STATE EX REL. ARIZ. DEPT. OF REV. v. Capitol Castings, Inc.

• Decision Date: 21 April 2004
• Docket Number: No. CV-03-0250-PR.,CV-03-0250-PR.
• Citation: 207 Ariz. 445,88 P.3d 159
• Parties: STATE of Arizona, ex rel., the ARIZONA DEPARTMENT OF REVENUE, Plaintiff-Appellant, v. CAPITOL CASTINGS, INC., Defendant-Appellee. State of Arizona, ex rel., the Arizona Department of Revenue, Plaintiff-Appellant, v. Capitol Castings, Inc., Defendant-Appellee.
• Court: Arizona Supreme Court

88 P.3d 159

207 Ariz. 445

STATE of Arizona, ex rel., the ARIZONA DEPARTMENT OF REVENUE, Plaintiff-Appellant, v. CAPITOL CASTINGS, INC., Defendant-Appellee.

State of Arizona, ex rel., the Arizona Department of Revenue, Plaintiff-Appellant, v. Capitol Castings, Inc., Defendant-Appellee.

No. CV-03-0250-PR.

Supreme Court of Arizona, En Banc.

April 21, 2004.

Terry Goddard, Arizona Attorney General, by Sara D. Branscum, Assistant Attorney General, Phoenix, Attorneys for Plaintiff Arizona Department of Revenue.

Snell & Wilmer, L.L.P., by Charles A. Pulaski, Jr. and Barbara J. Dawson and Martha E. Gibbs, Phoenix, Attorneys for Defendant Capitol Castings, Inc.

Fennemore Craig, P.C., by Steven R. Partridge, Phoenix, Attorneys for Amicus Curiae Arizona Tax Research Association.

BERCH, Justice.

¶ 1 Arizona law exempts from use tax any "[m]achinery[ ] or equipment [ ] used directly in manufacturing, processing, fabricating, ... or metallurgical operations." Ariz.Rev.Stat. ("A.R.S.") § 42-5159(B)(1) (Supp.2003).¹ Capitol Castings claimed that several items purchased for use in its foundry facilities qualified for the use tax exemption. The court of appeals, however, concluded that the items did not qualify for the exemption because they were not "machinery or equipment." See State ex rel. Ariz. Dep't of Revenue v. Capitol Castings, Inc., 205 Ariz. 258, 266, ¶¶ 34, 36, 69 P.3d 29, 37 (2003) ("Capitol II"). We granted Capitol Castings' petition for review and, for the reasons set forth, vacate the opinion of the court of appeals, resolve the exemption status of several items, and remand the case for further proceedings.

BACKGROUND AND PROCEDURAL HISTORY

¶ 2 Capitol Castings manufactured grinding balls and custom-cast items used in mining and other industries.² Manufacturing these items entailed pouring molten metals and alloys into molds to form the desired shapes. Capitol constructed its molds using metal, silica sand, chemical binders, exothermic sleeves, mold cores, mold wash, and hot topping.

¶ 3 The molds for custom castings consisted almost entirely of sand. For some of the custom molds, Capitol would ram the sand for each half of the mold into a steel flat containing a wood pattern of the desired shape. For other custom molds, Capitol would pour sand treated with chemical binders over wood patterns. The binders helped the sand retain its form. Capitol would then insert into one of the custom casting mold's halves an exothermic sleeve, a round tube that protruded from the mold like an exhaust pipe and retained excess molten metal that became part of the casting as the metal inside cooled and contracted. Capitol used "hot topping," a powder, to cover the end of the exothermic sleeve to keep the molten metal in the sleeve from cooling. After removing the wood patterns from the molds, Capitol sprayed the cavity left by the pattern in the mold with a mold wash to prevent the sand from sticking to the casting. Capitol sometimes used mold cores, also made of sand, to form cavities in the molds. Once the halves of each custom casting mold were complete, Capitol put the halves together to form a single mold.

¶ 4 Capitol's molds were destroyed during the manufacturing process. The chemical binder and mold wash were completely consumed and the exothermic sleeves and hot topping were rendered unusable each time Capitol used a mold, but Capitol was able to salvage the metal and sand for use in future molds.

¶ 5 The Arizona Department of Revenue ("ADOR") did not contest the exemption for the metal molds, thus impliedly conceding that the metal molds are exempt from use tax, but it contends that the other materials—silica sand, chemical binders, hot topping, mold wash, mold cores, and exothermic sleeves—are not exempt.

¶ 6 ADOR also contests the exemption for the cement and lime Capitol used at its Chandler facility to detoxify dust created by the arc furnaces used in the casting process. Like the chemical binders and hot topping, the cement and lime could not be reused after they were injected into the toxic dust.

¶ 7 Finally, ADOR contests the exemption for refractory materials, such as coxy sand and cerwool blankets, used to protect Capitol's machinery and equipment from the extreme heat generated by its manufacturing processes. The manufacturing process destroyed the refractory materials, requiring Capitol to replace them periodically.

¶ 8 This case has an extensive procedural history, including two tax court proceedings, two published court of appeals opinions, and a legislative amendment to the exclusions from the exemptions afforded by A.R.S. § 42-5159(B). We will explain the history as it becomes pertinent to the analysis.

DISCUSSION

A. Standard of Review

¶ 9 This case involves the interpretation of statutory provisions, matters that we review de novo. See Bilke v. State, 206 Ariz. 462, 464, ¶ 11, 80 P.3d 269, 271 (2003) (citing Canon Sch. Dist. No. 50 v. W.E.S. Constr. Co., 177 Ariz. 526, 529, 869 P.2d 500, 503 (1994)). When interpreting statutes, we strive 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). We "construe the statute as a whole, and consider its context, language, subject matter, historical background, effects and consequences, [as well as] its spirit and purpose." Id. (quoting State ex rel. Ariz. Dep't of Revenue v. Phoenix Lodge No. 708, Loyal Order of Moose, Inc., 187 Ariz. 242, 247, 928 P.2d 666, 671 (App.1996)).

¶ 10 In the tax field, we liberally construe statutes imposing taxes in favor of taxpayers and against the government, Ariz. Tax Comm'n v. Dairy & Consumers Co-op. Ass'n, 70 Ariz. 7, 18, 215 P.2d 235, 242-43 (1950), but strictly construe tax exemptions because they violate the policy that all taxpayers should share the common burden of taxation. See Tucson Transit Auth., Inc. v. Nelson, 107 Ariz. 246, 252, 485 P.2d 816, 822 (1971)

; 71 Am.Jur.2d State and Local Taxation §§ 232, 233 (2001). Nevertheless, an exemption should "not be so strictly construed as to defeat or destroy the [legislative] intent and purpose."³ W.E. Shipley, Annotation, Items or Materials Exempt from Use Tax as Used in Manufacturing, Processing, or the Like, 30 A.L.R.2d 1439, 1442 (1953). Bearing these principles in mind, we turn to the issue raised by the parties.

B. Machinery or Equipment

¶ 11 Our analysis begins with the text of A.R.S. § 42-5159(B)(1), which exempts "[m]achinery, or equipment, used directly in manufacturing, processing, fabricating, job printing, refining or metallurgical operations." The statute requires that the "terms `manufacturing,' `processing,' `fabricating,' `job printing,' `refining' and `metallurgical'" be interpreted to include "those operations commonly understood within their ordinary meaning." Id. No one disputes that Capitol's casting processes were of the type contemplated by the statute.

¶ 12 The statute does not define the terms "machinery or equipment." Generally accepted definitions of "machinery" indicate that it may be "an assemblage of machines," "the parts of a machine collectively," or "a system by which action is maintained or by which some result is obtained." Webster's College Dictionary 788 (2d ed.1997). The definition includes "an apparatus consisting of interrelated parts with separate functions, used in the performance of some kind of work," or "a device that transmits or modifies force or motion." Id. at 787. "Equipment" includes "the articles, implements, etc., used or needed for a specific purpose or activity." Id. at 442.

¶ 13 Despite the lack of definitional specificity in the statute, there is no dispute about its underlying purpose. The legislature enacted A.R.S. § 42-5159(B)(1) to stimulate business investment in Arizona in order to improve the state's economy and increase revenue from other taxes, such as income and property taxes. See Ariz. Dep't of Revenue v. Blue Line Distrib., Inc., 202 Ariz. 266, 268, ¶ 11, 43 P.3d 214, 216 (App.2002) (describing the policy supporting the "machinery or equipment" exemption from the transaction privilege tax and citing 71 Am.Jur.2d State and Local Taxation § 288 (2001)); Duval Sierrita Corp. v. Ariz. Dep't of Revenue, 116 Ariz. 200, 204, 568 P.2d 1098, 1102 (App.1977) (same). Our interpretation of the statute therefore should further, not frustrate, the policy of encouraging investment and spurring economic development.

¶ 14 Although the text of the statute may not clearly reveal the legislature's intent, the procedural history of this case provides significant evidence of the legislature's intended definition and its purpose in exempting machinery and equipment used in industrial processes from the use tax. In Arizona Department of Revenue v. Capitol Castings, Inc., 193 Ariz. 89, 970 P.2d 443 (App.1998) ("Capitol I"), which addressed the issue presented in this case before the legislature amended § 41-5159(C)(1), the court of appeals held that the items at issue did not qualify for the use tax exemption afforded by § 42-5159(B)(1) because they were expended or consumed in the production process. Id. at 95, ¶ 26, 970 P.2d at 449. The court also found that the items at issue did not qualify as machinery or equipment, but determined that this conclusion was "moot" in light of its holding that the items fell within § 42-5159(C)(1), which excluded "expendable materials" from the use tax exemption contained in § 42-5159(B)(1). Id. at 93-95, ¶ ¶ 14-26, 970 P.2d at 447-49.

¶ 15 In the course of its "machinery or equipment" discussion, the court overruled the tax court's opinion in Arizona Department of Revenue v. Cyprus Sierrita Corp., 177 Ariz. 301, 303, 867 P.2d 871, 873 (Tax 1994) ("Cyprus Sierrita"), which had held that chemicals expended during the ore leaching process nonetheless qualified as "machinery or equipment" for purposes of the exemption because they functioned as machinery might in an ore leaching...