People of Faith Inc. v. Arizona Dept. of Revenue, TX

• Decision Date: 01 September 1989
• Docket Number: No. TX,TX
• Citation: 779 P.2d 829,161 Ariz. 514
• Parties: PEOPLE OF FAITH INC. v. ARIZONA DEPARTMENT OF REVENUE. 89-00001.
• Court: Arizona Tax Court

Page 829

779 P.2d 829

161 Ariz. 514

PEOPLE OF FAITH INC. v. ARIZONA DEPARTMENT OF REVENUE.

No. TX 89-00001.

Tax Court of Arizona.

Sept. 1, 1989.

[161 Ariz. 515] Ryley, Carlock & Applewhite, P.A. by Mark V. Scheehle, Phoenix, for plaintiff.

Atty. Gen. by J. Scott Halverson, Phoenix, for defendant.

OPINION

MORONEY, Judge.

The Court has had under advisement the first motion for partial summary judgment filed by the plaintiff taxpayer and the cross-motion for summary judgment of the defendant, Arizona Department of Revenue.

IT IS ORDERED denying the plaintiff's first motion for partial summary judgment.

IT IS FURTHER ORDERED granting partial summary judgment to the defendant.

The sole issue presented to the Court is whether Arizona's Use Tax may apply to tangible personal property purchased within the state.

The Court holds that it may.

The taxpayer is an eleemosynary organization which constructed, and now operates, the Royal Oaks Life Care Center in Sun City, Arizona. Royal Oaks Life Care Center, hereinafter referred to as "Royal Oaks", consists of a 100 bed licensed nursing care facility, a 249 unit residential complex, and 100 garden homes. The relevant time period is from December 1, 1982, through June 30, 1986, during which time Royal Oaks was constructed.

As a licensed nursing care institution, the plaintiff has a sales tax exemption, presumably pursuant to Ariz.R. & Regs. R15-5-1821. It is the position of the Department that the taxpayer was entitled to purchase, in transactions exempt from transaction privilege taxes (sales taxes), personal property within the state for use in the construction of that portion of Royal Oaks which is the 100 bed nursing care facility. However, it is further the position of the Department that the taxpayer was not entitled to make such tax free purchases for personal property used in the construction of the part of Royal Oaks which is not a nursing care facility.

The taxpayer employed Mardian Construction Company as its contractor to build Royal Oaks. Mardian used the taxpayer's exemption, and purchased, in tax free transactions, property which it incorporated in the construction of all of Royal Oaks, not just the nursing care facility.

The Department now seeks to impose a use tax on the property purchased in sales tax exempt transactions within the state but not used in the construction of the nursing care facility. The taxpayer has argued that the use tax cannot apply to property purchased within the state. The taxpayer's motion for partial summary judgment and the Department's cross-motion are intended to have the Court resolve this issue. The taxpayer does not concede that any of the purchases made in its behalf by Mardian should have been subject to sales tax. This question, however, is not within the scope of the motions under consideration.

The use tax is imposed by article 2, chapter 8, title 42, of the Arizona Revised Statutes. The relevant statutes have remained unchanged since the tax year at issue. A.R.S. § 42-1408 provides for the levy of the tax. It reads as follows:

There is levied and imposed an excise tax on the storage, use or consumption in this state of tangible personal property purchased from a retailer as a percentage of the sales price. The rate of taxation shall be equal to the rate of taxation for retail transactions imposed by article 1 of this chapter for the same type of transaction or business activity. Every person storing, using or otherwise consuming in this state tangible personal property purchased from a retailer is liable for the tax. Such person's liability is not extinguished until the tax has been paid to this state, except that a receipt from a retailer maintaining a place of business in this state or from a retailer who is authorized by the department to collect the tax, under such rules and regulations as it may prescribe, and who is for the purposes of this article regarded as a retailer maintaining a place of business in this state, given to the purchaser in accordance with the provisions of § 42-1411 is sufficient to relieve the purchaser from further liability for the tax to which the receipt refers. (footnote omitted)

The taxpayer agrees that there is nothing in the language of A.R.S. § 42-1408 which suggests that its application is limited to out-of-state transactions.

A.R.S. § 42-1409 provides a list of exemptions to the application of the use tax. A.R.S. § 42-1409(A)(1) exempts "tangible personal property sold in this state, the gross receipts from the sale of which are included in the measure of the tax imposed by article 1 of this chapter." Article 1 imposes the transaction privilege tax.

It is the position of the taxpayer that A.R.S. § 42-1409(A)(1) exempts from use tax any property the retail sale of which in this state should have been subject to a transaction privilege tax. It is the position of the Department that A.R.S. § 42-1409(A)(1) exempts only that property the retail sale of which was, in fact, subjected to a transaction privilege tax.

The solution to this conundrum turns upon an interpretation of the clause "included in the measure of the tax imposed by article 1."

The taxpayer argues that the only interpretation which makes the statute conform to the constitution is one which exempts from the use tax all personal property sold at retail within the state.

The taxpayer points to four types of sales transactions which are exempt from sales tax, but for which there are no specific exemptions from use tax. These are sales of prescription drugs, sales of required college textbooks, sales of magazines by the state which encourage tourist travel, and sales by charitable organizations. The taxpayer argues that, to interpret A.R.S. § 42-1409(A)(1) as the Department wants to interpret it, would nullify the sales tax exemptions granted by the legislature in the four situations enumerated.

The taxpayer also makes much of an argument that the application of the use tax to in-state purchases now urged by the Department is directly contrary to what the Department's own regulations reflect. It is also different from what the Department implies to the taxpaying public in the instructions and guides which it provides to taxpayers.

The taxpayer also argues that to interpret the use tax statute to apply to in-state purchases would allow the Department to embark upon a discriminatory policy of selective enforcement, sometimes collecting unpaid sales taxes from sellers as delinquent sales taxes due, and sometimes from buyers as a use tax.

Tradition, at least, is in the camp of the taxpayer. Use taxes, sometimes otherwise labelled, came into being to inhibit buyers from avoiding sales taxes by making purchases out-of-state of goods which were to be used within the state. Bank of America v. State Board of Equalization, 209 Cal.App.2d 780, 26 Cal.Rptr. 348 (1962); Southwestern Bell Telephone v. State Commission of Revenue, 168 Kan. 227, 212 P.2d 363 (1949); Brandtjen & Kluge v. Fincher, 44 Cal.App.2d Supp. 939, 111 P.2d 979 (1941). The difference between sales and use taxes is sometimes defined by describing sales taxes as being imposed on transactions within a state, and use taxes as being imposed on transactions consummated out-of-state. Sullivan v. United States, 395 U.S. 169, 89 S.Ct. 1648, 23 L.Ed.2d 182 (1969); Halliburton Oil Well Co. v. Reily, 373 U.S. 64, 83 S.Ct. 1201, 10 L.Ed.2d 202 (1963), reh'g denied 374 U.S. 858, 83 S.Ct. 1861, 10 L.Ed.2d 1082; Avco Mfg. Corp. v. Connelly, 145 Conn. 161, 140 A.2d 479 (1958).

Typically, sales taxes and use taxes are complementary. Wallace Berrie & Co. v. State Bd. of Equal., 40 Cal.3d 60, 219 Cal.Rptr. 142, 707 P.2d 204 (1985). Both taxes start with a retail sale. The sales tax is a transaction tax on the sale. It is imposed upon the seller but ordinarily is passed through to the buyer. The use tax is a tax on the privilege of using the purchased property within the state and is imposed on the buyer. Both taxes are computed by multiplying the sale price by the tax rate. To be truly complementary, both taxes should be at the same rate. If the sale was subject to sales tax, the buyer is exempt from use tax. Robert Emmet and Son Oil and Supply Co. v. Sullivan, 158 Conn. 234, 259 A.2d 636, 45 A.L.R.3d 1261 (1969); Colonial Pipeline Co. v. Clayton, 275 N.C. 215, 166 S.E.2d 671 (1969); United States Gypsum Co. v. Green, 110 So.2d 409 (Fla.1959).

If the foregoing scheme works as it is designed to work, the buyer (the real payer of the sales tax, whether passed through or not), pays one tax or the other on retail purchases, regardless of where the purchase is made. If all retail sales within a state are subject to a sales tax, then, because the buyer is exempt from use taxes on such sales, use taxes can only be imposed on the use of property purchased outside the state.

A review of the Use Tax regulations promulgated by the Arizona Department of Revenue (Ariz.Comp.Admin.R. & Regs. R15-5-2301 et seq.) makes it clear that, at least at one time, the Department was of the view that the Arizona Use Tax applied only to property purchased out of state.

The taxpayer argues that the regulations now in force demonstrate that the Department interprets the statute to exempt retail sales within the state from use tax, and the court should be persuaded by that interpretation. The Department argues that, although it may once have been of the view which the taxpayer ascribes to it, the exemption statute has been amended. As a result, the Department now interprets the statute to apply to sales within the state. ¹

The amendment to which the Department points took place in 1981. Prior to being amended, A.R.S. § 42-1409(A)(1) exempted from the applicability of the use tax, "tangible personal property sold in this state, the gross receipts from the sale of which are required to be included in the measure of the tax imposed by article 1 of this chapter."

Article 1 imposes...