Appeal from the Superior Court in Maricopa County No. TX2010-000404 The Honorable Dean M. Fink, Judge
Steptoe & Johnson, LLP, Phoenix By Patrick Derdenger, Bennett Evan Cooper Counsel for Plaintiff/Appellee
Arizona Attorney General's Office, Phoenix By Jerry A. Fries, Benjamin H. Updike Counsel for Defendant/Appellant
Judge Maurice Portley delivered the Opinion of the court, in which Presiding Judge Patricia A. Orozco and Judge Randall M. Howe joined.
¶1 We are asked to determine whether CCI Europe, Inc. ("CCI") is required to pay the transaction privilege tax on the proceeds it receives from its software license agreement and maintenance agreements with Phoenix Newspapers, Inc. ("PNI"). Because the software is used as part of the manufacturing process to produce the printed version of the Arizona Republic newspaper, the proceeds from the agreements are statutorily exempt. Accordingly, we affirm the tax court's summary judgment.
FACTUAL AND PROCEDURAL BACKGROUND
¶2 CCI develops and sells software to facilitate the production of printed newspapers. The software performs all layout, formatting, and typesetting functions necessary to produce printed editions of a newspaper. For example, the software automatically: creates the page layout for the newspaper, margin width, column width, as well as spacing and location of articles, editorials, advertisements, photos, and graphics; assigns a naming convention that identifies each page and its relationship to the finished product; and in the printing process, dictates whether pages are printed in color, or in black and white.
¶3 CCI granted PNI a 99-year license to use its software to produce the printed Arizona Republic in 1997. Additionally, the parties entered into software maintenance agreements where CCI agreed to provide PNI with new software updates and releases, as well as support and software troubleshooting.
¶4 After CCI was audited for the period between June 2002 and May 2006, the Arizona Department of Revenue (the "Department") determined that CCI owed transaction privilege tax in the amount of $82, 511.44 plus interest on its income from the software agreements with PNI. CCI unsuccessfully protested the assessment through the administrative process, arguing that the income from the agreements is deductible under Arizona Revised Statutes ("A.R.S.") section 42-5061(B)(1) (2014),  which exempts gross proceeds realized from the sale of machinery or equipment "used directly in manufacturing[.]"
¶5 CCI filed an appeal to the tax court and subsequently moved for summary judgment. After briefing and argument, the tax court determined that "the software, and by extension the maintenance agreements, are exempt under A.R.S. § 42-5061(B)(1)" and granted CCI summary judgment. The Department then filed this appeal.
¶6 The Department contends the tax court erred by ruling that the gross income CCI earns from the sale of software to PNI is exempt from taxation under § 42-5061(B)(1). Specifically, the Department argues that: (1) newspaper publishing is not manufacturing; but (2) even if newspaper publishing is manufacturing, the software is not "used directly" in the manufacturing process.
¶7 We review de novo the grant of summary judgment. Wilderness World, Inc. v. Ariz. Dep't of Revenue, 182 Ariz. 196, 198, 895 P.2d 108, 110 (1995). We also review de novo the tax court's construction of statutes. Ariz. Dep't of Revenue v. Cent. Newspapers, Inc., 222 ...