State v. On-Auk-Mor

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UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL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

STATE OF ARIZONA E.S.A. TAX UNIT, Plaintiff/Appellee,

v.

ON-AUK-MOR TRADE CENTER, LLC, Defendant/Appellant.

No. 1 CA-TX 21-0005
FILED 4-28-2022

Appeal from the Arizona Tax Court
No. TX2020-000781
The Honorable Danielle J. Viola, Judge

AFFIRMED

COUNSEL

Arizona Attorney General’s Office, Mesa
By Thomas Jose
Counsel for Plaintiff/Appellee

Big Fire Law & Policy Group, Omaha, NE
By Michael J. Novotny
Counsel for Defendant/Appellant
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MEMORANDUM DECISION

Judge Peter B. Swann delivered the decision of the court, in which Presiding
Judge Cynthia J. Bailey and Judge D. Steven Williams joined.

S W A N N, Judge:

¶1 On-Auk-Mor Trade Center, LLC (“OAM”) appeals from the
tax court’s grant of summary judgment in favor of the Arizona Department
of Economic Security’s E.S.A. Tax Unit (“Department”) finding that OAM
is subject to Arizona’s unemployment insurance tax. For the following
reasons, we affirm.

FACTS AND PROCEDURAL HISTORY

¶2 The material facts are not in dispute. OAM is a limited
liability company (“LLC”) organized under Arizona law. OAM’s sole
member is the Montiel Family Trust, and David Montiel is the sole trustee
of the Trust and manager of OAM. Montiel is an enrolled member of the
Salt River Pima-Maricopa Indian Community (“Community”) and resides
on the Community’s reservation (“Reservation”). OAM is licensed by the
Community to do business on the Reservation. It does business entirely on
the Reservation, operating within Indian country as defined by 18 U.S.C.
§ 1151. The Community has no ownership interest in OAM.

¶3 In 2018, a former employee of OAM filed for unemployment
benefits, but the Department was unable to find an employer who reported
and paid unemployment insurance taxes on her wages. After an
investigation, the Department determined that OAM was an employer
under A.R.S. § 23-613 and was liable for unemployment insurance taxes.
OAM appealed the Department’s determination, arguing it was not subject
to Arizona’s unemployment insurance tax because OAM is located on the
Reservation and owned by a member of the Community. The Department
affirmed its decision.

¶4 OAM appealed the Department’s reconsidered determination
to the Appeals Board, which reversed the decision. The Appeals Board held
that OAM was not subject to Arizona’s unemployment insurance tax under
Oklahoma Tax Comm’n v. Chickasaw Nation, 515 U.S. 450 (1995) because the
legal incidence of the tax fell on a member of the Community.

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¶5 The Department appealed the Appeals Board’s decision to the
tax court. The parties filed cross-motions for summary judgment. After
oral argument, the tax court reversed the Appeals Board’s decision, denied
OAM’s motion, and granted the Department’s motion, finding that OAM
was subject to Arizona’s unemployment insurance tax.

¶6 OAM appeals.

DISCUSSION

¶7 OAM argues that the court erred in denying its motion for
summary judgment and granting the Department’s motion because OAM
is not subject to Arizona’s unemployment insurance tax. It contends that
the unemployment insurance tax is categorically barred under Chickasaw
because it imposes an excise tax on a member of the Community doing
business entirely on the Reservation. The Department argues that
Chickasaw does not apply because OAM is not a member of the Community.
We review the tax court’s ruling on motions for summary judgment and
issues of statutory interpretation de novo. Staples v. Concord Equities, L.L.C.,
221 Ariz. 27, 29, ¶ 8 (App. 2009). Summary judgment is appropriate where
“there is no genuine dispute as to any material fact and the moving party is
entitled to judgment as a matter of law.” Ariz. R. Civ. P. 56(a); see also Orme
Sch. v. Reeves, 166 Ariz. 301, 305 (1990).

¶8 Frequently, as here, the dispositive question in Indian tax
cases is who bears the legal incidence of a tax. See Chickasaw, 515 U.S. at
458–59. Under Chickasaw,

If the legal incidence of an excise tax rests on a tribe or on
tribal members for sales made inside Indian country, the tax
cannot be enforced absent clear congressional authorization.
But if the legal incidence of the tax rests on non-Indians, no
categorical bar prevents enforcement of the tax; if the balance
of federal, state, and tribal interests favors the State, and
federal law is not to the contrary, the State may impose its
levy

....

Id. at 459 (internal citations omitted). In conducting this inquiry, the court
does not look at the economic realities of who bears the tax burden. Id. at
459–60.

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¶9 Arizona’s unemployment insurance tax statute expressly
states, and the parties agree, that the legal incidence of the tax falls on
employers. A.R.S. §§ 23-612, -614(A), -726(A). Thus, the question before us
is whether the legal incidence of the tax rests on OAM as an LLC or on
Montiel as the sole manager of OAM.

¶10 OAM argues that the legal incidence of the unemployment
insurance tax falls on Montiel, a member of the Community, because
income “passes through” OAM on to Montiel as the sole manager of an
LLC. He contends that Congress has not expressly authorized the state to
impose unemployment insurance taxes on businesses owned by tribal
members operating entirely on the Reservation. Therefore, the state is
categorically barred from imposing the unemployment insurance tax on
OAM under Chickasaw.

¶11 But LLCs exist by virtue of state law. See A.R.S. §§ 29-3101
to -4202. Under Arizona law, an LLC is an entity distinct from its owners.
1

A.R.S. § 29-3108(A). For unemployment insurance tax purposes, Arizona
taxes LLCs in accordance with federal law. See A.R.S. §§ 29-3123; 43-105.
Under federal law, a single manager LLC is generally classified as
disregarded for tax purposes. See 26 C.F.R. § 301.7701-2(a). If an entity is
disregarded, “its activities are treated in the same manner as a sole
proprietorship.” Id. A sole proprietorship “has no existence apart from the
individual.” State v. Ivanhoe, 165 Ariz. 272, 274 (App. 1990). A single
manager LLC that is otherwise disregarded, however, is treated as a
corporation for purposes of unemployment insurance taxes. See 26 C.F.R.
§ 301.7701-2(c)(2)(iv)(A)–(B); 26 U.S.C. §§ 3301–3311. And a corporation is
a separate entity from its owners. Deutsche Credit Corp. v. Case Power &
Equip. Co., 179 Ariz. 155, 160 (App. 1994).

¶12 Although Montiel is the sole manager of OAM, OAM is
treated as a separate entity from Montiel for purposes of Arizona’s
unemployment insurance tax. Accordingly, the legal incidence of the tax
falls on OAM as an Arizona LLC, not on Montiel as its sole manager.

¶13 According to the Community’s constitution, only natural
persons are considered enrolled members of the Community. Salt River
Pima-Maricopa Indian Cmty. Const. art. II, § 1. Thus, as an LLC, OAM
cannot be an enrolled member of the Community. Because the tax

1 We cite to the current version of applicable statutes absent any
change material to this decision.

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incidence falls on OAM as a non-member of the Community, Chickasaw
does not categorically bar the state from enforcing the tax.

¶14 OAM argues that we should disregard its LLC status for
unemployment insurance tax purposes because justice requires piercing the
corporate veil. “A corporate entity will be disregarded, and the corporate
veil pierced, only if there is sufficient evidence that 1) the corporation is the
‘alter ego or business conduit of a person,’ and 2) disregarding the
corporation’s separate legal status is ‘necessary to prevent injustice or
fraud.’” JTF Aviation Holdings Inc. v. CliftonLarsonAllen LLP, 249 Ariz. 510,
514, ¶ 21 (2020) (citation omitted). We do not have any evidence that OAM
has operated improperly to justify piercing the corporate veil.

¶15 To support its argument that justice requires piercing the
corporate veil here, OAM cites to the Appeals Board’s decision that found
piercing the corporate veil was particularly appropriate for LLCs because
“LLCs allow income to ‘pass through’ to the owners, thereby
demonstrating that at least for some purposes the LLC is not viewed as
separate from the owner.” But as discussed above, single manager LLCs
are treated as corporations under both federal and Arizona law for
purposes of unemployment insurance taxes, and OAM has cited no
authority that justifies departing from the law.

¶16 In the alternative, OAM argues that if we find Chickasaw does
not categorically bar the state from enforcing the tax, we should remand the
case to the tax court to balance the respective state, federal, and tribal
interests under White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980),
because it is a fact-intensive analysis that precludes summary judgment. In
Bracker, the United States Supreme Court noted that a “particularized
inquiry into the nature of the state, federal, and tribal interests at stake”
may be required where a state asserts authority over non-Indians on the
reservation. Id. at 145.

¶17 On appeal, OAM asserts that the balance of interests does not
support the tax because the Community has an interest in retaining tribal
sovereignty, promoting self-sufficient economic development, and
preventing the aggrandizement of state authority at the expense of the
Community. OAM also argues that the state’s interest in reducing
unemployment and helping workers during periods of unemployment is
not genuine.

¶18 To the extent that Bracker applies here, OAM has waived any
argument regarding it. We lack an evidentiary basis to remand on this issue

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because OAM did not raise any arguments regarding the state, federal, or
tribal interests in the tax court, despite the Department’s motion practice on
the issue, and did not discuss the balance of interests until its reply brief on
appeal. See Trantor v. Fredrikson, 179 Ariz. 299, 300 (1994) (holding the court
cannot consider issues raised for the first time on appeal); State v. Guytan, 192 Ariz. 514, 520, ¶ 15 (App. 1998) (holding an issue raised for the first time
in the reply brief is waived); see also Rudinsky v. Harris, 231 Ariz. 95, 99, ¶ 14
(App. 2012) (“A party who fails to respond to a motion for summary
judgment . . . ‘does so at his peril because uncontroverted evidence
favorable to the movant, and from which only one inference can be drawn,
will be presumed to be true.’” (citation omitted)).

¶19 Finally, OAM argues that it is not subject to Arizona’s
unemployment insurance tax because it does not meet the definition of
“employing unit” under A.R.S. § 23-614(A). As relevant here, Arizona’s
unemployment insurance tax applies to any employing unit that has a gross
payroll of at least $1,500 in a calendar quarter or employs one or more
employees for at least 20 weeks in a calendar year. A.R.S. §§ 23-601, -612,
-613(A)(2). An employing unit is an organization that has “one or more
individuals performing services for it within this state.” A.R.S. § 23-614(A).

¶20 OAM contends that it does not employ individuals who
perform services within this state because OAM does business entirely on
the Reservation. But the Arizona Supreme Court has held that “Indian
reservations remain politically and governmentally part of the state, and
state law applies on the reservations . . . so long as its application is
consistent with the will of Congress.” United States v. Superior Court, 144
Ariz. 265, 276 (1985); see also State v. Zaman, 194 Ariz. 442, 444, ¶ 12 (1999)
(“[A]ll Indian reservations in Arizona are within the political and
governmental, as well as geographical, boundaries of the state.” (citation
omitted)). Arizona’s unemployment insurance tax is consistent with the
will of Congress because Congress encouraged states to enact
unemployment insurance tax schemes. 26 U.S.C. §§ 3304–05. Even tribes
are subject to Arizona’s unemployment insurance tax. See A.R.S. § 23-
751.01(A)–(B). By forming an LLC under Arizona law, OAM elected to be
bound by state law, and thus has availed itself of the benefits and burdens
of doing so.

CONCLUSION

¶21 Because OAM is an LLC organized under Arizona law, is
taxed as a corporation for unemployment insurance tax purposes, and is

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not an enrolled member of the Community, it is subject to Arizona’s
unemployment insurance tax. We affirm.

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

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