1 CA-TX 98-0010





       (Not for Publication

       Rule 28, Arizona Rules

       of Civil Appellate







Appeal from the Arizona Tax Court


Cause No. TX 96-00012


The Honorable Jeffrey S. Cates, Judge





Janet A. Napolitano, Attorney General

  by      David J. Dir, Assistant Attorney General

Attorneys for Plaintiff-Appellee




Quarles & Brady Streich Lang LLP

  by      Michael G. Galloway

Attorneys for Defendants-Appellants






P A T T E R S O N, Judge


The Brannan Sand & Gravel Co. and its successor in interest, Brannan Sand & Gravel L.L.C. (collectively "Brannan"), appeal from summary judgment in favor of the Arizona Department of Revenue (ADOR) on ADOR's claim to recover prime contracting transaction privilege taxes previously assessed for the period of May 1987, through December 1988, and prejudgment interest. Brannan's appeal presents these issues:


1.         Whether Brannan exhausted its administrative remedies;


2.         If Brannan did not exhaust its administrative remedies, whether it nevertheless retained the right to challenge the substantive legal basis of ADOR's claim because

a.         ADOR's action was merely a common law action of debt; or

b.         the rule requiring exhaustion of administrative remedies did not apply to Brannan's challenge to its underlying tax liability as derived from an illegal, void tax.

3.         Did ADOR's failure to contest Brannan's claim that the assessment was illegal constitute a concession?

We find all of Brannan's arguments wholly without merit', and affirm.



Exhaustion Requirement


A party who has statutory recourse to an administrative agency with authority to grant appropriate remedies must pursue "all" of his administrative remedies or the superior court will acquire no jurisdiction to consider his claim.  Hamilton v. State, 186 Ariz. 590, 593, 925 P.2d 731, 734 (App. 1996); Estate of Bohn v. Waddell, 174 Ariz. 239, 245-46, 848 P.2d 324, 330-31 (App. 1992).  See also Original Apartment Movers, Inc. v. Waddell, 179 Ariz. 419, 880 P.2d 639 (App. 1993) (tax court appropriately dismissed action for declaration of rights under tax statutes brought by plaintiff who sought to bypass administrative process doctrine of primary jurisdiction).


Brannan invoked the administrative process, but through error failed to see it through to conclusion.  Brannan did not utilize all of its administrative remedies, as Arizona law requires.


Brannan asserts, however, that the only statutory ground on which a taxpayer is deemed to have waived all challenges to a ADOR deficiency assessment is failure to file a timely petition for hearing, correction or redetermination from the ADOR's notice of proposed assessment. Arizona Revised Statutes Annotated (A.R.S.) 42-122(B).  See also A.R.S. 42-117 (audit; deficiency assessments), 42-118 (failure to file a return, etc.).  Brannan filed a timely petition for hearing, correction or redetermination after receiving ADOR's audit assessment. Brannan accordingly argues that its later failure to timely pursue its administrative remedies did not affect its entitlement to assert the merits of its protest as a defense in ADOR's collection action.


Brannan is quite mistaken. The underlying theory on which Brannan's argument proceeds is wholly inconsistent with Arizona's rule requiring resort to and exhaustion of all available administrative remedies.


Additionally, contrary to Brannan's assertion, A.R.S. section 42-122 is not the only statute that expressly forecloses. a taxpayer's challenge on the merits for failure to take a necessary procedural step.  Section 42-124 provides that a taxpayer aggrieved by a final order of ADOR may appeal to the tax court either directly or through initial resort to the state board of tax appeals.  Section 42-124(D)(2) provides:


The action shall not begin more than thirty days after the order or decision of the board or department becomes final. Failure to bring the action within thirty days after the order or decision of the board or department becomes final constitutes a waiver of the protest and a waiver of all claims against this state arising from or based on the illegality in the tax, penalties and interest at issue . . . .

(Emphasis added.)  In view of this provision, it makes no sense to posit that the legislature would have intended a different consequence where the taxpayer failed, as Brannan did here, even to pursue its protest to a final order of the Department of Revenue. 


ADOR's Action as One for Debt Under Common Law


Brannan next argues that ADOR's claim in this case is one for debt under the common law. As such, Brannan reasons, it is subject to Brannan's defense of non-liability on the debt.


We disagree. ADOR's authority to bring this action is found not in the common law of debt, but in A.R.S. section 42-125(A):


The department may bring an action in the name of this state to recover the amount of any taxes, penalties and interest due and unpaid. The department of law shall prosecute the action. . . . In the action a certificate by the department of revenue showing the delinquency is prima facie evidence of the levy of the tax, of the delinquency and of the compliance by the department of revenue with all the provisions of law relating to the computation and levy of the tax.

Brannan does not cite or discuss this statute in its opening brief, and has filed no reply brief.  Brannan's citations to 26 C.J.S. Debt, Action of section 3 (1956) and non-Arizona authorities are inapposite.


Challenge to Assessment as Illegal and Void


Brannan contends that the Arizona rule requiring exhaustion of available administrative remedies does not preclude it from challenging the tax as illegal or void. Brannan cites eight non-Arizona cases for this proposition.


These cases do not assist Brannan here. In the tax court, Brannan never sought to defeat ADOR's collection claim on the theory that the prime contracting privilege tax on which ADOR based its assessment was illegal or void.  Brannan's defense was instead that ADOR had erroneously assessed such taxes against it under the facts and circumstances of this case. None of Brannan's non-Arizona cases holds that a mere claim of erroneous assessment survives the taxpayer's failure to exhaust administrative remedies.


We observe in addition that the cases on which Brannan relies are fundamentally inconsistent with governing Arizona case law.  In Estate of Bohn and Kerr v. Waddell, the taxpayers contended that the Arizona income tax was unconstitutional and void to the extent ADOR had applied it to portions of their income that were protected from state taxation under the intergovernmental tax immunity doctrine and the supremacy clause of the United States Constitution, Estate of Bohn, 174 Ariz. at 241, 848 P.2d at 326; Kerr, 185 Ariz. 457, 459, 916 P.2d 1173, 1175 (App. 1996).  In both cases, we held that the taxpayers were nevertheless required to pursue and exhaust their administrative remedies before asserting those contentions in the tax court.  Estate of Bohn, 174 Ariz. at 245, 848 P.2d at 330; Kerr, 18S Ariz. at 462-63, 916 P.2d at 1178-79.


Contrary to Brannan's contention, neither Estate of Bohn nor Kerr is distinguishable. Neither case considered the degree to which the taxpayers had failed to exhaust available administrative remedies.  It was the fact of failure to exhaust that the court found crucial. Brannan's initial resort to the administrative process and its later failure to properly pursue it does not take this case outside the general rule of exhaustion for which Estate of Bohn and Kerr stand.


ADOR's Failure to Contest Brannan's Contention that the Taxes Were Wrongfully Assessed


Finally, Brannan contends that ADOR's failure in the tax court to contest Brannan's claim that the assessment was illegal amounted to a concession on that point.  Brannan argues:


While the Department's position is that substantive issues cannot be raised in this proceeding, they cannot be ignored when placed at issue in a motion for summary judgment, which is exactly what happened in the Tax Court.  If the Department does not refute the substantive tax issues, it concedes that the assessed tax is illegal.

We disagree.  Brannan cites no authority for this contention.  It was quite clear in the tax court, as it is here, that under the procedural circumstances of the case, the merits of Brannan's challenge to ADOR's underlying finding of tax liability were simply immaterial.  ADOR's failure to address that challenge in recognition of its immateriality cannot be viewed as an admission of the challenge's substantive validity.  ADOR properly refrained from expanding the unnecessary reading with which this case had already burdened the tax court.  The judgment is affirmed.




Cecil B. Patterson, Jr., Judge








Jefferson L. Lankford,

Presiding Judge





Philip E. Toci, Judge





1996 Michael G. Galloway

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