Opinion
1 CA-TX 10-0002
12-06-2011
SPRINT SPECTRUM LP, dba SPRINT PCS, a Delaware limited partnership, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona, Defendant/Appellee.
Snell & Wilmer, L.L.P. By Barbara J. Dawson Martha E. Gibbs Colleen Schiman Attorneys for Plaintiff/Appellant Thomas C. Horne, Attorney General By Amy C. Sparrow, Assistant Attorney General Attorneys for Defendant/Appellee
NOTICE: THIS DECISION DOES NOT CREATE LEGAL PRECEDENT AND MAY NOT BE CITED
EXCEPT AS AUTHORIZED BY APPLICABLE RULES.
See Ariz. R. Supreme Court 111(c); ARCAP 28(c);
Ariz. R. Crim. P. 31.24
MEMORANDUM DECISION
(Not for Publication - Rule 28, Arizona Rules of Civil Appellate Procedure)
Appeal from the Arizona Tax Court
Cause No. TX2007-000266
The Honorable Dean M. Fink, Judge
AFFIRMED
Snell & Wilmer, L.L.P.
By Barbara J. Dawson
Martha E. Gibbs
Colleen Schiman
Attorneys for Plaintiff/Appellant
Phoenix
Thomas C. Horne, Attorney General
By Amy C. Sparrow, Assistant Attorney General
Attorneys for Defendant/Appellee
Phoenix WINTHROP , Chief Judge
¶1 This is an appeal from a transaction privilege tax case resolved on cross-motions for summary judgment. Sprint Spectrum, L.P. ("Taxpayer") challenges the inclusion of customer-paid late charges in its tax base. Finding no genuine dispute of material fact or legal error, we affirm the judgment.
FACTS AND PROCEDURAL BACKGROUND
¶2 Taxpayer is a limited partnership that provides telephone and other telecommunications services to Arizona customers. Telecommunications is a taxable transaction privilege classification under Arizona law. See Ariz. Rev. Stat. ("A.R.S.") § 42-5064 (Supp. 2010).
Section 42-5064, as amended in 2008, applies retroactively to tax periods from and after December 31, 1999. A.R.S. § 42-5064 Historical and Statutory Notes (Supp. 2010) (citing 2008 Ariz. Sess. Laws, ch. 194, § 5 (2nd Reg. Sess.)).
¶3 Following an audit covering the period from April 1, 2002, through October 31, 2003, the Arizona Department of Revenue ("the Department") assessed transaction privilege taxes on Taxpayer's revenues, including its processing fees and late payment charges. Taxpayer protested the assessment and requested a revised assessment notice excluding these amounts, but an administrative law judge upheld an amended assessment that removed revenues derived from Taxpayer's "third party motorist assist" program but included the receipts from processing fees and late payment charges.
¶4 Taxpayer filed a complaint in Arizona Tax Court pursuant to A.R.S. § 42-1254(C) (2006), but later opted to drop its challenge to the processing fee portion of the assessment. The tax court denied Taxpayer's motion for summary judgment and granted summary judgment in favor of the Department, although the court included the caveat that late charges based on untimely payment of non-taxable charges are not taxable. Taxpayer did not quantify any late charges related to non-taxable receipts, and filed a Notice of Non-Opposition to a judgment upholding the entire amended assessment.
¶5 The tax court entered a final judgment on May 12, 2010. We have jurisdiction over this timely appeal pursuant to A.R.S. §§ 12-170(C) (2003) and 12-2101(A)(1) (West 2011).
The Arizona Legislature recently renumbered A.R.S. § 122101. See 2011 Ariz. Sess. Laws, ch. 304, § 1 (1st Reg. Sess.i (effective July 20, 2011).
ANALYSIS
I. As A Matter Of Law, Late Charges Are Imposed Pursuant To Customer Contracts And Are Part Of Taxpayer's Services.
¶6 We review the tax court's grant of summary judgment de novo. Wilderness World, Inc. v. Dep't of Revenue, 182 Ariz. 196, 198, 895 P.2d 108, 110 (1995). We also apply the de novo standard when reviewing the tax court's construction of statutes. Ariz. Dep't of Revenue v. Ormond Builders, Inc., 216 Ariz. 379, 383, ¶ 15, 166 P.3d 934, 938 (App. 2007).
¶7 Arizona imposes transaction privilege taxes based on "the amount or volume of business transacted by persons on account of their business activities." A.R.S. § 42-5008(A) (2006). A "business" generally "includes all activities or acts, personal or corporate, engaged in or caused to be engaged in with the object of gain, benefit or advantage, either directly or indirectly, but not casual activities or sales." A.R.S. § 42-5001(1) (Supp. 2010). The tax base for the telecommunications business "is the gross proceeds of sales or gross income derived from the business, including the gross income derived from tolls, subscriptions and services on behalf of subscribers or from the publication of a directory of the names of subscribers." A.R.S. § 42-5064(B).
We cite the current version of the statutory subsection, which is identical to the version in effect at the relevant time.
¶8 The key issue on appeal is whether Taxpayer's late charge revenue is properly included in its tax base. In accordance with its customer contracts for telephone and other telecommunications services, Taxpayer imposes a late charge when a customer fails to remit a timely payment:
Late Payment Charges. Payment is past due if we do not receive it by the due date shown on your invoice. Any payment for Services and equipment not made when due accrues late charges until paid at the rate of 5% per month or at the highest rate allowed by law. Acceptance of late or partial payments (even if marked "paid in full") does not waive our right to collect
all amounts that you owe us. If your Service has been suspended due to non-payment, you may be charged a reactivation fee.
¶9 The parties do not dispute that Taxpayer is in the intrastate telecommunications business and generally subject to the transaction privilege tax under the telecommunications classification. See A.R.S. § 42-5064(A) (defining the telecommunications classification as comprising "the business of providing intrastate telecommunications services"), (E)(4) (defining the term "intrastate telecommunications services" as meaning "transmitting . . . sounds . . . by wire, radio waves, light waves or other electromagnetic means if the information transmitted originates and terminates in this state"). Taxpayer contends, however, that the late charges are not a "service" and are not in exchange for continued telecommunications service.
The fact that these late charges are listed separately in Taxpayer's "Terms and Conditions of Services" and are not listed in the "Monthly Service Charges" section of customer invoices is not dispositive. Taxpayer bears the burden to rebut the presumption that its late charges are part of the tax base, see A.R.S. § 42-5023 (2006), and cannot use its own classifications to avoid taxation. See Puget Sound Energy, Inc. v. City of Bellingham, 259 P.3d 345, 348, ¶ 14 (Wash. Ct. App. 2011).
¶10 Arizona's statute levies a tax on the intrastate telecommunications business. See A.R.S. § 42-5064(B). Establishing the terms of payment is an integral part of Taxpayer's business. Late charges accrue under Taxpayer's agreements for telecommunications services when payment is untimely, thereby underscoring that their assessment is part of the business.
¶11 Moreover, the late charge provision is integral to and has no function apart from the subscription of services. Late charges are designed to encourage all subscribers to make timely payments. Thus, even assuming that a late charge and a subscription fee are analytically distinct, as Taxpayer argues, both constitute "gross income derived from the business." Id. Therefore, the tax court properly rejected Taxpayer's argument that a late charge is somehow unrelated to the business of telecommunications.
¶12Taxpayer asserts the tax court improperly considered the late charge a separate "service"; however, when read fully and in context, the court's minute entry indicates the court suffered no analytical misconception. The services of record here are the telecommunications services. Although Taxpayer disputes the characterization of its charges as a payment in exchange for delaying the timely payment of subscription fees, Taxpayer supplies no record evidence as to exactly what its customers receive in return for remitting late charges. Nor is there anything in the record to indicate that customers who refuse to pay late charges continue to receive service.
¶13 In sum, we hold that Taxpayer's late charges are linked to and paid in exchange for telecommunications services. Consequently, these receipts constitute gross income for the purpose of A.R.S. § 42-5064(B).
II. As A Matter Of Law, Taxpayer's Tax Base Includes The Late Charges.
¶14 The parties also dispute whether the tax court applied the correct statutory analysis in resolving whether the late charges are includable in the tax base. We review the tax court's statutory interpretation de novo. Ormond Builders, 216 Ariz. at 383, ¶ 15, 166 P.3d at 938.
¶15 We presume "that all . . . gross income derived by a person from business activity classified under a taxable business classification comprise the tax base for the business until the contrary is established." A.R.S. § 42-5023. For the telecommunications classification, the tax base "is the gross proceeds of sales or gross income derived from the business, including the gross income derived from tolls, subscriptions and services on behalf of subscribers or from the publication of a directory of the names of subscribers." A.R.S. § 42-5064(B). Section 42-5001(4) broadly defines "gross income" as "the gross receipts of a taxpayer derived from trade, business, commerce or sales and the value proceeding or accruing from the sale of tangible personal property or service, or both, and without any deduction on account of losses." (Emphasis added.)
¶16 These statutes cover the late charges because they are part of Taxpayer's gross receipts and are derived from its business. See A.R.S. §§ 42-5001(4), -5064(B). Further, these statutes are devoid of any language excluding late charges.
¶17 Taxpayer contends, however, that we must resort to statutory rules of construction to determine whether its late charges are properly included in the tax base in light of A.R.S. § 42-5064(B)'s listing of "tolls, subscriptions and services on behalf of subscribers or from the publication of a directory of the names of subscribers." The Department counters that late charges are clearly covered, and resort to the rules of construction is unwarranted. Because we conclude the statutory language unambiguously covers the services, we need not resort to the ejusdem generis and expressio unius est exclusio alterius rules of construction. See Paging Network of Ariz., Inc. v. Ariz. Dep't of Revenue, 193 Ariz. 96, 97-98, ¶¶ 8-13, 970 P.2d 450, 451-52 (App. 1998) (explaining that the rules of statutory construction have no application to an unambiguous statute and concluding that former A.R.S. § 42-1310.04(C) unambiguously defined intrastate telecommunications services).
See Puget Sound Energy, 259 P.3d at 347-48, 11 10-15 (holding that a statute taxing "the business of selling or furnishing electric light and power" was unambiguous, was not restricted to revenue obtained from providing electricity, and extended to late payment fees).
Further, even were we required to consider the rules of statutory construction, we find Taxpayer's arguments with respect to ejusdem generis and expressio unius est exclusio alterius unavailing.
III. The Late Charges Do Not Derive From Separate Business Activities Under Ebasco Services and Holmes & Narver.
¶18 Taxpayer alternatively argues that the tax court failed to recognize that not all money a business receives is necessarily included in the tax base. Arizona courts have outlined the standard for excluding non-taxable revenue in Ebasco Services, Inc. v. Arizona State Tax Commission, 105 Ariz. 94, 459 P.2d 719 (1969), and State Tax Commission v. Holmes & Narver, Inc. , 113 Ariz. 165, 548 P.2d 1162 (1976).
¶19 Ebasco Services involved a taxpayer whose corporate umbrella covered multiple services, including construction contracting and engineering/design. 105 Ariz. at 96, 459 P.2d at 721. The Arizona Supreme Court held that receipts from engineering and design services by a taxpayer that also offers contracting services are not taxable under the contracting classification. Id. at 98, 459 P.2d at 723.
¶20 In both Ebasco Services and Holmes & Narver, our supreme court concluded that engineering and prime contracting are distinct businesses, and often persons will purchase engineering services separately from prime contracting services. Ebasco Servs., 105 Ariz. at 96, 459 P.2d at 721; Holmes & Narver, 113 Ariz. at 169, 548 P.2d at 1166. Here, Taxpayer identifies no non-taxable, non-telecommunications business activity from which the late charge revenue derives. No customer would be paying Taxpayer a late fee if the customer had not already purchased telecommunications services.
¶21 In Holmes & Narver, our supreme court outlined a three-part test for distinguishing taxable from non-taxable sources of revenue. 113 Ariz. at 169, 548 P.2d at 1166. To establish the existence of two lines of revenue, one taxable and one not, the taxpayer must show (1) the receipts from each business are readily ascertainable, (2) the income from each business is not inconsequential in relation to the taxpayer's total taxable business, and (3) the smaller business is not incidental to the main business. Id. As the tax court in this case pointed out, the late charge revenue comprises a "tiny piece" of Taxpayer's receivables, making it inconsequential under the second test. See id. Further, even assuming the late charge is not derived from the telecommunications business, it is incidental to it under the third test because it is "inseparable from the principal business and interwoven in the operation thereof to the extent that they are in effect an essential part of the major business." See id. at 168, 548 P.2d at 1165.
¶22 Taxpayer acknowledges these cases but, in our view, mistakenly relies on Arizona Department of Revenue v. Ormond Builders. The Ormond Builders court held that payments made to a prime contractor for services by trade contractors were not taxable to the prime contractor. See id. at 387, ¶ 37, 166 P.3d at 942. The prime contractor was not liable for the tax because it served as simply a conduit for payments from school districts to trade contractors. Id. In contrast, we have no evidence here that Taxpayer served as a third-party conduit or collection agency for the subject payments.
IV. Taxpayer's Arguments Cannot Be Reconciled With The Express Tax On "Gross Receipts" Under § 42-5001(4) And The Limited Exclusionary Terms Of § 42-5002(A).
¶23 Equally unavailing is Taxpayer's argument that it "did not charge these late payment fees to make a gain, but rather, charged the late payment fees to avoid a loss, i.e. , the late payment fees represent the time value of money and also cover the cost of collection activities on past due accounts." Taxpayer further argues that authorities analyzing finance charges and bad debt should guide our analysis.
¶24 The broad language of A.R.S. § 42-5001(4) undercuts Taxpayer's arguments. This statute defines "gross income" to include "the gross receipts of a taxpayer derived from trade, business, commerce or sales and the value proceeding or accruing from the sale of tangible personal property or service, or both, and without any deduction on account of losses." A.R.S. § 42-5001(4) (emphases added). Gross income represents gross receipts, not profits or net income. We cannot reconcile the "gross receipts" language with an interpretation allowing an offset associated with or allocated to cost; indeed, such a result would frustrate the mandate to tax "gross income derived from the business" under A.R.S. § 42-5064(B).
¶25 Furthermore, Taxpayer's late charges are not covered by the legislature's express exclusions applicable to all types of transaction privilege taxes. According to material portions of A.R.S. § 42-5002 (2006):
A. For the purpose of this article the total amount of gross income, gross receipts or gross proceeds of sales shall be deemed to be the amount received, exclusive of:
1. The taxes imposed by this chapter and chapter 6, article 3 of this title, sales or transaction privilege taxes imposed by municipalities in this state and sales or transaction privilege taxes imposed in this state by Indian tribes . . . .
2. Freight costs billed to and collected from a purchaser by a retailer for tangible personal property which, upon the order of the retailer, is shipped directly from a manufacturer or wholesaler to the purchaser.
¶26 In other words, the taxpayer may exclude from gross revenue the listed taxes passed on to the consumer, including those imposed by municipalities and tribes, along with freight costs. See id. Plainly, Taxpayer's late charges do not fall within this statute, and are not excluded. See id.
V. Taxpayer's Analogies To Finance Charge And Bad Debt Authorities, And Reliance Upon Non-Arizona Statutes, Are Not Persuasive.
A. The Arizona Authorities
¶27 To buttress its argument, Taxpayer directs us to two administrative code provisions and a statute authorizing exemptions from gross income for financing charges and bad debt: Arizona Administrative Code ("A.A.C.") R15-5-106, A.A.C. R15-5-2011, and A.R.S. § 42-6004(A)(5) (Supp. 2010).
We cite the current version of the statute, which is identical in all material respects to the version applicable to the audit period.
¶28 Under A.A.C. R15-5-106, a taxpayer may claim an exemption from tax for finance charges incurred in connection with the retail sale of tangible personal property, in cases in which the charges result from the sale of property on credit or under an installment contract. No party has asserted that this case involves the retail sale of tangible personal property; accordingly, the regulation does not apply. See generally Brink Elec. Constr. Co. v. Ariz. Dep't of Revenue, 184 Ariz. 354, 359-60, 909 P.2d 421, 426-27 (App. 1995) (explaining that retail exemptions apply to retailers and refusing to apply a retail exemption to the prime contracting classification).
¶29 Under A.A.C. R15-5-2011, a taxpayer may take a deduction for bad debt on proceeds previously recorded as taxable. Taxpayer's charges were not previously reported as taxable, and we have no information they relate to bad debt. The late charges do not fit into any of the excluded categories.
¶30 We also find no support for Taxpayer's reliance on A.R.S. § 42-6004(A)(5), which exempts the "[i]nterest on finance contracts" from a transaction privilege tax levied by "[a] city, town or special taxing district." The statute is silent as to state levies, and is located under the article entitled "Administration of Local Excise Taxes." Accordingly, we hold that A.R.S. § 42-6004(A)(5) does not apply to state transaction privilege taxes, and consequently does not exempt Taxpayer's late charges from tax pursuant to A.R.S. § 42-5064.
This holding eliminates the need to consider whether the other statutory terms apply or are even analogous.
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B. The New York And Indiana Authorities
¶31 We are also not persuaded by Taxpayer's reliance on authorities from Indiana and New York. The New York regulations cited by Taxpayer are readily distinguishable. One provides that "[a]ny charge for credit" constitutes "consideration for the extension of credit" that "shall not be included in the receipt subject to sales tax." N.Y. Comp. Codes R. & Regs. tit. 20, § 526.5(h)(1) (West 2011). This exclusion from taxable receipts also applies to late payment charges by utility companies, which are considered charges for interest and are not part of the sale price of the service. Id. at § 527.2(f). Arizona's statutes and regulations are devoid of such language.
¶32 Taxpayer additionally relies on the Indiana Department of Revenue's determination that late payment fees are not subject to Indiana's utility receipts tax on income derived from telecommunications services. Ind. Dep't of State Rev., Supp. Ltr. of Findings: 09-0224, at 2 (Sept. 30, 2009). In light of Indiana's statutory definition of "telecommunications services" and an earlier letter of findings by the Indiana Department of State Revenue, we find this authority distinguishable.
¶33 The Indiana Code defines "telecommunications services" for purposes of its income tax as "the transmission of messages or information by or using wire, cable, fiber optics, laser, microwave, radio, satellite, or similar facilities," and excludes (1) value-added service revenues for purposes "other than transmission" and (2) video programming transmissions provided by or generally considered comparable to a television or radio broadcast station. Ind. Code § 6-2.3-1-13 (West 2011). Based on this statute, the Indiana Department of State Revenue concluded in 2008 that services for purposes other than transmission (including caller identification and speed-dial) are not telecommunications services subject to tax under Indiana law. Ind. Dep't of State Rev., Ltr. of Findings: 08-0417, at 8 (Oct. 15, 2008) (citing Ind. Code § 6-2.3-1-13).
¶34 In contrast, Arizona's statutes do not limit the tax base to telecommunications "transmissions," and even extend the tax to "the publication of a directory of the names of subscribers." A.R.S. § 42-5064(B); see People's Choice TV Corp. v. City of Tucson, 202 Ariz. 401, 403-04, ¶ 8, 46 P.3d 412, 414-15 (2002) (rejecting the proposition that A.R.S. § 42-5064 taxes only transmissions of information, and not services). Furthermore, the applicable regulation does not expressly exclude late charges. Accordingly, we find the Indiana authorities cited by Taxpayer unpersuasive.
CONCLUSION
¶35 Finding none of Taxpayer's arguments persuasive, we affirm the tax court's judgment. We therefore also deny Taxpayer's request for attorneys' fees on appeal pursuant to A.R.S. § 12-348(B)(1) (2003).
LAWRENCE F. WINTHROP, Chief Judge CONCURRING: MICHAEL J. BROWN, Presiding Judge PHILIP HALL, Judge