The Arizona Supreme Court recently addressed the constitutionality of a rental car surcharge imposed by Maricopa County. The surcharge, which was approved by voters, was used to fund sports facilities and stadiums. The amount of the surcharge was the greater of $2.50 per rental or 3.25 percent of a rental car company’s gross proceeds or gross income. Although the surcharge was imposed on car rental companies, the companies generally passed the cost on to their customers. The taxpayer at issue was a car rental business that rented primarily to local residents. It filed suit in Arizona tax court alleging that the surcharge violated the dormant Commerce Clause of the U.S. Constitution and the Anti-Diversion Clause of the Arizona Constitution. After the tax court ruled in favor of the state on the Commerce Clause issue and in favor of the rental-car company on the Anti-Diversion question, the appeals court ruled in the state’s favor on both issues. The case was subsequently appealed to the Arizona Supreme Court.
With respect to the dormant Commerce Clause, the essence of the taxpayer’s argument was that the surcharge was enacted with “discriminatory intent” because Arizona voters intended to target nonresidents because nonresidents are more likely to rent vehicles than residents. However, the court held that the car rental surcharge was not enacted with a discriminatory intent. Nothing in the language of the surcharge or in the publicity pamphlet for the initiative containing the surcharge suggested an intent to treat in-state and out-of-state interests differently or engage in the type of “economic protectionism” at odds with the Commerce Clause. The surcharge statute treated residents the same as non-residents and the fact that visitors as a group paid more of the surcharges collected by the car rental companies did not render the surcharge discriminatory. In support of this position, the court cited to Commonwealth Edison Co. v Montana, in which the U.S. Supreme Court concluded that Montana’s tax on the sale of coal did not violate the dormant Commerce Clause although most of the tax was borne by out-of-state purchasers.
The court next addressed the Arizona Constitution’s Anti-Diversion Clause. This clause was intended ensure that the state continued to receive federal highway funding by mandating that fees and taxes related to highway usage were dedicated to fund roads and highways. In relevant part, the clause provides that “no moneys derived from fees, excises or license taxes relating to registration, operation, or use of vehicles on the public highways or streets shall be expended for other than highway or street purposes.” The taxpayer argued that the rental car surcharge was connected to the use or operation of vehicles on public streets and highways. The state, in contrast, argued for a narrower interpretation of the clause and noted that the taxpayer’s interpretation would capture taxes like transaction privileges taxes imposed on rental car transactions. The court ultimately sided with the state, noting that the types of fees, excises, and taxes implicated by the Anti-Diversion Clause were those that were imposed as a prerequisite to or triggered by the legal operation or use of a vehicle on a public road. Please stay tuned to TWIST for additional state developments.
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