Valencia Energy Co. v. Arizona Dept. of Revenue

Citation178 Ariz. 251,872 P.2d 206
Decision Date04 April 1994
Docket NumberNo. TX,TX
PartiesVALENCIA ENERGY COMPANY v. ARIZONA DEPARTMENT OF REVENUE. 93-00277.
CourtTax Court of Arizona
OPINION

SCHAFER, Judge.

Tucson Electric Power Company (TEP) built a coal-fired electric plant in Springerville, Arizona which the Alamito Company runs. The Valencia Energy Company, a wholly owned subsidiary of TEP, contracted with Alamito to supply all the coal needed to operate Alamito's burner. The contract requires the coal to be a certain size and to have limited amounts of moisture, ash, and sulfur.

Valencia buys the coal from mines in New Mexico. It then ships it to Springerville where Valencia readies it for burning by Alamito. After the coal is burned, Valencia removes the ash left behind.

The Arizona Department of Revenue audited Valencia's books for the period of November 1985 through March 1990 and imposed an additional assessment of $4,979,216.85, plus interest. 1 During those years, Valencia paid transaction privilege taxes only on the activity of procuring the coal--not on the activities of transporting and then handling it before it was used by Alamito. Valencia thought (and argues here) it was conducting three separate businesses--procurement, transportation, and handling--not just one. After running the audit, the Department disagreed; it believed Valencia's sale of coal to Alamito (including all related activities) was one business. The issue then is whether, during that period, Valencia conducted one or three businesses.

Valencia also argues that whether or not it is conducting three businesses, the Department should be estopped from collecting the additional assessment because the Department led Valencia to believe only the activity of procuring the coal was taxable. Finally, Valencia argues that if the Department is not estopped, a portion of Valencia's receipts fall within an exemption from taxation. The Court disagrees with Valencia on all three points.

ANALYSIS

The first question that should be answered is whether the Department is estopped from imposing the additional assessment. If it is, the Court need not decide whether Valencia conducts more than one business and whether it is entitled to an exemption.

A. Estoppel

Valencia's argument is based upon its reliance on the informal written opinion of Department employees, given in 1986, that only Valencia's activity of procuring the coal was subject to the transaction privilege tax. Valencia contends that because of its reliance it suffered damage and prejudice since it failed to collect the cost of the taxes from Alamito and cannot now go back and recoup that cost. The Department, therefore, should be estopped from collecting the tax for past years. 2 The Department does not dispute that Valencia relied upon representations of Department employees and that it did not collect the tax from Alamito. Nevertheless, the Department claims, it is not estopped.

Even admitting Valencia relied on the representations and was damaged, its argument goes directly against both this Court's recent holding in PCS, Inc. v. Ariz. Dept. of Rev., 176 Ariz. 628, 863 P.2d 920 (Tax 1993), and well-settled law which refuses to apply estoppel to the Department in a situation such as this.

Arizona courts have repeatedly found that estoppel will not be applied against taxing authorities except in rare and unique circumstances. The rule is clear:

[T]here can be no estoppel involved against a sovereign state. The failure of the tax commission to attempt to collect taxes now sought to be collected from plaintiff for a period of years constitutes no defense to their collection.

Arizona Tax Commission v. Dairy & Consumers Cooperative Association, 70 Ariz. 7, 14, 215 P.2d 235, 240 (1950). The refusal to apply estoppel to taxing authorities is based upon the fundamental principle that:

In the matter of collecting revenues, the state is acting in its governmental or sovereign capacity, and ordinarily there can be no estoppel. Were this not the rule the taxing officials could waive most of the state's revenue.

Crane Company v. Arizona State Tax Commission, 63 Ariz. 426, 441, 163 P.2d 656, 662 (1945). Valencia's estoppel argument is also negated by the Arizona Constitution, Article 9, section 1, which provides "[t]he power of taxation shall never be surrendered, suspended, or contracted away." These principles are applicable here.

Had Valencia not been misled by an improper interpretation of the applicability of the tax, it might have passed this tax on to Alamito. However, if the Department is estopped from collecting a tax which is applicable to Valencia's operations, then the taxing officials would have, in effect, acted to waive the Department's right to collect the tax. Clearly, this is not allowable.

Valencia points to Tucson Electric Power Company v. Arizona Department of Revenue, 174 Ariz. 507, 851 P.2d 132 (1993) for support. That case doesn't help. The rule of law from that case is quite narrow and Valencia does not come within its scope. The Tucson court limited its holding by noting:

We have previously pointed out in this opinion a critical distinction between the situation presented in this case [where "the taxpayer is not relying upon estoppel to avoid the application of a taxing statute to activities contemplated by the statute"] and the situations presented in prior Arizona decisions that have refused to permit the application of estoppel against the taxing authorities. In those cases, the application of estoppel would have directly and substantially impinged upon the state's sovereign power to levy taxes, since the representations or conduct of the taxing authorities relied upon by the taxpayer related directly to whether the taxpayer's activities were taxable.

Id. at 516, 851 P.2d at 141.

And:

All the Arizona tax decisions that we have found in which the court has refused to apply the doctrine of estoppel have involved situations in which the intent of the statute was to impose a tax upon the activities engaged in by the particular taxpayer. In seeking to avoid payment of the tax, imposed by the statute, the taxpayer was relying upon past actions or representations of taxing authorities to the effect that the statute did not impose a tax upon the taxpayer's activities. In each case, the court refused to permit the claimed action of the state taxing authorities to defeat the intent of the legislature to impose a tax on the very activities engaged in by the taxpayer.

Id. at 515, 851 P.2d at 140.

Valencia relied upon Department representations that the tax was not applicable (to some activities). Estoppel does not apply here. Therefore, we must now determine whether, during the relevant period, Valencia's activities of procuring, transporting, and handling the coal were all part of one taxable business.

B. One Business or More?

Arizona places a transaction privilege tax on the business of selling things at retail and it measures the tax by the gross proceeds of the sales. A.R.S. § 42-1310.01(A). "Business" means "all activities or acts, personal or corporate, engaged in or caused to be engaged in with the object of gain, benefit or advantage, either directly or indirectly, but not casual activities or sales." A.R.S. § 42-1301(1). No deductions are allowed for cost of property sold, materials used, labor or services performed, interest paid, losses or any other expense. A.R.S. § 42-1301.

Since Valencia admits that its act of procuring the coal is taxable, the issue is whether it may segregate its business activities for tax purposes and avoid taxes on the activities of transporting and handling the same coal. Valencia says it may and points to two Arizona cases, State Tax Commission v. Holmes & Narver, Inc., 113 Ariz. 165, 548 P.2d 1162 (1976) and Ebasco Services, Inc. v. Arizona State Tax Commission, 105 Ariz. 94, 459 P.2d 719 (1969), as support. However, those cases do not support Valencia's argument.

Ebasco involved a taxpayer who had three separate contracts with a single client--one contract for engineering services, one for contracting services, and a third for design services. At...

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2 cases
  • Valencia Energy Co. v. Arizona Dept. of Revenue
    • United States
    • Arizona Supreme Court
    • May 19, 1998
    ...denied Valencia's motion for summary judgment, upholding the assessment of back taxes and interest. Valencia Energy Co. v. Arizona Dep't of Revenue, 178 Ariz. 251, 872 P.2d 206 (Tax 1994). ¶7 Valencia raised numerous issues on appeal, including whether the Department was estopped from asses......
  • Valencia Energy Co. v. Arizona Dept. of Revenue
    • United States
    • Arizona Court of Appeals
    • September 12, 1996
    ...court granted summary judgment in favor of DOR, upholding the assessment of back taxes and interest. Valencia Energy Co. v. Arizona Dep't of Revenue, 178 Ariz. 251, 872 P.2d 206 (Tax 1994). Valencia timely Valencia presents four issues on appeal: 1. Are Valencia's coal transportation and co......

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