Saban Rent-a-Car LLC v. Arizona Department of Revenue

          Appeal from the Arizona Tax Court The Honorable Dean M. Fink, Judge The Honorable Christopher T. Whitten, Judge No. TX2010-001089

         Opinion of the Court of Appeals, Division One 244 Ariz. 293 (App. 2018)

          Shawn K. Aiken (argued), Shawn Aiken PLLC, Phoenix; Gregory D. Hanley, Kickham Hanley PLLC, Royal Oaks, MI; Taylor C. Young, Robert A. Mandel, Mandel Young PLC, Phoenix, Attorneys for Saban Rent-a-Car LLC

          Mark Brnovich, Arizona Attorney General, Phoenix, Kimberly Cygan, Jerry A. Fries, Assistant Attorneys General, Phoenix; Thomas L. Hudson (argued), Eric M. Fraser, Osborn Maledon, P.A., Phoenix, Attorneys for Arizona Department of Revenue

          Timothy Berg (argued), Janice Procter-Murphy, Emily Ward, Fennemore Craig, P.C., Phoenix; and Scot L. Claus, Vail C. Cloar, Dickinson Wright PLLC, Phoenix, Attorneys for Tourism and Sports Authority

          Lawrence A. Kasten, Lewis Roca Rothgerber Christie LLP, Phoenix, Attorneys for Amicus Curiae John Halikowski, Director, Arizona Department of Transportation

          Michael R. King, Cameron C. Artigue, Christopher L. Hering, Gammage & Burnham, PLC, Phoenix, Attorneys for Amici Curiae Convention and Visitors Bureaus

          Barbara LaWall, Pima County Attorney, Regina L. Nassen, Deputy County Attorney, Tucson, Attorneys for Amici Curiae Pima County and the Pima County Stadium District

          Paul F. Eckstein, Thomas D. Ryerson, Perkins Coie LLP, Phoenix, Attorneys for Amicus Curiae City of Phoenix

          Michael K. Kennedy, Mark C. Dangerfield, Gallagher & Kennedy, P.A., Phoenix, Attorneys for Amici Curiae The Arizona Chamber of Commerce & Industry and The Greater Phoenix Chamber of Commerce

          JUSTICE TIMMER authored the opinion of the Court, in which CHIEF JUSTICE BALES, VICE CHIEF JUSTICE BRUTINEL, and JUSTICES PELANDER, GOULD, and LOPEZ joined.

          OPINION

          TIMMER JUSTICE.

         ¶1 Maricopa County imposes a surcharge on car rental agencies to fund a stadium and other sports and tourism-related ventures. The issue here is whether this surcharge violates the dormant Commerce Clause implied by Article I, Section 8, Clause 3 of the United States Constitution or the anti-diversion provision, article 9, section 14 of the Arizona Constitution. We hold that it does not violate either provision.

         BACKGROUND

         ¶2 The legislature created the Arizona Tourism and Sports Authority (the "AzSTA") in 2000 to build and operate a sports stadium, build Major League Baseball spring training facilities, build youth and amateur sports and recreation facilities, and promote tourism. See A.R.S. §§ 5-801(4), -802(A), -807 to -809, -815. AzSTA's authority is restricted to counties with populations greater than two million people, meaning it has only ever operated in Maricopa County. See § 5-802(A). AzSTA's construction projects are funded solely by taxes and surcharges approved by Maricopa County voters. See § 5-802(C). One such voter-approved surcharge is at issue here.

         ¶3 Soon after the creation of AzSTA, Maricopa County voters passed an initiative that levied a surcharge on car rental companies based on their income derived from leasing vehicles for less than one year. See A.R.S. § 5-839(A)-(C) (authorizing voters to levy the surcharge and providing its terms). (The initiative also imposed a tax on hotels. The hotel tax is not at issue here.) The surcharge is the greater of $2.50 per rental or 3.25% of the company's gross proceeds or gross income. § 5-839(B)(1). If the rental is a "temporary replacement" for a damaged or lost vehicle, however, the surcharge is a flat $2.50. § 5-839(B)(2). The state treasurer distributes $2.50 per rental transaction to the Maricopa County Stadium District, which has collected a surcharge in this amount since 1991. See § 5-839(G)(1); Act of June 25, 1991, ch. 285, § 10, 1991 Ariz. Sess. Laws 1444, 1451-53 (1st Reg. Sess.) (codified at A.R.S. § 48-4234). The remaining amount, the difference between $2.50 per rental transaction and 3.25% of the company's gross income or proceeds, is distributed to AzSTA. § 5-839(G)(2). Although the surcharge is imposed on car rental companies, they can and do pass its cost on to their customers.

         ¶4 Plaintiff Saban Rent-a-Car ("Saban") rents vehicles in Maricopa County and has paid the car rental surcharge. Its customers are primarily local residents. In 2009, after unsuccessfully seeking a refund from the Arizona Department of Revenue ("ADOR"), Saban sued ADOR in the tax court and sought refunds and injunctive relief for all similarly situated car rental companies. The tax court certified a class of all individuals or entities that paid the surcharge from September 2005 through March 2008 and allowed AzSTA to intervene as a defendant.

         ¶5 As it does here, Saban argued to the tax court that the surcharge violates both the dormant Commerce Clause and the anti-diversion provision. On cross-motions for summary judgment, the court agreed with ADOR and AzSTA that the surcharge does not violate the dormant Commerce Clause. It agreed with Saban, however, that the surcharge violates the anti-diversion provision. Consequently, the court granted summary judgment for Saban and ordered ADOR to refund the surcharge payments to class members. The court also authorized ADOR to recoup the refund amounts from AzSTA pursuant to A.R.S. § 42-5029(G).

         ¶6 Like the tax court, the court of appeals ruled that the surcharge does not violate the dormant Commerce Clause. Saban Rent-A-Car LLC v. Ariz. Dep't of Revenue, 244 Ariz. 293, 296 ¶ 2 (App. 2018). But unlike the tax court, the court of appeals concluded that the surcharge also does not violate the anti-diversion provision. Id. It therefore reversed the tax court's ruling and remanded for entry of summary judgment in favor of ADOR and AzSTA. See id. at 308 ¶ 49.

         ¶7 We granted review to address these legal issues of statewide importance. We have jurisdiction pursuant to article 6, section 5(3) of the Arizona Constitution.

         DISCUSSION

         I. The Dormant Commerce Clause

         ¶8 We review the constitutionality of the car rental surcharge de novo, as a question of law. See Gallardo v. State, 236 Ariz. 84, 87 ¶ 8 (2014). Likewise, "[w]e review questions of statutory construction and grants of summary judgment de novo." BSI Holdings, LLC v. Ariz. Dep't of Transp., 244 Ariz. 17, 19 ¶ 9 (2018). We presume that a statute not involving fundamental constitutional rights or suspect-classification distinctions is constitutional "and will uphold it unless it clearly is not." Cave Creek Unified Sch. Dist. v. Ducey, 233 Ariz. 1, 5 ¶ 11 (2013).

         ¶9 The Commerce Clause empowers Congress "[t]o regulate Commerce . . . among the several States." U.S. Const. art. I, § 8, cl. 3. By negative implication, states cannot unjustifiably discriminate against or erect barriers to interstate commerce. See Or. Waste Sys., Inc. v. Dep't of Envtl. Quality of Or., 511 U.S. 93, 98 (1994). This implied restraint is known as the "dormant Commerce Clause" and serves to prevent "economic protectionism [, ] that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors." Dep't of Revenue of Ky. v. Davis, 553 U.S. 328, 337-38 (2008); see also Gen. Motors Corp. v. Tracy, 519 U.S. 278, 299 (1997) (describing the dormant Commerce Clause's fundamental objective as "preserving a national market for competition undisturbed by preferential advantages conferred by a State upon its residents or resident competitors"). The principles developed under the dormant Commerce Clause to counter economic Balkanization, however, have respected a degree of local autonomy, as favored by the Framers. See Davis, 553 U.S. at 338; see also Hunt v. Wash. State Apple Advert. Comm'n, 432 U.S. 333, 350 (1977) (recognizing that "in the absence of conflicting legislation by Congress, there is a residuum of power in the state to make laws governing matters of local concern which nevertheless in some measure affect interstate commerce or even, to some extent, regulate it" (internal quotation marks omitted)).

         ¶10 To determine if a law violates the dormant Commerce Clause, courts initially ask whether the law "regulates evenhandedly with only incidental effects on interstate commerce, or discriminates against interstate commerce." Or. Waste Sys., 511 U.S. at 99 (internal quotation marks omitted). If a law is discriminatory, it will survive only if its proponents "show that it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives." Id. at 100-01 (internal interlineations and quotation marks omitted). Courts have sometimes noted that such scrutiny renders a law "virtually per se invalid." See id. at 99. If the challenged law is non-discriminatory but incidentally affects interstate commerce, a balancing test is used, and the law will be upheld unless "the burden imposed on such commerce is clearly excessive in relation to the putative local benefits." Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).

         ¶11 Saban argues the car rental surcharge is discriminatory and thus subject to strict scrutiny review. A "discriminatory" tax is one that is "facially discriminatory, has a discriminatory intent, or has the effect of unduly burdening interstate commerce." Amerada Hess Corp. v. Dir., Div. of Taxation, N.J. Dep't of the Treasury, 490 U.S. 66, 75 (1989). Saban abandons prior assertions that the surcharge is facially discriminatory and unduly burdens interstate commerce, see Saban, 244 Ariz. at 303 ¶ 30, 304 ¶ 32, and solely argues the surcharge is "invalid because it was motivated by discriminatory intent, that is, forcing out-of-state visitors [to] pay a special tax that residents are shielded from." ADOR and AzSTA counter that the surcharge was not enacted with a discriminatory intent but, even if it was, intent alone is an insufficient reason to invalidate the surcharge.

         ¶12 The car rental surcharge was not enacted with a discriminatory intent, as that term is used in Commerce Clause jurisprudence. Discrimination "means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." Or. Waste Sys., 511 U.S. at 99. Nothing in the language of the surcharge or in the publicity pamphlet for the initiative enacting the surcharge suggests 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. Indeed, the surcharge applies equally to resident and non-resident car rental agencies operating in Maricopa County and is calculated and imposed without regard to their customers' residencies.

         ¶13 Saban nevertheless argues that discriminatory intent exists because statements in the initiative's publicity pamphlet suggest voters targeted non-resident visitors, who purportedly rent most vehicles offered by car rental agencies, to pay the lion's share of the surcharges. But even if true, this does not evidence an intent that out-of-state visitors be treated any differently from residents, as required to be discriminatory. See id. ...