Sonitrol of Maricopa County v. City of Phoenix

• Decision Date: 11 August 1994
• Docket Number: CA-TX,No. 1,1
• Citation: 891 P.2d 880,181 Ariz. 413
• Parties: SONITROL OF MARICOPA COUNTY, an Arizona corporation, Appellant, v. CITY OF PHOENIX, a municipal corporation, Appellee. 92-0015.
• Court: Arizona Court of Appeals

Page 880

891 P.2d 880

181 Ariz. 413

SONITROL OF MARICOPA COUNTY, an Arizona corporation, Appellant, v. CITY OF PHOENIX, a municipal corporation, Appellee.

No. 1 CA-TX 92-0015.

Court of Appeals of Arizona Division 1, Department T.

Aug. 11, 1994.

Review Denied March 21, 1995.

[181 Ariz. 414] Warner, Angle, Roper & Hallam, P.C. by Larry C. Schafer, John A. Buric, Phoenix, for appellant.

Roderick G. McDougall, City Atty. by Sandra K. McGee, Asst. City Atty., Phoenix, for appellee.

OPINION

GRANT, Presiding Judge.

Taxpayer Sonitrol of Maricopa County, Inc., ("Sonitrol") appeals from summary judgment denying its claim for a refund of some $40,082.55 in City of Phoenix privilege license taxes assessed pursuant to Phoenix City Code section 14-470 (taxing "the business of providing telecommunications services to consumers within this City"), effective April 1, 1987. The appeal raises these issues:

(1) whether this court should vacate the tax court's opinion, filed while this appeal was in the briefing process;

(2) whether Phoenix's telecommunications tax is unconstitutional as written because it taxes revenues of in-state security alarm monitoring services and exempts revenues of out-of-state security alarm monitoring services;

(3) whether the City of Phoenix is applying the telecommunications tax in violation of the federal and state equal protection clauses; and

(4) assuming the telecommunications tax is unconstitutional as written or as applied, whether Sonitrol is entitled to a refund.

We have jurisdiction pursuant to Ariz.Rev.Stat.Ann. ("A.R.S.") section 12-2101(B). ¹

FACTS AND PROCEDURAL HISTORY

Sonitrol is an Arizona corporation that does business in Maricopa County. Sonitrol sells, installs, services and monitors residential and commercial security alarm systems.

Sonitrol monitors security alarm systems for customers located in Phoenix and other areas of Arizona. Its central monitoring station is located in Phoenix. Sonitrol monitors alarm systems over dedicated and ordinary telephone lines. When its monitoring station receives a signal from an alarm that has been triggered, the appropriate authorities are contacted. Security alarm monitoring services whose central monitoring stations are outside Arizona monitor their customers' locations in the same way as those who monitor from within Arizona. The only difference is the location where alarm signals are received.

Sonitrol charges its monitoring service customers for providing an operator to respond to emergencies seven days a week, twenty-four hours a day. Sonitrol does not in fact charge its customers for alarm signals transmitted when alarms are activated, nor for long distance costs.

Before April 1, 1987, the City of Phoenix's privilege license tax on the business of providing telecommunications services did not apply to the business of monitoring security alarms. Effective April 1, 1987, the city adopted a version of the Arizona Model City Tax Code, including a new telecommunications privilege license tax. Phoenix City Code § 14-470. Section 14-470 provides in pertinent part:

(a) The tax rate shall be at an amount equal to two and seven tenths percent (2.7%) of the gross income from the business activity upon every person engaging or continuing in the business of providing telecommunication services to consumers within this City.

(1) Telecommunication services shall include:

(A) two-way voice, sound, and/or video communication over a communications channel.

(B) one-way voice, sound, and/or video transmission or relay over a communications channel.

(C) facsimile transmissions.

(D) providing relay or repeater service.

(E) providing computer interface services over a communications channel.

(F) time-sharing activities with a computer accomplished through the use of a communications channel.

(2) Gross income from the business activity of providing telecommunication services to consumers within this City shall include:

(A) all fees for connection to a telecommunication system.

(B) toll charges, charges for transmissions, and charges for other telecommunications services; provided that such charges relate to transmissions originating in the City and terminating in this State.

(C) fees charged for access to or subscription to or membership in a telecommunication system or network.

(D) charges for monitoring services relating to a security or burglar alarm system located within the City where such system transmits or receives signals or data over a communications channel.

....

(c) Interstate transmissions. Charges by a provider of telecommunications services for transmissions originating in the City and terminating outside the State are exempt from the tax imposed by this section.

In October or November 1988, the city assigned an employee to research whether alarm monitoring companies were properly reporting their monitoring revenues. At that time the City of Phoenix's Tax and Licensing Division interpreted the telecommunications tax under new section 14-470 as exempting revenues earned through alarm system monitoring from central monitoring stations outside Arizona. The city was not aware of any out-of-state alarm monitoring services that began complying with the telecommunications tax voluntarily when the tax became effective.

The city gathered information from alarm monitoring services over a period of up to six months. The city's auditor called the alarm companies listed in the Phoenix Yellow Pages and asked each whether it had a central monitoring station located in Arizona or outside Arizona. Ten or fifteen companies stated they monitored security systems from outside Arizona. In accordance with its interpretation of Code section 14-470, the city did not seek to enforce compliance with the telecommunications tax by those companies at that time.

Sonitrol's central monitoring station was in Phoenix, Arizona. On July 7, 1989, the city began a telecommunications privilege license tax audit of Sonitrol. The audit covered the period from April 1987 through October of 1989. On December 21, 1989, the city notified Sonitrol that it was assessing it $40,082.55 in unpaid taxes under section 14-470 for the audit period.

Sonitrol timely petitioned for a hearing on the assessment. Its petition asserted that section 14-470 exempted security alarm system monitoring businesses located outside Arizona from taxation, and that the section was therefore unconstitutional under the equal protection clause.

An administrative hearing was held on June 21, 1990, before a City of Phoenix hearing officer. At the commencement of the hearing the assistant city attorney representing the city stated in part as follows:

[T]he basic allegation in this protest is that this [taxing provision] ... discriminates against domestic or in-city monitoring businesses as opposed to foreign or out of the city monitoring businesses. When I say "out of the city," that is those in which the monitoring set up is outside of the city versus inside of the city. After reviewing the ordinance, I have advised the tax and licensing division, yet I also called Mr. Schafer yesterday afternoon so that this would not come as a surprise to him, that I felt that [the division's] position was erroneous.... [I]t's our position at this point ... that all of the businesses will be taxable and not just the ones in the City of Phoenix. The ... correct interpretation ... is that ... anyone who had a burglar alarm system within the City of Phoenix, we would not care whether the monitoring station was inside or outside of the City of Phoenix. We would consider the gross revenue taxable under the section.

The city's tax and licensing division personnel suspended any efforts to recontact businesses which monitor security alarm systems in Phoenix from outside Arizona pending a ruling by the hearing officer on Sonitrol's protest.

The hearing officer issued his ruling on January 25, 1991. He agreed with the city's new interpretation of section 14-470 and held that Sonitrol's activities fell squarely within it. The hearing officer also stated:

With respect to the out-of-state monitoring companies, the city has avowed to this tribunal that it will impose the tax at issue in this matter with respect to revenues received by those entities for monitoring systems located in Phoenix. Whether or not there is a constitutional interstate commerce defense which may be raised by the out-of-state monitoring companies need not be addressed here. ² It is enough for purposes of this proceeding that the entire taxpayer class is being treated identically. ³

Based on the hearing officer's ruling, the city issued an adjusted assessment in the amount of $42,753.84 on March 6, 1991. Pursuant to Phoenix City Code section 14-575, Sonitrol paid the entire adjusted assessment under protest, and timely filed a petition in the tax court for redetermination of the adjusted assessment.

The city moved for summary judgment. In response, Sonitrol argued that despite the city's changed interpretation of section 14-470, subsection (c) clearly exempted all security alarm monitoring companies whose monitoring stations were located outside Arizona. Sonitrol contended alternatively that if section 14-470(c) did not apply to security alarm monitoring companies, it would necessarily be unconstitutionally vague.

Sonitrol also offered evidence that the city had been attempting to contact out-of-state monitoring services concerning the telecommunications tax from February 11, 1991, through May of 1992, and as of May 1992 was auditing only one such company. Sonitrol contended that the city's failure to attempt to collect the telecommunications tax from out-of-state monitoring services before June 20, 1990, was intentional conduct that resulted in discrimination against in-state monitoring services. Sonitrol finally argued that it should be entitled to a refund on the ground that the applicable four-year limitations period, Phoenix City Code section...