City of Peoria v. BRINK'S HOME SECURITY, INC.

SUPREME COURT OF ARIZONA
En Banc

CITY OF PEORIA, a municipal ) Arizona Supreme Court
corporation; and CITY OF PHOENIX, ) No. CV-10-0218-PR
a municipal corporation, )
) Court of Appeals
Plaintiffs/Defendants/ ) Division One
Appellees, ) No. 1 CA-TX 09-0001
)
v. ) Arizona Tax Court
) Nos. TX2006-000113
BRINK'S HOME SECURITY, INC., a ) TX2006-000116
Delaware corporation, ) TX2006-000228
) TX2006-000335
Defendant/Plaintiff/ ) (Consolidated)
Appellant. )
)
) O P I N I O N
__________________________________)

Appeal from the Arizona Tax Court
The Honorable Thomas Dunevant, III, Judge
________________________________________________________________

Opinion of the Court of Appeals, Division One
224 Ariz. 278, 229 P.3d 1020 (2010)

VACATED AND REMANDED
________________________________________________________________

STEPHEN M. KEMP, PEORIA CITY ATTORNEY Peoria
By Cynthia Odom, Assistant City Attorney
Attorneys for City of Peoria

GARY VERBURG, PHOENIX CITY ATTORNEY Phoenix
By James H. Hays, Assistant City Attorney
Attorneys for City of Phoenix

SNELL & WILMER LLP Phoenix
By Barbara J. Dawson
Martha E. Gibbs
Melissa M. Krueger
Robert I. Schwimmer
Attorneys for Brink’s Home Security, Inc.
OSBORN MALEDON, P.A. Phoenix
By Randall C. Nelson
Thomas L. Hudson
Mark P. Hummels
Attorneys for Amici Curiae Arizona-New Mexico Cable
Communications and The Broadband Tax Institute

STEPTOE & JOHNSON LLP Phoenix
By Pat Derdenger
Bennett Evan Cooper
Attorneys for Amicus Curiae Arizona Tax Research Association
________________________________________________________________

B A L E S, Justice

¶1 This case concerns municipal taxation of home-security

services when the provider’s monitoring facility is out of state

and the services include telecommunications. Municipalities are

prohibited from taxing interstate telecommunications services.

Ariz. Rev. Stat. (“A.R.S.”) § 42-6004(A)(2) (2006). The court

of appeals held that the telecommunications involved are

intrastate because they are part of a transmission loop that

begins and ends in Arizona. We reject this theory and conclude

that separate interstate telecommunications cannot be aggregated

and characterized as intrastate. We remand this case for the

court of appeals to consider whether the assessed taxes are

permissible because they are imposed on the monitoring services

and not on telecommunications services.

I.

¶2 Brink’s Home Security (“BHS”) provides home-security

systems and monitoring services to customers throughout Arizona.

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If an alarm is triggered at an Arizona home and not disarmed,

information from the alarm system is transmitted electronically

to BHS’s monitoring station in Texas. Personnel there receive

the automated signal and attempt to contact the customer –

typically by telephone. When appropriate, the monitoring

personnel in Texas call emergency responders in Arizona.

¶3 The Cities of Peoria and Phoenix assessed transaction

privilege taxes against BHS pursuant to Peoria City Code § 12-

470(a)(2)(D) and Phoenix City Code § 14-470(a)(2)(D). Each code

provides for taxation of gross income from providing

“telecommunication services,” which include “[c]harges for

monitoring services relating to a security or burglar alarm

system located within the City where such system transmits or

receives signals or data over a communications channel.” Peoria

City Code § 12-470(a)(2)(D); Phoenix City Code § 14-

470(a)(2)(D). BHS protested the assessments, arguing that it

provides interstate telecommunications services immune from

municipal taxation under A.R.S. § 42-6004(A)(2). The Tax Court

granted summary judgment for the Cities, concluding that the

monitoring services are primarily intrastate and therefore

taxable.

¶4 In a split decision, the court of appeals affirmed.

City of Peoria v. Brink’s Home Sec., Inc., 224 Ariz. 278, 280

¶ 1, 229 P.3d 1020, 1022 (App. 2010). Characterizing BHS’s

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monitoring process as a “transmission loop” that begins and ends

in Arizona, the majority opinion concluded that the services are

intrastate and therefore taxable. Id. at 283 ¶¶ 19–21, 229 P.3d

at 1025. The dissenting opinion viewed the monitoring process

as involving separate interstate communications that are not

subject to municipal taxation. Id. at 286 ¶ 35, 229 P.3d at

1028 (Johnsen, J., dissenting).

¶5 We granted review to consider unresolved issues of

statewide importance concerning municipal taxation of home-

security monitoring services. The Court has jurisdiction under

Article 6, Section 5(3) of the Arizona Constitution and A.R.S.

§ 12-120.24 (2003).

II.

¶6 “[I]t is especially important in tax cases to begin

with the words of the operative statute.” Arizona State Tax

Comm’n v. Staggs Realty Corp., 85 Ariz. 294, 297, 337 P.2d 281,

283 (1959). We read tax provisions “to gain their fair meaning,

but not to gather new objects of taxation by strained

construction or implication.” Id.

¶7 No city, town or special taxing district may tax

“[i]nterstate telecommunications services, which include that

portion of telecommunications services, such as subscriber line

service, allocable by federal law to interstate

telecommunications service.” A.R.S. § 42-6004(A)(2). Neither

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§ 42-6004(A)(2) nor any other Arizona statute defines

“interstate telecommunication services.”

¶8 Another Arizona tax provision defines “intrastate

telecommunications services” as “transmitting signs, signals,

writings, images, sounds, messages, data or other information of

any nature by wire, radio waves, light waves or other

electromagnetic means if the information transmitted originates

and terminates in this state.” A.R.S. § 42-5064(E)(4) (emphasis

added). Although this definition appears in the statutes for

state transaction privilege taxes, rather than municipal, we

agree with the court of appeals that telecommunications services

that are “intrastate” under § 42-5064(E)(4) are not “interstate”

for purposes of § 42-6004(A)(2). See People’s Choice TV Corp.

v. City of Tucson, 202 Ariz. 401, 403–04 ¶ 8, 46 P.3d 412, 414–

15 (2002) (noting the converse relationship between “intrastate”

and “interstate”).

¶9 Arizona cases provide little guidance for

distinguishing between interstate and intrastate

telecommunications services. This Court’s only decision

interpreting § 42-6004(A)(2) is People’s Choice, which

considered whether the City of Tucson could impose transaction

privilege taxes on a television service provider. Upholding the

tax, the court of appeals construed § 42-6004(A)(2) to prohibit

“only the taxation of interstate ‘transmissions’ of information,

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not the taxation of the ‘services ancillary to the interstate

transmission of signals.’” Id. at 403 ¶ 6, 46 P.3d at 414. We

disagreed, holding that “the phrase ‘interstate

telecommunications services’ requires a more expansive meaning”

and § 42-6004(A)(2) prohibits the taxation of both interstate

transmissions and services ancillary to such transmissions. Id.

at 403–04 ¶ 8, 46 P.3d at 414–15.

¶10 Whether a certain telecommunication is intrastate or

interstate was not before us in People’s Choice. The television

service provider there carried both local and out-of-state

programs, and A.R.S. § 42-5064(A) “specifically exempts cable

and microwave television systems from intrastate taxation

because such systems . . . primarily provide interstate

programming.” Id. at 404 ¶ 10, 46 P.3d at 415. In this case,

in contrast, no statutory scheme explicitly exempts home-

security monitoring transmissions from intrastate taxation. We

accordingly reject the conclusion below that People’s Choice

suggests the phrase “intrastate telecommunications services” be

given an “expansive meaning.” Brink’s Home Sec., 224 Ariz. at

283 ¶ 19, 229 P.3d at 1025.

¶11 The triggering of the home-alarm systems at issue in

this case may result in three separate transmissions. First,

the home-security system in Arizona sends a transmission to the

Texas monitoring facility. Second, when the automated signal is

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received, personnel at the monitoring facility call the Arizona

customer to determine whether the original transmission is a

false alarm or an emergency situation. If it is a false alarm,

the monitoring process ends. If it is an emergency, BHS’s

personnel call local emergency responders — a third

transmission. Each of these transmissions is made from one

state to another. See Brink’s Home Sec., 224 Ariz. at 286

¶¶ 37–38, 229 P.3d at 1028 (Johnsen, J., dissenting).

¶12 These separate transmissions cannot be characterized

as “intrastate” by describing them as involving “information”

that both originates and terminates in Arizona. The court of

appeals correctly observed that the monitoring process may

involve communications that begin with an alarm signal here and

end with a call received by an Arizona emergency responder. 224

Ariz. at 283 ¶ 21, 229 P.3d at 1025. But the “loop” involves

separate transmissions that relay different information. Thus,

like the dissenting judge, we conclude that the

telecommunications involved are not “intrastate” under A.R.S.

§ 42-5064(E)(4).

III.

¶13 The Cities argue that even if the telecommunications

involved in the home-security monitoring services are not

“intrastate,” the municipal taxes are still permissible because

(1) A.R.S. § 42-6004(A)(2) does not apply to this kind of

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interstate telecommunication service, or (2) the taxes are

imposed on “monitoring services” rather than telecommunications

services.

A.

¶14 The Cities maintain that A.R.S. § 42-6004(A)(2) only

prohibits municipal taxation of services that federal law

defines as interstate telecommunications services. When first

adopted, § 42-6004(A)(2) simply prohibited municipal taxation of

“interstate telecommunications services.” 1990 Ariz. Sess.

Laws, ch. 5, § 1 (3d Spec. Sess.). The section was amended in

1991 to prohibit taxes on “[i]nterstate telecommunications

services, which include that portion of telecommunication

services, such as subscriber line service, allocable by federal

law to interstate telecommunications service.” 1991 Ariz. Sess.

Laws, ch. 28, § 1.

¶15 The Cities contend that the 1991 amendment added a

restrictive clause, requiring “interstate telecommunications

services” to be defined with reference to federal law. But, the

insertion of the comma that precedes “which include” makes the

clause non-restrictive; that is, services “allocable by federal

law to interstate telecommunications service” are among those to

which § 42-6004(A)(2) applies, but they do not completely define

the scope of the statute. Neither the language nor the

legislative history supports the Cities’ restrictive reading.

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 B.

¶16 The Cities also argue that the taxes are not assessed

on “telecommunications services.” Although the city codes

expressly list “monitoring services” among the

“telecommunication services” subject to municipal taxes, Peoria

City Code § 12-470(a)(2)(D), Phoenix City Code § 14-

470(a)(2)(D), the Cities maintain that the taxes are assessed on

the monitoring services, not on the telecommunications, which

they characterize as merely incidental to the services.

¶17 The City presented this argument below, but the court

of appeals majority did not discuss it. (The dissenting opinion

rejected it. See Brink’s Home Sec., 224 Ariz. at 288–89 ¶¶ 46–

48, 229 P.3d at 1030–31 (Johnsen, J., dissenting)). We

therefore remand to the court of appeals to consider this issue

in the first instance. Because this issue is unresolved, we

also do not address BHS’s argument that if the municipal taxes

apply to its services, the Commerce Clause of the federal

constitution requires the taxes to be fairly apportioned to the

Arizona component of its activities.

IV.

¶18 For the reasons stated, we vacate the opinion of the

court of appeals and remand to that court for further

proceedings. We deny BHS’s request for an award of attorney

fees pursuant to A.R.S. § 12-348 without prejudice to its

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renewing this request below if it ultimately prevails.

_____________________________________
W. Scott Bales, Justice

CONCURRING:

_____________________________________
Rebecca White Berch, Chief Justice

_____________________________________
Andrew D. Hurwitz, Vice Chief Justice

_____________________________________
A. John Pelander, Justice

_____________________________________
Robert M. Brutinel, Justice

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