Swift v. Ador

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

SWIFT TRANSPORTATION CO. OF ARIZONA L.L.C.,
Plaintiff/Appellant,

v.

ARIZONA DEPARTMENT OF REVENUE,
Defendant/Appellee.

No. 1 CA-TX 19-0004
FILED 7-14-2020

Appeal from the Arizona Tax Court
No. TX2018-001103
The Honorable Christopher T. Whitten, Judge

AFFIRMED

COUNSEL

Ryan Rapp & Underwood & Pacheco, PLC, Phoenix
By Michael G. Galloway, Ian A. Macpherson
Counsel for Plaintiff/Appellant

Arizona Attorney General’s Office, Phoenix
By Kimberly J. Cygan, Nancy K. Case
Counsel for Defendant/Appellee

The Cavanagh Law Firm, P.A., Phoenix
By James G. Busby, Jr., Karen Stafford
Counsel for Amicus Curiae Waste Management of Arizona, Inc.
 SWIFT v. ADOR
Opinion of the Court

OPINION

Presiding Judge David D. Weinzweig delivered the opinion of the Court, in
which Judge Jennifer M. Perkins and Judge James B. Morse Jr. joined.

W E I N Z W E I G, Judge:

¶1 Arizona law imposes one of two distinct taxes on all diesel
fuel sales—fuel tax (A.R.S. § 28-5606) or use tax (A.R.S. § 42-5155)—
depending on how the diesel fuel is used. The law requires diesel fuel
vendors to collect fuel taxes from consumers at purchase based on a
legislative presumption that the fuel is acquired to propel motor vehicles
on Arizona highways. But if the diesel fuel is ultimately used for a different
purpose, the fuel taxes are refunded and the use tax is applied.

¶2 Swift Transportation Co. of Arizona, LLC (“Swift”) sued the
Arizona Department of Revenue (“ADOR”) in tax court to obtain a refund
of use taxes levied on its diesel fuel purchases, having already received a
refund of fuel taxes on the same fuel. The tax court granted ADOR’s motion
to dismiss under Arizona Rule of Civil Procedure 12(b)(6). We affirm.

FACTS AND PROCEDURAL BACKGROUND

¶3 On appeal from a motion to dismiss, this court “assume[s] the
truth of [all] well-pled factual allegations and indulge[s] all reasonable
inferences therefrom.” Cullen v. Auto-Owners Ins. Co., 218 Ariz. 417, 419, ¶
7 (2008).

¶4 ADOR enforces state taxation laws, A.R.S. § 42-5003(A), while
the Arizona Department of Transportation (“ADOT”) enforces state
transportation laws, A.R.S. § 28-5602. As the largest publicly traded
common carrier in North America, Swift owns and operates an immense
fleet of semi-trucks. Swift in turn must acquire and consume large amounts
of diesel fuel to power those trucks.

Fuel Tax and Use Tax

¶5 Arizona law imposes fuel taxes or use taxes on diesel fuel
sales depending on the fuel’s ultimate use. A fuel tax is levied on diesel
fuel acquired and used to propel “a use class motor vehicle” on Arizona
highways, and is intended to “partially compensate” the State “for the use

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Opinion of the Court

of its highways.” A.R.S. § 28-5606(B)(2). A use tax is also levied on diesel
fuel as “tangible personal property” when stored, used or consumed in
Arizona. A.R.S. § 42-5155(A). But consumers are exempt from paying use
taxes under A.R.S. § 42-5159(A)(5) if their diesel fuel is “subject to” fuel
taxes under A.R.S. § 28-5606(B).

Three-Step Process

¶6 Arizona law follows a three-step process to assure that diesel
fuel is taxed based on its actual use. At purchase, A.R.S. § 28-5606(C)
requires diesel fuel vendors to collect “advance payments” of fuel taxes
from diesel fuel consumers. The vendor adds fuel taxes “to the price of
motor vehicle fuel” and remits the taxes to ADOT “for the purpose of
convenience and facility only.” Id. This advance payment of fuel tax is
imposed and collected under a statutory presumption that diesel fuel is
“consumed in propelling [a] vehicle on the highways in this state,” which
ensures “the proper administration” of fuel taxes and “prevent[s] [tax]
evasion.” A.R.S. § 28-5615(A). And because the diesel fuel is “subject to”
fuel taxes at point of sale, consumers are exempt from paying use taxes.
A.R.S. § 28-5606(B).

¶7 Consumers may later rebut the presumption, recouping their
advance payment of fuel taxes on diesel fuel by proving an actual use
“other than to propel a motor vehicle on [Arizona] highway[s].” See A.R.S.
§ 28-5601(A)(36). Consumers submit their fuel tax refund applications to
ADOT and ADOT “shall” refund the fuel taxes if its director is satisfied “the
fuel was consumed” for another purpose. Id., § 28-5612(A)(2)(a). ADOT
adopts “rules and procedures” for taxpayers to prove actual use. A.R.S. §
28-5615(A).

¶8 And last, consumers who seek and obtain a fuel-tax refund
must pay use taxes on the diesel fuel because the fuel is no longer “subject
to” fuel taxes under A.R.S. § 28-5606(B) and thus no longer exempt from
use taxes under A.R.S. § 42-5159(A)(5). Ariz. Admin. Code R15-5-2327(B)
(“[A] purchase of use fuel is subject to use tax under A.R.S. § 42-5155 on the
date the consumer is issued a refund because the use fuel is not subject to
the use fuel tax under A.R.S. § 28-5606.”). ADOT cannot even refund the
fuel taxes of consumers “until [it] determines the difference between the
amount of the refund and the amount of the use tax that is imposed under
[the statute] on the fuel exempt from use fuel taxes if owed by the person.”
A.R.S. § 28-5612(F). If “the amount of the [fuel tax] refund is greater than
the amount owed for the use tax,” ADOT must subtract the “amount owed

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Opinion of the Court

for the use tax” and “refund the amount of the difference to the person.”
Id.

Swift Refund of Fuel Taxes

¶9 Swift bought diesel fuel from vendors and tendered the
advance payments of fuel taxes at purchase. Swift ultimately used part of
the fuel for something other than to propel motor vehicles on Arizona
highways. It thus applied to ADOT for a fuel-tax refund of $281,018.91,
simultaneously reporting it would then owe $190,836.39 in use taxes,
leaving a balance refund payment of $90,182.52. ADOT approved Swift’s
application in full.

¶10 A year later, Swift asked ADOR to refund its $190,836.39
offset payment of use taxes. Swift conceded that ADOT refunded its fuel
taxes and acknowledged that it stored, used or consumed the diesel fuel as
required to impose use taxes. But Swift argued it was still exempt from use
taxes because the diesel fuel was “subject to” fuel taxes at purchase, which
remained true notwithstanding the fuel-tax refund. A.R.S. § 42-5159(A)(5).
ADOR denied the claim, ruling that Swift was no longer “subject to” fuel
taxes after ADOT refunded those taxes and Swift then owed use taxes on
the diesel fuel. Ariz. Admin. Code R15-5-2327(B).

¶11 Swift appealed to the tax court under A.R.S. § 42-1251(B)(2),
bypassing administrative review. Swift alleged that “[p]urchases of motor
vehicle fuel are subject [to] the Arizona use tax pursuant to A.R.S. § 42-
5155,” but simultaneously “exempt from the use tax pursuant to A.R.S. §
42-5159(A)(5) because they are subject to motor vehicle fuel tax pursuant to
A.R.S. § 28-5606(A).”

¶12 The tax court granted ADOR’s Rule 12(b)(6) motion to
dismiss, stressing that A.R.S. § 28-5612(F) “adds additional steps, requiring
[ADOR] to determine the amount of use tax to which the taxpayer would
be subject if it were subject to use tax, and subtract that amount from the
refund.”1 Swift timely appealed. We have jurisdiction under A.R.S. § 12-
2101(B).

DISCUSSION

¶13 Swift raises two arguments on appeal: (1) the tax court
erroneously dismissed its claim on a Rule 12(b) motion to dismiss, and (2)

1 ADOR and Swift do not contest the application of A.R.S. § 28-
5612(F).
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the court misinterpreted Arizona tax statutes. We review both issues de
novo. Canon Sch. Dist. No. 50 v. W.E.S. Constr. Co., 177 Ariz. 526, 529 (1994)
(statutory interpretation); Coleman v. City of Mesa, 230 Ariz. 352, 355 ¶ 7
(2012) (motion to dismiss).

I. Propriety of Motion to Dismiss

¶14 Swift argues the tax court applied an incorrect standard to the
motion to dismiss under Rule 12(b)(6). A motion to dismiss should be
granted “only if as a matter of law plaintiffs would not be entitled to relief
under any interpretation of the facts susceptible of proof.” Conklin v.
Medtronic, Inc., 245 Ariz. 501, 504, ¶ 7 (2018) (citations omitted). Arizona
courts assume the truth of all well-pled, material allegations in the
complaint, but “do not accept as true allegations consisting of conclusions
of law, inferences or deductions that are not necessarily implied by well-
pleaded facts, unreasonable inferences or unsupported conclusions from
such facts, or legal conclusions alleged as facts.” Jeter v. Mayo Clinic Ariz., 211 Ariz. 386, 389, ¶ 4 (App. 2005).

¶15 The tax court applied the proper standard. Swift’s claim
presented a pure legal issue of statutory interpretation; ADOR’s motion to
dismiss tested the legal sufficiency of that claim. Blankenbaker v. Marks, 231
Ariz. 575, 577, ¶ 6 (App. 2013) (statutory interpretation is a question of law).
Swift acknowledges the point, framing the “substantive issue of this
appeal” as one of “undisputed facts with only the question of a legal
interpretation of the applicable use fuel and use tax provisions under A.R.S.
Titles 28 and 42.”

¶16 Even so, Swift emphasizes that “Arizona is a notice pleading
state” and motions to dismiss are disfavored, which is true. But motions to
dismiss are disfavored because they test the legal sufficiency of the
complaint without the benefit of a fully developed factual record. See
Newman v. Maricopa Cty., 167 Ariz. 501, 504 (App. 1991). Swift does not
contend that discovery or external facts would have altered the scrutiny or
fate of its purely legal claim, instead stressing “the facts are basic and
undisputed.”

II. Statutory Interpretation

¶17 Swift next contends the tax court incorrectly held that Swift
must pay use taxes on its diesel fuel purchases after ADOT refunded its fuel
taxes. This argument requires us to interpret the use tax exemption under
A.R.S. § 42-5159(A)(5). When interpreting statutes, our goal is to determine

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and effectuate the legislature’s intent, Rasor v. Nw. Hosp., LLC, 243 Ariz. 160,
164, ¶ 20 (2017), and a statute’s plain language is the most reliable indicator
of legislative intent, State ex rel. Ariz. Dep’t of Revenue v. Capitol Castings, Inc.,
207 Ariz. 445, 447, ¶ 9 (2004). A word’s meaning is not read in “isolation,”
but should instead account for context and the whole statute. Normandin v.
Encanto Adventures, LLC, 246 Ariz. 458, 460, ¶ 11 (2019). Arizona courts
liberally construe tax statutes in favor of taxpayers and against the
government, but “strictly construe tax exemptions because they violate the
policy that all taxpayers should share the common burden of taxation.”
Capitol Castings, 207 Ariz. at 447, ¶ 10. Arizona tax statutes “shall not be
construed to require or permit double taxation.” A.R.S. § 42-11003.

¶18 Section 42-5159(A)(5) creates a use tax exemption for “the
storage, use or consumption” of diesel fuel if the fuel is “subject to” fuel
taxes under A.R.S. § 28-5606(B)(2). The tax court interpreted “subject to” as
a synonym for “required to pay,” meaning that Swift lost its use tax
exemption when ADOT refunded its advance payments of fuel taxes.

¶19 Swift argues the court misinterpreted the relevant statutes
and offers an alternative interpretation. Swift would define the adjective
“subject to” as fixed in time at the point of sale. Thus, because Swift was
“subject to” an “advance payment” of fuel taxes when purchasing diesel
fuel, it forever remains “subject to” fuel taxes and exempt from use taxes—
whether the fuel taxes are later refunded as envisioned and authorized
under Arizona law based on actual use.

¶20 We are not persuaded. Swift’s interpretation conflicts with
the statutes’ plain language and basic principles of statutory construction.
The legislature crafted a versatile, multi-step process that attributes no
permanent significance to the advance payment of fuel taxes at purchase
but instead aims to ensure that diesel fuel is ultimately taxed on its actual
use. Vendors must collect “advance payments” of fuel taxes from diesel
fuel purchasers at point of sale based on a presumed use—the legislative
presumption that consumers acquire diesel fuel to propel vehicles on state
highways—which furthers “convenience and facility” and prevents tax
evasion. A.R.S. §§ 28-5606(C), -5615(A). But the presumed use is not fixed
in time. Consumers have an express path to later rebut the presumption
based on actual use and recover their tentative fuel tax payments, A.R.S. §§
28-5601(A)(36), -5612(A), -5615(A), leaving use taxes to fill the void, A.R.S.
§ 42-5155. We must “strive to construe a statute and its subsections as a
consistent and harmonious whole.” Excell Agent Services, LLC v. Ariz. Dep’t
of Revenue, 221 Ariz. 56, 57, ¶ 9 (App. 2008) (quoting State v. Wagstaff, 164
Ariz. 485, 491 (1990)).

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¶21 That’s what happened here. Swift’s fuel was presumed
“subject to” fuel taxes at purchase, but Swift later disproved the
presumption and recouped its fuel-tax payments. Cf. Airport Properties v.
Maricopa Cty., 195 Ariz. 89, 99, ¶ 37 (App. 1999) (confirming “the idea that
something is ‘subject to’ an influence or action does not communicate the
idea that it is continuously and actively affected by that influence or
action”). Whether the diesel fuel would be “subject to” fuel taxes was
conclusively answered when ADOT granted Swift’s fuel tax refund
application.

¶22 Furthermore, A.R.S. § 42-5155 imposes use taxes on “the
storage, use or consumption” of personal property in Arizona, including
diesel fuel. But Swift’s interpretation would enshrine a tax loophole on
diesel fuel when the fuel is not used on Arizona highways. Swift offers no
reason or rationale for this tax-free chasm and we “avoid a construction that
leaves the statute meaningless or of no effect.” St. Joseph’s Hosp. & Med. Ctr.
v. Maricopa Cty., 130 Ariz. 239, 248 (App. 1981).

¶23 Our interpretation is confirmed by the legislative purpose of
fuel taxes and use taxes. Capitol Castings, 207 Ariz. at 448, ¶ 13 (“Our
interpretation of the statute therefore should further, not frustrate, the
policy of encouraging investment and spurring economic development.”).
The legislature adopted fuel taxes “[t]o partially compensate this state for
the use of its highways,” A.R.S. § 28-5606(B)(2), helping defray the regular
maintenance required to keep the highways operational. As a result, diesel
fuel is not “subject to” fuel taxes unless used to traverse Arizona’s
highways. Meanwhile, use taxes exist to prevent state tax avoidance and
erosion of the state’s tax base. Qwest Dex, Inc. v. Arizona Dep’t of Revenue,
210 Ariz. 223, 225-26, ¶ 12 (App. 2005) (explaining that the use tax prevents
consumers from avoiding Arizona’s transaction privilege tax by making
their purchases in other states); see also A.R.S. § 42-5155(B) (“The [use] tax .
. . applies to any purchaser that purchased tangible personal property for
resale but subsequently uses or consumes the property.”). Thus, as applied
here, a taxpayer is required to pay use taxes on diesel fuel after its fuel tax
payments are refunded. Our interpretation also accommodates the
legislature’s directive that tax statutes “shall not be construed to require or
permit double taxation,” shielding taxpayers from having to pay fuel taxes
and use taxes on the same gallon of diesel fuel. See A.R.S. § 42-11003.

¶24 Swift misses the mark with its reliance on dictionary
definitions, a 1984 Arizona Attorney General (“AG”) opinion (I84-002), and
this court’s interpretation of a corporate tax reporting statute in State v.
Fendler, 127 Ariz. 464, 472 (App. 1980). First, the dictionary definitions of

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“subject to” are consistent with our interpretation because the adjective is
not fixed in time at point of sale. Thus, diesel fuel may be “subordinate to”
or “subservient to” fuel taxes at purchase but not later. ADOT’s refund
decision is dispositive. Second, while AG opinions are advisory, Bonito
Partners, LLC v. City of Flagstaff, 229 Ariz. 75, 80 n.5 (App. 2012), this one is
outdated because it interprets an earlier version of the relevant tax statutes
from decades before the legislature passed A.R.S. § 28-5612(F) and codified
the relationship between fuel-tax refunds and use taxes, including the offset
procedure. Third, Fendler does not involve tax exemptions but was instead
a criminal appeal in which this court “acquiesce[d]” to ADOR’s
interpretation of a corporate tax reporting statute. 127 Ariz. at 472.

¶25 We further note that Swift did not even accept its own
alternative interpretation. The record reflects that Swift knew the process—
that taxpayers were entitled to obtain a fuel-tax refund based on actual use
but would then owe use taxes on that diesel fuel. Thus, when Swift applied
to ADOT for a fuel-tax refund, it simultaneously reported the amount of
use taxes it would owe if successful. Swift cannot argue it was prevented
from “comply[ing] and order[ing] [its] affairs accordingly.” BSI Holdings,
244 Ariz. at 22, ¶ 25.2

CONCLUSION

¶26 We affirm the tax court’s statutory interpretation and final
judgment. We deny Swift’s request for attorney fees and costs because it
did not prevail.

AMY M. WOOD • Clerk of the Court
FILED: AA

2 We do not address Swift’s equitable estoppel argument because it
was not raised in Swift’s opening brief. Ariz. Dep’t of Revenue v. Ormond
Builders, Inc., 216 Ariz. 379, 386 n.7 (App. 2007).
8