Ute Mountain Ute Tribe v. Ariz. Dep't of Revenue

• Docket Number: 1 CA-TX 22-0004
• Decision Date: 10 January 2023
• Parties: UTE MOUNTAIN UTE TRIBE, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.
• Court: Arizona Court of Appeals

UTE MOUNTAIN UTE TRIBE, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.

No. 1 CA-TX 22-0004

Court of Appeals of Arizona, First Division

January 10, 2023

Appeal from the Arizona Tax Court No. TX2021-000365 The Honorable Danielle J. Viola, Judge

Yoder & Langford PC, Scottsdale By Robert R. Yoder Counsel for Plaintiff/Appellant

Arizona Attorney General's Office, Phoenix By Kimberly J Cygan and Benjamin H. Updike Counsel for Defendant/Appellee

Judge Jennifer B. Campbell delivered the opinion of the Court, in which Presiding Judge Brian Y. Furuya and Judge Paul J McMurdie joined.

OPINION

CAMPBELL, JUDGE

¶1 The Ute Mountain Ute Tribe (Ute Mountain) and the Weeminuche Construction Authority (WCA) (collectively, the Appellants) challenge the tax court's judgment upholding the Arizona Department of Revenue's (the Department) determination that WCA owes transaction privilege taxes on its earnings from three construction projects. Because the gross proceeds from construction work performed under a contract with the federal government on a Native American reservation by a nonaffiliated Native American contractor are subject to Arizona's transaction privilege tax, we affirm the tax court's judgment.

BACKGROUND

¶2 Ute Mountain is a Native American tribe. Ute Mountain owns the WCA. In 2014 and 2015, the Bureau of Indian Affairs (the Bureau) contracted with WCA to perform three construction projects, two on the Navajo Nation and one on the Hopi reservation. Each project involved the management of reservation land resources and tribal water rights.

¶3 In 2018, the Department audited WCA from January 1, 2012 through October 31, 2017. Upon completing the audit, the Department issued a deficiency assessment for transaction privilege taxes on WCA's gross proceeds from the three construction projects (the project earnings), characterizing the projects as "for the B[ureau]" rather than "for" the Navajo and Hopi tribes. The Appellants protested the assessment, asserting the Bureau contracted with WCA in its trust capacity to benefit the Navajo and Hopi tribes, thereby exempting the project earnings from the transaction privilege tax.

¶4 Unable to resolve their dispute with the Department through informal and bypass conferences, the Appellants appealed to the tax court. On the Department's motion, the tax court dismissed the Appellants' complaint with prejudice for failure to state a claim and denied the Appellants' request to amend the complaint as untimely and futile. The Appellants timely appealed.

DISCUSSION

¶5 Challenging the tax court's dismissal of their complaint the Appellants first argue that federal law preempts imposing Arizona's transaction privilege tax in this case. Absent federal preemption, the Appellants alternatively contend that the project proceeds are exempt from Arizona's transaction privilege tax under both TPR 95-11, the Department's transaction privilege tax ruling in effect during the relevant period, and A.R.S. § 42-5122. Finally, the Appellants assert that the tax court improperly dismissed their claims without permitting them to file an amended complaint. We address each argument in turn.

¶6 Arizona law imposes an excise tax on persons and entities engaging in business within the State under certain business classifications. A.R.S. § 42-5008. Prime contracting is one of the enumerated business classifications subject to the transaction privilege tax. A.R.S. § 42-5010(A)(1)(h). Because the tax is "assessed on the privilege or right to engage in an occupation or business," the business providing the service pays it and may not shift it to the customer.^[1] Vangilder v. Ariz. Dep't of Revenue, 252 Ariz. 481, 485, ¶ 7 (2022).

¶7 We review the dismissal of a complaint de novo. Coleman v. City of Mesa, 230 Ariz. 352, 355, ¶ 7 (2012). We accept as true all well-pled factual allegations and reasonable inferences from them, Cullen v. Auto-Owners Ins. Co., 218 Ariz. 417, 419, ¶ 7 (2008), and will affirm only if, as a matter of law, the Appellants "would not be entitled to relief under any interpretation of the facts," Coleman, 230 Ariz. at 356, ¶ 8 (quotation and citation omitted).

I. Federal Preemption

¶8 The Appellants contend that the tax court applied the wrong legal standard to assess whether federal law preempts imposing Arizona's transaction privilege tax on the project proceeds. Relying on White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980), the Appellants argue that the court should have engaged in a fact-specific inquiry and weighed the interests of the parties to determine whether federal law preempts Arizona's taxing authority rather than finding the "bright-line" test for federal preemption enunciated in Arizona Department of Revenue v. Blaze Construction Co., Inc., 526 U.S. 32 (1999), dispositive.

¶9 In Bracker, the United States Supreme Court considered the extent of state authority to regulate and tax economic activities on Native American reservations. 448 U.S. at 137. Recognizing Native American tribes' "sovereignty over both their members and their territory," the Supreme Court explained that "state law is generally inapplicable" to tribal conduct on reservations, but states may have a regulatory interest in the conduct of nontribal persons on reservations. Id. at 142-44 (quotation and citation omitted). To assess the extent of a state's interest, the Supreme Court formulated a balancing test requiring "a particularized inquiry into the nature of the state, federal, and tribal interests at stake." Id. at 145.

¶10 Applying this balancing test to the facts of the case, the Supreme Court held that the federal government's "comprehensive" regulatory scheme for harvesting timber on Native American reservations was "so pervasive" that it precluded Arizona's assessment of certain state taxes on the logging and hauling proceeds from a nontribal company's contract with a Native American tribe to "fell[] tribal timber" and "transport[] it to the tribal organization's sawmill." Id. at 136, 145-51.

¶11 Nearly 20 years later, in Blaze, the United States Supreme Court revisited the scope of state taxing authority over business conducted on tribal land and held that a state may impose taxes on the proceeds derived from a nontribal contractor's federal contract for construction work on a Native American reservation. 526 U.S. at 34. Distinguishing Bracker, the Supreme Court held that applying a balancing test is proper only when the proceeds at issue derive from a nontribal entity's direct transaction with the tribe or tribal members. Id. at 37. Stated differently, the Supreme Court clarified that Bracker's balancing test is inapplicable when a state seeks to tax a transaction between the federal government and a nontribal contractor. Id. For economic transactions between the federal government and a nontribal contractor, the Supreme Court articulated a "bright-line standard" in favor of "tax[ing] federal contracts, regardless of whether the contracted-for activity takes place on [Native American] reservations." Id. ¶12 With that standard in mind, the Supreme Court considered the economic transaction at issue, involving a construction company owned by a Native American tribe member in Montana that contracted with the Bureau to build, repair, and improve roads on several Native American reservations in Arizona. Id. at 34. Although Blaze was owned by a Native American and incorporated under the laws of the owner's tribe, the Supreme Court deemed it "the equivalent of a non-[tribal entity] for purposes of th[e] case because none of its work occurred" on the owner's tribal lands.^[2] Id. (citing Washington v. Confederated Tribes of Colville Reservation, 447 U.S. 134, 160-61 (1980) ("[N]onmembers are not constituents of the governing Tribe. For most practical purposes [nonaffiliated Native Americans] stand on the same footing as non-[Native Americans].")). At the end of the contracting period, the Department "issued a tax deficiency against Blaze for its failure to pay Arizona's transaction privilege tax on the proceeds from its contracts with the Bureau." Id. The Supreme Court upheld the deficiency tax assessment, expressly distinguishing earlier cases, including Bracker, that applied a balancing test. Id. at 37-39. In so doing, the Supreme Court explained that it "never employed [a] balancing test in a case" in which a state sought "to tax a transaction between the Federal Government and its non-[tribal] private contractor." Id. at 37. Concluding "[i]nterest balancing in this setting would only cloud the clear rule," and "to avoid litigation and to ensure efficient tax administration," the Supreme Court adopted the "bright-line standard for taxation of federal contracts." Id.

¶13 To support their contention that Bracker 's fact-specific inquiry and balancing test governs federal preemption here, the Appellants distinguish Blaze as simply a "governmental tax immunity case." While the Supreme Court addressed the governmental tax immunity doctrine in Blaze and reaffirmed its previous holding that tax immunity applies only to the federal government or an "agency or instrumentality" closely connected to the federal government, the Appellants' characterization fails to recognize the full scope of Blaze's holding. Id. at 35-36. Upon determining that Blaze did not qualify for, or even assert, governmental tax immunity, the Supreme Court considered Blaze's contention that Arizona's transaction privilege tax "cannot be applied to activities taking place on [Native American] reservations." Id. at 36-37. The Supreme Court acknowledged that its prior "cases involving taxation of on-reservation activity" had applied a balancing test but clarified that it had "never...