Arizona High Court Narrows the Meaning of "Day" for Tax Purposes

As state tax lawyers, we are often asked for advice on navigating different—and often competing—state tax schemes. The law in this area is subject to a handful of constitutional limitations. For instance, the Commerce Clause requires (among other things) that state taxes be fairly apportioned. So in the case of nonresidents and other out-of-state or multistate taxpayers, many state tax schemes determine the taxability of a transaction or person based on the numbers of days spent in the taxing state. Consequently, our advice to nonresident taxpayers often turns on the number of “days” involved. This concept of counting “days” is actually pretty important in our world! But one thing that can be interesting in these cases is seeing how different states treat seemingly similar situations or transactions.

With that background, you can probably understand why we were encouraged by the Arizona Supreme Court’s decision last week in BSI Holdings v. ADOT. That case involved Arizona’s aircraft tax, which is imposed on certain aircraft that are “based in” Arizona for a certain number of days in a given calendar year. As is relevant here, the number of “days” dictates the applicable tax rate. One rate applies if the aircraft is “based in” Arizona for more than 90 days but less than 210 days per year, and a higher rate applies to aircrafts “based in” Arizona for more than 210 days.

The taxpayer in the BSI Holdings case, an Oregon entity, owned a dual engine turbo-jet airplane. The jet was primarily located in Arizona and was used to fly one of the taxpayer’s members to and from Scottsdale Airport. The taxpayer conceded that it was subject to the lower rate but disagreed with the ADOTs’ assertion that it was subject to the higher rate. This dispute centered on the taxpayer and the ADOT’s opposing definitions of the term “day” which was not defined in the Arizona statute. The taxpayer argued that the term “day” should be defined to include only full 24-hour periods and thus, days that the jet flew into or out of Scottsdale were excluded from this count. But the ADOT contended that a “day” should be defined as “any period of time within a day.” Using the taxpayer’s definition made it subject to the lower tax rate whereas ADOT’s subjected it to the higher rate.

By the time the case arrived at Arizona Supreme Court, it had gone through the Arizona Tax Court (which granted summary judgment in the taxpayer’s favor) and then the Arizona Court of Appeals (which vacated and remanded the case). In doing so, the appeals court affirmatively deferred to the ADOT’s definition of “day” and, in doing so, concluded that “day” means “any fraction of a day in which the aircraft is on the ground. Then the Supreme Court granted review and oral argument was heard and the Court ultimately vacated the appeals court’s order and remanded the case to the tax court.

The Court’s analysis of the defining “day” walked through a series rules of statutory construction. Initially, the Court observed that the legislature failed to define the term “day,” but recognized that it was not bound by ADOT’s interpretation since the term “is not a technical one requiring expertise to construe it.” Then, the Court explained that the term could not be interpretation “in isolation” but had to instead be construed in its “overall context” and the context in which “day” is used was, according to the Court, when an aircraft is ‘based in’ Arizona.” But this too was problematic since “based in” was also “statutorily undefined.” And for this reason, the Court remanded the case to the Arizona Tax Court to determine the meaning of “based in” with the following instructions: “If at the end of the day, having exhausted other statutory construction tools, the tax court determines the statute is still ambiguous, it should construe it in favor of the taxpayers.”

And like we said above, it can be interesting to see how different states treat seemingly similar situations or transactions. Case in point, New York’s definition of “days” for statutory residency purposes. In that context, a taxpayer can be taxed as a resident if they taxpayer maintains a “permanent place of abode” in New York and “spends” more than 183 days in-state. In cases like Zanetti and Leach v. Chu, New York taxpayers unsuccessfully argued that the term “day” under Tax Law § 605(b)(1)(B) should be interpreted as 24–hour periods from midnight to midnight, just as the taxpayer in BSI Holdings argued. But in both cases, the Appellate Division upheld a Tax Department regulation that generally defines “day” as “any part of a day.” Quite a contrast from the Arizona Supreme Court’s ruling in BSI Holdings.

On the one hand, the Arizona Supreme Court’s decision in BSI Holdings can be distinguished from the New York cases like Zanetti and Leach since the Arizona case involved the ADOT’s interpretation in that particular case, whereas the New York cases have analyzed the meaning of “day” under the regulation. And the standard of reviewing a regulatory definition is far more deferential to the taxing authority (as we saw in Zanetti and Leach) versus an ad hoc construction in a single case (as we saw in BSI Holdings). Still, the analysis in BSI Holdings may provide an opening for challenging the meaning of “spends” in New York under Tax Law § 605(b)(1)(B). But first let’s see how things play out in that case on remand to the Arizona Tax Court.

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