# ADOT

Director's Office Douglas A. Ducey, Governor John S. Halikowski, Director Scott Omer, Deputy Director for Operations Kevin Biesty, Deputy Director for Policy Dallas Hammit, Deputy Director for Transportation



### February 1, 2016

Federal Aviation Administration Byron K. Huffman, Acting Director Office of Airport Compliance and Management Analysis 800 Independence Avenue, SW Washington, DC 20591 Re: FAA New Policy on Use of Aviation Fuel Tax Revenue
Dear Mr. Huffman: Thank you for your letter, dated November 7, 2014, outlining the Federal Aviation Administration's (FAA) Policy Clarification for the Use of Aviation Fuel Tax Revenue. The Arizona Department of Transportation (ADOT) has communicated with each of the 17 taxing jurisdictions identified as collecting these aviation fuel taxes to assist them in the development and submittal of their respective Action Plans. Enclosed is Arizona's Action Plan that has been reviewed and approved by Arizona Governor Douglas A. Ducey. This Plan will bring our state into compliance with the new FAA Policy (79 Federal Regulations 6628) by December 8, 2017. If you have any further needs or questions, please contact Michael Klein, ADOT Aeronautics Group Manager at (602) 712-7647or by email at maklein@azdot.gov

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Sincerely,

1" 

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pm S. Halikowski ADOT Director

cc: Governor Douglas A. Ducey Rene Guillen, Policy Advisor, Governor's Office Mike N. Williams, FAA Phoenix Dist. Manager David Briant, AZDOR Director Kevin Biesty, ADOT Deputy Director for Policy

ARIZONA DEPARTMENT OF TRANSPORTATION 206 S. 17th Ave. I Phoenix, AZ 85007 I azdot.gov

# ADOT

ACTION PLAN TO COMPLY WITH Federal Aviation Administration's Policy on the Collection and Distribution of Aviation Fuel Taxes

Background On Nov. 7, 2014, the Federal Aviation Administration (FAA) published a "Final Policy Amendment," effective Dec. 8, 2014, that further clarified eligible expenses in its Revenue Use Policy for any revenues collected on aviation fuel taxes. This includes both aviation gasoline and jet fuel. According to FAA, the Airport and Airway Improvement Act of 1982 was intended toensure that aviation fuel taxes are spent only on State Aviation Programs or on other airportrelated purposes. In 1987, FAA published additional clarifications designed to prevent State and local governments from utilizing aviation fuel tax revenues for non-aviation purposes. However, there was enough flexibility in FAA's clarification that still indirectly permitted aviation fuel taxes to be used for other purposes. Accordingly, FAA's newest amendment only applies to State/local aviation fuel taxes in effect after Dec. 30, 1987. Arizona imposed a sales tax on jet fuel in 1991, so Arizona is not eligible for these grandfather rights.According to Arizona Revised Statutes (A.R.S.) §42-5352, Arizona imposes a tax of $3.05 centsper-gallon (CPG) on jet fuel, up to 10 million gallons, and distributes those monies for State/local General Fund purposes. Each year this generates between 4 to 5 million dollars. This does not comply with FAA's new rule. The following is data from the Arizona Department of Revenue regarding the amount of tax revenue collected on jet fuel and jet fuel use from FY 2012 through FY 2015:

FY12 FY13 FY14 FY15 Jet Fuel Distribution Base $1,523,951 $1,505,337 $1,276,165 $1,579,239 Non-shared $2,285,926 $2,258,006 $1,914,247 $2,368,859 Jet Fuel Use $731,896 $561,935 $382,061 $671,606 Total Revenue Collected $4,541,773 $4,325,278 $3,572,473 $4,619,704

General Fund $3,543,433 $3,339,132 $2,736,457 $3,585,145 Shared $998,340 $986,146 $836,016 $1,034,559 _Total Revenue Distributed $4,541,773 $4,325,278 $3,572,473 $4,619,704 Additionally, A.R.S. § 28-8344 imposes a 5 cent/gallon tax on aviation gasoline, In FY 2015 a total of $449,710.90 was collected and deposited into the State Aviation Fund. The distribution of these aviation fuel revenues to the State Aviation Fund is in compliance with the new FAA rule. Some Facts and Figures

• In Federal Fiscal Year 2015, FAA awarded approximately $3.2 billion in grants to State and local airports. Of this amount, Arizona received nearly $83 million.• Failure to comply with FAA's new rule could be a "breach of contract" and consequently

result in FAA grant monies being withheld from State of Arizona and some Arizona Public Airports.

• Arizona has 58 airports eligible to receive FAA grants. These grants are used to finance up to 95% of various airport capital projects/improvements.

• Arizona and each taxing jurisdiction must submit a draft action plan to FAA by February 8, 2016 and has until December 8, 2017 to fully comply.

• A.R.S. §42-5353 distributes jet fuel tax revenues to the State General Fund and A.R.S. §42- 5029 (state-shared revenues).

• FAA's new rule impacts State/local budgeting and requires legislative action to fully comply. Several Arizona counties/cities also tax jet fuel. Who's involved? The State's Transaction Privilege Use Tax (referred to as State Sales Tax) is collected via three methods: 1. State's collection of the Transaction tax; 2. State's collection of the same Excise Tax on behalf of 7 communities and 4 Counties (referred to as Program Cities); and, 3. six Non-Program cities collecting their own taxes directly. In addition to the State of Arizona, these are the 17 affected communities/counties: Program Cities Bullhead City Lake Havasu City Gila County Chino Valley Sierra Vista Maricopa County Gila Bend Winslow Pima County Goodyear Pinal County Non Program Cities Chandler Phoenix Glendale Prescott Mesa Scottsdale Each of these communities/counties has their own taxing authority to set tax rates. In this case, the 2015 rates range from a low of 0.015 cents per gallon to as high as 0.732 cents per gallon. Compliance with the FAA policy As stated above, failure to comply with FAA's new rule could be a "breach of contract" and consequently result in FAA grant monies being withheld from State of Arizona and these other communities/counties. If a community owns no airport but still receives jet fuel taxes, FAA has specifically stated they would enter civil administration processes. Compliance means the state must ensure that monies collected on aviation fuels by any taxing jurisdiction are used directly by aviation. Generally speaking, there are three avenues which will comply. The first, all monies collected will be deposited into the State Aviation Fund. The second would be to deposit the monies into the account of each airport from which the taxes were assessed and used for any purpose on the airport supporting aviation activities. The third would be to stop collecting any taxes on aviation jet fuel if they are not to be used for aviation purposes.
Actions 1. ADOT to meet as often as necessary with all 17 of communities, counties and the State to discuss their preferences on how to comply with the FAA Policy and ensure complete understanding of the consequences of noncompliance. The purpose of this action wouldbe to create a consensus of all affected communities. This action could take a year to accomplish. 2. Develop a series of schedules so each community can go through their respective processes as well as the legislative process for the state and finish with a complying program that can be implemented before December 8, 2017.