CCI Europe, Inc. v. Arizona Department of Revenue
344 P.3d 352
Ariz. Ct. App.2015Background
- CCI Europe licensed software to Phoenix Newspapers, Inc. (PNI) that performs layout, formatting, typesetting, naming/flow control, and other functions used to produce the printed Arizona Republic. A 99-year license was granted in 1997 and maintenance/update agreements existed.
- The Arizona Department of Revenue audited CCI for June 2002–May 2006 and assessed transaction privilege tax of $82,511.44 (plus interest) on receipts from the software and related agreements.
- CCI claimed the receipts were deductible under A.R.S. § 42-5061(B)(1) as proceeds from sales of machinery or equipment “used directly in manufacturing.”
- The tax court granted CCI summary judgment, concluding the software and maintenance receipts were exempt because the software is machinery/equipment used directly in manufacturing printed newspapers.
- The Department appealed, arguing (1) newspaper publishing is not manufacturing, and (2) even if it is, the software is not used directly in manufacturing.
- The Court of Appeals affirmed, holding production of the printed paper is manufacturing and the software (and updates) are used directly in that manufacturing process.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is producing the printed newspaper "manufacturing" under § 42-5061(B)(1)? | Production of the printed Arizona Republic is manufacturing; presses and integrated operations transform raw materials into a new product. | Newspaper publishing is not manufacturing (argues different activity). | Held: Yes — printing the newspaper is manufacturing under ordinary meaning and administrative definitions. |
| Is CCI's software "machinery or equipment used directly in manufacturing"? | Software is essential to layout/formatting, controls page flow, integrates with presses, and is necessary to produce the finished paper. | Software is not used directly in manufacturing; it is separate, intangible, or post-production. | Held: Yes — software (and updates) are integral to and used directly in the manufacturing process and thus deductible. |
| Are maintenance fees/updates taxable? | Updates and releases are exempt as repair/replacement receipts for exempt machinery/equipment. | Department assessed tax because CCI did not segregate service receipts from software receipts. | Held: Updates/releases and maintenance receipts tied to exempt software are deductible; CCI entitled to exemption. |
Key Cases Cited
- Ariz. Dep’t of Revenue v. Capitol Castings, 207 Ariz. 445, 88 P.3d 159 (supreme court) (framework for evaluating whether items are "used directly" in manufacturing)
- Mountain States Tel. & Tel. Co. v. Arizona Dep’t of Revenue, 113 Ariz. 467, 556 P.2d 1129 (supreme court) (transaction privilege tax is an excise on privilege to do business)
- Ariz. Dep’t of Revenue v. Cent. Newspapers, 222 Ariz. 626, 218 P.3d 1083 (court of appeals) (statutory construction of tax statutes reviewed de novo)
- Wilderness World, Inc. v. Ariz. Dep’t of Revenue, 182 Ariz. 196, 895 P.2d 108 (court of appeals) (summary judgment reviewed de novo)
- Hearst Corp. v. State Dep’t of Assessment & Taxation, 308 A.2d 679 (Md. 1973) (discussing evolution of newspaper printing from hand presses to automated manufacturing)
- Concord Publishing House, Inc. v. Director of Revenue, 916 S.W.2d 186 (Missouri) (recognizing newspaper publication involves mechanical processing of words/pictures and qualifies as manufacturing)