State ex rel. Arizona Dept. of Revenue v. Blaze Const. Co., Inc.

• Decision Date: 29 April 1997
• Docket Number: No. 1,CA-TX,1
• Citation: 190 Ariz. 262,947 P.2d 836
• Parties: , 242 Ariz. Adv. Rep. 3 STATE of Arizona, ex rel., ARIZONA DEPARTMENT OF REVENUE, Plaintiff-Appellee, v. BLAZE CONSTRUCTION COMPANY, INC., Defendant-Appellant. 96-0010.
• Court: Arizona Court of Appeals

Page 836

947 P.2d 836

190 Ariz. 262, 242 Ariz. Adv. Rep. 3

STATE of Arizona, ex rel., ARIZONA DEPARTMENT OF REVENUE, Plaintiff-Appellee, v. BLAZE CONSTRUCTION COMPANY, INC., Defendant-Appellant.

No. 1 CA-TX 96-0010.

Court of Appeals of Arizona Division 1, Department T.

April 29, 1997.

Review Denied Dec. 16, 1997. ^*

Grant Woods, Attorney General by Patrick Irvine, Assistant Attorney General, Phoenix, for Plaintiff-Appellee.

Margrave, Celmins & Verburg by Gary Verburg, Phoenix, for Defendant-Appellant.

OPINION

EHRLICH, Judge.

The Arizona Department of Revenue ("ADOR") assessed delinquent Arizona transaction privilege (contracting) taxes against taxpayer Blaze Construction Company. The taxes were computed on Blaze's gross proceeds from building roads for the United States Bureau of Indian Affairs ("BIA") on Indian reservations within Arizona. Blaze protested the assessment, arguing that federal law pre-empted application of the contracting tax. It prevailed in the administrative process.

ADOR then brought an action in the tax court, seeking to rein state the assessment. On cross-motions for summary judgment, ADOR prevailed and Blaze appealed to this court, presenting the following issues:

1. Whether Blaze's pre-emption claim necessarily fails given the absence of any federal statute that expressly pre-empted the imposition of state transaction privilege taxes on the gross proceeds from work performed for BIA;

2. Whether the tax court erred in holding that federal law did not impliedly pre-empt the imposition of the tax; and

3. Whether the tax court erred in denying Blaze's claim for credit against the assessment in the amount of Arizona contracting taxes paid by its subcontractors and suppliers.

FACTS AND PROCEDURAL HISTORY

Blaze was incorporated under the laws of the Blackfeet Tribe of Oregon. Blaze Construction. Co. v. Taxation and Revenue Dep't of New Mexico, 118 N.M. 647, 884 P.2d 803, 804 (1994), cert. denied 514 U.S. 1016, 115 S.Ct. 1359, 131 L.Ed.2d 216 (1995). During the audit period of June 1, 1986, through August 31, 1990, under contracts with the BIA, it provided road-paving, grading, drainage, overlayment, marking and bridge-building services at locations on six Indian reservations within Arizona, those of the Navajo, Hopi, Fort Apache, Colorado River, Tohono O'Odham and San Carlos Apache Indian Tribes. These reservation roads provided access to Indian villages, Indian residences, tribal governmental buildings and other locations used by tribal members.

Each of the road-improvement projects that Blaze undertook for the BIA was funded with Federal Highway Administration ("FHA") funds. The authorization for the funding was the Federal Lands Highway Program, 23 U.S.C. § 204 (1994). That statute authorizes the United States Government to establish a coordinated program for highways on federal lands, including forest highways, public-lands highways, park roads, parkways and Indian reservation roads.

Annually, the BIA's Branch of Roads is told approximately what it will receive under the program for road construction. Over the period from 1989 to 1992, the annual figure was approximately $18 million for the Navajo area. The Navajo Nation has a roads committee that establishes priorities for roads and road-improvement projects. Using the Nation's priority list, the Branch of Roads decides the scope of each project and the amounts of money to be allocated to each. Similar procedures are presumably followed in the other areas involved in this case.

The Branch of Roads issues a specification package for each project. Based on the package, the BIA's Design Section advertises for bids. The section maintains daily contact with the FHA concerning funding for the project. Once the FHA authorizes a particular sum for the project, the BIA awards the contract.

Several of Blaze's contracts with the BIA provided for preconstruction meetings at the BIA's Phoenix office. Blaze used state roads to transport equipment from reservation to reservation in performing its BIA contracts. It paid Arizona motor vehicle registration fees, motor carrier taxes and use fuel taxes.

The State of Arizona did not participate in planning or developing any of Blaze's projects on reservations in Arizona. It issued no permits. It provided no inspection services related to employment, construction, quality or safety. It provided no maintenance or regular law-enforcement services on any of the reservation roads on which Blaze worked. The tribes provided all of the employment-referral services for each project. Some 85% of the workers whom Blaze employed on the projects are Indians.

State highway services are funded by appropriations from the Arizona Highway User Revenue Fund, the source for which is Arizona fuel taxes. ARIZ.REV.STAT. ANN. ("A.R.S.") §§ 28-1502, 28-1557. The state also receives funds through three federal programs for highway resurfacing, rehabilitation and restoration. It receives no more or less of these funds because the roads to which they pertain pass through Indian reservations. None of the portions of reservation roads on which Blaze worked under contracts with the BIA was among those for which the state was responsible to maintain, repair, resurface, rehabilitate or restore.

On May 21, 1993, ADOR issued a revised assessment of contracting privilege taxes against Blaze for the audit period June 1, 1986, through August 31, 1990. ADOR's hearing officer and, later, its director, rejected Blaze's protest on the merits. On administrative appeal, the Board of Tax Appeals vacated the assessment, holding that federal law pre-empted application of the contracting privilege tax to Blaze's BIA contract payments.

ADOR brought a refund action in the tax court pursuant to A.R.S. § 42-124(B) (Supp.1996). The court held for ADOR, finding dispositive the decision in Department of Revenue v. Hane Construction Co., 115 Ariz. 243, 564 P.2d 932 (App.1977), and Blaze appealed.

DISCUSSION

A. Applicability of Indian Law Pre-emption Analysis

Blaze contends that this case is governed by the implied preemption analysis that the United States Supreme Court has repeatedly applied to assertions of state authority over the activities of non-Indians on Indian reservations. It argues that this Indian law pre-emption analysis precludes the state from imposing contracting privilege taxes on the proceeds from Blaze's BIA contracts.

ADOR's initial response is that Indian law pre-emption analysis does not apply here at all. It argues that, because Blaze's contracts were with the BIA and not the affected tribes, a more general rule applies: State taxes will be deemed pre-empted only if they are imposed directly on the federal government or if a federal statute expressly preempts them. See United States v. New Mexico, 455 U.S. 720, 102 S.Ct. 1373, 71 L.Ed.2d 580 (1982). Relying on the decision of the New Mexico Supreme Court in Blaze Construction, 118 N.M. 647, 884 P.2d 803, ADOR claims that Indian law pre-emption analysis applies only when a state attempts to assert authority over the reservation activities of non-Indians who engage directly in commerce with reservation Indians.

The Supreme Court articulated the modern formulation of Indian law pre-emption analysis in White Mountain Apache Tribe v. Bracker:

When on-reservation conduct involving only Indians is at issue, state law is generally inapplicable, for the State's regulatory interest is likely to be minimal and the federal interest in encouraging tribal self-government is at its strongest. [Citations omitted.] More difficult questions arise where, as here, a State asserts authority over the conduct of non-Indians engaging in activity on the reservation. In such cases we have examined the language of the relevant federal treaties and statutes in terms of both the broad policies that underlie them and the notions of sovereignty that have developed from historical traditions of tribal independence. This inquiry is not dependent on mechanical or absolute conceptions of state or tribal sovereignty, but has called for a particularized inquiry into the nature of the state, federal, and tribal interests at stake, an inquiry designed to determine whether, in the specific context, the exercise of state authority would violate federal law.

448 U.S. 136, 144-45, 100 S.Ct. 2578, 2584, 65 L.Ed.2d 665 (1980) (emphasis added).

This formulation neither suggests nor implies that Indian law pre-emption analysis is inapplicable when the on-reservation activities of non-Indians over which the state seeks to exercise authority do not arise out of direct commercial relations with the tribe or a tribal entity. Moreover, nothing in the Court's application of that analysis in White Mountain suggests that it implicitly follows any such limitation. The identity of the nominal contracting party in fact played no part in the inquiry. The Court stated, for example:

... Respondents [including the State of Arizona] seek to apply their motor vehicle license and use fuel taxes on Pinetop [the taxpayer] for operations that are conducted solely on Bureau [of Indian Affairs] and tribal roads within the reservation. There is no room for these taxes in the comprehensive federal regulatory scheme. In a variety of ways, the assessment of state taxes would obstruct federal policies. And equally important, respondents have been unable to identify any regulatory function or service performed by the State that would justify the assessment of taxes for activities on Bureau and tribal roads within the reservation.

* * * * * *

Respondents' argument is reduced to a claim that they may assess taxes on non-Indians engaged in commerce on the reservation whenever there is no express congressional statement to the contrary. That is simply not the law. In a number of cases we have held that state authority over non-Indians acting on tribal reservations is pre-empted even though Congress has offered no explicit statement on...