The Arizona Department of Revenue v. Action Marine, Inc. – 4/9/2008

April 15, 2008

Arizona Supreme Court Holds That Corporate Officers Can be Held Personally Liable for Failure to Remit Additional Charges Made to Cover Transaction Privilege Tax Under A.R.S. § 42-5028.

The trial court held that the Randalls, corporate officers of Action Marine, Inc., were personally liable for unpaid transaction privilege taxes under A.R.S. § 42-5028.  The Court of Appeals reversed, holding corporate officers could not be personally liable because they do not fall within the scope of the statute.  The Supreme Court of Arizona granted the Arizona Department of Revenue’s petition for review.  In a 3-2 decision, the Supreme Court agreed with the trial court that § 42-5028 provides for the personal liability of corporate officers and directors.

Under § 42-5028, “[a] person who fails to remit any additional charge made to cover the [TPT] or truthfully account for and pay over any such amount is, in addition to other penalties provided by law, personally liable for the total amount of the additional charge so made and not accounted for or paid over.”  (Emphases added.)  The parties’ dispute turned on the meanings of “person” and “additional charge” under the statute.  The Randalls argued that only the tax-paying entity, not corporate officers qualify as “persons” under § 42-5028.  The Supreme Court disagreed, reasoning that the statutory definition of “person,” which included “an individual” or a “corporation,” was broad enough to include corporate officers.  The legislature has also expressly restricted tax liability to the tax-paying entity on other occasions, suggesting they did not intend to do so here.  Action Marine’s interpretation of § 42-5028 also rendered the statute duplicative, because the tax-paying entity is already liable for unpaid transaction privilege taxes under §§ 42-5002(A) and 42-5024.  In addition, § 43-435, enacted in the same bill as § 42-5028, creates liability for persons other than the tax-paying entity, suggesting the legislature intended § 42-5028 to operate similarly.  The Supreme Court also reasoned that allowing corporate officers to be liable for the transaction privilege tax would deter them from abusing the tax process for their personal gain.  Finally, the Supreme Court noted that a supermajority of other states with a transaction privilege tax (or similar tax) statutorily impose personal liability on corporate officers.

As for the meaning of “additional charges,” the Randalls argued that they were required to remit only included charges collected that exceeded their total tax obligation.  The Supreme Court disagreed, holding that, under § 42-5028’s language, the additional charges include any charge “made to cover the tax.”  The Supreme Court reasoned this interpretation prevented corporations from adding extra profit to their sales “under the guise of a compulsory tax.”

The Supreme Court vacated the decision of the Court of Appeals and remanded the case to the trial court.

The dissent recognized the majority’s interpretation of § 42-5028 as plausible but agreed with the Court of Appeals.  The dissent relied on A.R.S. § 42-5002(A)(1), which creates the duty to remit additional charges only on those that “impose” the charges.  Because only the corporate entity can impose the additional charge, the dissent argued that only the entity can be liable.

Vice Chief Justice Berch authored the majority opinion, with Chief Justice McGregor and Justice Ryan concurring.  Justice Hurwitz authored the dissent, with Justice Bales concurring.