Opinion ID: 2561998
Heading Depth: 2
Heading Rank: 3

Heading: under our three-part inquiry, the privilege tax statute complies with the uniform operation of laws provision of the utah constitution

Text: ¶ 15 In analyzing a legislative enactment under article I, section 24, we must make three determinations: (1) whether the classification is reasonable; (2) whether the objective of the legislative action is legitimate; and (3) whether there is a reasonable relationship between the legislative purpose and the classification. Blue Cross & Blue Shield of Utah v. State, 779 P.2d 634, 637 (Utah 1989); see also Anderson v. Provo City Corp., 2005 UT 5, ¶ 18, 108 P.3d 701; Gallivan v. Walker, 2002 UT 89, ¶ 43, 54 P.3d 1069. While the analytical model used to determine if the uniform laws provision is met is the same in all inquiries, we give broad deference to legislative enactments in the area of taxes and purely economic regulation. Blue Cross & Blue Shield, 779 P.2d at 637; Mountain Fuel Supply Co. v. Salt Lake City Corp., 752 P.2d 884, 888 (Utah 1988). Further, we strongly presume tax statutes are constitutional. Kennecott Corp. v. Utah State Tax Comm'n, 858 P.2d 1381, 1384 (Utah 1993). ¶ 16 ABCO argues that it is unreasonable to include lessees of exempt property in the same class as fee simple owners for the purposes of the privilege tax, and thus the uniform operation of laws provision is violated by the legislature's failure to treat lessees as a differently situated class. We are not persuaded. Utah Code section 59-4-101, which includes lessees of exempt property in the same class as fee simple owners of exempt property, is not unreasonable or arbitrary, nor does it lack a reasonable relationship to the purpose of the taxing scheme.
¶ 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.
¶ 24 Even if some distinctions could be made among groups within a classification, under the second step we may still affirm the validity of the statute where on the whole, after considering the burdens it imposed on those taxed, it appear[s] to be a reasonable attempt to achieve the legitimate government ends. Blue Cross & Blue Shield, 779 P.2d at 644 (discussing this court's affirmation of a classification scheme in Mountain Fuel Supply that may [a]t the margins . . . not have stood the test of its justifications). ¶ 25 The legislative objective of section 59-4-101 is to close any gaps in the tax laws. This objective was discussed at length and validated in Thiokol Chemical Corp. v. Peterson: It is evident that the 1959 Legislature, by the enactment of Section 59-13-73, [later renumbered as section 59-4-101,] intended to close any gaps in the tax laws by imposing a tax on any property possessed or used in connection with a business for profit which was otherwise exempt from taxation. It closely resembles the Michigan statute of similar purpose, which was recently held constitutional in a series of U.S. Supreme Court cases. They are grounded on the proposition that a private contractor's right to use property in a business for profit may be made subject to a nondiscriminatory tax based on its value, even though title to the property may be in the United States; and that the burden of the tax may ultimately fall on it. 15 Utah 2d 355, 393 P.2d 391, 393-94 (1964) (footnotes omitted) (emphasis added). In Mountain Fuel Supply, we upheld the legitimacy of a similar statute, which raised revenue and equalized the tax burden in a more fair and uniform manner. 752 P.2d at 890. ABCO contends that under our reasoning in Beaver County v. WilTel, Inc., 2000 UT 29, ¶ 34, 995 P.2d 602, the legitimacy of the legislative purpose to close any gaps in the tax law is discounted. But that reliance is misplaced. In WilTel, we held that there was no `gap' to close because the intangible property at issue was subject to an entirely different tax scheme and thus had not escaped taxation. Id. ¶ 26 ABCO's position would lead to a gap in the tax scheme because ABCO is actually petitioning to be taxed for a lesser amount. This lesser amount would create a gap in the tax scheme by allowing lessees who use exempt property in connection with a for-profit business to pay less tax than an owner of nonexempt property. The full value of the exempt property would thus escape taxation. Consequently, the gap would establish an incentive for an owner of exempt property to lease the property, and thus lower tax liability and for businesses to rent from exempt over nonexempt property owners. Indeed, such a gap would create a potential competitive disadvantage for businesses that lease from private property owners. These are the sort of gaps that the legislature sought to avoid. Thus, the legislative purpose for the statute is legitimate.
¶ 27 The legislative purpose of the statute is to close any gaps in the tax laws by imposing a tax on any property possessed or used in connection with a business for profit which was otherwise exempt from taxation. Thiokol Chem. Corp., 393 P.2d at 393. This allows Weber County to raise revenue for governmental expenses, which we have held is a legitimate governmental purpose. Blue Cross & Blue Shield, 779 P.2d at 640. Further, so long as there is no unreasonable burden on the affected parties, Weber County is not to be denied the . . . effective means of raising . . . revenue[ ]. Mountain Fuel Supply, 752 P.2d at 891. ¶ 28 Here, it is not unreasonable to impose the pro rata share of raising governmental revenue upon a lessee of exempt property, especially where the property would otherwise escape taxation. As discussed above, such taxes are able to be negotiated between a lessee and owner and do not impose a substantial competitive burden upon a lessee of exempt property as opposed to a lessee of nonexempt property. Therefore, the means used to achieve the legitimate governmental purpose are reasonable.