Opinion ID: 2561998
Heading Depth: 3
Heading Rank: 1

Heading: The Privilege Tax Statute Creates a Reasonable Classification

Text: ¶ 17 Broad deference is given to the legislature when assessing the reasonableness of its classifications and their relationship to legitimate legislative purposes. Blue Cross & Blue Shield, 779 P.2d at 637. But classifications and their relationship to legislative purposes must be reasonable and not arbitrary. State v. Merrill, 2005 UT 34, ¶ 34, 114 P.3d 585. To determine whether an imperfect classification is an impermissible classification, we examin[e] . . . the impact of the misclassification. See Blue Cross & Blue Shield, 779 P.2d at 643 (noting that examination of the impact of a classification is not constitutionally required, but can be relevant to determining whether the legislative body has exceeded the bounds of its broad discretion by creating the classification at issue). Among the factors we have used to evaluate a possibly overinclusive tax-related classification, three are relevant here: (1) the choice made by the potentially distinct class to voluntarily join the classification, (2) the extent of the competitive disadvantage caused by the classification, and (3) the effectiveness of the tax in accomplishing the taxing entity's aims. See Amax Magnesium Corp. v. Utah State Tax Comm'n, 796 P.2d 1256, 1261-62 (Utah 1990); Blue Cross & Blue Shield, 779 P.2d at 644-45; Mountain Fuel Supply, 752 P.2d at 891.
¶ 18 A classification may be unreasonable if fundamentally different groups are compelled to be treated similarly under an overinclusive classification. In Lee, we found that the legislature had created an unreasonable and arbitrary classification under the statute of limitations provision of the Medical Malpractice Act because it treat[ed] minors and adults as if they were situated the same under the law. 867 P.2d at 578. The targets of the classification could do nothing to escape their fate. They did not join their statutory classification by choice. They were not volunteers. Merrill, 2005 UT 34, ¶ 38, 114 P.3d 585 (discussing Lee, 867 P.2d at 577). Some of the rationales for finding the classification unreasonable were the historically different rules necessary to protect the legal rights of children, and the fundamental differences between minors and adults with respect to their status in the law. Lee, 867 P.2d at 578-79. ¶ 19 In this case, such fundamental differences do not exist where lessees and fee simple owners are classified similarly for purposes of achieving the goals of a tax statute. Lessees can decline to be so classified by leasing nonexempt property rather than exempt property. In contrast to the minors in Lee, ABCO is a volunteer and could have escaped its fate merely by declining to enter into the property exchange agreement with Ogden City.
¶ 20 ABCO does not suffer from a substantial competitive disadvantage from the classification. In Mountain Fuel Supply, we concluded that a potentially underinclusive taxing scheme at issue did not create a competitive disadvantage for the taxed entity and effectively accomplished the aims of the taxing body. 752 P.2d at 891. There, Mountain Fuel Supply was able to pass on the tax in question to its customers without a large administrative burden and its customers continued to overwhelmingly choose natural gas and electricity over other heating fuel possibilities regardless of a tax added solely to natural gas and electricity. Id. ¶ 21 Here, ABCO argues that as a lessee it cannot use equity value in the property to repair the roofs of the buildings, and therefore it is unable to obtain the highest use of the buildings. We fail to see how this is unlike the differences between lessees and fee simple owners of nonexempt property, where such factors as who must pay taxes and maintain buildings are part of the negotiation of the terms of a lease. That ABCO failed to protect itself in its negotiations of maintenance provisions or tax burdens in its short-term property exchange agreement with Ogden City does not result in a substantial impact or a competitive disadvantage created by the statute. Presumably, other lessees of nonexempt property who failed to negotiate such provisions, or even fee simple owners who were unable to leverage the property for various reasons, would be in the same position as ABCO, regardless of the statute. Therefore, the statutory classification is reasonable.
¶ 22 We have found that a classification reasonably achieves the aims of a taxing entity where it would be too administratively burdensome to collect the tax by creating different classifications or where the classification is a reasonable means to equalize the tax burden generally. See Mountain Fuel Supply, 752 P.2d at 891 (holding that a potentially underinclusive tax classification was reasonable because it would be too large an administrative burden to collect such a tax from small-scale fuel suppliers); Amax Magnesium Corp., 796 P.2d at 1261-62 (finding that the tax scheme was not an effective method to accomplish the aim of equalizing the tax burden among state and county assessments because the valuation method actually aggravated the disparity between tax burdens rather than equalizing it). In the end, we do not require perfection in the area of purely economic regulation and recognize that [l]egislative enactments that are basically economic in nature rarely affect all persons equally. Blue Cross & Blue Shield, 779 P.2d at 644 (citation omitted). ¶ 23 Here, the statute serves to equalize tax burden. Its objective is to close any gaps in the tax laws between those who possess or use exempt property for a profit and those who possess or use nonexempt property for a profit. Great Salt Lake Minerals & Chem. Corp. v. State Tax Comm'n, 573 P.2d 337, 339 (Utah 1977). The privilege taxregardless of whether the taxee is the possessor or lessee of the tax-exempt property used for profiteffectively achieves this purpose with less administrative burden. The privilege tax ensures that exempt property used in connection with a for-profit business is taxed at an equal rate to the same business conducted on nonexempt property.