THAD M. MOORE, FRANK LUKE and D.C. O'NEIL, as Members of and Constituting the State Tax Commission of Arizona, and FRANK E. FRASER, as Director of the Sales Tax Division of the State Tax Commission of Arizona, Appellants,
PLEASANT HASLER CONSTRUCTION COMPANY, a Cororation, Appellee
APPEAL from a judgment of the Superior Court of the County of Maricopa. J. C. Niles, Judge. Judgment reversed and cause remanded for a new trial.
Mr. Joe Conway, Attorney General, Mr. J. B. Sumter, his Special Assistant, and Mr. W. E. Polley, his Assistant, for Appellants.
Messrs. Kibbey, Bennett, Gust and Smith & Rosenfeld, for Appellee.
[50 Ariz. 319] ROSS, J.
This action was brought by the Pleasant Hasler Construction Company against the State Tax Commission and Frank E. Fraser as director of the Sales Tax Division to secure a declaratory judgment as to the proper construction of some of the provisions of chapter 77, Laws of 1935, known as the "excise revenue act of 1935." The plaintiff, before bringing the action, had contracted with the State Highway Department to build for the state of Arizona two steel bridges and approaches on the state's right of way known as highway No. 60, agreeing to furnish all labor and materials, for which the state had agreed to pay it a lump sum. The State Tax Commission, whose duty it is to collect the taxes due the state under the said Excise Revenue Act, had demanded of the plaintiff that it pay a tax of 2 per cent. on the gross contract price it was to receive for constructing said bridges and approaches, it being its contention that the transaction constitutes a sale at retail of the personal property, such as steel, cement, sand and gravel, corrugated metal pipe, etc., entering into the construction of the bridges and taxable under the law.
Plaintiff, contending under its contract with the state it was not a seller at retail of such tangible personal property to the state, but was itself the ultimate consumer, brought this action to secure the court's determination of the question. The respective contentions were presented by the plaintiff's complaint and the defendants' answer. The court sustained a demurrer to defendants' answer and, the latter having elected to stand thereon and not to amend, judgment was entered in favor of plaintiff, from which judgment the defendants have appealed.
The question is a new one in this jurisdiction. It involves a construction of the pertinent provisions of said chapter 77. This chapter by its terms imposes [50 Ariz. 320] an annual privilege tax upon the business activities of both natural and artificial persons in the following words (in article 2):
"Sec. 2. Imposition of the Tax. From and after the effective date of this act, there is hereby levied and shall be collected by the tax commission... annual privilege taxes measured by the amount or volume of business done by the persons on account of their business activities, and in the amounts to be determined by the application of rates against values, gross proceeds of sales, or gross income, as the case may be, in accordance with the following schedule: ...
"(d) At an amount equal to two per cent. of the gross proceeds of sales or gross income from the business upon every person engaging or continuing within this state in the following businesses:
"1.Selling any tangible personal property whatsoever at retail, except bonds and stock."
Whether appellee should pay a 2 per cent. tax on the contract price of the bridges is the issue. It should if the materials, such as cement, steel, nails, etc., were "sold," as that word is used in the act, to the state for consumption. It should not if appellee purchased said materials for consumption itself and not for resale. In the latter case it would pay no tax, and since, as we know from common knowledge, such materials are not produced or manufactured in this state, or at most only a small portion of them, but are shipped in from the outside, no tax whatever would be paid, the sale to the contractor not being made in the state.
The following definitions will be of aid in determining the question:
"(d) The term 'sale' or 'sales' includes the exchange of properties as well as the sale thereof for money, every closed transaction constituting a sale....
[50 Ariz. 321] "(f) The term 'gross income' means the gross receipts of a taxpayer derived from trades, business, commerce or sales and the value proceeding or accruing from the sale of tangible personal property, or service, or both, and without any deduction on account of losses.
"(g) The term 'business' when used in this article shall include all activities or acts engaged in (personal and corporate), or caused to be engaged in with the object of gain, benefit or advantage either direct or indirect, but shall not include casual activities or sales.
"(h) The term 'gross proceeds of sales' means the value proceeding or accruing from the sale of tangible personal property without any deduction on account of the cost of property sold, expenses of any kind, or losses." Section 1, art. 2.
The trial court, when it sustained the demurrer to appellants' answer, accepted appellee's construction of the law, that is,
that a building or construction contract wherein and whereby the contractor agrees to furnish all labor and material and to build or erect on the premises of the owner a completed bridge or structure for a lump sum, sells the owner the finished bridge or structure and not the tangible personal property put into it. Otherwise stated, that while the concrete, steel, pipe, etc., are furnished by the contractor they are not sold within the meaning of the law to the owner, the only thing sold being the finished structure. This conclusion is reached by this course of reasoning: Under the Uniform Sales Act (sec. 2805, Rev. Code of 1928), and under the common law (23 R.C.L. 1186, § 2), the definition of a sale being practically the same in both, "A sale of goods is an agreement whereby the seller transfers the property in the goods to the buyer for a consideration called the price" (sec. 2805, supra), and since no price was put upon the materials entering into the bridges, there was no sale of such materials within [50 Ariz. 322] the meaning of that word as used in the Uniform Sales Act or the common law.
It is also said that the owner acquires the title to the materials by accession; that the materials remain the property of the contractor until they are affixed to the realty, and that the title does not pass until they become fixtures; that is, that the materials change their character from tangible personal property to realty before the ...