Menu

AZAPP Blog Your resource for news and analysis of cases in Arizona's appellate courts.

AZAPP Blog header image

Watts v. ADOR - 5/26/2009

Arizona Court of Appeals Division One Holds That Purchases of Water Trucks and Water Wagons for Lease Do Not Qualify for Pollution Control Income Tax Credit.


Taxpayers filed refund claims under A.R.S. §§ 43-1081 and -1170, which provide income tax credits for expenditures “to purchase real or personal property that is used in the taxpayer’s trade or business in this state to control or prevent pollution.”  Taxpayers claimed they were entitled to the credit for purchases of water trucks and water wagons that their company leased to others.  The equipment, although suitable for dust control on construction sites, also was leased for other purposes. 

The state tax department denied the refund claims on the grounds that the taxpayers failed to use the equipment in their business to control or prevent pollution, and because the equipment was attached to a motor vehicle.  Taxpayers appealed and the cases were consolidated and transferred to the Arizona Tax Court.  On cross-motions for summary judgment, the Tax Court ruled in favor of the State and entered judgment.  Taxpayers appealed.

The Court of Appeals affirmed the Tax Court judgment.  Construing the tax credit statutes strictly against the credits, the Court found the refund claims precluded by the plain language of the statutes.  The credit did not apply because the taxpayers did not use the equipment in their trade or business to prevent pollution, but instead leased the equipment to others, who may or may not use the equipment to prevent or control pollution. 

The Court further found that the Legislature had expressly made retroactive a statutory amendment excluding tax credits for pollution control equipment attached to motor vehicles.  In addition, the legislative history indicated that the amendment was intended to clarify that taxpayers were never entitled to a credit for pollution control equipment attached to a motor vehicle.  Even assuming that the taxpayers’ rights to a refund had accrued prior to filing their refund claims, the rights had not vested prior to the legislative amendment because the taxpayers had not yet filed refund claims.

Presiding Judge Thompson authored the opinion; Judges Kessler and Downie concurred.

Posted On: 7/2/2009