Rebel Empire v. Ador

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

REBEL EMPIRE, LLC,
Plaintiff/Appellant,

v.

ARIZONA DEPARTMENT OF REVENUE,
Defendant/Appellee.

No. 1 CA-TX 20-0010
FILED 8-19-2021

Appeal from the Arizona Tax Court
No. TX2018-001177
The Honorable Danielle J. Viola, Judge

AFFIRMED

COUNSEL

The Newmark Law Firm, PLLC, Phoenix
By Stephen C. Newmark
Counsel for Plaintiff/Appellant

Arizona Attorney General's Office, Phoenix
By Nancy K. Case
Counsel for Defendant/Appellee
 REBEL EMPIRE v. ADOR
Decision of the Court

MEMORANDUM DECISION

Judge James B. Morse Jr. delivered the decision of the Court, in which
Presiding Judge D. Steven Williams and Judge David B. Gass joined.

M O R S E, Judge:

¶1 Rebel Empire, LLC ("Rebel") appeals from the tax court's
grant of summary judgment in favor of the Arizona Department of Revenue
("Department") finding Rebel liable for unpaid luxury tax on tobacco sold
during 2016. For the following reasons, we affirm.

FACTS AND PROCEDURAL BACKGROUND

¶2 Rebel is a licensed Arizona tobacco distributor operating a
retail store in Flagstaff. In 2016, Rebel purchased OHM Pipe Tobacco and
Au Naturall'e Pipe Tobacco ("Subject Tobacco"). Rebel did not report these
purchases on its luxury tax return under the "smoking tobacco" category,
which includes pipe tobacco. See A.R.S. § 42-3001(23) (defining smoking
tobacco). Instead, Rebel reported the purchases under the "cavendish"
category. Arizona taxes cavendish tobacco at a lower rate than smoking
tobacco. See A.R.S. §§ 42-3052(6)-(7), -3251(A)(2)-(3), -3371(2)-(3).

¶3 The Department audited Rebel's 2016 luxury tax returns and
determined that Rebel should have reported the Subject Tobacco under the
smoking tobacco category instead of the cavendish category because the
Subject Tobacco was pipe tobacco. The Department issued a proposed
assessment for $12,209.87 in underreported taxes. Rebel protested the
assessment. The Office of Administrative Hearings heard the matter and
upheld the assessment. After exhausting its administrative remedies, Rebel
appealed to the tax court.

¶4 The parties filed cross-motions for summary judgment. The
tax court heard oral argument, denied Rebel's motion, and granted the
Department's motion. The court entered judgment and Rebel timely
appealed. We have jurisdiction under A.R.S. § 12-2101(A)(1).

DISCUSSION

¶5 We review the tax court's grant of summary judgment de
novo. SolarCity Corp. v. Ariz. Dep't of Revenue, 243 Ariz. 477, 480, ¶ 8 (2018).

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 REBEL EMPIRE v. ADOR
Decision of the Court

We view the facts in the light most favorable to Rebel, the party against
whom summary judgment was entered. See Valencia Energy Co. v. Ariz.
Dep't of Revenue, 191 Ariz. 565, 568, ¶ 2 (1998). But our review "is limited to
the record before the [tax] court." GM Dev. Corp. v. Cmty. Am. Mortg. Corp.,
165 Ariz. 1, 4 (App. 1990).

¶6 The parties dispute who bore the burden to prove the
classification of the Subject Tobacco. "The appropriate burden of proof is a
question of law, which this court reviews de novo." Am. Pepper Supply Co.
v. Fed. Ins. Co., 208 Ariz. 307, 309, ¶ 8 (2004). Whether the Subject Tobacco
is cavendish or pipe tobacco is a fact dispute. See Goodyear Aircraft Corp. v.
Ariz. State Tax Comm'n, 1 Ariz. App. 302, 306 (1965) (noting categorization
of taxpayer's activity as the sale of personal property or sale of services was
a question of fact). In tax appeals, the burden of proof on a factual issue
shifts to the Department only if, among other requirements, a
preponderance of the evidence shows the taxpayer has asserted "a
reasonable dispute" on that issue. A.R.S. § 42-1255(1). Here, the tax court
found that by failing to offer any evidence of a reasonable dispute, Rebel
failed to establish "the initial showing by a preponderance that would
support shifting the burden of proof to" the Department. We agree.

¶7 In its response brief to the Department's motion for summary
judgment, Rebel stated it "was trying to determine whether it was selling
cavendish." But Rebel did not provide or point to any evidence that the
Subject Tobacco was cavendish. Without evidence to substantiate its claim,
Rebel failed to assert a reasonable dispute. See Ariz. Joint Venture v. Ariz.
Dep't of Revenue, 205 Ariz. 50, 56, ¶ 30 (App. 2002) (holding that a legal
argument was insufficient to shift the burden on a fact dispute); see also State
ex rel. Ariz. Dep't of Revenue v. Wendtland, 1 CA-TX 18-0004, 2019 WL
2468832, at *2, ¶ 12 (Ariz. App. June 13, 2019) (mem. decision) (holding that
taxpayer "did not assert 'a reasonable dispute,'" in part, because he "did not
respond to the Department's motion for summary judgment"); Ariz. R. Civ.
P. 56(e) ("[A]n opposing party may not rely merely on allegations or denials
of its own pleading[,]" but must "set forth specific facts showing a genuine
issue for trial."). Thus, Rebel still bore the burden of establishing the Subject
Tobacco was cavendish.

¶8 Rebel also asserts the Department erred by relying on a
definition of cavendish promulgated by the Department in a 2018 policy
statement. See Luxury Tax Ruling LTR 18-1, 2018 WL 1964618 (Apr. 17,
2018). But Rebel fails to cite, and we cannot find, anything in the record
where the Department relied on LTR 18-1 in this case. Instead, the
Department applied the definition of cavendish from a 2004 policy

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 REBEL EMPIRE v. ADOR
Decision of the Court

statement. See Luxury Tax Ruling LTR 04-2 (Mar. 3, 2004),
https://azdor.gov/sites/default/files/RULINGS_LUXURY_2004_ltr04-
2.pdf. Accordingly, this argument is not well taken.

¶9 On appeal, Rebel does not address or dispute the LTR 04-2
definition used by the tax court. Instead, Rebel cites a definition of
cavendish promulgated by the legislature in 2019. See 2019 Ariz. Sess.
Laws, ch. 65, § 1 (1st Reg. Sess.) (SB 1347); A.R.S. § 42-3001(3) (defining
cavendish tobacco). But to the tax court, Rebel argued the 2019 legislation
should not apply to the 2016 audit because it lacked retroactivity language.
See State v. Superior Court (Mauro), 139 Ariz. 422, 427 (1984) ("Unless a statute
is expressly declared to be retroactive, it will not govern events that
occurred before its effective date."). Rebel now asks this Court to order the
Department "to devise a way to blend the theory of the audit with the new
statutory definition of Cavendish." We conclude Rebel has waived this
argument by failing to raise it before the tax court. See Westin Tucson Hotel
Co. v. Ariz. Dep't of Revenue, 188 Ariz. 360, 364 (App. 1997) (noting
arguments not raised in the tax court are waived on appeal).

¶10 Based on the undisputed evidence presented, the tax court
correctly determined that the Subject Tobacco was pipe tobacco subject to
taxation at the higher rate. Summary judgment was appropriate.

CONCLUSION

¶11 For the foregoing reasons, we affirm. As Rebel is not the
prevailing party, we deny its request for attorney fees.

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

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