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State Tax Commission v. Wallapai Brick & Clay Products, Inc.

Supreme Court of Arizona

October 15, 1958

The STATE TAX COMMISSION of The State of Arizona and Thad M. Moore, Warren Peterson and William Stanford, as members of and constituting the same, Appellants and Cross-Appellees,
v.
WALLAPAI BRICK AND CLAY PRODUCTS, Inc., a corporation; Western Clay Products Company, Inc., a corporation; Clinton Campbell Contractors, Inc., a corporation doing business as Phoenix Brick Yard; John S. Sundt, doing business as Tucson Pressed Brick Company; and Wm. F. Grabe, doing business as Grabe Brick Company, Appellees and Cross-Appellants.

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Page 990

[85 Ariz. 26] Robert Morrison, Atty. Gen., and D. Kelly Turner, Special Asst. Atty. Gen., for appellants.

Evans, Kitchel & Jenckes, and James Powers, Phoenix, for appellees.

JOHN F. MOLLOY, Superior Court Judge.

This is an appeal and a cross-appeal from a judgment rendered in the lower court in a declaratory judgment action. The plaintiffs are various brick manufacturing companies who are engaged in the business of buying land containing raw brick clay, removing such clay from the ground, refining same by various screening processes, mixing such clay with water, forming such clay into brick, drying the bricks and baking them into finished bricks of the type used in the construction industry.

The second amended complaint in this action, upon which declaratory judgment was rendered, after motions for summary judgment were filed by both the plaintiffs and the defendants, petitioned that the court declare that certain regulations of the Arizona State Tax Commission, hereinafter referred to as Commission, be declared invalid as applied to the plaintiffs' businesses because the said regulations were allegedly in violation of A.R.S. § 42-1301 et seq., these sections being the Excise Revenue Act of 1935 as amended. A.R.S. § 42-1310, subdivision (a) of paragraph 2, under which the plaintiffs' businesses were alleged to be taxed, reads in part as follows:

'The tax imposed by subsection A of § 42-1309 shall be levied and collected at the following rates:

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'2. At an amount equal to one 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:

'(a) Mining, quarrying, smelting, or producing for sale, profit or commercial use, any oil, natural gas, limestone, sand, gravel, copper, gold, silver or other mineral product, compound or combination of mineral products, or felling, producing or preparing timber or any product of the forest for sale, profit or commercial use.'

The facts of the case are not in dispute and have been stipulated by the parties. The manner and method used by plaintiffs in the removal of brick clay from the ground and the processes used in converting such raw clay into the finished brick are a part of the stipulations reached. Of particular interest are the following facts:

Brick clay in the ground has a very small value, it bring stipulated that such value is approximately 2 1/2cents per cu. yd.; from 2 1/4 cu. yd. of raw clay 1,000 finished bricks are produced; the fair market value of 1,000 [85 Ariz. 27] finished bricks is $25; brick clay is a 'mineral' as that term is understood in geology; raw clay severed from the land, including such raw clay before and after refining processes, has no market value; such clay, severed from the land, is not bought and sold and there is no regular market for it.

The regulation of the Commission challenged by the plaintiffs' first cause of action is regulation 2.2.7, reading as follows:

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'Tax on Sales. The taxable value of mineral products produced or prepared for use is the sale price or market value after processing. For example, the measure of the mining tax on the production for sale of sand and gravel is the sale price which, in part at least, depends upon the extent of the preparation and processing. River run sand and washed and graded sand and gravel vary in sale price or value, and the amount of the tax is measured accordingly. Shale prepared and made into cement and clay processed into bricks constitutes production 'for sale, profit, or commercial use' subject to the tax, and the amount of the tax is determined by the sale price or market value of the end product, in this case being either cement or building bricks. Likewise, the sale price or value of quarried building stone processed or cut to marketable size or specification determines the amount of the tax.'

The regulation challenged by the second cause of action is regulation B-1.4, which will not be quoted for the reason that it was stipulated by the parties that this regulation is no longer in effect, it having ceased to be effective on August 23, 1956. The Commission admitted in its answer and in the stipulation filed that, in pursuance of the 'regulation', it proposed to impose a liability upon the plaintiffs on the gross proceeds of sales or gross income from the businesses of the plaintiffs, under the above quoted subsection of the Excise Revenue Act, and that it proposed to include within such proceeds or gross income all sales made to persons licensed as contractors. The plaintiffs contend, on the other hand, that they are entitled to the exemption or deduction allowed by A.R.S. § 42-1321, subsection A, paragraph 3, which reads as follows:

'A. This article shall not apply to:

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'3. Sales of tangible personal property to a person licensed as a contractor under chapter 10 of Title 32 who holds a valid privilege tax license for engaging or continuing in the business of contracting under this article when the tangible personal property so sold is incorporated or fabricated by the contractor into any ...


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