Watts V. Ador
IN THE COURT OF APPEALS
DIVISION ONE
FILED:
05/26/09
STATE OF ARIZONA
PHILIP G. URRY,CLERK
DIVISION
ONE
BY: DN
CHRISTOPHER M. WATTS; MANDY J.
)
1 CA-TX 08-0002
WATTS; BENNO E. JURGEMEYER;
)
LORRAINE A. JURGEMEYER; GARTH E. PRICE;
)
DEPARTMENT T
LORIE M. PRICE; MICHAEL L. WATTS;
)
CYNTHIA A. WATTS; and JOHN DEERE
)
O P I N I O N
INDUSTRIAL HOLDINGS,
)
INC.,
)
)
Plaintiffs-Appellants, )
)
v. )
)
ARIZONA DEPARTMENT OF REVENUE, an
)
agency of the State of Arizona, )
)
Defendant-Appellee.
)
)
Appeal from the Arizona Tax Court
Cause Nos. TX2005-000051, TX2005-000052, TX2005-050120,
TX2005-050136, TX2005-050165 (Consolidated)
The Honorable Thomas Dunevant, III, Judge
AFFIRMED
Bauman Loewe Witt & Maxwell, PLLC
Scottsdale
By
C. Edwin Witt, Jr.
Attorneys for Plaintiffs-Appellants
Terry Goddard, Attorney General
Phoenix
By
Michael F. Kempner, Assistant Attorney General
Scot G. Teasdale, Assistant Attorney General
Attorneys for Defendant-Appellee
T H O M P S O N, Presiding Judge
¶1
Taxpayers1 appeal from a grant of summary judgment
holding that they are not entitled to pollution control income tax
credits under Arizona Revised Statutes (A.R.S.) sections 43-1170
(1998) (credits for corporations) or 43-1081 (1998) (credits for
individuals) for the cost of water trucks and water wagons they
leased to others during tax years 1998 to 2001. Finding no genuine
dispute of material fact or error of law, we affirm the judgment.
FACTUAL AND PROCEDURAL HISTORY
A. The Pollution Control Income Tax Credit Statutes
¶2
In 1994, the Arizona Legislature enacted two statutes
providing a pollution control income tax credit as part of Senate
Bill 1523. 1994 Ariz. Sess. Laws, ch. 117, §§ 3, 6, 41st Leg. (2d
Reg. Sess.). Effective beginning December 31, 1994, id. at § 7,
A.R.S. §§ 43-1170 and 43-1081 provided in relevant part:
A. A credit is allowed against the taxes
imposed by this title for expenses that the
taxpayer incurred during the taxable year to
purchase real or personal property that is
used to control or prevent pollution. The
amount of the credit is equal to ten per cent
of the purchase price.
B. Property that qualifies for the credit
under this section includes that portion of a
structure, building, installation, excavation,
1 The taxpayers in this consolidated appeal are Christopher M.
Watts, Mandy J. Watts, Benno E. Jurgemeyer, Lorraine A. Jurgemeyer,
Garth E. Price, Lorie M. Price, Michael L. Watts, Cynthia A. Watts,
and John Deere Industrial Holdings, Inc. (John Deere). The
individual taxpayers listed here are shareholders of Watts
Holdings, Inc. (Watts Holdings), a subchapter S corporation, whose
tax attributes flow through to its shareholders. 26 U.S.C. § 1366.
Watts Holdings and John Deere, a Delaware corporation, are
members/owners of Sunstate Equipment Company, L.L.C. (Sunstate).
2
machine, equipment or device and any
attachment or addition to or reconstruction,
replacement or improvement of that property
that is directly used, constructed, or
installed for the purpose of meeting or
exceeding rules or regulations adopted by the
United States environmental protection agency,
the department of environmental quality or by
a political subdivision of this state to
prevent, monitor, control or reduce air, water
or land pollution.
¶3
The legislative history of A.R.S. § 43-1170 suggests that
the credit was designed “to encourage companies to consider
expansion or renovations now.” Minutes of Comm. on Ways and Means,
S.B. 1523 (Ariz. March 22, 1994) (statement of Scot Butler). The
minutes are devoid of any discussion about applying the credit to
equipment attached to motor vehicles. Enter. Leasing Co. of
Phoenix v. Ariz. Dep’t of Revenue, 545 Ariz. Adv. Rep. 19, 19, ¶ 2,
__ P.3d __ (App. Dec. 16, 2008).
¶4
In 1995, the Legislature modified A.R.S. §§ 43-1170(A-B)
and 43-1081(A-B) to read as follows:
A. A credit is allowed against the taxes
imposed by this title for expenses that the
taxpayer incurred during the taxable year to
purchase real or personal property that is
used in the taxpayer’s trade or business in
this state to control or prevent pollution.
The amount of the credit is equal to ten
percent of the purchase price.
B. Property that qualifies for the credit
under this section includes that portion of a
structure, building, installation, excavation,
machine, equipment or device and any
attachment or addition to or reconstruction,
replacement or improvement of that property
that is directly used, constructed, or
installed in this state for the purpose of
3
meeting or exceeding rules or regulations
adopted by the United States environmental
protection agency, the department of
environmental quality or a political
subdivision of this state to prevent, monitor,
control or reduce air, water or land
pollution.
1995 Ariz. Sess. Laws, ch. 200, §§ 15, 18, 42d Leg. (1st Reg.
Sess.) (emphasis added for additions). These amendments apply
retroactively to the taxable years beginning from and after
December 31, 1994. Id. at § 21(L).
¶5
The Legislature initially pegged the annual cost of the
pollution control credits at about $2.5 million. Joint Legislative
Budget Comm. Staff Memorandum on General Fund Impact of S.B. 1504,
at 5 (Ariz. March 29, 2000). In December 1999, the Arizona
Department of Revenue (the Department or ADOR) received the first
claim for a pollution control income tax credit for equipment
attached to a motor vehicle. Enter. Leasing, 545 Ariz. Adv. Rep.
at 19, ¶ 3, __ P.3d at __. Lawmakers then realized that, without
clarifying legislative action, the tax credit could cost the state
about $15 million annually. Id.
¶6
By March 10, 2000, the Legislature had drafted Senate
Bill 1504 in an effort to “[c]orrect the current income tax credit
for pollution control equipment to exclude motor vehicle
equipment.” H.R. Summary of S.B. 1504, 44th Leg., 2d Reg. Sess.
(Ariz. March 10, 2000). In April 2000, the Legislature amended
section B of both A.R.S. §§ 43-1081 and 43-1170 to state: “The
credit allowed pursuant to this section does not apply to the
4
purchase of any personal property that is attached to a motor
vehicle.” 2000 Ariz. Sess. Laws, ch. 405, §§ 26, 30, 44th Leg. (2d
Reg. Sess.).
¶7
According to the revised legislation, the amendments “are
intended to be clarifying changes and are consistent with the
legislature’s intent when those sections were enacted.” 2000 Ariz.
Sess. Laws, ch. 405, § 41, 44th Leg. (2d Reg. Sess.). Another
purpose was to "close loopholes.” Minutes of Comm. on Gov’t Reform
at 19, S.B. 1504 (Ariz. March 10, 2000) (statement of House Speaker
Jeff Groscost). The legislation additionally provides that it is
to “apply retroactively to taxable years beginning from and after
December 31, 1994.” 2000 Ariz. Sess. Laws, ch. 405, § 40(A), 44th
Leg. (2d Reg. Sess.).
B. This Action
¶8
Taxpayers are the indirect owners of Sunstate. Sunstate
is a Delaware limited liability company that has filed Arizona
partnership tax returns for tax years 1998 through 2001. Because
Sunstate is treated as a partnership for federal and state income
tax purposes, its tax attributes pass through to Taxpayers, its
members/owners. See 26 U.S.C. §§ 701 to 761 (2004).
¶9
Sunstate is in the equipment leasing business, serving
primarily construction job sites, and maintains several locations
in Arizona and other states. The equipment at issue consists of
water trucks and water wagons or trailers. The water trucks are
registered as motor vehicles with the Motor Vehicle Division of the
5
Arizona Department of Transportation. They are outfitted with
water tanks and pumps. The water wagons feature a 500-gallon water
tank and built-in hitches for attachment to motor vehicles and can
exceed 5700 pounds when filled. The equipment is installed on the
vehicles by the manufacturer.
¶10
The water trucks and water wagons are designed for
multiple uses, including: (1) dust control and ditch jetting; (2)
fighting fires; (3) washing equipment and/or machinery; (4)
spraying horse arenas; (5) watering trees and city street plants;
(6) "feeding" highway equipment; and (7) watering concrete slabs.
Sunstate’s Chief Financial Officer Garth Price testified that “any
number of possible uses could come of [the water trailers and
trucks], limited only by your imagination.” Likewise, Sunstate’s
equipment rental agreements acknowledge that “Lessor has no control
over the use of the Equipment by Lessee . . . .” Indeed, Northern
Arizona University used one of Sunstate’s water trucks for “Mud
Volleyball 2000” and Cutler Fire Protection has also leased a
vehicle.
¶11
Taxpayers filed their income tax returns for 1998 through
2001 without claiming a pollution control income tax credit for the
water trucks and water wagons. On August 20, 2002, they submitted
an income tax refund claim totaling $402,170 for tax years 1998 to
2001 based upon claimed income tax credits for these vehicles under
A.R.S. § 43-1081 (pollution control income tax credits for
individuals) and § 43-1170 (pollution control income tax credits
6
for corporations). Taxpayers did not amend their returns for the
tax years at issue.
¶12
On March 31, 2003, the Department denied Taxpayers’
refund claims based on the failure to use the equipment in their
business to control or prevent pollution, and the equipment’s
attachment to a motor vehicle. Taxpayers protested, but the
Department’s hearing officer upheld the decision. Accordingly,
Taxpayers took small claims appeals, and the cases were eventually
consolidated and transferred to the Arizona Tax Court.
¶13
The parties cross-moved for summary judgment. Taxpayers
claimed that the lessees’ use of the water trucks and water wagons
to spray water, dust suppressant, or adhesive soil stabilizer
solutions on undeveloped ground at construction sites established
their own eligibility for the credits. They submitted affidavits
from several of the thousand lessees and two Sunstate employees
attesting that, during the vast majority of their job site visits,
they had observed the water trucks and water wagons being used for
dust control purposes. The tax court ruled in favor of the
Department, denied Taxpayers’ motion, and entered judgment. This
appeal followed.
DISCUSSION
A. Taxpayers’
Last Antecedent Interpretation Is Inconsistent With
the Plain Terms of A.R.S. §§ 43-1170 and 43-1081
¶14
We review the tax court’s grant of summary judgment de
novo. Wilderness World, Inc. v. Ariz. Dep’t of Revenue, 182 Ariz.
7
196, 198, 895 P.2d 108, 110 (1995). Likewise, we review de novo
the tax court’s interpretation of the relevant statutes. Walls v.
Ariz. Dep’t of Pub. Safety, 170 Ariz. 591, 594, 826 P.2d 1217, 1220
(App. 1991).
¶15
Taxpayers are seeking a tax credit. Tax credits are
obtained by legislative grace and not by right. DaimlerChrysler
Servs. N. Am., L.L.C. v. Ariz. Dep’t of Revenue, 210 Ariz. 297,
304, ¶ 25, 110 P.3d 1031, 1038 (App. 2005) (citation omitted). In
Arizona, we construe tax statutes strictly against such credits.
E.g., Ariz. Dep’t of Revenue v. Raby, 204 Ariz. 509, 511, ¶ 16, 65
P.3d 458, 460 (App. 2003) (“[T]ax deductions, subtractions,
exemptions, and credits are to be strictly construed.”).
¶16
The resolution of this issue turns on our construction of
A.R.S. §§ 43-1170 and 43-1081. “[W]e first look to the language of
the statute and will ascribe plain meaning to the terms unless they
are ambiguous.” Mago v. Mercedes-Benz, U.S.A., Inc., 213 Ariz.
404, 408, ¶ 15, 142 P.3d 712, 716 (App. 2006). The critical
language in both statutes provides a tax credit for expenses
incurred in a taxable year “to purchase real or personal property
that is used in the taxpayer’s trade or business in this state to
control or prevent pollution.” A.R.S. §§ 43-1170(A), -1081(A).
¶17
The tax court reasoned that the phrases “in this state”
and “to control or prevent pollution” modified “used.” Taxpayers
themselves do not use the equipment in their trade or business in
this state to control or prevent pollution. Instead, they lease
8
the equipment to others who may or may not use the water trucks and
water wagons to prevent pollution. Accordingly, the tax court
concluded that the tax credit statutes did not apply to Taxpayers.
We agree.
¶18
Taxpayers nevertheless insist that “to control or prevent
pollution” only modified “in this state” under the rule of the last
antecedent.2 According to this view, Taxpayers need not
demonstrate that their business is “to control or prevent
pollution.” But as the tax court pointed out, the Arizona
Legislature included these phrases in one uninterrupted sentence.
The word “used” appears only once in the sentence and connects the
entire following part of the sentence, which includes “in the
taxpayer’s trade or business in this state to control or prevent
pollution.”
¶19
We conclude that the Legislature intended each word to
influence every other word in this sentence. A contrary conclusion
would require us to find that “used in the taxpayer’s trade or
business,” “in this state” and “to control or prevent pollution”
2 See generally Phoenix Control Sys., Inc. v. Ins. Co. of N.
Am., 165 Ariz. 31, 34, 796 P.2d 463, 466 (1990) (“The last
antecedent rule is recognized in Arizona and requires that a
qualifying phrase be applied to the word or phrase immediately
preceding as long as there is no contrary intent indicated.”);
Black’s Law Dictionary 882 (6th ed. 1990) (describing the last
antecedent rule as “[a] canon of statutory construction that
relative or qualifying words or phrases are to be applied to the
words or phrases immediately preceding, and as not extending to or
including other words, phrases, or clauses more remote, unless such
extension or inclusion is clearly required by the intent and
9
would modify “real or personal property” but would not modify
“used,” and that “in this state” could not modify “to control or
prevent pollution.”
¶20
It is highly unlikely that the Arizona Legislature
intended to grant a pollution control tax credit to a taxpayer that
does not use its property for that purpose and has no control over
whether its lessees use the property for that purpose. As the
Department points out, Taxpayers stand in no better position than a
retailer who sells water trucks and water wagons to end users, but
does not use them itself to prevent pollution.
¶21
Another problem with Taxpayers' last antecedent
construction is that it requires us to infer that the “in this
state” restriction does not apply to “used” and that the
Legislature was willing to sacrifice tax revenues for the purpose
of reducing pollution in other states. Such a construction would
neither benefit Arizona nor advance its compliance with the Clean
Air Act’s mandates.3
¶22
We reject such a construction. “[T]he clear intent of
the legislature takes precedence as a canon of construction of all
grammatical rules, and particularly of [the rule of last
antecedent].” Gamez v. Indus. Comm’n, 213 Ariz. 314, 320, ¶ 36,
______________________
meaning of the context, or disclosed by an examination of the
entire act.”).
3 The tax court found that, for the most part, the lessees use
the equipment in this state.
10
141 P.3d 794, 800 (App. 2006) (quoting S. Tucson v. Pima County, 52
Ariz. 575, 584, 84 P.2d 581, 585 (1938)).
¶23
Taxpayers alternatively argue that we must construe
A.R.S. §§ 43-1170 and 43-1081 in pari materia with the agricultural
pollution control tax credits enacted in 1998 and codified at
A.R.S. §§ 43-1081.01(A) and 43-1170.01(A). They contend that the
agricultural statutes are more restrictive because they require a
showing that personal property “is primarily used in the taxpayer’s
trade or business in this state to control or prevent pollution.”
A.R.S. §§ 43-1081.01(A), -1170.01(A). Regardless of how these
statutes apply, the fact remains that Taxpayers do not use the
property in their business to control or prevent pollution and
cannot qualify for pollution control income tax credits under
A.R.S. §§ 43-1170 or 43-1081.
B.
Taxpayers Do Not Directly Use the Water Trucks and Water
Wagons In This State to Meet or Exceed Pollution Rules and
Regulations
¶24
Not only does Taxpayers’ construction contradict the
plain terms of A.R.S. §§ 43-1170(A) and 43-1081(A), but it is also
inconsistent with the rest of the statutory scheme. In two related
provisions, A.R.S. §§ 43-1170(B) and 43-1081(B), the Arizona
Legislature imposes an additional tax credit requirement for
qualifying property “that is directly used, constructed, or
installed in this state for the purpose of meeting or exceeding
11
rules or regulations adopted . . . to prevent, monitor, control or
reduce air, water or land pollution.”
¶25
The undisputed facts reflect that Taxpayers do not
directly use the property to meet or exceed rules or regulations
concerning pollution. Taxpayers emphasize that their lessees are
required to use the property during construction to minimize dust
and other air contaminants under Arizona Administrative Code
(A.A.C.) R18-2-604(A). This regulation applies only to persons who
“cause, suffer, allow or permit” construction activity. Id. Some
of the lessees qualify, but Taxpayers and Sunstate do not.
Taxpayers have identified no pollution control function for which
they directly use the water trucks and wagons and, consequently,
they are not using them in the manner that A.R.S. §§ 43-1170(B) and
43-1081(B) require.
¶26
Indeed, Taxpayers have proffered no statutory text or
legislative history materials that would support a positive
legislative intent to extend the pollution control credits to
equipment lessors. Without such evidence, we construe the statute
strictly against Taxpayers and conclude that they are not entitled
to a tax credit.
¶27
Our resolution of this issue obviates the need to address
the parties’ alternative arguments concerning the administrative
burden of verifying the actual uses of the water trucks and water
wagons. We also need not consider whether Taxpayers’ failure to
12
file amended tax returns precludes them from receiving pollution
control tax credits.
C.
Section 1-249 Does Not Preclude the Retroactive Application
of the 2000 Amendments
¶28
Taxpayers alternatively contend that the 2000 amendment
should not apply to their claim for those tax years prior to its
enactment. According to Taxpayers, A.R.S. § 1-249 (2002) precludes
this application:
Repealing act; effect on pending action or
accrued right
No action or proceeding commenced before a
repealing act takes effect, and no right
accrued is affected by the repealing act, but
proceedings therein shall conform to the new
act so far as applicable.
¶29
Taxpayers premise their construction of A.R.S. § 1-249 on
Brunet v. Murphy, 212 Ariz. 534, 538-40, ¶¶ 18-25, 135 P.3d 714,
718-20 (App. 2006), but their reliance on that case is misplaced.
In Brunet, a personal representative filed an amended complaint
alleging that a physician had violated the Adult Protective
Services Act (the APSA), A.R.S. §§ 46-451 to -457 (1998). Id. at
536-37, ¶¶ 4-6, 135 P.3d at 716-17. Four months earlier the
Arizona Legislature had amended the APSA to limit physicians’
responsibilities unless they qualified under a designated category.
Id. at 536, ¶¶ 5-6, 135 P.3d at 716. The physician defendant’s
actions had occurred prior to the amendment’s enactment, when the
13
APSA still provided for claims. Id. at 536-37, ¶¶ 6-7, 135 P.3d at
716-17.
¶30
We held that any “accrued” right against the physician
defendant under the former version of the APSA was lost and
prevented from vesting because the plaintiff had not filed until
after the amendment had taken effect. Id. at 539, ¶ 20, 135 P.3d
at 719. “[U]ntil the holder of the accrued right chooses to assert
it, the right is subject to an ‘event that may prevent [its]
vesting,’ such as the running of the statute of limitations or a
change in the law by the legislature.” Id. at 538, ¶ 13, 135 P.3d
at 718 (citation omitted).
¶31
Likewise, even assuming that Taxpayers had accrued rights
prior to filing their refund claims in 2002, their rights had not
vested and the 2000 amendment prevented them from vesting. Because
their rights did not vest, the amendment did not constitute a
retroactive abrogation. See id.
¶32
The general savings statute, A.R.S. § 1-249, fails to
preserve any such rights. The statute establishes a
"rule of statutory construction to the effect that the mere repeal
of a statute without any further action by the Legislature does not
terminate any accrued right conferred by the statute," and provides
"a general method of enforcing such rights.” Higgins’s Estate v.
Hubbs, 31 Ariz. 252, 264, 252 P. 515, 520 (1926) (arising under a
predecessor statute). In this case, the Legislature made the 2000
amendment expressly retroactive and demonstrated an intent not to
14
preserve any claims under prior law inconsistent with the
amendment.
¶33
Moreover, A.R.S. § 1-249 cannot apply because the 2000
amendment was not a "repealing act." In Brunet, this court found
that the amendment created a statutory exception "to eliminate the
previously existing right to bring an APSA claim against
physicians" like the defendant. Brunet, 212 Ariz. at 539, ¶ 22,
135 P.3d at 719. We find no intent in the 2000 amendment to
eliminate a previously existing right to claim the income tax
credit for equipment attached to a motor vehicle. The legislative
history indicates that there was no discussion about applying the
laws to vehicles in the original 1994 bill. Rather, the law was
intended to clarify that taxpayers were never entitled to a credit
for equipment attached to a motor vehicle. See 2000 Ariz. Sess.
Laws, ch. 405, § 41, 44th Leg. (2d Reg. Sess.) (the revised
legislation explains that these "are intended to be clarifying
changes and are consistent with the legislature’s intent when those
sections were enacted.").4
4 The 2000 amendment applies retroactively without creating a
due process violation. See Enter. Leasing, 545 Ariz. Adv. Rep. at
19, ¶ 21, __ P.3d at __. No constitutional due process violation
can exist because Taxpayers have no vested rights. See Brunet, 212
Ariz. at 538, ¶¶ 14-17, 135 P.3d at 718.
15
D.
As a Matter of Law, the 2005 Amendments Do Not Support
Reversal
1. The Amendments Took Effect After the Refund Period
¶34
Taxpayers alternatively claim that amendments to the
statutes in 2005 included changes significantly narrowing the
availability of pollution control tax credits. According to
Taxpayers, these changes indicate that the earlier versions of
A.R.S. §§ 43-1081 and 43-1170 applied to their claims for tax years
1998 to 2001.
¶35
The amended versions of A.R.S. §§ 43-1081 and 43-1170
(2005) provide in relevant part:
B. Property that qualifies for the credit under
this section includes that portion of a structure,
building, installation, excavation, machine,
equipment or device and any attachment or addition
to or reconstruction, replacement or improvement of
that property that is directly used, constructed or
installed in this state for the purpose of meeting
or exceeding rules or regulations adopted by the
United States environmental protection agency, the
department of environmental quality or a political
subdivision of this state to prevent, monitor,
control or reduce air, water or land pollution that
results from the taxpayer’s direct operating
activities in conducting a trade or business in
this state.
C. The credit allowed pursuant to this section
does not apply to:
1. The purchase of any personal property
that is attached to a motor vehicle.
2. Any property that has a substantial
use for a purpose other than the purposes
described in subsection B.
16
3. Any portion of pollution control
property that is included as a standard
and integral part of another property.
(Emphasis added). These versions of the statutes contain no
retroactivity provision. Consequently, they do not apply to
Taxpayers’ refund claims for tax years 1998-2001. See A.R.S. § 1-
244 (2002) (a statute does not apply retroactively unless expressly
specified by the legislature).
CONCLUSION
¶36
We affirm the tax court’s judgment in all respects.
________________________________
JON W. THOMPSON, Presiding Judge
CONCURRING:
_____________________________________
DONN KESSLER, Judge
_____________________________________
MARGARET H. DOWNIE, Judge
17
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