IN THE

COURT OF APPEALS

STATE OF ARIZONA

DIVISION ONE

Appeal from the Arizona Tax Court
Cause No. TX 91-00191
The Honorable William T. Moroney, Judge

AFFIRMED

R. Lee McFadden III Phoenix
and
ULRICH, THOMPSON & KESSLER, P.C.
By: Paul g. Ulrich
Attorneys for Plaintiff-Appellant Phoenix

Grant Woods, Attorney General
By: Daniel G. Harrington
Steven R. Partridge
Michael Worley, Assistant Attorneys General
Attorneys for Defendant-Appellee Phoenix

C L A B O R N E, Judge

Canyon Contracting Company ("Taxpayer") brought a refund claim for state transaction privilege taxes it paid from October 1978 through July 1982 on receipts from residential construction contracts with Indian tribes on Indian reservations. Taxpayer appeals from dismissal of the claim as barred by the four-year limitations period of Ariz. Rev. Stat. Ann. ("A.R.S.") sections 42-113 and 42-15 (1991). The appeal presents two questions:

1. Whether the Arizona Department of Revenue’s ("ADOR") oral and written advice to Taxpayer that its receipts from reservation contracting for Indian tribes were subject to Arizona transaction privilege taxation estopped ADOR from asserting that the statute of limitations barred Taxpayer’s refund claim; and

2. Whether ADOR’s communications to Taxpayer equitably tolled the running of the limitations period, so that Taxpayer’s refund claim was timely filed.

This court has jurisdiction pursuant to A.R.S. section 12-2101(B) (Supp. 1992).

FACTS AND PROCEDURE BELOW

Between October 1978 and July 1982, Taxpayer constructed residential housing on Indian reservations under contract with Indian tribes. In late 1978 Taxpayer’s owner, Robert Pierson, heard from subcontractors and other general contractors that ADOR had no authority to collect taxes from those engaged in contracting on Indian reservations.

Pierson contacted ADOR and explained the nature of Taxpayer’s work. An ADOR representative told him that Taxpayer definitely owed state transaction privilege taxes on its receipts from those activities. When Pierson questioned this, the representative became adamant and stated that documents would be sent to demonstrate Taxpayer’s tax liability. ADOR later mailed Taxpayer a copy of former ADOR regulation A.A.C. Rule 315-5-620, which stated that "income from contracting by non-Indians on an Indian reservation is taxable."

Pierson testified that he continued to hear from others involved in construction on Indian reservations that the state contracting tax was inapplicable. Between 1978 and 1982, Taxpayer called ADOR eight to twelve times concerning its tax liability, and ADOR consistently stated that Taxpayer owed state transaction privilege taxes on its Indian reservation contracts.

On December 4, 1981, Taxpayer wrote to ADOR and asked if a majority Indian-owned construction partnership in which it was participating was exempt from transaction privilege taxes for work done on the reservation. On April 19, 1982, ADOR responded that "it is our position that a majority Indian-owned partnership would be subject to the imposition of Arizona transaction privilege tax (Sales) on its construction activity both on and off the reservation."

Pierson testified before ADOR’s hearing officer that Taxpayer paid state transaction privilege taxes on its receipts from Indian construction contracts because ADOR told him it was necessary. When asked by a member of the Board of Tax Appeals why he had not consulted an attorney, Pierson testified in part: "I don’t know. Because I had it in writing, I had it in writing many times, and they never wavered. If they’d ever given me the slightest hint that maybe I didn’t owe, well, I’d have been there in a second . . . ." Pierson also testified that ADOR never notified him that the state transaction privilege tax did not apply to his Indian contracting activities, and if it had he would have pursued a refund promptly.

On July 2, 1982, the United States Supreme Court decided Ramah Navajo Sch. Bd., Inc. v. Bureau of Revenue of New Mexico, 458 U.S. 832 (1982), in which the court held that federal law preempted New Mexico’s gross receipts tax on amounts paid by a tribal school board to a non-Indian construction company for constructing a school on the reservation.

ADOR subsequently repealed A.A.C. Rule R15-5-620, effective April 13, 1987. On July 20, 1987, Taxpayer filed a refund claim with ADOR, which was denied as barred by the statute of limitations. After exhausting its administrative remedies, Taxpayer brought this action in the tax court.

ADOR moved to dismiss Taxpayer’s complaint and Taxpayer moved for summary judgment. The tax court granted ADOR’s motion to dismiss. The court rejected Taxpayer’s contention that ADOR was estopped to assert that its refund claim was barred, reasoning: 1) a taxpayer who contemplates challenging the validity of a tax has no right to rely on representations of his adversary, the taxing authority, with respect to the merits of his claim; 2) the act which caused Taxpayer injury was its failure to timely file a refund claim, and ADOR did not directly induce it not to file one; 3) when ADOR was telling Taxpayer its Indian contracting receipts were taxable, ADOR could not have "known" that this was incorrect; and 4) ADOR’s lack of knowledge was not sufficient fault to invoke equity.

The tax court also rejected Taxpayer’s contention that ADOR’s conduct equitably tolled the running of the statutory limitations period. It found no evidence that ADOR had induced Taxpayer not to file a refund claim within the statutory period. It stated further that ADOR’s "expected representations" about its position did not constitute such inequitable conduct that would justify taking away from ADOR its rights under A.R.S. section 42-115.

The tax court finally observed that ADOR had conceded the retroactive application of Ramah, but that ‘[Taxpayer] does not lose its claim because Ramah is determined not to have retroactive application; [Taxpayer] loses it claim because it failed to make that claim within the limitation period defined in A.R.S. § 42-115." The tax court entered a formal judgment in accordance with its ruling, from which Taxpayer timely appealed.

A. EQUITABLE ESTOPPEL

The Arizona cases offer several roughly similar formulations of the doctrine of equitable estoppel. The more recent cases seem to agree on those three elements: (1) conduct by which one induces another to believe certain material facts; (2) the inducement results in acts in justifiable reliance thereon; and (3) the resulting acts cause injury. Heltzel v. Mecham Pontiac, 152 Ariz. 58, 60, 730 P.2d 235, 237 (1986); Darnet Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 394, 682 P.2d 388, 399 91984); Dunn v. Progress Indus. Inc., 153 Ariz. 62, 64, 734 P.2d 604, 606 (App. 1986). In Freightways, Inc. v. Arizona Corp. Comm’n, 129 Ariz. 245, 630 P.2d 541 (1981), the supreme court recognized a slightly different formulation that included as an additional element that the party to be estopped must "know the facts." 129 Ariz. at 247, 630 P.2d at 543. Freightways also stated that reliance on government conduct or representations about the application of law to facts is reasonable in "a person sincerely desirous of obeying the law would have accepted the information as true, and would not have been put on notice to make further inquires." Id., quoting United States v. Lansing, 424 F.2d 225, 227 (9^th Cir. 1970).

Representations concerning matters of law formerly could not generate an estoppel to rely on the statute of limitations unless a confidential relationship existed between the parties or the party making the representations was especially skilled in the law while the party to whom the representations were made was not. Waugh v. Lennard, 69 Ariz. 214, 227, 211 P.2d 806, 819 (1949). Recently this court recognized Freightways’ tacit abandonment of that rule in Tucson Elec. Power co. v. Arizona Dep’t of Revenue, ____ Ariz. ____, 851 P.2d 132 (App. 1992):

The state argues . . . that since these representations were not strictly factual in nature, they cannot form a basis for the application of estoppel. If this were an action involving two private litigants, the state’s argument would have general validity, but, even in private litigation, exceptions to the general rule have been made. In our opinion, the "factual-legal" dichotomy has much less validity in litigation involving the application of estoppel against governmental entities, since, as pointed out by the taxpayer, such litigation will invariably involve representations of governmental authorities concerning the application of law to a set of facts.

An illustration of this is found in the Arizona Supreme Court’s decision in Freightways, although the issue was not discussed in the court’s opinion. Prior representations concerning facts as opposed to legal rights did not form the basis for the application of estoppel against the governmental agency in Freightways. Rather, the representations or conduct which the agency was estopped to deny were legal in nature - - the validity of a certificate of convenience and necessity which the agency had issued. We therefore reject the state’s contention that because of their legal nature, the representations made in this case could not form a basis for the application of estoppel.

Id. at ____, 851 P. 2d at 142.

The estoppel argument breaks down on two of the four recognized elements. The first is that the party to be estopped must know "the facts," or in this case, the law applicable to Taxpayer’s activities from October 1978 through July 1982. Taxpayer overstates the certainty and predictability of pre-Ramah law and for that matter post-Ramah federal preemption case law affecting state taxation of transactions on Indian reservations. Generally, an assertion of "[s]tate jurisdiction over activities on Indian reservations is preempted by federal law only if it interferes or is incompatible with federal and tribal interests reflected in federal law." State ex rel. Dep’t of Revenue v. Dillon, 170 Ariz. 560, 566, 826 P.2d 1185, 1192 (App. 1991). In White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980), the Supreme Court stated:

More difficult questions arise where, as here, a State asserts authority over the conduct of non-Indians engaging in activity on the reservation. In such cases we have examined the language of the relevant federal treaties and statutes in terms of both the broad policies that underlie them and the notions of sovereignty that have developed from historical traditions of tribal independence. This inquiry is not dependent on mechanical or absolute conceptions of state or tribal sovereignty, but has called for a particularized inquiry into the nature of the state, federal, and tribal interests at stake, an inquiry designed to determine whether, in the specific context, the exercise of state authority would violate federal law.

448 U.S. at 144-45. Accord Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148 (1973). For example, in Warren Trading Post v. Arizona Tax Comm’n, 380 U.S. 683 (1983), the Court held imposition of the Arizona transaction privilege tax on reservation sales by federally licensed Indian traders to reservation Indians was preempted because Congress’ comprehensive economic regulation of that commerce left no room for state taxation. 380 U.S. at 691-92.

In White Mountain Apache Tribe, the Court invalidated the application of Arizona’s motor carrier and use fuel taxes to a non-Indian enterprise operating on the reservation under contract with the tribe. 448 U.S. at 151. The Court went into detail concerning the extent of a federal regulation of Indian timber harvesting. It stated:

In these circumstances we agree with petitioners that the federal regulatory scheme is so pervasive as to preclude the additional burdens sought to be imposed in this case. Respondents seek to apply their motor vehicle license and use fuel taxes on Pinetop [taxpayer] for operations that are conducted solely on Bureau and tribal roads within the reservation. There is no room for these taxes in the comprehensive federal regulatory scheme. In a variety of ways, the assessment of state taxes would obstruct federal policies.

Id. at 148.

In Central Mach. Co. v. Arizona Tax Comm’n, 448 U.S. 160 (1980), the Court similarly invalidated application of the Arizona transaction privilege tax on a taxpayer’s sale of farm tractors to an enterprise of the Gila River Tribe. Holding that the tax was preempted by federal regulation of trading with the Indians, the Court stated:

It is irrelevant that appellant is not a licensed Indian trader. Indeed, the transaction falls squarely within the language of 25 U.S.C. § 264, which makes it a criminal offense for "[a]ny person . . . to introduce goods, or to trade" without a license "in the Indian country, or on any Indian reservation." It is the existence of the Indian trader statutes, then, and not their administration, that pre-empts the field of transactions with Indians occurring on reservations.

448 U.S. at 164-65.

During the same stretch of time, both the Arizona Supreme Court and the U.S. Court of Appeals for the Tenth Circuit held that applying state transaction privilege taxes to contracting income derived from Indian tribes was not invalid under federal law. Dep’t of Revenue v. Hane Constr. Co., Inc., 115 Ariz. 243, 564 P.2d 832 (App. 1977), relied in part on language of earlier U.S. Supreme Court decisions requiring individualized treatment of specific treaties and statutes. Mescalero Apache Tribe v. O’cheskey, 625 F.2d 967 (10^th Cir. 1980), cert. denied, 450 U.S. 959 (1981), distinguished White Mountain Apache Tribe and Central Mach. Co. in denying rehearing of its opinion holding valid a New Mexico gross receipts tax on non-Indian contractors for work on an Indian reservation resort complex under contract with the tribe.

In Ramah, the Court held that the new Mexico gross receipts tax on amounts paid to an Indian construction company for constructing a school for Indian children on the Navajo reservation under contract with a school board organized under federal and Navajo tribal law was preempted by comprehensive federal regulation of the construction and financing of Indian educational institutions. The Court’s opinion said that the New Mexico Court of Appeals had denied rehearing of its ruling in favor of the state based on White Mountain Apache Tribe and Central Mach. Co., holding that the case before it did not involve either a comprehensive or pervasive scheme of federal regulation, or federal regulations similar to the Indian trader statutes. The Supreme Court’s opinion repeated the court’s statement in White Mountain Apache Tribe that preemption analysis in the area of state regulatory authority over activity on Indian tribes required a particularized examination of the relevant state, federal, and tribal interests. The Court characterized the case as "indistinguishable in all relevant respects from White Mountain." Ramah, 458 U.S. at 839. After detailing the federal statutes and regulations affecting the construction of education facilities for Indian children, the court expressed "disappointment that the courts below apparently gave short shrift to . . . our precedents in this area . . ." Id. at 846. In dissent, three justices opined that this rebuke was undeserved. The dissent argued that while the majority observed the requirement of sharp focus on the preemptive effect of federal statutes and treaties, it focused instead on the degree of economic burden on the Indian tribe.

It was against this developing background that ADOR took the position that Arizona could validly impose its transaction privilege tax on Taxpayer’s contracting income from Indian tribes in this case. ADOR could not be charged with "knowledge" that the relevant Supreme Court decisions leading up to Ramah were contrary or even necessarily inconsistent with its position. Indeed, not even Ramah itself was directly in conflict. ADOR hearing officer correctly analyzed the situation as follows:

It is altogether another thing to conclude . . . that the Department should have known in 1978, or any time before July 1982, that the Ramah case would arise and how it would come out. It is clear from the dissent by Justice Stevens in White Mountain, which Justices Stewart and Rehnquist joined him in, and Justice Rehnquist’s dissent in Ramah, in which he was joined by Justices White and Stevens, that reasonable minds could differ on whether the principles announced in Warren Trading Post applied to the facts of those two cases. Even if the Department was fully informed as to the nature of Taxpayer’s contracting during the period at issue, therefore, it is not possible to find the necessary wrongful conduct on its part so as to estop it from raising the statute of limitations.

Taxpayer’s estoppel claim fails for another reason. Even assuming ADOR’s advice induced Taxpayer to forbear claiming a refund until July of 1987, it is plain that Taxpayer’s continuing reliance on those representations was not justifiable. As the tax court observed, ADOR was Taxpayer’s potential adversary. It was unreasonably naive for Taxpayer to rely exclusively on ADOR’s statements of its legal position. Further, during 1978-1982 and thereafter, Taxpayer heard continuous rumblings from other contracting associates directly contrary to ADOR’s stated position. Pierson himself admitted skepticism from the start about ADOR’s position, both in general and in view of what he had heard from other sources. Contrary to Taxpayer’s argument, this was not a situation in which a person who wanted to obey the law would have accepted ADOR’s statements as true and would not have been put on notice to make further inquiries.

B. EQUITABLE TOLLING

Taxpayer argues that the four year limitation period was equitably tolled as of February 1, 1979, when ADOR sent Taxpayer a highlighted copy of its regulation, until April 13, 1987, "when the regulations were repealed and [Taxpayer] would have had notice of the change in the law." Taxpayer observes that under Hosogai v. Kadota, 145 Ariz. 227, 231, 700 P.2d 1327, 1331 (1983), equitable tolling is appropriate when it would effectuate the policies underlying the law under which the plaintiff seeks relief and also the purposes underlying the statute of limitations. Taxpayer argues that applying equitable toling here would further the policy that taxpayers pay only taxes for which they are legally liable, and would not interfere with the policy of protecting defendants from plaintiffs who have slept on their rights.

If Taxpayer is right that the Supreme Court’s decision in Ramah plainly undermined ADOR’s position, then surely Taxpayer "would have had notice of the change in the law" when Ramah was decided in July of 1982. If the law was clear enough before Ramah to require ADOR to predict that Ramah would come out as it did, then the issuance of Ramah itself would have been sufficient to render unjustifiable any continuing reliance by Taxpayer on ADOR’s pre-Ramah statements. Accordingly, assuming the four year limitations period was tolled as of February 1, 1979, its running would have recommenced with the filing of Ramah on July 2, 1982. The filing of Taxpayer’s refund claim on July 20, 1987, over five years later, would still have been untimely.

CONCLUSION

The tax court correctly rejected Taxpayer’s equitable estoppel and equitable tolling claims, and properly dismissed Taxpayer’s action as barred by the four year limitations period of A.R.S. sections 42-113 and 42-115.