1 UNITED STATES DEPARTMENT OF TRANSPORTATION FEDERAL AVIATION ADMINISTRATION WASHINGTON, D.C.

CHANDLER AIR SERVICE

Complainant,

v.

CITY OF CHANDLER, ARIZONA

Respondent. FAA Docket No. 16-13-05

DECLARATION OF LEE GRAFSTROM IN SUPPORT OF THE ANSWER OF THE CITY OF CHANDLER , ARIZONA TO COMPLAINANT’S 14 C.F.R. PART 16 COMPLAINT

1. My name is Lee Grafstrom. I am an em ployee of the City of Chandler, Arizona (“City”), and serve as the Tax A udit Supervisor of the Management Services Department. My responsibilities include the collectio n of taxes on the sale of aviation fuels in the City. I have worked for the City’s Revenue Department in a variety of positions since August 3, 1999.

2. In the course of my responsibilities, I ha ve become familiar with the history of the City’s tax on aviation fuels, and the application and collection of that ta x. I am specifically familiar with the applicability of that tax to th e aviation fuel sales by the City and Chandler Air Service (“CAS”) and other sellers of aviation fuel in the City.
History of the City of Ch andler’s Privilege and Use Tax

3. The City first imposed privilege and use taxes on the sale of aviation fuels on January 1, 1960 pursuant to Chandler City Ordinance No. 273, approve d December 7, 1959, a true and accurate copy of which is attached as Exhibit 1. Ordinance 273 imposed a general transaction privilege (sales) tax on the sale of all tangible persona l property, except as expressly excluded, at a rate of 0.5% of the gross sales pric e. Aviation fuels are ta ngible personal property, are not excluded from the tax, and have been subj ect to the City's privilege and use tax since 1960.

4. In the years since the transaction privile ge tax was first adopted, the City’s tax code has been amended and recodified a number of times, but none of those amendments or recodifications suspended or affect ed the applicability of the tax to the sale of aviation fuels. Attached as Exhibit 2 is a true and correct copy of the City’s ta x code as it existed on December 30, 1987.2 5. In 1991, Arizona amended its tax laws to re quire that any tax applicable to the sale of jet fuel be based on the number of gallons sold instead of the gross sales price. Ariz. Rev. Stat. § 42-5352. My predecessor followed the Legisl ature’s consideration of that measure and I am familiar with the legislative history. The impetus for the law was the concern of airlines (in particular America West) that rapi dly fluctuating jet fuel prices made it difficult to calculate the applicable tax. The intent was to keep the effect ive tax rate the same as before, but change the method of measuring the tax to avoid the accounti ng complexities caused by fluctuating prices.

6. As part of the legislativ e process, local governments agreed to make similar changes in their transaction priv ilege and use taxes in order to avoid being expressly included in the state legislation. The Arizona Department of Revenue provided local governments with a detailed formula to use in order to assure th at the change in methodol ogy did not result in an increase in the actual amount of taxe s paid on the sale of jet fuel.

7. On January 23, 1992, the City adopted Ordinance 2258, which amended the City’s Tax Code to extract jet fuel from the gene ral retail classification, s ubject to a 1% tax rate on gross sales, to a new jet fuel classification subject to a $0.018/gallon ta x rate. Applying this new tax rate did not incr ease the effective tax rate or impose a new tax; it simply changed the way the tax on jet fuel sales was measured. A true and correct copy of Ordinance 2258 is attached as Exhibit 4.

8. In the years since 1992, the City made a number of amendments to the Tax Code but none of those amendments changed the applicab ility of the use tax to the sale of aviation fuels. In 1999, the City recodi fied the tax code by moving th e existing code language out of Appendix C and into Chapter 62. The recodifi cation did not make any substantive changes regarding the applicability of the City’s use tax to the use and sale of aviation fuels. A true and correct copy of Ordinance 3046 is attached as Exhibit 5.
City of Chandler’s Collection of the Transacti on Privilege and Use Tax on the Sale of Aviation Fuels

9. Applying the plain terms of th e tax code, the City has al ways treated the sale of aviation fuels, both Avgas and jet fuel, as subject to the City’s tax. Due to changes in the computer systems used to track tax payments and receipts, it is not possible to retrieve information prior to 1989 without undue expense. I have reviewed the records dated 1989 and after to determine how the City applied the tax to the sale and use of aviation fuel.

10. Those records show that, from 1989 th rough February, 1996, the Airport paid taxes to the City for the sale of Avgas. Those records also show that the City collected taxes from the sale of aviation fuels from an FBO at Stellar Airpark, a private airport located in the City. Until approximately early 1994, the City’s management services department took direct responsibility for assessing and coll ecting the tax from the sale of Avgas at the Airport, after which time Airport staff took over those functions directly. For reasons that are not clear, but which appear to be due to administrative oversig ht, the Airport did not pa y taxes on the sale of Avgas from March 1996 through October, 2006.

11. Those records also show that beginni ng in approximately February, 2003, CAS reported its aviation fuel sales as taxable, but claimed an off-setti ng deduction based on the flowage fee assessed by the Airport. In July 2005, CAS paid tax on it s sale of jet fuel for several months, but, again, stopped in February, 2006.