Airport Properties v. Maricopa County

• Citation: 195 Ariz. 89,985 P.2d 574
• Decision Date: 19 January 1999
• Docket Number: No. 1-CA-CV-97-0597.,1-CA-CV-97-0597.
• Parties: AIRPORT PROPERTIES, aka Airport Properties Phase I, an Arizona limited partnership; and Air Commerce Center, L.L.C., an Arizona Limited Liability Company, Plaintiffs-Appellees, v. MARICOPA COUNTY, Arizona, Defendant-Appellant.
• Court: Court of Appeals of Arizona

985 P.2d 574

195 Ariz. 89

AIRPORT PROPERTIES, aka Airport Properties Phase I, an Arizona limited partnership; and Air Commerce Center, L.L.C., an Arizona Limited Liability Company, Plaintiffs-Appellees, v. MARICOPA COUNTY, Arizona, Defendant-Appellant.

No. 1-CA-CV-97-0597.

Court of Appeals of Arizona, Division 1, Department C.

January 19, 1999.

Review Denied September 21, 1999.

Helm & Kyle, Ltd by John D. Helm, Roberta S. Livesay, Michelle M. Tran, Tempe, Attorneys for Appellant Maricopa County.

Robert R. Bauer, Phoenix, Attorney for Appellees Airport Properties and Air Commerce Center.

Grant Woods, Attorney General by Linda D. Bach, Assistant Attorney General, Phoenix, Attorneys for Appellee Arizona Department of Revenue.

OPINION

EHRLICH, Judge.

¶ 1 Maricopa County appeals from summary judgment entered for Airport Properties ("AP") and Air Commerce Center, L.L.C. ("ACC") in consolidated actions challenging the County's right (1) to tax AP's and ACC's interests in Scottsdale Municipal Airport real property as class three (commercial) property for tax years 1993 and 1994, and (2) to assess any ad valorem property taxes at all against those interests after the 1995 repeal of Arizona's possessory interest taxing scheme, former ARIZ.REV.STAT. ANN. ("A.R.S.") sections 42-681 through 42-687. Listed in their logical order, the appeal presents these issues:

(1) Whether the legal nature of ACC's interest in Scottsdale Municipal Airport real property constituted in reality an improvement on a possessory right ("IPR") rather than a possessory interest;

(2) Whether the County had "standing" to challenge the constitutionality of Arizona's possessory interest and IPR taxing schemes or the legislature's repeal of the possessory interest taxing scheme;

(3) Whether the trial court violated the No-Exemption Clause of the Arizona Constitution, ARIZ. CONST. Art. 9, sec. 2(12) (Supp.1997),¹ in holding that the legislature's repeal of Arizona's possessory interest taxing scheme precluded the County from taxing possessory interests after its effective date;

(4) Whether Arizona's general personal property taxing provisions authorized the County to assess and tax possessory interests in and after 1995 independently of Arizona's repealed possessory interest taxing scheme; and

(5) Whether Arizona's possessory interest taxing scheme violated, and its IPR taxing scheme violates, the Uniformity Clause of the Arizona Constitution, ARIZ. CONST. Art. 9, section 2(1).

I. BACKGROUND OF APPLICABLE STATUTORY AND CASE LAW

¶ 2 In Cutter Aviation, Inc. v. Arizona Department of Revenue, 191 Ariz. 485, 958 P.2d 1 (App.1997), review denied June 25, 1998, we recounted in detail the legislative and decisional history of a controversy with facts similar to those of these taxpayers' in many respects. For this case, we present a summary of that history with only the detail necessary to facilitate understanding the issues before us.

¶ 3 In 1985, the legislature enacted provisions subjecting "possessory interests," defined as rights to possess and actual possession of land or improvements under nonfreehold rights, to ad valorem taxation. A.R.S. §§ 42-681 through 42-686 (1991)(repealed effective retroactively to January 1, 1995). These statutes applied to private possessory rights in government real property. Certain specifically-described possessory interests were either exempted from the tax outright or benefitted from valuation reduction formulae. The possessory interests subjected to taxation were assessed at 1% of full cash value.

¶ 4 In 1994, the legislature enacted amendments and revisions yielding the possessory interest and IPR taxing schemes with which this appeal is concerned. ARIZ. SESS. LAWS Ch. 293, § 8, retroactively effective to January 1, 1993. The law now provides:

In this article, unless the context otherwise requires:

* * *

3. "Possessory interest" means possession of public property pursuant to an agreement with a governmental entity regardless of how the interest is identified in any document by which it is created, except possession pursuant to and by virtue of ownership of a freehold interest in the real property or ownership of the improvements or personal property.

A.R.S. § 42-681(3).

¶ 5 The 1994 legislation retained A.R.S. section 42-162(A)(12)(c) in its pre-1994 form. That section included within class twelve:

(c) Interests in property located on state, city, town or county airports and public airports operating pursuant to sections 2-311, 2-312 and 2-313, if the property is used for or in connection with aviation, including hangars, tie-downs, aircraft maintenance, sales of aviation[-]related items, charter and rental activities, parking facilities and restaurants, stores and other services located in a terminal.

Possessory interests were assessed at 1% of full cash value. Former A.R.S. § 42-227(A)(12).

¶ 6 The 1994 legislation also added a new class thirteen, retroactively effective to January 1, 1993. This class included:

(b) Improvements located on public property, as defined in section 42-681, owned by the lessee of such public property [IPRs] provided:

(i) That the improvements shall become the property of the owner of the public property upon termination of the possessory interest in the public property.

(ii) That both the improvements and the public property are used for or in connection with aviation, including hangars, tie-downs, aircraft maintenance, sales of aviation-related items, charter and rental activities, parking facilities and restaurants, stores and other services located in a terminal.

(iii) That both the improvements and the public property are located on a state, county, city or town airport or a public airport operating pursuant to sections 2-311, 2-312 and 2-313.

Like possessory interests, IPRs classified under A.R.S. section 42-162(A)(13) are assessed at 1% of full cash value. Former A.R.S. § 42-227(A)(13); see A.R.S. § 42-162(A)(11) (Supp.1997); § 42-227(A)(11) (Supp.1997).

¶ 7 In section 8 of 1995 ARIZ. SESS. LAWS ch. 294, the legislature repealed A.R.S. sections 42-681 through 42-687, effective retroactively to January 1, 1995. The repeal did not affect the taxation of IPRs.

II. OUTLINE OF FACTS AND PROCEDURE BELOW

¶ 8 The pertinent facts are undisputed. Under lease agreements with the City of Scottsdale, AP built air services related improvements on city land at Scottsdale Municipal Airport. ACC succeeded to AP's interest in one such lease in July 1993. Both taxpayers operated air services businesses using those improvements and portions of airport land throughout tax years 1993, 1994 and 1995.

¶ 9 During the decade preceding tax year 1993, the County viewed AP as holding leasehold interests in improvements owned by the City of Scottsdale. It treated AP's interests in the improvements as exempt from ad valorem taxation. For tax year 1993, however, the County took the position that AP and ACC themselves owned the improvements. For tax year 1993, the County classified the improvements occupied by AP as class three (commercial) property and assessed them at 25% of full cash value. A.R.S. § 42-162(A)(3); § 42-227(A)(3). For the second half of 1993, it accorded the same treatment to the improvements ACC had occupied since July of that year. For tax years 1994 and 1995, the County continued to treat the improvements as owned by the taxpayers, but it assessed them as IPRs at 1% of full cash value pursuant to former A.R.S. sections 42-162(A)(13) and 42-227(A)(13).

¶ 10 The taxpayers challenged their assessments for 1993, 1994 and 1995. After resorting to and exhausting applicable administrative remedies, they brought two property tax appeals in the superior court, later consolidated. In a series of motions and cross-motions for summary judgment, the court ruled: (1) a 1979 judgment precluded the County from taking the position that AP and not the City of Scottsdale owned the airport improvements that it occupied; (2) under the lease assigned by AP to ACC in July 1993, the City of Scottsdale retained ownership of the improvements that ACC occupies under that lease; (3) the repeal of the possessory interest taxing scheme effective beginning with the 1995 tax year did not violate the No-Exemption Clause of the Arizona Constitution; and (4) the 1% assessment ratio provided for possessory interests during 1993 and 1994 and for IPRs during 1994 and 1995 did not violate the Uniformity Clause.

¶ 11 The substance and practical effects of the superior court's rulings were as follows:

• For tax year 1993, in which possessory interests were assessed and taxed at 1% of full cash value and IPRs were not classified as such, AP's and ACC's interests in the airport improvements they occupied were assessed and taxed at 1% of full cash value as possessory interests rather than at 25% of full cash value as class three (commercial) property wholly owned by the taxpayers.

• For tax year 1994, the first year in which IPRs were assessed and taxed at 1% of full cash value, AP's and ACC's interests in the airport improvements remained taxable at 1% of full cash value as possessory interests.

• For tax years 1993 and 1994, AP's and ACC's airport improvement interests were not taxable at 25% of full cash value as class three (commercial) property on the County's theory that the possessory interest and IPR classifications of former A.R.S. section 42-162(A)(12) and (13) effectively caused differential taxation of classes of property with no real differences in use, utility, productivity or physical characteristics, in violation of the Uniformity Clause.

• For tax year 1995, the first year in which the repeal of Arizona's possessory interest taxing statutes was effective, AP's and ACC's airport improvement interests were no longer liable for ad valorem property taxes because the repeal removed the required statutory mechanism for taxing possessory interests and signified the legislature's intent that such

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