Valencia Energy Co. v. Arizona Dept. of Revenue

• Decision Date: 19 May 1998
• Docket Number: No. CV-96-0666-PR,CV-96-0666-PR
• Citation: 270 Ariz. Adv. Rep. 3,191 Ariz. 565,959 P.2d 1256
• Parties: , 270 Ariz. Adv. Rep. 3 VALENCIA ENERGY COMPANY, Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant-Appellee.
• Court: Arizona Supreme Court

Page 1256

959 P.2d 1256

191 Ariz. 565, 270 Ariz. Adv. Rep. 3

VALENCIA ENERGY COMPANY, Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant-Appellee.

No. CV-96-0666-PR.

Supreme Court of Arizona,

En Banc.

May 19, 1998.

Ulrich Kessler & Anger P.C. by Paul G. Ulrich, David L. Abney, of counsel--and--Hartley E. Newkirk, Tucson--and--Walker Ellsworth P.L.C., Phoenix by Francis Migray--and--Newmark Irvine, P.A., Phoenix by Stephen C. Newmark, for Plaintiff-Appellant, Valencia Energy Company.

Grant Woods, Attorney General by James M. Susa, Patrick Irvine, for Defendant-Appellee, Arizona Department of Revenue.

Quarles & Brady by Michael G. Galloway, Jeffrey A. Sandquist, Phoenix, for Amicus Curiae General Motors Corporation.

OPINION

FELDMAN, Justice.

¶1 The Arizona Department of Revenue ("Department") audited Valencia Energy Company ("Valencia") and assessed a deficiency. The court of appeals affirmed the grant of summary judgment against Valencia. We granted review to determine whether the Department can be estopped from collecting back taxes owed because a Department agent advised Valencia in writing that the activity now levied on was not subject to tax. We have jurisdiction pursuant to Ariz. Const. art. VI, § 5(3) and A.R.S. § 12-102.

FACTS AND PROCEDURAL HISTORY

¶2 We view the facts in the light most favorable to the party against whom summary judgment was granted. Martinez v. Woodmar IV Condominiums Homeowners Ass'n, Inc., 189 Ariz. 206, 211, 941 P.2d 218, 223 (1997).

¶3 Tucson Electric Power Company ("TEP") built and owns a coal-fired electric plant in Springerville, Arizona, operated by Alamito Company ("Alamito"). ¹ On October 4, 1984, Valencia, a wholly owned subsidiary of TEP, contracted to supply Alamito's coal requirements for the Springerville plant. The agreement set the price per ton of coal, payable monthly and subject to renegotiation as needed. ² Valencia began performance, buying the coal in New Mexico, transporting it to Springerville, and then preparing it for burning by Alamito.

¶4 Prior to beginning performance, Valencia questioned "the status of the business for Arizona tax purposes." Valencia's representatives met with Department officials on December 17, 1985, to ascertain what taxes would be due on Valencia's operations. Valencia thereafter corresponded with Mr. Deemer, a Department tax analyst. As a tax analyst, Deemer regularly rendered written advice to taxpayers after such advice was first cleared with his supervisor. Deemer issued three letters to Valencia. The third letter, dated January 31, 1986, stated that Valencia's transportation charges were not subject to tax. In reliance on the Department's advice, Valencia did not charge or collect transaction privilege taxes from Alamito on the transportation receipts at issue.

¶5 The Department conducted a transaction privilege tax audit of Valencia for the period November 1985 through March 1990. Although there were no pertinent, substantive changes in the Arizona statutes or Department rules during the audit period, the Department concluded that the transportation charges were subject to the transaction privilege tax. In May 1990, the Department issued a Notice of Deficiency Assessment to Valencia claiming underpayment of almost $5 million, plus interest.

¶6 After an adverse administrative decision to its challenge to the assessment, Valencia appealed to the superior court. In a published opinion, the judge presiding in the tax division of the superior court granted summary judgment in favor of the Department and 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 assessing back taxes because a Department agent advised that revenue from coal transportation and handling was not taxable. The court of appeals found for the Department on all 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 Comm'n, 63 Ariz. 426, 163 P.2d 656 (1945), and Duhame v. State Tax Comm'n, 65 Ariz. 268, 179 P.2d 252 (1947), prevent the Department from being equitably estopped by its incorrect representations that no tax was applicable. Id. at 84, 938 P.2d at 479 (citing PCS, Inc. v. Arizona Dep't of Revenue, 186 Ariz. 539, 925 P.2d 680 (App.1995)). We granted Valencia's petition for review on the estoppel issue only.

DISCUSSION

A. Equitable estoppel against the Department

¶8 This case requires us to decide whether and to what extent a taxpayer may assert equitable estoppel against the Department. The Department first argues that article IX, section 1 of the Arizona Constitution, which provides that the "power of taxation shall never be surrendered, suspended, or contracted away," absolutely bars estopping the government from collecting taxes owed. Valencia and amicus argue that article IX, section 1 is inapplicable here because its purpose is only to restrict the Legislature from contracting away its power to tax.

1. Article IX, section 1 and Crane Co. v. Arizona State Tax Commission

¶9 Crane was the genesis of our construction of article IX, section 1 as it relates to estopping the state taxing authority. The tax commission had adopted a rule excepting from taxation certain items sold to contractors. The commission later repealed the rule, audited the taxpayer, and assessed back taxes owed on completed transactions. We recognized that the taxpayer could no longer pass the cost of the tax to its buyers but nonetheless upheld the tax and rejected the taxpayer's claim of estoppel:

The general rule is that the state will not be estopped in the collection of its revenues by an unauthorized act of its officers. 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. The Constitution, Art. 9, Sec. 1, provides that the power of taxation (which must of necessity include collection) "shall never be surrendered, suspended, or contracted away." To hold that the commission by regulation may waive taxes which the law required to be imposed would be violative of this provision.

The regulation of the tax commission, upon which appellant bases its plea of estoppel, was wholly unauthorized. The tax commission cannot by any rule or regulation exempt a taxpayer from the payment of a tax unless such authority has been specifically granted to it by the legislature. Here no such authority exists.

63 Ariz. at 441, 163 P.2d at 662 (emphasis added) (citations omitted).

¶10 Two years later, in Duhame, we disapproved Crane 's substantive holding that the sales to contractors were subject to the sales tax. With little discussion and relying on Crane, we again declined to apply equitable estoppel against the state taxing authorities.

It is true that during the time plaintiff was engaged in the contracting here in question he might have passed this tax on to the government had he not been misled, by an improper interpretation of the Act by the Commission, into believing no tax was due. Still, it is the settled law of the land and of this jurisdiction that as taxation is a governmental function, there can be no estoppel against a government or governmental agency with reference to the enforcement of taxes. Were this not the rule the taxing officials could waive most of the state's revenue. Therefore there is no merit to plaintiff's claim of estoppel in this case.

65 Ariz. at 281, 179 P.2d at 260. Our court of appeals has rigidly adhered to the letter of Crane and Duhame. See, e.g., General Motors Corp. v. Arizona Dep't of Revenue, 189 Ariz. 86, 938 P.2d 481 (App.1996). ³

¶11 In a different context, however, we held that the corporation commission could be estopped to deny the validity of a certificate of convenience and necessity improperly issued fifty years earlier. In reaching that conclusion, we disapproved of the "no estoppel against the sovereign" rule, stating:

Whatever the basis for these exceptions to the general rule [of no estoppel], it would appear that where the application of estoppel will not affect the exercise by the state of its governmental powers and sovereignty, or bind it by unauthorized acts of its officers and employees, estoppel will, when justice dictates, be applied to the state.

Freightways, Inc. v. Arizona Corp. Comm'n, 129 Ariz. 245, 248, 630 P.2d 541, 544 (1981).

¶12 Following Freightways, the court of appeals distinguished Crane and Duhame to find the Department estopped because of prior incorrect representations about procedural requisites for claiming income tax deductions. If not for the procedural errors the taxpayer committed by following the Department's instructions, it was clearly entitled to the deductions as a matter of substantive law and legislative intent. Tucson Electric Power Co. v. Arizona Dep't of Revenue, 174 Ariz. 507, 851 P.2d 132 (App.1992). The court reasoned:

The taxpayer in this case, however, presents a very different situation. Here, the taxpayer is not relying upon estoppel to avoid the application of a taxing statute to the activities contemplated by the statute.... It is undisputed in the record presented to this court that, from a factual standpoint, the taxpayer clearly was entitled to claim the benefits of that accelerated amortization.

In advancing its estoppel argument, the taxpayer seeks to enforce, rather than avoid, the basic intent of the statute.

Id. at 515, 851 P.2d at 140 (footnotes omitted). Moreover, the court clarified the scope of the Crane/...