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Thursday, April 29, 2004
Ariz. Dept. of Rev. v. Capitol Castings: The Arizona Supreme Court clarifies the appropriate standard for determining the applicability of the tax exemption in A.R.S. § 42-5159(B)
A.R.S. § 42-5159(B)(1) exempts from tax any "machinery or equipment used directly in manufacturing, processing, fabricating . . . or metallurgical operations." Pursuant to this statute, Capitol Castings, a plant that manufactures items used in mining and other industries, claimed as exempt several metal and non-metal products used in its facilities. The Arizona Department of Revenue ("ADOR") contended that most of the products Capitol used were not exempt because they were not "machinery or equipment" as used in the statute.
The dispute resulted in a long procedural embroilment, including two tax court proceedings, a published court of appeals opinion, a responsive legislative amendment, and a second court of appeals decision. The final appellate decision held that the legislative amendment did not alter the first appellate court's determination of the meaning of the phrase "machinery or equipment," and that the items Capitol claimed as tax-exempt were not. Against this background, the Arizona Supreme Court accepted review. Reviewing both the statutory and generally-accepted meanings of the terms "machinery or equipment," as well as the long procedural history of the case, the court determined that the legislative amendment had intended to reverse the first appellate court decision in its entirety, including its interpretation of the meaning of the term "machinery and equipment." The Court held that the legislative amendment had intended to reinstate a functional approach articulated by a prior court of appeals decision in order to determine the exemption status of materials under § 42-5159(B). That approach allowed some items that would normally not be considered "machinery or equipment" to be tax-exempt if they functioned "as a necessary part of an integrated process." The Court adopted this test, and listed a number of factors a court should consider in making this determination.
Ultimately, the Court held that a number of Capitol's items qualified for the exemption, that some did not, and that still others required remand to the tax court to determine whether the exemption applied.
Justice Berch authored the opinion; Chief Justice Jones, Vice Chief Justice McGregor, and Justices Ryan and Hurwitz concurred.
A.R.S. § 42-5159(B)(1) exempts from tax any "machinery or equipment used directly in manufacturing, processing, fabricating . . . or metallurgical operations." Pursuant to this statute, Capitol Castings, a plant that manufactures items used in mining and other industries, claimed as exempt several metal and non-metal products used in its facilities. The Arizona Department of Revenue ("ADOR") contended that most of the products Capitol used were not exempt because they were not "machinery or equipment" as used in the statute.
The dispute resulted in a long procedural embroilment, including two tax court proceedings, a published court of appeals opinion, a responsive legislative amendment, and a second court of appeals decision. The final appellate decision held that the legislative amendment did not alter the first appellate court's determination of the meaning of the phrase "machinery or equipment," and that the items Capitol claimed as tax-exempt were not. Against this background, the Arizona Supreme Court accepted review. Reviewing both the statutory and generally-accepted meanings of the terms "machinery or equipment," as well as the long procedural history of the case, the court determined that the legislative amendment had intended to reverse the first appellate court decision in its entirety, including its interpretation of the meaning of the term "machinery and equipment." The Court held that the legislative amendment had intended to reinstate a functional approach articulated by a prior court of appeals decision in order to determine the exemption status of materials under § 42-5159(B). That approach allowed some items that would normally not be considered "machinery or equipment" to be tax-exempt if they functioned "as a necessary part of an integrated process." The Court adopted this test, and listed a number of factors a court should consider in making this determination.
Ultimately, the Court held that a number of Capitol's items qualified for the exemption, that some did not, and that still others required remand to the tax court to determine whether the exemption applied.
Justice Berch authored the opinion; Chief Justice Jones, Vice Chief Justice McGregor, and Justices Ryan and Hurwitz concurred.
Posted date: Thu, Apr 29, 2004
