Court rules firm must pay taxes on reservation

Companies can't escape paying state property taxes just because they locate on Indian reservations, the Arizona Court of Appeals has ruled.

Judge Patrick Irvine, writing for the unanimous court, said the Arizona Constitution requires that taxes be paid on all property in the state.

Irvine acknowledged that, in general, the state cannot tax property located on a reservations.

But he said the mere fact that the property is located on a reservation does not, by itself, make it tax-exempt. The issue, he said, is who owns it.

And in this case, Irvine said, the buildings - the issue in the case - were owned by the private company.

The case involves the Calpine Construction Finance Co., which signed a 50-year lease in 1999 with the Fort Mohave Indian Tribe to build and operate a power plant on tribal land.

In 2003 the state Department of Revenue said the property subject to taxation was valued at $88 million; the figure for 2004 was nearly $122.9 million.

A trial judge concluded the assessments were legal, resulting in the appeal.

Irvine said the question turns around the question of ownership.

In general, he said, when a tenant builds something on leased land, it becomes the property of the landowner. But the judge said that presumption can be overcome if there is a specific agreement between the parties that makes the building the property of the lessee.

In this case, Irvine said, the lease between the company and the tribe shows that the buildings were owned by Calpine.

He pointed to one provision which says if someone other than the tribe condemns the property, the tribe gets the part of the award that represents the value of the property, with Calpine getting the value of the improvements.

More to the point, Irvine noted, the lease itself extends only to the raw land, and Calpine pays no rent at all for the first 16 years. And the judge said the lease itself refers to any buildings as "Calpine's power plant property."

Irvine also said a modification made to the lease allows Calpine to remove or replace any of the buildings without the consent of the tribe or the Secretary of the Interior.

There is a provision in the lease which says that, at the end of the 50 years, any buildings remain on the property. Irvine said that, however, does not change the conclusion that the buildings are Calpine's - and are taxable.

"Calpine controls what will be done with them in the interim," he wrote. "Given the extent of its control, we conclude that Calpine owns the property."