State ex rel., Arizona Dept. of Revenue v. Dillon

• Decision Date: 24 September 1991
• Docket Number: No. 1,CA-TX,1
• Citation: 826 P.2d 1186,170 Ariz. 560
• Parties: STATE of Arizona, ex rel. ARIZONA DEPARTMENT OF REVENUE, Plaintiff-Appellee, v. Harry DILLON, Sr., an individual, dba Dillon Tobacco Barn, Defendant-Appellant. 90-033.
• Court: Arizona Court of Appeals

Page 1186

826 P.2d 1186

170 Ariz. 560

STATE of Arizona, ex rel. ARIZONA DEPARTMENT OF REVENUE, Plaintiff-Appellee, v. Harry DILLON, Sr., an individual, dba Dillon Tobacco Barn, Defendant-Appellant.

No. 1 CA-TX 90-033.

Court of Appeals of Arizona,

Division 1, Department T.

Sept. 24, 1991.

Review Denied April 7, 1992.

Grant Woods, Atty. Gen. by Patrick Irvine, Asst. Atty. Gen., Phoenix, for plaintiff-appellee.

Margrave, Celmins & Verburg, P.C. by Gary Verburg, Scottsdale, for defendant-appellant.

OPINION

JACOBSON, Presiding Judge.

This appeal deals once again with the conflict arising from the existence of Indian reservations within the state of Arizona and the power of the state to tax activities occurring on those reservations.

Harry Dillon, Sr. (Dillon), a member of the Puyallup Indian Tribe of Washington State, appeals from a judgment in excess of $2.5 million for unpaid Arizona luxury privilege taxes assessed over a four-year period on Dillon's sales of cigarettes on the Tohono O'Odham Indian Reservation near Tucson, Arizona, to non-Indians and other nonmembers of the Tohono O'Odham Tribe. The appeal poses the following issues for our resolution:

(1) Whether the Department of Revenue timely filed its complaint as required by A.R.S. § 42-124;

(2) Whether Dillon's status as a member of the Puyallup Indian Tribe of Washington State rendered him immune from Arizona luxury privilege taxation; and

(3) Whether the application of the Arizona luxury privilege tax to the proceeds of Dillon's sales of cigarettes to non-Indians and other nonmembers of the Tohono O'Odham Tribe was federally preempted because Dillon operated on the reservation as a federally licensed Indian trader.

FACTS AND PROCEDURAL BACKGROUND

The facts that we view as material to our resolution of this appeal are undisputed. Harry Dillon, Sr., is an enrolled member of the Puyallup Tribe of Indians of the state of Washington. Since 1976, as a licensed Indian trader, he has engaged in the business of selling cigarettes as the sole proprietor of the Dillon Tobacco Barn, which is located at the intersection of U.S. Highway 89 and Los Reales Road at the northern boundary of the Tohono O'Odham (formerly Papago) Indian Reservation. U.S. Highway 89 is part of the state highway system and is maintained by the state of Arizona. The portion of Los Reales Road that runs by the Dillon Tobacco Barn, from U.S. Highway 89 west to 12th Avenue, is maintained by the city of Tucson.

The Dillon Tobacco Barn is situated within the exterior boundaries of the reservation, and the business site lease is approved by the Tohono O'Odham Tribe. The tribe imposes a tax on all of Dillon's business at the rate of 5% of the gross sales. For the years 1981 through 1985, this produced approximately $900,000 in revenues to the tribe. Approximately 11.4% of his cigarette sales are made to members of the Tohono O'Odham Tribe. The remaining 88.6% of sales are made to non-Indians and other nonmembers of the tribe.

Dillon does not reside in the state of Arizona. He stays at hotels and motels located off the reservation while he is working at the Dillon Tobacco Barn. Dillon purchases his cigarette inventory from Border Tobacco in El Paso, Texas, which ships cigarettes directly to the Dillon Tobacco Barn. Dillon pays no Arizona luxury privilege taxes when he purchases his inventory, and as a result his cigarette prices are substantially lower than those charged by off-reservation merchants. It is clear that Dillon's business success and the tribe's tax revenues are based upon the competitive advantage Dillon enjoys by selling tax-free cigarettes to non-tribal members.

The Arizona Department of Revenue (Department) audited Dillon's cigarette business for the periods of October 1981 through August 1983 and September 1983 through December 1985. As a result of these audits, the Department issued assessments for luxury privilege taxes pursuant to A.R.S. §§ 42-1201 et seq. on all Dillon's cigarette sales during the audit periods. Dillon challenged these assessments unsuccessfully before Department hearing officers and the Department director. See A.R.S. § 42-122. He then appealed the Department's final decisions to Division Two of the State Board of Tax Appeals. See A.R.S. §§ 42-124 and 42-171. The parties stipulated before the Board that the assessment totals should each be reduced by 11.4%, recognizing the non-taxability of sales to members of the Tohono O'Odham Tribe. After this reduction, the assessments totaled approximately $2.46 million.

In a 2 to 1 decision, the Board of Tax Appeals reversed the Department's orders, determining that, pursuant to Warren Trading Post Company v. Arizona State Tax Commission, 380 U.S. 685, 85 S.Ct. 1242, 14 L.Ed.2d 165 (1965), application of Arizona's luxury privilege tax to a federally licensed Indian trader was federally preempted.

On January 27, 1989, the 52nd day following Dillon's counsel's receipt of the Board's decision, the Department brought this action in the Arizona Tax Court to review the decision of the Board of Tax Appeals. Dillon moved to dismiss the action as untimely. The tax court denied the motion to dismiss, interpreting A.R.S. § 42-124 "to permit the appeal to be filed at any time up to 60 days after the decision of the State Board of Tax Appeals."

The Department and Dillon then filed cross-motions for summary judgment on the merits. After briefing and argument, the tax court granted summary judgment in favor of the Department. Based on Washington v. Confederated Tribes of Colville Indian Reservation, 447 U.S. 134, 100 S.Ct. 2069, 65 L.Ed.2d 10 (1980), the tax court determined that neither Dillon's status as a member of the Puyallup Indian Tribe nor his status as a federally licensed Indian trader required the conclusion that federal law preempted application of the state tax. The court also found that the indirect economic impact of the tax on the Tohono O'Odham Tribe did not invalidate the tax as applied. The tax court entered formal judgment in favor of the Department, and Dillon timely appealed. We have jurisdiction of this appeal pursuant to A.R.S. § 12-2101(B); the appeal was assigned to Department T of this court pursuant to A.R.S. §§ 12-120.04 and 12-170(C).

TIMELINESS OF THE DEPARTMENT'S ACTION UNDER A.R.S. § 42-124

Dillon first argues that the trial court erred in denying his motion to dismiss for lack of jurisdiction. He contends that, under A.R.S. § 42-124, the Department had 30 days following Dillon's receipt of the decision of the Board of Tax Appeals within which to appeal by filing an action in the tax court. Thus, Dillon contends, the Department's appeal filed 52 days after receipt was untimely. In response, the Department argues that A.R.S. § 42-124(A) and (B), when read together, provide that the Board's decision only becomes final 30 days after the taxpayer receives it, and that an action appealing the decision filed within 30 days thereafter is timely.

We agree with the Department. A.R.S. § 42-124 provides in part:

A. ... On determining the appeal the board shall issue a decision consistent with its determination. The board's decision is final on the expiration of thirty days from the date when notice of its action is received by the taxpayer, unless either the department or the taxpayer brings an action in superior court as provided in subsection B.

B. The department or a taxpayer aggrieved by a decision of the board may bring an action in superior court subject to the following provisions:

....

2. Except in the case of income tax, after payment of any tax, penalty or interest under protest and setting forth the grounds of objection to the legality of the tax, the taxpayer may bring an action against the department in superior court for the recovery of the tax, interest or penalty so paid under protest. In the case of income tax the taxpayer may bring an action against the department in superior court without paying the tax, penalty or interest under protest. The action shall not begin more than thirty days after the order or decision of the board becomes final. Failure to bring the action within thirty days constitutes a waiver of the protest and a waiver of all claims against this state arising from illegality in the tax, penalties and interest so paid.

(Emphasis added.) Subsection (A) provides that "[t]he board's decision is final on the expiration of thirty days from the date when notice of its action is received by the taxpayer, unless either the department or the taxpayer brings an action in superior court as provided in subsection B." (Emphasis added.) Subsection (B)(2) commences the running of the 30-day period for the filing of an appeal to the superior court from the date the Board's decision "becomes" final. This "finality" clearly refers back to the special definition of "finality" established by subsection (A). Subsections (A) and (B) are in pari materia, and it is plain that the legislature intended the term "final" to carry the same meaning in both. Accordingly, the 30-day period provided by subsection (B)(2) for filing an action in superior court begins to run, pursuant to subsection (A), on the expiration of 30 days following the taxpayer's receipt of notice of the Board's decision.

Dillon, nevertheless, contends that subsection (B)(2) only provides an additional 30 days for actions filed by the taxpayer. Observing that the first two sentences of subsection (B)(2) focus exclusively on actions initiated by the taxpayer, he argues that interpreting the third sentence as applicable to actions filed by the Department would construe it out of context. A cursory reading of this subsection may be subject to that interpretation. However, the initial sentence of subsection (B) provides: "The department or a taxpayer aggrieved by a decision of the board may bring an action in superior court subject to the following provisions...." (Emphasis added.) The first two sentences of subsec...