S. Point Energy Ctr. LLC v. Ariz. Dep't of Revenue

• Decision Date: 27 April 2021
• Docket Number: No. 1 CA-TX 20-0004,1 CA-TX 20-0004
• Court: Arizona Court of Appeals
• Parties: SOUTH POINT ENERGY CENTER LLC, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, et al., Defendants/Appellees.

251 Ariz. 263

490 P.3d 372

SOUTH POINT ENERGY CENTER LLC, Plaintiff/Appellant,

v.ARIZONA DEPARTMENT OF REVENUE, et al., Defendants/Appellees.

No. 1 CA-TX 20-0004

Court of Appeals of Arizona, Division 1.

FILED April 27, 2021

Lewis Roca Rothgerber Christie LLP, Phoenix, By Patrick Derdenger, Karen M. Jurichko Lowell, Counsel for Plaintiff/Appellant

Dickinson Wright PLLC, Phoenix, By Bennett Evan Cooper, Vail C. Cloar, Co-Counsel for Plaintiff/Appellant

Arizona Attorney General's Office, Phoenix, By Kimberly J. Cygan, Counsel for Defendant/Appellee Arizona Department of Revenue

Arizona Attorney General's Office, Phoenix, By Jerry A. Fries, Counsel for Defendant/Appellee Mohave County

Judge Cynthia J. Bailey delivered the opinion of the Court, in which Presiding Judge Paul J. McMurdie and Judge Lawrence F. Winthrop joined.

BAILEY, Judge:

¶1 In these consolidated actions challenging the state and county's power to tax property on tribal land, South Point Energy Center, LLC ("Taxpayer") appeals the tax court's grant of summary judgment to the Arizona Department of Revenue and Mohave County (collectively, "ADOR"). For the following reasons, we vacate the judgment and remand to the tax court for further proceedings.

FACTS AND PROCEDURAL HISTORY

¶2 Taxpayer is a non-Indian entity that owns and operates an electrical generating plant ("Facility") in Mohave County on land it leases from the Fort Mojave Indian Tribe ("Tribe").¹ Under the lease ("Lease"), Taxpayer owns "[t]he Facility and all Improvements," but at the end of the term, it will have to "remove any and all above ground Improvements and personal property from the Leased Land," except for certain roads, foundations, and underground piping and equipment.

¶3 In 2013 and 2014, Taxpayer sued ADOR to recover property taxes paid on the Facility for the property tax years 2010-2013. ADOR moved to dismiss, arguing issue preclusion barred Taxpayer from relitigating the tax's legality and that Taxpayer was not entitled to error-correction relief, and the court entered judgment for ADOR. See Ariz. R. Civ. P. 12(d). After Taxpayer appealed, this court vacated the judgment and remanded for further proceedings. See S. Point Energy Ctr., LLC v. Ariz. Dep't of Revenue , 241 Ariz. 11, 13, ¶¶ 1-2, 382 P.3d 1226, 1228 (App. 2016).

¶4 On remand, the tax court ultimately consolidated the cases with five other lawsuits in which Taxpayer challenged property taxes it had paid on the Facility for years 2014-2018. The court denied the parties’ cross-motions for partial summary judgment on whether 25 U.S.C. § 5108 per se preempts property taxes levied on the Facility. On a second set of cross-motions, the court then ruled the Facility is not a permanent improvement exempt under § 5108 because the Lease requires Taxpayer to remove the above-ground improvements at the conclusion of the term. The court granted summary judgment to ADOR, holding that under White Mountain Apache Tribe v. Bracker , 448 U.S. 136, 151, 100 S.Ct. 2578, 65 L.Ed.2d 665 (1980), tribal sovereignty does not preempt taxation of the Facility.

¶5 Taxpayer timely appealed, and we have jurisdiction pursuant to Article 6, Section 9, of the Arizona Constitution and A.R.S. §§ 12-120.21, -170(C) and -2101(A)(1).

DISCUSSION

¶6 Taxpayer argues the tax court erred by (1) rejecting its contention that 25 U.S.C. § 5108 categorically preempts state and local property taxes on permanent improvements on leased tribal land; (2) ruling based on state law, and without briefing or hearing evidence, that the entirety of the Facility is personal property rather than permanent improvements; and (3) erroneously applying the Bracker interest-balancing analysis to the Facility.

¶7 We conclude the tax court erred by disregarding § 5108 and categorizing the Facility as personal property without conducting the proper analysis. We therefore vacate the judgment and remand for further proceedings consistent with this Opinion.

I. Standard of Review

¶8 We review a grant of summary judgment de novo. Jackson v. Eagle KMC L.L.C. , 245 Ariz. 544, 545, ¶ 7, 431 P.3d 1197, 1198 (2019). In doing so, we view the evidence and reasonable inferences in the light most favorable to the nonmoving party. Harianto v. State , 249 Ariz. 563, 565, ¶ 7, 473 P.3d 348, 350 (App. 2020).

II. Whether the tax court erred by granting summary judgment to ADOR.

A. Whether the tax court erred by failing to apply 25 U.S.C. § 5108 to the Facility.

¶9 Taxpayer argues the tax court erred by failing to rule the Facility is exempt from taxes under § 5108, which, in relevant part, states that "lands or rights" taken in the name of the United States in trust for an Indian tribe "shall be exempt from State and local taxation." Under the statute, taxation of such property is per se preempted.

¶10 To support its argument, Taxpayer cites four cases: United States v. Rickert , 188 U.S. 432, 23 S.Ct. 478, 47 L.Ed. 532 (1903), Mescalero Apache Tribe v. Jones , 411 U.S. 145, 93 S.Ct. 1267, 36 L.Ed.2d 114 (1973), Confederated Tribes of the Chehalis Rsrv. v. Thurston Cnty. Bd. of Equalization , 724 F.3d 1153 (9th Cir. 2013), and Seminole Tribe of Florida v. Stranburg , 799 F.3d 1324 (11th Cir. 2015). Of course, United States Supreme Court cases bind Arizona courts on issues of federal preemption. See Weatherford ex rel. Michael L. v. State , 206 Ariz. 529, 532-33, ¶¶ 8-9, 81 P.3d 320, 323-24 (2003). As Taxpayer recognizes, federal circuit decisions are not binding on Arizona courts. See Plan. Grp. of Scottsdale, L.L.C. v. Lake Mathews Mineral Props., Ltd. , 226 Ariz. 262, 267, ¶ 22, 246 P.3d 343, 344 (2011). They may be persuasive, however, id. , especially when they are "consistent and well-reasoned," Filer v. Tohono O'Odham Nation Gaming Ent. , 212 Ariz. 167, 174, ¶ 28, 129 P.3d 78, 85 (App. 2006).

¶11 Rickert is the first Supreme Court case addressing state and local taxation of permanent improvements on land held in trust by the United States. 188 U.S. at 432, 23 S.Ct. 478. In that case, two tribal members owned improvements that were built on allotted land held in trust. Id. Although Rickert was decided before Congress enacted § 5108, it established that a state may not tax land held in trust by the United States and that "[e]very reason that can be urged to show that the land was not subject to local taxation applies to the assessment and taxation of the permanent improvements" on such land. Id. at 437-38, 442, 23 S.Ct. 478.

¶12 Congress enacted § 5108 in 1934 to codify Rickert ’s holding. See 25 U.S.C. § 5108 ; Club One Casino, Inc. v. United States Dep't of the Interior , 328 F. Supp. 3d 1033, 1045 (E.D. Cal. 2018) ("Under Ninth Circuit authority, this Court should treat land placed in trust for a tribe pursuant to [ § 5108 ] ... in the same manner as land held in trust for tribes prior to enactment of the [Indian Reorganization Act] in 1934."), aff'd sub nom. Club One Casino, Inc. v. Bernhardt , 959 F.3d 1142 (9th Cir. 2020), cert. pending (Dec. 23, 2020).

¶13 Mescalero then addressed whether New Mexico could impose a use tax on permanent improvements owned by an Indian entity on trust land. 411 U.S. at 146, 93 S.Ct. 1267. Applying § 5108, the Supreme Court held that the improvements, being permanently attached to the land, were "certainly ... immune from the State's ad valorem property tax" because "use of permanent improvements upon land is so intimately connected with use of the land itself that an explicit provision relieving the latter of state tax burdens must be construed to encompass an exemption for the former." Id. at 158, 93 S.Ct. 1267.

¶14 In Chehalis , the Ninth Circuit built upon Rickert and Mescalero . 724 F.3d at 1155-56. The tribe in question was not the sole owner of the improvements, but the court held § 5108 applies to all permanent improvements on trust land, regardless of whether they are tribal-owned. Id. at 1157, 1159. The court also held that federal law governs whether the property at issue is a permanent improvement subject to § 5109. Id. at 1157-58.

¶15 Finally, two years later, the Eleventh Circuit in Seminole Tribe of Florida v. Stranburg addressed Florida's attempt to tax rent that a non-Indian entity paid to do business on trust land. 799 F.3d at 1326. The court concluded that § 5108 barred the rental tax because the leasehold was "so connected to the land that the tax amounted to a tax on the land itself." Id. at 1329. The court held in the alternative that, although § 5108 precluded the tax, it also would be precluded under Bracker . Id. at 1335.

¶16 ADOR argues Rickert , Mescalero , and Chehalis are inapplicable to this case because the permanent improvements in those cases were owned by Indians, while Taxpayer is a non-Indian entity. See Rickert , 188 U.S. at 433, 23 S.Ct. 478 ; Mescalero , 411 U.S. at 146, 93 S.Ct. 1267 ; Chehalis , 724 F.3d at 1154. Contrary to ADOR's contention, the cited cases do not hold that the exemption applies only to Indian-owned improvements. See Rickert , 188 U.S. at 442-43, 23 S.Ct. 478 ; Mescalero , 411 U.S. at 158, 93 S.Ct. 1267 ; Chehalis , 724 F.3d at 1159. Indeed, as noted, Chehalis expressly held that § 5108 categorically bars a state tax on permanent improvements on trust land regardless of whether those improvements are owned by Indians.

¶17 As Stranburg explained at length, § 5108 forecloses taxes on "the bundle of privileges that make up property or ownership of property." 799 F.3d at 1330 (quoting Mescalero , 411 U.S. at 157, 93 S.Ct. 1267 ). The court reasoned that the rental tax was effectively a tax on the tribal land subject to the lease because "[t]he ability to lease property is a fundamental privilege of property ownership." 799 F.3d at 1330. Further, viewed from the other side of the lease transaction, the rent the lessee paid to the tribe secured its "possessory interest in the land for the duration of the lease." Id. at 1331 (stating that "payment under a lease is intimately and indistinguishably connected to the leasing...