A tax on car rentals that funded construction of Cactus League and University of Phoenix stadiums does not violate the state Constitution or federal commerce laws, a panel of the Arizona Court of Appeals ruled Tuesday.

The ruling overturns a lower-court decision that had put hundreds of millions of dollars used for stadium construction and other programs in doubt. Rental-car companies that challenged the tax sought to collect that money, along with attorney fees and other expenses.

The decision by the three-member Arizona Court of Appeals panel was a victory for the Arizona Sports and Tourism Authority and the Arizona Department of Revenue against more than 100 rental-car companies that fought the tax or surcharge.

The rental-car companies argued in part that the levy on vehicles violated the state Constitution because the money raised didn’t fund highway projects.

The appellate decision reversed an earlier court rulingin 2014 favoring the rental-car companies and ordering the Department of Revenue to refund tax collections to them.

“We are pleased the court has affirmed that voters in Maricopa County had full legal authority to help fund the University of Phoenix Stadium, tourism promotion, Cactus League facilities and youth and amateur sports grants when they passed Proposition 302,” said Maria Baier, board chair of the Arizona Sports and Tourism Authority, in a prepared statement.

Attorneys representing the rental-car companies weren’t available for comment.

What is the rental-car tax?

The tax, approved by Maricopa County voters in 2000 and designed to raise more than $1 billion over 30 years, led to the construction of University of Phoenix Stadium and various spring-training baseball venues, while helping to fund youth sports and tourism programs.

Voter approval came shortly after the state Legislature established the Sports and Tourism Authority. The surcharge amounts to 3.25 percent of rental-car company proceeds or $2.50 per car rental, whichever is larger.

The tax continues to be collected. It has helped bump up rental-car taxes in Maricopa County to some of the highest levels in the nation.

A Maricopa County Superior Court judge in 2014 had sided with the rental-car companies, ruling that the tax was unconstitutional. A section of the state Constitution requires that revenue collected from vehicle excise taxes be used on highway and street projects.

A tax-court judge the following year ordered that taxes collected must be refunded to the companies. At the time, the collected taxes to date were estimated at about $150 million.

The tax court had ruled the surcharge was invalid under the state Constitution but not under a provision implied by the U.S. Constitution.

However, the Appeals Court panel determined that the rental-tax surcharge didn’t violate either state or federal law.

Why the court said the tax is OK

“Because we conclude the surcharge is not invalid under either constitutional provision, we reverse the tax court’s refund order,” wrote Appellate Judge Diane Johnsen on behalf of herself and Judges Lawrence Winthrop and Maria Elena Cruz. 

Challenges to the tax were filed starting in 2004, on behalf of rental-car customers, and five years later on behalf of rental-car companies, with Saban Rent-A-Car the lead plaintiff.

The rental-car companies sought a refund of taxes paid, arguing that the surcharge violated the state Constitution and the Dormant Commerce Clause implied by the U.S. Constitution.

That clause can be violated when a state taxes services that are primarily used by non-residents, as Saban’s attorneys argued in this case. 

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

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