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The Pop Shoppe v. Ketchican Gateway Borough (7/23/93), 855 P 2d 1335
Notice: This is subject to formal correction
before publication in the Pacific Reporter.
Readers are requested to bring typographical
or other formal errors to the attention of
the Clerk of the Appellate Courts, 303 K
Street, Anchorage, Alaska 99501, in order
that corrections may be made prior to
THE SUPREME COURT OF THE STATE OF ALASKA
EDWARD A. DILLEY, d/b/a THE )
POP SHOPPE, )
) Supreme Court File No. S-5408
Appellant, ) Superior Court File No.
) 1KE-91-01024 Civil
KETCHIKAN GATEWAY BOROUGH, ) O P I N I O N
Appellee. ) [No. 3977 - July 23, 1993]
Appeal from the Superior Court of the
State of Alaska, First Judicial District,
Thomas M. Jahnke, Judge.
Appearances: Kenneth D. Lougee, Hughes,
Thorsness, Gantz, Powell & Brundin,
Fairbanks, for Appellant. Teresa S.
Williams, Borough Attorney, Ketchikan, for
Before: Moore, Chief Justice,
Rabinowitz, Burke, Matthews and Compton,
This appeal arises out of a sales tax dispute between
the Ketchikan Gateway Borough (Borough) and Edward
Dilley, a licensed pull-tab operator. Dilley was
assessed over $400,000 for uncollected sales taxes, and
interest, on gross revenues from pull-tab sales. The
Borough Assembly denied Dilley's appeal and upheld the
assessment. The superior court affirmed. We reverse.
I. FACTUAL AND PROCEDURAL BACKGROUND
Dilley operates pull-tab games1 under a state license.
Typically, non-profit organizations retain Dilley to
operate a pull-tab game for fund-raising purposes. See
AS 05.15.100(a). Pursuant to the statutory framework,
these organizations pay Dilley a fee for operating the
pull-tab game. Dilley then remits the net proceeds
from pull-tab sales to the non-profit organization.
See AS 05.15.112, .165(a), .210(23).
For a number of years, Dilley conducted pull-tab games
in the Borough. Dilley paid sales taxes on the net
proceeds of pull-tab sales, i.e., gross receipts minus
prizes awarded. Disputing this calculation, the
Borough requested remittance of sales taxes on the
gross receipts from pull-tab sales. When this payment
was not forthcoming, the Borough assessed against
Dilley the uncollected amount of sales tax and
interest, estimated to be in excess of $400,000.
Dilley appealed this decision to the Borough Assembly.
After his appeal was denied, Dilley appealed to the
superior court. Alaska R. App. P. 602(a)(2). In
addition to arguing that the Borough's sales tax
applied only to net proceeds of pull-tab sales, Dilley
alternatively argued that the tax was unconstitutional,
and that the tax did not apply to the sale of pull-tabs
at all. The superior court affirmed the Borough's
decision. This appeal followed.
At issue is whether the sale of pull-tabs is subject to
the Borough's sales tax. As this is a question of
statutory interpretation not involving agency
expertise, the appropriate standard of review is the
substitution of judgment test. Public Employees' Local
71 v. State, 775 P.2d 1062-63 (Alaska 1989).
The Borough levies a 1.5% sales tax "upon all rents,
retail sales and services in the borough, except those
hereinafter specifically exempted from the tax."
Ketchikan Gateway Borough Code (KGB) 45.20.010.
"Retail sale"is defined to mean "any nonexempt sale of
services, rentals or tangible personal property made to
a buyer who intends to use the item purchased for his
own personal use." KGB 45.20.005 (emphasis added).
Dilley argues that pull-tabs are intangible personal
property which are not subject to taxation under the
ordinance. The Borough disputes this classification,
arguing that pull-tab games are "amusement services"
subject to taxation.2
Dilley's argument that the sale of pull-tabs
constitutes a sale of intangible property, rather than
a provision of services, is persuasive.3 Black's Law
Dictionary defines "intangible property"as follows:
As used chiefly in the law of taxation,
this term means such property as has no
intrinsic and marketable value, but is merely
the representative or evidence of value, such
as certificates of stock, bonds, promissory
notes, copyrights, and franchises.
Black's Law Dictionary 809 (6th ed. 1990). In this case, the
pull-tab represents the contractual right to receive
payment of prize money if the patron uncovers a winning
This conclusion is supported by cases from other
jurisdictions. For example, the Supreme Court of
Minnesota held that a "Big Perfecta"dog race ticket
constituted intangible personal property:
The "Big Perfecta"ticket embodied [the
right to receive money] contingent on the
winning of a race or races by some dog or
combination of dogs. When this contingency
was satisfied, appellants received a check,
which it is hard to characterize as anything
other than "income . . . from intangible
Hillstrom v. Commissioner of Revenue, 270 N.W.2d 265, 267 (Minn.
1978).5 Similarly, the United States Court of Appeals
for the Fifth Circuit has described lottery tickets as
"more in the nature of choses in action, being in some
respects memoranda of conditional promises to pay."
United States v. Mueller, 178 F.2d 593, 594 (5th Cir.
Because pull-tabs constitute intangible personal
property, they are not subject to the Borough's sales
tax. The Borough's sales tax ordinance could be
amended to cover pull-tab sales, as the state statutory
scheme does. See AS 05.15.184 (providing for tax of 3%
on gross receipts minus prizes awarded). However, the
existing ordinance cannot be construed to cover the
sale of pull-tabs.
Pull-tabs are intangible property not subject to the
Borough's sales tax ordinance. The decision of the
superior court is REVERSED and the superior court
directed to enter judgment consistent with this
1. A "pull-tab game"is defined as "a game of chance where
a card, the face of which is covered to conceal a
number, symbol, or sets of symbols, is purchased by the
participant and where a prize is awarded for a card
containing certain numbers or symbols designated in
advance and at random." AS 05.15.210(28) (Supp. 1992).
2. Both the superior court and the Borough use the term
"amusement services,"even though this term is not used
in the ordinance in question. This use becomes
extremely questionable given the Borough's reliance on
cases in which a statute specifically provides for
taxation of "amusement services." See Chilivis v.
Fleming, 228 S.E.2d 178 (Ga. App. 1976). The ordinance
in question provides only for taxation of "any
nonexempt sale of services, rentals or tangible
personal property." KGB 45.20.005.
Further, the language of the Borough Code itself
militates against the Borough's expansive
interpretation. The ordinance does not define
"services." However, it does define "remuneration for
services" to mean "gross remuneration received for
furnishing labor and materials for accomplishing a
specified result." KGB 45.20.005. Dilley has not
furnished labor and materials for a result specified by
3. Dilley confuses the issue somewhat by focusing on the
relationship between the non-profit organization and
the pull-tab operator. While it is true that the
transaction between these parties falls within the
definition of "services for remuneration,"this point
is irrelevant. The transaction at issue is the sale of
pull-tabs to individual pull-tab patrons.
4. Responding to the Borough's characterization of pull-
tab sales as a service, Dilley points out that the sale
of any intangible personal property can be so
characterized. For example, a broker's sale of stock
can be construed as an "investment service," and a
banker's sale of a certificate of deposit as a "banking
service." However, such characterizations ignore the
underlying nature of the property involved.
5. The superior court's attempt to distinguish Hillstrom
is unpersuasive. The superior court suggests that
Hillstrom addressed only whether race track tickets
were tangible property, not whether the sale of such
tickets represented a service. However, the superior
court ignored Hillstrom's discussion of the nature of
the property involved.