HAROLD VANGILDER, et al., Plaintiffs/Appellees/Cross-Appellants, v. ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee/Cross-Appellee, PINAL COUNTY, et al., Defendants/Appellants/Cross-Appellees.
No. 1 CA-TX 19-0001
IN THE ARIZONA COURT OF APPEALS DIVISION ONE
FILED 1-16-2020
Appeal from the Arizona Tax Court No. TX2017-000663
The Honorable Christopher T. Whitten, Judge
REVERSED IN PART; AFFIRMED IN PART
COUNSEL
Goldwater Institute, Phoenix
By Timothy Sandefur, Matthew Robert Miller
Co-Counsel for Plaintiffs/Appellees/Cross-Appellants
Mooney Wright & Moore, P.L.L.C, Mesa
By Paul J. Mooney
Co-Counsel for Plaintiffs/Appellees/Cross-Appellants
Arizona Attorney General‘s Office, Phoenix
By Scot G. Teasdale, Jerry A. Fries, Lisa A. Neuville
Counsel for Defendant/Appellee/Cross-Appellee
Pinal County Attorney‘s Office, Florence
By Christopher C. Keller
Co-Counsel for Defendant/Appellant/Cross-Appellee Pinal County
Ballard Spahr L.L.P., Phoenix
By Joseph A. Kanefield, Brian Schulman, Chase Bales
Co-Counsel for Defendants/Appellants/Cross-Appellees Pinal County and Pinal Regional Transportation Authority
Fennemore Craig, P.C., Phoenix
By Patrick Irvine, Taylor Burgoon
Co-Counsel for Defendants/Appellants/Cross-Appellees Pinal County and Pinal Regional Transportation Authority
Sims Mackin, Ltd., Phoenix
By William J. Sims
Co-Counsel for
By Evan Bolick, Johathan Udell
Amicus Curiae for Pinal Partnership Inc.
Dickson Wright P.L.L.C., Phoenix
By Scott A. Holcomb, Vail C. Cloar
Amicus Curiae for Town of Queen Creek
Fitzgibbons Law Office, P.L.C., Casa Grande
By Denis M. Fitzgibbons
Amicus Curiae for City of Maricopa and City of Coolidge
Florence Town Attorney‘s Office, Florence
By Clifford L. Mattice
Amicus Curiae for Town of Florence
The Cavanagh Law Firm, P.A., Phoenix
By James G. Busby, Jr., Karen C. Stafford
Amicus Curiae for Arizona Tax Research Association and The Arizona Free Enterprise Club
OPINION
Presiding Judge Kenton D. Jones delivered the Opinion of the Court, in which Judge James B. Morse Jr. and Judge Diane M. Johnsen joined.
JONES, Judge:
¶1 In 2017, Pinal County voters simultaneously approved Proposition 416 (Prop 416) to adopt a regional transportation plan and Proposition 417 (Prop 417) to enact an excise tax to fund the plan. In this appeal, Appellants, Pinal County (the County) and the Pinal Regional Transportation Authority (the RTA), appeal from the tax court‘s order invalidating the excise tax, and Cross-Appellants (collectively, Vangilder) challenge the court‘s order denying their request for an award of attorneys’ fees. The Arizona Department of Revenue (ADOR) joins Vangilder in asserting the tax is invalid but joins Appellants in defending Prop 417‘s constitutionality and opposing Vangilder‘s claim for fees.
¶2 We find the Prop 417 tax to be valid. The RTA‘s authorizing resolution does not change the substance of the question posed to and approved by the voters; the tax, by its terms, applies across all transaction privilege tax (TPT) classifications; and the tax includes a valid, constitutional modified rate as applied to the retail sales classification. Accordingly, we reverse the order invalidating the tax. Because Vangilder is no longer the successful party in the tax court, we affirm the denial of his request for attorneys’ fees.
FACTS AND PROCEDURAL HISTORY
¶3 The RTA is a public improvement and taxing subdivision of the State of Arizona established by the Pinal County Board of Supervisors (the Board) in 2015 to coordinate multi-jurisdictional transportation planning, improvements, and funding. See
¶4 In June 2017, the RTA adopted the Pinal County Regional Transportation Plan (the Plan), which identifies key roadway and transportation projects to be developed over the next twenty years. In the same resolution (the June Resolution), the RTA asked the County to schedule a special election on the Plan and on “the issue of levying a transportation excise tax at a rate equal to one-half percent (0.005%) [sic] of the gross income from the business activity upon every person engaging or continuing in the business of selling tangible personal property at retail . . . needed to fund the Plan.” The June Resolution further stated that the tax rate upon retail sales would be a “variable or modified rate,” in that the tax would apply only to the first $10,000 in gross income from the sale of any single item of tangible personal property, effectively capping the tax at $50 per item.
¶5 Before the election, and as directed by
If Proposition 417 is approved by the voters, the Transportation Excise Tax would . . . be assessed on the same business transactions that are subject to the State of Arizona transaction privilege (sales) tax [(TPT)], but at a rate equal to 10% of the State tax . . . . [T]he Transportation Excise Tax rate will generally be 0.5% or 1 cent on each $2 o[f] State taxable items.
The Pamphlet identified each of the sixteen business classifications subject to the TPT and detailed the rates at which the transportation excise tax would apply to each class.2 See
¶6 The question ultimately posed to the voters was stated in both the Pamphlet and official ballot:
PROPOSITION 417
(Relating to County Transportation Excise (Sales) Taxes)Do you favor the levy of a transportation excise (sales) tax including at a rate equal to one-half percent (0.5%) of the gross income from the business activity upon every person engaging or continuing in the business of selling tangible personal property at retail; provided that such rate shall become a variable or modified rate such that when applied in any case when the gross income from the sale of a single item of tangible personal property exceeds ten thousand dollars ($10,000), the one-half percent (0.5%) tax rate shall apply to the first ten thousand dollars ($10,000), and above ten thousand dollars ($10,000), the measure of tax shall be a rate of zero percent (0.0%), in Pinal County for twenty (20) years to provide funding for the transportation elements contained in the Pinal Regional Transportation Plan?
Do you favor the levy of a transaction privilege (sales) tax for regional transportation purposes, including at a variable or modified rate, in Pinal County?
YES ______
NO ______
(A “YES” vote has the effect of imposing a transaction privilege (sales) tax in Pinal County, including at a variable or modified rate, for twenty (20) years to provide funding for the transportation projects contained in the Regional Transportation Plan.)
(A “NO” vote has the effect of rejecting the transaction privilege (sales) tax for transportation purposes in Pinal County.)
In November 2017, Pinal County voters approved both the regional transportation plan set out in Prop 416 and the transportation excise tax set out in Prop 417.
¶7 The following month Vangilder filed a complaint to enjoin ADOR, the County, and the RTA from collecting and/or enforcing the tax, alleging it was invalid and unconstitutional.3 The tax court resolved
DISCUSSION
I. The Prop 417 Tax is Valid.
¶8 Resolution of this appeal requires us to determine the scope and legality of the tax enacted by the voters via Prop 417. The interpretation and application of a voter-approved measure present questions of law we review de novo. See Ariz. Citizens Clean Elections Comm‘n v. Brain, 234 Ariz. 322, 325, ¶ 11 (2014).
A. The Authorizing Resolution Does Not Invalidate the Tax.
¶9 Vangilder first contends the tax is invalid because the June Resolution described a tax on “the gross income from the business activity upon every person engaging or continuing in the business of selling tangible personal property at retail.” See supra ¶ 4. Thus, Vangilder contends “voters were asked to approve a tax that applied solely to retail sales” in violation of
¶10 First,
¶11 Second, although Vangilder relies on Braden v. Yuma County Board of Supervisors, 161 Ariz. 199 (App. 1989), to argue the RTA‘s failure to properly describe the tax in the June Resolution invalidates the tax, Braden does not apply. There, a county board of supervisors attempted to levy an assessment to build a bridge within a flood control improvement district. Id. at 200. The relevant statute “required as a prerequisite” that the board first adopt a resolution specifying its intention to undertake a flood control project before imposing an assessment for the project. Id. at 203-04. The board had not enacted such a resolution before it approved the bridge and the related assessment, and thus, had not given the required notice of its intentions. Id. at 204. Accordingly, the Braden court invalidated the assessment because the board‘s failure to comply with the statute did not “afford[] the landowner an opportunity to be heard on the necessity and wisdom of the proposed improvement.” Id.; see also Henningson, Durham & Richardson v. Prochnow, 13 Ariz. App. 411, 416 (1970). By contrast, nothing in the statutory scheme at issue here, governing passage of a county transportation excise tax, suggests the RTA‘s resolution was required to or intended to provide the public with notice of the details of the proposed tax. See generally
¶12 In fact,
B. The Prop 417 Tax Applies to All TPT Classifications.
¶13 Vangilder and ADOR argue that the tax is invalid because they read Prop 417 to describe a tax that applies only to retail sales in violation of
¶14 When construing a voter-approved measure, “[o]ur primary objective . . . is to place a reasonable interpretation on ‘the intent of the electorate that adopted it.‘” State v. Estrada, 201 Ariz. 247, 250, ¶ 15 (2001) (quoting Foster v. Irwin, 196 Ariz. 230, 231, ¶ 3 (2000)). We begin by examining the plain language of the measure, see Am. Bus Lines, Inc. v. Ariz. Corp. Comm‘n, 129 Ariz. 595, 598 (1981), “giv[ing] the words used ‘their natural, obvious and ordinary meaning’ unless the context suggests otherwise,” Ariz. Chamber of Commerce & Indus. v. Kiley, 242 Ariz. 533, 537, ¶ 9 (2017) (quoting Brewer v. Burns, 222 Ariz. 234, 239, ¶ 26 (2009)); see also
¶15 The Prop 417 Pamphlet and ballot asked Pinal County voters:
Do you favor the levy of a transportation excise (sales) tax including at a rate equal to one-half percent (0.5%) of the gross income from the business activity upon every person engaging or continuing in the business of selling tangible personal property at retail; provided that such rate shall become a variable or modified rate such that when applied in any case when the gross income from the sale of a single item of tangible personal property exceeds ten thousand dollars ($10,000), the one-half percent (0.5%) tax rate shall apply to the first ten thousand dollars ($10,000), and above ten thousand dollars ($10,000), the measure of tax shall be a rate of zero percent (0.0%), in Pinal County for twenty (20) years to provide funding for the transportation elements contained in the Pinal Regional Transportation Plan?
Do you favor the levy of a transaction privilege (sales) tax for regional transportation purposes, including at a variable or modified rate, in Pinal County?
(Emphasis added.). Voters were then advised: “A ‘YES’ vote has the effect of imposing a transaction privilege (sales) tax in Pinal County, including at a variable or modified rate, for twenty (20) years to provide funding for the transportation projects contained in the Regional Transportation Plan.”
¶16 Vangilder argues the phrase “including at a rate,” emphasized in the quoted language above, established and limited the scope of the tax to “person[s] engaging or continuing in the business of selling tangible personal property at retail” only. Under this interpretation, however, the descriptive phrase “including at a rate” could be deleted entirely from the proposal, such that the voters were said to be asked: “Do you favor the levy of a transportation excise (sales) tax [] equal to one-half percent (0.5%) of the gross income from the business activity upon every person engaging or continuing in the business of selling tangible personal property at retail?” While Vangilder‘s interpretation is not entirely untenable, it renders the phrase “including at a rate” meaningless, in contravention to the general rule of construction that “each word, phrase, clause and sentence must be given meaning so that no part will be void, inert, redundant or trivial.” Adams v. Bolin, 74 Ariz. 269, 276 (1952) (citing City of Phx. v. Yates, 69 Ariz. 68, 72 (1949)).
¶17 The entire sentence can be given meaning if we read the question as: “Do you favor the levy of a transportation privilege (sales) tax . . . in Pinal County?” Under this
¶18 Reading all portions of the initiative together, cf. Indus. Comm‘n v. C & D Pipeline, Inc., 125 Ariz. 64, 67-68 (App. 1979) (“[I]t is a fundamental principle of statutory construction that a statute should be considered as a whole.“) (citations omitted), there is but one reasonable interpretation of Prop 417 as it appeared on the ballot. We thus conclude that “including” modifies “transportation excise (sales) tax,” and the remainder of the phrase describes the retail-sales component of a broader tax.
¶19 Vangilder correctly observes the ballot did not identify any of the other fifteen business classifications to which the tax would apply. But generally applicable tax rates — that is, those not variable or modified — are not required to be specified on the ballot itself. See
¶20 Additionally, the Pamphlet the Board sent to voters before the election clearly advised that the “transportation excise tax” would “be assessed on the same business transactions that are subject to the State of Arizona transaction privilege (sales) tax.” The Pamphlet specifically identified each of the business classifications subject to the TPT and then specified the rate that would apply to each classification, including the tiered-rate structure proposed for retail sales. Thus, even if the scope of the tax was not clear from the ballot alone, secondary principles of construction support the conclusion that the tax was to apply to all business classifications. See Jett v. City of Tucson, 180 Ariz. 115, 119-20 (1994) (recognizing the value of “a publicity pamphlet to apprise the voters of the purpose and intent behind the [ballot proposition]” in ascertaining its intended effect); accord Calik v. Kongable, 195 Ariz. 496, 500, ¶ 16 (1999); Laos v. Arnold, 141 Ariz. 46, 48 (1984).
¶21 For these reasons, we reject Vangilder‘s suggestion that construing the proposition to apply to TPT classifications other than retail sales would extend the tax to “something not specifically covered by the language” of the proposition, Corp. Comm‘n v. Equitable Life Assurance Soc‘y of U.S., 73 Ariz. 171, 178 (1951), and “gather new objects of taxation by strained construction or implication,” Ariz. State Tax Comm‘n v. Staggs Realty Corp., 85 Ariz. 294, 297 (1959). There is nothing strained in the application of the ordinary meaning of the word “including” to signal that the description of the retail-sales component that followed was merely part of a non-exhaustive list of business classifications to which the proposed tax would apply. See
¶22 “[T]he courts will not strain, stretch and struggle to uncover hidden taxable items,” State Tax Comm‘n v. Miami Copper Co., 74 Ariz. 234, 243 (1952) (citing Alvord v. State Tax Comm‘n, 69 Ariz. 287, 292 (1950)), but such efforts are not required here. When considered as a whole, Prop 417 can only be reasonably read to have proposed a transportation excise tax across all TPT classifications, in accordance with
C. The Tiered-Rate Structure for Retail Sales is a Permissible “Modified Rate” Within the Meaning of A.R.S. § 42-6106(C) .
¶23 Vangilder and ADOR argue the Prop 417 tax‘s tiered-rate structure for retail sales is not a permissible “variable or modified rate” within the meaning of
¶24 Vangilder contends that a modified rate is one that changes an existing rate, but he cites no authority supporting this contention. Because the term “modified rate” appears nowhere else in Arizona‘s tax code, we will apply the “natural, obvious, and ordinary meaning as understood and used by the people.” Circle K Stores, Inc. v. Apache Cty., 199 Ariz. 402, 406, ¶ 11 (App. 2001) (citing Airport Props. v. Maricopa Cty., 195 Ariz. 89, 99, ¶ 35 (App. 1999)). “[R]eference to established, respected dictionaries is appropriate in determining the commonly accepted meaning of words.” Sierra Tucson, Inc. v. Pima Cty., 178 Ariz. 215, 220 (App. 1994) (citing State v. Wise, 137 Ariz. 468, 470 (1983)).
¶25 The New Oxford American Dictionary 1124 (3d ed. 2010) defines “modified” as the adjective form of the verb “modify,” to “make partial or minor changes to (something), typically so as to improve it or to make it less extreme.” Black‘s Law Dictionary (11th ed. 2019) likewise defines modify as “[t]o make somewhat different; to make small changes to (something) by way of improvement, suitability, or effectiveness[;] . . . [t]o make more moderate or less sweeping; to reduce in degree or extent; to limit, qualify, or moderate.” These definitions are broad in scope and, as applied to “rate,” would include almost any type of change to the rate but particularly one that, as here, lessens its burden upon the taxpayer.
¶26 Further support for a broad construction of the term “modified” can be found in the legislative history of the transportation excise tax scheme. When the legislature chose to allow the creation of regional transportation authorities, it acknowledged that counties the size of Pinal County “possess unique characteristics,” including “[u]nique transportation related funding needs generated by the area‘s land use, topography and environmental quality . . . unmet by any existing transportation-specific funding mechanisms.” 1990 Ariz. Sess. Laws, ch. 380, § 1 (2nd Reg. Sess.). The legislature then determined these needs could be met only through “certain unique strategies,” id., including imposition of an excise tax at a variable or modified rate, see
¶27 Vangilder and ADOR nonetheless suggest that the Prop 417 tax‘s tiered-rate structure is invalid because the County lacks the power “to modify the legislatively defined tax base in any particular classification.” See Maricopa Cty. v. S. Pac. Co., 63 Ariz. 342, 347 (1945) (“The authority to levy a tax must be derived from a statutory grant of power.“). They argue a county that chooses to enact an excise tax must impose the same tax rate on all income earned within any particular business
¶28 ADOR next argues that the tax rate on income above $10,000 from the retail sale of any one item is effectively zero, and “is not a tax at all, because zero is not a rate.” Thus, ADOR contends the Prop 417 tax violates the statutory mandate that a transportation excise tax “shall be levied and collected” across all business classifications.
¶29 Finally, ADOR, which collects all TPTs imposed by the cities, towns and counties in Arizona, argues the tiered-rate structure is confusing and will create “administrative chaos” in implementation. ADOR‘s fear of imminent havoc is unpersuasive. More than twenty Arizona cities and towns, including Phoenix and Glendale, have adopted the Model City Tax Code, which allows for an identical tiered-rate structure for retail sales.5 See
¶30 Accordingly, we conclude that the tiered rate within the transportation excise tax approved via Prop 417 does not violate
D. The Modified Rate Does Not Violate the U.S. or Arizona Constitutions.
¶31 Vangilder argues the tiered-rate structure for retail sales in the Prop 417 tax violates constitutional equal protection guarantees and constitutes an illegal special law. We review constitutional challenges de novo. See Gallardo v. State, 236 Ariz. 84, 87, ¶ 8 (2014). In doing so, we presume a measure is constitutional unless proven otherwise beyond a reasonable doubt.
¶32 The U.S. and Arizona Constitutions guarantee equal protection of the law. See
¶33 A tax statute is not unconstitutional simply because it does not impose an identical burden on all taxpayers; “if there is a rational basis for the classification, there is no constitutional infirmity.” State v. Levy‘s, 119 Ariz. 191, 192 (1978). “In determining whether a statute meets the rational basis standard, [courts] must first ascertain whether the challenged legislation has a legitimate purpose and then determine if it is reasonable to believe that the classification will promote that purpose.” Big D Constr. Corp. v. Court of Appeals, 163 Ariz. 560, 566 (1990) (citations omitted). Rational basis review “is especially deferential in the context of classifications made by complex tax laws.” Nordlinger v. Hahn, 505 U.S. 1, 11 (1992); accord City of New Orleans v. Dukes, 427 U.S. 297, 303 (1976).
¶34 Vangilder asserts the County proposed the tiered-rate structure for retail sales at the urging of businesses that sell high-priced retail items, such as cars, farming equipment, and recreational vehicles, who feared the transportation excise tax would drive buyers to neighboring counties to make their high-dollar purchases.7 The County, however, has a legitimate interest in encouraging sales and other economic activity within its jurisdiction. See State ex rel. ADOR v. Dillon, 170 Ariz. 560, 569 (App. 1991) (recognizing a “legitimate governmental interest in raising revenues“); cf. Flagstaff Vending Co. v. City of Flagstaff, 118 Ariz. 556, 560 (1978) (“[A] government may validly ‘foster what it conceives to be a beneficent enterprise.‘“) (quoting Carmichael v. S. Coal & Coke Co., 301 U.S. 495, 512 (1937)). A partial reduction in the tax rate upon certain business transactions is a rational way to encourage sales and promote economic activity. See Levy‘s, 119 Ariz. at 191-92 (finding no equal protection violation in a statute exempting TPT upon sales under $1,000 to Mexican residents with proper documentation within thirty miles of the Mexican border where its purpose was to “bring back business to the areas“); see also Minneapolis Star & Tribune Co. v. Minn. Comm‘r of Revenue, 460 U.S. 575, 581-82 (1977) (noting a use tax “eliminat[es] the incentive to make major purchases in [s]tates with lower sales taxes“).
¶35 For example, without the tiered-rate structure, an Apache Junction resident in the market for a $500,000 motor home could avoid paying $2,500 in Pinal County TPT by driving a short distance to buy the same motor home in the Phoenix metropolitan area. The County could reasonably believe that this resident is unlikely to spend the time, gas, and energy to travel out-of-county, however, if the tax applies only to the first $10,000 of the sale and totals only $50. In addition, retailers who lose high-dollar sales to neighboring counties might decide to relocate outside the County, causing a further decrease in revenue. Moreover, the tiered-rate tax does not differentiate between
¶36 The Arizona Constitution also prohibits enactment of any “local or special laws [regarding the] . . . [a]ssessment and collection of taxes.”
¶37 The first prong of the special-law test “is identical to that required for equal protection analysis.” Gallardo, 236 Ariz. at 88, ¶ 12. We have already determined that the County had a rational basis to treat sales of high-priced retail items differently. See supra ¶ 34. The Arizona Constitution also requires the classification be legitimate and flexible. Republic Inv., 166 Ariz. at 148, 150. Vangilder concedes these points through his silence. Moreover, the tiered-rate structure applies equally to all retailers selling single items of tangible personal property over $10,000, and
there is no restriction on who can join or leave the class.9 Therefore, Prop 417 is not an unconstitutional special law.
II. Vangilder is Not Entitled to an Award of Attorneys’ Fees.
¶38 In his cross-appeal, Vangilder argues the tax court abused its discretion in denying his request for an award of attorneys’ fees under the private attorney general doctrine. See Cave Creek Unified Sch. Dist. v. Ducey, 231 Ariz. 342, 353, ¶ 34 (App. 2013) (explaining the private attorney general doctrine permits a discretionary award of fees to a party that has vindicated an important public right) (citing Arnold v. Ariz. Dep‘t of Health Servs., 160 Ariz. 593, 609 (1989)). Because we reverse the court‘s order granting relief to Vangilder, he is not eligible for an award of fees. Therefore, the order denying fees is affirmed.
CONCLUSION
¶39 The tax court‘s order invalidating the Prop 417 tax is reversed, and its order denying
AMY M. WOOD • Clerk of the Court
FILED: AA