (1958). When a constitutional provision is clear and logically capable of only one interpretation, no extrinsic matter may be shown in support of a construction which would vary its apparent meaning. If, however, the constitutional language is ambiguous, or a construction is urged which would result in an absurdity, a court may look behind the bare words of the provision to determine the conditions which gave rise to it and the effect which it was intended to have. American Bus Lines, Inc. v. Arizona Corporation Commission, 129 Ariz. 595, 633 P.2d 404 (1981); Ward v. Stevens, 86 Ariz. 222, 344 P.2d 491 (1959).

It is not suggested that the language of the constitutional provision at issue is ambiguous, nor are we referred to any circumstance in the history of the adoption of the amendment which would require us to give a meaning to the words used other than that commonly employed.

The publicity pamphlet published by the Secretary of State for the 1964 election, at which the constitutional provision at issue was adopted, contained...