Arizona Electric Power Cooperative, Inc. v. Arizona Department of Revenue
393 P.3d 146
Ariz. Ct. App.2017Background
- AEPCO, an Arizona nonprofit cooperative, operates the Apache Generating Station and buys coal and natural gas mostly from out-of-state suppliers.
- AEPCO paid Arizona use tax on those out-of-state fuel purchases but later sought refunds for taxes paid from 2003–2010; the Department denied the claims.
- After exhausting administrative protest, AEPCO appealed to the tax court; cross-motions for summary judgment were filed.
- The tax court granted summary judgment for the Arizona Department of Revenue; AEPCO appealed.
- The core factual stipulation: fuels are combusted in turbines/boilers to produce mechanical then electrical energy; the fuel mass is consumed and does not become part of the electricity.
Issues
| Issue | Plaintiff's Argument (AEPCO) | Defendant's Argument (Department) | Held |
|---|---|---|---|
| Whether out-of-state purchases of coal and natural gas are subject to Arizona use tax or are sales for resale exempt from use tax | Fuel is purchased as the chemical energy input that is converted into electricity and thus is an ingredient of a product sold (resale) | Fuel is stored/used/consumed in Arizona; combustion consumes the fuel so it is not held for sale and is subject to use tax | Purchases are subject to use tax; AEPCO failed to rebut presumption that out-of-state purchases are for storage/use/consumption in Arizona |
| Whether fuel purchases are exempt under the exemption for tangible property that directly enters into and becomes an ingredient or component part of a manufactured article for sale (A.R.S. § 42-5159(A)(4)) | Coal/natural gas (or part thereof) directly enter into and become an ingredient/component of electricity sold | Fuel is combusted and consumed in generation; it does not directly enter into or become part of electricity; similar fuel-consumed rules apply | Exemption does not apply; fuels are consumed in generation and do not become a component of electricity |
Key Cases Cited
- CCI Europe, Inc. v. Ariz. Dep’t of Revenue, 237 Ariz. 50 (App. 2015) (standard of review for tax court summary judgment)
- Qwest Dex, Inc. v. Ariz. Dep’t of Revenue, 210 Ariz. 223 (App. 2005) (use tax reaches out-of-state sales brought into Arizona)
- Motorola, Inc. v. Ariz. Dep’t of Revenue, 196 Ariz. 137 (App. 1999) (items purchased for resale are not subject to use tax)
- Farrand Coal Co. v. Halpin, 10 Ill.2d 507 (Ill. 1957) (consumption of coal by combustion is a complete use/consumption)
- Searles Valley Minerals Operations, Inc. v. State Bd. of Equalization, 160 Cal.App.4th 514 (Cal. Ct. App. 2008) (coal used to generate electricity is subject to use tax because mass is combusted and not incorporated into electricity)