Carter Oil v. Ador
460 P.3d 808
Ariz. Ct. App.2020Background
- Carter Oil sold dyed diesel to Hanson Aggregates to power dozers, loaders, haul trucks, and rock crushers used in Hanson’s gravel mining and processing operations.
- Carter Oil paid transaction privilege tax on those sales and sought a refund (~$11,769) claiming the sales were exempt as "machinery or equipment" under A.R.S. § 42-5061(B)(1)–(2).
- The Department of Revenue denied the refund; the tax court granted summary judgment for Carter Oil, concluding the dyed diesel qualified as exempt machinery/equipment.
- On appeal, the Court of Appeals applied the Supreme Court’s Capitol Castings framework (ultimate-function and integrated tests with six factors) to determine whether dyed diesel is "machinery or equipment used directly" in mining/processing.
- The court concluded dyed diesel does not touch or manipulate raw materials, does not function like traditional equipment, and the legislature has separate fuel tax provisions—so the diesel is not exempt.
- Holding: reversed the tax court and remanded with instruction to enter judgment for the Department; sale of dyed diesel is subject to the transaction privilege tax.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether dyed diesel sold to a miner qualifies as "machinery or equipment" exempt from the transaction privilege tax under A.R.S. § 42-5061(B)(1)–(2) | Dyed diesel is functionally part of the machinery (powers and lubricates equipment) and is therefore "machinery or equipment" used directly in mining/processing — exempt from tax. | Fuel is not machinery/equipment; it does not touch, manipulate, or add value to raw materials; legislature provided distinct fuel tax/exemptions and did not exempt dyed diesel from the transaction privilege tax. | Dyed diesel is not "machinery or equipment" under the Capitol Castings tests; sale is subject to the transaction privilege tax. |
Key Cases Cited
- State ex rel. Ariz. Dep't of Revenue v. Capitol Castings, 207 Ariz. 445 (Ariz. 2004) (adopts flexible "ultimate function" and integrated tests and six-factor framework for machinery/equipment exemptions)
- Duval Sierrita Corp. v. Ariz. Dep't of Revenue, 116 Ariz. 200 (App. 1977) (origin of ultimate-function and integrated approach to exemption analysis)
- Cyprus Sierrita Corp. v. Ariz. Dep't of Revenue, 177 Ariz. 301 (Ariz. Tax Ct. 1994) (chemicals that directly act on ore treated as machinery/equipment)
- Empire Sw. LLC v. Ariz. Dep't of Revenue, 244 Ariz. 542 (App. 2018) (fuel truck held exempt as equipment used directly in extraction as part of an integrated system)
- SolarCity Corp. v. Ariz. Dep't of Revenue, 243 Ariz. 477 (Ariz. 2018) (de novo review of tax-court statutory interpretation)
- Tucson Transit Auth., Inc. v. Nelson, 107 Ariz. 246 (Ariz. 1971) (tax exemptions construed narrowly)