SOUTH POINT ENERGY CENTER LLC v. ARIZONA DEPARTMENT OF REVENUE, ET AL.
No. CV-21-0130-PR
Supreme Court of Arizona
April 26, 2022
251 Ariz. 263
Appeal from the Arizona Tax Court, The Honorable Christopher T. Whitten, Judge, Nos. TX2013-000522, TX2014-000451, TX2015-000850, TX2016-001228, TX2017-001744, TX2018-000019, TX2019-000086 (Consolidated). Opinion of the Court of Appeals, Division One, 251 Ariz. 263 (App. 2021). VACATED IN PART AND REMANDED
COUNSEL:
Bennett Evan Cooper (argued), Vail C. Cloar, Dickinson Wright PLLC, Phoenix; Pat Derdenger, Karen Lowell, Lewis Roca Rothgerber Christie LLP, Phoenix, Attorneys for South Point Energy Center LLC
Cameron C. Artigue (argued), Camila Alarcon, Christopher L. Hering, Gammage & Burnham, P.L.C., Phoenix, Attorneys for Arizona Department of Revenue, et al.
Charles W. Galbraith, Jenner and Block LLP, Washington, D.C.; Verrin T. Kewenvoyouma, Christopher Love, Kewenvoyouma Law, P.L.C., Tempe, Attorneys for Amici Curiae Fort Mojave Indian Tribe, the Navajo Nation, the Gila River Indian Community, Gila River Indian Community Utility Authority, the Inter-Tribal Association of Arizona, and the National Congress of American Indians
James M. Susa, DeConcini McDonald Yetwin & Lacy, P.C., Tucson, Attorneys for Amicus Curiae County Supervisors Association of Arizona and the Arizona Association of Counties
VICE CHIEF JUSTICE TIMMER authored the opinion of the Court, in which CHIEF JUSTICE BRUTINEL and JUSTICES BOLICK, LOPEZ, BEENE, MONTGOMERY, and KING joined.
¶1 The issue here is whether the Indian Reorganization Act of 1934 (the “Act“) expressly preempts Mohave County‘s ad valorem property tax on a power plant owned by non-Indian lessees of land purportedly acquired by the federal government under the Act and held in trust for the benefit of an Indian tribe. We hold the Act does not expressly preempt this tax.
BACKGROUND
¶2 In 1999, Calpine Construction Finance Co. (“Calpine“), a non-Indian-owned entity, leased 320 acres of undeveloped land on a long-term basis from the Fort Mojave Indian Tribe (the “Tribe“) to construct and operate an electric power generating plant (the “Plant“) on reservation lands. The Plant, which began operating in 2001, is a “merchant plant” that sells electrical energy to public and private utility companies for resale and redistribution to end-users. It does not supply electrical energy to the Tribe or to any person or entity located on the reservation. The Tribe did not finance the Plant‘s construction and does not contribute any operating funds.
¶4 Calpine paid the taxes and unsuccessfully sued for a refund, arguing the Tribe, as lessor, owned all improvements to the leased property, thereby exempting the Plant from state taxation pursuant to federal law. See Calpine Constr. Fin. Co. v. Ariz. Dep‘t of Revenue, 221 Ariz. 244, 249 ¶ 22 (App. 2009); see also Cass County v. Leech Lake Band of Chippewa Indians, 524 U.S. 103, 110 (1998) (“State and local governments may not tax Indian reservation land ‘absent cession of jurisdiction or other federal statutes permitting it.‘” (quoting County of Yakima v. Confederated Tribes & Bands of Yakima Nation, 502 U.S. 251, 258 (1992))). In the ensuing appeal, the court of appeals acknowledged the general rule that a lessor owns all real property improvements made by a lessee but concluded the parties’ lease varied that rule by providing that Calpine owns all improvements. Calpine Constr., 221 Ariz. at 248 ¶¶ 16-17. Consequently, the court affirmed the tax court‘s judgment that Calpine was liable for property taxes based on the value of the Plant and related personal property. See id. at 246 ¶ 1.
¶5 After a series of transactions involving Calpine and several of its related entities, the Tribe‘s land and the Plant were sublet to South Point Energy Center LLC (“South Point“), another Calpine-related entity, with the Tribe‘s consent and approval by the Bureau of Indian Affairs (the “BIA“). In 2012, the Tribe and Calpine‘s successor-lessees, which we include in our references to “South Point” for convenience, executed an amended lease, which remained in place during this lawsuit. Among other things, the amended lease provides that no partnership exists between the Tribe and South Point. It further reaffirms that the Plant and “all [i]mprovements and associated materials, supplies, and equipment” are “owned and controlled” by South Point, and that at the expiration of the lease, South Point must remove all above-ground real property improvements and personal property, excepting roads and foundations.
¶6 The amended lease contemplates that ad valorem property taxes may be assessed on the Plant. The lease requires South Point to timely pay all taxes levied by any governmental entity to prevent imposition of any liens and to hold the Tribe harmless against any liens that are imposed. The BIA approved the amended lease.
¶7 South Point initiated these consolidated lawsuits seeking a refund of payments for property taxes imposed from 2010 to 2018, to the extent they were based on valuations of the Plant. See
¶8 The tax court rejected both of South Point‘s arguments and granted summary judgment for Mohave County and ADOR (collectively, the “County“). The court of appeals reversed, reasoning that § 5 of the Act expressly and categorically exempts permanent improvements on the Tribe‘s land from state taxation regardless of ownership. S. Point Energy Ctr. LLC v. Ariz. Dep‘t of Revenue, 251 Ariz. 263, 269 ¶ 30 (App. 2021). It remanded for the tax court to determine which, if any, of the assets making up the Plant constitute the tax-exempt permanent improvements. Id. The court did not itself apply the balancing test under Bracker but instead instructed the tax court to do so in considering whether property taxes on the Plant‘s impermanent assets were taxable. Id.
¶9 We granted review to decide whether § 5 of the Act expressly preempts taxing permanent improvements constructed on tribal lands acquired under that section when those improvements are owned by non-Indians, an issue of statewide importance.
DISCUSSION
I.
¶10 We review the tax court‘s entry of summary judgment de novo, viewing the facts in the light most favorable to South Point as the nonmoving party. Dinsmoor v. City of Phoenix, 251 Ariz. 370, 373 ¶ 13 (2021). We will affirm if there is no genuine dispute of material fact and the State is entitled to judgment as a matter of law. Id.;
II.
A.
¶11 The Supremacy Clause of the United States Constitution makes valid federal laws predominate over conflicting state laws. See
¶12 The only issue before us is whether § 5 of the Act expressly preempts application of Arizona‘s ad valorem tax laws against the Plant. See Confederated Tribes of Chehalis Rsrv. v. Thurston Cnty. Bd. of Equalization, 724 F.3d 1153, 1159 (9th Cir. 2013) (stating that when § 5 of the Act applies to preempt taxation, there is no need to consider implied preemption under Bracker).
B.
¶13 Section 5 of the Act provides in relevant part:
The Secretary of the Interior is authorized, in his discretion, to acquire, through purchase, relinquishment, gift, exchange, or assignment, any interest in lands, water rights, or surface rights to lands, within or without existing reservations, including trust or otherwise restricted allotments, whether the allottee be living or deceased, for the purpose of providing land for Indians.
. . . .
Title to any lands or rights acquired pursuant to this Act or the Act of July 28, 1955
(69 Stat. 392), as amended ( 25 U.S.C. 608 et seq. ) shall be taken in the name of the United States in trust for the Indian tribe or individual Indian for which the land is acquired, and such lands or rights shall be exempt from State and local taxation.
¶14 Our primary goal in interpreting § 5 is to determine and give effect to Congress‘s intent. See Steven H. v. Ariz. Dep‘t of Econ. Sec., 218 Ariz. 566, 570 ¶ 14 (2008). We read words in context and effectuate the plain meaning of § 5 unless doing so would be absurd. See Welch v. Cochise Cnty. Bd. of Supervisors, 251 Ariz. 519, 523 ¶ 11 (2021). If the language is ambiguous, we consider secondary interpretive principles, such as the Act‘s subject matter, history, and purpose, and the consequences of differing interpretations. Id.
¶15 We start with § 5‘s plain language. The provision exempts “such lands or rights” from state and local taxation.
¶16 The Act itself does not delineate the rights included in the federal government‘s ownership of land under § 5. According to the BIA, those rights include “any interests, benefits, and rights inherent in the ownership of the real property.”
¶17 It is settled that South Point, not the federal government, owns the Plant. Calpine Constr., 221 Ariz. at 248 ¶ 17. Based on this fact alone, § 5 seemingly does not exempt the Plant from the County‘s property taxes because the land owned by the United States in trust for the Tribe does not include the Plant. See
¶18 The Court in Rickert addressed whether a South Dakota county could assess and impose property taxes on permanent improvements and personal property owned by Indians and used in cultivating lands allotted them under the now-defunct General Allotment (Dawes) Act of 1887, ch. 119, 24 Stat. 388 (codified as amended in scattered sections of 25 U.S.C.). 188 U.S. at 432-33. That act authorized the federal government to allot agricultural and grazing lands on Indian reservations to individual Indians. General Allotment Act, § 1. Upon allotment, the land was owned by the government in trust for the sole use and benefit of allottee Indians for twenty-five years, at which time the government would convey fee simple title to them and discharge the trust.
¶19 The Rickert Court first concluded that the South Dakota county lacked authority “to assess and tax the lands in question until at least the fee was conveyed to the Indians.” 188 U.S. at 437. It characterized the allotted trust lands as “an instrumentality employed by the United States” to benefit Indians and reasoned that permitting taxation would defeat the government‘s statutory obligation to convey the land in fee to allottees free of any encumbrances, including tax liens. Id. at 437-38.
¶20 The Court applied similar reasoning in holding the county could not assess and tax the Indians’ permanent improvements or personal property (cattle, horses, and the like), the latter having been purchased with federal funds to fulfill the government‘s goal of aiding the Indians in successfully cultivating the allotted lands. See id. at 441-45. The Court stated that allotting lands to individual Indians evidenced Congress‘s expectation that those lands “would be improved and cultivated by the allottee,” and concluded “that object would be defeated if the improvements [and personal property] could be assessed and sold for taxes.” Id. at 442. Responding to the county‘s suggestion that the government‘s only interest was conveying the allotted land free from encumbrance after twenty-five years and not the improvements or personalty, the Court explained that the government owed a duty of “care and protection” to the Indians that transcended its contractual obligation. Id. at 442-43. “The government would not adequately discharge its duty to these people if it placed its engagements with them upon the basis merely of contract, and failed to exercise any power it possessed to protect them in the possession of such improvements and personal property as were necessary to the enjoyment of the land held in trust for them.” Id. at 443.
¶21 After Rickert, and by the 1920s, allotment proved disastrous for Indian tribes and individual Indians. See Frickey, supra, at 15 (describing the loss of “huge amounts of Indian land . . . through sales and tax foreclosures” after the Indians became fee owners of the allotted lands); L. Scott Gould, The Consent Paradigm: Tribal Sovereignty at the Millennium, 96 Colum. L. Rev. 809, 829 (1996) (“Although the [General Allotment
¶22 This brings us to Mescalero. The Mescalero Apache Tribe owned and operated an off-reservation ski resort in New Mexico, which the tribe developed under the Act. Mescalero, 411 U.S. at 146. Specifically, the United States Forest Service leased land to the tribe, and the federal government loaned the tribe money to build and equip the resort.1 See
¶23 The Court reached a contrary conclusion regarding the use tax, which taxed the tribe‘s use of the ski lifts and was assessed based on the out-of-state purchase price for the materials used to construct the lifts. See id. at 147, 158. The Court initially noted the ski lifts had been permanently attached to the land and, citing Rickert, concluded they “would certainly be immune from the State‘s ad valorem property tax.” Id. at 158. It found that the same immunity extended to the use tax, reasoning that use of land “is among the ‘bundle of privileges that make up property or ownership’ of property and, in this sense, at least, a tax upon ‘use’ is a tax upon the property itself.” Id. (quoting Henneford v. Silas Mason Co., 300 U.S. 577, 582 (1937)). And because “use of permanent improvements upon land is so intimately connected with use of the land itself,” the Court concluded that § 5‘s exemption applied to the use tax. Id.
¶24 South Point argues Mescalero categorically bars the County‘s assessment of property taxes on the Plant under § 5 regardless of South Point‘s ownership of the facility. It asserts that, as with use of the ski lifts in Mescalero, the Plant is included within the “bundle of privileges” comprising the Tribe‘s beneficial ownership of the land underlying the Plant, and taxing the Plant necessarily, and impermissibly, taxes that “bundle.” The County counters Mescalero had “nothing to do with the taxation of non-Indian property,” and we should therefore apply the plain language of § 5 to find it does not exempt the Plant from the County‘s tax.
¶26 Second, Rickert, which the Mescalero Court relied on for its use-tax analysis, turned on the property owners’ status as Indians. Specifically, Rickert prohibited imposition of property taxes on Indian-owned permanent improvements and personal property on allotted lands to avoid taxing “an instrumentality” employed by the federal government to benefit and protect allottee Indians in improving and cultivating trust lands. 188 U.S. at 437, 442-44; cf. M‘Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 436-37 (1819) (disallowing a state-levied tax on the operations of a national bank that, in violation of the Supremacy Clause, interfered with the federal government‘s execution of powers). Taxing permanent improvements owned by non-Indians would not affect those objectives. Thus, it does not necessarily follow that Rickert, as applied in Mescalero to interpret § 5, exempts non-Indian-owned property from state taxation.
¶27 Third, before Mescalero, the Court had refused to extend Rickert‘s “federal instrumentality” analysis to exempt state property taxes and state excise taxes for non-Indian lessees of Indian lands if those taxes were imposed on similarly situated persons. See Okla. Tax Comm‘n v. Tex. Co., 336 U.S. 342, 343, 366-67 (1949) (holding that a non-Indian lessee of mineral rights on lands allotted under the General Allotment Act was not immunized by the Supremacy Clause from state taxes levied against both the lessee‘s property used in producing petroleum and on the oil and gas produced in the tax year); Taber v. Indian Territory Illuminating Oil Co., 300 U.S. 1, 3-5 (1937) (upholding a state‘s non-discriminatory ad valorem property taxes on dwelling, tool house, garage, and equipment used by non-Indian lessee of restricted Indian lands to produce oil and gas). The Court in Oklahoma Tax Commission v. Texas Co. concluded that “whether immunity shall be extended in situations like these is essentially legislative in character,” and because Congress had not created such immunity by affirmative action, the taxes there were validly levied. 336 U.S. at 365-66.
¶28 The Mescalero Court recognized that Oklahoma Tax Commission v. Texas Co. and other cases had “cut to the bone the proposition that restricted Indian lands and the proceeds from them were—as a matter of constitutional law—automatically exempt from state taxation.” 411 U.S. at 150. In determining § 5‘s applicability, the Court also relied on Oklahoma Tax Commission v. Texas Co. in stating that “[l]essees of otherwise exempt Indian lands are also subject to state taxation.” Id. at 157. In light of this pronouncement, if the Court had interpreted § 5 as also exempting permanent improvements owned by non-Indian lessees from state and local taxation, we would expect the Court to have said so rather than leaving confusion in its wake. It did not.
¶29 Fourth, applying Mescalero‘s holding outside the context of Indian-owned property would ignore § 5‘s requirement that the federal government own the “lands or rights” in trust for an Indian tribe or for individual Indians. See
¶31 The Ninth Circuit found Mescalero dispositive and held the county was barred from taxing the company‘s permanent improvements. See id. at 1157-58. In its concluding paragraph, the court stated, ”Mescalero sets forth the simple rule that [§ 5] preempts state and local taxes on permanent improvements built on non-reservation land owned by the United States and held in trust of an Indian tribe. This is true without regard to the ownership of the improvements.” Id. at 1159 (emphasis added). In isolation, this statement supports South Point‘s view of Mescalero. But the body of the opinion clarifies that § 5 preemption applies to permanent improvements regardless of the ownership vehicle a tribe uses to own the improvements. Specifically, the court rejected the county‘s argument that Mescalero was distinguishable because a private company rather than the Confederated Tribes of Chehalis Reservation itself owned the permanent improvements. See id. at 1157. The court characterized Mescalero as instructing that “the question of tax immunity cannot be made to turn on the particular form in which the [t]ribe chooses to conduct its business.” Id. at 1156 (quoting Mescalero, 411 U.S. at 157 n.13). The court then concluded that “the [t]ribe‘s decision to give ownership of the [permanent improvements] to its limited liability company for the duration of the lease” was irrelevant. Id. at 1157. Chehalis, therefore, does not support applying Mescalero to exempt the tax against the Plant. Alternately, if the Ninth Circuit indeed intended the broader reading of Mescalero urged by South Point, we reject that reading for the reasons previously explained. See supra ¶¶ 25-29.
¶32 We are also unpersuaded that other federal authorities cited by South Point establish that § 5 preempts the County‘s tax on the Plant. In Seminole Tribe of Florida v. Stranburg, 799 F.3d 1324, 1326 (11th Cir. 2015), one issue was whether § 5 exempted a state tax on rents paid by a non-Indian lessee of food-court operations inside two Indian-owned casinos. Under Florida law, the tax was imposed for the “privilege [of engaging] in the business of renting, leasing, letting, or granting a license for the use of any real property,” assessed against the lessee and collected by the landlord, which remitted the tax to the state. Id. (alteration in original) (quoting
¶33 Stranburg did not apply Mescalero‘s holding to taxing non-Indian-owned permanent improvements because the case did not involve taxing such improvements. Nevertheless, South Point seizes on Stranburg‘s description of Mescalero as meaning § 5 preempts state and local taxes on privileges attending Indians’ beneficial ownership of property, asserts the Tribe‘s ownership privileges include benefitting from South Point‘s “use of the land and any permanent improvements,” and argues the tax here infringes those privileges and are therefore preempted under § 5. This is a leap too far. The County‘s property tax is not imposed on South Point‘s rental payments, so the tax does not burden the Tribe‘s use of its land as was the case in Stranburg. And as previously explained, the Tribe has no ownership interest
¶34 South Point also asks us to give weight to a Department of Interior regulation concerning Indian land leases. See Wade v. Ariz. State Ret. Sys., 241 Ariz. 559, 563 (2017) (acknowledging that absent legislative direction, the court will give weight to an agency‘s construction of the system it administers). Title 25, § 162.017(a) of the Code of Federal Regulations states that “[s]ubject only to applicable Federal law, permanent improvements on the leased land, without regard to ownership of those improvements, are not subject to any fee, tax, assessment, levy, or other charge imposed by any State or political subdivision of a State.”
¶35 The regulation does not persuade us to interpret § 5 differently. First, the regulation itself cannot preempt the County‘s tax. See Kansas v. Garcia, 140 S. Ct. 791, 801 (2020) (stating preemption can arise only from “the Constitution itself or a valid statute enacted by Congress“). Second, Congress has provided direction on the exemption at issue by enacting § 5. We can ascertain that provision‘s meaning by applying interpretive principles, and we have no need to defer to the Department of Interior‘s interpretation. See Wade, 241 Ariz. at 563 (recognizing the judiciary has final authority in interpreting statutes). Third, the regulation is “[s]ubject . . . to applicable Federal law,” which includes § 5, the cases interpreting it, and Bracker.
¶36 In sum, § 5 preempts state and local taxes imposed on land and rights acquired by the Secretary of the Interior and titled in the name of the United States in trust for Indian tribes or individual Indians. Ownership rights in land generally include permanent improvements affixed to that land by a lessee but not if the parties agree that the lessee owns those improvements. When that lessee is a non-Indian, § 5 does not preempt a state or locality from taxing the improvements. Neither Mescalero nor other federal authorities provides otherwise.
¶37 Here, South Point indisputably owns the Plant, and the property taxes fall solely on it and not the Tribe‘s land. Consequently, § 5 does not exempt the Plant from taxation, and the court of appeals erred by holding otherwise. Considering our decision, we need not address the County‘s additional argument that exemption does not apply because the Secretary of the Interior did not acquire the land underlying the Plant pursuant to § 5. Because the court of appeals did not address whether the tax court correctly ruled that the Plant is also not impliedly exempt from the County‘s tax under Bracker, we remand to the court of appeals to decide that issue. See S. Point Energy Ctr., 251 Ariz. at 268 ¶ 24.
CONCLUSION
¶38 For the foregoing reasons, we vacate the court of appeals’ opinion ¶¶ 9-24 and the first sentence in ¶ 30. We remand to the court of appeals to decide the remaining issue left undecided by that court.
ANN A. SCOTT TIMMER
VICE CHIEF JUSTICE