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Kenai Peninsula Borough v. Arndt (5/22/98), 958 P 2d 1101
Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the attention of
the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone
(907) 264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
KENAI PENINSULA BOROUGH, )
) Supreme Court No. S-7776
Petitioner, )
) Superior Court No.
v. ) 3KN-92-406 CI
)
KENNETH ARNDT, ) O P I N I O N
)
Respondent. ) [No. 4989 - May 22, 1998]
______________________________)
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Kenai,
Jonathan H. Link, Judge.
Appearances: Joseph K. Donohue, Preston Gates
& Ellis, Anchorage, and Robert J. Molloy, Molloy & Landry, Kenai,
for Petitioner. No appearance by Respondent.
Before: Compton, Eastaugh, Fabe, and Bryner,
Justices. [Matthews, Chief Justice, not participating.]
BRYNER, Justice.
The Kenai Peninsula Borough sued to collect a full year's
tax on the assessed value of a locally-harbored vessel. The
borough had charged the tax to the registered owner of the vessel
as of its assessment date -- the first day of the tax year -- but
the owner sold the vessel several months after assessment and
refused to pay. The superior court ruled that the Federal
Constitution's Due Process and Commerce Clauses required reduction
of the tax to reflect the vessel's post-assessment sale and its
departure from borough waters. We reverse, holding that the
vessel's tax status became fixed for the full tax year on the date
of its assessment and that the Constitution requires no adjustment
for post-assessment changes.
I. FACTS
In 1987, Kenneth Arndt (Arndt) paid $585,000 to buy the
M/V Krystal Sea, a 134-foot, 187-gross-ton vessel. Arndt
registered the Krystal Sea's home port in Homer, within the Kenai
Peninsula Borough (the KPB or the borough). From November 1989 to
May 1991, the Krystal Sea was under charter to Underwater
Construction, Inc., (UCI) an Anchorage company. Although the
Krystal Sea spent part of its chartered time outside the KPB
waters, it remained registered to Arndt in Homer, worked out of the
Homer harbor part of the time, and was kept in the harbor when not
actively working.
It is undisputed that the Krystal Sea was moored in the
Homer harbor on January 1, 1991, and that it had an established tax
situs in the KPB on that date. The Krystal Sea remained at harbor
through March and worked out of Homer during April and early May.
On May 19, UCI exercised an option to buy the Krystal Sea from
Arndt for $850,000. UCI then took the vessel to Anchorage,
Seattle, and the South Pacific for the remainder of the year.
In February 1991, three months before selling the Krystal
Sea to UCI, Arndt filed a 1991 personal property tax statement with
the KPB identifying himself as the vessel's owner. Arndt added a
handwritten note indicating that he would be selling the vessel; he
requested the borough to send UCI the tax bill. After informing
Arndt that it could not bill UCI without a copy of the documents
transferring title, the borough sent him a notice appraising the
Krystal Sea at $468,000. Soon after selling the Krystal Sea, Arndt
sent a copy of the bill of sale to the KPB and again requested the
borough to send UCI the tax notice. However, the KPB notified
Arndt that he remained responsible for paying the full amount of
the 1991 tax, and in July the KPB sent Arndt a tax bill for
$7,394.40.
Arndt failed to pay the bill. In April 1992 the KPB
filed suit in the district court to collect the delinquent taxes.
In response, Arndt denied owning the Krystal Sea and asserted that
the KPB's efforts to tax him were "unconstitutional and illegal."
Arndt contended that his sale of the vessel to UCI required the
1991 tax to be apportioned. He further claimed, however, that
because the KPB's ordinances contained no express provision
authorizing apportionment, the borough lacked apportionment power.
Arndt thus maintained that he owed the KPB nothing.
The district court rejected Arndt's arguments and entered
summary judgment against him. Arndt appealed to the superior
court, which reversed the district court on constitutional grounds.
Relying on the Due Process Clause, the superior court ruled that,
regardless of where the Krystal Sea was taken after Arndt sold it
in May 1991, the KPB violated the Federal Constitution by holding
Arndt "liable for taxes accrued on property after he had
relinquished all of his ownership interest." Alternatively,
relying on the Commerce Clause, the court ruled that, because the
Krystal Sea "severed its ties to the KPB and the State of Alaska"
in May 1991, the KPB "was without constitutional authority to levy
a tax on [Arndt] or the new owner." After finding that the KPB had
inherent authority to apportion taxes when constitutionally
necessary, the superior court remanded to the district court for
entry of judgment in an amount reduced to reflect the portion of
1991 during which Arndt actually owned the Krystal Sea.
Following the district court's entry of an amended
judgment apportioned in accordance with the superior court's
directive, and after a renewed appeal in which the superior court
affirmed the amended judgment with only minor alterations, the KPB
petitioned this court for a hearing to review the superior court's
rulings. See Alaska R. App. P. 301(b). We granted the petition
and ordered briefing on the merits. [Fn. 1]
II. DISCUSSION
The outer limits of the KPB's power to tax personal
property are defined by the United States Constitution's Due
Process and Commerce Clauses. [Fn. 2] Due process requires a
minimal nexus between the borough and the property it taxes. See
Braniff Airways v. Nebraska State Bd. of Equalization & Assessment,
347 U.S. 590, 599-600 (1954); Gulf Oil Corp. v. State, Dep't of
Revenue, 755 P.2d 372, 383 n.33 (Alaska 1988). "So far as due
process is concerned the only question is whether the tax in
practical operation has relation to opportunities, benefits, or
protection conferred or afforded by the taxing State." Ott v.
Mississippi Valley Barge Line Co., 336 U.S. 169, 174 (1949). See
also Sjong v. State, Dep't of Revenue, 622 P.2d 967, 970 (Alaska
1981) (holding that the due process question turns on "'whether the
state has given anything for which it can ask return'") (quoting
Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444 (1940)).
However, "the Due Process Clause [does not] confine the
domiciliary State's taxing power to such proportion of the value of
the property being taxed as is equal to the fraction of the tax
year which the property spends within the State's borders." See
Central R.R. Co. v. Pennsylvania, 370 U.S. 607, 612 (1962).
Rather, due process only bars taxation of personal property that is
permanently situated outside the taxing jurisdiction. See id.;
Union Refrigerator Transit Co. v. Kentucky, 199 U.S. 194, 202
(1905) (finding that due process is violated by taxation of
property "wholly within the taxing power of another state").
To the limitations imposed by due process, the Commerce
Clause adds only one dimension: "an additional requirement that the
tax not discriminate against interstate or foreign commerce." Gulf
Oil Corp., 755 P.2d at 383 n.33. See also Japan Line, Ltd. v.
County of Los Angeles, 441 U.S. 434, 444-45 (1979). "It is only
multiple taxation of interstate operations that offends the
Commerce Clause." Central R.R. Co., 370 U.S. at 612 (citations and
internal markings omitted). Hence, the Commerce Clause is
triggered only upon an affirmative showing that property taxed by
one jurisdiction has another taxable situs and could be taxed
elsewhere: "[T]he burden is on the taxpayer who contends that some
portion of its total assets are beyond the reach of the taxing
power of its domicile to prove that the same property may be
similarly taxed in another jurisdiction." Id. at 613.
It is undisputed that the Krystal Sea's primary tax situs
was within the KPB when the vessel was assessed on January 1, 1991.
It is also undisputed that Arndt did not prove that the vessel
could be taxed by some other jurisdiction in 1991, the tax year in
question. The superior court nonetheless concluded that due
process required apportionment of the 1991 tax because, after May
19, 1991, Arndt no longer owned the Krystal Sea. The court further
concluded that the Commerce Clause required apportionment because
the vessel's new owner had removed it from the KPB and because
Arndt should not be burdened with proving the Krystal Sea's new tax
situs.
In reaching these conclusions, the superior court relied
on the assumption that Arndt's tax liability for 1991 "accrued"day
by day throughout the year. A review of the KPB's personal
property taxation process, however, reveals this assumption to be
mistaken.
The KPB's taxation process is controlled by a mix of
Alaska and borough law. Under AS 29.45.240(a), the KPB is
empowered to "assess, levy, and collect a property tax . . . by
means of an ordinance." The KPB assessor must "assess property at
its full and true value as of January 1 of the assessment year,"AS
29.45.110(a), and is authorized to "require each person having
ownership or control of or an interest in property to submit a
return . . . based on property values . . . existing on January 1"
of any given tax year. AS 29.45.120(a). Based on the authority
conferred by these statutes, Kenai Peninsula Borough Ordinance
(KPBO) 05.12.120 provides for all personal property within the
borough's limits to be taxed at a rate of "not more than 8 mills on
the assessed valuation."[Fn. 3] Kenai Peninsula Borough
Resolution (KPBR) 77-11 specifies January 1 as the date for
determining the presence of property in the borough: "All personal
property which is located within the Kenai Peninsula Borough on
January 1st of any tax assessment year is subject to the tax if the
property has a tax situs within the borough."[Fn. 4] Pursuant to
AS 29.45.300, "[t]he owner of assessed personal property is
personally liable for the amount of taxes assessed against the
property." This statute is mirrored by KPBO 05.12.120, which
provides that "the owner [of property] shall be liable for payment
of the tax."
These provisions expressly require the value of property
to be set as of the assessment date each year, January 1. AS
29.45.110(a); AS 29.45.120(a); KPBR 77-11. They also designate
January 1 as the relevant date for determining the property's tax
situs -- its location within the KPB. AS 29.45.120(a); KPBR 77-11.
And they specify that the owner of the property on that date is the
one "personally liable"for payment of the tax. AS 29.45.300; KPBO
05.12.120. Thus, when read together, these provisions describe a
system of property taxation in which the principal attributes of
tax status -- value, situs, and ownership -- are determined as of
January 1 each year and remain fixed throughout the year that
follows. Because tax status, once determined under these
provisions, in turn determines each year's levy, it follows that
the KPB's property tax itself becomes fixed each year as of the
date of assessment. The tax "accrues"in full each year on
January 1.
A tax system structured in this manner offends neither
due process nor the Commerce Clause. The system neither eliminates
nor dilutes the need to establish a valid tax situs -- a nexus
between the borough and the property ensuring that "the tax in
practical operation has relation to opportunities, benefits, or
protection conferred or afforded by the taxing State." Ott v.
Mississippi Valley Barge Line Co., 336 U.S. 169, 174 (1949).
Rather, by demanding evidence of a nexus already established at the
time of assessment, the system necessarily focuses on opportunities
and benefits conferred in the year preceding assessment. [Fn. 5]
A retrospective focus of this kind is not in itself a
cause of constitutional concern:
There is no talismanic quality or
significance of constitutional dimension in the 'tax year' such
that absence from the State of personal property all during that
year should automatically invalidate an assessment denominated
'for' that year but statutorily based upon location in the State of
property upon a certain date preceding, but not unduly remote
therefrom, and reasonably referable to that year.
City of Bayonne v. International Nickel Co., 248 A.2d 547, 553
(N.J. Super. App. Div. 1968). [Fn. 6]
Nor does the retrospective nature of the KPB's system
appreciably enlarge the danger of arbitrary or multiple taxation.
The KPB's failure to adjust current taxes for changes in status
occurring during the year of assessment creates no risk of
unfairness to a taxpayer who remains in the borough, since these
post-assessment changes will be captured and taken into account
when the KPB assesses for the next tax year. The KPB's system
likewise creates no increased risk of multiple taxation for
property that moves from year to year within Alaska, since, as we
have seen, the KPB's retrospective property tax approach is largely
a creature of Alaska law and must thus be applied uniformly
throughout the state. [Fn. 7]
Moreover, insofar as the Commerce Clause is a matter of
concern, the KPB's system creates no added risk of multiple
taxation beyond the state's borders, because a similar approach to
taxation of personal property prevails nationwide: "The well-nigh
universal rule in this country is that the tax status and value of
property is set for the entire fiscal year on the assessment date."
Appeal of Title Serv., Inc., 252 A.2d 585, 587 (Pa. 1969). [Fn. 8]
The proposition thus appears widely settled that post-assessment
changes in value, situs, and ownership of taxed property require no
change in tax for the corresponding assessment year. [Fn. 9]
Accordingly, apportionment of Arndt's 1991 tax for the
Krystal Sea was not necessary to avoid an unconstitutional taking
of Arndt's property or to prevent the possibility of multiple
taxation. Arndt's ownership of the Krystal Sea on January 1, 1991,
the vessel's tax situs within the KPB on that date, and its value
at the time are firmly established by record evidence and were
never seriously disputed. Because Arndt became personally liable
for the full 1991 tax based on the Krystal Sea's tax status on
January 1, 1991, and because he failed to allege or show
circumstances indicating any actual danger of multiple taxation,
his post-assessment transfer of the vessel and its post-transfer
departure from the borough are irrelevant for purposes of the 1991
tax. [Fn. 10]
III. CONCLUSION
We thus conclude that the superior court erred in
reversing the district court's original judgment granting summary
judgment to the KPB. [Fn. 11] Accordingly, we VACATE the superior
court's appellate rulings and REMAND the case to the district court
with directions to reenter judgment for the KPB in accordance with
this opinion.
FOOTNOTES
Footnote 1:
1 Arndt did not respond to the petition and has declined to
file a brief on the merits.
Footnote 2:
2 U.S. Const. amend. XIV, cl. 1 and art. I, sec. 8, cl. 3.
Footnote 3:
3 Also, in accordance with applicable state statutes, the
KPB has adopted an ordinance requiring its assessor, by January 1
of each year, to mail personal property assessment forms to all
persons known to own personal property in the borough. KPBO
05.12.140. Another ordinance, KPBO 05.12.180, requires all owners
of property in the borough to file returns by February 15. State
law requires that upon return of the assessment forms, the KPB
assessor must "assess property at its full and true value as of
January 1 of the assessment year." AS 29.45.110(a). The assessor
must then prepare an assessment roll that describes all taxable
property, identifies all persons "with property subject to
assessment and taxation,"and lists the property's assessed value.
Former AS 29.45.160(a) (effective at the time relevant here).
Notice of this assessment must be sent to each person named on the
roll. Former AS 29.45.170 (also effective at the time relevant
here). By June 1 -- after allowing time for correction and appeal
of the assessments, see AS 29.45.180-.210 -- the assessor must
certify a final roll. AS 29.45.210(c). Based on the certified
roll, the KPB is charged with determining a rate of levy by June
15; it must then mail tax statements by July 1. AS 29.45.240(b).
Footnote 4:
4 Determining whether property has a tax situs within the
KPB is also governed by KPBR 77-11, which provides, in relevant
part:
Tax situs means the place where an item of
personal property is located. Tax situs can be based on the
residence and domicile of the owner, or whether the property in
question is taxed by another taxing government, or the fact of its
physical location within the borough on January 1st of any tax
assessment year.
Footnote 5:
5 See, e.g., City of Bayonne v. International Nickel Co.,
248 A.2d 547, 551 (N.J. Super. App. Div. 1968) (citing D.L. & W.R.
Co. v. Pennsylvania, 198 U.S. 341 (1905), for the proposition that
"the critical time for determining whether the property is
constitutionally untaxable by the state because absent is the time
as of which the statutory appraisal is to be made (in other words,
the assessing date)"); Seegmiller v. County of Nevada, 62 Cal.
Rptr. 2d 238, 241 (Cal. App. 1997) (reasoning that "[t]he tax lien
date [California's equivalent of the assessment date] . . . is
simply a practical method for determining that the taxpayer enjoyed
the benefit of governmental services during the year preceding the
assessment").
Footnote 6:
6 See also Seegmiller, 62 Cal. Rptr. 2d at 242 (concluding
that "[s]ince the tax levy corresponded to the benefits of
governmental services enjoyed as of the tax lien [assessment] date,
the timing of Seegmiller's exit from the state was, for due process
purposes, irrelevant. A fortiori, no 'proration' was required for
the following year"). Cf. Central R.R. Co. v. Pennsylvania, 370
U.S. 607, 612 (1962) (holding that "the Due Process Clause [does
not] confine the domiciliary State's taxing power to such
proportion of the value of the property being taxed as is equal to
the fraction of the tax year which the property spends within the
State's borders").
Footnote 7:
7 An example of this uniformity may be gleaned from North
Slope Borough v. Puget Sound Tug & Barge, 598 P.2d 924 (Alaska
1979). There we approved the North Slope Borough's assessment of
a prorated property tax on barges with a home port outside the
borough that arrived in Barrow around August 1, 1975, became
icebound, and remained in borough waters until the following
spring. Id. at 925-26. Our opinion in North Slope Borough
indicates that the barges were assessed a prorated value of 5/12ths
of their fair market value, reflecting five months' presence in the
borough. Id. at 926. Although our opinion makes no mention of the
specific months that were taxed or the year of taxation, the briefs
filed by the parties in that case make it clear that the barges
were assessed by the North Slope Borough in the tax year 1976 based
on their presence in the borough during five months -- August
through December -- of 1975, the year preceding taxation. See
Appellees' Brief, S-3858 at 26-29 (filed June 26, 1978); Reply
Brief of Appellant and Brief of Cross Appellant, S-3858 at 12
(filed August 1, 1978).
Footnote 8:
8 See also City of Bayonne, 248 A.2d at 550-52 (discussing
numerous cases); accord Seegmiller, 62 Cal. Rptr. 2d at 241-42.
Footnote 9:
9 See, e.g., City of Bayonne, 248 A.2d at 550-52;
Seegmiller, 62 Cal. Rptr. 2d at 241-42; Long Island Power Auth. v.
Shoreham Wading River Ctr. Sch. Dist., 670 N.E.2d 419, 422 (N.Y.
1996) (holding that "ownership of real estate on the taxable status
date determines whether the property is subject to real property
taxation for the entire ensuing taxable year, irrespective of the
property's subsequent acquisition by a tax-exempt entity during
that taxable year"); City of Fayetteville v. Phillips, 811 S.W.2d
308, 311 (Ark. 1991) (finding no tax exemption under statutory
exemption for "public property . . . used for public purposes"
where construction of arts center was proposed on tax assessment
date but not begun, even if intent was to eventually have
exclusively public use); Thomas Dodge of Highland, Inc. v. State
Bd. of Tax Comm'rs, 542 N.E.2d 245 (Ind. Tax 1989) (setting taxable
inventory on assessment date); Bethany Baptist Church v. Deptford
Township, 542 A.2d 505, 507 (N.J. Super. App. Div. 1988)
(concluding that "property used for a nonexempt purpose on . . .
the assessment date, which is later transferred to an exempt owner,
is nevertheless subject to taxation for the succeeding tax year");
First Nat'l Bank v. Mid-Central Food Sales, Inc., 473 N.E.2d 372,
374 (Ill. App. 1984) (holding owner of real property on January 1
of any year shall be liable for taxes of that year). See generally
2 A.L.R.4th 438 (1980).
Footnote 10:
10 In an affidavit submitted to the district court, Arndt
asserted without elaboration that when he purchased the Krystal
Star (apparently another vessel) from General Electric, its prior
owner, the KPB "taxed me for the value of the boat, not General
Electric,"and that this occurred even though General Electric sold
him the vessel in Seattle. Since Arndt fails to specify whether
the KPB attempted to tax him in the year of purchase or in the
subsequent tax year, his conclusory assertions, even if accepted,
would not raise an inference of double taxation.
Footnote 11:
11 Our resolution of the constitutional issues in this case
makes it unnecessary to decide whether the superior court erred in
reversing the district court's alternative conclusion that Arndt's
constitutional arguments were barred by his failure to exhaust the
administrative remedies that were available for challenging the
KPB's assessment.
In the Supreme Court of the State of Alaska
Kenai Peninsula Borough, )
) Supreme Court No. S-07776
Appellant, )
v. ) Order
) Withdraw an Opinion
Kenneth Arndt, )
)
Appellee. ) Date of Order: 5/22/98
)
Trial Court Case # 3KN-92-00406CI
Before: Compton, Eastaugh, Fabe, and Bryner, Justices. [Matthews, Chief Justice,
not participating].
It is Ordered, Sua Sponte:
1. Opinion No. 4983, issued on May 8, 1998 is Withdrawn and Opinion No. 4989 is
issued in its place today.
Entered by direction of the court.
Clerk of the Appellate Courts
Cheryl Jones, Deputy Clerk
cc: Supreme Court Justices
Trial Court Judge
Trial Court Appeals Clerk
Publishers
Distribution:
Joseph K. Donohue
Preston Gates & Ellis
420 L Street #400
Anchorage AK 99501
Robert J. Molloy
Molloy & Landry
110 South Willow Street #102
Kenai AK 99611
John W. Hendrickson
Attorney at Law
3105A Lakeshore Drive #102
Anchorage AK 99517
