Ute Mountain v. Ador

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

UTE MOUNTAIN UTE TRIBE, Plaintiff/Appellant,

v.

ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.

No. 1 CA-TX 22-0004
FILED 1-10-2023

Appeal from the Arizona Tax Court
No. TX2021-000365
The Honorable Danielle J. Viola, Judge

AFFIRMED

COUNSEL

Yoder & Langford PC, Scottsdale
By Robert R. Yoder
Counsel for Plaintiff/Appellant

Arizona Attorney General’s Office, Phoenix
By Kimberly J. Cygan and Benjamin H. Updike
Counsel for Defendant/Appellee

UTE MOUNTAIN v. ADOR
Opinion of the Court

OPINION

Judge Jennifer B. Campbell delivered the opinion of the Court, in which
Presiding Judge Brian Y. Furuya and Judge Paul J. McMurdie joined.

C A M P B E L L, Judge:

¶1 The Ute Mountain Ute Tribe (Ute Mountain) and the
Weeminuche Construction Authority (WCA) (collectively, the Appellants)
challenge the tax court’s judgment upholding the Arizona Department of
Revenue’s (the Department) determination that WCA owes transaction
privilege taxes on its earnings from three construction projects. Because the
gross proceeds from construction work performed under a contract with
the federal government on a Native American reservation by a non-
affiliated Native American contractor are subject to Arizona’s transaction
privilege tax, we affirm the tax court’s judgment.

BACKGROUND

¶2 Ute Mountain is a Native American tribe. Ute Mountain owns
the WCA. In 2014 and 2015, the Bureau of Indian Affairs (the Bureau)
contracted with WCA to perform three construction projects, two on the
Navajo Nation and one on the Hopi reservation. Each project involved the
management of reservation land resources and tribal water rights.

¶3 In 2018, the Department audited WCA from January 1, 2012
through October 31, 2017. Upon completing the audit, the Department
issued a deficiency assessment for transaction privilege taxes on WCA’s
gross proceeds from the three construction projects (the project earnings),
characterizing the projects as “for the B[ureau]” rather than “for” the
Navajo and Hopi tribes. The Appellants protested the assessment, asserting
the Bureau contracted with WCA in its trust capacity to benefit the Navajo
and Hopi tribes, thereby exempting the project earnings from the
transaction privilege tax.

¶4 Unable to resolve their dispute with the Department through
informal and bypass conferences, the Appellants appealed to the tax court.
On the Department’s motion, the tax court dismissed the Appellants’
complaint with prejudice for failure to state a claim and denied the

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Appellants’ request to amend the complaint as untimely and futile. The
Appellants timely appealed.

DISCUSSION

¶5 Challenging the tax court’s dismissal of their complaint, the
Appellants first argue that federal law preempts imposing Arizona’s
transaction privilege tax in this case. Absent federal preemption, the
Appellants alternatively contend that the project proceeds are exempt from
Arizona’s transaction privilege tax under both TPR 95-11, the Department’s
transaction privilege tax ruling in effect during the relevant period, and
A.R.S. § 42-5122. Finally, the Appellants assert that the tax court improperly
dismissed their claims without permitting them to file an amended
complaint. We address each argument in turn.

¶6 Arizona law imposes an excise tax on persons and entities
engaging in business within the State under certain business classifications.
A.R.S. § 42-5008. Prime contracting is one of the enumerated business
classifications subject to the transaction privilege tax. A.R.S. § 42-
5010(A)(1)(h). Because the tax is “assessed on the privilege or right to
engage in an occupation or business,” the business providing the service
pays it and may not shift it to the customer.1 Vangilder v. Ariz. Dep’t of
Revenue, 252 Ariz. 481, 485, ¶ 7 (2022).

¶7 We review the dismissal of a complaint de novo. Coleman v.
City of Mesa, 230 Ariz. 352, 355, ¶ 7 (2012). We accept as true all well-pled
factual allegations and reasonable inferences from them, Cullen v. Auto-
Owners Ins. Co., 218 Ariz. 417, 419, ¶ 7 (2008), and will affirm only if, as a
matter of law, the Appellants “would not be entitled to relief under any
interpretation of the facts,” Coleman, 230 Ariz. at 356, ¶ 8 (quotation and
citation omitted).

I. Federal Preemption

¶8 The Appellants contend that the tax court applied the wrong
legal standard to assess whether federal law preempts imposing Arizona’s

1 In their complaint, the Appellants alleged that “[t]he Department is
foreclosed from enforcing its assessment” because “the Hopi Tribe and the
Navajo Nation are indispensable parties that cannot be joined as a result of
their sovereign immunity.” To the extent the Appellants reassert this
contention on appeal, it lacks merit. An assessment for transaction privilege
taxes is levied directly against the business and liability for such taxes may
not be enforced against or passed onto the customer.

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transaction privilege tax on the project proceeds. Relying on White Mountain
Apache Tribe v. Bracker, 448 U.S. 136 (1980), the Appellants argue that the
court should have engaged in a fact-specific inquiry and weighed the
interests of the parties to determine whether federal law preempts
Arizona’s taxing authority rather than finding the “bright-line” test for
federal preemption enunciated in Arizona Department of Revenue v. Blaze
Construction Co., Inc., 526 U.S. 32 (1999), dispositive.

¶9 In Bracker, the United States Supreme Court considered the
extent of state authority to regulate and tax economic activities on Native
American reservations. 448 U.S. at 137. Recognizing Native American
tribes’ “sovereignty over both their members and their territory,” the
Supreme Court explained that “state law is generally inapplicable” to tribal
conduct on reservations, but states may have a regulatory interest in the
conduct of nontribal persons on reservations. Id. at 142–44 (quotation and
citation omitted). To assess the extent of a state’s interest, the Supreme
Court formulated a balancing test requiring “a particularized inquiry into
the nature of the state, federal, and tribal interests at stake.” Id. at 145.

¶10 Applying this balancing test to the facts of the case, the
Supreme Court held that the federal government’s “comprehensive”
regulatory scheme for harvesting timber on Native American reservations
was “so pervasive” that it precluded Arizona’s assessment of certain state
taxes on the logging and hauling proceeds from a nontribal company’s
contract with a Native American tribe to “fell[] tribal timber” and
“transport[] it to the tribal organization’s sawmill.” Id. at 136, 145–51.

¶11 Nearly 20 years later, in Blaze, the United States Supreme
Court revisited the scope of state taxing authority over business conducted
on tribal land and held that a state may impose taxes on the proceeds
derived from a nontribal contractor’s federal contract for construction work
on a Native American reservation. 526 U.S. at 34. Distinguishing Bracker,
the Supreme Court held that applying a balancing test is proper only when
the proceeds at issue derive from a nontribal entity’s direct transaction with
the tribe or tribal members. Id. at 37. Stated differently, the Supreme Court
clarified that Bracker’s balancing test is inapplicable when a state seeks to
tax a transaction between the federal government and a nontribal
contractor. Id. For economic transactions between the federal government
and a nontribal contractor, the Supreme Court articulated a “bright-line
standard” in favor of “tax[ing] federal contracts, regardless of whether the
contracted-for activity takes place on [Native American] reservations.” Id.

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¶12 With that standard in mind, the Supreme Court considered
the economic transaction at issue, involving a construction company owned
by a Native American tribe member in Montana that contracted with the
Bureau to build, repair, and improve roads on several Native American
reservations in Arizona. Id. at 34. Although Blaze was owned by a Native
American and incorporated under the laws of the owner’s tribe, the
Supreme Court deemed it “the equivalent of a non-[tribal entity] for
purposes of th[e] case because none of its work occurred” on the owner’s
tribal lands.2 Id. (citing Washington v. Confederated Tribes of Colville
Reservation, 447 U.S. 134, 160–61 (1980) (“[N]onmembers are not
constituents of the governing Tribe. For most practical purposes [non-
affiliated Native Americans] stand on the same footing as non-[Native
Americans].”)). At the end of the contracting period, the Department
“issued a tax deficiency against Blaze for its failure to pay Arizona’s
transaction privilege tax on the proceeds from its contracts with the
Bureau.” Id. The Supreme Court upheld the deficiency tax assessment,
expressly distinguishing earlier cases, including Bracker, that applied a
balancing test. Id. at 37–39. In so doing, the Supreme Court explained that
it “never employed [a] balancing test in a case” in which a state sought “to
tax a transaction between the Federal Government and its non-[tribal]
private contractor.” Id. at 37. Concluding “[i]nterest balancing in this setting
would only cloud the clear rule,” and “to avoid litigation and to ensure
efficient tax administration,” the Supreme Court adopted the “bright-line
standard for taxation of federal contracts.” Id.

¶13 To support their contention that Bracker’s fact-specific inquiry
and balancing test governs federal preemption here, the Appellants
distinguish Blaze as simply a “governmental tax immunity case.” While the
Supreme Court addressed the governmental tax immunity doctrine in Blaze
and reaffirmed its previous holding that tax immunity applies only to the

2 To the extent the Appellants contend that WCA enjoys sovereign
immunity for its conduct on the Navajo Nation and Hopi reservation
because it is wholly owned by a federally recognized Native American
tribe, their claim lacks merit. Duro v. Reina, 495 U.S. 676, 686 (1990)
(“Exemption from state taxation for residents of a reservation . . . is
determined by tribal membership, not by reference to [Native Americans]
as a general class.”), superseded on other grounds by statute as recognized in
United States v. Lara, 541 U.S. 193, 196, 199–200 (2004); see also Ariz. Dep’t of
Revenue v. Dillon, 170 Ariz. 560, 565–66 (App. 1991) (concluding taxpayer’s
status as a Native American did not immunize him from Arizona’s taxing
authority over economic transactions he conducted on another tribe’s
lands).

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federal government or an “agency or instrumentality” closely connected to
the federal government, the Appellants’ characterization fails to recognize
the full scope of Blaze’s holding. Id. at 35–36. Upon determining that Blaze
did not qualify for, or even assert, governmental tax immunity, the Supreme
Court considered Blaze’s contention that Arizona’s transaction privilege tax
“cannot be applied to activities taking place on [Native American]
reservations.” Id. at 36–37. The Supreme Court acknowledged that its prior
“cases involving taxation of on-reservation activity” had applied a
balancing test but clarified that it had “never employed this balancing test”
when a state sought “to tax a transaction” between the federal government
and a nontribal private contractor. Id. at 37. Read in its entirety, the scope
of Blaze’s holding is not, as the Appellants contend, limited to the
governmental tax immunity doctrine.

¶14 The Appellants also argue that Blaze is inapplicable here
because the Bureau, in contracting with WCA, was not “acting in the
interest of the federal government” but “as and for” the Navajo and Hopi
tribes. As such, the Appellants assert that there is no meaningful distinction
between these facts and those of a “direct contractor-to-tribe arrangement,”
unquestionably governed by Bracker’s balancing test. Moreover, the
Appellants contend that Blaze is distinguishable because unlike the
construction projects at issue in that case, which involved building and
repairing “federal roads open to the general public,” here, the construction
projects conserve and manage tribal resources. Furthermore, while nothing
in Blaze’s factual recitation reflects that the tribes upon whose lands the
roads were constructed took an active role in the projects, according to the
Appellants, the Hopi and Navajo tribes were actively involved here.

¶15 Contrary to the Appellants’ contentions, Blaze expressly and
unambiguously sets out a bright-line standard upholding state taxing
authority over the proceeds derived from all federal contracts. Id. at 38. As
the Appellants correctly note, the Supreme Court, in Blaze, did not fully
analyze the extent of the tribes’ involvement with the federal public road
projects on their lands. But, a bright-line test, by its nature, is not a nuanced,
fact-specific inquiry. While pronouncing the bright-line rule, the Supreme
Court acknowledged that tribes may choose “to advance their interests”
under the Indian Self-Determination and Education Assistance Act by
“enter[ing] into a self-determination contract ‘to plan, conduct, and
administer programs or portions thereof, including construction
programs.’” Id. (quoting 25 U.S.C. § 450f(a)(1)). Because the tribes “on
whose reservations Blaze’s work was performed” did not “exercise[] this
option, and the Federal Government [] retained contracting responsibility,”
the Supreme Court determined it was unnecessary to consider whether the

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preemption doctrine “would apply when [t]ribes choose to take a more
direct and active role in administering [] federal funds.” Id. at 38–39 (emphasis
added).

¶16 Like Blaze, here, the Navajo and Hopi tribes did not enter into
self-determination contracts to plan, conduct, and administer their own
construction programs. Because the federal government retained
contracting responsibility, the bright-line standard favoring taxation of
federal contracts applies. Indeed, as this court has recognized, Blaze
conclusively “resolved” that a state may tax the “proceeds from a contract
with the federal government for work performed on [a Native American]
reservation for the benefit of [Native Americans].” Luther Constr. Co., Inc. v.
Ariz. Dep’t of Revenue, 205 Ariz. 602, 607, ¶ 28 (App. 2003). For that reason,
the tax court correctly determined that federal law does not preempt
Arizona’s transaction privilege tax in this case, and the Appellants’
allegation predicated on federal preemption failed to state a claim for relief
as a matter of law.

II. State Exemption

¶17 As the Appellants correctly note, Blaze does not mandate state
taxation of federal contract proceeds but simply holds that federal law does
not preempt state taxing authority over contracts negotiated between the
federal government and nontribal contractors. 526 U.S. at 38. Absent federal
preemption, the Appellants alternatively argue that the project proceeds are
exempt from Arizona’s transaction privilege tax under both TPR 95-11 and
A.R.S. § 42-5122.3

¶18 “Exemptions from the transaction privilege tax must be
strictly construed, with the presumption being against such exemption.”
Carter Oil Co., Inc. v. Ariz. Dep’t of Revenue, 248 Ariz. 339, 341, ¶ 5 (App. 2020)
(internal quotation and citation omitted). In 1995, the Department issued
TPR 95-11, which interprets Arizona’s transaction privilege tax statutes and
specifically addresses “[t]he imposition of transaction privilege tax on
activities performed on [Native American] reservations located within the
State of Arizona.” We need not construe the Department’s ruling, however,
to evaluate whether the Appellants adequately stated a claim for relief

3 To the extent the Appellants reframe their reliance on TPR 95-11 as
supporting a claim for administrative relief rather than an exemption, we
note that the allegations of their complaint characterized the claim as one
of exemption. Accordingly, we address the claim as raised in the tax court,
not as recast on appeal.

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based on a TPR 95-11 exemption because the Department lacks the
authority to create such an exemption. See State ex rel. Woods v. Block, 189
Ariz. 269, 275 (1997) (“The legislature has the exclusive power to declare
what the law shall be.” (quotation and citation omitted)); Val-Pak East
Valley, Inc. v. Ariz. Dep’t of Revenue, 229 Ariz. 164, 171, ¶ 27 n.8 (App. 2012)
(explaining that the Department’s tax rulings are “advisory only” and “not
controlling”). That is, the Department’s ruling cannot, as a matter of law,
create a legal exemption to Arizona’s transaction privilege tax statutory
scheme. Instead, TPR 95-11 provided only the Department’s interpretation
of the relevant statutes, but those legal conclusions are not binding, and
courts, not agencies, “remain the final authority on critical questions of
statutory construction.” SWAT Training Facilities L.L.C. v. Ariz. Dep’t of
Revenue, 251 Ariz. 269, 273, ¶ 8 (App. 2021). Indeed, TPR 95-11 includes an
“explanatory notice” specifically stating that the ruling only “provide[s]
interpretive guidance” and expressly acknowledging that it may be
“modif[ied] or negate[d]” by statute, case law, administrative rules, or later
rulings. To be clear, neither TPR 95-11 nor any other Department ruling
created a legal exemption to Arizona’s transaction privilege tax statutory
scheme.

¶19 Likewise, we need not construe A.R.S. § 42-5122 to evaluate
whether the Appellants adequately stated a claim for relief predicated on a
statutory exemption because the legislature did not enact A.R.S. § 42-5122
until 2021, well after the relevant contractual period. See 2021 Ariz. Sess.
Laws, ch. 443, § 4. To apply retroactively, a statute must contain an express
statement of retroactive intent, and A.R.S. § 42-5122 contains no such
language. A.R.S. § 1-244; see also Aranda v. Indus. Comm’n, 198 Ariz. 467, 470,
¶ 10 (2000). Moreover, even accepting the Appellants’ contention that
A.R.S. § 42-5122 merely “codifie[d]” TPR 95-11, its enactment did not render
the Department’s ruling a statutory exemption or otherwise imbue TPR 95-
11 with legal force.

¶20 Because neither TPR 95-11 nor A.R.S. § 42-5122 provided an
exemption, the project proceeds are subject to Arizona’s transaction
privilege tax, and the Appellants’ allegations based on an exemption failed
to state a claim for relief.

III. Estoppel

¶21 Having determined that federal law does not preempt
Arizona’s taxing authority over the project proceeds and that neither TPR
95-11 nor A.R.S. § 42-5122 exempts the project proceeds from Arizona’s
transaction privilege tax, the remaining question is whether the tax court

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improperly denied the Appellants’ request to amend their complaint. Our
review is constrained by the Appellants’ failure to submit proposed written
amendments in the tax court. In their cursory written request, the
Appellants broadly sought leave to amend without specificity, and at oral
argument on the motion, they referenced only an amendment based on a
claim of detrimental reliance on TPR 95-11.

¶22 As a rule, amendments should be liberally permitted absent a
finding of undue delay, dilatory motive, undue prejudice, or futility in the
amendment. Ariz. R. Civ. P. 15(a)(2) (“Leave to amend must be freely given
when justice requires.”); Bishop v. State Dep’t of Corr., 172 Ariz. 472, 474–75
(App. 1992); Owen v. Superior Court, 133 Ariz. 75, 79 (1982); see also
Wigglesworth v. Mauldin, 195 Ariz. 432, 439, ¶ 26 (App. 1999) (explaining the
court should grant a non-moving party the opportunity to amend a
complaint “if such an amendment cures its defects”). “Although the
superior court has the discretion to deny a motion to amend, we review de
novo whether a request to amend is futile.” Worldwide Jet Charter, Inc. v.
Toulatos, 1 CA-CV 21-0717, 1 CA-CV 22-0173, 2022 WL 17684985, at *4, ¶ 22
(Ariz. App. Dec. 15, 2022). In considering futility, we presume as true all
well-pled factual allegations outlined in the proposed amendments. See
Cullen, 218 Ariz. at 419, ¶ 7.

¶23 A claim for “equitable estoppel may lie against a taxing
authority under the following four circumstances: (1) the taxing authority
engaged in affirmative conduct inconsistent with a position it later adopted
that is adverse to the taxpayer, (2) the taxpayer actually and reasonably
relied on the taxing authority’s prior conduct, (3) the taxing authority’s
repudiation of its prior conduct caused the taxpayer to suffer a substantial
detriment because the taxpayer changed its position in a way not compelled
by law, and (4) applying estoppel against the taxing authority would
neither unduly damage the public interest nor substantially and adversely
affect the exercise of governmental powers.” Luther Constr. Co., 205 Ariz. at
604–05, ¶ 11.

¶24 TPR 95-11 provided in relevant part:

C. Construction contracts performed on [Native American]
reservations.

The gross proceeds derived from contracting activities
performed on a reservation by the [Native American] tribe, a
tribal entity or an affiliated [Native American] are not subject
to Arizona’s transaction privilege tax.

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The gross proceeds derived from construction projects
performed on [Native American] reservations by non-
affiliated [Native American] or non-[Native American] prime
contractors are not subject to the imposition of Arizona
transaction privilege tax under the following conditions:

1. The activity is performed for the tribe or a
tribal entity for which the reservation was
established; or

2. The activity is performed for an individual
[Native American] who is a member of the tribe
for which the reservation was established.

The gross proceeds derived from construction projects
performed on [Native American] reservations by non-
affiliated [Native American] and non-[Native American]
prime contractors for all other persons, including the federal
government, are subject to the imposition of Arizona
transaction privilege tax.

¶25 In their reply brief, the Appellants contend for the first time
that they reasonably believed the project proceeds were not subject to
Arizona’s transaction privilege tax under Section I(C)—“The gross
proceeds derived from contracting activities performed on a reservation by
the [Native American] tribe, a tribal entity or an affiliated [Native
American] are not subject to Arizona’s transaction privilege tax.”—because
Ute Mountain is a tribe and WCA is a tribal entity. See In re Marriage of
Pownall, 197 Ariz. 577, 583, ¶ 25 n.5 (App. 2000) (holding issues raised for
the first time in a reply brief are waived). Waiver aside, this reading
contradicts the plain language of the Department’s ruling, which states that
activities performed on a reservation by “the” tribe, a tribal entity, or an
affiliated Native American are exempt. Rather than encompassing any
Native American tribe, tribal entity, or individual Native American, the
ruling referred to “the” tribe, meaning the “tribe for whose benefit the
reservation was established.” TPR 95-11, Definitions. Because neither Ute
Mountain nor WCA are the intended beneficiaries of the Navajo or Hopi
reservations, they are not contemplated within this provision.

¶26 Next, the Appellants assert that they reasonably believed the
project proceeds were not subject to Arizona’s transaction privilege tax
under Section I(C)(1)—“The activity is performed for the tribe or a tribal
entity for which the reservation was established.”—because WCA

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performed its contracted services for the benefit of the Navajo and Hopi
tribes. In other words, the Appellants contend that “for,” as the term is used
in TPR 95-11, means the entity for whom the contracted work is intended to
benefit rather than for whom the contractor contracted to work.

¶27 Viewed in isolation, the language of Section I(C)(1) arguably
allows for the Appellants’ interpretation. Read within the context of the
entire section, however, the Department expressly differentiated between
contractor transactions with the tribe, a tribal entity, or an affiliated member
and contractor transactions with a nontribal person or entity, “including the
federal government.” To be clear, read as a whole, TPR 95-11 stated that
project proceeds are not subject to Arizona’s transaction privilege tax when
the entity for whom the contract is performed is “the tribe or a tribal entity.”
Because TPR 95-11, in proper context, does not lend itself to the Appellants’
proposed reading, there is no basis to conclude that the Department, in
issuing the ruling, engaged in affirmative conduct inconsistent with its later
deficiency tax assessment in this case or that the Appellants actually and
reasonably relied on TPR 95-11 to conclude that the project proceeds are not
subject to Arizona’s transaction privilege tax. Moreover, by the time WCA
entered the contracts at issue, caselaw had addressed the scope of TPR 95-
11 and clarified that Arizona’s transaction privilege tax “applie[s] to
proceeds from federal contracts with non-[tribal members] to construct on-
reservation structures for use by [tribal members].” Luther Constr. Co., 205
Ariz. at 609, ¶ 34 (emphasis added); see also Ariz. Gen. Tax P. GTP 96-1
(explaining that taxpayers “may rely” on a Department ruling “unless it has
been revoked or modified” by legislation, administrative rules, court
decisions, or subsequent Department rulings).

¶28 Because the proposed amended complaint—adding a claim
relying on estoppel—nonetheless would have faced dismissal for failure to
state a claim, the tax court did not abuse its discretion by denying the
Appellants’ request to amend their complaint as futile. For these reasons,
the tax court did not err by dismissing the Appellants’ complaint with
prejudice.

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CONCLUSION

¶29 For the foregoing reasons, we affirm.

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

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