SCOTIP. LEWIS slewis@ andersonkreiger.corn T:6 I7-62

I-6560 F:6I7-62

I-6660 March 31,2016 ANDERSON KR E IG E R SENTBYEMAILand FEDERAL EXPRESS ByronK.Huffman

,Acting Director Officeof Airport Compliance and Management Analysis Federal Aviation Administration 55MStreetSE Washington DC20003 Re: City ofPlwen ix/AviationFuel Taxes DearMr.Huffman

: We representthe Cityof Phoenix (the "City")

,sponsorof Phoenix Sky Harbor International Airpmi, with respect
to compliance withthe FAA's Policy and Procedures Concerning theUse of Airport Revenue (the "Revenue Use Policy")

asitrelatestotheuseof proceeds from taxeson aviation fuel.TheFAA granted the Cityanextension from December

8 ,2015until March 31, 2016tosub

.mitanaction plan underthe RevenueUse Policy. Having nowcarefully reviewed the City

'staxesonaviation fuel,weareoftheviewthat theyare grandfathered
and

,accordingly

, thatthereisnoneedforthe Citytotake anyconective actions. Federal Regulatory Bacl{ground The Cityhasfor manyyearsbeen

arecipient offederal grantsunderthe Airport Improvement Program ("AlP"). Since 1982, Congress has mandated thatthe City,asasponsorofAlP grants, provide

agrantassurance

tothe Secretary
of Transportation, acting through the Federal Aviation Administration

("FAA'

' ),thatthe Citywill onlyuseairport revenueforthe capital and operating costsofits airport system,andnotfot General Fund purposes.This requirement

is cmTently codified
as49U.S

.C. § 47107(b)(l);

itisthe subjectofAlP Grant Assurance 25;anditis amplified bytheFAA

's"Policy and Procedures Concerning theUseof Airport Revenue

,"64 Fed. Reg

.7696 (Feb. 16, 1999) (the

"RevenueUse Policy")

. ANDERSO

N &KR EI G E R L L P
I O N E C A N AL PARK

,S UIT E 2 00

,C AMBRID GE, MA 02141

I 617 .62

1 .6 500Byron K. Huffman March 31,2016 Page2 In 1987, Congress amended the AlP statute to expand the scope ofthe revenue-use restriction

so that it would apply not only to "the revenues generated by a public airport," but also "local taxes on aviation fuel (except taxes in effect on December 30, 1987)."

1 The FAA's Revenue Use Policy, promulgated

in 1999, provides **in~**II.B.2, consistent with the 1987 statute, that "[ s ]tate or local taxes on aviation fuel (except for taxes in effect on December 30, 1987) are considered

to be airpmi revenue subject to the revenue-use requirement."

64 Fed. Reg. 7716. The Revenue Use Policy was otherwise silent on the issue. In November 2013, the FAA gave notice of a proposed amendment

to the Revenue Use Policy that would focus on compliance with the 1987local aviation fuel tax provision enacted by Congress. See 78 Fed. Reg. 69789 (Nov. 21, 2013). After receiving comments, the FAA promulgated

a formal amendment

to the Revenue Use Policy in November 2014. See 79 Fed. Reg. 66282 (Nov. 7, 2014) (the "Amended Revenue Use Policy"). The FAA's Amended Revenue Use Policy took effect on December

8, 2014. 79 Fed. Reg. 66283. The Policy requires that affected airport sponsors (and non-sponsoring units of government imposing aviation fuel taxes) submit "action plans" to the FAA by December

8, 2015 detailing how they will comply with the Amended Revenue Use Policy and the underlying 1987 statutory provision. See 79 Fed. Reg. 66386. The Phoenix Taxes on Jet Fuel The City has continuously imposed taxes on the sale and use of jet fuel since at least April1, 1987.

2 Phoenix Ordinance G-2976
(a true and correct copy of which
is attached

at Tab A), effective April
1, 1987, rewrote Chapter
14 of the Phoenix City Code ("PCC"), "Privilege and Excise Taxes,"
in accordance with the State's model tax code. Section 14-460(a)
of the new tax law imposed

a tax of 1.2% of the gross income from the business activity of selling tangible personal property, including jet fuel, at retail, and Section 14-610(b)(1) imposed

a tax of 1.2% of the cost of tangible personal property, including jet fuel, acquired from

a retailer and stored or used in the City. The City began to levy these taxes
on the sale and use of jet fuel effective April 1, 1987. See Ordinance G-2976, Section
7. There
is no doubt that these were local taxes on aviation fuel "in effect on December 30, 1987" within the meaning of§ 47107(b)(1), Grant Assurance
25 and the FAA's Amended Revenue Use Policy. The City used the proceeds of these taxes for General Fund purposes,

as allowed by federal law. If the City were still levying privilege taxes in these forms on the sale and use of jet fuel, there would, accordingly,

be no doubt that the City could lawfully continue
to use the proceeds of these taxes
for General Fund purposes.

In 1991, however, the City amended the form of its taxes In 1996, the Congress made the airport revenue-use restrictions applicable

to all airpmt proprietors that receive federal financial assistance even ifthey are not AlP grant sponsors. See 49 U.S.C.

§ 47133(a). This statutory enactment also grand fathered local taxes on aviation fuel in effect on December 31, 1987 and does not alter our analysis. 2 The City of Phoenix does not tax the sale or use ofavgas
or receive any revenue from the State of Arizona's taxation of avgas.Byron K. Huffman March 31, 2016 Page
3 on the sale and use of jet fuel. Phoenix Ordinance G-3458
(a true and correct copy ofwhich

is attached
at Tab B) amended the PCC to substitute for the 1987 aviation fuel taxes, which were levied on a percentage
of gross income or cost basis, new privilege taxes on the sale and use of jet fuel that are levied on the basis of the volume fuel, rather than on the basis of its price: 0.732 cents/gallon. This new form of jet fuel tax took effect on October

1, 1991 (see Ordinance
G3458, Section
8) and has remained

in effect ever since. The City's conversion
of the form of its levies raises the question of whether the current taxes were "in effect on December 30, 1987" within the meaning of the federal revenue-use rule. Congress provided no guidance
as to exactly what it meant when it excluded from the revenueuse rule local taxes on aviation fuel "in effect on December 30, 1987," and the FAA does not discuss this "grandfathering"
rule in any detail in its Amended Revenue Use Policy. The Amended Revenue Use Policy does provide, however, that it applies "to a new assessment

or imposition
of a tax on aviation fuel, even if the tax could have been imposed earlier under

a statute enacted before December 30, 1987." Amended Revenue Use **Policy,~**IV.D.4.d,
79 Fed. Reg. at 66288 (emphasis added). The commercial context and legislative history of the 1991 amendments

to the City's jet fuel taxes show that they were not a "new assessment

or imposition"

of a tax within the meaning of the Amended Policy because the change in the form of the tax was not intended
to increase the amount of the assessment. The 1991 amendments were prompted by the airline industry, which consumes the lion's share of jet fuel and bears the heaviest burden of the jet fuel tax. Airlines have

a strong desire for predictability

in their costs. Because the quantity of jet fuel to be consumed

is stable and predictable, but the price of jet fuel is not (as events of the past year have dramatically illustrated), the airline industry sought to have jet fuel taxes based upon gallons purchased, rather than upon dollars paid, throughout Arizona. This can be seen from various contemporaneous documents that were found in the City's archives. An August 12, 1991 memorandum from the Tax & License Administrator

to the Deputy City Manager
(a true and correct copy of which
is attached
at Tab C) reports that (a) representatives of America West Airlines and Southwest Airlines (then the City's two dominant hub carriers) supported the tax revision; (b) the amendment "provides the airline industry with the ability to more accurately budget taxes on jet fuel because quantities purchased are relatively stable while sales prices can vary widely"; and, impmiantly,

(c) "[t]he taxation of jet fuel at a rate of0.732 cents per gallon will return approximately
the same $1,400,000

in City taxes received during 1990 on 1.2 percent of jet fuel sales." The August 13, 1991 "Request for Council Action"
(a true and correct copy of which
is attached at Tab D), which led to the new tax provisions

in Phoenix, recites that the purpose of the amendments was to provide the airlines with better ability to budget their jet fuel tax liability and to bring the City's jet fuel tax into alignment with the amended State provision. And an August 15, 1991 memorandum

to the City's Tax Administrator
and Deputy City Clerk from the Chief Counsel for the Civil Division
(a true and correct copy is attached

at Tab E) reiterates thatByron K. Huffman March 31, 2016 Page4

' "the rate is designed

to be revenueneutral and to track the percentage-to-gallon formula used in tb.e newState law" (emphasis added). The airlines serving Phoenix have obviously known about the change
in the form ofthe City's jet fuel tax since 1991

-after all, the amendment wasmade at their request and with their supportbut the airlines,
to our knowledge, have neverclaimed that the 1991 changes
in the fmm of the jet fuel taxes in Phoenix caused the City to lose its "grandfathered" status and required the City to use jet fuel tax revenues only for airpmi oraviation purposes. Given the purposeand effect of the 1991 amendment

-to improve the ability of the airlines
to budget for the payment of jet fuel taxes without increasing the amounts

to be paid to the Citythe FAA should find that the 1991 amendment wasnot "a newassessment

or imposition
of a tax" within the meaning **of~**IV.D.4.d of the Amended Policy.

3 We hope that the FAA will agreethat the City's current taxes on jet fuel sales and usein Phoenix are "grandfathered" under federal law and that there is noneed for the City to take anycorrective action with respect
to its useof jet fuel tax revenuesfor General Fund purposes. The City commits that it will advise the FAA of anyfuture amendments

to its tax code that could affect its grandfathered status

. Please let usknow ifthe FAA has any questions
orconcernsabout the City's position. Thank you. esE. Bennett

,A.A.E

. Denise Olson Brad Holm Jo Ellen McBride The City is awarethat the Arizona Department

of Transportation ("ADOT") has submitted

to the FAA an Action Plan with respect
to the State's owncollection and distribution

of aviation fuel tax revenues-and that ADOT makes noclaim that the State's aviation fuel taxes are "grandfathered" under federal law

.Under Arizona Jaw

,ADOT collects transaction privilege use taxes, including aviation fuel taxes

,for itself and onbehalf of 11 " programcities." Phoenix

is not a "program city"; ADOT does not collect anyaviation fuel taxes onbehalf of the City ordistribute anyaviation fuel tax revenue
to the City; and the City is not bound by ADOT's apparent position that the aviation fuel taxes collected and distributed
by the State are subject
to the federal airport revenue-use constraints.