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Ducey orders tax agency not to collect taxes despite veto

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In a move that has raised legal questions, Gov. Doug Ducey is ordering the Department of Revenue not to collect hundreds of thousands of dollars in sales taxes against certain types of businesses that the agency – and even a court – says are owed to the state.

On Tuesday, the governor vetoed legislation sought by the affected firms to wipe out the levy.

Ducey, in his message to lawmakers, said his concern was not the state would forego future revenues.  Instead, he objected to the fact that lawmakers wanted to retroactively kill the larger of the tax bills back to 1998, essentially meaning the taxes owed that far back would be uncollectable. And there was no estimate of how much that could cost the state.

But Ducey did more than veto the bill. He directed the Department of Revenue “stay any future and ongoing enforcement efforts” to tax either kind of sale until the Legislature comes back to the Capitol next year and gets a chance to fix the bill.

And Ducey insisted that, as governor, he has that power.

He justified the suspension based on his contention that the law making the specific transactions taxable is not that clear. Yet Ducey did not dispute that the Department of Revenue’s own auditors have reached the opposite conclusion and that the taxes are owed.

Attorney Tim Hogan and state Sen. Steve Pierce, R-Prescott, who voted against the bill, both questioned the governor’s legal power to do what he did. But Ducey’s legal counsel backed his boss’ action.

“The governor is exercising his authority under the constitution to ‘stand down’ while the judicial process works and while the legislative process works,” said Michael Liburdi.

That, Liburdi said, stems from the constitutional mandate to “take care that the laws be faithfully executed.” He said it was the clear intent of the Legislature that the transactions at issue here not be taxed.

And Liburdi said it’s irrelevant that there is no law to be executed because Ducey vetoed the bill.

“Constitutions are drafted broadly to give government some flexibility and to give some flexibility when it comes to individual rights,” the attorney sad.

The legislation deals with two separate issues.

One involves the conclusion by the Department of Revenue that the sale of aircraft for crop dusting is subject to the state sales tax.

Lobbyist Robert Shuler representing crop dusters told lawmakers his clients never had been charged taxes – at least not until several years ago when state revenue officials concluded that was not consistent with the wording of the law.

The other stems from a decision by the Department of Revenue that Papillon Helicopters and related companies which offer tours of the Grand Canyon owed money for the purchase and use of equipment.

In that case, the companies filed legal appeals. But the state Court of Appeals ruled the firms owed about $700,000 for a four-year period audited by the Department of Revenue ending in 2006. That ruling, unless overturned, also means the firm owes taxes for every year since, a figure that could top $1 million.

That led to their interests also seeking legislative relief.

HB 2358 was designed to take care of both problems.

It changed the law, retroactive to 1985, to say that crop dusters are exempt. And it had a similar provision, retroactive to 1998, to not only wipe out the helicopter company’s tax liability but also essentially overturn the Court of Appeals ruling.

Ducey defended his directive.

“This is a bill that we liked its intention,” he said.

“There was a concern in the language that we thought the department was not getting right,” the governor continued. “And we’re going to fix it in legislation.”

That intent to fix it next year, said Liburdi, gives Ducey the power to tell the Department of Revenue not to try to collect a tax that its own staff has concluded is owed.

“I don’t know where he gets that authority,” said Tim Hogan, attorney with the Arizona Center for Law in the Public Interest.

Pierce had the same assessment.

The senator said he voted against the measure because it provided a special tax break for one kind of company but not others. The governor’s directive came as news to him.

“If they actually said ‘We’re not going to enforce the law,’ well, that’s stupid,” Pierce said. “I don’t know how he can do that.”

Rep. Bob Robson, R-Chandler also voted against the measure. But Robson said the decision to suspend collection of the tax did not surprise him.

“There’s a ‘time out’ rule that we sort of apply down there,” he said, particularly in cases like this where there appear to be the votes to alter the law at some point in the future. “If it’s an issue that need to be resolved, why go through the gyrations (of collecting the tax) if you’re going to return that money anyhow.”

Robson, however, did not cite any specific legal authority for such a move.

Hogan said the issue goes beyond the governor assuming authority to decide not to collect a tax.

He cited that $700,000 judgment the Department of Revenue already has against the helicopter firm and its related companies and the Court of Appeals decision affirming that ruling.

“If you forego collection, that’s a gift,” Hogan said. And the Arizona Constitution specifically prohibits the state from giving away anything that belongs to it.

Liburdi said, though, that may depend on whether the Supreme Court rules in the interim on the appeal by the helicopter company.

Ducey’s defense of his edict came as he launched a multi-city bus tour with Republican legislative leaders to tout what he said are the accomplishments of his first 100 days in office. That includes the 324 bills he signed into law and the 20 he vetoed, including this one.

2 comments

  1. Easy folks. The Governor is new. It takes a while to learn that, in politics, you don’t walk on water, you gotta swim.

    Ted Downing

  2. So the Governor can’t say, “don’t collect that $700,000 because the law is going to change next year” because that violates the gift clause. But it would have been okay if he signed the bill this year, making the transactions exempt retroactively and wiping out the same $700,000 tax bill for these guys? What did I miss?

    And isn’t this exactly the same thing the legislature does every year when they pass one or two TPT exemption bills retroactive to some specific day in 2004 or whenever, which just happens to be the same day that somebody’s audit period started? I don’t get why that process is not also a violation of the gift clause. A company that owes a big bill comes down to the legislature and asks for an exemption, and then the legislature and governor give it to them retroactively and they don’t owe the big bill anymore. That sure feels like a gift.

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