South Point v. Ador

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

SOUTH POINT ENERGY CENTER LLC, Plaintiff/Appellant,

v.

ARIZONA DEPARTMENT OF REVENUE, et al., Defendants/Appellees.

No. 1 CA-TX 20-0004
FILED 4-27-2021

Appeal from the Arizona Tax Court
No. TX2013-000522
TX2014-000451
TX2015-000850
TX2016-001228
TX2017-001744
TX2018-000019
TX2019-000086
(Consolidated)

The Honorable Christopher T. Whitten, Judge

VACATED AND REMANDED

COUNSEL

Lewis Roca Rothgerber Christie LLP, Phoenix
By Patrick Derdenger, Karen M. Jurichko Lowell
Counsel for Plaintiff/Appellant

Dickinson Wright PLLC, Phoenix
By Bennett Evan Cooper, Vail C. Cloar
Co-Counsel for Plaintiff/Appellant
Arizona Attorney General’s Office, Phoenix
By Kimberly J. Cygan
Counsel for Defendant/Appellee Arizona Department of Revenue

Arizona Attorney General’s Office, Phoenix
By Jerry A. Fries
Counsel for Defendant/Appellee Mohave County

OPINION

Judge Cynthia J. Bailey delivered the opinion of the Court, in which
Presiding Judge Paul J. McMurdie and Judge Lawrence F. Winthrop joined.

B A I L E Y, Judge:

¶1 In these consolidated actions challenging the state and
county’s power to tax property on tribal land, South Point Energy Center,
LLC (“Taxpayer”) appeals the tax court’s grant of summary judgment to
the Arizona Department of Revenue and Mohave County (collectively,
“ADOR”). For the following reasons, we vacate the judgment and remand
to the tax court for further proceedings.

FACTS AND PROCEDURAL HISTORY

¶2 Taxpayer is a non-Indian entity that owns and operates an
electrical generating plant (“Facility”) in Mohave County on land it leases
from the Fort Mojave Indian Tribe (“Tribe”). 1 Under the lease (“Lease”),
Taxpayer owns “[t]he Facility and all Improvements,” but at the end of the
term, it will have to “remove any and all above ground Improvements and

1 Taxpayer and its predecessor-in-interest have been involved in earlier
actions in this court relating to property taxes on the Facility. See Calpine
Constr. Fin. Co. v. Ariz. Dep’t of Revenue, 221 Ariz. 244, 248-49, ¶¶ 17, 22 (App.
2009) (holding Taxpayer’s predecessor-in-interest, not the Tribe, owned the
improvements and personal property that comprise the Facility and that
the predecessor-in-interest was liable for property taxes); Ariz. Dep’t of
Revenue v. S. Point Energy Ctr., LLC, 228 Ariz. 436, 441, ¶ 20 (App. 2011)
(holding the Arizona Department of Revenue did not err within the
meaning of the error-correction statutes in valuing the Facility).

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personal property from the Leased Land,” except for certain roads,
foundations, and underground piping and equipment.

¶3 In 2013 and 2014, Taxpayer sued ADOR to recover property
taxes paid on the Facility for the property tax years 2010-2013. ADOR
moved to dismiss, arguing issue preclusion barred Taxpayer from
relitigating the tax’s legality and that Taxpayer was not entitled to error-
correction relief, and the court entered judgment for ADOR. See Ariz. R.
Civ. P. 12(d). After Taxpayer appealed, this court vacated the judgment
and remanded for further proceedings. See S. Point Energy Ctr., LLC v. Ariz.
Dep’t of Revenue, 241 Ariz. 11, 13, ¶¶ 1-2 (App. 2016).

¶4 On remand, the tax court ultimately consolidated the cases
with five other lawsuits in which Taxpayer challenged property taxes it had
paid on the Facility for years 2014-2018. The court denied the parties’ cross-
motions for partial summary judgment on whether 25 U.S.C. § 5108 per se
preempts property taxes levied on the Facility. On a second set of cross-
motions, the court then ruled the Facility is not a permanent improvement
exempt under § 5108 because the Lease requires Taxpayer to remove the
above-ground improvements at the conclusion of the term. The court
granted summary judgment to ADOR, holding that under White Mountain
Apache Tribe v. Bracker, 448 U.S. 136, 151 (1980), tribal sovereignty does not
preempt taxation of the Facility.

¶5 Taxpayer timely appealed, and we have jurisdiction pursuant
to Article 6, Section 9, of the Arizona Constitution and A.R.S. §§ 12-120.21,
-170(C) and -2101(A)(1).

DISCUSSION

¶6 Taxpayer argues the tax court erred by (1) rejecting its
contention that 25 U.S.C. § 5108 categorically preempts state and local
property taxes on permanent improvements on leased tribal land; (2) ruling
based on state law, and without briefing or hearing evidence, that the
entirety of the Facility is personal property rather than permanent
improvements; and (3) erroneously applying the Bracker interest-balancing
analysis to the Facility.

¶7 We conclude the tax court erred by disregarding § 5108 and
categorizing the Facility as personal property without conducting the
proper analysis. We therefore vacate the judgment and remand for further
proceedings consistent with this Opinion.

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I. Standard of Review

¶8 We review a grant of summary judgment de novo. Jackson v.
Eagle KMC L.L.C., 245 Ariz. 544, 545, ¶ 7 (2019). In doing so, we view the
evidence and reasonable inferences in the light most favorable to the non-
moving party. Harianto v. State, 249 Ariz. 563, 565, ¶ 7 (App. 2020).

II. Whether the tax court erred by granting summary judgment to
ADOR.

A. Whether the tax court erred by failing to apply 25 U.S.C. §
5108 to the Facility.

¶9 Taxpayer argues the tax court erred by failing to rule the
Facility is exempt from taxes under § 5108, which, in relevant part, states
that “lands or rights” taken in the name of the United States in trust for an
Indian tribe “shall be exempt from State and local taxation.” Under the
statute, taxation of such property is per se preempted.

¶10 To support its argument, Taxpayer cites four cases: United
States v. Rickert, 188 U.S. 432 (1903), Mescalero Apache Tribe v. Jones, 411 U.S.
145 (1973), Confederated Tribes of the Chehalis Rsrv. v. Thurston Cnty. Bd. of
Equalization, 724 F.3d 1153 (9th Cir. 2013), and Seminole Tribe of Florida v.
Stranburg, 799 F.3d 1324 (11th Cir. 2015). Of course, United States Supreme
Court cases bind Arizona courts on issues of federal preemption. See
Weatherford ex rel. Michael L. v. State, 206 Ariz. 529, 532-33, ¶¶ 8-9 (2003). As
Taxpayer recognizes, federal circuit decisions are not binding on Arizona
courts. See Plan. Grp. of Scottsdale, L.L.C. v. Lake Mathews Mineral Props., Ltd.,
226 Ariz. 262, 267, ¶ 22 (2011). They may be persuasive, however, id.,
especially when they are “consistent and well-reasoned,” Filer v.
Tohono O’Odham Nation Gaming Ent., 212 Ariz. 167, 174, ¶ 28 (App. 2006).

¶11 Rickert is the first Supreme Court case addressing state and
local taxation of permanent improvements on land held in trust by the
United States. 188 U.S. at 432. In that case, two tribal members owned
improvements that were built on allotted land held in trust. Id. Although
Rickert was decided before Congress enacted § 5108, it established that a
state may not tax land held in trust by the United States and that “[e]very
reason that can be urged to show that the land was not subject to local
taxation applies to the assessment and taxation of the permanent
improvements” on such land. Id. at 437-38, 442.

¶12 Congress enacted § 5108 in 1934 to codify Rickert’s holding.
See 25 U.S.C. § 5108; Club One Casino, Inc. v. United States Dep’t of the Interior,

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328 F. Supp. 3d 1033, 1045 (E.D. Cal. 2018) (“Under Ninth Circuit authority,
this Court should treat land placed in trust for a tribe pursuant to [§ 5108]
. . . in the same manner as land held in trust for tribes prior to enactment of
the [Indian Reorganization Act] in 1934.”), aff’d sub nom. Club One Casino,
Inc. v. Bernhardt, 959 F.3d 1142 (9th Cir. 2020), cert. pending (Dec. 23, 2020).

¶13 Mescalero then addressed whether New Mexico could impose
a use tax on permanent improvements owned by an Indian entity on trust
land. 411 U.S. at 146. Applying § 5108, the Supreme Court held that the
improvements, being permanently attached to the land, were “certainly . . .
immune from the State’s ad valorem property tax” because “use of
permanent improvements upon land is so intimately connected with use of
the land itself that an explicit provision relieving the latter of state tax
burdens must be construed to encompass an exemption for the former.” Id.
at 158.

¶14 In Chehalis, the Ninth Circuit built upon Rickert and Mescalero.
724 F.3d at 1155-56. The tribe in question was not the sole owner of the
improvements, but the court held § 5108 applies to all permanent
improvements on trust land, regardless of whether they are tribal-owned.
Id. at 1157, 1159. The court also held that federal law governs whether the
property at issue is a permanent improvement subject to § 5109. Id. at 1157-
58.

¶15 Finally, two years later, the Eleventh Circuit in Seminole Tribe
of Florida v. Stranburg addressed Florida’s attempt to tax rent that a non-
Indian entity paid to do business on trust land. 799 F.3d at 1326. The court
concluded that § 5108 barred the rental tax because the leasehold was “so
connected to the land that the tax amounted to a tax on the land itself.” Id.
at 1329. The court held in the alternative that, although § 5108 precluded
the tax, it also would be precluded under Bracker. Id. at 1335.

¶16 ADOR argues Rickert, Mescalero, and Chehalis are inapplicable
to this case because the permanent improvements in those cases were
owned by Indians, while Taxpayer is a non-Indian entity. See Rickert, 188
U.S. at 433; Mescalero, 411 U.S. at 146; Chehalis, 724 F.3d at 1154. Contrary
to ADOR’s contention, the cited cases do not hold that the exemption
applies only to Indian-owned improvements. See Rickert, 188 U.S. at 442-
43; Mescalero, 411 U.S at 158; Chehalis, 724 F.3d at 1159. Indeed, as noted,
Chehalis expressly held that § 5108 categorically bars a state tax on
permanent improvements on trust land regardless of whether those
improvements are owned by Indians.

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¶17 As Stranburg explained at length, § 5108 forecloses taxes on
“the bundle of privileges that make up property or ownership of property.”
799 F.3d at 1330 (quoting Mescalero, 411 U.S. at 157). The court reasoned
that the rental tax was effectively a tax on the tribal land subject to the lease
because “[t]he ability to lease property is a fundamental privilege of
property ownership.” 799 F.3d at 1330. Further, viewed from the other side
of the lease transaction, the rent the lessee paid to the tribe secured its
“possessory interest in the land for the duration of the lease.” Id. at 1331
(stating that “payment under a lease is intimately and indistinguishably
connected to the leasing of the land itself”). It did not matter that the lessee
that paid the tax was a non-Indian entity; the tax was barred because it
amounted to a tax on the tribe’s exercise of one of the privileges of owning
the land. Id. 2

¶18 Section 5108’s text supports the conclusion that permanent
improvements on trust land are exempt regardless of ownership. The
statute states that “lands and rights” taken by the federal government in
trust for a tribe are “exempt from State and local taxation,” and, contrary to
ADOR’s assertions, no statutory language limits that exemption to Indian-
owned improvements. Ownership of permanent improvements on “lands”
taken in trust, accordingly, is immaterial.

¶19 In sum, applying the text of § 5108 and the reasoning of the
several federal cases applying the statute, we conclude that a tax on any
permanent improvements subject to the Lease is effectively a tax on one of
the privileges of the Tribe’s ownership of trust land, and therefore is barred
by § 5108.

¶20 ADOR nevertheless argues that whether the tax is preempted
is controlled not by § 5108 but instead by Bracker, a case that addressed a
challenge to fuel taxes and motor vehicle licensing fees imposed on a non-
Indian company doing business on trust land. But Bracker has nothing to
say about property that is categorically exempt from taxation under § 5108.3

2 ADOR argues the lease in Stranburg did not require the non-Indian tenant
to remove improvements at the end of the lease term. That is beside the
point. To the extent that the improvements at the Facility are permanent,
Stranburg and Chehalis teach that § 5108 bars ADOR from collecting taxes
on those improvements.
3 Neither Bracker nor any of the cases ADOR cites applying Bracker discuss

§ 5108 or address permanent improvements on land held in trust by the
United States. See, e.g., Bracker, 448 U.S. at 137; Oklahoma Tax Comm’n v.

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As Bracker itself explained, there are “two independent but related barriers
to the assertion of state regulatory authority over tribal reservations and
members.” 448 U.S. at 142. The first barrier is preemption by “federal law.”
Id. The second is unlawful infringement “on the right of reservation Indians
to make their own laws and be ruled by them.” Id. (quoting Williams v. Lee,
358 U.S. 217, 220 (1959)). “[E]ither [barrier], standing alone, can be a
sufficient basis for holding state law inapplicable to activity undertaken on
the reservation or by tribal members.” Id. at 143; see Stranburg, 799 F.3d at
1335 (after holding the rental tax violated § 5108, but before addressing
Bracker, noting that “[w]e could, of course, stop our analysis regarding the
Rental Tax at this point”).

¶21 ADOR cites a rule issued by the Bureau of Indian Affairs that
it contends supports its assertion that Bracker applies to permanent
improvements owned by non-Indians on leased land. 25 C.F.R. § 162.017;
see Residential, Business, and Wind and Solar Resource Leases on Indian
Land, 77 Fed. Reg. 72,439 (Dec. 5, 2012). However, neither § 162.017 nor the
Bureau’s explanation of it supports ADOR’s argument. Section 162.017
provides:

(a) Subject only to applicable Federal law, permanent
improvements on the leased land, without regard to
ownership of those improvements, are not subject to any fee,
tax, assessment, levy, or other charge imposed by any State or
political subdivision of a State. Improvements may be subject
to taxation by the Indian tribe with jurisdiction.

(b) Subject only to applicable Federal law, activities under a lease
conducted on the leased premises are not subject to any fee,
tax, assessment, levy, or other charge (e.g., business use,
privilege, public utility, excise, gross revenue taxes) imposed
by any State or political subdivision of a State. Activities may
be subject to taxation by the Indian tribe with jurisdiction.

(c) Subject only to applicable Federal law, the leasehold or
possessory interest is not subject to any fee, tax, assessment,
levy, or other charge imposed by any State or political

Chickasaw Nation, 515 U.S. 450, 457-58 (1995) (motor fuels excise tax); Cotton
Petroleum Corp. v. New Mexico, 490 U.S. 163, 187-89 (1989) (severance tax on
the production of oil and gas).

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subdivision of a State. Leasehold or possessory interests may
be subject to taxation by the Indian tribe with jurisdiction.

(Emphasis added.)

¶22 ADOR contends that the “subject only to applicable Federal
law” language refers to Bracker. Although we agree that Bracker constitutes
“federal law,” “federal law” also includes § 5108 and the cases applying
that statute, including Rickert, Mescalero, Chehalis, and Stranburg.

¶23 The rest of the regulation’s language also supports our
interpretation. The regulation unambiguously says, “permanent
improvements on the leased land, without regard to ownership of those
improvements, are not subject to any fee, tax, assessment, levy, or other
charge imposed by any State or political subdivision of a State.” 25 C.F.R.
§ 162.017(a). Because federal law—including Rickert, Mescalero, Chehalis,
and Stranburg—does not conflict with this language, the regulation’s
language supports our interpretation of § 5108. The Bureau of Indian
Affairs’s explanation of the rule also supports our interpretation of
§ 162.017(a). See 77 Fed. Reg. at 72,448 (stating that because permanent
improvements are “affixed to the land,” “a property tax on the
improvements burdens the land, particularly if a State or local government
were to attempt to place a lien on the improvement,” and “State and local
taxation of improvements undermine Federal and tribal regulation of
improvements”).

¶24 Because we have concluded that § 5108 categorically exempts
any permanent improvements subject to the Lease, we need not determine
whether taxes imposed on those permanent improvements also would be
barred under a Bracker analysis. We next examine whether the tax court
erred by ruling that the entirety of the Facility is personal property, not
permanent improvements to which § 5108 would apply.

B. Whether the tax court erred by ruling the entirety of the
improvements are non-permanent and not subject to 25
U.S.C. § 5108.

¶25 Taxpayer argues the tax court erred by concluding without
the benefit of briefing or evidence that the entirety of the Facility is personal
property not subject to § 5108. It contends this ruling violated “the principle
of party presentation.”

¶26 “In our adversary system, in both civil and criminal cases, in
the first instance and on appeal, we follow the principle of party

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presentation.” Greenlaw v. United States, 554 U.S. 237, 243 (2008). “That is,
we rely on the parties to frame the issues for decision and assign to courts
the role of neutral arbiter of matters the parties present.” Id. Although the
principle of party presentation is “supple, not ironclad,” United States v.
Sineneng-Smith, 140 S. Ct. 1575, 1579 (2020), “as a general rule, ‘[o]ur
adversary system is designed around the premise that the parties know
what is best for them, and are responsible for advancing the facts and
arguments entitling them to relief,’” Greenlaw, 554 U.S. at 244 (quoting
Castro v. United States, 540 U.S. 375, 386 (2003) (Scalia, J., concurring in part
and concurring in judgment)). Although violation of this principle does not
constitute reversible error, the rationale behind the principle is particularly
applicable here. See Sineneng-Smith, 140 S. Ct. at 1579, 1581 (“[A] court is
not hidebound by the precise arguments of counsel.”).

¶27 During the second round of summary judgment briefing, the
parties agreed that the Facility contained both personal property and
permanent improvements. The tax court nevertheless concluded the
Facility was entirely personal property, based upon the Lease provision
that requires Taxpayer to remove all above-ground improvements at the
end of the term. As the court reasoned, “[i]f [Taxpayer] retain[ed] the right
to remove an improvement, that improvement is by definition not a
permanent improvement.” In making this ruling, however, the tax court
disregarded the principle that federal law, not state law, determines
whether specific property is a permanent improvement exempt from
taxation under § 5108. See Drye v. United States, 528 U.S. 49, 52 (1999)
(holding that what constitutes “property [and] rights to property” for
purposes of a federal tax statute is determined by federal law, not state law);
Chehalis, 724 F.3d at 1158 (stating “it is irrelevant whether permanent
improvements constitute personal property under [state] law”). Under
federal tax law, whether an asset is a permanent improvement or personal
property turns on six factors set out in Whiteco Indus., Inc. v. Comm’r, 65 T.C.
664 (1975). See PPL Corp. v. Comm’r, 135 T.C. 176, 193 (2010); see also
Trentadue v. Comm’r, 128 T.C. 91, 99 (2007).

¶28 The Whiteco factors primarily focus on “the permanence of
depreciable property and the damage caused to it or to realty upon removal
of the depreciable property.” Trentadue, 128 T.C. at 99. The factors are: (1)
“Is the property capable of being moved, and has it in fact been moved?”;
(2) “Is the property designed or constructed to remain permanently in
place?”; (3) “Are there circumstances which tend to show the expected or
intended length of affixation, i.e., are there circumstances which show that
the property may or will have to be moved?”; (4) “How substantial a job is
removal of the property and how time-consuming is it? Is it ‘readily

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removable’?”; (5) “How much damage will the property sustain upon its
removal?”; and (6) “What is the manner of affixation of the property to the
land?” Whiteco, 65 T.C. at 672-73.

¶29 Under Whiteco, although the existence of a contract requiring
removal of the property is relevant, it is not determinative. See id.
(considering contract term under factors (2) and (3)). The tax court
accordingly erred by concluding the Facility was “by definition” not a
permanent structure without conducting a Whiteco analysis.

CONCLUSION

¶30 Because we conclude that 25 U.S.C. § 5108 establishes a
categorical exemption for permanent improvements on Indian land held in
trust by the United States, and that the tax court erred by concluding the
Facility was entirely personal property without conducting the proper
analysis, we vacate the court’s grant of summary judgment to ADOR. We
remand this case to the tax court to conduct a Whiteco analysis to determine
which, if any, of the assets that make up the Facility are permanent
improvements that therefore are exempt from taxation under § 5108. The
court then should consider whether property taxes on the assets that are not
permanent improvements are preempted under Bracker. See Mashantucket
Pequot Tribe v. Town of Ledyard, 722 F.3d 457, 459-60 (2nd Cir. 2013)
(applying Bracker analysis to state personal property tax).

AMY M. WOOD • Clerk of the Court
FILED: AA

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