Saban Rent‐​A‐​Car v. Arizona Dep’t of Revenue

August 27, 2019 • Legal Briefs
By Richard M. Loeb, Nicholas Peterson, and Ilya Shapiro

The state of Arizona needed to raise money to update its sports facilities, but polling indicated that a new tax for this purpose was politically unpalatable. The Arizona legislature had an idea: it would tax the tourism industry through hotel and rental car surcharges. The initial draft of the tax exempted Arizonans from the surcharge, but a smart legislative counsel observed that this just might be unconstitutional because it treated in‐​staters differently than out‐​of‐​staters. Instead, when Arizona levied a new tax on rental vehicles, it exempted long‐​term rentals, replacement rentals, bus rentals, and a whole slew of other vehicle rentals that are used primarily by locals, leaving the tax in effect on the short‐​term rentals favored by visitors. This tax would be voted into place by individual counties.

On the day Maricopa County (Phoenix) voted to enact the surcharge, pamphlets circulated claiming, “it will cost Arizona residents next to nothing. As much as 95% of the new … taxes will be borne by visitors.” These predictions have borne true; businesses reported that 72–87 percent of surcharge tax revenue has come from out‐​of‐​staters.

Saban Rent‐​A‐​Car, a Maricopa County business, paid the surcharges and sued for a refund in Arizona Tax Court. It made arguments based on the Commerce Clause of the U.S. Constitution—that the law interfered with interstate commerce—as well as state constitutional claims. The Tax court rejected both grounds. Arizona’s intermediate appellate court affirmed the tax court decision on Commerce Clause grounds. A divided Arizona Supreme Court also affirmed. Saban now seeks review in the U.S. Supreme Court.

This case raises two issues. First: the power of the states to regulate within their borders. The history of the Commerce Clause shows that it was written specifically to address discriminatory state legislation targeting out‐​of‐​state commerce. A necessary corollary to Congress’s power to regulate interstate commerce is the Dormant Commerce Clause, which prohibits states and their political sub‐​units from discriminating against out‐​of‐​state commerce. Over the years, the Supreme Court has invalidated taxes on trains carrying freight out of state, laws allowing additional harbor fees on ships carrying out‐​of‐​state goods, and taxes on out‐​of‐​staters shipping liquor into a state.

The second issue, to quote a Revolutionary War slogan, is “no taxation without representation!” Arizona has passed a tax that disparately impacts visitors from out‐​of‐​state who are not represented in the Arizona legislature. This ordinarily is not a problem. When a tax applies equally to all, visitors’ objections will be readily voiced by residents, who are equally effected. But when the tax is designed to fall on visitors, their lack of representation becomes a problem because their interests are opposed to the citizens of the state. For out‐​of‐​staters, this amounts to taxation without representation.

Cato has thus filed a brief supporting Saban Rent-A-Car’s petition. The Arizona rental‐​car surcharge violates the Commerce Clause and impermissibly taxes out‐​of‐​staters without adequate representation of their interests in the state legislature.

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