Peabody Coal Co. v. State, 1
| Decision Date | 10 May 1988 |
| Docket Number | CA-CIV,No. 1,1 |
| Citation | 761 P.2d 1094,158 Ariz. 190 |
| Parties | PEABODY COAL COMPANY, a Delaware corporation, Plaintiff-Appellant, v. STATE of Arizona and Arizona Department of Revenue, Defendants-Appellees. 9317. |
| Court | Arizona Court of Appeals |
This appeal concerns whether Arizona can lawfully impose transaction privilege taxes upon Peabody Coal Company (Peabody), a non-Indian coal company, based upon Peabody's sales to non-Indians of the coal it mines entirely from the Navajo and Hopi reservations in Arizona.
Peabody is a Delaware corporation with its Arizona headquarters located in Flagstaff, Arizona. Flagstaff is outside the boundaries of any Indian reservation. In 1966, the Navajo and Hopi Tribes and Peabody's predecessor-in-interest entered into two leases pursuant to the Indian Mineral Leasing Act of 1938, 25 U.S.C. §§ 396a-396g. Peabody, under these leases, mines coal from Navajo tribal land at the Kayenta Mine and from Navajo-Hopi joint-use tribal land at the Black Mesa Mine. Peabody sells 100% of the Kayenta Mine coal to a consortium of five electrical utility participants--Arizona Public Service Company, Department of Water and Power of the City of Los Angeles, Nevada Power Company, Salt River Project Agricultural Improvement and Power District, and Tucson Gas and Electric Company. The company sells approximately 99% of the Black Mesa Mine coal to a consortium of four participants--Southern California Edison Company, Department of Water and Power of the City of Los Angeles, Nevada Power Company, and Salt River Project Agricultural Improvement and Power District. The remaining 1% of the Black Mesa Mine coal is distributed free at the mine site to Indians for home-heating purposes.
Arizona has imposed the taxes in question upon Peabody for the privilege of doing business in the state, with the taxes measured by the company's gross receipts or gross income received from these mining operations. Under the agreements with the power consortiums, Peabody is reimbursed in full for the amount of these taxes paid. From July 1, 1970 until December 31, 1979, Peabody paid, without protest, the taxes at issue. 1 From January 1, 1980 through December 31, 1985, Peabody paid these taxes under protest pursuant to A.R.S. § 42-1339(B) (repealed 1986; now § 42-124), and has sought to claim a refund. At the time judgment was entered, the amount in controversy was approximately $42 million.
In 1983, Peabody brought this suit against the state and the Arizona Department of Revenue seeking refund of the taxes paid under protest. Peabody argued that the application of the taxes to its coal- mining activities conducted on tribal lands violated principles of federal preemption of state law, infringed upon tribal sovereignty, and violated the commerce clause. U.S. Const. art. 1, § 8, cl. 3. Neither the Navajo nor the Hopi Tribes are parties to this litigation.
Based upon cross-motions for summary judgment, in April 1986, the trial court granted the state's motion. The court found that the policies of the Indian Mineral Leasing Act of 1938, 25 U.S.C. §§ 396a-396g, and the Indian Reorganization Act of 1934, 25 U.S.C. §§ 461-479, as well as the rationale of Industrial Uranium Co. v. State Tax Comm'n, 95 Ariz. 130, 387 P.2d 1013 (1963), all supported imposition of the taxes. The court also found that the taxes imposed no burden on the tribes, and caused no infringement upon tribal sovereignty. In fact, the court noted that the taxes directly benefited both tribes, for the reimbursements for taxes Peabody received from the power consortiums contributed to the company's gross revenue, the figure upon which Peabody's royalty payments to both tribes was based. Finally, the trial court noted that the taxes also benefited Peabody, its employees, and the tribes through the mandated expenditure of state funds for health, education and welfare. Thus, the trial court found no preemption, infringement upon tribal sovereignty, or interference with interstate commerce.
Peabody filed a motion for new trial and to reopen under Rule 59(a)(4) and (8), Arizona Rules of Civil Procedure, based primarily on allegedly material new evidence. The new information dealt with a proposed amendment to the transaction privilege tax statutes (which did not pass) which would have provided for the state to share revenue from the taxes with the Hopi and Navajo Tribes, and with documents which purportedly suggested that Navajo Indians were generally opposed to any state taxation within their reservation boundaries. The trial court denied the motion, and this appeal followed.
On appeal, Peabody raises these issues:
1. whether Arizona can impose a privilege tax on an Indian Reservation;
2. whether Arizona's authority to exact these taxes has been preempted or whether such taxes interfere with tribal sovereignty;
3. whether the interstate commerce clause has been violated by the levy of these taxes; and
4. whether the trial court erred when it denied Peabody's motion for new trial and to reopen.
The three taxes in issue are taxes based upon the privilege of doing business in Arizona, measured by gross income or gross receipts. A.R.S. §§ 42-1306 (formerly § 42-1309), -1361, and -1371; State Tax Comm'n v. Howard P. Foley Co., 13 Ariz.App. 85, 474 P.2d 444 (1970).
Given the basis of the taxes (the privilege of doing business) Peabody initially questions the state's power to impose them, contending that only the federal or tribal governments may grant the prvilege to operate on a reservation. In response to this argument the state relies exclusively upon Industrial Uranium Co. v. State Tax Comm'n, 95 Ariz. 130, 387 P.2d 1013 (1963). In our opinion this reliance is not justified--not because the case does not support the state's position, but because the validity of Industrial Uranium has been seriously impaired by subsequent decisions of the United States Supreme Court. In Industrial Uranium, the Arizona Supreme Court held that the Arizona transaction privilege taxes (the same taxes which are at issue here) could be validly imposed upon a mining company operating within the confines of the Navajo Indian Reservation pursuant to a lease with the tribe and approved by the Secretary of the Interior. In disposing of most of the same arguments raised by Peabody here, the court relied to a great extent upon the applicability of 25 U.S.C. § 398 to the leases in question. This statute specifically provided that the production of minerals from unalloted lands on Indian reservations could be taxed by the state in which they were located in all respects the same as production from non-Indian reservation lands. With this clear federal legislative enactment, the court did not need to dwell long on the issue of the state's authority to tax mineral production from an Indian reservation.
However, the federal law interpreting the applicability of 25 U.S.C. § 398 has changed since the Industrial Uranium decision. In 1984, the Ninth Circuit held in Blackfeet Tribe of Indians v. Montana, 729 F.2d 1192 (9th Cir.1984), that 25 U.S.C. § 398 is not applicable to leases entered into by Indian Tribes after comprehensive amendments to the Indian Reorganization Act in the area of mineral leasing were added by the Act of May 11, 1938 (codified as 25 U.S.C. §§ 396a-396g (1976)). The court stated:
We hold that the 1924 Act's consent to taxation [25 U.S.C. § 398] is inapplicable to the 1938 Act and to leases executed pursuant to its authority.
729 F.2d at 1203. Accordingly, the court struck down Montana's attempt to tax oil and gas producers on the Blackfeet Reservation, who in turn deducted the taxes from royalties payable to the Tribe. 2
On appeal to the United States Supreme Court in Montana v. Blackfeet Tribe of Indians, 471 U.S. 759, 105 S.Ct. 2399, 85 L.Ed.2d 753 (1985), the Ninth Circuit's opinion was affirmed. The Supreme Court noted that generally the states may tax Indians only when Congress has manifested clearly its consent to taxation and that statutes are construed liberally in favor of Indians, with ambiguous provisions interpreted to their benefit. The court then held:
When the 1924 and 1938 Acts are considered in light of these principles, it is clear that the 1924 Act [25 U.S.C. § 398] does not authorize Montana to enforce its tax statutes with respect to leases issued under the 1938 Act.
471 U.S. at 766, 105 S.Ct. at 2404, 85 L.Ed.2d at 759-60.
Since the leases involved in Industrial Uranium and here were entered into under the 1938 Act, it is apparent that the continuing validity of the holding in Industrial Uranium is in serious question. For this reason we pass directly to the merits of Peabody's contentions.
Generally, the fact that a non-Indian business activity occurs on an Indian reservation does not necessarily remove the activity from this state's jurisdiction. See, e.g., Surplus Trading Co. v. Cook, 281 U.S. 647, 50 S.Ct. 455, 74 L.Ed. 1091 (1930). Moreover, the incident of the tax is on the "privilege" of doing business in the state, as compared to a tax directly on sales or property. See Arizona State Tax Comm'n v. Garrett Corp., 79 Ariz. 389, 291 P.2d 208 (1955). In the limited context of Peabody's "privilege" argument, this business privilege should not fall without the state's jurisdiction, unless other considerations prohibit its application. Arizona Dep't of Revenue v. Hane Constr. Co., 115 Ariz. 243, 564 P.2d 932 (App.1977). Contrary to Peabody's assertion, this "privilege" relates not to the right to conduct the business, but to the benefits the state...
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