Southwest Airlines Co. v. Dept. of Revenue

• Decision Date: 29 January 2008
• Docket Number: No. 1 CA-TX 07-0002.,1 CA-TX 07-0002.
• Citation: 175 P.3d 700,217 Ariz. 451
• Parties: SOUTHWEST AIRLINES CO., a Texas corporation, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona; State of Arizona, Defendants/Appellees.
• Court: Arizona Court of Appeals

175 P.3d 700

217 Ariz. 451

SOUTHWEST AIRLINES CO., a Texas corporation, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona; State of Arizona, Defendants/Appellees.

No. 1 CA-TX 07-0002.

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

January 29, 2008.

Fennemore Craig, P.C. By Paul J. Mooney, Jim L. Wright, Deryck R. Lavelle, Phoenix, Attorneys for Plaintiff/Appellant.

Terry Goddard, Attorney General By Frank Boucek, III, Assistant Attorney General, Kenneth J. Love, Assistant Attorney General, Phoenix, Attorneys for Defendants/Appellees.

OPINION

JOHNSEN, Judge.

¶ 1 Southwest Airlines Co. ("Southwest") appeals the tax court's summary judgment upholding the inclusion in its personal property taxes of avionics software installed in flight computers aboard its aircraft. Finding no legal error or genuine dispute of material fact, we affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 2 At issue is the tax treatment afforded of avionics application software used in Southwest's aircraft. The types of software vary with the model of the aircraft, but the various programs are used to assist navigation, autopilot/flight direction, situation awareness, air-ground data communications, auxiliary power unit control, engine control, data entry, flight data displays and flight guidance. The software is loaded into flight computers installed as original equipment on planes when Southwest purchases them. The invoices the aircraft manufacturer issues to Southwest do not separately state the price of the software programs.

¶ 3 In accordance with Arizona Revised Statutes ("A.R.S.") section 42-14254 (2006), the Arizona Department of Revenue (the "Department") values "flight property" for companies engaging in air commerce in Arizona.¹ Since the Legislature enacted the valuation statute at issue in 1996, the Depart ment never has deducted the cost of avionics software from an aircraft's valuation.

¶ 4 During the 2004 tax year, the Depart ment derived a full cash value of $155,319,100 for Southwest's flight property. Contending that its avionics software was not taxable, Southwest appealed to the State Board of Equalization (the "Board") pursuant to A.R.S. § 42-14005(1) (2006).² The Board declined to deduct the value of the software in setting the full cash value of Southwest's flight property. Southwest appealed to the tax court pursuant to A.R.S. §§ 42-16203 (Supp.2007), -16204 (2006), -16207 (2006) and -11005 (2006). It later amended its complaint to add a claim for the 2005 tax year and filed a separate appeal for the 2006 tax year. The parties ultimately stipulated to consolidate all three tax year appeals.

¶ 5 Southwest and the Department filed cross motions for summary judgment on whether the Department should have excluded the value of the software from the value of the company's personal property. The tax court granted the Department's motion and entered final judgment in favor of the Department. This appeal, followed.

DISCUSSION

A. Standard of Review.

¶ 6 We review de novo the tax court's judgment. Wilderness World, Inc. v. Dep't of Revenue, 182 Ariz. 196, 198, 895 P.2d 108, 110 (1995). This case requires the interpretation of statutory provisions, which presents questions of law that we likewise review de novo. Canon Sch. Dist. No. 50 v. W.E.S. Constr. Co., 177 Ariz. 526, 529, 869 P.2d 500, 503 (1994). Our task is to "discern and give effect to legislative intent." People's Choice TV Corp. v. City of Tucson, 202 Ariz. 401, 403, ¶ 7, 46 P.3d 412, 414 (2002).

B. The Department Correctly Interpreted and Applied A.R.S. 42-14254.

¶ 7 The Arizona Constitution provides that all property not exempt by law may be taxed. Ariz. Const., art. 9, § 2(13); see also A.R.S. § 42-11002 (2006) ("All property in this state is subject to taxation except as provided in article IX, Constitution of Arizona, and article 3 of this chapter."). The Legislature specifically has exempted certain types of property from taxation. See Airport Properties v. Maricopa County, 195 Ariz. 89, 985 P.2d 574 (App.1999) (distinguishing between property exempted from taxation and property the Legislature has not chosen to tax). The enumerated exemptions, which are listed in A.R.S. §§ 42-11101 through -11133 (2006 & Supp.2007), refer neither to software in general nor to avionics software in particular. We strictly construe tax statutes against exemptions, Ariz. Dep't of Revenue v. Raby, 204 Ariz. 509, 511-12, ¶ 16, 65 P.3d 458, 460-61 (App.2003), and presume that property is not exempted, Hillman v. Flagstaff Cmty. Hosp., 123 Ariz, 124, 125-26, 598 P.2d 102, 103-04 (1979). Therefore, because avionics software is not among the enumerated categories of property exempt from taxation, we presume that avionics software is subject to taxation. See id. at 125, 598 P.2d at 103 ("It is the established rule in Arizona that property is not exempt from taxation unless expressly or unequivocally exempted by the Legislature.").

¶ 8 Given that avionics software is not exempt from taxation, the question is whether the Legislature has chosen to tax it. We conclude that by enacting a package of statutes providing broadly for the taxation of airplanes and all of their components, the Legislature intended to tax avionics software programs such as those at issue, which are installed on flight computers and are integral to the planes' airworthiness.

¶ 9 Article 6 of Chapter 14 of Title 42 is titled "Valuation and Taxation of Airline Companies." The statutes require that an airline operating within the state must file an annual report and that from those reports the Department annually shall determine the full cash value of each airline's "flight property" in use in the state. A.R.S. §§ 42-14253, -14254. More specifically, section 42-14254 provides in relevant part:

A. On or before August 31 the department shall determine the full cash value of all flight property that is operated in this state in air commerce by each airline company. The full cash value is the Value determined as of January 1 of the valuation year.

B. The department shall:

1. Determine the valuation of flight property by fleet type.

2. Determine the valuation of each fleet type by the original cost less depreciation.

"`Flight property' means all airline company aircraft of the types used in this state except aircraft that are permanently removed from operations." A.R.S. § 42-14251(6) (2006).

¶ 10 Examining these provisions, the tax court concluded:

Under the statute, the entire "aircraft" is taxable. The statute makes no distinction between tangible and intangible parts: if the software is part of the "aircraft," and only then, it is taxable.

¶ 11 In this appeal from the tax court's judgment, we must determine whether the Legislature has directed that a, component such as software installed on an aircraft is, as the tax court found, "part of the aircraft." Section 42-14251(2) defines "aircraft" to mean "any device that is used or designed for navigation or flight through the air." The taxable property, therefore, is the "device" that flies—the airplane. We see nothing in the statutory scheme that instructs the taxing authority to tax some components of an airplane and not others.

¶ 12 Our conclusion is reinforced by the statute's requirement that the full cash value of flight property is to be determined based on its "original cost," which is defined as:

the capitalized acquisition cost to the original purchaser from the manufacturer of airframes and engines plus substantial modifications. If the acquisition cost cannot be determined, original cost means the manufacturer's original list price for the model, type and year plus substantial modifications.

A.R.S. § 42-14251(8). As noted, the software at issue was pre-installed on the airplanes when Southwest purchased them; the manufacturer's invoices did not separately itemize the software's price. Under the statute, therefore, the cost of the software was included within the "original cost" of the aircraft that the Legislature directed to be taxed.

¶ 13 Nevertheless, Southwest maintains that the statutory definition of "original cost" does not encompass avionics software, and argues that as a consequence, property tax may not be assessed against the software. The airline contends that avionics software is neither part of an aircraft's "airframe" or "engine" nor a "substantial modification" thereof. According to Southwest, therefore, because the definition of "original cost" does not include avionics software, the software cannot be taxed.

¶ 14 This argument fails to give effect to the very broad term "airframes." The statutes do not define the term, but, contrary to Southwest's contention, that does not mean that the statutory reference is ambiguous. See Circle K Stores, Inc. v. Apache County, 199 Ariz. 402, 408, 1118, 18 P.3d 713, 719 (App.2001). To the contrary, in declining to provide a statutory definition, the Legislature generally intends to give a word its ordinary meaning. Id.; A.R.S. § 1-213 (2002) (words and phrases should be construed according to the common and approved use of the language).

¶ 15 The ordinary meaning of "airframe" is "[a]n aircraft without its power plant." Webster's II New College Dictionary 24 (2001). Therefore, we conclude that for this purpose an "airframe" includes every component of an airplane, with the exception of the plane's power plant. An airframe therefore includes the plane's wings, fuselage and tail—but it also includes the plane's interior lighting, seats, food and beverage preparation areas and lavatories. Likewise, it necessarily also includes avionics software such is at issue here, which is installed on aircraft computers at the time of purchase.³

¶ 16 Southwest's argument that the avionics software installed on its planes is not part of the planes'"airframes" is undermined by its concession on summary judgment that the software is included in...