Cutter Aviation, Inc. v. Arizona Dept. of Revenue

• Decision Date: 22 May 1997
• Docket Number: Nos. 1,CA-TX,s. 1
• Parties: , 243 Ariz. Adv. Rep. 53 CUTTER AVIATION, INC., an Arizona corporation, Plaintiff-Appellant, v. The ARIZONA DEPARTMENT OF REVENUE, a Department of the State of Arizona, Maricopa County, a political subdivision of the State of Arizona, Defendants-Appellees. SOUTHWEST AIRLINES COMPANY, a Texas corporation, Plaintiff-Appellant, Cross Appellee, v. MARICOPA COUNTY, Defendant-Appellee, Cross Appellant, Arizona Department of Revenue, Defendant-Appellee. 95-0017, 1 96-0001.
• Court: Arizona Court of Appeals

Page 1

958 P.2d 1

191 Ariz. 485, 243 Ariz. Adv. Rep. 53

CUTTER AVIATION, INC., an Arizona corporation, Plaintiff-Appellant, v. The ARIZONA DEPARTMENT OF REVENUE, a Department of the State of Arizona, Maricopa County, a political subdivision of the State of Arizona, Defendants-Appellees.

SOUTHWEST AIRLINES COMPANY, a Texas corporation, Plaintiff-Appellant, Cross Appellee, v. MARICOPA COUNTY, Defendant-Appellee, Cross Appellant, Arizona Department of Revenue, Defendant-Appellee.

Nos. 1 CA-TX 95-0017, 1 CA-TX 96-0001.

Court of Appeals of Arizona Division 1, Department T.

May 22, 1997.

Review Denied June 25, 1998.

Michael A. Bosco, Jr., Leonard J. McDonald, Jr., Phoenix, for Plaintiff-Appellant Cutter Aviation.

Helm & Kyle, Ltd. by John D. Helm, Roberta S. Livesay and Michelle L. Margolies, Tempe, for Defendant-Appellee, Cross Appellant Maricopa County.

Grant Woods, Attorney General by Stephen C. Lepley and Frank Boucek, III, Assistant Attorneys General, Phoenix, for Defendant-Appellee Arizona Department of Revenue.

Fennemore Craig, P.C. by Paul J. Mooney and Kendis K. Muscheid, Phoenix, for Plaintiff-Appellant, Cross-Appellee Southwest Airlines.

OPINION

WEISBERG, Judge.

Cutter Aviation, Inc. ("Cutter") and Southwest Airlines Co. ("Southwest") filed separate actions against Maricopa County ("the county") and the Arizona Department of Revenue ("DOR") in the Arizona Tax Court for refunds of property taxes that each had paid under protest. The tax court denied refunds to Cutter and Southwest and each has separately appealed. Because their appeals involve similar issues, we address both in this single opinion.

These appeals concern the classification of the subject property and constitutionality of Arizona's short-lived statutory scheme for ad valorem taxation of private taxpayers' possessory interests and improvements of possessory rights in and on lands owned by governmental entities. Although we reject the constitutional challenges, we reverse because the tax court erred by affirming DOR's classification of Cutter's and Southwest's possessory interests as class three rather than class twelve property.

I. LEGAL BACKGROUND

In 1985 the legislature extended ad valorem property taxation to previously untaxed rights to possess and actual possession of land or improvements under non-freehold rights. 1985 Ariz. Sess. Laws ch. 264, §§ 1, 2; see also A.R.S. §§ 42-681 through 42-686 (1991) (repealed by 1995 Ariz. Sess. Laws ch. 241, § 43, and ch. 294, § 8 (effective retroactively to January 1, 1995)). A.R.S. section 42-682 (1991) subjected such rights in the property of federal, state, county, and municipal governments and their subdivisions, defined as "possessory interests," to ad valorem taxation as unsecured personal property, to be assessed at 1% of their full cash value. A.R.S. §§ 42-681(3), -682 (1991); see generally A.R.S. tit. 42, ch. 3. A.R.S. section 42-684 (1991) expressly exempted from this tax a large variety of possessory interests in governmental property. A.R.S. section 42-685 (1991) provided valuation reduction formulas applicable in the initial eight to ten years of possessory interests created in property located in slum clearance and redevelopment areas. See A.R.S. tit. 36, ch. 12, art. 3.

In an unpublished and unappealed ruling in January 1993, the tax court invalidated the exemptions contained in former A.R.S. section 42-684 (1991) on the ground that Ariz. Const. art. IX, § 2, did not authorize them. See Scottsdale Princess Partnership v. Maricopa County, 185 Ariz. 368, 371 n. 2, 916 P.2d 1084, 1087 n. 2 (Ariz.App.1995). In the 1993 legislative session, the legislature responded to the tax court's ruling by: (1) repealing former A.R.S. section 42-684 (1991); (2) adding a new class twelve to A.R.S. sections 42-162 and -227 for possessory interests to be assessed at 1% of full cash value; (3) extensively amending A.R.S. sections 42-681 through -683; (4) adding new sections 42-684 and -687; and (5) enacting a number of exemptions from the revised possessory interest tax as A.R.S. sections 42-271.01 through -271.04. See 1993 Ariz. Sess. Laws ch. 191.

Pursuant to the amended A.R.S. section 42-162(A)(12)(c), class twelve included, in part:

(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.

New A.R.S. section 42-683 adopted an alternative method of valuing class twelve property at the election of the taxpayer. It allowed the full cash value of a possessory interest in class twelve to be "determined as the capitalized value of the property based on the gross annual rental amounts paid by the holder of the possessory interest using the capitalization rate prescribed by the department and standard appraisal methods." See 1993 Ariz. Sess. Laws ch. 191, § 8.

The county brought a declaratory judgment action against the state to challenge the constitutionality of the exemptions in new A.R.S. sections 42-271.01 through -271.04. On July 21, 1993, in an unpublished and unappealed ruling, the tax court held that those sections violated Ariz. Const. art. IX, § 2. Maricopa County v. State of Arizona, Arizona Tax Court No. TX 93-00217.

In response, the legislature adopted, retroactive to January 1, 1993, the possessory interest taxing scheme at issue in these appeals. See 1994 Ariz. Sess. Laws ch. 293, § 8. After these changes, A.R.S. section 42-681 provided in part:

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. section 42-681(4) defined "public property" as "real or personal property or improvements, or any combination of such property, owned or held by" a government entity.

1994 Ariz. Sess. Laws ch. 293, § 1 left unchanged the class twelve classification adopted as A.R.S. section 42-162(A)(12)(c) in the 1993 legislative session. However, the 1994 amendment added new subsections (g) through (k) to A.R.S. section 42-162(A)(12), thereby adding to class twelve property a number of the possessory interests that were previously exempted by former A.R.S. sections 42-271.01 through -271.03.

Section 1 of the 1994 enactment also added a new class thirteen, retroactive to January 1, 1993. Like class twelve property, this new class of property was to be assessed at 1% of full cash value. A.R.S. § 42-227(A)(13) (1994). Class thirteen included, in part:

(b) Improvements located on public property, as defined in section 42-681, owned by the lessee of such public property 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.

Class 13(b) functioned as the direct counterpart of class 12(c). Consequently, A.R.S. sections 42-162(A)(12)(c) and (13)(b) provided identical treatment in the situation described in those subsections, retroactive to the effective date of subsection 12(c), whether the improvements in question were deemed owned by the taxpayer lessee or by the governmental lessor.

In 1995, the legislature repealed A.R.S. sections 42-681 through -687 effective retroactively to January 1, 1995. See 1995 Ariz. Sess. Laws ch. 294, § 8. In 1996, the legislature replaced ad valorem property taxation of possessory interests with the government property lease excise tax set forth in A.R.S. tit. 42, ch. 13. 1996 Ariz. Sess. Laws ch. 349, §§ 1(B), 5.

II. FACTS AND PROCEDURAL HISTORY

A. Southwest Airlines

On April 30, 1991, Southwest entered into a lease with the City of Phoenix Aviation Department ("the city"). The lease covered approximately 12 acres at Phoenix Sky Harbor International Airport ("Sky Harbor") and required Southwest to build improvements on the leased property, including a maintenance hangar and support facilities.

For tax year 1993, the county assessor classified Southwest's hangar and maintenance facility as class three (commercial) property taxable on 25% of full cash value. See A.R.S. §§ 42-162(A)(3), -227(A)(3). The assessor classified Southwest's leased land as class twelve property taxable on 1% of full cash value. See A.R.S. §§ 42-162(A)(12),-227(A)(12) (1994).

America West Airlines, a competitor of Southwest that leased land at Sky Harbor under a lease similar to Southwest's, received the same tax treatment as Southwest for tax year 1993. America West, however, appealed its assessment to the State Board of Tax Appeals ("the Board"). The Board ruled that America West's possessory interest in the improvements on the airport leasehold should have been classified, like the leasehold itself, as class twelve property. The Department of Revenue ("DOR") did not challenge this ruling in the tax court.

Meanwhile, Southwest paid its assessment on the improvements under protest and brought this action against the county and DOR directly in the tax court pursuant to A.R.S. sections...