Walgreen Ariz. Drug v. Ariz. Dept. of Rev.

• Decision Date: 23 September 2004
• Docket Number: No. 1 CA-TX 03-0009.,1 CA-TX 03-0009.
• Citation: 209 Ariz. 71,97 P.3d 896,209 Az. 71
• Parties: WALGREEN ARIZONA DRUG COMPANY, an Arizona corporation, Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona, Defendant-Appellee.
• Court: Arizona Court of Appeals

97 P.3d 896

209 Ariz. 71

209 Az. 71

WALGREEN ARIZONA DRUG COMPANY, an Arizona corporation, Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona, Defendant-Appellee.

No. -0009.

Court of Appeals of Arizona, Division 1, Department T.

September 23, 2004.

Snell & Wilmer, L.L.P. by Charles A. Pulaski, Jr., Barbara J. Dawson, Phoenix, Attorneys for Plaintiff-Appellant.

Terry Goddard, Attorney General by Elizabeth S. Hill, Assistant Attorney General, Phoenix, Attorneys for Defendant-Appellee.

OPINION

HALL, Judge.

¶ 1 Walgreen Arizona Drug Company (Taxpayer) appeals a summary judgment holding that a return of investment principal is not includable as part of its total sales for purposes of the Arizona corporate income tax. We affirm the tax court's decision.

BACKGROUND

¶ 2 Taxpayer operates retail drugstores as its primary business. As of 1995, Taxpayer's parent company, Walgreen Company (Walgreen Co.), operated 2085 stores nationwide, with 120 in Arizona. The stores sell prescription drugs and other merchandise. Taxpayer and Walgreen Co. filed their Arizona income taxes on a combined basis.

¶ 3 Walgreen Co., headquartered in Deerfield, Illinois, earns interest on short-term investments,¹ and typically reinvests the proceeds in similar interest-bearing instruments. This is a treasury function designed to maintain cash needed to operate the business on a daily basis.

¶ 4 Taxpayer amended its Arizona corporate income tax returns for fiscal years ending August 31, 1988 through August 31, 1995. It included the return of principal in the denominator of the corporate income tax formula, which would lead to a smaller amount of taxable income attributed to Arizona. Accordingly, Taxpayer requested refunds totaling more than 1.3 million dollars, excluding interest.

¶ 5 The Arizona Department of Revenue (ADOR) denied the refund requests. Taxpayer filed a complaint, and ADOR answered. Following briefing and oral argument on cross-motions for summary judgment, the tax court ruled in favor of ADOR. This appeal followed, and we have jurisdiction pursuant to Arizona Revised Statutes (A.R.S.) section 12-2101(B) (2003).

DISCUSSION

¶ 6 We review the tax court's summary judgment de novo. Citizens Telecommunications Co. of White Mountains v. Ariz. Dep't of Revenue, 206 Ariz. 33, 38, ¶ 20, 75 P.3d 123, 128 (App.2003). When, as here, the material facts are undisputed, we must determine whether the tax court correctly applied the substantive law to those facts. S. Pac. Transp. Co. v. Ariz. Dep't of Revenue, 202 Ariz. 326, 329-30, ¶ 7, 44 P.3d 1006, 1009-10 (App.2002). Questions of statutory interpretation are issues of law subject to de novo review. Anderson v. Indus. Comm'n of Ariz., 205 Ariz. 411, 412, ¶ 2, 72 P.3d 341, 342 (App.2003).

¶ 7 In 1983, the Arizona Legislature enacted a modified version of the Uniform Division of Income for Tax Purposes Act (UDITPA). See A.R.S. §§ 13219; 43-1131 to -1150 (1998).² Pursuant to the Act, Arizona applies an "apportionment formula" to determine its respective share of business income attributable to each multi-state business that has income taxable both within and without Arizona.

¶ 8 Arizona's taxable share of a company's income is obtained by multiplying the company's "business income" (as defined by A.R.S. § 43-1131(1)) by a fraction, "the numerator of which is the property factor plus the payroll factor plus two times the sales factor, and the denominator of which is four." A.R.S. § 43-1139 (Supp.2003). In turn, each of these three factors is itself defined as a fraction, with a numerator consisting of the value or amount of the factor attributable only to Arizona and a denominator composed of the value or amount of the factor everywhere (with certain exceptions not applicable here). See A.R.S. §§ 13219; 43-1140 (property factor), -1143 (payroll factor), and -1145 (sales factor). For example, the numerator of the sales factor "is the total sales of the taxpayer in this state during the tax period" and the denominator "is the total sales of the taxpayer everywhere during the tax period...." § 43-1145. The share of a company's business income that is apportionable to Arizona is more readily perceived when expressed formulaically as shown:

Arizona Property Value Arizona Payroll (Arizona Sales) + + 2 Total Property Value Total Payroll (Total Sales) 4

¶ 9 Before 1991, the Arizona apportionment formula weighted these factors equally and divided their sum by three. In 1991, the Legislature modified the apportionment formula to count the sales factor twice and divide the sum by four. 1991 Ariz. Sess. Laws, ch. 189, § 1.

¶ 10 The current version of § 43-1139 thus amplifies the effect any changes in the sales factor, relative to changes in the other factors, have on the amount of Arizona's share in a taxpayer's income. For example, under the revised formula, taxpayers who have a declining sales factor — due to either a decrease in their Arizona sales or an increase in their sales everywhere — show twice the decline in apportioned income they would show relative to a similar decline in one of the other factors. By including the return of principal in its amended returns, Taxpayer increased the sales factor denominator to such an extent that the percentage of business income attributable to Arizona under the formula decreased by 10.7% or $14,221,241.00.

¶ 11 Accordingly, this appeal turns on whether "total sales" in the sales factor denominator includes the return of principal from short-term investments.³ "Sales" consists of "all gross receipts of the taxpayer not allocated under this article"⁴ except as "the context otherwise requires." A.R.S. § 43-1131(5). Thus, we must determine whether the return of principal to Taxpayer is a "sale" as defined by § 43-1131(5).

¶ 12 The cardinal rule of statutory construction "is to ascertain the meaning of the statute and intent of the legislature." City of Phoenix v. Superior Court, 139 Ariz. 175, 178, 677 P.2d 1283, 1286 (1984). In construing statutes, we give the words used their ordinary meaning unless the legislature has clearly intended to give a term special meaning. State v. Cotton, 197 Ariz. 584, 586, ¶ 6, 5 P.3d 918, 920 (App.2000). In addition, we interpret statutes to give them a fair and sensible meaning and to avoid absurd results. Ariz. Dep't of Revenue v. Raby, 204 Ariz. 509, 511, ¶ 15, 65 P.3d 458, 460 (App.2003); Pfeil v. Smith, 183 Ariz. 63, 65, 900 P.2d 12, 14 (App.1995). We also recognize that an agency's interpretation of a statute that it implements is entitled to great weight. Ariz. Water Co. v. Ariz. Dep't of Water Resources, 208 Ariz. 147, 154-55, ¶ 30, 91 P.3d 990, 997-98 (2004).

¶ 13 Relying on general definitional distinctions between "gross" and "net,"⁵ and urging what it characterizes as the "plain meaning" principle of statutory interpretation, Taxpayer argues that the reference to "total sales" in the sales factor (A.R.S. § 43-1145) must be construed to mean "gross receipts" under A.R.S. § 43-1131(5). In other words, according to Taxpayer, all money coming in everywhere, including the return of investment principal, constitutes gross receipts that must be included in the denominator of the sales factor. Taxpayer alternatively asserts that, even assuming that the meaning of "total sales" is unclear, the statutory scheme should be construed to include the return of principal given the generally applicable rule that ambiguities in tax statutes are resolved in favor of the taxpayer. See People's Choice TV Corp., Inc. v. City of Tucson, 202 Ariz. 401, 403, ¶ 7, 46 P.3d 412, 414 (App.2002).

¶ 14 ADOR points out, however, that Taxpayer's arguments would require us to ignore the caveat "unless the context otherwise requires" preceding the definition of "sales" in § 43-1131. Cf. State v. Heylmun, 147 Ariz. 97, 99, 708 P.2d 778, 780 (App.1985)

(the same prefatory language in A.R.S. § 13-105 means that its definitions "are not to be applied mechanistically and rigidly"). Instead, ADOR asserts that under the circumstances of this case, only the net gain from short-term investments should be treated as a "sale." Otherwise, by including the return of principal, the denominator of the sales factor is distorted by (at a minimum) double-counting the same receipts: first, as revenue generated from retail sales, and, second, as additional revenue received from the corporation's investment of its excess cash.

¶ 15 The tax court, agreeing with ADOR, reasoned that the return of investment principal does not qualify as gross receipts for purposes of the sales factor:

[D]aily revenue from Walgreen's sales would be considered gross receipts when received. Any excess revenue after payment of debt or other disbursements remains a part of those gross receipts and should be counted as such. However, once that excess revenue is invested in securities or other interest bearing mediums, it loses its characterization as gross receipts and may not be counted a second time as gross receipts simply because the money was withdrawn from an investment in a marketable security or interest bearing account. This is akin to someone taking the $100 left from their [sic] weekly paycheck[,] which is considered income when it was received, depositing it into an interest bearing account[,] then withdrawing the $100 one month later and claiming it as income a second time. That $100 is not income.

¶ 16 Taxpayer argues that the tax court's comparison of the investments to money in a bank account demonstrates its failure to understand the nature of the investments. In response to the tax court's bank analogy, Taxpayer contends that a more appropriate analogy would be to a hypothetical business that uses gross receipts from retail sales of toothbrushes to reinvest in inventory, such as toothpaste, which is then sold to create additional receipts. According to Taxpayer, the additional gross receipts in such a scenario should...