Jones Outdoor Advertising, Inc. v. Arizona Department of Revenue

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
JONES OUTDOOR ADVERTISING, INC., an Arizona corporation,
Plaintiff/Appellant,
v.
ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona,
Defendant/Appellee.
No. 1 CA-TX 14-0006
FILED 7-16-2015
Appeal from the Arizona Tax Court
No. TX2013-000017
The Honorable Dean M. Fink, Judge
REVERSED AND REMANDED
COUNSEL
DeConcini McDonald Yetwin & Lacy, P.C., Tucson
By James M. Susa, Sesaly O. Stamps
Counsel for Plaintiff/Appellant
Arizona Attorney General’s Office, Phoenix
By Jerry A. Fries, Raj Saker, Benjamin H. Updike
Counsel for Defendant/Appellee
JONES OUTDOOR v. ADOR
Opinion of the Court
OPINION
Judge Peter B. Swann delivered the opinion of the court, in which Presiding Judge
Kent E. Cattani and Judge Lawrence F. Winthrop joined.
S W A N N, Judge:
¶1 Jones Outdoor Advertising, Inc. (“Jones”) appeals from the tax
court’s grant of summary judgment in favor of the Arizona Department of
Revenue (“Department”), finding Jones liable for transaction privilege tax (“TPT”)
on its sale of billboard advertising under A.R.S. § 42–5071(A). For the following
reasons, we reverse.
FACTS AND PROCEDURAL HISTORY
¶2 Jones is an outdoor advertising company that owns billboards
throughout the state of Arizona. Jones contracts with customers that pay to
display their messages on the billboards.
¶3 The Department audited Jones’s income arising from its billboard
advertising business for the period from January 2008 to March 2011. The
Department determined that Jones’s business fell within the scope of A.R.S. § 42–
5071(A), which imposes TPT on the leasing or renting of tangible personal
property, and assessed TPT and interest against Jones in the amount of
$275,047.20. After exhausting its administrative remedies, Jones filed a complaint
in tax court. The parties filed cross-motions for summary judgment, and the tax
court ruled in favor of the Department. Jones timely appeals from the tax court’s
judgment.
DISCUSSION
¶4 Arizona’s TPT 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. & Tel. Co., 113 Ariz. 467, 468, 556 P.2d 1129, 1130 (1976). It is
not a sales tax, but rather a tax on the gross receipts of an entity’s business
activities. See A.R.S. § 42–5008.
¶5 The issue in this case is whether Jones’s sale of billboard advertising
constitutes “leasing or renting tangible personal property for a consideration.” Id.
The question requires us to interpret § 42–5071(A) and our review therefore is de
novo. Energy Squared, Inc. v. Ariz. Dep’t of Revenue, 203 Ariz. 507, 509, ¶ 15, 56 P.3d
2JONES OUTDOOR v. ADOR
Opinion of the Court
686, 688 (App. 2002). Any ambiguity surrounding the scope and meaning of the
statute must be resolved in favor of the taxpayer. City of Phoenix v. Borden Co., 84
Ariz. 250, 252–53, 326 P.2d 841, 843 (1958).
I. RENTING OR LEASING REQUIRES POSSESSION AND CONTROL.
¶6 A.R.S. § 42-5071(A) provides: “The personal property rental
classification is comprised of the business of leasing or renting tangible personal
property for a consideration.”
¶7 Under our holding in Arizona Dep’t of Revenue v. Ariz. Outdoor
Advertisers, Inc., billboards are personal property. 202 Ariz. 93, 102, ¶ 51, 41 P.3d
631, 640 (App. 2002).1 See also City of Scottsdale v. Eller Outdoor Adver. Co. of Ariz.,
119 Ariz. 86, 92, 579 P.2d 590, 596 (App. 1978) (“Eller’s ownership interest in the
billboards both before and after the taking as between it and its landlord, was
personal property ownership.”) Because there is no dispute that Jones’s customers
pay consideration for the advertising, the issue in this case is whether Jones is
“leasing or renting” the billboards to its customers.
¶8 The terms “leasing” and “renting” are not defined by statute, and we
therefore look to their ordinary definitions. Arizona State Tax Comm’n v. First Bank
Bldg. Corp., 5 Ariz. App. 594, 601, 429 P.2d 481, 488 (1967). In State Tax Commission
v. Peck, our supreme court interpreted the terms “leasing” and “renting” to
determine whether TPT applied to income derived from a self-service laundromat
and a self-service car wash.2 106 Ariz. 394, 395, 476 P.2d 849, 850 (1970). The court
relied upon the following definition of “to rent” from Webster’s Third
1 The Department relies upon our decision in Arizona Outdoor Advertisers for
the proposition that billboard advertising is taxable under § 42-5071. However, as
the tax court noted below, that case, “while generally instructive, does not address
the primary question presented here, which is the nature of the transaction
between the billboard owner and the advertiser.” Arizona Outdoor Advertisers did
not address whether the transaction between a billboard owner and its customers
constitutes leasing or renting -- the transaction in question was that between the
billboard owner and the owner of the land on which the billboard was constructed.
Arizona Outdoor Advertisers, 202 Ariz. at 102, ¶ 51, 41 P.3d at 640. In that case, the
taxpayer never raised the issue of what constituted “renting or leasing” and
apparently conceded that its business was subject to TPT under A.R.S. § 42-
5071(A). Id. at 95, ¶ 10, 41 P.3d at 633.
2 In Peck, the court applied a statutory predecessor to § 42-5071, which also
assessed a tax on the activity of “[l]easing or renting tangible personal property
for a consideration.” Peck, 106 Ariz. at 395, 476 P.2d at 850.
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JONES OUTDOOR v. ADOR
Opinion of the Court
International Dictionary: “‘(1) to take and hold under an agreement to pay rent,’
or ‘(2) to obtain the possession and use of a place or article for rent.’” Id. at 396,
476 P.2d at 851.
¶9 Applying this definition, the court in Peck concluded that both the
laundromat and the car wash were in the business of renting tangible personal
property and therefore subject to TPT. Peck, 106 Ariz. at 396, 476 P.2d at 851.
Notably, the court reasoned that:
There is no question that when customers use the equipment on the
premises of the plaintiffs herein, such customers have an exclusive
use of the equipment for a fixed period of time and for payment of a
fixed amount of money. It is also true that the customers themselves
exclusively control all manual operations necessary to run the
machines. In our view such exclusive use and control comes within
the meaning of the term ‘renting’ as used in the statute.
Id. (emphasis added).
¶10 Since the supreme court’s decision in Peck, this court has twice
addressed the question of what constitutes the leasing or renting of tangible
personal property. See Energy Squared, Inc. v. Ariz. Dep't of Revenue, 203 Ariz. 507,
56 P.3d 686 (App. 2002); City of Phoenix v. Bentley-Dille Gradall Rentals, Inc., 136
Ariz. 289, 665 P.2d 1011 (App. 1983). In both Energy Squared and Bentley-Dille, this
court’s focus was on whether the business owner gave up possession and control
of the tangible personal property. In Energy Squared, we concluded that income
from a tanning salon was not subject to TPT because the business owner “reserves
overall control over its customers’ use of tanning devices not merely by virtue of
its control over its premises, but rather as a part of the business design by which it
provides artificial tanning.” 203 Ariz. at 511, ¶ 25, 56 P.3d at 690. In Bentley-Dille,
we determined that income derived from the provision of construction equipment
was not taxable because the taxpayer did not “give up possession and control” of
the equipment. 136 Ariz. at 292, 665 P.2d at 1014. We held that “as a matter of law
[ ] appellant did not give up possession and control of the Gradalls when it
provided them to various construction projects with operators and thus, such
activity was not ‘renting’ within the meaning of the transaction privilege tax.” Id.
¶11 Here, the Department argues that “Jones is in the business of renting
billboards” and that the advertisers have exclusive use and control of the
billboards for the duration of their contracts. Jones argues, however, that the
customers do not have sufficient control over the billboards to constitute “renting”
within the meaning of § 42–5071(A). We agree with Jones.
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JONES OUTDOOR v. ADOR
Opinion of the Court
¶12 Jones retains possession and control of the billboards during the
term of the contract with its customers, the advertisers, as evidenced by the
following undisputed facts: (1) Jones owns the vinyl on which the advertisement
is printed; (2) Jones affixes the vinyl to the billboard; (3) only Jones’s employees
are permitted on the billboard to post, re-post, repair, adjust or illuminate the
billboard; (4) only Jones may hire an electrician, repair person, or other
maintenance person to service the billboard; (5) under no circumstances does Jones
permit its customers entry on the billboards; (6) Jones removes the vinyl at the end
of the advertising period; (7) Jones retains possession of the vinyl after its removal;
(8) under the terms of the contract, Jones reserves the right to relocate and assign
the advertisement to another billboard location “of approximately equal
advertising value”; and (9) Jones also “reserves the right at any time to refuse or
withdraw any advertising copy in its sole discretion.” In view of these facts, we
conclude that Jones’s customers receive the mere right to have a message
displayed on the billboards -- they do not enjoy possession or control of the
billboards.3 See Snarr Adver., Inc. v. Utah State Tax Comm’n, 432 P.2d 882, 884 (Utah
1967); Federal Sign & Signal Corp. v Bowers, 174 N.E. 2d 91, 93 (Ohio 1961) (holding
that the rental of outdoor advertising signs was not subject to sales tax because the
lease did not involve the transfer of possession).
II. THE LEGISLATURE HAS REPEALED THE TAX ON ADVERTISING.
¶13 Beginning in 1935, Arizona provided for a privilege tax on
advertising, which applied to “[j]ob printing, engraving, embossing and copying,
advertising by billboards, direct mail, radio, or by any means calculated to appeal to
prospective purchasers.” Laws 1935, Chapter 77, § 2(c)(8) (emphasis added). In
1986, as part of an act “providing for incremental removal of taxation from
proceeds of local advertising,” the Legislature expressly repealed the TPT on local
advertising. 1982 Ariz. Sess. Laws ch. 188, pp. 509-511. The act provided that,
“From and after December 31, 1985, sales of local advertising are exempt from the
tax imposed by this paragraph,” including “local advertising by billboard, direct
mail, radio, television or by any other means.” 1982 Ariz. Sess. Laws ch. 188, p.
511. There is no indication the legislature repealed the tax because it believed the
3 Administrative regulations provide the following examples of tangible
personal property that is included in the tax base under the personal property
rental classification: “televisions, cars, trucks, lawnmowers, floor polishers,
tuxedos, uniforms, furniture, towels, and linens.” Arizona Administrative Code
(“A.A.C.”) Rule 15-5-1502(A). Jones’s customers do not possess or control the
billboards in the same way that a customer who rents a television, a car, or any of
the items listed in the regulation would possess and control the property.
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JONES OUTDOOR v. ADOR
Opinion of the Court
advertising activity would be taxable under the personal property rental tax
classification.
¶14 As the Department’s own website confirms, the state does not
currently impose a tax on advertising:
There are some differences between the state and local authorities in
the taxability of transactions. For instance, the state does not impose
a transaction privilege tax on 1) renting, leasing, or licensing for use
residential real property or 2) the sale of advertising. However,
many cities do tax these activities.4
Indeed, cities and towns that follow the Model City Tax Code do impose a tax on
advertising, including billboard advertising. See, e.g., Phoenix City Code § 14-405;
Tucson City Code § 19-405. It is undisputed that Jones paid the cities’ tax on
advertising, as applicable, during the audit period.
¶15 By repealing the tax on advertising, the Legislature manifested its
intent that TPT not apply to billboard advertising. If the Legislature had intended
the personal property rental classification to extend to billboard advertising, it
could have stated so explicitly. Cf. First Bank Bldg. Corp., 5 Ariz. App. at 601, 429
P.2d at 488 (holding that if the Legislature had intended to extend the transaction
privilege to property owners on whose property the business is conducted it
“could have easily spelled it out in the Statute”). Applying the rule of statutory
construction that statutes imposing taxes must be construed in favor the taxpayer,
we decline to extend § 42-5071 to billboard advertising. See Arizona Tax Comm’n v.
Dairy & Consumers Co-op. Ass’n, 70 Ariz. 7, 18, 215 P.2d 235, 242 (1950) (explaining
the rule of statutory construction “that statutes imposing taxes will be most
strongly construed against the government and in favor of the taxpayer or
citizen”).
4 http://www.azdor.gov/Business/TransactionPrivilegeTax.aspx.
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JONES OUTDOOR v. ADOR
Opinion of the Court
CONCLUSION
¶16 For the foregoing reasons, we reverse the decision of the tax court
and remand with instructions for the tax court to enter summary judgment in
favor of Jones. Jones has requested attorney’s fees on appeal pursuant to A.R.S. §
12–348. A.R.S. § 12–348(B)(1) permits us to award attorney’s fees to a party that
successfully challenges the assessment or collection of taxes. We grant Jones’s
request subject to the limitation imposed by § 12-348(E)(5).
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