Karbal v. ADOR

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IN THE COURT OF APPEALS STATE OF ARIZONA DIVISION ONE STEVEN KARBAL, individually and in a representative capacity, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, a political subdivision of the State of Arizona; VANGUARD CAR RENTAL USA, INC., dba NATIONAL CAR RENTAL, an Oklahoma corporation, individually and in a representative capacity; FOUR SEASONS HOTELS LIMITED, a Canadian corporation, individually and in a representative capacity, Defendants/Appellees, and ARIZONA SPORTS & TOURISM AUTHORITY, a political subdivision of the State of Arizona, Defendant-inIntervention/Appellee. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 1 CA-TX 06-0010 DEPARTMENT T O P I N I O N FILED 5-24-07 Appeal from the Arizona Tax Court Cause No. TX 2005-050091 The Honorable Mark W. Armstrong, Judge AFFIRMED Kickham Hanley, P.C. By Gregory D. Hanley Attorneys pro hac vice for Plaintiff/Appellant Royal Oak, MI and Hebert Schenk, P.C. By Shawn K. Aiken Richard M. Gerry Co-Counsel for Plaintiff/Appellant Phoenix Terry Goddard, Attorney General Phoenix By Elizabeth S. Hill, Assistant Attorney General Kimberly J. Cygan, Assistant Attorney General Attorneys for Defendant/Appellee Arizona Department of Revenue Fennemore Craig, P.C. By Paul J. Mooney Jim L. Wright Attorneys for Defendant-in-Intervention/Appellee Arizona Sports & Tourism Authority Phoenix P O R T L E Y, Judge ¶1 refund Steven Karbal ( Karbal ) appeals the dismissal of his claim jurisdiction. because the tax court lacked subject matter For the following reasons, we affirm. FACTUAL AND PROCEDURAL BACKGROUND ¶2 Beginning March 1, 2001, Arizona imposed a transaction privilege tax on car and hotel room rentals pursuant to Arizona Revised Statutes ( A.R.S. ) sections 5-839 and 5-840 to fund projects sponsored by the Arizona Sports and Tourism Authority ( AZ-STA ). See, e.g., Long v. Napolitano, 203 Ariz. 247, 252, ¶ 7, 53 P.3d 172, 177 (App. 2002) (discussing taxes collected to fund construction of a professional football stadium). 2 ¶3 Karbal, a Michigan resident, rented a car from National Car Rental ( National )1 and a hotel room at the Four Seasons Hotels Ltd. ( Four Seasons ) during his visit to Arizona in May 2005. Michael Devine ( Devine ), also a Michigan resident, rented a car from Enterprise Leasing Co. of Phoenix ( Enterprise ) and a hotel room from KSL Biltmore Resort, Inc. ( Biltmore ) during his March 2003 visit. Pursuant to A.R.S. §§ 5-839 and 5-840, the car rental companies collected amounts equal to 3.25% of their car rental prices, and the hotels collected amounts equal to 1% of their hotel rates. ¶4 Devine filed a refund claim with the Arizona Department of Revenue ( ADOR ) challenging the validity of the taxes collected by Enterprise and Biltmore. claim, and Devine unsuccessfully Administrative Hearings. action in tax court.2 appealed ADOR denied the to the Office of After the appeal, Devine filed this The complaint was amended in July 2005 to add Karbal as a plaintiff. Three days later, Devine voluntarily dismissed his individual claims.3 ¶5 ADOR moved to dismiss the complaint because (1) the tax court lacked subject-matter jurisdiction because Karbal and 1 National is the business name of Vanguard Car Rental USA. Devine filed for his individual refund, and as a class representative for others similarly situated. The putative class has not been certified. 3 Karbal stipulated to allow AZ-STA to intervene as a defendant. 2 3 other members of the putative class had not exhausted the available administrative remedies, and (2) Karbal did not have standing to challenge the taxes vendors, not on their customers. because they fell on the The tax court dismissed the claim because Karbal had not filed a refund claim, and this appeal followed. We have jurisdiction pursuant to A.R.S. § 12- 2101(B) (2003). DISCUSSION ¶6 The parties bring this action.4 de novo. contest whether Karbal has standing to Standing is a question of law that we review Robert Schalkenbach Found. v. Lincoln Found., Inc., 208 Ariz. 176, 180, ¶ 15, 91 P.3d 1019, 1023 (App. 2004). A putative class representative who does not have standing cannot maintain a class action on behalf of others who could allege standing. See Fernandez v. Takata Seat Belts, Inc., 210 Ariz. 138, 141, ¶¶ 12-13, 108 P.3d 917, 920 (2005). ¶7 The question of standing in Arizona does not raise constitutional concerns Constitution, Arizona s controversy requirement. because, unlike constitution Armory Park the contains United no Neighborhood States case or Ass n v. Episcopal Cmty. Servs. in Ariz., 148 Ariz. 1, 6, 712 P.2d 914, 919 (1985). Nevertheless, standing generally requires an injury 4 Because we find that Karbal does not have standing to pursue this suit, we decline to address the issue of exhaustion of administrative remedies. 4 in fact, economic or otherwise, caused by the complained-of conduct, and resulting in a distinct and palpable injury giving the plaintiff a personal stake in the controversy s outcome. Aegis of Ariz., L.L.C. v. Town of Marana, 206 Ariz. 557, 562-63, ¶ 18, 81 P.3d 1016, 1021-22 (App. 2003) (quotations omitted). If there is no standing, courts generally decline jurisdiction. See Bennett v. Brownlow, 211 Ariz. 193, 195-96, ¶¶ 14-16, 119 P.3d 460, 462-63 (2005) (stating that standing raises prudential concerns and is only waived on rare occasions ). A. ¶8 first The Hotel Tax and Car Rental Surcharge Are More Similar to Transaction Privilege Taxes Than to Sales Taxes. In analyzing determine the surcharge. whether nature Karbal of the has hotel standing, tax and we car must rental The tax imposed by A.R.S. § 5-839(C) is a surcharge applied to the business of leasing or renting vehicles. Its statutory twin, A.R.S. § 5-840(A), provides for a tax on the gross proceeds of sales or gross income from the business of every person engaging or continuing in a [hotel] business. ¶9 The two taxes are akin to transaction privilege taxes, which are an excise on the privilege or right to engage in particular businesses within the taxing jurisdiction. US West Commc ns., Inc. v. City of Tucson, 198 Ariz. 515, 523, ¶ 24, 11 P.3d 1054, 1062 (App. 2000). Transaction privilege taxes are levied on gross income or gross proceeds from specific business 5 activities. See S. Pac. Transp. Co. v. State, 202 Ariz. 326, 333, ¶ 25, 44 P.3d 1006, 1013 (App. 2002). ¶10 [A]n excise tax on the privilege or right to engage in an occupation or business in the State of Arizona is a tax paid by the business providing the service, not a tax upon the sale itself. Ariz. Dep t of Revenue v. Mountain States Tel. & Tel. Co., 113 Ariz. 467, 468, 556 P.2d 1129, 1130 (1976); see also Tower Plaza Invs., Ltd. v. DeWitt, 109 Ariz. 248, 250, 508 P.2d 324, 326 (1973) (stating that the tax is not upon sales . . . but upon the privilege or right to engage in business in the State, although measured by the gross volume of business activity ). Karbal concedes that the AZ-STA taxes are excise taxes, as opposed to sales taxes, because they are regulated as local excise taxes under A.R.S. Title 42, Chapter 6.5 B. ¶11 Karbal Does Not Have Standing Because the Legal Incidence of the Taxes Falls on the Businesses, Not Their Customers. Because Arizona imposes taxes on the business activity of renting cars and hotel rooms, Karbal is not liable for the payment of these taxes to the State. hotels and rental remitting the taxes. car businesses The taxpayers are the filing the returns and The legal incidence of the transaction 5 Transaction privilege taxes are regulated under A.R.S. Title 42, Chapter 5. Local excise taxes are collected in the same manner as authorized for transaction privilege taxes. A.R.S. § 42-6002. 6 privilege tax is on the seller, even though the cost may be passed on to customers like Karbal. See J.C. Penney Co. v. Ariz. Dep t of Revenue, 125 Ariz. 469, 472, 610 P.2d 471, 474 (App. 1980). Karbal lacks legal standing to bring this suit because he is not the actual taxpayer. See Twentieth Century Sporting Club, Inc. v. United States, 34 F. Supp. 1021, 1023 (Ct. Cl. 1940) ( But even though the plaintiff had in fact borne the burden of the tax, it nevertheless was not the taxpayer; no taxes were exacted from it by the defendant and there is, therefore, no right given to it under the law to recover. ).6 1. ¶12 No Injury in Fact Karbal, however, argues standing does exist, relying on Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992), a nontax case. In Lujan, the United States Supreme Court, in a case challenging a regulation which impacted the Endangered Species Act, developed a three-part test for standing, requiring (1) an injury in fact, (2) a causal connection between the injury and the alleged conduct, and (3) the likelihood that a favorable decision would redress the plaintiff s injury. 6 Id. at 560-61. Karbal contends that a determination that the legal incidence of the taxes falls on the hotels and rental car companies is a factual finding, and that we must assume the truth of his allegations when reviewing the motion to dismiss. The legal incidence of taxes, however, is a legal question, and we are not bound by Karbal s allegations. 7 Karbal contends he meets the Lujan standard because he bears the economic burden of taxes allegedly passed through to him. ¶13 Lujan does not, however, support Karbal s argument. The Court, in examining whether the environmental groups had standing to challenge the regulation, explained that [w]hen . . . a plaintiff s asserted injury arises from the government s allegedly unlawful regulation . . . of someone else, much more is needed. Lujan, 504 U.S. at 562. The Court warned that causation and redressability are more difficult to prove where they ordinarily hinge on the response of the regulated (or regulable) third party to the government action. Id.; see also ASARCO Inc. v. Kadish, 490 U.S. 605, 614-15 (1989) (holding that an Arizona teachers association did not have standing to challenge the State s procedure for granting mineral leases that finance educational trust funds because the State could offset any increase by reducing other funding sources or could use the increase for something other than teacher salaries or benefits). ¶14 Karbal maintains that the government s imposition of tax on the hotels and car rental agencies gave rise to his alleged grievance. But those entities, not the State, chose to pass the tax on to Karbal. exist merely because a Standing to challenge a tax does not customer pays a product or service received from a taxpayer. 8 higher price for a ¶15 In an effort to find analogous authority applying Lujan, Karbal turns to Supreme Court cases examining sales and use taxes. See Gen. Motors Corp. v. Tracy, 519 U.S. 278 (1997) (addressing general sales and use taxes Ohio imposed on natural gas purchasers); Maryland v. Louisiana, 451 U.S. 725 (1981) (analyzing a first use tax Louisiana imposed on certain uses of imported natural gas). the distinction between The Supreme Court, however, recognizes those forms of tax and transaction privilege taxes: We follow standard usage, under which gross receipts taxes are on the gross receipts from sales payable by the seller, in contrast to sales taxes, which are also levied on the gross receipts from sales but are payable by the buyer (although they are collected by the seller and remitted to the taxing entity). Okla. Tax Comm n v. Jefferson Lines, Inc., 514 U.S. 175, 179 n.3 (1995), superseded by statute on other grounds, 49 U.S.C. § 14505 (2006), as recognized in Tri-State Coach Lines, Inc. v. Metro. Pier & Exposition Auth., 732 N.E.2d 1137, 1146-47 (Ill. App. Ct. 2000). ¶16 The Court has expressly held that it is pivotal to identify who bears the legal incidence of the tax in resolving standing. In Oklahoma Tax Commission v. Chickasaw Nation, Oklahoma disputed a finding that the legal incidence of a fuel tax fell on the retailer because 9 the approach has no relationship to economic realities. (quotations omitted). The Court 515 U.S. 450, 459 (1995) declined to engage in the daunting inquiry into economic realities, which might oblige it to consider how completely retailers can pass along tax increases without Moreover, the sacrificing statute sales contained no volume. pass-through Id. at 460. provision or indication that retailers [were] simply collection agents for taxes ultimately imposed on consumers. Id. at 461, 462. Consequently, the Court held only the retailer could challenge the tax. Id. at 461-62.7 ¶17 In the case of transaction privilege taxes, Arizona courts have held that [t]he legal incidence of the transaction privilege tax is on the seller, or in the case of leases, on the landlord, even though it may be passed on to the customer or tenant. J.C. Penney, 125 Ariz. at 472, 610 P.2d at 474; see also Ariz. State Tax Comm n v. Garrett Corp., 79 Ariz. 389, 393, 291 P.2d 208, 210-11 (1955) (stating that transaction privilege taxes do not have to be passed through to consumers even though common practice is to do so); Tucson Mech. Contracting, Inc. v. Ariz. Dep t of Revenue, 175 Ariz. 176, 180, 854 P.2d 1162, 1166 (App. 1992) (holding that even separately stating the tax does 7 More recently, the Court ruled that there is no general taxpayer standing to challenge state taxes because general taxpayer standing does not entail an actual or imminent or concrete and particularized injury to the taxpayer. See DaimlerChrysler Corp. v. Cuno, 126 S. Ct. 1854, 1862-64 (2006). 10 not economically affect compel exclusions from shifting gross the tax receipts, to the or change hotels and purchaser, the legal incidence of the tax). ¶18 The mere fact that Arizona car rental agencies may pass their taxes to customers does not shift the legal incidence of the tax or confer standing on Karbal. As the Arizona Supreme Court explained: The parties to a commercial transaction cannot change the essential nature of a tax imposed upon one of them by agreeing that the other shall be liable for payment of the tax. . . . . Whether the [hotels and car rental companies] explicitly or implicitly require [customers] to bear the burden of the tax, or whether they choose to bear the expense themselves, the result is the same. The tax is imposed upon the [business o]wner . . . . Kunes v. Samaritan Health Serv., 121 Ariz. 413, 417, 590 P.2d 1359, 1363 (1979).8 2. A Favorable Decision Will Not Redress Karbal s Alleged Injury. ¶19 fact Assuming that Lujan applies, it requires an injury in and a showing that the injury 8 can be redressed by a Karbal also relies upon a minute entry in Long v. Napolitano, CV 2001-015659 (Maricopa County Super. Ct. Nov. 2, 2001). Because Long was not published, see Walden Books Co. v. Dep t of Revenue, 198 Ariz. 584, 589, ¶ 23, 12 P.3d 809, 814 (App. 2000), and standing was not discussed in the subsequent appeal, Long, 203 Ariz. 247, 53 P.3d 172, we decline to address it. 11 favorable decision. 504 U.S. at 560-61. Karbal cannot make this showing. ¶20 Arizona law provides no mechanism requiring the hotel and car rental companies to return to Karbal any sum collected for the payment of taxes. See Ariz. Dep t of Revenue v. Canyoneers, Inc., 200 Ariz. 139, 144, ¶¶ 20-23, 23 P.3d 684, 689 (App. 2001) (holding that the State cannot condition transaction privilege tax refunds upon subsequent customer repayment without clear statutory authority to do so). Consequently, although a favorable decision could lead to a refund for the rental car companies and hotels charged with the taxes, there is no requirement that they pass along the refund to the plaintiff class. C. Joining the Four Seasons Defendants Does Not Cure Problem. ¶21 and National as Karbal s Standing In an effort to acquire standing, Karbal has joined the Four Seasons and National as defendants. He relies upon Javor v. State Board of Equalization, 527 P.2d 1153 (Cal. 1974). This effort is unavailing. ¶22 Javor is a sales tax case with no relationship to transaction privilege taxes. reimbursed by the State It concerned retailers who were Board of Equalization for excessive sales taxes but failed to reimburse the customers who paid the taxes. Id. at 1155-56. The California Supreme Court allowed 12 the customers to compel the retailers to claim refunds from the Board so the customers could be repaid by the retailers. 1161. Id. at As explained previously, Four Seasons and National are not required to pass the tax on to their customers, and there is no mechanism in place requiring them to give their customers any refund they may obtain. The Javor rationale has no bearing here. D. ¶23 ADOR is Not Estopped from Arguing the Standing Issue. Karbal additionally argues that ADOR is estopped from arguing that the taxes are intended to burden hotels and car rental agencies because AZ-STA had stated that the taxes were designed to affect out-of-state visitors. ADOR is estopped if: (1) it commits acts inconsistent with a position it later adopts, (2) the other party relies upon those acts, and (3) the other party is injured when ADOR repudiates its prior acts. Valencia Energy Co. v. Ariz. Dep t of Revenue, 191 Ariz. 565, 576-77, ¶ 35, 959 P.2d 1256, 1267-68 (1998). Because Karbal does not explain how these elements apply, we do not address the argument. 13 CONCLUSION ¶24 Based on the foregoing, we affirm the trial court s dismissal of Karbal s claim in both his individual and representative capacities. ________________________________ MAURICE PORTLEY, Presiding Judge CONCURRING: ________________________________ DONN KESSLER, Judge ________________________________ PATRICK IRVINE, Judge 14

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