Southern Pacific Transp. Co. v. State

• Citation: 202 Ariz. 326,44 P.3d 1006
• Decision Date: 25 April 2002
• Docket Number: No. 1 CA-TX 00-0024.,1 CA-TX 00-0024.
• Parties: SOUTHERN PACIFIC TRANSPORTATION COMPANY, INC., a Delaware corporation, Plaintiff-Appellant, Cross-Appellee, v. STATE of Arizona, DEPARTMENT OF REVENUE, Defendant-Appellee, Cross-Appellant, Town of Clifton, Defendant Appellee.
• Court: Court of Appeals of Arizona

44 P.3d 1006

202 Ariz. 326

SOUTHERN PACIFIC TRANSPORTATION COMPANY, INC., a Delaware corporation, Plaintiff-Appellant, Cross-Appellee, v. STATE of Arizona, DEPARTMENT OF REVENUE, Defendant-Appellee, Cross-Appellant, Town of Clifton, Defendant Appellee.

No. -0024.

Court of Appeals of Arizona, Division 1, Department T.

April 25, 2002.

Fennemore Craig, P.C., By Paul J. Mooney, David T. Cox, William S. Gates, Kendis K. Muscheid, Phoenix, Attorneys for Plaintiff-Appellant, Cross-Appellee Southern Pacific.

Janet Napolitano, Attorney General, By Sara D. Branscum, Assistant Attorney General, Phoenix, Attorneys for Defendant-Appellee, Cross-Appellant State of Arizona.

Gust Rosenfeld, P.L.C., By Jill D. Winans, Tucson, Attorneys for Defendant-Appellee Town of Clifton.

GARBARINO, Judge.

¶ 1 A portion of Southern Pacific Transportation Company's gross income is earned by transporting copper concentrate from the Town of Clifton to other points in Arizona over a railroad route that exits and then re-enters Arizona's boundaries. Southern Pacific appeals from a summary judgment in favor of the Arizona Department of Revenue (ADOR) and the Town of Clifton that partially sustained assessments of delinquent transaction privilege taxes imposed on these gross receipts under the transportation classification, Arizona Revised Statutes (A.R.S.) section 42-5062 (Supp.2001),¹ and section 9-475 of Clifton's version of the Model City Tax Code.² ADOR cross appeals from the judgment to the extent it held that ADOR's original assessment had to be proportionately reduced to exclude from taxation any sums attributable to mileage traveled outside Arizona. The Town of Clifton filed no cross-appeal. The appeal and cross-appeal present these issues:

1. Whether Article 1, Section 8, Clause 3 of the United States Constitution (the Commerce Clause) requires apportionment of state and local business privilege taxes on gross receipts from transportation services between points in Arizona when approximately twenty percent of the route is located in a neighboring state;

2. If apportionment is required, whether Arizona law authorizes the apportionment of such taxes;

3. If so, whether court-ordered retroactive apportionment of such taxes comports with due process; and

4. If so, whether apportionment may be based solely on the percentage of track miles outside the boundaries of Arizona.

FACTUAL AND PROCEDURAL HISTORY

¶ 2 The Clifton Branch is a railroad line that runs between Clifton, Arizona, and Lordsburg, New Mexico. Lordsburg was a crew-change point on the Transcontinental Railroad Line through New Mexico before the Clifton Branch began operation under Southern Pacific's ownership in 1884. The Clifton Branch was built to avoid the mountainous terrain immediately south and west of Clifton and to take advantage of the existing Southern Pacific facilities in Lordsburg.

¶ 3 Southern Pacific's facility at Clifton consisted of a single depot. All four or five of Southern Pacific's employees who worked on the Clifton Branch during the audit period were based in Lordsburg. Southern Pacific's facility at Lordsburg included a yard office building, a crew room, a locker room, housing facilities, storage rooms, and fueling facilities.

¶ 4 During the audit period, Phelps Dodge was Southern Pacific's only customer on the Clifton Branch. Using its own separate railroad line, Phelps Dodge transported railroad cars loaded with copper concentrate from its Morenci mine to Clifton for shipment to Phelps Dodge smelters in Arizona and New Mexico. At Clifton, Southern Pacific attached Phelps Dodge's cars to its own trains and pulled them to Lordsburg. At Lordsburg, Southern Pacific uncoupled the Arizona-bound cars and re-coupled them to trains that originated in El Paso, Texas. Once in Arizona these cars were rerouted for delivery to the Phelps Dodge smelters at Miami, San Manuel, Hayden, and Douglas.

¶ 5 Southern Pacific's routes from Clifton to Arizona smelters each covered 52.9 miles within New Mexico. This New Mexico mileage ranged from 17.46% to 21.31% of the total mileage from Clifton to the four respective Arizona smelters.

¶ 6 For the audit period, ADOR assessed delinquent Arizona and Town of Clifton transaction privilege taxes against Southern Pacific on its gross receipts from shipping that originated in Clifton and terminated at Arizona smelters. Southern Pacific challenged the assessments unsuccessfully before ADOR and the Arizona Board of Tax Appeals, and commenced judicial appeals that were consolidated before the tax court. On cross-motions for summary judgment, the tax court held that ADOR and the Town of Clifton could impose their transaction privilege taxes on Southern Pacific's gross receipts earned in shipping from Clifton to Arizona smelters via Lordsburg, but that the taxes had to be reduced by the percentages representing New Mexico mileage. From formal judgment in accordance with the tax court's rulings, Southern Pacific appeals and ADOR cross-appeals. We have appellate jurisdiction. A.R.S. § 12-2101(B) (1994).

DISCUSSION

I. Standard of Review

¶ 7 The dispositive questions in this appeal are pure issues of law. On appeal from a summary judgment in which the material facts are not in dispute, we review the issues of law de novo and determine only whether the tax court correctly applied the law to the undisputed facts. Brink Elec. Constr. Co. v. Arizona Dep't of Revenue, 184 Ariz. 354, 358, 909 P.2d 421, 425 (App.1995).

II. Apportionment of Transportation Transaction Privilege Tax

A. Commerce Clause—Background Principles

¶ 8 The Commerce Clause authorizes Congress to "regulate Commerce ... among the several States...." U.S. Const. art. 1, § 8, cl. 3. The United States Supreme Court has ascribed to the Commerce Clause the goal of "preventing a State from retreating into economic isolation or jeopardizing the welfare of the Nation as a whole, as it would do if it were free to place burdens on the flow of commerce across its borders that commerce wholly within those borders would not bear." Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 179-80, 115 S.Ct. 1331, 131 L.Ed.2d 261 (1995). The Supreme Court has always interpreted the Commerce Clause to prohibit a state from using its taxing authority to burden the flow of interstate commerce. Because this is an interpretation of the Commerce Clause not apparent from the face of the Constitution, it has been referred to as "the dormant Commerce Clause." Id. at 179, 115 S.Ct. 1331.

¶ 9 Modern dormant Commerce Clause principles were defined in a four-part test suggested in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977), and first recognized and applied by the Supreme Court in Commonwealth Edison Co. v. Montana, 453 U.S. 609, 617, 101 S.Ct. 2946, 69 L.Ed.2d 884 (1981). That test considers the practical effect of the tax statute in question and proposes to "sustain[ ] a tax against [a] Commerce Clause challenge when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State." Complete Auto, 430 U.S. at 279, 97 S.Ct. 1076. Only the second prong of the Complete Auto test, requiring "fair apportionment" of the tax in question, is at issue in this appeal.

¶ 10 The Supreme Court determines whether a state tax on interstate commercial activity "is fairly apportioned by examining whether it is internally and externally consistent." Goldberg v. Sweet, 488 U.S. 252, 261, 109 S.Ct. 582, 102 L.Ed.2d 607 (1989); see also Jefferson Lines, 514 U.S. at 185, 115 S.Ct. 1331; Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169, 103 S.Ct. 2933, 77 L.Ed.2d 545 (1983). A state tax is internally consistent if "the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear." Jefferson Lines, 514 U.S. at 185, 115 S.Ct. 1331. The internal consistency test "simply looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate." Id.

¶ 11 By contrast, the external consistency test looks at the in-state business activity that causes the state to impose its tax and the practical or economic effect of the tax to determine "whether the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed." Goldberg, 488 U.S. at 262, 109 S.Ct. 582. Under external consistency analysis, "the threat of real multiple taxation (though not by literally identical statutes) may indicate a State's impermissible overreaching." Jefferson Lines, 514 U.S. at 185, 115 S.Ct. 1331.

B. Application of Apportionment Principles

¶ 12 We first address ADOR's cross-appeal. ADOR argues that its assessment under A.R.S. § 42-5062(A) properly encompassed Southern Pacific's entire gross receipts from transportation services between Clifton and smelters in Arizona, and that the tax court erred by holding otherwise. ADOR contends that non-apportionment of taxes on these gross receipts does not unduly burden interstate commerce and that Southern Pacific failed to establish that any portion of those receipts was subject to multiple taxation.

¶ 13 ADOR principally relies on Central Greyhound Lines of New York, Inc. v. Mealey, 334 U.S. 653, 68 S.Ct. 1260, 92 L.Ed. 1633 (1948), for the proposition that the tax does not place an undue burden on interstate commerce. In Central Greyhound, the Supreme Court invalidated a New York business privilege tax as applied to the unapportioned gross receipts of a bus company that sold tickets in New York for transportation services rendered over a route that covered ground...