                          NOTICE: NOT FOR PUBLICATION.
   UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION DOES NOT CREATE
          LEGAL PRECEDENT AND MAY NOT BE CITED EXCEPT AS AUTHORIZED.




                                    IN THE
             ARIZONA COURT OF APPEALS
                                DIVISION ONE


            KLP ENTERPRISES, INC., an Arizona corporation,
                        Plaintiff/Appellant,

                                        v.

                ARIZONA DEPARTMENT OF REVENUE,
                Transaction Privilege and Use Tax Section,
                            Defendant/Appellee.

                             No. 1 CA-TX 13-0003
                              FILED 10-16-2014


           Appeal from the Superior Court in Maricopa County
                          No. TX2011-000427
                   The Honorable Dean M. Fink, Judge

                                  AFFIRMED


                                   COUNSEL

Jennings Strouss & Salmon, PLC, Phoenix
By Wayne A. Smith, Eric D. Gere, Ryan Womack
Counsel for Plaintiff/Appellant

Arizona Attorney General’s Office, Phoenix
By Scot G. Teasdale
Counsel for Defendant/Appellee
         KLP ENTERPRISES v. ARIZONA DEPT. OF REVENUE
                      Decision of the Court



                      MEMORANDUM DECISION

Presiding Judge Patricia A. Orozco delivered the decision of the Court, in
which Judge Randall M. Howe and Judge Maurice Portley joined.


O R O Z C O, Judge:

¶1             KLP Enterprises, Inc. (KLP) appeals a tax court judgment
finding it liable to pay the transaction privilege tax (TPT) under Arizona’s
prime contracting classification. The judgment held KLP liable to the State
for $35,981.66 plus interest. Because we find that KLP performed taxable
activities as a prime contractor under Arizona Revised Statutes (A.R.S.)
section 42-5075 (West 2014),1 we affirm summary judgment in favor of the
Arizona Department of Revenue (the Department) and award the
Department its taxable costs.

                FACTS AND PROCEDURAL HISTORY

¶2             KLP is an Arizona corporation licensed with the Arizona
Registrar of Contractors. KLP owns and operates earth moving equipment,
tractors, disks, laser land levelers, and various other equipment used when
contracting with farmers to perform various services including: removing
an obsolete orchard, laser leveling fields, excavating dirt, installing and
repairing dirt berms,2 disking fields, rebuilding or reshaping field borders,
and removing soil from irrigation ditches. KLP did not charge its customers
a tax for providing these services.

¶3           The Department audited KLP for the period September 2005
through July 2009 and subsequently assessed a prime contracting TPT on a
variety of KLP’s services performed during that time period. Determining
that KLP acted as a contractor and that the prime TPT classification made
taxable KLP’s receipts for land clearing, leveling, and building roads and
berms, the Department levied the tax under A.R.S. § 42-5075. KLP filed an


1     We cite the current version of applicable statutes when no revisions
material to this decision have since occurred.

2     A berm may be described as “a small hill or wall of dirt or sand.” See
Merriam-Webster’s Collegiate Dictionary 115 (11th ed. 2012).



                                     2
          KLP ENTERPRISES v. ARIZONA DEPT. OF REVENUE
                       Decision of the Court

administrative protest and participated in a hearing before the Office of
Administrative Hearings in March 2011. The administrative law judge
(ALJ) found that the prime contracting tax of A.R.S. § 42-5075 applied to
KLP’s services and affirmed the tax assessment.

¶4            KLP appealed to the tax court and argued that its “activities
[were] not subject to the prime contracting tax set forth in A.R.S. § 42-5075.”
The tax court granted summary judgment to the Department, and affirmed
the taxes, penalties, and interest assessment against KLP in the amount of
$35,981.66. The tax court also granted the Department their taxable costs.

¶5             KLP argued both to the ALJ and the tax court that Arizona
Administrative Code (A.A.C.) R15-5-606 (A.A.C. R15-5-606 or the
regulation), which excludes services from the prime contracting tax when
those services directly relate to crop production, exempted its activities
from the prime contracting tax. The tax court rejected the argument and
reasoned that to the extent A.A.C. R15-5-606(3) conflicts with A.R.S. § 42-
5075.J, the statute prevails over the earlier-enacted regulation. Citing § 42-
5075.J, the tax court held that several of KLP’s activities—grading or
leveling ground, felling trees and removing stumps, and building or
modifying irrigation berms—were at issue and explicitly fell within the
statute’s defined “landscaping” activities, which are “taxed accordingly
regardless of its purpose.” The tax court also held that demolishing a
former citrus crop was “not directly related” to the production of crops
because there “is no difference between removing an exhausted citrus
orchard to plant crops and removing a building to plant crops; that the
former once produced fruit does not transform its removal into ‘crop
rotation.’” The tax court noted that disking was the only service KLP
provided that would have warranted exclusion from the tax under A.A.C.
R15-5-606, but because KLP’s invoice did not specify between the amounts
charged for disking and the taxable services, KLP could not claim any
exclusions.

¶6            KLP timely appealed the tax court’s decision. We have
jurisdiction pursuant to Article 6, Section 9, of the Arizona Constitution,
and A.R.S. §§ 12-120.21.A.1 (West 2014) and -2101.A.1 (West 2014).

                                DISCUSSION

¶7            We review de novo the tax court’s summary judgment ruling.
Wilderness World, Inc. v. Dep’t of Revenue State of Ariz., 182 Ariz. 196, 198, 895
P.2d 108, 110 (1995). We also review de novo “the tax court’s construction
of statutes and findings that combine facts and law.” Ariz. Dep’t of Revenue



                                        3
          KLP ENTERPRISES v. ARIZONA DEPT. OF REVENUE
                       Decision of the Court

v. Ormond Builders, Inc., 216 Ariz. 379, 383, ¶ 15, 166 P.3d 934, 938 (App.
2007).

I.     “Prime Contracting” and “Landscaping Activities”

¶8             “Arizona imposes a [TPT] on a prime contractor’s gross
income derived from the business of prime contracting.” See Ormond
Builders, 216 Ariz. at 383, ¶ 16, 166 P.3d at 938 (citing A.R.S. §§ 42-5008
(2006), -5010, -5075 (Supp. 2006)) (internal quotation marks omitted). TPTs
are imposed on vendors for the privilege of conducting business in Arizona.
See H.R. Bill Summary (May 9, 2013), [H.B. 2535, 51st Leg. 1st Reg. Sess. (Ariz.
2013)] “Business activities subject to TPT include but are not limited to
prime contracting and retail sales.” Id. On appeal, KLP argues that it did
not engage in prime contracting because its activities fall outside the scope
of the TPT and therefore the trial court erred in ruling that its services were
taxable under A.R.S. § 42-5075 as “prime contracting.” We disagree.

¶9               For the purposes of the statute, “prime contracting” means
“engaging in business as a prime contractor.” A.R.S. § 42-5075.P.7. A
“prime contractor” is a contractor “who supervises, performs or
coordinates the modification of any . . . road, . . . excavation, . . . or other
. . . project, development or improvement . . . and who is responsible for the
completion of the contract.” Id. § 42-5075.P.8. “The gross proceeds of sales
or gross income derived from landscaping activities are subject to tax under
this section.” Id. § 42-5075.J. Landscaping activities include: “installing
lawns, grading or leveling ground, installing gravel or boulders, planting trees
and other plants, felling trees, removing or mulching tree stumps, removing
other imbedded plants, building or modifying irrigation berms, repairing
sprinkler or watering systems, installing railroad ties and installing
underground sprinkler or watering systems.” Id. (emphasis added).

¶10           From this record, we conclude that many of KLP’s services
provided on the invoices were, in fact, activities enumerated in the statute.
When construing a tax statute, we give words their “plain and ordinary
meaning.” Wilderness World, Inc., 182 Ariz. at 198, 895 P.2d at 110 (internal
quotation marks omitted). To make a service taxable, the statute neither
requires “landscaping activities” for the property’s beautification, nor does
it exempt such activities when completed for agricultural purposes.
Despite KLP’s assertion that its activities fell outside the TPT’s scope,
accepting KLP’s proffered interpretation would result in carving out a
specific exception for any landscaping activities on farmland that could
possibly relate to the production of crops. We conclude the statute’s plain
language does not support such an interpretation, and by construing the


                                       4
         KLP ENTERPRISES v. ARIZONA DEPT. OF REVENUE
                      Decision of the Court

statute’s words by their plain and ordinary meaning, KLP engaged in the
business of a prime contractor when it supervised, performed, and
coordinated the modification of its farming customers’ roads and excavated
their fields. See A.R.S. § 42-5075.P.8. Additionally, KLP’s services of laser
leveling the ground, removing the orchard (felling trees and removing tree
stumps), and building or modifying irrigation berms are all taxable as
landscaping activities under A.R.S. § 42-5075.J. We agree with the tax court
that disking is not taxable under the statute, but because the invoices are
not itemized, it is impossible to identify the disking portion of the invoice
that would be tax exempt. The tax court, therefore, did not err in
characterizing these activities as taxable landscaping activities.

II.    Effect of Arizona Administrative Code (A.A.C.) R15-5-6063

¶11           KLP nonetheless asserts that work performed on improved
farm land for purposes of agricultural production is exempt from the prime
contracting tax. Citing A.A.C. R15-5-606, KLP argues that its services were
not taxable because they were performed for the purpose of agricultural
production. We disagree with KLP’s interpretation of A.A.C. R15-5-606 as
the regulation relates to A.R.S. § 42-5075.




3       During the relevant time period, A.A.C. R15-5-606 stated:
R15-5-606. Land Clearing and Well Drilling
....
E. Agricultural production on improved farm lands is not taxable.
1. Agricultural production includes the following activities:
a. Cultivating,
b. Disking,
c. Planting,
d. Plowing,
e. Seeding, and
f. Any other activity that directly relates to the production of crops on
improved farm lands.
2. Agricultural production does not include the following activities:
a. Installation or repair of drainage or irrigation delivery systems,
b. Construction or repair of farm buildings or structures, or
c. Any other activity which is not directly related to the production of
crops on improved farm land.




                                      5
         KLP ENTERPRISES v. ARIZONA DEPT. OF REVENUE
                      Decision of the Court

¶12           The now-expired A.A.C. R15-5-6064 excluded activities from
the prime contracting tax that were “directly relate[d] to the production of
crops on improved farm land.” Excluded activities included cultivating,
disking, planting, plowing, and seeding. However, activities “not directly
related” to the production of crops, such as the installation and repair of
drainage or irrigation delivery systems and work on farm buildings and
structures, remained taxable under the TPT.

¶13             The Department enacted the regulation in 1998 and the
legislature defined taxable landscaping activities at § 42-5075 in 2002.
Compare A.A.C. R15-5-606 with 2002 Ariz. Sess. Laws, ch. 307, § 1 (2nd Reg.
Sess.).5 Although A.A.C. R15-5-606 might have created exceptions to
normally-taxable landscaping activities, any such exception would be
preempted by A.R.S. § 42-5075.J to the extent that the regulation conflicted
with the statute. See Sharpe v. Arizona Health Care Cost Containment System,
220 Ariz. 488, 499, ¶ 31, 207 P.3d 741, 752 (App. 2009) (holding a regulation
invalid that conflicted with an applicable statute); Ferguson v. Ariz. Dep’t of
Econ. Sec., 122 Ariz. 290, 292, 594 P.2d 544, 546 (App. 1979) (concluding that
a regulation “should not be inconsistent with or contrary to the provisions
of a statute . . . it seeks to effectuate”). Accordingly, the tax court did not
err in ruling that A.A.C. R15-5-606 does not exempt KLP’s activities on
improved farm land from the TPT.

III.   Estoppel

¶14          Finally, KLP argues that the Department should be estopped
from obtaining an assessment against KLP. KLP asserts that the
Department, as the proponent of the regulations, must exercise its
rulemaking authority and correct any regulations that are inconsistent with
statutes. KLP further contends that it would not have needed to pay any
penalties had the regulation not conflicted with the statutes.

¶15          Although KLP did not directly make the argument at either
the administrative or tax court hearings, KLP made a good faith effort to


4      The regulation was amended effective as of December 11, 1998, but
expired under A.R.S. § 41-1056.E, effective September 28, 2011. Thus, the
regulation was in effect for the time period reviewed in this case.

5       The definition of landscaping activities was originally codified at
A.R.S. § 42-5075.I in 2002. The definition is now codified at A.R.S. § 42-
5075.J.



                                      6
         KLP ENTERPRISES v. ARIZONA DEPT. OF REVENUE
                      Decision of the Court

raise the issue by moving to supplement its summary judgment filings. We
therefore address the issue. “Estoppel sounds in equity and will therefore
not apply to the detriment of the public interest.” Valencia Energy Co. v.
Ariz. Dep’t of Revenue, 191 Ariz. 565, 576, ¶ 32, 959 P.2d 1256, 1267 (1998).
Taxing authorities are only subject to a taxpayer’s equitable estoppel claim
in very limited circumstances and when four required elements are present.
Ariz. Joint Venture v. Ariz. Dep’t of Revenue, 205 Ariz. 50, 53, ¶ 16, 66 P.3d
771, 774 (App. 2002) (citing Valencia Energy Co., 191 Ariz. at 576–77, ¶¶ 35–
38, 959 P.2d at 1267–68). The four required elements for estoppel are: (1)
whether a representative of the Department with authority to act in the area
under consideration engaged in an affirmative act inconsistent with the
later position that the taxpayer seeks to preclude the Department from
asserting; (2) whether the affected taxpayer actually relied on the
Department’s action and whether this reliance was reasonable under the
circumstances; (3) whether the Department’s prior action caused the
affected taxpayer to change positions in a way not compelled by law and to
sustain substantial detriment upon the Department’s later repudiation of
the action; and (4) whether the proposed application of equitable estoppel
against the Department unduly damages the public interest or substantially
and adversely affects the exercise of governmental powers. Id. at 53–54, ¶¶
16-18, 66 P.3d at 774–75.

¶16            In this case, KLP cannot establish any of the four elements.
First, KLP failed to demonstrate that the Department made an affirmative
act inconsistent with the later position that KLP seeks to preclude the
Department from asserting. KLP merely argues that the “Department took
no action to amend or repeal A.A.C. R15-5-606 despite knowing that
taxpayers would rely on it to their detriment.” The Department’s failure to
act is not an affirmative act and therefore cannot establish the first element.
Second, KLP failed to demonstrate that relying on the regulation was
reasonable under the circumstances. Relying on the regulation was not
reasonable simply because KLP may not have been not aware that the
statute was enacted after the regulation.




                                      7
         KLP ENTERPRISES v. ARIZONA DEPT. OF REVENUE
                      Decision of the Court

¶17            Third, KLP failed to establish that the Department’s action
caused KLP to change its position. For example, there is no indication that
KLP would have avoided agricultural work if it knew that such work was
taxed under A.R.S. § 42-5057.J. Finally, failing to assess these taxes could
cause damage to the public interest. “[O]ur tax system relies primarily on
the good faith of citizens to [self-report.]” Valencia Energy Co., 191 Ariz. at
576, ¶ 34, 959 P.2d at 1267. The public is harmed when businesses do not
self-report or are incorrectly self-reporting.

¶18           Therefore, under these facts, KLP has not established an
equitable estoppel claim against the Department, and accordingly, the
Department correctly assessed penalties for KLP’s misplaced reliance on
the regulation.

                              CONCLUSION

¶19           For the foregoing reasons, we affirm the judgment of the tax
court.




                                    :gsh




                                       8
