Chevron U.S.A. Inc. v. Arizona Department of Revenue

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
CHEVRON U.S.A. INC., a Pennsylvania corporation,
Plaintiff/Appellant,
v.
ARIZONA DEPARTMENT OF REVENUE, an agency of the State of
Arizona, Defendant/Appellee.
No. 1 CA-TX 14-0013
FILED 12-3-2015
Appeal from Arizona Tax Court
No. TX2011-001038
The Honorable Dean M. Fink, Judge
The Honorable Christopher T. Whitten, Judge
REVERSED AND REMANDED
COUNSEL
Gallagher & Kennedy, PA, Phoenix
By Mark A. Fuller
Co-Counsel for Plaintiff/Appellant
Cavanagh Law Firm, Phoenix
By James G. Busby, Jr.
Co-Counsel for Plaintiff/Appellant
Arizona Attorney General’s Office, Phoenix
By Jerry A. Fries
Counsel for Defendant/Appellee
Snell & Wilmer, LLP, Phoenix
By Craig R. McPike and Robert I. Schwimmer
Co-Counsel for Amicus Curiae Arizona Tax Research Association,
Arizona Chamber of Commerce and Industry, Arizona
Manufacturers Council, and Arizona Mining Association
Fennemore Craig, PC, Phoenix
By Patrick Irvine
Co-Counsel for Amicus Curiae Arizona Tax Research Association,
Arizona Chamber of Commerce and Industry, Arizona
Manufacturers Council, and Arizona Mining Association
OPINION
Presiding Judge Donn Kessler delivered the opinion of the Court, in which
Chief Judge Michael J. Brown and Judge Andrew W. Gould joined.
K E S S L E R, Judge:
¶1 Chevron U.S.A., Inc. appeals from the tax court’s entry of
summary judgment in favor of the Arizona Department of Revenue. We
hold that the industrial oils and greases used in mining and metallurgical
operations involved in this case are exempt from the transaction privilege
tax. Accordingly, we reverse the decision of the tax court and remand for
entry of summary judgment in favor of Chevron.
FACTUAL AND PROCEDURAL HISTORY
¶2 This case involves the application of Arizona’s transaction
privilege tax to Chevron’s sale of oils and greases to Freeport-McMoRan,
Inc. for use in its mining and metallurgical operations. Freeport uses the
oils and greases in conjunction with its machinery and equipment.
¶3 Chevron filed a refund claim for $324,233.79 in taxes paid
between July 2002 and March 2006 on products sold to Freeport. Chevron
asserted that the sales of oils and greases are exempt from the transaction
privilege tax under Arizona Revised Statutes (“A.R.S.”) sections 42-
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Opinion of the Court
5061(B)(1), (2), (18) (Supp. 2015),1 which exempt machinery and equipment
used in mining or metallurgical operations and for machinery and
equipment used to prevent or reduce pollution arising from such
operations.
¶4 In response, the Department granted Chevron a refund of
$8,357.26 for taxes paid on the sale of hydraulic oils and transmission fluids
only. The Department denied the remainder of Chevron’s refund claim
pertaining to engine oil, gear oil, grease, and open gear lube.
¶5 After exhausting its administrative remedies, Chevron filed a
complaint in tax court pursuant to A.R.S. § 42-1254(C) (2013). The parties
filed cross-motions for summary judgment, and the court granted summary
judgment in favor of the Department. Chevron timely appealed, and we
have jurisdiction pursuant to A.R.S. § 12-2101(A)(1) (Supp. 2015).
DISCUSSION
¶6 “We review de novo the tax court’s grant[] of summary
judgment to the Department.” See Ariz. Dep’t of Revenue v. Salt River Project
Agric. Improvement and Power Dist., 212 Ariz. 35, 38, ¶ 13 (App. 2006). We
also review de novo the tax court’s interpretation of A.R.S. § 42-5061, the
statute at issue in this case. See State ex rel. Ariz. Dep’t of Revenue v. Capitol
Castings, Inc., 207 Ariz. 445, 447, ¶ 9 (2004). Because Chevron seeks an
exemption from the transaction privilege tax, we apply the general rule that
“laws exempting property from taxation are to be strictly construed; the
presumption being against such exemption.” Tucson Transit Auth., Inc. v.
Nelson, 107 Ariz. 246, 252 (1971). At the same time, we acknowledge our
supreme court’s guidance that exemptions should “not be so strictly
construed as to defeat or destroy the [legislative] intent and purpose.”
Capitol Castings, 207 Ariz. at 447-48, ¶ 10 (alteration in original) (quoting
W.E. Shipley, Annotation, Items or Materials Exempt from Use Tax as Used in
Manufacturing, Processing, or the Like, 30 A.L.R. 2d 1439, 1442 (1953)).
Applying these standards, we consider whether the industrial oils and
greases at issue in this case are exempt under A.R.S. § 42-5061(B)(1),(2), (18).
¶7 Arizona’s transaction privilege tax is “an excise tax on the
privilege or right to engage in an occupation or business in the State of
Arizona.” Ariz. Dep’t of Revenue v. Mountain States Tel. and Tel. Co., 113 Ariz.
1We cite the current version of the applicable statute unless revisions
material to this decision have occurred since the events in question.
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Opinion of the Court
467, 468 (1976). The retail classification imposes a tax on the gross proceeds
of sales or the gross income derived from the “business of selling tangible
personal property at retail.” A.R.S. § 42-5061(A).
¶8 The legislature has carved out numerous exemptions to the
retail transaction privilege tax. See A.R.S. § 42-5061. The exemptions at
issue in this case are for: (1) machinery or equipment used directly in
manufacturing or metallurgical operations; (2) mining machinery or
equipment; and (3) machinery or equipment used directly to meet or exceed
pollution control regulations.2 See A.R.S. § 42-5061(B)(1), (2), (18).
I. Legislative Intent
¶9 This Court’s primary goal in “interpreting a statute is to
discern and give effect to legislative intent.” People’s Choice TV Corp. v. City
of Tucson, 202 Ariz. 401, 403, ¶ 7 (2002). “[B]ecause a statute’s plain
language provides the best evidence of intent,” Martineau v. Maricopa Cty.,
207 Ariz. 332, 334, ¶ 9 (App. 2004), we begin our analysis with the plain
language of A.R.S. § 42-5061.
¶10 Section 42-5061(B)(2) exempts from the transaction privilege
tax proceeds from the sale of:
Mining machinery, or equipment, used directly in the process
of extracting ores or minerals from the earth for commercial
purposes, including equipment required to prepare the
materials for extraction and handling, loading or transporting
such extracted material to the surface.
Subsections (B)(1) and (B)(18) provide similar exemptions for machinery
and equipment used in metallurgical operations and for pollution control
equipment used in mining and metallurgical operations. Chevron argues
that these exemptions apply to the industrial greases and oils at issue here.
¶11 Although the Department concedes that Freeport’s mining
machinery and equipment are exempt from transaction privilege tax, it
argues that the greases and oils required by that machinery and equipment
are taxable because they are “expendable materials” that are used up “in
minutes, days or months in mining operations.” Pursuant to § 42-
2 The legislature provided a corresponding use tax exemption for these
types of machinery and equipment. See A.R.S. § 42-5159(B)(1), (2), (18)
(Supp. 2015).
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Opinion of the Court
5061(C)(1), “expendable materials” are taxable but only if they do not
otherwise qualify for one of the exemptions set forth in subsection B:
The deductions provided by subsection B of this section do
not include sales of: 1. Expendable materials. For the purposes
of this paragraph, expendable materials do not include any of the
categories of tangible personal property specified in subsection B of
this section regardless of the cost or useful life of that property.
(Emphasis added.)
¶12 The legislature added the above-italicized portion of
subsection (C)(1) in 1999.3 See 1999 Ariz. Sess. Laws, ch. 153, § 1 (1st Reg.
Sess.). In doing so, the legislature intentionally expanded the scope of the
subsection (B) exemptions to include expendable materials “regardless of
the cost or useful life of the property” so long as “the tangible personal
property would otherwise be exempt under the transaction privilege and
use tax.”4 Senate Fact Sheet for H.B. 2395 (Feb. 18, 1999). As a result of this
statutory amendment, the useful life of property no longer determines
whether it is exempt from tax. See House Abstract for H.B. 2395 (Jan. 26,
1999).
¶13 In light of the 1999 amendment to A.R.S. § 42-5061(C)(1), the
proper inquiry in this case is not whether the greases and oils are consumed
or used up in Freeport’s operations, but rather whether they qualify for the
exemptions set forth in A.R.S. § 42-5061(B)(1), (2), or (18). If the oils and
greases qualify as machinery or equipment used directly in Freeport’s
mining and metallurgical activities, they are exempt.
3 The legislature simultaneously amended the corresponding use tax
exemption, A.R.S. § 42-5159(C)(1). See 1999 Ariz. Sess. Laws, ch. 153, § 2
(1st Reg. Sess.).
4 Our supreme court’s decision in Capitol Castings traces the history of this
legislative amendment and explains that the legislature intended to
overrule an earlier decision by this court and remove an item’s
expendability “as an impediment to qualification” for the exemption. 207
Ariz. at 449, ¶ 18.
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Opinion of the Court
II. Capitol Castings
¶14 Five years after the legislature amended subsection (C)(1) of
A.R.S. §§ 42-5061 and 42-5159, our supreme court applied the amended use
tax statute in Capitol Castings.5 In Capitol Castings, the court adopted a
“more expansive definition of machinery or equipment” by applying
“flexible and commonly used definitions” of those terms. 207 Ariz. at 450-
51, ¶ 24. In applying these definitions, the supreme court instructed lower
courts to:
[E]xamine the nature of the item and its role in the operations.
Items essential or necessary to the completion of the finished
product are more likely to be exempt. The prominence of an
item’s role in maintaining a harmonious “integrated
synchronized system” with the indisputably exempt items
will also directly correlate with the likelihood that the
exemption applies.
Id. at 451, ¶ 25 (citing Duval Sierrita Corp. v. Ariz. Dep’t of Revenue, 116 Ariz.
200, 205-07 (App. 1977)).6 The supreme court explained that whether an
item is exempt from the transaction privilege tax should be determined not
5 In Capitol Castings, the court applied the use tax statute, A.R.S. § 42-
5159(B)(1). 207 Ariz. at 448, ¶ 11. The language of the transaction privilege
tax statute, A.R.S. § 42-5061(B)(1), is identical.
6 In Capitol Castings, the supreme court concluded that the legislature, in
amending the transaction privilege tax and use tax statutes, had embraced
the “integrated rule” test announced by this court in Duval Sierrita. 207
Ariz. at 450, ¶¶ 23-24. Pursuant to that test:
[T]he boundaries of the exempt operation must be drawn
taking into consideration the entire operation as it is
“commonly understood” which operation must, of necessity,
include those items which are essential to its operation and
which make it an integrated system.
Duval Sierrita, 116 Ariz. at 206 (emphasis added). In Capitol Castings, the
supreme court characterized the “Duval Sierrita approaches” as allowing
“items that would not ordinarily be considered ‘machinery’ or ‘equipment’
to qualify for the . . . exemption if they function as a necessary part of an
integrated process.” 207 Ariz. at 450, ¶ 21.
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Opinion of the Court
by the material it is made from (metal or non-metal) but rather by the
function it performs. Capitol Castings, 207 Ariz. at 451 n.4, ¶ 25. Thus, we
look to see if the item is essential or necessary to the completion of the
finished product and whether it maintains a harmonious “integrated
synchronized system” with the indisputably exempt items regardless of
whether the item is a viscous liquid or a solid item. If that test is met, the
item is exempt from the tax.
¶15 Applying this reasoning, the supreme court determined that
a variety of materials utilized by Capitol Castings in its manufacturing
operations were exempt. Id. at ¶ 26. Of particular note, the supreme court
found that “mold wash,” a substance sprayed on the mold to prevent the
sand from sticking to the casting, was exempt. Id. at 447, ¶ 3, 451, ¶ 26.
Likewise, the court found that hot topping, a powder employed to keep the
molten metal from cooling, was exempt. Id.
¶16 In concluding that such items were exempt from taxation, the
supreme court emphasized the purpose of the machinery and equipment
exemptions, which is to “stimulate business investment in Arizona in order
to improve the state’s economy and increase revenue from other taxes, such
as income and property taxes.” Id. at 448, ¶ 13. The court advised that our
interpretation of the exemptions “should further, not frustrate, the policy
of encouraging investment and spurring economic development.” Id.; see
also CCI Europe, Inc. v. Ariz. Dep’t of Revenue, 237 Ariz. 50, 54-55, ¶ 20 (App.
2015) (emphasizing the purpose of the machinery and equipment
exemption).
¶17 Following the guidance of our supreme court in Capitol
Castings, we begin our examination of Chevron’s oils and greases by
reference to commonly used definitions of “equipment.”7 As referenced by
the court in Capitol Castings, Webster’s College Dictionary defines
equipment to include “the articles, implements, etc., used or needed for a
specific purpose or activity.” 207 Ariz. at 448, ¶ 12 (quoting Webster’s
College Dictionary 442 (2d ed. 1997)). The online Merriam-Webster
dictionary similarly defines equipment to include “supplies or tools needed
for a special purpose.” Merriam-Webster online dictionary,
7 We agree with the argument made by the Arizona Tax Research
Association in its amicus brief that the oils and greases constitute
equipment rather than machinery.
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Opinion of the Court
http://www.merriam-webster.com/dictionary/equipment (last visited
Nov. 12, 2015).
¶18 The oils and greases at issue here function to reduce friction,
disperse heat, and suspend contaminants. They also create hydrodynamic
pressure, which “cushions loads on components in various systems.” They
enable the machinery to function. We conclude that the oils and greases
satisfy the commonly used definitions of “equipment” because they are
articles, implements, and supplies needed by Freeport in its mining and
metallurgical activities.
¶19 Next, we analyze the nature of Chevron’s oils and greases and
the role they play in Freeport’s mining and metallurgical operations by
reference to the evidence presented to the tax court. Chevron’s expert
explained that the oils and greases function to “maintain the separation of
two surfaces in relative motion when loads, speeds, and temperature
conspire to induce metal to metal contact.” He further testified that the oils
and greases perform the following functions: “dissipation of heat, occlusion
and suspension of contaminants.” A Freeport employee, who submitted a
declaration supporting Chevron’s motion for summary judgment,
explained:
Without these products, the machinery (and the systems
within the machinery) would not function. They are as
essential as any other component of Freeport’s machinery and
equipment, and are a critical, integral part of the machinery.
In other words, the oils and greases are not used solely to
protect or extend the life of the machinery – although that is
obviously a critical function in and of itself – but to make it
operable in the first place.
Furthermore, as stated in Chevron’s statement of facts, “given the size and
weight of the machinery, it must be transported with these products in
place. Otherwise, much of it would simply collapse on itself.” See Sato v.
Van Denburgh, 123 Ariz. 225, 228 (1979) (affirming that if a party fails to
controvert the moving party’s statement of facts in a motion for summary
judgment, the moving party’s facts may be considered true).
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Opinion of the Court
¶20 The Department did not controvert this evidence.8 Indeed,
the Department concedes that the oils and greases are essential to Freeport’s
mining and metallurgical activities and that they are “used directly” in
those operations. Nevertheless, the Department argues that the oils and
greases do not qualify for the exemption because they are “not the
functional equivalent of machinery and equipment.” We disagree.
¶21 In Capitol Castings, our supreme court concluded that:
[S]ilica sand, chemical binders, exothermic sleeves, mold
cores, mold wash, and hot topping qualify for the exemption
because they were used directly in and were an integral part
of a qualifying process under A.R.S. § 42–5159(B)(1). The
items functioned the way machinery or equipment might in
an integrated, synchronized system within the industry.
207 Ariz. at 451, ¶ 26. Similarly, Chevron’s oils and greases are “used
directly in” and are “an integral part of” Freeport’s mining and
metallurgical operations. Moreover, based on the uncontroverted
evidence, we conclude that the oils and greases function as equipment in
Freeport’s operations. Accordingly, under the supreme court’s holding in
Capitol Castings, the oils and greases are exempt from taxation under A.R.S.
§ 42-5061(B)(1), (2), (18).9
¶22 Our conclusion is consistent with the Department’s policy
relating to the statutory exemption from transaction privilege tax for lessors
of motor vehicles subject to the motor carrier fee. See Transaction Privilege
Tax Ruling TPR 2003-2, 2003 WL 23178083 (Ariz. Bd. Tax App. Dec. 4, 2003).
8 Chevron submitted two declarations in support of its motion for summary
judgment that described the function of the oils and greases in Freeport’s
operations. The first was signed by James Taylor, a Freeport employee. The
second was signed by Paul Bessette, Chevron’s expert. The Department
disputed only limited portions of Mr. Taylor’s declaration.
9 The tax court relied on the fact that “[t]he oils and greases do not touch
the raw materials or work in progress” in concluding that “they play no
direct part in the completion of the finished product.” Although the
supreme court indicated in Capitol Castings that a “court should consider
whether the item physically touches the raw materials or work in process,”
such a determination is not dispositive. 207 Ariz. at 451, ¶ 25.
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In TPR 2003-2, the Department declared that “[a]lthough items such as
antifreeze, motor oil, transmission fluid, bearing grease and windshield
washer solution may be replaced with frequency, they are, nevertheless, a
part of the vehicle, and therefore, qualify for exemption” pursuant to A.R.S.
§ 42-5061(A)(41).10 The same logic applies to the oils and greases that
Freeport utilizes in its mining operations.
¶23 Chevron contends that the issue before this Court “is purely
one of law, on an undisputed factual record.” We agree. “[W]here the
issues can be decided as a matter of law, we have the authority both to
vacate the trial court’s grant of summary judgment in favor of one party
and to enter summary judgment for the other party if appropriate.” See
Anderson v. Country Life Ins. Co., 180 Ariz. 625, 628 (App. 1994).
CONCLUSION
¶24 For the foregoing reasons, we reverse summary judgment in
favor of the Department and direct entry of judgment for Chevron on
remand. Chevron requests attorneys’ fees and expenses pursuant to A.R.S.
§ 12-348(B)(1) (Supp. 2015). Under A.R.S. § 12–348(B)(1), courts may award
fees and expenses to taxpayers who successfully challenge the denial of a
tax refund. In the exercise of our discretion, we award Chevron its
reasonable attorneys’ fees and expenses incurred on appeal upon
compliance with Arizona Rule of Civil Appellate Procedure 21 and A.R.S.
§ 12–348(E).
:ama
10At the time the Department issued TPR 2003-2, this exemption was found
at A.R.S. § 42-5061(A)(42).
10