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Court of Appeals rules rental-car levy legal

There’s nothing illegal about taxing car rentals to pay for sports stadiums and other projects, the state Court of Appeals ruled Tuesday.

In a key victory for the state’s two largest counties, the judges overruled a lower court decision which said the Arizona Constitution requires levies connected with driving to be spent only on road and other transportation projects. Judge Diane Johnsen, writing for the court, said there’s a key difference between the act of renting a car and actually operating it.

Diane Johnsen

Diane Johnsen

Johnsen acknowledged that the tax may have been designed to place the largest burden on tourists. But she said it does not violate federal constitutional bars against states interfering with interstate commerce.

Tuesday’s ruling may not be the last word. The car rental company that first brought the challenge in 2010 has the option to seek review by the Arizona Supreme Court.

At issue is a law designed to help counties attract and retain sports teams and spring training by building facilities. The chosen method in Maricopa County was a 3.5 percent surcharge on car rental contracts, paid by the car rental companies; Pima County put in a flat $3.50 per rental charge.

Shawn Aiken, representing Saban Rent-A-Car, challenged the levy as illegal.

In 2014 Maricopa County Superior Court Judge Dean Fink ruled the Arizona Constitution limits any taxes levied on the use of vehicles on public streets to be used solely to fund road construction and maintenance and related purposes. Fink said the tax on car rentals clearly falls outside that purpose.

But Johnsen, acting on an appeal by the state Department of Revenue and the Sports and Tourism Authority, said Fink, in essence, did not understand the difference between the business of renting vehicles and the actual operation or use of vehicles on public roads.

“The surcharge is not imposed on the road user (the driver-customer), but instead is imposed on the car-rental business,” she wrote.

“Second, the taxable event that triggers the surcharge is the rental of a vehicle, not its operation or use,” Johnsen continued. “While most every car-rental transaction will result in the customer using the car on public highways or streets, the surcharge is imposed regardless of whether, how much or how often the customer drives the car.”

Aiken separately argued the tax was sold to voters, who approved it, on the premise that the lion’s share would be paid by tourists.

Johnsen acknowledged the U.S. Constitution gives Congress the power to regulate commerce among the states. It also stands for the principle that, in general, states cannot impose taxes designed to benefit in-state economic interests by burdening out-of-state competitors.

But the judge pointed out that the levy also is imposed on Arizonans who have to rent a vehicle.

“It is irrelevant whether the overall burden of the tax falls mostly on visitors to the state,” she wrote.

Tuesday’s ruling, unless overturned, is a crucial victory for the Tourism and Sports Authority as the car-rental tax generates more than $14 million of its nearly $55 million annual budget. The largest share of that goes to paying off the debt on the construction of the stadium for the Arizona Cardinals.

Potentially more significant, it also undermines Aiken’s bid to not only end the tax but also get a refund of what has been paid since 2005, a figure he said ultimately could top $200 million.

In Pima County the levy has paid for construction of the Kino Sorts Complex. While that debt is being paid off, the sports district intends to keep the car-rental fee in place to pay to expand the complex to include 12 grass fields that can accommodate a variety of sports.

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