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ARIZONA TAX 2010 UPDATE
This update will provide you with an overview of Arizona tax developments that have occurred over the past year focusing on 2010 tax
legislation and court cases. We trust that you will find this annual compilation of Arizona tax developments useful and interesting.
Should you have any questions about the developments reported here, or their potential applicability to your business, please feel
free to call Pat Derdenger, the head of our state and local tax practice, at 602.257.5209, or e-mail him at pderdenger@steptoe.
com. We are also happy to announce that the past editions of our Arizona Tax Updates are now available on our website; please
visit www.steptoe.com/aztaxupdates to view them.
Arizona’s Major Tax Development of 2010: Voter-Approved Sales Tax Increase
New Rates in Some Cities Will Exceed 10% has entered into a contract that contains a provision that
O
n May 18, 2010, Arizona voters approved Propo- entitles the taxpayer to recover from the purchaser the
sition 100, which temporarily increases Arizona’s amount of the additional tax.” Ariz. Rev. Stat. § 42-
sales tax rate by 1% for most tax classifications, 5010(I)(1). Thus, most businesses are protected from the
such as retail sales, personal property rentals, and prime tax increase for 120 days with respect to pre-existing
contracting. As a result, the state component of the sales contracts (unless the contract permits the business to
tax will increase from 5.6% to 6.6%. Counties and cities recover the increased tax from the customer).
also impose sales taxes – in some locations the com- Contractors. Prime contractors, on the other hand,
bined rate may exceed 10%, putting Arizona near the have their own special grandfather clause which provides
top among states with a sales tax. At the time of passage, that “any increase in the rate of tax that is imposed . . .
the sales tax hike was expected to bring in about $1 bil- and that is enacted by the legislature or by a vote of the
lion in additional revenue per year. The express terms of people does not apply with respect to contracts entered
Proposition 100 (which amended the state constitution) into by prime contractors or pursuant to written bids
specify that the sales tax increase will automatically ex- made by prime contractors on or before the effective
pire on May 31, 2013. Of course, voters would be free date of the legislation or the date of the election enact-
to extend the tax increase through another ballot initia- ing the increase.” Ariz. Rev. Stat. § 42-5010(H). Apply-
tive, or the legislature could act to extend the increase ing the grandfather clause provision to the Proposition
(which would be more difficult, since it would require a 100 sales tax increase, the original, lower tax rate applies
supermajority under state law). to contracts or written bids made by prime contractors
on or before May 18, 2010, the day of the election.
The Grandfather Provision
Change Orders. Application of the grandfather clause
Whenever the sales tax rate goes up, grandfather clause in the prime contracting context is fairly clear when
provisions go into effect to preserve pre-existing con- contractors merely enter into a contract prior to May
tracts at the previous, lower rate of tax. The Legislature 18, 2010. However, application of the grandfather
enacted the grandfather clause provisions so that busi- clause has become rather grey when the parties enter
nesses who counted on the original, lower sales tax rate into a change order that changes the scope or terms of
in entering into contracts would not be unduly harmed. the original contract. Some contractors have argued
This is particularly relevant for prime contractors who that a change order is merely a part of the original con-
took the lower sales tax rate into account when they tract and, like the original contract, should be taxed at
bid on projects. In such cases, the grandfather clause the pre-May 18, 2010 tax rate. However, the Arizona
prevents the financial harm that would occur if prime Department of Revenue has posted guidance on its
contractors had to pay a higher sales tax on projects website on this issue and takes the following official po-
when they had counted on the rate in effect at the time sition: “Change orders executed after May 18, 2010 are
they submitted the bid or entered into the contract. subject to the higher rate of 6.6% regardless of when
Retailers and Others. The statutory language of the the original contract was executed or when the change
grandfather clause, with respect to taxpayers other than order process began.” Transaction Privilege Tax FAQ
prime contractors, provides that “[a]ny increase in the rate Prop. 100 (Ariz. Dep’t of Revenue 2010), http://www.
of tax . . . does not apply for a period of one hundred azdor.gov/About/FAQs/TPTProp100.aspx. In light of
twenty days from the date of the tax rate increase . . . the Department’s position, contractors should use the
with respect to written contracts entered into before the higher tax rate for any additional charges made under a
effective date of the tax rate increase unless the taxpayer change order.
Arizona Tax U p d a te
SALES AND USE TAX Senate Bill 1137 (Ariz. Sess. Laws 2010 Chapter 202): Au-
thorizes disclosure of confidential tax information to the
LEGISLATION Department of Transportation.
ARS § 42-2003 lists specific entities to whom confiden-
House Bill 2513 (Ariz. Sess. Laws 2010 Chapter 154): tial tax information may be disclosed. This bill adds to
Requires cities that collect their own transaction privilege that list, authorizing disclosure of confidential tax infor-
taxes to report to the Department of Revenue each year the mation to “the department of transportation for its use
amount of taxes collected by the city. in administering taxes and surcharges” under the trans-
Municipalities may enter into agreements with the De- portation laws. The Department of Transportation ad-
partment of Revenue that authorize the Department to ministers car rental excise taxes, while the Department
collect transaction privilege and affiliated excise taxes. of Revenue administers the state sales tax on rentals of
This bill requires those cities that opt to collect their tangible personal property. As a result of this bill, the
own taxes to report to the Department on or before two departments may communicate back and forth to
September 1 of each year the total amount of transac- verify that taxpayers are paying both taxes.
tion privilege and affiliated excise taxes collected by the
city in the preceding fiscal year. House Bill 2012 (Ariz. Sess. Laws 2010 Chapter 12): The
Arizona Department of Revenue May Charge a License Re-
House Bill 2510 (Ariz. Sess. Laws 2010 Chapter 260): newal Fee and Increased New License Fees.
Repeals exemption from municipal tax enacted for the This bill permits the Arizona Department of Revenue
Tempe Town Lake construction. Adds an exemption for to charge a one-time sales tax license renewal fee. The
income from a commercial lease between a reciprocal renewal fee only applies to licenses issued before July 1,
insurer or corporation, and an affiliated corporation. 2009. The bill also allows the Department to increase
This bill deleted language exempting from municipal the fee for new licenses until June 30, 2011. Finally,
transaction privilege, sales, and use tax “income received the bill establishes that businesses that owe more than
from a contract from constructing any lake facility de- $100,000 of annual sales tax or telecommunications ser-
velopment in a commercial enhancement reuse district.” vice excise tax must make estimated payments in June
In addition, the bill adds an exemption from municipal 2010, 2011, and 2012.
transaction privilege, sales, and use tax for “gross pro- House Bill 2160 (Ariz. Sess. Laws 2010 Chapter 225): Ex-
ceeds of sales or gross income derived from a commer-
cial lease in which a reciprocal insurer or a corpora-
tension of Exemptions for Certain Sales to Environmental
tion leases real property to an affiliated corporation.” Technology Manufacturers.
The bill defines affiliated corporation as one that is at House Bill 2160 extends for an additional 5 years the
least 80% controlled by the lessor; controls at least 80% exemption under the transaction privilege tax utility
of the lessor; or is at least 80% controlled by a corpora- classification for sales of electricity, water, and natural
tion or reciprocal insurer that also controls at least 80% and artificial gas to qualified environmental technology
of the lessor. A reciprocal insurer “means an unincorpo- manufacturers, producers or processors. The bill also
rated aggregation of subscribers operating individually extends for another 5 years the retail classification ex-
and collectively through an attorney-in-fact to provide emptions for sales of coal, petroleum, coke, natural gas,
reciprocal insurance among themselves.” virgin fuel oil, and electricity purchased by a qualified
environmental technology manufacturer used in genera-
House Bill 2445 (Ariz. Sess. Laws 2010 Chapter 258): tion of on-site power.
Clarifies that the mining classification applies only to ma-
terial mined within the State of Arizona. House Bill 2257 (Ariz. Sess. Laws 2010 Chapter 316):
This bill adds a somewhat obvious requirement to the
Limitations Imposed on Cities’ Ability to Impose New or In-
definition of mining classification. It specifies that the creased Taxes or Fees.
classification applies only to mineral products that have Under this new law, cities and towns may not assess new
been “mined, quarried or otherwise extracted within taxes or fees or increase existing taxes or fees without
the boundaries” of Arizona. first proving that such taxes or fees are authorized by
statute. Development fees and property tax rate in-
House Bill 2700 (Ariz. Sess. Laws 2010 Chapter 294): creases are excluded from this rule. In addition, cities
Extends solar energy tax incentives through 2016. and towns also must post notice of the new or increased
Under the prime contracting classification, Arizona law taxes or fees on their websites at least 60 days before a
temporarily allows deduction of gross income derived vote on the taxes or fees.
from a contract to provide and install a solar energy de-
vice. ARS § 42-5075(14). This bill extends the deduc-
tion six years, through taxable periods ending before
January 1, 2017.
2
2010
House Bill 2434 (Ariz. Sess. Laws 2010 Chapter 150): Ex- in this state.” A.R.S. § 42-5064(E)(4) (Supp. 2009). Dis-
emption from Car Rental Surcharge for Vanpool Vehicles. agreeing with Brinks, the court held that Brinks’s system
constituted an intrastate loop that began and ended in
This bill creates an exemption from car rental surcharges
Arizona. The temporary stop in Texas did not create an
for vehicles used in certain vanpools transporting 7-14
interstate communication, and Brinks was not exempt
passengers (including the driver) from their residences
from Phoenix’s and Peoria’s transaction privilege taxes.
to their places of employment.
One judge dissented, arguing that Brinks’s service con-
House Bill 2514 (Ariz. Sess. Laws 2010 Chapter 52): Char- stitutes interstate telecommunications. According to the
ter Schools Qualify for Certain Sales and Use Tax Exemp- dissent, the initial alarm signal from Arizona to Texas is
tions. one interstate communication, and the subsequent calls
from Brinks’s monitoring station in Texas to the ho-
This bill establishes that charter schools now qualify for
meowners and the local police in Arizona are separate
Arizona’s sales and use tax exemption for food, drink,
interstate communications. Brinks therefore is engaged
condiments, and accessory property served to students
in interstate telecommunications services and is exempt
for consumption on campus.
from Phoenix’s and Peoria’s taxes under A.R.S. § 42-
House Bill 2627 (Ariz. Sess. Laws 2010 Chapter 326): Al- 6004(A)(2).
lows Certain Counties to Levy Both Transportation Excise
Taxes and Road Excise Taxes. HOT OFF THE PRESS
This bill permits counties with a population of 200,000 The Arizona Supreme Court released its opinion in the
to 400,000 to elect to levy both transportation excise Brinks case on March 3, 2011. The Court rejected the
taxes and road excise taxes. Previously such counties “loop” theory espoused by the court of appeals and re-
could only impose one of these taxes, but not both. manded the case to the Court of Appeals for a decision
in the first instance on the issues that were not addressed
COURT DECISIONS by the Court of Appeals the first time around: whether
the taxes could be sustained on the basis that they are on
City of Peoria v. Brinks Home Security, Inc., 224 Ariz. 278, “monitoring” services and not “telecommunications,”
229 P.3d 1020 (Ariz. Ct. App. 2010). A telecommunica- and if so whether taxation would violate the Commerce
tions services provider does not qualify for the interstate Clause. See City of Peoria v. Brinks Home Security, Inc.,
services exemption from municipal transaction privilege 2011 WL 721921 (Ariz. 2011).
tax if the telecommunications originate and terminate
within the state, regardless of whether the communications DECISIONS OF THE DIRECTOR
travel outside the state.
Case No. 200800211-S (January 22, 2010). Taxpayer’s
Brinks sells alarm monitoring systems to homes in software sales to a newspaper publisher were not deduct-
Phoenix and Peoria. Triggered alarms initiate a signal ible under ARS § 42-5061(B)(1) as “[m]achinery, or equip-
that travels from the customer’s phone line in Arizo- ment, used directly in manufacturing.”
na to Brinks’s monitoring station in Texas. A human
monitor in Texas then calls the customer in Arizona and, A software company licensed software to a newspaper
if necessary, the local police department. Phoenix and publisher and generated income through a software
Peoria taxed Brinks’s alarm monitoring services under maintenance agreement. The company argued that its
Phoenix City Code § 14-470 and Peoria City Code § software maintenance revenues were deductible under
12-470. Those statutes tax telecommunication services the exemption for income from sales of “[m]achinery,
and specifically apply to “monitoring services relating or equipment, used directly in manufacturing.” ARS §
to a security or burglar alarm . . . [that] . . . transmits or 42-5061(B)(1). The director surprisingly held that the
receives signals or data over a communications channel.” exemption did not apply. First, newspaper publishers are
Brinks challenged the tax, arguing it was exempt un- not necessarily manufacturers, considering the preva-
der A.R.S. § 42-6004(A)(2), which prohibits cities from lence of digital publishing and the emphasis on “pre-
levying a transaction privilege tax on “[i]nterstate tele- sentation of a publication’s content rather than simply
communications services.” According to Brinks, alarm the transformation of paper.” Instead, the business of
signals from Phoenix to the monitoring station in Texas publishing newspapers has its own unique classification
were one interstate communication, and the calls from under ARS § 42-5065. Second, even if the printing pro-
Texas back to Arizona were a separate interstate com- cess itself is manufacturing, the computer software was
munication. Because the Code does not define inter- not used “directly” in the process as required by the ex-
state telecommunication, the court looked to the Code’s emption. Instead, the software functions in pre-printing
definition of “intrastate telecommunications services,” design and layout, and the proceeds from these software
which includes all electromagnetic communication “if maintenance agreements are therefore not exempt.
the information transmitted originates and terminates
3
Arizona Tax U p d a te
PRIVATE TAXPAYER RULINGS 3. No deduction when used to treat acne scars.
THE FOLLOWING DEPARTMENT OF REVENUE STATEMENT 4. No deduction when used to treat oral and maxil-
lofacial defects.
ACCOMPANIES ALL PRIVATE TAXPAYER RULINGS:
5. No deduction when used for nipple reconstruction
“This response is a private taxpayer ruling and the de-
after mastectomy.
termination herein is based solely on the facts provided
in your request. The determination in this taxpayer rul- 6. Prosthetic appliance deduction when used for vocal
ing is the present position of the department. This deter- fold augmentation to treat speech impediments.
mination is subject to change should the facts prove to
be different on audit. If it is determined that undisclosed 7. Prosthetic appliance deduction when used as a peri-
facts were substantial or material to the department’s urethral bulking agent to treat stress urinary incon-
making of an accurate determination, this taxpayer rul- tinence from poorly functioning urethral sphincter
ing shall be null and void. Further, the determination is muscles.
subject to future change depending on changes in stat-
utes, administrative rules, case law or notification of a Private Taxpayer Ruling LR10-003 (February 24, 2010). The
different department position.” prime contractor classification applies to gross receipts
from sign installation, maintenance agreements, and parts
Private Taxpayer Ruling LR10-001 (January 15, 2010). In- sales incidental to maintenance.
come from sales of optional vehicle service agreements The taxpayer manufactures, installs, and maintains sig-
included in a leasing agreement is subject to transaction nage in Arizona and other states. The company requested
privilege tax as personal property rental. a ruling on whether its installation, maintenance, and
The taxpayer leases vehicles and offers an optional vehi- parts sales were subject to transaction privilege tax under
cle service agreement. It requested a ruling on whether the prime contractor classification. First, the Department
the service agreements are subject to transaction privi- ruled that sign installation falls under prime contractor
lege tax, citing AAC R15-5-105, which provides an ex- classification because installation comes within the defi-
ception for services rendered in addition to retail sales if nition of “modification.” ARS § 42-5075 defines prime
the service charge is invoiced separately from the retail contractor as one who performs “modification” of any
sale. The Department explained that vehicle leases fall structure; modification includes “construction, altera-
under personal property rental, not retail sales classifica- tion, repair, addition, subtraction, improvement, wreck-
tion. Exemptions under one business classification do age, or demolition.” Second, prime contracting classifica-
not apply to a different classification. Personal property tion applies to receipts from maintenance agreements as
rental classification does not contain an exemption for “repairs, alterations, or additions. Third, prime contrac-
services rendered. Therefore, all income derived from tor classification applies to parts sales incidental to main-
taxpayer’s vehicle service agreements is taxable as per- tenance. The Department explained that tax treatment
sonal property rental, regardless of how it is invoiced. of parts sales without installation depends on whether
the taxpayer operates a separate retail parts business in
Private Taxpayer Ruling LR10-002 (February 10, 2010). Tis- Arizona. If the company engages in retail parts sales not
sue filler implants for injection by physicians qualify for the incidental to installation and maintenance, then all repair
prosthetic appliance deduction from retail sales only when parts sold without installation would be subject to retail
sales classification.
used for certain limited treatment purposes.
ARS § 42-5061 deducts prosthetic appliances from re- Private Taxpayer Ruling LR10-004 (March 4, 2010). Prime
tail sales classification. But the code defines prosthetic contracting classification applies to gross proceeds of a
appliance as a device “necessary to support or take the call center located out of state that acts as an intermediary
place of a part of the body, or to increase the acuity between Arizona customers and repair contractors.
of a sense organ.” The Department explained that this
definition requires an “absence of a body part or a body A call center located in New York requested a ruling that
function.” The taxpayer uses the tissue filler injections it was not a contractor under ARS § 42-5075(O)(8). The
for many treatments, and the Department ruled on each call center’s business operated by taking calls from re-
treatment separately. The rulings turn on whether the tail customers (some of which were located in Arizona)
physician uses the tissue filler to support a normal body who sought referrals to local repair contractors. The call
function that is functioning improperly. center not only located the appropriate contractor, but
invoiced the customer for the contracting service, in-
1. No deduction when used to treat facial wrinkles cluding an upcharge for the call center’s referral services.
and folds. The Department ruled that the call center was a contrac-
tor subject to prime contractor transaction privilege tax
2. No deduction when used to restore or correct signs because all of its proceeds were “derived from the busi-
of facial fat loss in people with HIV.
4
2010
ness of prime contracting.” Even though the call center services. The Department explained that “the principal
was located outside Arizona, “the location of the tax- characteristic of a rental or lease is the giving up of pos-
able event for a prime contracting activity is the county session to the lessee so that he, as opposed to the lessor,
where the prime contracting takes place.” exercises control over and uses the leased or rented prop-
erty.” By installing the monitoring device in customers’
Private Taxpayer Ruling LR10-005 (March 5, 2010). Trans- cars, the company relinquishes possession and control
port fees charged to potential customers by motor vehicles of the property. Because of this, the Department ruled
retailers are subject to transaction privilege tax under the that all income derived from installing the device—in-
retail classification. cluding income from fees, costs and charges described
The taxpayer was a motor vehicles retailer that owned in the “service agreement”—are subject to transaction
several dealerships at different locations. For a fee and privilege tax as personal property rental.
upon customer request, the retailer transported vehicles Private Taxpayer Ruling LR10-007 (March 24, 2010). Com-
from one dealership to another more convenient to the panies licensing computer software are engaged in leasing
customer’s location. The taxpayer argued that transfer
fees are not subject to transaction privilege tax because
personal property, and gross receipts from licenses of soft-
the fees are not contingent upon sale of the vehicle ware for use in Arizona are subject to transaction privilege
and so are unrelated to the taxable sale. Also, when the tax as personal property rental. Gross receipts are taxable
customer does not ultimately purchase the vehicle, the regardless of whether the licensee allows subsequent use
transfer fee involves only the provision of a non-taxable of the software by third parties outside Arizona.
service. The taxpayer entered into a licensing agreement to pro-
The Department ruled that transaction privilege tax vide “mainframe” and “midrange” software to a licens-
applies to gross income derived from vehicle transfer ee who would install the mainframe software at a data
fees because the service activity “is an integral part of processing center in Arizona. The licensee would then
the Company’s retail business of selling motor vehicles.” distribute midrange software to clients outside Arizona,
Quoting Walden Books Co. v. Ariz. Dep’t of Revenue, 198 who would pay for services accessed through the soft-
Ariz. 584 (App. 2000). The Department explained that ware. The taxpayer first argued that its licenses were not
“[s]ervices intended to induce customers to buy more subject to transaction privilege tax because “the over-
goods are not provided ‘in addition to’ selling goods; whelming usage of the software occurs outside Arizona.”
they are ‘a part of the sales’ of those goods, and are in- Second, the taxpayer argued that software licenses are
cluded in retail ‘gross’ income.” In Walden Books, the not leases and therefore cannot be taxable as leases of
taxpayer sold book club memberships, which the court tangible personal property.
held were subject to transaction privilege tax because On the first issue, the Department explained that gross
the taxpayer provided the service to increase sales. The receipts derived from any sale (whether retail sale or
Department further explained that income from trans- lease) of tangible personal property are taxable unless
porting merchandise prior to retail sale is subject to tax. (a) the vendor delivers the property for use exclusively
Under Arizona Administrative Code rule R15-5-133, outside the state or (b) the vendor’s customers make sub-
which covers delivery charges in connection with retail sequent retail sales, in which case the initial transactions
sales, “[w]hen the freight cost is incurred any time prior are non-taxable “sales for resale.” Here, the licensee used
to the time of the retail sale, such cost is part of the gross the mainframe software in Arizona and did not merely
sale and, therefore, subject to the tax.” resell the software to its out-of-state clients. As a result,
the entire amount of the taxpayer’s gross receipts were
Taxpayer Information Ruling LR10-006 (March 5, 2010). subject to transaction privilege tax as personal property
Income derived from ignition monitoring systems installed rentals under ARS § 42-5071.
in cars of drivers participating in state-mandated alcohol
On the second issue, the Department ruled that a soft-
monitoring programs is subject to transaction privilege tax ware license is a lease for purposes of taxation and is
under the personal property rental classification. taxable as personal property rental rather than retail
Taxpayer provides ignition monitoring systems to driv- sales. The Department explained that “a software license
ers who have been convicted of DUI and are subject to should not be confused with the common law concept
state alcohol reporting programs. The taxpayer installs of license.” A software license is different from tradition-
devices that require a breath-alcohol test before the ig- al licenses because software licensees effectively “own”
nition will start. It requested a ruling on whether the the software and may use it as often and for as long as
income it generates through “monitoring fees” is subject they like. Tax treatment, according to the Department, is
to transaction privilege tax, asserting that it does not based on the underlying rights that arise from a transac-
“rent” any tangible property, but only charges fees for tion, not the particular label it is given.
5
Arizona Tax U p d a te
PROPERTY TAX House Bill 2247 (Ariz. Sess. Laws 2010, Chapter 68): New
section added for appeals to the court by new owner of
2010 LEGISLATION property.
This bill renumbers former A.R.S. § 42-16205(B) as a
Senate Bill 1201 (Ariz. Sess. Laws 2010, Chapter 303): new section, A.R.S. § 42-16205.01, that specifically re-
Makes various revisions to the renewable energy tax incen- lates to appeals to the court by new owners of a property.
tive statutes established in 2009 under the Arizona Renew- The statute allows the new owner of a property that was
able Energy Tax Incentive Program. valued by the assessor and whose valuation or classifica-
tion was not appealed by the former owner to appeal
Qualifying businesses can receive a real and personal
directly to the tax court on or before December 15 of
property tax reduction. In order to qualify, a business
the year the taxes are levied.
must make a capital investment of at least $25 million,
which will allow the business to have qualifying proper- Senate Bill 1287 (Ariz. Sess. Laws 2010, Chapter 279):
ties placed in Class 6, with an assessment ration of 5% Amending the provision governing payment of property tax-
instead of Class 1, with an assessment ration of 21%. The
es by electronic funds transfer.
classification is effective for either 10 or 15 years, de-
pending on the amount of high paying jobs the business This bill amends A.R.S. § 42-18051(E), regarding pay-
produces. While there are no limits on the amount of ment of real and personal property taxes by electronic
property tax saving for a qualified business, the last year funds transfer. The previous statute allowed the county
for new properties to be reclassified as a Class 6 property treasurer to require electronic submission of all payments
under the program is tax year 2014. In addition, this bill and supporting documentation for owners of property
changes the eligibility requirements for property to fit who submitted tax payments to the county treasurer in a
within Class 6 so that a facility used primarily in renew- lump sum exceeding $50,000 or who submitted 100 or
able energy manufacturing will qualify (previously the more personal property payments. The new statute low-
facility had to be used exclusively in renewable energy ers the number of individual payments by one taxpayer
manufacturing to qualify). before electronic submission may be required from 100
to 50, and removes the specific requirement that they be
House Bill 2504 (Ariz. Sess. Laws 2010, Chapter 321): personal property tax payments. Rather, the require-
Makes changes to the Government Property Lease Excise ment now apparently applies to both real and personal
Tax (GPLET). property tax payments.
The GPLET, enacted in 1996, served as the successor to Senate Bill 1217 (Ariz. Sess. Laws 2010, Chapter 80):
the possessory interest tax. It applies to property leased Emergency measure to increase the number of members on
from a government entity, and is based on the square
the State Board of Equalization.
footage of a building, not its value. (For more infor-
mation on GPLET, see infra Section 7, p. 28.) This bill The State Board of Equalization (SBOE) is responsible
amends GPLET is several ways. Notably for lessees: for hearing property valuation and classification appeals
from taxpayers in Pima and Maricopa counties. All oth-
• It changes the requirement for who will collect the er counties appeal to their county board of equalization.
annual excise tax: it will be the county treasurer A.R.S. § 42-16165 requires that all appeals made to the
rather than the government lessor. SBOE be heard and decided by October 15 of the year
• It keeps the current tax rates for existing leases and of valuation. In 2009, the SBOE received approximate-
leases entered into before January 1, 2011, but es- ly 17,000 tax appeals, about four times the number the
tablishes new rates for leases entered into thereafter board was designed to hear. Consequently, the SBOE
(the rate doubles). was not able to hear and decide all appeals by the Oc-
tober 15 deadline. In response, this emergency measure
• It permits, rather than requires, that property be added additional members to the current SBOE, and
abated if it meets the requirements for abatement. created a committee to identify and analyze issues in the
• It modifies the requirements for abatement of the property tax appeals process and make recommendations
GPLET. to the legislature by December 2010.
• It requires the prime lessee to notify the county Senate Bill 1005 (Ariz. Sess. Laws 2010, Chapter 158):
treasurer and the government lessor when applying
for abatement.
Adds property tax exemption for educational trap and skeet
shooting clubs.
• It sets forth new requirements for approval of leases
that will receive tax abatement, and exempts non- A.R.S. § 42-11104(C) provides that property and build-
abated properties from the requirements of approval ings, including land, improvements, furniture and equip-
of new leases under certain specified circumstances. ment owned by a nonprofit organization recognized un-
6
2010
der section 501(c)(3) are exempt from taxation. The an interest in the appeal, and the court must therefore
provision was formerly limited to charter schools. This necessarily maintain jurisdiction. The court noted that
bill adds section A.R.S. § 42-16165(C)(2), which adds the interests of the new owner were clearly paramount
an exemption from property taxes for educational trap in obtaining the second type of relief, the correct future
and skeet shooting clubs that meet certain requirements. valuation of the property, and thus the new owner would
be well-advised to participate in the appeal through
House Bill 2159 (Ariz. Sess. Laws 2010, Chapter 37): State joinder or substitution; however, the court found that
Board of Equalization may issue final decisions. this was not a requirement of retaining jurisdiction.
Arizona law permits county boards of supervisors to
contract with the State Board of Equalization to per- Hing v. Maricopa County, 581 Ariz. Adv. Rep. 50, 2010 WL
form hearings and make property valuation decisions. 1794494 (May 4, 2010). Direct appeals of the county as-
However, under previous law any decision by the State sessor’s valuation pursuant to A.R.S. § 42-1601(A) must be
Board of Equalization was subject to final approval by filed by December 15 of the year of valuation, not December
the county board of supervisors. This bill allows State 15 of the year the tax is levied.
Board of Equalization decisions to be final without the A.R.S. § 42-1601(A) requires that direct appeals of the
need for approval by the county board of supervisors. county assessor’s valuation to the Arizona Tax Court
must be filed on or before December 15. Here, the tax-
House Bill 2507 (Ariz. Sess. Laws 2010, Chapter 96): Clari-
payers were provided with a timely notice of valuation
fication of valuation of property split or combined by gov- for the 2009 tax year by the county assessor on March 1,
ernmental action. 2008. The taxpayers appealed the valuation to the Ari-
This bill clarifies how limited property values may be zona Tax Court on November 25, 2009, arguing that the
calculated where parcels are split, subdivided or con- statute does not specifically say whether the deadline for
solidated due to governmental action. For properties filing an appeal is December 15 of the year of the valu-
valued between January 1 and September 30, the value ation, or December 15 of the year the taxes were levied.
will be the lower of :(1) comparable properties of similar The tax court held that the most natural reading of the
use or classification; or (2) the original value determined statute was that an appeal must be filed by December 15
by current law. For properties valued between Octo- of the year of the valuation—not the year the taxes are
ber 1 and December 31, properties are valued the same actually levied.
as the original value as determined under current law;
however, in the next valuation year, the limited value Hormel v. Maricopa County, 224 Ariz. 454 (App. 2010).
will be the lower of: 1) comparable properties of similar County was bound by oral agreement to reclassify property
use or classification; or (2) the value as determined by as historic property.
current law. The taxpayer owned the Wrigley Mansion and sought
to have it reclassified as a Class Six, non-commercial
2010 PROPERTY CASES historic property, with a low, 5% assessment ratio. The
Maricopa County field agent reviewing the taxpayer’s
Maracay Thunderbird L.L.C. v. Maricopa County, 580 Ariz. claim verbally agreed to reclassify the property, and the
Adv. Rep. 4, 231 P.3d 389 (Az. Tax. Ct. 2010) (April 22, field agent’s supervisor approved the reclassification de-
2010). Tax court does not lose jurisdiction over a tax ap- cision. The County subsequently failed to reclassify the
peal when the property is sold to another owner during the property and issue refunds related to the reclassification.
appeal. The Arizona Court of Appeals held that the County was
A tax court does not lose jurisdiction over a tax appeal bound by the verbal agreement to reclassify the property.
because the property was subsequently sold to anoth- Sempre Limited Partnership v. Maricopa County, 1 CA-TX
er owner. Here, Maracay Thunderbird objected to the 08-0008 (June 6, 2010). Taxpayers are not required by
assessor’s valuation of property it owned in Maricopa
County, and filed an appeal to the Arizona Tax Court.
statute to exhaust their administrative remedies before ap-
Eight days after it filed its appeal, Maracay Thunderbird pealing directly to the tax court.
sold the parcels. Maricopa County subsequently filed Taxpayers are not required to seek administrative review
a motion to dismiss the appeal, claiming that the Tax before filing a direct appeal in the tax court. In Sem-
Court had been stripped of jurisdiction by the selling of pre, the taxpayer sought to appeal the county’s notice of
the property. The court disagreed. classification and valuation concerning its real property.
The court pointed out that in a tax appeal, two types of They did not file an appeal within the 60-day dead-
relief are typically sought: first, a refund of taxes already line for administrative review required under A.R.S. §
collected, and second, an order that the assessor cor- 42-13051. Instead, they filed an appeal directly with the
rect the valuation of the property. It is clear that a past tax court on November 15 of that year, before the De-
property owner who is seeking the first type of relief cember 15 deadline required by A.R.S. § 42-16201(A).
and wishes to recover taxes improperly collected still has The county moved to dismiss the appeal on the grounds
7
Arizona Tax U p d a te
that the taxpayers had not exhausted their administra- render Class 9 meaningless, as virtually no property could
tive remedies and thus, the county argued, had no right qualify for it. Rather, the court held that Class 9 only
to file a direct appeal with the tax court. The tax court requires a demonstrable reversionary interest at the time
agreed with the county, and dismissed the appeal for of taxation, and not a guarantee that improvements will
lack of jurisdiction. revert.
The court of appeals reversed, holding that both the Under the second criteria, the County argued that the
plain language of the statute and the legislative history hotel and resort was not primarily used for athletic,
surrounding it supported the view that there is no statu- recreational, entertainment or convention activities. The
tory requirement that taxpayers exhaust their adminis- Tax Court had previously determined that the hotel
trative remedies before pursuing a direct appeal. and resort met the primary use requirement; however,
the County neglected to cross appeal that issue. As a
Swift Transportation Co., Inc. v. Maricopa County, 225 Ariz. result, the Court of Appeals did not allow the County
265 (App. 2010). A split or combination of property may to raise the issue on appeal and allowed the Tax Court’s
trigger a revaluation of property, which is not limited to the determination to stand.
change or addition triggering the revaluation.
Through a special warranty deed, a taxpayer adjusted
the borders of several adjacent properties that it owned.
UNCLAIMED PROPERTY
Pursuant to ARS § 42-15105, a split or combination of
property may trigger a revaluation of the property for
2010 LEGISLATION
property tax purposes. The Arizona Court of Appeals House Bill 2111 (Ariz. Sess. Laws 2010, Chapter 119):
held that the split or combination does not limit a sup- Changes the amount of time until travelers’ checks are pre-
plemental valuation to the change or addition triggering
the supplemental valuation. Rather, the county assessor
sumed to be abandoned.
may also revaluate the unchanged property which had In 2009, the legislature accelerated by either one or two
already been valued previously – which resulted in an years, depending on the type of property, the length of
increased value in this case. time required for property to be considered abandoned.
Travelers checks however were accelerated 12 years; the
CNL Hotels and Resorts, Inc. v. Maricopa County, 1 CA-TX legislature changed the length of time before they were
09-0003 (Dec. 28, 2010). Class 9 property (certain les- presumed abandoned from 15 years to only 3 years.
see owned improvements on governmental land) does not This bill changes the timeframe for when a travelers
require a guarantee that the improvement will ultimately check is presumed to be abandoned from 3 years back to
revert to the government. the original 15.
In this case, the taxpayer constructed a hotel and resort
on land that it leased from the Arizona State Land House Bill 2453 (Ariz. Sess. Laws 2010, Chapter 102):
Department. For the tax years in question, the County Changes the amount of time required before a stock or eq-
classified the property as class one (general commercial uity interest, the principal and interest on debt, corporate
property) with an assessment ratio of 25%. The taxpayer bond investments, and dividends/interest due to a share-
appealed the County’s classification, and argued that the holder/bondholder are presumed abandoned.
property should be classified as Class 9, with an assessment Like HB 2111, this bill reverses some of the 2009
ratio of 1%. Class 9 property includes improvements on changes to the period before property is presumed to
government-owned land if: (1) the improvements revert be abandoned. The following are again presumed to be
to the governmental entity upon termination of the abandoned after 3 years, rather than 2: (1) a stock or equity
lease; and (2) the property is used primarily for athletic, interest in a business association or financial institution, (2)
recreational, entertainment, artistic, cultural or convention the principal or interest on a debt of a business association
activities. A.R.S. § 42-12009. or financial institution, and (3) any dividend, profit,
Under the first criteria the County argued that the distribution, interest, redemption, payment on principal or
property did not fit within Class 9 because the taxpayer other sum held or owing by a business association for or
technically had the ability to remove or destroy the to its shareholder, certificate holder, member, bondholder,
improvements prior to termination of the lease, and thus or other security holder.
there was no guarantee that the improvements would This appears to be an attempt to bring the statutory
revert to the government. The Arizona Court of Appeals time period in line with U.S. Securities and Exchange
held that the County’s position was too narrow and would requirements for abandoned brokerage accounts.
8
2010
INCOME TAX House Bill 2160 (Ariz. Sess. Laws 2010, Chapter 225): Re-
visions to healthy forest tax credit procedures.
LEGISLATION HB 2160 states that companies applying to claim the
healthy forest tax credit must provide additional infor-
Senate Bill 1201 (Ariz. Sess. Laws 2010, Chapter 303): mation to the Department of Commerce in their annual
Clarifies and fine-tunes the application process and eli- reports, such as the amount of forest products harvested,
gibility requirements for renewable energy companies to transported or processed.
qualify for income tax credits. House Bill 2370 (Ariz. Sess. Laws 2010, Chapter 289): New
Retroactive to October 1, 2009, SB 1201 makes a num- credits for research, development and production of solar
ber of changes to the application process and the eligi- liquid fuel.
bility requirements for a renewable energy company to
obtain certain income tax credits. For example, the bill This bill adds new income tax credits for increased re-
clarifies that a business must receive both pre-approv- search, development, production and delivery system
al and post-approval from the Arizona Department of costs associated with solar liquid fuel. This credit is in
Commerce in order to obtain the credits. In addition, lieu of Arizona’s general research and development cred-
the bill reduces the amount of time that the renewable it.
energy company must remain in business in order to House Bill 2700 (Ariz. Sess. Laws 2010, Chapter 294): Ex-
retain the credits to 5 years (previously the time require-
ment was 10 years).
tension of Solar Energy Device Installation.
Arizona law contains a tax credit for installing qualifying
Senate Bill 1254 (Ariz. Sess. Laws 2010, Chapter 312): solar energy devices for commercial or industrial pur-
Amends renewable energy tax credit provisions and creates poses. The credit was scheduled to expire at the end of
a new renewable energy generation credit. tax year 2012, but HB 2700 extends the credits until the
end of tax year 2018.
SB 1254 provides that companies with fewer than 150
full-time employees may apply for partial refunds of un- House Bill 2663 (Ariz. Sess. Laws 2010, Chapter 292): Re-
used tax credits rather than carry them forward (under visions to rules for private school tuition organizations that
certain circumstances). Such refunds are retroactive to
January 1, 2010, on a first-come, first-served basis with a
receive corporate income tax credits.
cumulative cap of $5 million per calendar year. HB 2663 imposes limitations and restrictions on pri-
vate school tuition organizations that receive corporate
SB 1254 also creates a new renewable energy generation
income tax credit contributions. It prohibits private
credit beginning in 2011. To qualify for the credit, a
school tuition organizations from issuing scholarships
taxpayer must hold title to a qualified energy generator
to children enrolled in a charter school. In addition,
that first produces electricity between January 1, 2011
it mandates that school tuition organizations apply for
and December 21, 2020. The credit is limited to 10
certification from the Arizona Department of Revenue.
consecutive years, and taxpayer may qualify for up to
The Department must maintain a list of certified school
$2 million per year on a first-come, first-served basis.
tuition organizations on its website, and any donations
However, the cumulative amount of credits to all tax-
to student tuition organizations that are not certified
payers is capped at $20 million. The credit is calculated
with the Department will not qualify for tax credits. In
based on the number of kilo-watt hours (KWH) gener-
addition, the bill imposes additional reporting and audit
ated. For wind or biomass generation, the credit is equal
requirements on the student tuition organization.
to $0.01/KWH. For solar generation, the credit is equal
to $0.04/KWH in year one, but reduced over time to House Bill 2664 (Ariz. Sess. Laws 2010, Chapter 293): Re-
$0.01/KWH by year ten. visions to the rules for private school tuition organizations
House Bill 2001 (Ariz. Sess. Laws 2010, Chapter 115): Cre- who receive individual income tax credit contributions.
ates a fund for persons wanting to make voluntary contri- HB 2664 imposes limitations and restrictions on private
butions to the state general fund when filing income tax school tuition organizations that receive individual in-
returns. come tax credit contributions similar to HB 2663. For
example, it requires private school tuition organizations
This bill creates the “I Didn’t Pay Enough” fund, which to apply for certification from the Arizona Department
allows people to make voluntary contributions to the of Revenue, and requires that the Department maintain
state general fund. The bill also alters the income tax a list of certified organizations on its website. The bill
return form to include a space for voluntary taxpayer further establishes an annual inflation adjustment to the
contributions. maximum credit taxpayers may claim for donations to
9
Arizona Tax U p d a te
student tuition organizations. Student tuition organi-
zations are also prohibited from awarding scholarships
RULINGS
based merely on recommendations of donors and tax Corporate Income Tax Ruling 09-1, 09-2 (Ariz. Dep’t of Rev-
credit swaps are also prohibited (i.e. I will donate for the enue Feb. 8, 2010): Rules for abatement of late payment
benefit of your dependant if you donate for the benefit penalties due to reasonable cause.
of my dependant).
The Arizona Department of Revenue may grant exten-
Senate Bill 1274 (Ariz. Sess. Laws 2010, Chapter 188): sions to file income tax returns. When the taxpayer is
Individual student tuition organization deadline extended. granted an extension, the taxpayer must pay at least 90%
of the tax disclosed in the return, or the Department will
The deadline for individuals to make student tuition
impose an extension underpayment penalty (but not the
organization contributions eligible for tax credits is ex-
normal late payment penalty). If the taxpayer pays at
tended from December 31 of the calendar year to the
least 90% of the tax, the extension underpayment pen-
deadline for filing an income tax return (generally April
alty will not apply – however, the normal late payment
15 for most individual taxpayers).
penalty will apply to amounts remaining unpaid, unless
HB 2156 (Ariz. Sess. Laws 2010, Chapter 176): Conformity the failure is due to reasonable cause.
to the Internal Revenue Code. In these circumstances, a taxpayer will be deemed to
This bill provides for conformity of Arizona tax law to have met the reasonable cause exception to the late pay-
most provisions of the Internal Revenue Code, with ment penalty only where: (1) the taxpayer has a valid
some exceptions. filing extension; (2) the taxpayer has paid at least 90%
of the tax due by the return’s original due date; (3) the
HB 2725 (Ariz. Sess. Laws 2010, Chapter 332): Individual taxpayer files the return by the extended due date; AND
tax credits for donations to schools expanded. (4) the taxpayer pays the remaining amount due in full
with the return.
Arizona law permits an individual income tax credit for
persons who make donations to public schools for ex- Private Taxpayer Ruling LR10-008 (Ariz. Dep’t of Revenue,
tracurricular activities or character education programs. March 24, 2010): Sales from certain LLCs to members of
This bill expands the definition of public schools to in- the parent’s affiliated group should be eliminated to avoid
clude schools that are part of a school district, a joint distortion.
technical education district or a charter school.
Arizona ruled that, under the facts of the case, sales from
CASES a 50% owned LLC to a member of the parent taxpayer’s
affiliated group should be eliminated from the numera-
RR Donnelley & Sons, Co. v. Ariz. Dep’t of Revenue, 224 tor and denominator of the sales factor to avoid dis-
Ariz. 254 (App. 2010): Subsidiaries engaged in support tortion. Likewise, under the facts at hand, sales from a
100% owned LLC to a member of the parent taxpayer’s
roles that are not operationally integrated with the parent affiliated group should also be eliminated from the nu-
are not included in the unitary group. merator and denominator of the sales factor to avoid
RR Donnelley was a printing holding company that distortion.
owned three subsidiaries that did not engage in the
printing business. Rather, they provided support ser- Private Taxpayer Ruling LR10-010 (Ariz. Dept of Revenue,
vices only, including accounts receivables, investment July 8, 2010): If insurance premium tax applies, corporate
management and trademark management. The question income tax does not apply.
before the court was whether these three non-print- A business subject to Arizona’s insurance premium tax is
ing subsidiaries form a part of RR Donnelley’s unitary not subject to Arizona’s corporate income tax. A business
group. With regards to the accounts receivables and in- may still be subject to insurance premium tax even if it
vestment subsidiaries, the court found that the subsid- has zero tax liability under that tax, and the corporate
iaries were not unitary because they were not opera- income tax will still not apply.
tionally integrated with the parent’s printing business.
Rather, they merely provided ancillary support services
***
(outside of Arizona) and could not be taxed by Arizo-
na. The court determined that the trademark company
It merits note that the foregoing summaries are not intended as
was operationally integrated and should be included in
legal advice on any particular question of law. If you have any
the unitary group, however, because the trademarks had
questions about these or related developments, please contact
no cognizable existence or value independent of the
Pat Derdenger.
products to which the trademarks were attached (those
printed and sold by RR Donnelley). The Arizona Su-
preme Court denied certiorari in this case, allowing the
Court of Appeals’ decision to stand.
10
Arizona Tax U p d a te
STEPTOE’S STATE & LOCAL TAX PRACTICE to achieve favorable results for our clients and to identify the
most effective approach to resolve the matter, which in many
Our Washington, Phoenix, Los Angeles, and Century City attor- cases may be a favorable settlement for the client rather than
neys represent business clients of many types and sizes in state and prolonged litigation.
local tax matters, including high-technology businesses, electric
utilities, telecommunications companies, mining and railroad DEEP AND CURRENT TRIAL AND APPELLATE EXPERIENCE
companies, a steel mill, semi-conductor, aerospace and other Settlement of Cases in Litigation. Many cases, when not
manufacturers, retailers, banks, printers, mail order businesses, settled administratively, can be favorably settled in litigation. We
tax-exempt organizations, and resorts. have a history of achieving such settlements, drawing on our
On behalf of these clients, our attorneys litigate complex and litigation skills and our experience as litigators.
varied income, sales and use, and property tax issues in admin- Actual Trial Experience. Relying on our courtroom experi-
istrative proceedings and state and federal courts, and they also ence, we develop and implement efficient, effective, and thorough
seek legislative solutions to industry-wide concerns that affect trial strategies. Whether the case is presented by dispositive
firm clients. motion, or by trial, we have the required skill and experience,
In addition, our attorneys counsel the firm’s clients on the including handling intricate discovery and evidentiary disputes,
multi-state tax implications of their business transactions. For the preparation and examination of fact and expert witnesses,
example, the firm advises its E-commerce industry clients on and utilization of the most sophisticated electronic trial presenta-
their complex multi-state income tax responsibilities and their tion and briefing techniques. Our experience enables us to be
sales and use tax collection obligations. prepared for all the twists, turns, and surprises of trial advocacy.
Effective Appellate Advocacy. Steptoe tax attorneys have
STATE AND LOCAL TAX LITIGATION argued cases in state courts and every major federal Court of
Steptoe’s State and Local Tax group includes experienced tax Appeals, as well as before the US Supreme Court. Our brief
litigators who have broad commercial litigation and tax litigation writing and appellate advocacy skills are recognized as leading
experience.Their practice is national in scope, including practice in the bar.
in many states. Pat Derdenger served as a Justice Department Step-in Litigation Ability. We have successfully litigated cases
trial attorney in the honors program representing the IRS in in which we were not involved in the administrative process.
numerous trials during his time there. He has over thirty years These clients sought the highest level of litigation experience,
of tax litigation experience, including property tax, sales and use and chose us for our premier tax litigation talent.
tax and income tax litigation. Dawn Gabel began her career as
a commercial litigator, litigating a broad range of commercial UNRIVALED TALENT
disputes including banking litigation, CERCLA litigation, toxic
torts, bad faith insurance disputes and general contract disputes. Substantive Tax Experience. Attorneys in our tax depart-
She has been practicing for over twenty years. For the last sixteen ment have experience in ad valorem property tax matters, con-
years she has focused on tax litigation, primarily property tax stitutional property tax matters, corporate tax, partnership tax,
litigation. We combine trial-tested litigation skills with up-to- consolidated returns, international tax, transfer pricing, financial
date substantive tax experience. This combination enables us instruments and products, ERISA, employee benefits, tax-exempt
to take on the most challenging cases and achieve outstanding organizations, sales and use tax, and other areas of tax law.
results for our clients. Litigation Experience. Our state and local tax attorneys
Our attorneys have proven skills and extensive experience in all litigate tax matters on a daily basis from the administrative level,
aspects of tax controversy and litigation: through state tax or superior court, the courts of appeals and
the Supreme Court. Attorneys in our Litigation Department
• Managing audits litigate across the United States and in other countries and are
• Prosecuting property tax valuation and classification appeals available to assist our tax litigation attorneys with complex and
through the administrative hearing and review process innovative litigation strategies.
• Filing appeals of administrative actions in tax or superior
court and bringing original actions in court Our specific experience and particular skills, as well as backup
• Negotiating litigation settlements provided by our colleagues in other practice disciplines, provide
• Trying cases in court Steptoe’s tax litigation attorneys with a valuable resource readily
• Arguing appeals in state appellate courts available as necessary to effectively represent our clients.
Our active controversy and litigation docket keeps us at the
cutting edge of evolving administrative and judicial practice and PROPERTY TAX
procedures, strategy, and tactics. Our real and personal property tax representation spans the
In addition to our litigation skills, we are widely recognized for full administrative process, including state tax boards of review,
our substantive tax knowledge and experience. Many members state superior and tax courts, and appellate courts of appeals.
have LL.M. degrees in taxation from, and teach classes at, top law In addition, we are active members of the National Association
schools, and are constantly researching, writing, and speaking to of Property Tax Attorneys, a national non-profit organization
professional audiences on a broad range of substantive tax issues. committed to providing exceptional property tax representation
for its members’ clients.
Pre-controversy Advice and Counsel. Our tax attorneys
combine litigation and substantive tax experience to assist clients
in effectively anticipating and planning for future controversies.
TELECOMMUNICATION INDUSTRY TAX LAW
Often, when the tax treatment of an item or transaction is chal- Our attorneys have considerable experience in dealing with
lenged, the ultimate resolution is influenced significantly by federal and state and local telecommunications excise tax mat-
actions taken or not taken when the transaction was planned, ters, including issues relating to the Mobile Telecommunications
implemented, or first reported. With this in mind, we provide Sourcing Act (sources cell phone calls for purposes of local
experience-based advice on reporting, document retention, and taxation). We have represented telecommunications clients on
other pre-controversy matters. real and personal property tax matters, including valuation issues.
Of note, our attorneys have represented a start-up international
Settlement Efforts. We fashion creative and effective ap- telecommunications carrier in structuring its state and local
proaches to settlement. Our experience encompasses not only telecommunications excise tax reporting requirements, including
direct negotiations for single clients, but also group representa- nexus issues. Our telecommunications clients in the tax area have
tions of taxpayers with the same or similar issues. We work hard included local, long distance, cell phone and satellite carriers.
12
2010
ELECTRIC UTILITIES AND PIPELINES TAX CONSEQUENCES OF MERGERS & ACQUISITIONS
Steptoe’s state and local tax practice has considerable experience Our attorneys counsel clients on the state and local tax conse-
in representing electric utilities and pipelines in a wide range of quences of mergers and acquisitions, both income tax and sales
state tax issues.We have represented electric utilities on property tax, including whether an asset sale is a casual sale for state sales
tax valuation matters, both generation and transmission and tax purposes. We also work with corporate counsel to draft tax
distribution facilities, including a nuclear generation station. provisions for merger and acquisition agreements.
[See ADOR v. SRP and APS, 212 Ariz. 35, 126 P.3d 1063 (App.
2006).] We have also advised electric utilities on corporate MULTI-STATE TAXATION & NEXUS ISSUES
income tax issues, including the sourcing of sales of electricity
when generated in one state and sold in another (particularly • Advised multi-state businesses on state income tax issues,
the costs of performance and market tests dealing with the including allocation and apportionment issues, business/
sales factor), nexus and Public Law 86-272 questions, as well as non-business income questions, Public Law 86-272 nexus
research and development tax credit issues. Our attorneys have issues, throwback rule issues, Appeal of Joyce-types of is-
also advised electric utilities on sales tax issues dealing with the sues, and intangible holding company issues and intangible
construction of generation plants and the applicability of various nexus issues.
sales tax exemptions to the construction of those facilities and • Counseled clients on the multi-state taxation of flow-
operation of generation plants, including sales tax issues on the through entities such as partnerships, S-corporations, and
sale of the electricity both in-state and out-of-state. In addition limited liability companies.
to electric utilities, we have represented natural gas pipelines
on sales tax, income tax and property tax matters. • Advised Internet and other remote sellers on nexus issues
relating to the obligation of the remote seller to collect the
CONSTITUTIONAL TAX ISSUES destination state’s sales or use tax on sales made into the state,
as well as advising clients in general on the sale and use tax
Steptoe’s state and local tax attorneys have considerable experi- implications of interstate sale transactions.
ence with federal commerce clause, due process clause and equal
protection clause issues, as well as state-specific constitutional • Advised telecommunications clients, including satellite
provisions such as the uniformity clause, which deals with telecommunications providers, on their multi-state sales and
property taxes and requires that property taxes as imposed on excise tax reporting obligations, including sourcing issues
a class of property be uniformly applied. under the Mobile Telecommunications Sourcing Act.
Commerce clause issues handled include not only income, sales SALES & USE TAXES, PRIVILEGE TAXES, & EXCISE TAXES
and use tax nexus issues but also issues dealing with discrimina- Our attorneys represent clients in a wide array of sales tax issues,
tory treatment of interstate commerce. Equal protection clause including advising: manufacturers, high tech companies, airlines,
matters have included challenges to a state’s unequal treatment railroads, electric and telephone utilities and others on issues of
of a taxpayer vis-à-vis the more favorable treatment provided to whether the machinery and equipment they purchase and use
competitors. Additionally, Steptoe’s attorneys in the Washington in their operations qualifies for exemption from various states
office have represented insurance companies in actions before sales taxes; telecommunications companies on nexus issues and
the US Supreme Court involving constitutional issues relating state and local tax collection obligations on inter-state and in-
to state premium taxes. ternational calls; hotels and travel booking websites on sales and
hotel tax issues; airlines and other air transportation companies
CORPORATE INCOME TAX on whether their sale or purchase of aircraft is subject to sales or
• Advised and represented corporations in controversies over use tax; out-of-state alarm monitoring services on nexus issues;
“unitary” combination issues—i.e., whether a particular E-commerce clients on sales and use tax collection obligations in
affiliate is a member of the unitary group or not under the various states where their customers are located and where
the various tests the states use for determining unitary the orders are shipped; clients engaged in taxable and nontaxable
combination (such as operational integration or functional business activities that have been taxed as if all receipts were
integration). from taxable business transactions; a bank in its protest of sales
tax assessed on the sale of a debtor’s business assets; petroleum
• Advised and represented homebuilders on the issue of companies on state fuel excise tax issues; providers of systems
whether the “gross receipts” or “net receipts” as contended design, software development, and other computer services on
by the state, from the sale of mortgages on the secondary exemptions from retail sales-and-use tax.
market are to be included in the denominator of the sales
factor as well as whether the receipts from the sale of CONSTRUCTION & HOMEBUILDER TAX ISSUES
mortgages secured by Arizona property is to be sourced
to Arizona or under the costs of performance test to the Our attorneys represent construction contractors, both general
homebuilder’s corporate headquarters state. and subcontractors, and homebuilders on a wide array of federal,
• Advised and represented corporations on income tax nexus state and local tax issues, including construction manager tax
issues, particularly with respect to the application of the issues, hospital construction projects and issues dealing with the
protection from state income tax afforded by Public Law installation of exempt machinery and equipment.
86-272 (which prohibits a state from imposing a net income We also advise and work with homebuilders on the marketing
tax where the company’s only contact with the state is the arm-contracting arm structure used in Arizona for state transac-
solicitation of orders where those orders are sent back to tion privilege tax purposes, as well as assist real estate developers
the home office for approval and filling). deal with the Arizona “speculative builder” tax.
• Advised and represented companies on business income vs. STATE & LOCAL TAX GROUP - PHOENIX
non-business income issues (business income is apportioned
to the various states the company does business in using Attorney Contact Phone E-mail
factor apportionment while non-business income is allo-
cated entirely to the source state). Some examples include Pat Derdenger 602.257.5209 pderdenger@steptoe.com
gain on the sale of stock of a foreign subsidiary, the sale of Dawn Gabel 602.257.5231 dgabel@steptoe.com
a plant that had been closed for a number of years, the sale
of land that had been acquired to build a new facility but Bennett Cooper 602.257.5217 bcooper@steptoe.com
where plans changed, royalty income from patents, income Frank Crociata 602.257.5261 fcrociata@steptoe.com
from court-awarded judgments. Benjamin Gardner 602.257.5291 bgardner@steptoe.com
13
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