Valencia Energy Co. v. Arizona Dept. of Revenue
| Decision Date | 12 September 1996 |
| Docket Number | CA-TX,No. 1,1 |
| Citation | 938 P.2d 474,189 Ariz. 79 |
| Parties | VALENCIA ENERGY COMPANY, Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant-Appellee. 94-0015. |
| Court | Arizona Court of Appeals |
Grant Woods, Attorney General by James M. Susa, Assistant Attorney General, Phoenix, for Defendant-Appellee.
Newmark Irvine, P.A. by Stephen C. Newmark, Phoenix, and Ulrich & Kessler, P.C. by Paul G. Ulrich, Phoenix, and Law Office of Hartley Newkirk by Hartley Newkirk, Tucson, and Walker, Ellsworth, P.L.C. by Frank L. Migray, Phoenix, for Plaintiff-Appellant.
Following a transaction privilege (sales) tax audit for the period between November 1985 and March 1990, the Department of Revenue ("DOR") concluded that Valencia Energy Company owed $4.98 million in taxes plus interest. Valencia succeeded only in part when it administratively challenged the assessment of back taxes, so it appealed to the tax court. In a published opinion, the tax 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 appealed.
Valencia presents four issues on appeal:
1. Are Valencia's coal transportation and coal handling business activities taxable as incidental to its retail coal sales?
2. Is DOR estopped from assessing back taxes against Valencia because a DOR agent had advised that revenue from coal transportation and handling was not taxable?
3. Should DOR's new interpretation of the tax as applied to Valencia's retail coal sales be enforced prospectively only?
4. Was Valencia entitled to exclude freight costs from its taxable revenue?
We have appellate jurisdiction pursuant to Ariz.Rev.Stat. Ann. ("A.R.S.") section 12-2101(B) (1994). We affirm.
Our review of a summary judgment is de novo. United Bank of Ariz. v. Allyn, 167 Ariz. 191, 195, 805 P.2d 1012, 1016 (App.1990). The tax court's entry of summary judgment was proper if the record reveals no genuine dispute of material fact and if, based on the undisputed facts, DOR was entitled to judgment as a matter of law. Pritchard v. State, 163 Ariz. 427, 433, 788 P.2d 1178, 1184 (1990).
We first address whether Valencia's coal transportation and coal handling activities were nontaxable services. We hold that both the transportation and handling of coal were taxable activities.
We begin by discussing Valencia's activities in supplying coal. Valencia entered into contracts with Alamito Company, the owner of one unit of the Springerville Generating Station, a coal-fired electric power plant located in Arizona. Valencia contracted to purchase, transport, handle and store coal for burning. The agreement, entitled "Fuel Burn Agreement," required Valencia to supply Alamito "all fuel required in and for the operation" of Alamito's power generating unit. Alamito purchased the coal "as delivered" to its Springerville facility.
Valencia obtained the coal from mines in New Mexico. The cost of coal accounted for half or more of Valencia's total costs. The remainder of its costs included transportation and handling of the coal. Valencia computed the amount of sales tax due Arizona based only on the amount it paid for the coal, excluding revenue it attributed to its transportation and handling of the coal.
The Valencia-Alamito contract provided for an initial price of $54 per ton. The parties agreed to review the price annually and to attempt to negotiate price adjustments. If negotiations failed, the parties agreed, binding arbitration would fix the price. 1
Valencia sent monthly invoices. The invoices indicated the quantity of coal, the price per ton, and the resulting total sales price. Valencia produced affidavits in the trial court stating that the invoice prices were based on "tariff sheets" showing Valencia's component costs in providing the coal, including the coal, transportation, and a "management fee" of $1.25 per ton. However, Valencia's evidence failed to explain how this description of the pricing method comported with the contract, which provided for a price of $54 per ton and annually negotiated adjustments. 2
In any case, Alamito contracted to purchase "as delivered" coal, and Valencia invoiced the coal in this manner. Neither the parties' contract nor Valencia's invoices provided for separate charges to Alamito for the coal and its transportation, processing, testing, handling and storage.
Was Valencia obligated to pay sales taxes on the full amount it charged Alamito, or only on the amount it paid for the coal? We conclude that Valencia was obligated to pay Arizona sales tax based on the full amount it charged Alamito, not merely on the amount Valencia paid for the coal.
Arizona imposes a "transaction privilege tax" on "the volume of business transacted by persons on account of their business activities...." A.R.S. § 42-1306(A) & (C) (1991). 3 Among other activities, the tax applies to "the business of selling tangible personal property at retail." A.R.S. § 42-1310.01(A) (Supp.1995). The tax base for the sale of retail goods is "the gross proceeds of sales or gross income derived from the business." Id.
Valencia contends that its tax should be based on what it paid the mines for coal, not on the price at which it sold the as-delivered coal to Alamito. The first difficulty with this approach is a fundamental conceptual one: The transaction privilege tax is imposed on Valencia's gross receipts from sales, not its cost of purchasing materials. Valencia's argument focuses on the wrong transactions--its purchases of coal.
The second problem with Valencia's argument is a practical one. Valencia asks that the tax be calculated based on the costs of coal because it did not separately price the sale of coal and the related services. The process of calculation, however, is itself uncertain, complex and burdensome for the tax collector. The impracticability of this method of computing the tax argues strongly against it.
The difficulty is that the price of a typical product sold at retail includes much more than the costs of the raw materials used to produce it. The price also includes other costs of production, including labor and capital equipment. It includes administrative and other overhead costs and, of course, profit. 4
Valencia's proposal requires either of two unacceptable practices. First, the tax could be computed on the cost of coal alone. By omitting the other factors in the retail price, this approach would substantially understate the price and thus understate the taxpayer's liability. Secondly and alternatively, the tax could be computed by adding the cost of coal to overhead, profit and other components of a retail price. To verify that amount, however, the tax collector would face a Herculean task. Instead of examining one set of books--Valencia's sales records--the tax authority would have to examine the gamut of taxpayer's financial records. What were the taxpayer's overhead, profit, labor and capital costs? Moreover, the tax collector would be forced to answer difficult, subjective questions which the taxpayer might easily choose to dispute and litigate. For example, what portion of the taxpayer's profit or overhead is attributable to its materials costs, and what portion to its other costs?
Even in the best case, Valencia's approach is impracticably burdensome. The practicality, efficiency and convenience of administrative enforcement is taken into consideration by courts when interpreting tax statutes. 3A Norman J. Singer, Sutherland Stat. Const. § 66.06 at 33 (5th ed.1992).
Valencia nevertheless argues that transportation and handling of the coal are not taxable because they involve the sale of a service, not of personal property. "Services rendered in addition to selling tangible personal property at retail" are not subject to the sales tax. A.R.S. § 42-1310.01(A)(2). On the other hand, the tax base for the sales tax derives from the gross proceeds of the sale of the retail good. A.R.S. § 42-1310.01(A). " 'Gross proceeds of sales' means the value proceeding or accruing from the sale of tangible personal property without any deduction on account of the cost of ... expense of any kind.... " A.R.S. § 42-1301(5) (Supp.1995) (emphasis added).
By statute, Valencia cannot avail itself of the exception for services. Simply put, Valencia cannot reduce the amount of gross sale proceeds by the amount attributable to services because it failed to keep separate sales records. A.R.S. section 42-1310.01(H) provides:
If a person is engaged in an occupation or business to which subsection [the services exception] applies, the person's books shall be kept so as to show separately the gross proceeds of sales of tangible property and the gross income from sales of services, and if not so kept the tax shall be imposed on the total of the person's gross proceeds of sales of tangible personal property and gross income from services.
(Emphasis added).
The exception does not apply because Valencia did not keep separate sales records. Its contract and its invoices all priced "as-delivered" coal: i.e., coal and the related transportation and other services were sold together for a single amount per ton. Although Valencia points to its records of coal purchases as separate records, those are not the records of the relevant transactions, which are the sales. Valencia's argument is no more than that a hypothetical separate retail price for coal can be constructed from Valencia's purchase records. We think it plain that this is not what the Legislature intended when it required taxpayers to keep separate books of sales of goods and services. 5
Valencia relies on two prior cases, but we do not believe that these decisions apply here. In the first case, the supreme court held that the taxpayer's services as a purchasing agent...
To continue reading
Request your trial
-
Valencia Energy Co. v. Arizona Dept. of Revenue
...issues, holding that Valencia's coal handling and transportation activities were subject to the tax. Valencia Energy Co. v. Arizona Dep't of Revenue, 189 Ariz. 79, 938 P.2d 474 (App.1996). On the estoppel issue, the court held that Ariz. Const. art. IX, § 1, Crane Co. v. Arizona State Tax C......