Arizona Flag

In a previous Fee Detective post, we wrote about the State of Arizona's tax on rental cars explicitly to fund sports stadiums and tourism promotion. Initiated in 2001, the tax was challenged by renters in 2004 but the case was dismissed in 2007 because vehicle renters were determined to not have valid standing to sue. In 2010, representatives of Saban's Rent-A-Car filed suit and in 2014, the tax was declared to violate the Arizona State Constitution. The year 2015 saw the State being ordered by courts to refund $160 million of these taxes. Yet the state continued to collect the taxes and appeal; otherwise, there would be no way to pay for the stadiums funded by abusing rental car users. Now, the stadium rental car tax has been ruled to comply with the constitution, a new chapter in a process that's likely to extend at least a few more years.

The judges found an "interesting" interpretation, proving the tax man will find something to tax.

As this story involved Arizona, we also have to note the subtext. The name "Saban's Rent A Car" might sound familiar to readers of our newsletter and blog. Saban happens to be the Phoenix area rental car company that was under a consent decree for intentional discrimination against customers with disabilities and was recently fined $1.85 million for almost unbelievable violations of the State's Consumer Fraud Act, with misleading statements, inaccurate billings, and made-up fees. Much like the current owner of Rent-A-Wreck and the founder of Rent-A-Wreck, it's safe to say that the Arizona Attorney General and the founder of Saban's Rent A Car don't have the best of relationships!

Yet it's Saban who advocates for the consumer on this issue! And Saban had a string of victories on the issue of whether the 3.25% stadium tax on rental cars was constitutional. After all, the Arizona Constitution states:

"No moneys derived from fees, excises, or license taxes relating to registration, operation, or use of vehicles on the public highways or streets or to fuels or any other energy source used for the propulsion of vehicles on the public highways or streets, shall be expended for other than highway and street purposes including the cost of administering the state highway system and the laws creating such fees, excises, or license taxes, statutory refunds and adjustments provided by law, payment of principal and interest on highway and street bonds and obligations, expenses of state enforcement of traffic laws and state administration of traffic safety programs, payment of costs of publication and distribution of Arizona highways magazine, state costs of construction, reconstruction, maintenance or repair of public highways, streets or bridges, costs of rights of way acquisitions and expenses related thereto, roadside development, and for distribution to counties, incorporated cities and towns to be used by them solely for highway and street purposes including costs of rights of way acquisitions and expenses related thereto, construction, reconstruction, maintenance, repair, roadside development, of county, city and town roads, streets, and bridges and payment of principal and interest on highway and street bonds."

There was already a separate 5% Surcharge on rental cars that the AZDOT states must be used only for vehicle licensing or roads; Saban's case appeared to be on solid ground until the Arizona Court of Appeals decided to pave a new road. As AZDOT notes on their tax:

The rental-vehicle surcharge must be used only for the reimbursement of the amount of Arizona vehicle license tax (VLT) imposed on rental vehicles, whether rented in this state or in another state or jurisdiction, and paid by the person engaged in the rental vehicle business. Any surcharge collected in excess of the VLT must be remitted to ADOT to be deposited in the Highway User Revenue Fund. Any surcharge collected in error must be refunded to the renter. If not refunded, this amount is to be included in the annual report.

How does the State of Arizona thus get out of using the 3.25% (or $2.50, whichever is greater) sports and tourism tax for anything other than roads? Here's the super-condensed CliffsNotes version of the Appeals Court Opinion

  1. The state readily admitted the rental car tax is an excise tax but doesn't violate the U.S. Constitution, so Arizona can do whatever it wants, provided it's legal under the Arizona Constitution .
  2. The Court of Appeals decided it's also cool that 3/4ths of the revenue comes from non-Arizonans because it wasn't solely targetted at non-Arizonans.
  3. The Court of Appeals also claimed that the citizens who voted on the Constitutional amendment more than 60 years ago couldn't possibly be aware that the State might make up more vehicle-related taxes in the future (governments would never do something like that).

And then comes the completely baffling part. The Court of Appeals fundamentally assumes that the person who rents a car may (or may not) decide to actually drive the car. In court logic, a renter might decide to rent a car to sit in the rental company's parking lot or to load it on a flatbed truck for a trip around town. Their precise language is that the act of renting a car itself and paying the tax is not "a tax or fee that is a prerequisite to, or triggered by, the legal operation or use of a vehicle on a public thoroughfare."

This is a critical component of the appeal court's opinion.

Again, the state admits that the fee is a tax, and you can't drive a rental car without paying the tax, but the tax paid before a rental car can be used is not a "prerequisite to" using the vehicle on a public road. One must pay the tax on the rental vehicle before driving but it's not a prerequisite to driving the vehicle. Mull that one over for a bit.

Cain thought he knew the definition of "prerequisite".

Headed off to Arizona? You'll continue to pay for their sports stadiums directly unless you're staying is Scottsdale and take the city up on their ride-hailing subsidies (which also come from tourist taxes, of course). And although those taxes show up on every area rental car bill, the individuals carrying the financial burden of those taxes -- the renters -- still have no grounds for filing a claim of their own against the State of Arizona.  

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