Enterprise Leasing Company ofPhoenix v. Arizona Department of Revenue (12/16/2008)

December 22, 2008

Arizona Court of Appeals Division One Holds That 2000 Amendment to A.R.S. § 43-1170 Retroactively Excluding Motor Vehicle Equipment from Tax Credit for Pollution Control Devices Did Not Violate Due Process or Separation of Powers Clauses.

Beginning in 1995,A.R.S. § 43-1170provided a tax credit for purchases of pollution control devices.  In 2000 some entities submitted claims for purchases of pollution control devices attached to motor vehicles, leading the Legislature to amend the provision to retroactively exclude credits for such equipment.  That same year, Enterprise Leasing Company (“Enterprise”) filed income tax returns claiming credits for pollution control devices attached to motor vehicles for the years 1996, 1997, and 1998.  Based on the Legislature’s retroactive exclusion, the Department of Revenue denied the claims.  On appeal, the Arizona Tax Court upheld the denial, holding that the 2000 amendment’s retroactivity was constitutional, or, alternatively, that the original statute’s language excluded the credit.  This appeal followed.

Judge Thompson, writing for a unanimous court, affirmed the first theory, holding that the retroactivity of the 2000 amendment did not violate due process or separation of powers.  First, the Court explained that the 2000 amendment was passed to clarify that the Legislature never intended motor vehicle equipment to be eligible for a credit under A.R.S. § 43-1170.  Because the amendment was intended to be a curative, retroactive clarification, it did not violate due process.  Second, the Court further held that Enterprise never acquired a vested property right entitled to due process because a taxpayer’s claim does not vest until the Department of Revenue accepts or verifies the claim.  Finally, the Court reasoned that the amendment nevertheless satisfied due process because the prevention of unanticipated revenue loss is a rational basis for legislation.  In so holding, the Court rejected the suggestion in Justice O’Connor’s concurrence in United States v. Carlton, 512 U.S. 26, 38 (1994) (O’Connor, J., concurring), that retroactivity provisions extending back longer than one year are problematic under due process.  Because the Legislature acted shortly after the first claims for motor vehicle equipment credits were filed, and because enterprise could not demonstrate detrimental reliance, Justice O’Connor’s concerns were not implicated.

The Court also rejected Enterprise’s argument that the retroactive amendment violated the Arizona Constitution’s separation of powers clause.  The Court distinguished between cases allowing a retroactive amendment to a civil statute and cases holding that the Legislature may not use a clarifying amendment to retroactively overrule a court’s interpretation of a criminal statute.  There was no separation of powers problem in this context because the amendment here did not overrule a court decision, and because civil statutes do not implicate the same ex post facto concerns as do criminal statutes.

Judge Thompson authored the opinion; Judges Winthrop and Irvine concurred.