Pimalco, Inc. v. Maricopa County

• Decision Date: 09 January 1997
• Docket Number: No. 1,CA-TX,1
• Citation: 188 Ariz. 550,937 P.2d 1198
• Parties: , 233 Ariz. Adv. Rep. 28 PIMALCO, INC., an Arizona Corporation; Payless Cashways, Inc., an Iowa Corporation; Gila River Indian Community, a Federally Recognized Indian Tribe, Plaintiffs-Appellants, v. MARICOPA COUNTY, a Subdivision of the State of Arizona; Arizona Department of Revenue, an Agency of the State of Arizona; Pete Corpstein, Maricopa County Assessor; and Doug Todd, Maricopa County Treasurer, Defendants-Appellees. 96-0002.
• Court: Arizona Court of Appeals

Page 1198

937 P.2d 1198

188 Ariz. 550, 233 Ariz. Adv. Rep. 28

PIMALCO, INC., an Arizona Corporation; Payless Cashways, Inc., an Iowa Corporation; Gila River Indian Community, a Federally Recognized Indian Tribe, Plaintiffs-Appellants, v. MARICOPA COUNTY, a Subdivision of the State of Arizona; Arizona Department of Revenue, an Agency of the State of Arizona; Pete Corpstein, Maricopa County Assessor; and Doug Todd, Maricopa County Treasurer, Defendants-Appellees.

No. 1 CA-TX 96-0002.

Court of Appeals of Arizona,

Division 1, Department T.

Jan. 9, 1997.

Snell & Wilmer, L.L.P. by Janet E. Barton, Phoenix, for Pimalco, Inc.

Mohr, Hackett, Pederson, Blakley, Randolph & Haga, P.C. by Arthur W. Pederson, Phoenix, for Payless Cashways, Inc.

Law Offices of Rodney B. Lewis by Rodney B. Lewis, Sacaton, for Gila River Indian Community.

Helm & Kyle, Ltd. by John D. Helm, Roberta S. Livesay, Michelle L. Margolies, Tempe, for Maricopa County, Pete Corpstein and Doug Todd.

Grant Woods, Attorney General by Patrick Irvine and Stephen C. Lepley, Assistant Attorneys General, Tax Division, Phoenix, for Arizona Department of Revenue.

TOCI, Judge.

In actions consolidated in the tax court, Pimalco, Inc. and Payless Cashways, Inc. ("taxpayers") sought refunds of property taxes assessed on their leasehold interests in real property held by the United States Government in trust for the Gila River Indian Community ("the tribe"). The tribe challenged the validity of the possessory interest tax. ¹ The parties now appeal from the grant of summary judgment to Maricopa County ("the County") and the Arizona Department of Revenue ("DOR").

The taxpayers and the tribe contend that (1) the tax court erred in finding the leasehold interests constituted a "possessory interest" taxable under former Ariz.Rev.Stat. Ann. ("A.R.S.") sections 42-681 and 42-682; (2) Arizona's former possessory interest tax was invalid under federal Indian law, constituted a direct tax on Indian lands, and unduly interfered with tribal self-government; (3) the County's enforcement of the possessory interest tax violated the taxpayer's rights to equal protection; and (4) the taxpayers were entitled to partial refunds of 1993 possessory interest taxes under a statute that retroactively reclassified non-ownership interests in Indian lands and subjected them to a one percent assessment factor. We find no error in the tax court's judgment on the first three issues but reverse and remand as to the fourth.

I. FACTUAL AND LEGAL BACKGROUND

The Gila River Indian Community is a federally-recognized Indian tribe. It occupies a reservation of approximately 372,000 acres in Maricopa and Pinal Counties. The United States of America holds title to the land in trust for the tribe, but the tribe governs and administers the land.

Using federal grant money, the tribe developed the Lone Butte Industrial Park ("the Industrial Park") on its reservation. In 1966, the tribe leased the Industrial Park to Lone Butte Industrial Development Corporation ("Development Corp."), a tribally-chartered instrumentality of the tribe, with the approval of the United States Secretary of the Interior. The Development Corp. then subleased a portion of the Industrial Park to Pimalco for its manufacturing business and to Payless Cashways for its business of warehousing and distributing building materials.

The subleases required each taxpayer to build certain improvements on the land and provided that the improvements were part of the real property owned by the United States in trust for the tribe. The subleases were not binding on either the tribe or lessee until approved by the Secretary of the Interior. They acknowledged that while the leased premises are in trust or restricted status, all of the lessees' obligations under the lease, and the obligations of its sureties, are to the United States Government, as well as to the lessor. Each sublease gave the lessee "the right to contest any claim, asserted tax or assessment against the property by posting bond to prevent enforcement of any lien resulting therefrom" and required the lessee to hold harmless the Development Corp., the tribe, the Secretary of the Interior, and the leased premises "from any and all claims, taxes, assessments and like charges," and "from any lien or sale or other proceedings to enforce payment thereof, and all costs in connection therewith."

In 1985, the Arizona legislature for the first time extended ad valorem property taxation to rights to possess and actual possession of land or improvements under non-freehold rights. ² 1985 Ariz. Sess. Laws Ch. 264, §§ 1, 2. Former A.R.S. section 42-682 subjected "possessory interests" in the property of federal, state, county, and municipal governments and their subdivisions to taxation as unsecured personal property. See A.R.S. §§ 42-601 et seq. But, A.R.S. section 42-684 expressly exempted a number of possessory interests in governmental property, including those in "property held in trust for an Indian or an Indian tribe by the United States government." A.R.S. § 42-684(4) (1991) (repealed by Ariz. Sess. Laws Ch. 191, § 9).

In an unpublished and unappealed ruling in 1993, the Arizona Tax Court invalidated those exemptions on the ground that they were not authorized under our constitution. See Scottsdale Princess Partnership v. Maricopa County, 185 Ariz. 368, 371, 916 P.2d 1084, 1087 (App.1995) (appeal resolving other rulings in same case). The legislature then (1) repealed and replaced former A.R.S. section 42-684, (2) added a new class twelve to the property classification statute and assessed that class at one percent of full cash value, (3) extensively amended the sections governing possessory interests, and (4) enacted a number of exemptions from the possessory interest tax. 1993 Ariz. Sess. Laws Ch. 191. Most of the new exemptions, however, closely resembled those in the repealed version of A.R.S. section 42-686, which the tax court had invalidated. ³

Maricopa County brought a declaratory judgment action against the state to challenge the constitutionality of the new exemptions. In July 1993, in an unpublished and unappealed ruling, the tax court determined that the exemptions violated the Arizona Constitution. Maricopa County v. State of Arizona, Dep't of Revenue, TX 93-00217 (Ariz. Tax Ct. July 1993). The legislature repealed the exemptions effective July 17, 1994. 1994 Ariz. Sess. Laws Ch. 293, § 2.

Maricopa County thereafter classified the taxpayers' leasehold interests in the Industrial Park as class three commercial/industrial property for 1993 and assessed 1993 property taxes against them on twenty-five percent of full cash value. See A.R.S. § 42-227(A)(3) (1991). The taxpayers paid the assessments under protest.

In 1994, the legislature adopted the possessory interest taxing scheme at issue in this case. 1994 Ariz. Sess. Laws Ch. 293. Retroactive to January 1, 1993, A.R.S. section 42-162(A)(12)(g) included in class twelve, "[t]o the extent allowed pursuant to federal law, interests in property held in trust for an Indian or an Indian tribe by the United States government." If applied to the 1993 tax year, this amendment would have reduced the assessment factor for the taxpayers' leasehold interests from twenty-five percent (class three) to one percent (class twelve). See A.R.S. § 42-227(A)(3), (12) (as amended).

Effective January 1, 1993, A.R.S. section 42-681 governing possessory interests provided in relevant part:

3. "Possessory interest" means possession of public property pursuant to an agreement with a governmental entity regardless of how the interest is identified in any document by which it is created, except possession pursuant to and by virtue of ownership of a freehold interest in the real property or ownership of the improvements or personal property. For the purposes of this paragraph, "governmental entity" includes:

(a) A governmental entity described in paragraph 4, or

(b) An agent established by the governmental entity for the purpose of leasing the property.

4. "Public property" means real or personal property or improvements, or any combination of such property, owned or held by:

(a) The United States, this state or any county, city, town or other political subdivision of this state as owner, trustee, agent or in any other capacity.

(b) An agency or instrumentality of the United States, of this state or of any county, city, town or other political subdivision of this state as owner, trustee, agent or in any other capacity.

(Emphasis added.)

The enacting legislation further provided that it would apply retroactively to tax years after December 31, 1992, and that the possessory interests which had been exempt under the prior statutes should be assessed and taxed for tax year 1993 at the one percent rate. A.R.S. § 42-681(8). Finally, the statute barred any assessment "for any tax year prior to 1993 for possessory interests which were previously designated as exempt." A.R.S. § 42-681(9).

In 1995, the legislature repealed A.R.S. sections 42-681 through 42-687 effective retroactively to January 1, 1995. 1995 Ariz. Sess. Laws Ch. 294, § 8.

II. THE LITIGATION

After exhausting their administrative remedies, the taxpayers commenced separate actions for refunds of the possessory interest taxes they had paid under protest for 1993. ⁴ The tribe commenced a separate action, in which Pimalco joined, attacking the validity of the possessory interest tax as applied to the leasehold interests in Indian land. After the actions were consolidated, the taxpayers and the tribe unsuccessfully moved for summary judgment. The tax court found that the taxpayers' interests

are possessory interests and were properly taxed as such ...; (2) taxing the possessory interests is not a tax on Indian land; (3) federal law does not preempt the tax; (4) there is no evidence of unconstitutional discrimination in the application of the tax laws; plaintiffs are not entitled...