Arizona Supreme Court Takes Aim at Legislative Intent in Tax Case

Arizona Department of Revenue v. Tunkey[1] concerned Arizona’s transaction privilege tax (“TPT”). The unanimous Arizona Supreme Court opinion held that business owners and corporate officers are personally liable for the TPT regardless of whether the TPT was directly assessed on the business owner or officer in addition to the corporate entity engaging in business. Four of the seven justices also signed onto a concurring opinion. That concurrence questioned precedent regarding a previous interpretation of the TPT statutes and indicated that, going forward, the Arizona Supreme Court will interpret statutes according to their “plain meaning.”[2]

Arizona imposes a TPT on certain businesses and services based on the gross receipts of a person or entity engaged in business activities.[3] The liability for the TPT falls on the entity, but it can choose to collect it from its customers.[4] If the person or entity collects more than what is owed to cover the TPT, it must still remit all money collected from its customers for TPT to the Arizona Department of Revenue (“ADOR”). Under Arizona precedent, business entity owners can be held personally liable if the entity does not fully remit the amount it collected from customers.[5] The specific issue in Tunkey was whether ADOR was required to assess the excess TPT against a business owner (or other “responsible person”) within four years of it coming due before filing suit against him personally.[6] The Arizona Supreme Court unanimously held that it was not.[7]

Peter Tunkey was a sandwich shop franchisee who formed an LLC with a business partner to operate the shop.[8] The LLC collected money from customers to cover the TPT from 2010 to 2012 but failed to remit $26,000 to ADOR.[9] ADOR sought this amount from the LLC, Tunkey, his business partner, and their spouses.[10] Tunkey argued that in order to be liable for the $26,000 in unpaid TPT, ADOR should have complied with A.R.S. § 42-1104(A)’s four-year limitation period. The trial court applied the Arizona Supreme Court’s interpretation of A.R.S. § 42-5028 from the 2008 case, Arizona Department of Revenue v. Action Marine. In so doing, the trial court ruled that Tunkey was a “responsible person” and ADOR was not required to separately assess the TPT against Tunkey, making him liable for the $26,000 in unpaid TPT.[11] The Arizona Court of Appeals affirmed.[12]

On appeal, the Arizona Supreme Court also affirmed, conducting a straightforward statutory interpretation of A.R.S. § 42-1104(A). Tunkey’s argument was that § 42-1104(A) requires ADOR to notify responsible persons of the amount due to cover the TPT within four years because it is an “additional tax due.”[13] The court found this unpersuasive for two reasons.[14]

First, § 42-1104(A) only concerns “additional tax due,” not self-assessed amounts such as the one by Tunkey’s LLC.[15] ADOR was not seeking to collect additional taxes but merely collecting the ones already reported by the LLC.[16] Second, the text of § 42-5028 states that a person is liable for “additional charge[s] made to cover the [TPT].”[17] Accordingly, they are the same charges as those self-assessed by the LLC and not something “additional.”[18]

The court quickly rejected Tunkey’s six non-textual arguments that he should not have to pay the amount of the unremitted TPT. Tunkey had seized on Action Marine calling the TPT “non-derivative” of business liability.[19] The court explained that this did not mean personal liability was a different tax than the TPT. Rather, the Action Marine court was merely differentiating between what a “responsible person” would have to pay and what someone would have to pay under a “derivative, alter ego theory.”[20] Under a derivative theory, a responsible person would also be liable for interest, costs, and penalties, rather than just the unremitted “additional charge.”[21]

Tunkey also argued that ADOR was not authorized to file suit because A.R.S. § 42-1114(A) only allows ADOR to file suit for taxes “due and unpaid.” The court explained that TPT charges were “due and unpaid” when the LLC “self-assessed the collected charges but did not remit that money to ADOR.”[22]

The court also rejected the notion that its holding was inconsistent with Arizona business law.[23] Tunkey averred that making LLC members liable for the TPT owed by the LLC would clash with A.R.S. § 29-3304(A), which provides that members of an LLC are not personally liable for the company’s debts or liability.[24] But liability in this case “results from a person’s failure to fulfill a duty to remit TPT charges collected from a [business entity’s] customers,” not a person’s status as a member of the LLC.[25] The court also noted that corporate officers could be liable for the TPT, not only members of the LLC.

The court ruled that Tunkey’s reliance on a case interpreting successor-employer liability for unpaid employment taxes was also misplaced.[26] In Video Stop v. Arizona Department of Economic Security, the Arizona Court of Appeals held that the Department of Economic Security (“DES”) had three years to determine and notify a successor-employer of its liability for unpaid unemployment taxes.[27] The court noted the statute in that case was different in that it required DES to “determine” and then provide notice.[28] Here, there is no determination, as the TPT liability was self-assessed, and there was no separate notice requirement from ADOR to Tunkey.[29]

The court further rejected using non-Arizona cases to reach a different conclusion, reasoning that those statutes “differ significantly” from Arizona’s.[30] Lastly, Tunkey’s public policy arguments did not persuade the court. The court recognized that it might be difficult for taxpayers to find evidence if ADOR sought to collect on liability that may be approaching the ten-year limitation period for TPT lawsuits, but it said that was a question for the legislature.[31]

The court concluded by affirming the court of appeals and denying Tunkey attorney fees.

The concurring opinion, written by Justice Clint Bolick and joined by Justices William Montgomery, James Beene, and Kathryn King, provides more guidance for Arizona practitioners as it calls for an explicit change in the court’s method of statutory interpretation from seeking to find the “legislative intent” to applying a statute’s “plain meaning.”[32]

In explaining the difference between the methodologies, Bolick goes all the way back to pre-Arizona statehood noting a 1908 case that said, “it is the duty of all courts to confine themselves to the words of the Legislature—nothing adding thereto; nothing demitting.”[33] According to Bolick this was the right approach, but it was unfortunately diluted shortly thereafter when the court began searching for the “legislative intent” when interpreting statutes.[34] What followed since then was a “conceptual inconsistency,” where the Arizona Supreme Court would pay lip service to both “legislative intent” and the “original public meaning” of statutes.[35] Some eras would favor one method over the other, and the recent trend is a stronger focus on the text of the statutes.[36]

The problem with seeking the legislature’s intent, Bolick said, is that it is “amorphous and illusory.”[37] The many legislators who pass a bill and the governor who signs it may have many different intentions.[38] This “licenses judges to credit not what the legislature said through the words it enacted but what it meant to say.”[39] Such a method “invites judicial mischief.”[40] Bolick made clear that focusing on the plain meaning does not mean secondary tools of interpretation are wholly irrelevant. If the legislature agrees on “findings, purposes, or definitions,” courts should determine statutory meaning through those lenses, and legislative history can help illuminate meaning as a “secondary interpretative device.”[41] The text, however, is the law.[42]

The judiciary “owe[s] it to the parties and advocates who come before us to tell them what we are looking for when interpreting a statute.”[43] In this regard, the concurring opinion is clear: the court will not try to “correct perceived legislative error or expand statutes beyond their plain meaning.”[44] Instead, it will seek to “determine the meaning of the words the legislature chose to use.”[45] Anything else would be a violation of separation of powers, as the judiciary would be usurping the legislature’s role.[46]

The concurring opinion then points out that Action Marine is paradigmatic of everything wrong with a search for legislative intent.[47] Section 42-5028 makes “a person who fails to remit any additional charge” for TPT personally liable for the total amount. The concurrence recounts how Action Marine, instead of merely applying the plain meaning of “person,” used a variety of methods to determine that not only is the business entity that collected the TPT charges liable but corporate officers who were responsible for remitting that amount were also liable.[48] In so holding, it relied on non-Arizona cases and statutes it considered analogous to conclude that the legislature intended to encourage corporate officers to assure additional charges are remitted to ADOR even though the statute was not entirely clear on that point.[49] While such a reading may have some virtue as public policy, it adds more to the text than is there and is inconsistent with previous tax law holdings that require “clear notice of obligations” and that ambiguous statutes be construed in favor of the taxpayer.[50] Accordingly, when the issue from Action Marine is properly before the court and fully briefed, the concurring opinion encourages the court to reconsider it.[51]

The concurring opinion signals two important things to practitioners. First, it embraces the “predominant”[52] form of originalism/textualism and continues the Arizona Supreme Court’s textualist turn of the last few years. The original public meaning—as to opposed original intended[53] meaning—of a statute or constitutional provision is what well-informed members of the public would have thought those provisions meant at the time they were passed.[54] This focus on the plain meaning of the text is not new.[55] Bolick notes two recent cases where the court interpreted statutes[56] or state constitutional provisions[57] without reference to their authors’ intent. His concurring opinion in this case appears to cement that trend with a public commitment by the majority of the current court that the words of a statute will be the deciding factor in statutory interpretation cases.

Second, it likely means that Action Marine’s days are numbered, but not necessarily. The majority opinion also applies the plain meaning of the relevant statutes, and the justices that signed onto the majority opinion but not the concurrence have signed on to opinions applying “original public meaning” or “plain meaning” to statutes in the past. There may be a textual reason to affirm Action Marine’s holding that was not articulated in the majority opinion. Nevertheless, with four justices inviting its reconsideration and using it as an example of how not to conduct statutory interpretation, Action Marine may be ripe for overruling.

In any case, Tunkey should stand as a warning for Arizona advocates that their arguments should focus on the actual text of the statutes and constitutional provisions at issue in their case and that tools for discerning original public meaning—such as corpus linguistics analyses and dictionaries published around the time of a law’s ratification—will be helpful aides to the court.

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