The Arizona Court of Appeals upheld a state tax court decision which affirmed Transaction Privilege Tax (TPT) assessments of over one and a half million dollars which the State Department of Revenue (DOR) and the City of Glendale sought to collect from the Arizona Cardinals football team was owed. The tax was assessed on a particular Facility Use Fee (Fee) which the Cardinals collected alongside sales of tickets to State Farm Stadium in lieu of charges for facility or city supplied parking spaces. The money collected for the Fee is used to service bonds which had been utilized to finance State Farm Stadium. The DOR audited the Cardinals and discovered the team had not been paying the TPT on the Fee, which lead to a proposed assessment just over $1.3 million owed to Arizona and just under $400,000 owed to the City of Glendale. The Cardinals argued both that the superior court incorrectly called the Fee part of retail gross income, and that since they are only acting as the Authority’s agent when collecting the Fee, it should be excluded from tax calculation. The superior court disagreed with both arguments and upheld the DOR’s decision to include the Fee in the gross receipts and thus the tax base.
The primary arguments in this case were based on three agreements which the Cardinals and the Stadium Authority entered into in 2005: The Amended and Restated Cardinals Use Agreement, the Facility Use Fee Agreement, and the FUF Trust Agreement. These three agreements structure the operation of State Farm Stadium and dictate how the Fee in question is collected and distributed by the Team. The Amended and Restated Cardinals Use Agreement obligates the Cardinals to play all home games at State Farm Stadium and the City of Glendale was also obliged to provide certain infrastructure and parking. A separate parking agreement allowed Stadium LLC, a Cardinals team affiliate, to retain all parking revenues for parking at the Stadium Facility during home games, except for the Net Facility Use Fees and Authority Tax Revenues. The agreements grant the Cardinals control of pricing, advertising, and distribution of the tickets, which means the Team owns all revenue on ticket sales for home games other than the Fee which is separately stated. The agreement requires the Team to collect and pay the Fee on ticket purchases and requires the Team to collect the fee on tickets sold through the Stadium box office on non- Cardinals events (the DOR presumes the businesses hosting non-Cardinals events would be assessed for TPT separately). The Use Agreement does allow the Cardinals to offer limited complimentary tickets which are not subject to the Fee, but the Team does have to pay the Fee for tickets offered above the allotted amount even if the Fee is not charged to recipients of the free tickets. The final agreement at issue is the FUF Trust Agreement, which controls what the Cardinals are to do with the Fee, from depositing it into an account with other revenue, to a same day transfer into the Fee Trust Account, to the final, post-game transfer to the Authority, which gains full rights, title, and interest to the money at the time of transfer.
Though the Court of Appeals agreed with the Team that the superior court incorrectly used the “gross receipts” definition which applies to the retail classification rather than the amusement classification, the Court goes on to highlight that TPT is based on “gross income”, which does include the “receipts of a taxpayer derived from trade, business, commerce, or sales”. In their review, the Court additionally noted that Arizona specifically includes admission and user fees as income under the amusement classification in the state laws, and that the Fee in question is specifically called a “Facility Use Fee”. Since the Arizona legislature clearly defined “gross income” to include admission and user fees, there is no room to apply another definition, thus, the Fee is subject to the TPT. Additionally, since the legislature did clearly define the term “gross income”, the Cardinals were not entitled to the more lenient reading of the TPT statues they had requested which they would have been entitled to under a more ambiguous statute.
The next argument the Cardinals made was that the Fee should be excluded from gross income as it was collected related to an expense and that it was a pass-through fee where they merely acted as agents. Since the Agreements themselves established the Fee was in exchange for the Authority giving the team control over parking, this argument fell flat. The team argued it was not an expense because the Team must be considered separate from the Authority, and the Fee was unilaterally applied by the Authority. The Court held this was always the case with fees—one side seeks the fee, the other pays it—and in this case the obligation to pay the Fee is set out in the Agreements which the Cardinals entered into and could have negotiated at the time. Next, the Team claimed the fee is simply collected and passed on to the Authority, which the Court rejected because the Fee must be paid even if not separately collected and because the Team must pay the Fee even when it gives away tickets over the limits in the Agreement. Finally, the team pointed to their accounting practices, arguing that the Fee is not income because it is booked neither as revenue nor as expense. Further, they claim the Agreements themselves highlight the fact that the Cardinals have no interest in the Fee. However, the Court rejected this attempt to use their accounting practices to avoid the liability, pointing out that the Agreements allow for the Team affiliated Stadium entity to receive some of the Fee and count it as income, thus completely negating the argument this is merely a pass-through transaction.
For all these reasons, the Fee is considered to be gross income and thus subject to TPT under the amusement classification as an “admission or user fee”. Though there are fact patterns which may create an agent relationship which would allow businesses to exclude certain funds, the existence of an agent relationship is a question of fact related to the relationships among the parties, which is undisputedly not the case here. Since the Stadium and their employees and contractors are not considered Authority employees or agents according to all three agreements in consideration, an agency relationship is expressly disclaimed.
The Court did also consider if the City of Glendale would also consider the Fees taxable. Since the Cardinals did not argue that the city code language varied significantly from Arizona’s TPT language and limited their argument to similar reasons used arguing against the State level assessment related to taxable income, and pass-through functions, the Court held that the City’s TPT would apply to the Fee as well.
Arizona taxpayers need to be aware of this case because it shows how different agreements and legislative statutes interact. Because the legislation was very clear in defining terms, the Cardinals were unable to request a more liberal review standard when considering the statutes in question. Further, much of the structuring of the original agreements between the Team and the Stadium Authority made it so any possible arguments the Team tried were closed off. Taxpayers need to ensure they are understanding the laws of the local jurisdictions and the structures created in any contracts they enter into during the course of business. Though it is unlikely that another Arizona taxpayer would be looking to build an NFL stadium in Arizona, this case does have implications which could impact the way they choose to structure contracts or carry out accounting functions. (Arizona Cardinals Football Club LLC v. Arizona Department of Revenue, No. 1 CA-TX 24-0003