Arizona Flag

Arizona is a unique setting when it comes to rental cars and taxes. We can say with certainty that it's rare for a government to keep collecting a tax that's already been ruled unconstitutional by multiple courts of law. While the Framers of the U.S. Government have never addressed motor vehicles in the U.S. Constitution, politicians and citizens in the State of Arizona actually wrote motor vehicles into their state's Constitution, then promptly ignored the state's own Constitution when the state needed money.

Like in many other states, Arizona's representatives came up with the brilliant idea of using rental car taxes to pay for initiatives the local taxpayers didn't really want to fund. Enter the Arizona Sports and Tourism Authority (AZSTA). The rental car tax was designed to help pay for University of Phoenix Stadium (home of the Arizona Cardinals), contribute a quarter billion dollars directly for tourism promotion, help pay for MLB Cactus League ballparks, contribute almost $75 million to amateur sports, support the operating budget of AZSTA, and even contribute to a sports reserve fund. The intent of the tax is to raise truckloads of money for sports. The only problem would be the state's Constitution, where a 199-word run-on sentence from hell/Phoenix (almost synonymous in the summer), explicitly states a requirement that any tax imposed on a vehicle has to be used for road-related purposes only

"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."

The State of Arizona already had a 5% tax that fully complied with the Constitution, then decided to tax another 3.25% that didn't comply with the Constitution.

There is an Arizona, and if she ever made it, she would have paid an unconstitutional rental car tax.

Condensed History of the Tax

In 2001, the State of Arizona decided they needed to raise major funds annually to pay for sports stadiums and sports promotion. Most of that money would come from a 3.25% tax on rental cars and a 1% tax on hotels. Rental vehicles are, by definition, a subset of "vehicles" and taxes on these vehicles can only be used on roads. Completely ignoring the prohibition in the State's Constitution, the state has collected the illegal tax for more than 16 years (and continues today), even after court rulings that the tax is unconstitutional. Did the Legislature and Governor of Arizona simply ignore the Constitution or did the Legislature and Governor of Arizona never even read the Constitution? The answer to one (or both) of those questions is clearly "yes".

Rental car users realized fairly early on that the tax was unconstitutional and sued the state. Karbal v. Arizona Department of Revenue was a class-action filed by renters in 2004, dismissed by a judge in 2007 only because the renters didn't have legal standing to sue under Arizona law. Most governments would have taken the dismissal on a technicality as notice but Arizona really needed the money. So Arizona kept collecting the unconstitutional tax. Then someone with legal standing -- a rental car company -- filed a lawsuit in 2010. So Arizona kept collecting the unconstitutional tax. In 2014, the tax was declared unconstitutional and in 2015, courts deemed the State of Arizona was required to refund $160 million. So Arizona kept collecting the unconstitutional tax. Why? AZSTA was found to be $48 million deficient in "tourism promotion" spending in just a four-year period and couldn't pay the football stadium bond debt without the (unconstitutional) rental car tax revenue. And the single largest revenue source for AZSTA in the FY2018 Budget? You guessed it, the Car Rental Surcharge Tax.

Courts have said the tax is unconstitutional and must be refunded. The courts haven't said the State needs to stop ...

There's are multiple expressions that when digging a hole, there's a point where it's clearly advisable to stop. These maxims don't appear to factor into the State of Arizona's decision-making framework. The State continues to seek the overturn of judicial rulings (and the mandated refunds of the unconstitutional tax) while continuing to collect the unconstitutional tax. And the only choice for renters in Arizona is to continue to pay the tax or seek alternative modes of transportation -- the courts ruled more than a decade ago that a renter has no legal standing to challenge a tax known to be unconstitutional! 

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