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Walgreen Arizona Drug Co. v. Arizona Dept. of Revenue, 209 Ariz. 71, 97 P.3d 896, 435 Ariz. Adv. Rep. 78

Facts

Walgreen Arizona Drug Company, a retail drugstore operator, amended its Arizona corporate income tax returns for fiscal years 1988 to 1995 to include the return of investment principal in the denominator of the corporate income tax formula. This amendment aimed to reduce the taxable income attributed to Arizona, leading to refund requests exceeding $1.3 million. The Arizona Department of Revenue denied these requests, prompting the taxpayer to file a complaint, which resulted in cross-motions for summary judgment in the tax court.

Taxpayer amended its Arizona corporate income tax returns for fiscal years ending August 31, 1988 through August 31, 1995. It included the return of principal in the denominator of the corporate income tax formula, which would lead to a smaller amount of taxable income attributed to Arizona.

Issue

Whether the return of investment principal is includable in the sales factor denominator for calculating corporate income tax in Arizona.

Accordingly, this appeal turns on whether 'total sales' in the sales factor denominator includes the return of principal from short-term investments.

Rule

The sales factor denominator includes total sales of the taxpayer everywhere during the tax period, but the definition of 'sales' allows for exceptions based on context.

Thus, we must determine whether the return of principal to Taxpayer is a 'sale' as defined by § 43–1131(5).

Analysis

The court analyzed the statutory definitions and the context of the transactions, concluding that the return of investment principal does not constitute gross receipts. It reasoned that including the return of principal would distort the sales factor by double-counting the same receipts, as the principal was already accounted for as revenue when initially received.

The tax court, agreeing with ADOR, reasoned that the return of investment principal does not qualify as gross receipts for purposes of the sales factor: [D]aily revenue from Walgreen's sales would be considered gross receipts when received. Any excess revenue after payment of debt or other disbursements remains a part of those gross receipts and should be counted as such. However, once that excess revenue is invested in securities or other interest bearing mediums, it loses its characterization as gross receipts and may not be counted a second time as gross receipts simply because the money was withdrawn from an investment in a marketable security or interest bearing account.

Conclusion

The Court of Appeals affirmed the tax court's ruling, holding that the return of investment principal is not includable in the sales factor denominator for Arizona corporate income tax calculations.

For the reasons stated, the judgment of the tax court is affirmed.

Who won?

Arizona Department of Revenue prevailed in the case because the court agreed with its interpretation that the return of investment principal does not qualify as gross receipts for tax purposes.

The Arizona Department of Revenue (ADOR) denied the refund requests. Taxpayer filed a complaint, and ADOR answered.

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