In 2018, the Arizona REALTORS® drafted and ran Proposition 126, “The Protect Arizona Taxpayers Act,” which was overwhelmingly approved by the voters. Pursuant to the Proposition, Article 9, Section 25 of the Arizona Constitution was amended to prohibit the state, cities and towns from imposing or increasing transaction-based taxes and fees on the privilege to engage in services performed in this state.

The constitutional amendment itself has a broad application, protecting consumers and small businesses across numerous industries from having to pay new and increased taxes on everyday services like childcare, doctor visits, and home repairs. Included in this list are real estate services performed by REALTORS® and other professionals within the real estate industry.

Without the protections afforded by Proposition 126, a sales tax on real estate related services would likely reduce the demand for housing by effectively increasing the cost of purchasing a home and could have discouraged buyers and sellers from using a REALTOR® based on the added expense that would result from a tax on their services.

While passing Proposition 126 was therefore of great importance, so too is ensuring that the law is upheld and judicially enforced when appropriate. It is for this reason that the Arizona REALTORS® filed an amicus curiae brief[1] with the Arizona Supreme Court in the case of State of Arizona v. City of Phoenix, No. CV-20-0019-SA.

In this litigation, the Court was asked to decide whether new and increased “trip fees” imposed by the City of Phoenix on commercial ground transportation vehicles (i.e. Uber and Lyft) that transport passengers to and from Sky Harbor Airport are prohibited by the language inserted in the Arizona Constitution via Proposition 126. Although the Court held that such new and increased trip fees are constitutional, the Court’s August 3, 2020 decision proves very beneficial to REALTORS®.

The key issue for the Court was whether the “trip fees” the City of Phoenix sought to charge are “transaction-based” as that term is used in Section 25 of the Arizona Constitution. As a part of its analysis, the Court defined a “transaction-based” fee as one “based on consumer spending for delivered goods or services.” The Court went on to specify that these types of taxes are calculated based on consumer spending in commercial dealings with persons engaged in a business or occupation.

Using the above definition, the Court concluded that the proposed “trip fees” are not based on the transaction between providers and passengers, but are instead based on the commercial vehicle’s use of Airport property. In other words, the City’s fee is not based on a passenger’s payment to the company providing their ride, which means it is not a “transaction-based” charge and is therefore constitutional.

So, what does this decision mean for REALTORS® practicing in Arizona?

Very clearly, a commission charged by a REALTOR® is based on a transaction between a provider of services and the party receiving the benefit of those services. A tax charged on a real estate commission would therefore be based on a consumer purchasing services within the scope of a commercial dealing and thus prohibited as intended by Proposition 126.

In other words, the Court’s decision convincingly supports the proposition that REALTOR® services are “transaction-based,” meaning that Proposition 126 should protect REALTORS® and consumers precisely as envisioned.

State of Arizona v. City of Phoenix represents the first time that the new law created by Proposition 126 has been analyzed, or even considered, by the Arizona Supreme Court. While future cases may provide further guidance, the precedent set by the Court in this case is overwhelmingly positive for REALTORS® and a reflection of all the time and hard work that went into passing Proposition 126.

[1] An amicus curiae brief, which translates to “friend of the court,” is a brief filed by a person or entity interested in influencing the outcome of a lawsuit but is not a party to the suit.

This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.

Scott M. Drucker, Esq., a licensed Arizona attorney, is Assistant CEO and General Counsel for the Arizona REALTORS® serving as the primary legal advisor to the association.