State Tax Commission v. Holmes & Narver, Inc.
| Decision Date | 27 April 1976 |
| Docket Number | No. 12019,12019 |
| Citation | 113 Ariz. 165,548 P.2d 1162 |
| Parties | STATE TAX COMMISSION of Arizona, the State of Arizona, and L. Waldo DeWitt, John M. Hazelett and Robert A. Kennedy, as members of and constituting the State Tax Commission of Arizona, Appellants, v. HOLMES & NARVER, INC., a California Corporation, Appellee. |
| Court | Arizona Supreme Court |
Bruce E. Babbit, Atty. Gen., Gary K. Nelson, Former Atty. Gen., James D. Winter, Asst. Atty. Gen., Ian A. Macpherson, Asst. Atty. Gen., Phoenix, for appellants.
Allen, McClennen & Fels, by Louis McClennen, Phoenix, for appellee.
This is a suit to recover a tax paid under protest after the State Tax Commission levied an additional assessment on a transaction privilege tax. The matter was submitted to the trial court on a motion for summary judgment supported by stipulated facts. Appellants State Tax Commission of Arizona, the State of Arizona and the members of the Tax Commission, hereinafter all referred to as the Commission, appeal from the judgment of the trial court granting summary judgment in favor of the appellee Holmes & Narver, Inc.
Holmes & Narver, a California corporation with offices in Los Angeles and no offices in Arizona, was founded in 1933 exclusively as a design and engineering concern. Prior to 1945 it had not engaged in the construction business and was not a contractor as defined under A.R.S. § 42--1301(3). Subsequent to 1945, Holmes & Narver began engaging in construction activities but only as an adjunct to its professional design and engineering activities and except on three occasions has never entered into a construction contract unless it was awarded the design and engineering contracts. By far the greater proportion of its employees (other than on-site laborers whose activities are not taxable under the act) are professional designers and engineers rather than employees engaged in construction activities. In its Los Angeles office the number of employees in its design and engineering division will range between 200 and 300, whereas the number of employees in its construction division will range between five and ten.
Kennecott Copper Corporation solicited a proposal from Holmes & Narver to design and engineer a silicate ore leach plant, a sulphuric acid plant and a precipitation plant. Prior to entering into formal contracts it was determined that Holmes & Narver should also construct these three plants. Thereafter the parties entered into two separate cost plus fixed fee contracts, one to design, engineer and construct the leach and acid plants and the other to design, engineer and construct the precipitation plant.
In the performance of its design and engineering activities, Holmes & Narver expended more than 273,000 man hours and produced in excess of 1,300 final drawings and a large number of preliminary drawings. Substantially all of the design and engineering services were performed outside of the State of Arizona.
Out of the total receipts paid to appellee under the contracts it paid a tax on $5,245,000 which it contended were the taxable receipts attributable to the business of contracting. It excluded from the amount it reported as taxable, receipts totaling $3,420,223.30, which were paid to it by Kennecott for design and engineering services. Out of a total fee of approximately $1,100,000, $474,709.61 was paid as a fixed fee for design and engineering services. All of the charges for design and engineering services for which Holmes and Narver were reimbursed by Kennecott were segregated and separately stated on Holmes & Narver's books of account.
The Commission assessed Holmes & Narver additional taxes on the ground that it had understated its income from the business of contracting and after an adverse decision by the Commission, Holmes & Narver paid the sum of $50,249.28 under protest which is the amount awarded Holmes & Narver by the trial court.
The trial court concluded that the $3,420,223.30 received by Holmes & Narver for design and engineering services were payments for professional services which are not taxable as gross receipts under A.R.S. § 42--1310 2(i), and that these services being performed outside of the state of Arizona are not taxable as the applicable statutes only impose a tax on business within the State of Arizona.
We are faced with the questions of whether receipts for design and engineering services are taxable as gross receipts pursuant to A.R.S. § 42--1310 2(i), whether such receipts are non-taxable as services being performed outside of the State of Arizona and whether they are non-taxable because they are unconstitutional as violative of the commerce clause and the due process clause of the Federal Constitution.
The Commission contends that under the facts of this case design and engineering services were so interwoven into the operation of the construction business that they are an essential part of that business and cannot appropriately be regarded as non-taxable on the ground that these particular services constitute a separate business. It argues that such a practical rule is necessary for the due administration of the tax system in order to prevent a flood of arguments over trivialities and to prevent taxpayers from breaking transactions into their constituent elements and arguing for or against taxability as the case may be. The State says essentially that the contract should be looked at as a package for the purpose of taxability and ought to be resolved on the basis of the predominant nature of the activity which produced the income i.e., in this case, the business of contracting.
Holmes & Narver relies principally upon this Court's decision in Ebasco Services, Inc. v. Arizona State Tax Commission, 105 Ariz. 94, 459 P.2d 719 (1969) contending that design and engineering services are professional services which are not taxable and that the nature of the receipts, not the form of the contractual relationships, should govern taxability. It contends that where non-taxable services are substantial the fact that they are included in one contract is not controlling.
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City of Prescott v. Town of Chino Valley
...Ebasco Services Incorporated v. Arizona State Tax Commission, 105 Ariz. 94, 459 P.2d 719 (1969); State Tax Commission of Arizona v. Holmes & Narver, Inc., 113 Ariz. 165, 548 P.2d 1162 (1976). The parties have not touched upon this subject in their briefing and we therefore say nothing furth......
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Valencia Energy Co. v. Arizona Dept. of Revenue
...not merged for tax purposes into the taxable contracting business and are not subject to taxation. State Tax Comm'n v. Holmes & Narver, Inc., 113 Ariz. 165, 169, 548 P.2d 1162, 1166 (1976). ¶49 Thus, to be considered separable, the activities must be (1) easily ascertainable, (2) not incons......
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...tax does not apply to the out-of-state printing services. ¶ 21 Our position is further supported by State Tax Comm'n v. Holmes & Narver, Inc., 113 Ariz. 165, 169, 548 P.2d 1162, 1166 (1976). There, the taxpayer entered into a contract involving the construction, design and engineering of th......
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Valencia Energy Co. v. Arizona Dept. of Revenue
...taxpayer had entered into separate contracts for construction and for engineering services. See Arizona Tax Comm'n v. Holmes & Narver, Inc., 113 Ariz. 165, 168, 548 P.2d 1162, 1165 (1976). Because the case at hand involves no separate books of sales and no separate contracts, Ebasco does no......