MacHu v. Pinal County ( 2023 )

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
MACHU PICCHU HOLDINGS, LLC, et al.,
Plaintiffs/Appellants,
v.
PINAL COUNTY, et al.,
Defendants/Appellees.
RUSTIN WAYAS, et al.,
Plaintiffs/Appellants,
v.
YAVAPAI COUNTY, et al.,
Defendants/Appellees.
Nos. 1 CA-TX 21-0003, 1 CA-TX 21-0007
(Consolidated)
FILED 3-16-2023
Appeal from the Arizona Tax Court
Nos. TX2019-001718, TX2020-000846
The Honorable Danielle J. Viola, Judge
REVERSED AND REMANDED
COUNSEL
Mooney, Wright, Moore & Wilhoit, PLLC, Mesa
By Jim L. Wright, Paul J. Mooney, Paul Moore, Bart S. Wilhoit
Counsel for Plaintiffs/Appellants
Pinal County Attorney’s Office, Florence
By Scott M. Johnson
Counsel for Defendant/Appellee Pinal County
DeConcini McDonald Yetwin & Lacy, P.C., Tucson
By James M. Susa
Counsel for Defendants/Appellees Pinal County and Yavapai County
Arizona Attorney General’s Office, Phoenix
By Jerry A. Fries, Lisa Neuville
Counsel for Defendant/Appellee Arizona Department of Revenue
OPINION
Judge D. Steven Williams delivered the opinion of the court, in which
Presiding Judge Cynthia J. Bailey and Vice Chief Judge David B. Gass1
joined.
W I L L I A M S, Judge:
¶1 Arizona’s property tax scheme tasks counties with levying
and collecting property taxes on real property within county limits. When
modifications or changes to a parcel of real property are made, the method
by which a county values that property for tax purposes can also
change—significantly affecting the amount of tax levied. See A.R.S.
§ 42-13302. This case requires us to examine whether a county may use a
“neighborhood system” to determine the limited property value of a parcel.
We hold that the neighborhood system violates A.R.S. § 42-13302 and,
therefore, reverse and remand.
FACTUAL AND PROCEDURAL HISTORY
¶2 Several property owners in Pinal County and Yavapai County
(collectively, “the Taxpayers”) brought these consolidated actions against
their respective counties and the Arizona Department of Revenue (“the
Department”) to recover property taxes allegedly collected illegally. The
Taxpayers contend the county assessors valued their properties in a
discriminatory manner in violation of A.R.S. § 42-13302; the Uniformity
1 Vice Chief Judge David B. Gass replaces Judge Peter B. Swann, who was
originally assigned to this panel. Judge Gass has read the briefs, watched
the recorded oral argument, and reviewed the record.
2
MACHU, et al. v. PINAL COUNTY, et al.
Opinion of the Court
Clause of the Arizona Constitution, Article 9, Section 1; the Equal Protection
Clause of the Arizona Constitution, Article 2, Section 13; and the Equal
Protection Clause of the Fourteenth Amendment to the United States
Constitution.
¶3 The Arizona Constitution authorizes the levying and
collection of taxes. See Ariz. Const. art. IX. The formula by which Arizona
calculates property tax is comprised of four general elements: (1)
classification, (2) valuation, (3) assessment ratio, and (4) tax rate. Aileen H.
Char Life Int. v. Maricopa Cnty., 208 Ariz. 286, 291, ¶ 8 (2004). Exercising its
constitutional power to classify property for tax purposes, Apache Cnty. v.
Atchison, T. & S. F. Ry. Co., 106 Ariz. 356, 359 (1970); People’s Fin. & Thrift Co.
v. Pima Cnty., 44 Ariz. 440, 445 (1934), the legislature established statutory
classes of real property. A.R.S. §§ 42-12001 to -12009 (creating separate
classes for residential, rented residential, agricultural and other types of real
property). The legislature delegated to counties the authority to levy and
collect real property taxes. A.R.S. § 42-13051. For most property in Arizona,
a county assessor values the property, A.R.S. § 42-13051, multiplies the
valuation by an assessment ratio—dictated by the legislative
classification—to produce the assessed value, A.R.S. §§ 42-15001 to -15010,
and then applies the applicable tax rate to the property’s assessed value to
determine the amount of tax due.
¶4 Each year, the county assessor must determine both the full
cash value (“FCV”), A.R.S. § 42-13051(B)(2), and the limited property value
(“LPV”), A.R.S. §§ 42-13301 and -13302, for real property within county
limits. The FCV, which is “synonymous with market value,” is “derived
annually by using standard appraisal methods and techniques.” A.R.S.
§ 42-11001(6). The LPV, which is the basis for assessing and levying primary
and secondary property taxes, A.R.S. § 42-11001(7), is determined through
two methods. A.R.S. §§ 42-13301 and -13302.
¶5 The first method, commonly known as “Rule A,” generally
applies when no changes to a property would affect its value. A.R.S.
§ 42-13301; Premiere RV & Mini Storage LLC v. Maricopa Cnty., 222 Ariz. 440,
442, ¶ 4 (App. 2009). Under Rule A, the LPV is “the [LPV] of the property
in the preceding valuation year plus five percent of that value,” so long as
that value does not exceed the property’s current FCV. A.R.S.
§ 42-13301(A)-(B). In periods of rapidly rising property values, Rule A
prevents a corresponding rapid rise in LPV. Premiere RV, 222 Ariz. at 442,
¶ 4.
3
MACHU, et al. v. PINAL COUNTY, et al.
Opinion of the Court
¶6 The second method, commonly known as “Rule B”—at issue
in this appeal—generally applies when there have been changes to a
property (such as by construction, destruction, demolition, or changes in
the property’s use) that affect its value. A.R.S. § 42-13302. Under Rule B, a
property’s LPV is established “at a level or percentage of full cash value
[referred to as the “Rule B Ratio”] that is comparable to that of other
properties of the same or a similar use or classification.” A.R.S.
§ 42-13302(A); Premiere RV, 222 Ariz. at 442, ¶ 4. In other words, a property’s
LPV is calculated by multiplying the property’s FCV by the applicable Rule
B Ratio. See A.R.S. § 42-13302. In the following tax years, the LPV
established under Rule B is used to calculate the parcel’s LPV under Rule
A. See A.R.S. § 42-13301(A).
¶7 Here, the Taxpayers own real property in Pinal and Yavapai
Counties. County assessors applied Rule B Ratios to the Taxpayers’
properties in 2018 (Pinal County) and 2019 (Yavapai County). The
Taxpayers challenged the methods employed by Pinal and Yavapai
Counties, contending that the Rule B Ratios applied to their properties were
greater than the Rule B Ratios applied to other properties within the same
property classification. We address each county’s method separately.
Pinal County
¶8 To calculate LPV, the county first places real property into one
of six categories. The six categories—agricultural, commercial, personal,
residential, rented residential, and vacant—generally correspond to the
statutory property classifications established by the legislature in A.R.S.
§§ 42-12001 through -12009. The county then further divides the properties
in each class by location, creating more than 100 “neighborhoods.”
¶9 Within each neighborhood, the assessor establishes a unique
Rule B Ratio for each property class based on the relationship between the
FCVs and LPVs of similar properties for which LPVs are determined under
Rule A. Upon establishing the Rule B Ratios for each property class within
each neighborhood, the assessor calculates each property’s LPV based on
the Rule B Ratio assigned to its class. Using this formulation, properties
within the same class—but located in different neighborhoods
—have different Rule B Ratios. The figure below illustrates the broad range
of Rule B Ratios applied in 2018 and shows what the Rule B Ratios would
have been for each class had Pinal County used a countywide system rather
than a “neighborhood” system.
4
MACHU, et al. v. PINAL COUNTY, et al.
Opinion of the Court
Yavapai County
¶10 Yavapai County employs a substantially similar method for
determining properties’ LPV, although it applies a countywide Rule B Ratio
to all agricultural property and divides the county into seven geographic
areas, referred to as “Market Areas.” As in Pinal County, properties within
the same class—but located in different Market Areas—have different Rule
B Ratios.
This Proceeding
¶11 Following the assessments in 2018 (Pinal County) and 2019
(Yavapai County), the Taxpayers filed complaints against the counties
alleging their methods for valuing LPV discriminated against them by
violating A.R.S. § 42-13302; the Uniformity Clause of the Arizona
Constitution, Article 9, Section 1; the Equal Protection Clause of the Arizona
Constitution, Article 2, Section 13; and the Equal Protection Clause of the
Fourteenth Amendment to the United States Constitution. Apart from
seeking a refund of the allegedly illegal taxes collected from them in 2018
and 2019, respectively, the Taxpayers asserted that the counties
miscalculated their properties’ valuations in all subsequent tax years by
relying on the unlawful LPVs from 2018 and 2019.
¶12 The tax court resolved these issues in favor of the counties on
cross-motions for summary judgment in each case. The Taxpayers timely
appealed. Because both cases raise the same legal issue, we consolidated
them on appeal, without objection from the parties. We have jurisdiction
under Article 6, Section 9, of the Arizona Constitution and A.R.S.
§§ 12-2101(A)(1), -161(A).
DISCUSSION
¶13 We review de novo a tax court’s ruling on cross-motions for
summary judgment. See Wilderness World, Inc. v. Ariz. Dep’t of Revenue, 182
5
MACHU, et al. v. PINAL COUNTY, et al.
Opinion of the Court
Ariz. 196, 198 (1995). We also review statutory interpretation de novo. Pinal
Vista Prop., L.L.C. v. Turnbull, 208 Ariz. 188, 190, ¶ 6 (App. 2004).
¶14 Arizona’s Uniformity Clause mandates that “all taxes shall
be uniform upon the same class of property within the territorial limits of
the authority levying the tax.” Ariz. Const. art. IX, § 1. Although the
Constitution extends the legislature broad power to classify property,
People’s Fin. & Thrift Co., 44 Ariz. at 445, thereby permitting property being
divided into different classes “to be taxed at different rates,” In re America
West Airlines, Inc., 179 Ariz. 528, 531 (1994), it requires taxing authorities to
levy uniform taxes against the same class of property within a taxing unit.
Here the taxing units are the counties.
¶15 Acting within its constitutional authority, the legislature
established a statutory system to identify and categorize real and personal
property in Arizona. A.R.S. §§ 42-12001 to -12009. This system was created
“for the common treatment of the property in each class for purposes of the
assignment of a common assessment percentage.” A.R.S. § 42-12010(A); see
also In re America West, 179 Ariz. at 531 (explaining that “property of the
same character must be taxed the same.”).
¶16 Apart from creating statutory property classifications, the
legislature prescribed the methods by which property must be valued.
A.R.S. § 42-13051(B)(2) (FCV); A.R.S. § 42-13301 (Rule A LPV); A.R.S.
§ 42-13302 (Rule B LPV).
¶17 This case requires us to consider whether Arizona law
permits counties to establish and apply different Rule B Ratios to real
property of the same class when the individual properties are located in
different parts of the same county.
¶18 As subdivisions of the state, counties “have only such
legislative powers as have been expressly, or by necessary implication,
delegated to them by constitution or by the legislature.” City of Phoenix v.
Ariz. Sash, Door & Glass Co., 80 Ariz. 100, 102, amended on reh’g, 80 Ariz. 239(1956). “These powers will be strictly construed.” Id., 80 Ariz. at 102.
¶19 In interpreting a statute, we “look first to the statute’s words,”
Knauss v. DND Neffson Co., 192 Ariz. 192, 199 (App. 1997) (quoting In re
Denton, 190 Ariz. 152, 155 (1997)), and “when the language of the statute is
clear, we follow its direction without resorting to other methods of
statutory interpretation,“ Pinal Vista Prop., 208 Ariz. at 190, ¶ 10; see also
Bowslaugh v. Bowslaugh, 126 Ariz. 517, 519 (1979) (explaining that we
“leav[e] any deficiencies or inequities to be corrected by the legislature.”).
6
MACHU, et al. v. PINAL COUNTY, et al.
Opinion of the Court
Applying a plain reading, we construe “statutes relating to the same subject
or having the same general purpose” together “as though they constituted
one law.” Pinal Vista Prop., 208 Ariz. 190, ¶ 10 (internal quotation omitted).
Our interpretation is guided by the principle that tax statutes are to be
interpreted “strictly against the state,” with “any ambiguities . . . resolved
in favor of the taxpayer.” Wilderness World, 182 Ariz. at 199. We endeavor
to harmonize statutes with the Arizona Constitution, “avoiding any
unconstitutional construction.” See Fragoso v. Fell, 210 Ariz. 427, 431–32,
¶ 13 (App. 2005).
¶20 Section 42-13302 provides that a property’s Rule B LPV “shall
be established at a level or percentage of full cash value that is comparable
to that of other properties of the same or a similar use or classification.”
¶21 Asserting that A.R.S. § 42-13302 requires only that “similar
use property be comparable,” the counties argue the neighborhood system
is permissible because the statute “is not specifi[c] as to whether the similar
use property must be on the same street, within the same neighborhood
. . . or within some other specific area in the [c]ounty.” But as noted, supra
¶ 6, the “level or percentage of full cash value” is the Rule B Ratio. A.R.S.
§ 42-13302. Accordingly, the Rule B Ratio must be “comparable to that of
other properties of the same or a similar use or classification.” Id. Meaning,
the Rule B Ratios of property within the same classification must be
comparable.
¶22 We next consider whether the Rule B Ratio “of other
properties of the same a similar use or classification” can be determined
based on the property’s location. See id.
¶23 In doing so, we are guided by the “presumption that what the
[l]egislature means, it will say.” Padilla v. Indus. Comm’n, 113 Ariz. 104, 106
(1976). Section 42-13302 requires that the Rule B Ratio be determined based
on other properties of the same or similar “use or classification.” The
legislature has plainly said the only property classifications are those listed
in A.R.S. §§ 42-12001 to -12009. Location is not a classification embodied in
those statutes, and “we will not imply classifications that the legislature has
not expressed.” In re America West, 179 Ariz. at 534 (noting the power to
classify is legislative); see also Ariz. Sash, Door & Glass Co., 80 Ariz. at 102(explaining that counties only have the powers delegated to them by the
legislature or constitution).
¶24 The counties further argue that this court should defer to the
Department’s historical practice of establishing Rule B Ratios on a
7
MACHU, et al. v. PINAL COUNTY, et al.
Opinion of the Court
neighborhood basis. We recognize that, several years ago, the Department
computed Rule B Ratios for thirteen of Arizona’s fifteen counties, and at
times used a neighborhood system to establish Rule B Ratios in those
counties. However, the Department informs it neither currently determines
Rule B Ratios for any Arizona county nor does it currently “instruct county
assessors with respect to the geographic areas that they should use when
determining the Rule B [R]atios.”
¶25 Applying A.R.S. § 42-13302’s plain language, the
neighborhood system is not permitted. We, therefore, accord no deference
to the Department’s past interpretation and application of the statute. See
S. Pac. Co. v. Cochise Cnty., 92 Ariz. 395, 406 (1963) (“We . . . cannot
countenance the wil[l]ful, systematic and intentional violation of the law no
matter how long continued.”).
¶26 Because we conclude the neighborhood system violates
A.R.S. § 42-13302, we need not determine whether such system violates the
Arizona or the United States Constitutions.
Attorneys’ Fees and Costs
¶27 The Taxpayers request their attorneys’ fees and costs on
appeal under A.R.S. § 12-348(B). We grant their requests subject to the
Taxpayers’ compliance with Arizona Rule of Civil Appellate Procedure 21.
¶28 The Department seeks exemption from the award of fees and
costs in 1 CA-TX 21-0003 (Pinal County) on the basis that the Department
“had nothing to do with the matters that [the Taxpayers] raised in their
complaint” and “played no material role in defending th[e] case below.”
But the Department did defend the case, to some degree, asking the tax
court to deny the Taxpayers summary judgment motion. And it appears the
Department initiated the neighborhood system in the 1980’s, which it used
to calculate Rule B Ratios for Pinal County up until 2010.
¶29 We award the Taxpayers attorneys’ fees and costs against
both the Department and the counties. The Department did not file an
answering brief in 1 CA-TX 21-0007 (Yavapai County). We therefore
consider any argument regarding attorneys’ fees and costs in that case
waived. See Van Loan v. Van Loan, 116 Ariz. 272, 274 (1977).
8
MACHU, et al. v. PINAL COUNTY, et al.
Opinion of the Court
CONCLUSION
¶30 For the foregoing reasons, we reverse the decision of the tax
court and remand this case for further proceedings consistent with this
opinion.
AMY M. WOOD • Clerk of the Court
FILED: AA
9