MERCEDES-BENZ CREDIT CORPORATION                                                                       1 CA-TX 99-0018



Plaintiffs-Appellants )




) (Not for Publication -


) of Civil Appellate

Defendant-Appellee. ) Procedure)


Appeal from the Arizona Tax Court
Cause No. TX 97-00424 and TX 97-00425
The Honorable William J. Schafer, III, Judge



Lewis and Roca LLP Phoenix
By John P. Frank
Patrick Derdenger
Attorneys for Plaintiff-Appellants

Janet Napolitano, Arizona Attorney General Phoenix
By Lisa A. Neuville
Assistant Attorney General
Attorneys for Defendant-Appellee


S U L T, Judge

Taxpayers Mercedes-Benz Credit Corporation and debis Financial Services, Inc., appeal from summary judgment for the Arizona Department of Revenue on their claims for refunds of transaction privilege taxes that they paid on gross receipts from leasing helicopters to non-party Omniflight, Inc., an emergency medical transport service. The taxpayers present two issues on appeal:

1. Whether Omniflight’s registration with the United States Department of Transportation as an "air taxi operator" exempt under 14 C.F.R. § 298.11 (1999) from the "certificate of public convenience and necessity" requirement imposed on other air carriers by 49 U.S.C. § 41101(a)(1) (1998) nevertheless qualified the taxpayers for the exemption under Arizona law from taxation of gross income from leasing aircraft to "[a]irlines holding a federal certificate of public convenience and necessity?"

2. Assuming the taxpayers did not qualify for the exemption, whether the availability of that exemption to air carriers who operated both large and small aircraft and were therefore subject to the federal "certificate of public convenience and necessity" requirement, violated the taxpayers’ right to equal protection of the laws?

We hold that the taxpayers were not entitled to the exemption and that the availability of the exemption to other air carriers did not violate the taxpayers’ right to equal protection of the law. We decline to address the taxpayers’ contention that the exemption provision constitutes an invalid "special law" prohibited by article 4, part 2, section 19, of the Arizona Constitution, because this contention was raised for the first time on appeal. Maricopa County v. State, 187 Ariz. 275, 281, 928 P.2d 699, 705 (App. 1996).


In 1967 the legislature exempted from transaction privilege taxation all gross income from retail sales of aircraft to air carriers "holding a federal or state certificate of public convenience and necessity." 1967 Ariz. Sess. Laws. 3d Spec. Sess., ch. 2, § 1. Three years later, the legislature brought within the scope fo the exemption receipts from leasing or renting aircraft to such air carriers. 1970 Ariz. Sess. Laws, ch. 50, § 1.

When the exemption was first created in 1967, federal law required all air carriers to obtain certificates of public convenience and necessity from the Civil Aeronautics Board. The Airline Deregulation Act of 1978 retained this requirement for large and foreign air carriers, but authorized the United States Department of Transportation to permit small domestic air carriers, termed "air taxi operators," to register as exempt from the certificate requirement on certain conditions. 49 U.S.C. § 40109(f) (1998); 14 C.F.R. pt. 298 (1999). Registration as an air taxi operator was, and is, exclusively available to carriers like Omniflight who operate only aircraft with sixty or fewer seats and aircraft with a payload capacity of less than eighteen thousand pounds. See 49 U.S.C. § 40109(f) (1998); 14 C.F.R. § 298.2(h), (u) (1999).

The legislature has twice amended the language of the exemption statute since 1978. See 1979 Ariz. Sess. Laws, ch. 146, § 7; 1984 Ariz. Sess. Laws, ch. 134 § 2. While the 1984 amendment dispensed with the reference to a state certificate, neither amendment dispensed with or provided any alternative to the requirement that a domestic airline to which the exemption-seeking taxpayer sells or leases aircraft hold a federal certificate of public convenience and necessity.

Non-party Omniflight registered with the United States Department of Transportation as an air taxi operator in June 1990. Pursuant to 14 C.F.R. § 298.22 (1999), the Department provided Omniflight with a duplicate copy of its registration statement, stamped "Registration Approved." The legal effect of this approved registration was to exempt Omniflight from federal regulatory requirements under a number of provisions of 49 U.S.C. that would have applied if Omniflight were to operate as an air carrier under a certificate of public convenience and necessity. 14 C.F.R. § 298.11(a)-(f) (1999). Omniflight received no document or other tangible item from the Department denominated as "a certificate of public convenience and necessity exemption authority."

The taxpayers leased four helicopters to Omniflight for twelve-year terms beginning in December 1990. For the period April 1991 through September 1994, the taxpayers paid personal property leasing taxes on their gross receipts from these leases. The taxpayers later sought refunds of all such taxes for that period but the request was denied by ADOR. After exhausting their administrative remedies, the taxpayers filed refund actions. On cross-motions for summary judgment in the consolidated cases, the tax court ruled for ADOR, and the taxpayers appealed.


Availability of Exemption

The taxpayers argue that Omniflight’s "certificate of public convenience and necessity exemption authority" was functionally and therefore legally equivalent to the "certificate of public convenience and necessity" required by Arizona’s exemption statute, and this therefore rendered them eligible for the exemption. Taxpayers reason that because the federal "certificate of public convenience and necessity" was the exclusive indicator of federal "economic authority" to operate as an air carrier when the exemption was enacted in 1967, it is proper to infer that the Arizona legislature intended to extend the exemption to all air carriers who have federal "economic authority" to so operate. This intention did not change in 1978 when the federal government deregulated air carriers and created the small carrier class. Thus, when small carrier Omniflight gained its "economic authority" to operate as an air carrier by virtue of its registration as an air taxi operator, the legislative intention underlying the Arizona exemption statute attached to Omniflight’s status, thereby qualifying it for the exemption.

We disagree for several reasons. When statutory language is clear and unambiguous, it is determinative of the statute’s meaning. See Janson v. Christensen, 167 Ariz. 470, 471, 806 P.2d 1222, 1223 (1991). "If [a] statute is unambiguous, . . . the rules of construction have no legitimate function. The court must give effect to the statute’s language as written, unless doing so would lead to absurd or impossible results." Paging Network fo Arizona v. Arizona Department of Revenue, 193 Ariz. 96, 97, ¶ 8, 970 P.2d 450, 451, ¶ 8 (App. 1998).

The exemption statute has never exempted the leasing of aircraft to one holding a "certificate of public convenience and necessity or the functional equivalent thereof." Only a lease to an airline that holds a "certificate of public convenience and necessity" qualifies for the exemption. The language the taxpayers wish us to read into the statute is an add-on that the clear language of the statute does not contemplate. We are not free to append it simply because the taxpayers wish it were there.

Even assuming events that occurred after the exemption became law in 1967 could be viewed as introducing uncertainty about the meaning of the statute’s language, exemptions from taxation must be "reasonably and strictly construed in a manner that gives effect to legislative intent." State ex rel. Arizona Department of Revenue v. Capitol Castings, Inc., 193 Ariz. 89, 93, ¶ 15, 970 P.2d 443, 447, ¶ 15 (App. 1998). A court does not discharge its duty to construe an exemption statute "reasonably and strictly" by interpreting its words broadly, expansively, or figuratively. Id. at 94, ¶ 20, 970 P.2d at 448, ¶ 20. To find, as the taxpayers desire, the existence of an implied legislative intent that expands the exemption beyond the language used by the legislature would clearly violate this duty.

From its initial enactment to the present, the language of the exemption statute has specifically, concretely, and unequivocally limited the exemption to carriers holding a certificate of public convenience and necessity. This includes the period from 1978 onward following the passage of the Airline Deregulation Act, an act of which we presume our legislature became aware. Since 1978, the legislature has revisited the exemption statute on two occasions, either of which provided an opportunity to change the clear language to encompass the new class of "air taxi operators" within the exemption. However, the legislature did not do so, an indication that it did not wish to do so. Cf. Bartning v. State Farm Fire and Casualty Co., 162 Ariz. 48, 49, 780 P.2d 1389, 1390 (App. 1988) (where legislature amends statute subsequent to court decision interpreting statute and retains language as construed by court, legislature is presumed to approve the interpretation), vacated in part on other grounds, 162 Ariz. 344, 783 P.2d 790 (1989).

The taxpayers nevertheless argue that because air carriers like Omniflight are still subject to federal control, that should qualify them for the exemption as the legislature surely intended that being subject to such economic control was the linchpin around which the right to the exemption would evolve. Our response echoes what we stated in State v. Weinstein,

"[W]hen we allow ourselves to be guided by intuition that the legislature didn’t really mean what it said, we are no longer interpreting laws, we are making them." United States v. Phelps, 895 F.2d 1281, 1283 (9th Cir. 1990) (Kozinski, J., dissenting).

182 Ariz. 564, 568, 898 P.2d 513, 517 (App. 1995). The exemption statute simply does not apply to the taxpayers here, and they must address their complaints to the legislature as this court is without authority to grant the relief they seek.

Equal Protection

The taxpayers contend in the alternative that if the exemption statute does not exempt gross receipts from Omniflight’s aircraft leases, their right to equal protection of the law has been violated. The taxpayers begin by asserting that the affected class is all air carriers who operate both large and small aircraft together with carriers, like Omniflight, who operate only small aircraft. We question this initial proposition as taxpayers fail to demonstrate that all members of this "class" share such substantial similarities that they should be grouped together. See Turf Paradise, Inc. v. Arizona Department of Revenue, 178 Ariz. 246, 248, 872 P.2d 201, 203 (Ariz. Tax Ct. 1994) (declining to find substantial similarities for equal protection class purposes between owners of racing horses and owners of racing dogs). Nevertheless, we will assume for purposes of this discussion that such a class does exist for purposes of equal protection analysis.

Taxpayers next reason that the exemption statute violates equal protection "because air carriers that operate only ‘small aircraft’ as air taxi operators are treated differently for sales tax exemption purposes than an air carrier that operates both ‘large aircraft’ and ‘small aircraft.’" They urge that this classification does not make sense, and therefore lacks any rational basis. The taxpayers also cite America West Airlines, Inc., 179 Ariz. 528, 880 P.2d 1074 (1994), for the proposition that "discrimination against air carriers based upon their size" is prohibited.

The taxpayers are mistaken on all counts. First, America West is wholly inapposite to this case. Our supreme court analyzed and decided that case under the Uniformity Clause of the Arizona Constitution. America West therefore sheds no light at all on the application of equal protection principles here.

Next, an equal protection challenge to a legislative tax classification can succeed only if the taxpayer can demonstrate that the classification is not rationally related to any conceivable legitimate governmental purpose. See Martin v. Reinstein, 195 Ariz. 293, 309-10, ¶ 52, 987 P.2d 779, 795-96, ¶ 52 (App. 1999); Brink Electric Construction Co. v. Arizona Department of Revenue, 184 Ariz. 354, 362, 909 P.2d 421, 429 (App. 1995). A legislative classification may be based on rational speculation unsupported by evidence or empirical data, see FCC v. Beach Communications, Inc., 508 U.S. 307, 315 (1993), and will survive rational basis review unless the court is convinced beyond a reasonable doubt that the classification is wholly unrelated to any legitimate legislative goal. Martin, 195 Ariz. at 310, ¶ 52, 987 P.2d at 796, ¶ 52. The burden is on the challenging party to demonstrate that there is no conceivable basis for the disparity in treatment. Id.

The taxpayers pay little heed to their burden of proof, first noting in their opening brief that ADOR had not suggested any rational basis for distinguishing between large and small air carriers, and then suggesting that they, the taxpayers, could conceive of none. Apparently, taxpayers believe that simply asserting an inability to conceive of a rational basis satisfies their burden of providing beyond a reasonable doubt the absence of a rational basis. The taxpayers are incorrect.

We could reject the taxpayers’ equal protection argument on this basis alone. However, we note that the classification created by the legislature’s decision not to expand the exemption beyond holders of "certificate[s] of public convenience and necessity" has a clear rational basis. As we have pointed out, registration under 14 C.F.R. pt. 298 relieves "air taxi operators" like Omniflight of the burden of complying with a number of federal regulatory requirements that apply to air carriers who must operate under certificates of public convenience and necessity. See 14 C.F.R. § 298.11. The legislature could have believed it reasonable to reserve the benefit of the exemption to those air carriers whom the 1978 Deregulation Act left subject to the more onerous federal regulatory burden, and that extending the exemption to the relatively more fortunate air taxi operators was unnecessary. Debate over the soundness or fairness of that belief might appropriately be presented to the legislature, but has no place here.


The tax court correctly determined that the taxpayers were not entitled to an exemption from the transaction privilege tax on their gross receipts from leasing aircraft to Omniflight. We therefore affirm the judgment of that court.



© 1996 Michael G. Galloway

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