City of Phoenix v. Orbitz Worldwide

IN THE

SUPREME COURT OF THE STATE OF ARIZONA
CITY OF PHOENIX ET AL,
Plaintiffs/Appellees/Cross Appellants,

v.

ORBITZ WORLDWIDE INC. ET AL,
Defendants/Appellants/Cross Appellees.

No. CV-18-0275-PR
Filed September 9, 2019

Appeal from the Arizona Tax Court
The Honorable Christopher T. Whitten, Judge
Nos. TX2014-000470
TX2014-000471
TX2014-000472
TX2014-000473
TX2014-000474
TX2014-000475
(Consolidated)
AFFIRMED IN PART; REVERSED IN PART AND REMANDED

Memorandum Decision of the Court of Appeals,
Division One
Nos. 1 CA-TX 16-0016
1 CA-TX 16-0018
(Consolidated)
Filed Sep. 6, 2018
VACATED IN PART

COUNSEL:

John Crongeyer (argued), Crongeyer Law Firm P.C., Atlanta, GA; Garrett
W. Wotkyns, Schneider Wallace Cottrell Konecky Wotkyns LLP, Scottsdale;
and Scott Andersen, Wright Welker & Pauole PLC, Phoenix, Attorneys for
City of Phoenix, City of Apache Junction, City of Chandler, City of Flagstaff,
City of Glendale, City of Mesa, City of Nogales, City of Prescott, City of
Scottsdale, City of Tempe, and City of Tucson
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

Thomas M. Peterson (argued), Morgan Lewis & Bockius LLP, San
Francisco, CA; and Barbara J. Dawson, Andrew M. Jacobs, Snell & Wilmer
L.L.P., Phoenix, Attorneys for Orbitz Worldwide Inc, Orbitz LLC, Trip
Network Inc, Internetwork Publishing Corp, Expedia Inc, Priceline.com
Inc, Travelweb LLC, Travelocity.com LP, Hotels.com LP, and Hotwire

Pat Derdenger, Lewis Roca Rothgerber Christie LLP, Phoenix; and Bennett
Evan Cooper, Dickinson Wright PLLC, Phoenix, Attorneys for Amicus
Curiae Arizona Tax Research Association

Mark Brnovich, Arizona Attorney General, Rusty D. Crandell, Deputy
Solicitor General, Scot G. Teasdale, Assistant Attorney General, Phoenix,
Attorneys for Amicus Curiae Arizona Department of Revenue

JUSTICE LOPEZ authored the opinion of the Court, in which JUSTICES
BOLICK, GOULD, and BALES (RETIRED) and JUDGE ECKERSTROM 1
joined. VICE CHIEF JUSTICE TIMMER, joined by CHIEF JUSTICE
BRUTINEL, concurred in part and dissented in part.

JUSTICE LOPEZ, opinion of the Court:

¶1 We consider whether online travel companies (“OTCs”) like
Orbitz Worldwide Inc. and the other appellants are subject to municipal
privilege taxes under Model City Tax Code (“MCTC” or “the Code”)2
§§ 444 and 447, and if so, whether the City of Phoenix and other city
appellees (collectively the “Cities”) may assess those taxes, penalties, and
interest retroactively. We hold that the OTCs are subject to taxation under

1 Pursuant to article 6, section 3 of the Arizona Constitution, the Honorable
Peter J. Eckerstrom, Judge of the Arizona Court Appeals, Division Two, was
designated to sit in this matter.
2 Although each of the Cities has passed its own tax ordinance, those

ordinances are based on and do not differ substantively from the MCTC.
Because the parties reference the MCTC in their briefs, we do so as well
throughout this opinion.
2
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

§ 444 because they are “brokers”—as defined by MCTC § 100—engaging in
“the business of operating a hotel,” and the proceeds from this business—
their service fees and markups on room rental rates—constitute taxable
gross income. We further hold that the OTCs are not subject to taxation
under § 447 because they are not “hotels.” Finally, we hold that MCTC
§ 542(b) bars taxation based on a new policy, procedure, or interpretation
of the Code until a city has adopted and provided impacted taxpayers with
clear notice of the change, and we remand to the tax court to determine
whether § 542(b) bars the Cities from assessing taxes, penalties, and interest
due under § 444 before the 2013 Notices of Tax Assessment (“2013
Assessments”).

I.

¶2 The OTCs develop, operate, and maintain websites that offer
travel-facilitation services. One of those services allows travelers to reserve
and pay for hotel rooms. The OTCs do not own the hotels or rooms they
advertise; they contract with the hotels to list rooms available for rent.

¶3 When a customer requests a hotel reservation, an OTC
collects the customer’s personal and payment information and provides a
total price for the room. The total price is a combination of the “Reservation
Rate” or “Nightly Rate” and an amount representing the “Taxes and Fees”
or “Tax Recovery Charge and Service Fees.” The “Reservation Rate”
consists of the room rental rate set by the hotel in its contract with the OTC
plus an additional markup that the OTC retains for its services. The “Taxes
and Fees” consist of the tax rate the hotel later remits to the city as a
privilege tax and an additional service fee paid to the OTC. The OTC does
not disclose to the customer the amount of the markup on the room rental
rate or the portion of the “Taxes and Fees” remitted for taxes.

¶4 Before finalizing a transaction with a customer, the OTC
confirms the room rates and availability with the hotel and requests a
reservation on the customer’s behalf. After the hotel confirms the
reservation, the OTC charges the customer’s credit card, appearing on the
statement as the merchant of record. Until the customer checks into the
hotel, the OTC provides customer service support and facilitates any
modifications or cancellations.

3
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

¶5 After a customer’s stay, the hotel invoices the OTC for the net
room rate—not including the OTC’s markup—and the amount covering the
tax owed by the hotel. The hotel then remits the tax to the city. Neither the
OTC nor the hotel pays the city any money representing tax on the OTC’s
service fees or markups.

¶6 In 2013, the Cities issued privilege tax assessments against the
OTCs—the 2013 Assessments—following a multi-year audit of the OTCs’
books and records. The assessments were based on the Cities’ position that
the OTCs owed unpaid privilege taxes under §§ 444 and 447 for engaging
in the business of operating hotels, or alternatively, for acting as brokers for
hotels. The OTCs challenged the assessments, and in May 2014 an
administrative hearing officer overturned them, concluding the OTCs were
not subject to taxation under §§ 444 or 447 because the OTCs were neither
hotel operators nor brokers.

¶7 In the ensuing appeal, the tax court partially granted and
partially denied the Cities’ motion for summary judgment. The court
concluded the OTCs do not own or operate hotels, but the OTCs “clearly
and unambiguously” qualify as “brokers” under the Code and are subject
to taxation under both §§ 444 and 447. The court also concluded that the
Cities’ position on OTCs as “brokers” in the 2013 Assessments constituted
“a new interpretation or application” under § 542(b), thus the Cities could
only assess taxes prospectively.

¶8 The OTCs appealed the tax court’s ruling regarding their
liability for taxes, and the Cities cross-appealed the ruling barring
retroactive collection of the tax. The court of appeals held that the OTCs
are subject to taxation under § 444 because they qualify as “brokers”
engaging in the taxable activity under the provision, and the OTCs’
proceeds from that activity—service fees and markups—are part of the
taxable gross income. City of Phoenix v. Orbitz Worldwide Inc., Nos. 1 CA-TX
16-0016; 1 CA-TX 16-0018, 2018 WL 4265950, at *3 ¶ 14 (Ariz. App. Sept. 6,
2018) (mem. decision). It further held that the OTCs are not subject to
taxation under § 447 because the tax liability of that provision is limited to
hotels. Id. at *5 ¶ 27. Finally, the court held that the Cities could assess the
taxes, penalties, and interest under § 444 retroactively, for years preceding
the 2013 Assessments, “[b]ecause there was no change in the Cities’
application or interpretation of the Code and the OTCs’ business activities
are not new.” Id. at *6 ¶ 32.

4
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

¶9 We granted review because the applicability of municipal
privilege taxes to the OTCs is a recurring legal issue of statewide
importance. We have jurisdiction under article 6, section 5(3) of the
Arizona Constitution.

II.

¶10 “City . . . ordinances are to be construed by the same rules and
principles which govern the construction of statutes,” Rollo v. City of Tempe,
120 Ariz. 473, 474 (1978), and “we review issues of statutory interpretation
de novo, seeking to effectuate the drafters’ intent.” City of Surprise v. Ariz.
Corp. Comm’n, 246 Ariz. 206, 210 ¶ 10 (2019). “In construing a specific
provision, we look to the statute as a whole and we may also consider
statutes that are in pari materia—of the same subject or general purpose—
for guidance and to give effect to all of the provisions involved.” Stambaugh
v. Killian, 242 Ariz. 508, 509 ¶ 7 (2017). If possible, we give meaning “to
every word and provision so that no word or provision is rendered
superfluous.” Nicaise v. Sundaram, 245 Ariz. 566, 568 ¶ 11 (2019). If the
language of a statute is unambiguous, “we apply it without further
analysis.” Glazer v. State, 237 Ariz. 160, 163 ¶ 12 (2015).

III.

¶11 We first address whether the OTCs are subject to taxation
under § 444. This provision imposes a tax on “the gross income from the
business activity upon every person engaging in or continuing in the
business of operating a hotel charging for lodging.” Therefore, to be subject
to taxation under § 444, the OTCs’ business activities must constitute “the
business of operating a hotel,” the proceeds the OTCs receive from hotel
customers in the form of markups and service fees must be part of the
taxable gross income contemplated by § 444, and the OTCs must qualify as
“persons” liable for the tax. We agree with the court of appeals that all three
requirements are satisfied here. See Orbitz, 2018 WL 4265950, at *3 ¶ 14.

¶12 At the outset, we recognize that other jurisdictions have
reached varying conclusions on whether OTCs are subject to taxes on hotel
lodging. Compare, e.g., City & County of Denver v. Expedia, Inc., 405 P.3d 1128,
1138 ¶ 36 (Colo. 2017) (city ordinance taxed privilege of purchasing lodging
and OTCs’ markups are inseparable from selling price of lodging), and

5
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

Travelocity.com, L.P. v. Wyo. Dep’t of Revenue, 329 P.3d 131, 143 ¶ 41, 145 ¶ 55
(Wyo. 2014) (OTCs qualify as “vendors,” taxable under city’s ordinance,
and their markups are part of the “sales price” subject to city’s tax on hotel
lodging), with State v. Priceline.com, Inc., 206 A.3d 333, 341 (N.H. 2019)
(statute at issue explicitly limited lodging tax to “operators,” and OTCs did
not qualify as hotel operators), and Pitt County v. Hotels.com, G.P., LLC, 553
F.3d 308, 313 (4th Cir. 2009) (same). Each of these cases was decided based
on the language of the particular statute or ordinance at issue. Because the
language of § 444 and the rest of the Code differs in several key respects—
especially with respect to its treatment of “brokers”—we do not find these
cases particularly instructive in resolving the issues before us. Instead, our
analysis is guided by the language of the Code.

A.

¶13 We agree with the court of appeals that the OTCs are engaged
in the taxable business activity: “the business of operating a hotel.” Orbitz,
2018 WL 4265950, at *4 ¶ 21. As a threshold matter, we note that § 444 is a
transaction privilege tax because it levies “an excise tax on the privilege or
right to engage in an occupation or business . . . . [It] is not a sales tax, but
rather is a tax on the gross receipts of a person or entity engaged in business
activities.” See Ariz. Dep’t of Revenue v. Action Marine, Inc., 218 Ariz. 141, 142
¶ 6 (2008) (internal quotations and citations omitted); see also MCTC § 400
(broadly imposing privilege taxes); Rigel Corp. v. State, 225 Ariz. 65, 67 ¶ 12
(App. 2010) (noting that transaction privilege taxes, as compared to sales
taxes, are levied on gross receipts rather than individual sales and on
business providers rather than consumers).

¶14 The taxable business activity under § 444 is “the business of
operating a hotel.” Section 100 defines “business” to mean, in relevant part,
“all activities or acts, personal or corporate, engaged in or caused to be
engaged in with the object of gain, benefit, or advantage, either directly or
indirectly.” This section also defines “hotel” as brick-and-mortar lodging
places. 3 But the Code does not define what it means to “operate” such

3 Under § 100, “‘Hotel’ means any public or private hotel, inn, hostelry,
tourist home, house, motel, rooming house, apartment house, trailer, or
other lodging place within the City offering lodging, wherein the owner
thereof, for compensation, furnishes lodging to any transient, except foster

6
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

locations. Because it does not appear from the context that the drafters
intended a special meaning, we are guided by the word’s ordinary
meaning. See State Tax Comm’n v. Peck, 106 Ariz. 394, 395 (1970); Antonin
Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 69
(2012) (“Words are to be understood in their ordinary everyday meanings
– unless the context indicates that they bear a technical sense.”).

¶15 The OTCs and the dissent assert that the “business of
operating a hotel” must be limited to the business activity of hotel owners
and operators—those who physically own or furnish lodging to customers.
See infra ¶ 49 (citing Pitt County, 553 F.3d at 313 and Mont. Dep’t of Revenue
v. Priceline.com, Inc., 354 P.3d 631, 635 (Mont. 2015)). We disagree. As we
noted previously, supra ¶ 12, the cases upon which the dissent relies are
inapposite because their holdings were decided based on the language of
the particular statute or ordinance at issue. In Pitt County, the tax provision
at issue levied a tax on “[o]perators of hotels, motels, tourist homes, tourist
camps, and similar type businesses.” 553 F.3d at 311. Similarly, the
Montana tax provision levied a tax on an “owner or operator” of lodging
facilities. Mont. Dep’t of Revenue, 354 P.3d at 634 ¶ 8. Here, § 444 levies a
much broader tax on “every person engag[ed] . . . in the business of operating
a hotel.” (Emphasis added.)

¶16 In construing § 444, we look to the Code as a whole and
attempt to give meaning “to every word and provision so that no word or
provision is rendered superfluous.” See Nicaise, 245 Ariz. at 568 ¶ 11;
Stambaugh, 242 Ariz. at 509 ¶ 7; Scalia & Garner, supra ¶ 14, at 167, 174
(discussing the “Whole-Text” and “Surplusage” canons). And while the
drafters used specific language to limit the additional tax liability of § 447
to the gross income of “hotels,” 4 they chose not to do the same for § 444.
This difference suggests that the tax liability of § 444 extends beyond the
hotels’ owners and operators. Indeed, § 444 expressly imposes the tax on
the entire business activity and on every “person” engaged in that activity.
See infra ¶¶ 29–30 (discussing the Code’s treatment of the defined term
“person” and how it applies to the OTCs).

homes, rest homes, sheltered care homes, nursing homes, or primary health
care facilities.”
4 Section 447 levies a tax on “the gross income from the business activity

of any hotel engaging or continuing within the City in the business of
charging for lodging.”
7
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

¶17 The dissent further suggests that § 447 and § 444 impose taxes
on the same taxpayer (i.e., hotel operators). Infra ¶ 52. We disagree.
Although § 447 does not identify a specific taxpayer, it identifies the taxable
gross income as “the gross income from the business activity of any hotel.”
This taxable gross income is distinctly different than that identified in § 444:
the gross income from the entire business activity and on every person
engaged in that activity. Because the taxable gross income differs between
the two provisions, the impacted taxpayer may differ as well. The fact that
the tax under § 447 is “[i]n addition to” the tax under § 444 simply means
that some of the taxpayers liable for the § 444 tax (i.e., hotel owners and
operators) will also be liable for the § 447 tax. While the dissent ignores the
drafters’ choice to use different language to distinguish the tax liabilities of
§§ 444 and 447, we interpret this difference to mean that § 444 applies more
broadly—with respect to both taxable gross income and taxpayers—than
§ 447.

¶18 Thus, we reject the OTCs’ and dissent’s assertion and consider
the more expansive meaning of “operating a hotel.” As a transitive verb,
“operate” means “to put or keep in operation.” Operate, Merriam-Webster,
https://www.merriam-webster.com/dictionary/operate (last visited
September 4 , 2019). And “operation” means “the quality or state of being
functional or operative.” Operation, Merriam-Webster, https://
www.merriam-webster.com/dictionary/operation (last visited September
4, 2019). Considering these ordinary meanings and the definitions
provided by the Code, we conclude that § 444 imposes a tax liability on any
“person”—not just a hotel owner or operator—that engages for profit in
business activities that are central to keeping brick-and-mortar lodging
places functional or in operation. Because the function of hotels—as
defined by the Code—is to furnish lodging to transients, the taxable
business activities are those that are essential to furnishing lodging. See
§ 100 (definition of “hotel”).

¶19 Undeniably, the OTCs engage in those types of business
activities. From the time a customer makes a credit card payment until the
customer physically checks into the hotel, the OTCs facilitate all aspects of
the transaction and receive compensation in the form of service fees and
markups on the room rental rates for providing their services. It would be
illogical to conclude that the OTCs—which advertise available rooms,
solicit potential customers, collect customers’ information, process

8
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

payments, confirm reservations, provide customer service, and facilitate
reservation modifications and cancellations—are not actively engaged in
“the business of operating a hotel.” Indeed, all these services provided by
the OTCs are central to keeping a hotel functional and in operation.

¶20 We similarly reject the OTCs’ related argument that they are
not engaged in the taxable business activity of “operating a hotel” because
they perform only a limited number of hotel operations before customers
check into the hotels. Nothing in the Code suggests that the taxable gross
income of § 444 is limited to the income of persons who perform all the
functions of a hotel. On the contrary, the fact that the drafters of § 444
imposed the tax on the gross income of the broadly defined “person”
(which includes “brokers,” infra ¶ 29) rather than the more narrowly
defined “hotel” necessarily implies that the drafters intended to tax the
gross income of all persons engaged in hotel operations and not just the
gross income of those who perform all the functions of a hotel. See City of
Flagstaff v. Mangum, 164 Ariz. 395, 398 (1990) (“Where the legislature uses a
term within one statute and excludes it from another, the term usually will
not be read into the provision from which it was excluded.”).

¶21 The dissent contends that our holding here “necessarily
imposes [§ 444 tax liability] on [other] persons and entities . . . who offer
hotel booking services for a profit,” such as “airlines, credit card companies,
[and] brick-and-mortar travel agents.” Infra ¶ 54. We agree. As adduced
in the record and during oral argument, hotels already remit taxes based on
the full amount charged to hotel customers, with no deductions for
markups or service fees, when brick-and-mortar travel agents and credit
card companies (e.g., American Express Travel) facilitate hotel lodging but
customers pay the entire transaction amount to the hotel. That brick-and-
mortar travel agents and credit card companies’ service fees, like the OTCs’,
may be taxable if customers pay such entities directly rather than hotels is
not an unintended consequence. But the dissent takes this one step further,
suggesting that our holding would also impose tax liability on “third-party
entities who provide maintenance, housekeeping, [and] gardening.” Infra
¶ 55. On this point, such secondary services are plainly distinguishable
from those performed by the OTCs and are not necessarily central to the
primary function of a hotel to furnish lodging. Nor, unlike the OTCs, are
those service providers “brokers.” See infra ¶¶ 29–30. But we need not
decide this issue here because the applicability of § 444 to such entities has
not been briefed and is not before us.

9
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

¶22 The OTCs argue generally that we must reject the court of
appeals’ and Cities’ interpretations here and of other portions of the Code
discussed below because the language is not clear and unambiguous, and
any ambiguity must be resolved in the OTCs’ favor. The dissent echoes this
argument for our holding regarding § 444. Infra ¶ 56. It is a well-settled
rule in Arizona that ambiguities in “revenue statute[s] should be construed
liberally in favor of the taxpayer and strictly against the state.” See Ebasco
Servs. Inc. v. Ariz. State Tax Comm’n, 105 Ariz. 94, 97 (1969). But this rule
only applies if, after exhausting all other tools of statutory construction, a
court concludes that a statute remains ambiguous. See BSI Holdings, LLC v.
Ariz. Dep’t of Transp., 244 Ariz. 17, 22 ¶ 25 (2018). The rule does not apply
here because, after employing relevant tools of statutory construction, we
do not find the language of § 444 or its accompanying definitions
ambiguous.

B.

¶23 We also agree with the court of appeals that the markups and
service fees the OTCs collect from hotel customers are part of the gross
income taxable under § 444. See Orbitz, 2018 WL 4265950, at *4 ¶¶ 22–24.
The OTCs would have us limit the taxable gross income under § 444 to the
gross income of hotels, but such an interpretation conflicts with the express
language of the provision and its accompanying definitions. Section 200
broadly defines “gross income” to include all proceeds from a taxable
activity, 5 and § 444 imposes a tax on the gross income of every “person”
engaged in the business of operating hotels. As established above, the
OTCs are engaged in the business of operating hotels. See supra ¶¶ 13–19.

5 Gross income, under § 200(a), includes:
(1) the value proceeding or accruing from the sale of property,
the providing of service, or both.
(2) the total amount of the sale, lease, license for use, or rental
price at the time of such sale, rental, lease, or license.
(3) all receipts, cash, credits, barter, exchange, reduction of or
forgiveness of indebtedness, and property of every kind or
nature derived from a sale, lease, license for use, rental, or
other taxable activity.
(4) all other receipts, whether payment is advanced prior to,
contemporaneous with, or deferred in whole or in part
subsequent to the activity or transaction.
10
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

And in the conduct of that business, the OTCs charge hotel customers
service fees and markups on the hotel room rental rates. Thus, the OTCs’
service fees and markups constitute proceeds from the taxable activity and
are part of the taxable gross income contemplated by § 444. See § 400(c)
(establishing a presumption “that all gross income . . . is subject to the tax
until the contrary is established by the taxpayer”).

¶24 The OTCs argue their service fees and markups are exempt
from § 444 taxation because the income they receive from customers is for
“travel-facilitation, non-lodging services,” such as comparison shopping
and loyalty programs, which differ from the services offered by hotels. We
are unpersuaded. Although the OTCs may provide some services that the
hotels do not, the OTCs also provide hotel customers with numerous
services that are central to operating hotels and, like the hotels, are subject
to § 444 taxation on the gross income from the provision of those services.

¶25 Clearly, if a hotel were to fractionalize all the aspects of
operating the hotel, charging separately for reservation services,
advertising, and customer support, the hotel would still be subject to § 444
taxation on the income from those services. See § 444 (taxing the gross
income generated by “operating a hotel charging for lodging”) (emphasis
added); § 100 (defining “lodging” to include “services and accommodations
accompanying the use and possession of [a] dwelling space”). Therefore,
the OTCs—which do not distinguish in their markups and service fees their
hotel-related services from other services they may provide—cannot
eliminate their service fees and markups from the taxable gross income
based on the other services they provide.

¶26 Indeed, failure to include the OTCs’ service fees and markups
in the taxable gross income results in illogical and unjustifiable tax
consequences. The OTCs conceded at oral argument that if a customer
reserves a room on an OTC site but chooses to pay the full amount charged
by an OTC directly to the hotel, the hotel remits taxes on the entire amount.
But if the customer opts to pay the OTC, the hotel remits taxes on a lesser
amount. For example, assume an OTC contracts with a hotel for a
discounted net rental rate of $100 in a city with a combined 10% occupancy
tax. The OTC then advertises the room for $150, plus an additional $15 for
taxes and service fees. If a customer pays the hotel $165, the hotel keeps
$100, remits $16.50 to the city, and pays the OTC the remaining $48.50. If a
customer pays the OTC instead, the hotel invoices the OTC after the

11
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

customer’s stay for $110, keeping $100 and remitting $10 to the city. The
OTC keeps the remaining $55. Thus, in this example, the customer’s choice
between paying the hotel and paying the OTC would result in a difference
of $6.50 in the amount of taxes paid to the city—an approximately 40%
reduction in tax revenue to the city if the customer pays the OTC. Although
this disparity could be justified if § 444 explicitly imposed a tax solely on
the gross income of hotels, it cannot be justified when the statute imposes
the tax on the entire business activity and on every “person” engaged in
that activity. See supra ¶ 16.

¶27 The dissent categorizes this disparity as “a matter of policy
that should be left to the MCTC drafters, not this Court.” Infra ¶ 57. But
the dissent’s argument is premised on its assumption that the gross income
taxed by § 444 does not cover the total amount paid by hotel guests. Id.
Because we conclude that the tax liability of § 444 does apply to the total
amount by applying to the entire taxable business activity and on every
person engaged in that activity, supra ¶¶ 16, 23, we reject the dissent’s
assertion that this disparity is merely a “loophole.” See infra ¶ 57 (citing Pitt
County, 553 F.3d at 314 and Louisville/Jefferson Cty. Metro Gov’t v. Hotels.com,
L.P., 590 F.3d 381, 388–89 (6th Cir. 2009)).

¶28 The OTCs also argue that their service fees are excluded from
taxation under § 444(b)(5), which excludes “[g]ross proceeds of sales or
gross income from commissions received from a person providing services
or property to the customers of the hotel.” But even if we accept that the
OTCs’ service fees constitute a commission, the MCTC Regulations
expressly provide that “brokers shall be wherever necessary treated as
taxpayers for all purposes” and “[n]o deduction shall be allowed for any
commissions or fees retained by . . . broker[s],” absent limited exceptions
inapplicable here. MCTC Reg. 100.1(a); see infra ¶¶ 29–31 (concluding that
OTCs qualify as “brokers” under the Code). More importantly, the OTCs
receive their service fees from hotel customers, not persons “providing
services or property” to those customers.

C.

¶29 We further agree with the court of appeals that the OTCs
qualify as “persons” subject to the tax liability of § 444 because they are
“brokers.” See Orbitz, 2018 WL 4265950, at *3 ¶¶ 15–20. Section 444 imposes
a tax on the gross income of all “persons” engaged in the taxable business

12
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

activity. In turn, § 100 defines “person” to include numerous entities,
including a “broker,” and defines “broker” as “any person engaged or
continuing in business who acts for another for a consideration in the
conduct of a business activity taxable under this Chapter, and who receives
for his principal all or part of the gross income from the taxable activity.”
Thus, to qualify as “brokers” under the Code’s definition, the OTCs must
be (1) acting for the hotels for a consideration, (2) conducting “the business
of operating a hotel,” and (3) receiving for the hotel all or part of the gross
income of that business.

¶30 As discussed above, the OTCs are engaged in “the business of
operating a hotel,” supra ¶¶ 13–19, and the income they receive in the form
of service fees and markups is part of the taxable gross income under § 444,
supra ¶¶ 20–24. The OTCs also regularly collect from hotel customers the
entire costs of the lodging, remitting only portions of it to the hotels. As to
the last point, the OTCs argue that to the extent they may act as “brokers,”
they do so only for travelers, not hotels. We disagree. The OTCs may
provide broker-like services for hotel customers, but they also act for the
hotels by providing services central to operating the hotels, including
advertising, booking, and customer support. Although MCTC Regulation
100.1(b) refers to a property manager as an example of a “broker,” it is only
an example and not an exhaustive list; in fact, it is offered to illustrate only
the unrelated proposition that a broker property manager may have to pay
the privilege tax even if the principal has no tax liability.

¶31 In sum, the OTCs fulfill all the requirements to satisfy the
statutory definition of “brokers,” their service fees and markups are part of
the gross income contemplated by § 444, and the services they provide to
hotel customers qualify as “the business of operating a hotel.”
Additionally, the Code’s Regulations recognize that the taxable gross
income under § 444 includes the income of “brokers” engaged in the taxable
business activity. See MCTC Reg. 100.1(a) (“[B]rokers shall be wherever
necessary treated as taxpayers for all purposes . . . . No deduction shall be
allowed for any commissions or fees retained by . . . broker[s] . . . .”). For
these reasons, we hold that the OTCs’ service fees and markups on hotel
room rental rates are subject to taxation under § 444.

13
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

IV.

¶32 We next address whether the OTCs are subject to taxation
under § 447. Unlike § 444, which imposes a tax on the gross income of
“every person engag[ed] . . . in the business of operating a hotel,” § 447
imposes an additional tax only on the gross income of “hotel[s].”
Specifically, this provision levies a tax on “the gross income from the
business activity of any hotel engaging or continuing within the City in the
business of charging for lodging.” § 447. The court of appeals held “that
the language of [§ 447] limits taxpayers to hotels renting lodging to
customers. It does not extend to brokers engaging in hotel operations, as
reflected in other sections of the Code.” Orbitz, 2018 WL 4265950, at *5 ¶ 27.
We agree. The Code’s definition of “hotel” is expressly limited to brick-
and-mortar lodging places; it does not include a “broker” for a hotel or any
other entity remotely affiliated with an OTC. See MCTC § 100 (definition of
“hotel”). Thus, the gross income of the hotels—the taxable gross income
under § 447—does not include the OTCs’ income (i.e., markups and service
fees).

¶33 The Cities argue § 447—like § 444—applies to the gross
income of the entire lodging transaction, including any income earned by
“brokers,” because § 447 must be read in conjunction with MCTC § 400,
which establishes the legal presumption that the privilege taxes are upon
all “gross income of persons.” (Emphasis added.) The Cities also cite to the
Code’s definition of “gross income,” which broadly encompasses all value
derived from the taxable activity. See MCTC § 200(a). We disagree that
§ 447 can be interpreted so expansively. Section 400 imposes privilege taxes
only “upon persons on account of their business activities, to the extent
provided elsewhere in this [a]rticle.” (Emphasis added.) And despite the
Code’s broad definition of “gross income,” § 447 “limits the taxable income
to business activities of hotels.” See Orbitz, 2018 WL 4265950, at *5 ¶ 27.

¶34 The Cities further argue that § 447 must be interpreted to
apply to “brokers” because limiting tax liability under the provision to
hotels will allow hotels to evade those taxes by setting up online shell
companies to broker their hotel room transactions. The Cities cite to the
MCTC Regulations, which state that “to prevent evasion of taxes
imposed . . . brokers shall be wherever necessary treated as taxpayers for
all purposes.” See MCTC Reg. 100.1(a). We disagree that our holding will
inspire—much less allow—such activity. The Code explicitly contemplates

14
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

and preempts any measures taken to evade taxes: Sections 210 and 220
expressly authorize tax collectors to examine transactions between
affiliated companies or persons, as well as transactions potentially made to
evade taxes, to determine the appropriate gross income subject to tax. And
in the event a hotel is using a broker to evade tax liability under § 447, the
city could invoke MCTC Reg. 100.1(a) to collect from the broker. Further,
as noted previously, supra ¶¶ 29–31, “brokers” are taxpayers for purposes
of assessing tax liability under § 444. Thus, for purposes of interpreting
§ 447, it is not necessary to apply the provision beyond its terms to prevent
tax evasion.

V.

¶35 Having established that the OTCs are subject to taxation
under § 444, we next consider the Cities’ authority to assess the taxes,
penalties, and interest under § 444 against the OTCs retroactively, before
the 2013 Assessments. MCTC § 542(b) provides that if a city “adopts a new
interpretation or application of any [MCTC] provision . . . or determines
that any provision applies to a new or additional category or type of
business and the change in interpretation or application is not due to a
change in the law,” then the city “shall not assess any tax, penalty or interest
retroactively based on the change in interpretation or application.” 6 The
tax court concluded that the Cities are barred from retroactive assessments
before 2013 because the Cities never attempted to apply or enforce the taxes
prior to that year. The court of appeals reversed the tax court and held that
the Cities were permitted to collect taxes for the years preceding the 2013
Assessments “[b]ecause there was no change in the Cities’ application or
interpretation of the Code and the OTCs’ business activities are not new.”
Orbitz, 2018 WL 4265950, at *6 ¶ 32.

¶36 As an initial matter, we note that the language of § 542(b) is
framed in the disjunctive, barring retroactive assessment of taxes, penalties,
and interest when a city “adopts a new interpretation or application” apart
from a change in the law. (Emphasis added.) Thus, either a new
interpretation or a new application of § 444 suffices to bar the Cities from
assessing the taxes, penalties, and interest of § 444 retroactively. See Devenir
Assocs. v. City of Phoenix, 169 Ariz. 500, 503 (1991) (“The court must, if
possible, give meaning to each clause and word in the statute or rule to

6 Section 542(b) mirrors its state tax code counterpart, A.R.S. § 42-2078.
15
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

avoid rendering anything superfluous, void, contradictory, or
insignificant.”). The Code does not explicitly define either “interpretation”
or “application,” but it does state that these terms “include[] policies and
procedures which differ from established interpretations of this Chapter.”
See § 542(c); cf. A.R.S. § 42-2078(D) (stating that “’new interpretation or
application’ includes policies and procedures adopted by administrative
rule, tax ruling, tax procedure or instructions to a tax return”). And
“application” is commonly defined as “an act of putting something to use.”
Application, Merriam-Webster, https://www.merriam-webster.com/
dictionary/application (last visited September 4, 2019). Based on this
language and definition, we find that § 542(b) expressly protects taxpayers
from retroactive taxation when a city puts into use any new policy,
procedure, or interpretation of the Code that differs from a previous formal
interpretation of the Code and is unattributable to any change in the law.

¶37 Section 542(b)’s express bar on retroactive taxation based on
any changes in interpretation or application embodies the principle of fair
notice to taxpayers. In interpreting tax statutes, we have held that such
“statutes should provide clear notice of obligations so that taxpayers may
comply and order their affairs accordingly.” BSI Holdings, 244 Ariz. at 22
¶ 25. And although privilege taxes are self-assessed, see Tucson Mech.
Contracting, Inc. v. Ariz. Dep’t of Revenue, 175 Ariz. 176, 178 (App. 1992)
(noting that the “liability for transaction privilege taxes
arises automatically when a taxpayer engages in taxable business activity
in Arizona”), they are not self-interpreted. In light of § 542’s bar on
retroactive taxation based on a new interpretation or application not due to
a change in the law, we see no reason not to require the same “clear notice”
from a city to overcome that bar. Thus, when a city seeks to collect taxes on
activities or a class of taxpayers based on a new interpretation or
application of the Code, it cannot do so for periods before it provides notice
—whether by public statements or communications to particular taxpayers
—to those affected. Thus, we must decide whether the Cities adopted a
new interpretation or application of the Code and, if so, whether the Cities
notified the OTCs of the change.

¶38 Here, the OTCs have facilitated reservations at hotels in the
Cities for over a decade, and the Cities never attempted to impose the tax
before the 2013 Assessments. But the “continued failure to collect a tax does
not preclude eventual taxation.” Ariz. Lotus Corp. v. City of Phoenix, 136
Ariz. 22, 24 (App. 1983) (allowing enforcement of an unambiguous tax

16
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

statute despite earlier contrary administrative interpretations (citing Miami
Copper Co. v. State Tax Comm’n, 121 Ariz. 150, 153 (App. 1978))). Thus, mere
delinquent enforcement does not implicate § 542’s bar on retroactive
taxation.

¶39 The OTCs argue that there is record evidence that at least
some Cities, through City-issued online guidance, affirmatively indicated,
at least by implication, that the OTCs were not taxpayers under § 444 as
“brokers” before the 2013 Assessments because hotel industry privilege
taxes were limited to entities that were physically located in a city and
operated hotels. See, e.g., Hotel/Motel, Scottsdale Privilege & Use Tax
(July 2013), available at https://web.archive.org/web/20140520230355/
http:/www.scottsdaleaz.gov/Assets/Public+Website/taxes/HotelMotel.
pdf (“You must be licensed and pay tax if you are located in Scottsdale and
you operate a hotel/motel charging for lodging space furnished to any
person.”). The OTCs contend this proves that the 2013 Assessments
embodied a new interpretation or application of the Code concerning the
OTCs’ status as “brokers” under § 444 because it differs from previous City-
issued online guidance.

¶40 The Cities argue they have interpreted and applied the
“brokers” policy since 2002. The Cities rely on a Private Taxpayer Ruling 7
from 2002 in which a City of Scottsdale Tax Audit Manager, in response to
an inquiry from an OTC, interpreted the Code in a manner consistent with
our current interpretation of § 444, identifying the OTCs as “brokers” and
the income they receive from markups as part of the taxable gross income.
The Cities also rely on a 2007 letter from the City of Peoria to an OTC
industry representative, relaying substantially the same information as the
2002 ruling. Finally, the Cities note that the 2013 Assessments stemmed
from a multi-jurisdictional audit, which two of the OTCs reported in their
2008 Security Exchange Commission filings as ongoing administrative
procedures that could result in assertions of claims against the OTCs for
unpaid hotel occupancy taxes.

¶41 Unquestionably, if a city issues a private taxpayer ruling, in
which a city official interprets and applies the Code for a taxpayer and

7A Private Taxpayer Ruling is a public written statement of a city’s position
interpreting the Code and applying the Code to a specific set of facts or a
particular tax situation. MCTC § 597(k); cf. A.R.S. § 42-2101.M.1.
17
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

provides the subject-taxpayer with clear notice, § 542(b) will not bar a city
from assessing taxes, penalties, and interest against that taxpayer from the
date it issued the ruling. But one city’s ruling for one taxpayer does not
provide clear notice to all OTCs on behalf of all the Cities. Similarly, one
city’s letter to an OTC industry representative is insufficient—even for the
city sending the letter—to show that the impacted taxpayers (i.e., the OTCs)
were formally notified. And the OTCs’ securities filings are evidence of no
more than an awareness that the Cities’ audits might result in assertions of
claims. It is possible that, as part of the Cities’ 2008 multi-jurisdictional
audit, the Cities provided the OTCs represented in this case with official
notices of their intent to assess taxes against the OTCs based on their status
as “brokers,” but such evidence is not in the record currently before us.

¶42 In sum, there is evidence in the record that the Cities’ OTC
“broker” position in the 2013 Assessments arguably represents a change
from some of the Cities’ earlier online tax guidance on the issue. Supra ¶ 39.
There is also countervailing evidence that some of the Cities may have
notified some of the OTCs before the 2013 Assessments that the OTCs were
taxable as “brokers.” Supra ¶ 40. We conclude that a remand is necessary
to resolve these factual disputes as to individual cities and taxpayers.

¶43 The Cities and the OTCs dispute the allocation of the burden
of proof under § 542(b). The Code is silent on this issue. Notably, § 542(b)’s
state law counterpart, § 42-2078, imposes the burden of proving whether an
“interpretation or application” of a tax provision is “new” on the taxpayer
as an affirmative defense. § 42-2078(b)(3) (“The change [in interpretation
or application] is an affirmative defense in any administrative or judicial
action for retroactive assessment of tax, interest and penalties to taxable
periods before the new interpretation or application was adopted.”). This
approach accords with the long-standing approach to place the burden of
proof on the taxpayer if the taxing statute fails to address the issue. See, e.g.,
State Tax Comm’n v. Magma Copper Co., 41 Ariz. 97, 104 (1932). We see no
reason to treat the Code and state tax code differently in this respect.

¶44 On remand, if the OTCs prove that the Cities’ 2013
Assessments constitute a new interpretation or application of the Code
rather than mere delayed enforcement, the Cities will bear the burden of
proving to the tax court that they nevertheless provided the OTCs with
clear notice of an intent to tax the OTCs under § 444 based on their status
as “brokers.” See, e.g., Harvest v. Craig, 195 Ariz. 521, 524 ¶ 14 (App. 1999)

18
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
Opinion of the Court

(stating that, when a statute is silent on the issue, “the allocation of a burden
of proof depends, inter alia, on what is fair, what is convenient, who is
seeking to change the status quo, and policy considerations such as those
disfavoring certain defenses”) (citing McCormick on Evidence § 337, at 432
(4th ed. 1992)); cf. BSI Holdings, 244 Ariz. at 22 ¶ 25 (noting that “statutes
should provide clear notice of obligations so that taxpayers may comply
and order their affairs accordingly”).

¶45 Accordingly, we hold that § 542(b) bars retroactive taxation
based on a new policy, procedure, or interpretation of the Code until such
time that a city has adopted any such change and provided the impacted
taxpayers with clear notice of the change.

VI.

¶46 For the foregoing reasons, we vacate paragraphs 29 through
32 of the court of appeals’ decision, as well as the portion of paragraph 33
reversing the tax court’s conclusion “that the Cities may not assess tax,
penalties, and interest before 2013,” and we remand to the tax court to
determine, consistent with this Opinion, whether MCTC § 542(b) bars the
Cities from assessing taxes, penalties, and interest due under § 444 before
the 2013 Assessments.

19
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
VICE CHIEF JUSTICE TIMMER, joined by CHIEF JUSTICE BRUTINEL, Dissenting

TIMMER, V.C.J., joined by BRUTINEL, C.J., dissenting.

¶47 Section 444 of the Model City Tax Code (“MCTC”) imposes
transaction privilege taxes on “every person engaging or continuing in the
business of operating a hotel charging for lodging and/or lodging space.”
Whether online travel companies (“OTCs”) are “brokers,” and therefore
“persons” under the MCTC, or not, the dispositive issue is whether they
engage in the business of operating hotels. The majority misinterprets § 444
as applying to anyone “engage[d] for profit in business activities that are
central to keeping brick-and-mortar lodging places functional or in
operation,” including OTCs. See supra ¶¶ 18–19. In my view, § 444 has a
narrower meaning that excludes OTCs. And because no other provision of
the MCTC applies, the OTCs are not subject to transaction privilege taxes.
I respectfully dissent.

¶48 The applicability of § 444 to OTCs depends on the meaning of
“operating” in that provision. Because the MCTC does not define the term,
we use its ordinary meaning. See Arizona ex rel. Brnovich v. Maricopa Cty.
Cmty. College Dist. Bd., 243 Ariz. 539, 541 ¶ 7 (2018). “Operate” as a
transitive verb means “to put or keep in operation” as in “operated a
grocery store.” Operate, Merriam-Webster, https://www.merriam-
webster.com/dictionary/operate (last visited July 31, 2019). “Operation”
means “the quality or state of being functional or operative.” Operation,
Merriam-Webster, https://www.merriam-webster.com/dictionary/
operation (last visited July 31, 2019). Thus, a person engages in the business
of operating a hotel, and is taxed for the privilege of doing so under § 444,
by putting a hotel into a functional or operative state or keeping it in
operation.

¶49 Applying § 444’s ordinary meaning here, OTCs do not engage
in the business of operating hotels. OTCs neither “put” hotels into a
“functional or operative” state nor “keep” them in that state. OTCs do not
own hotels, oversee hotel operations, or let hotel rooms. See Pitt County v.
Hotels.com, L.P., 553 F.3d 308, 313 (4th Cir. 2009) (applying the dictionary
definition of “operator” and “operate” and concluding that OTCs “have no
role in the day-to-day operation or management of the hotels” and are
therefore not “operators”); Mont. Dep’t of Revenue v. Priceline.com, Inc., 354
P.3d 631, 635 (Mont. 2015) (“The OTCs do not fit within the dictionary
definition of ‘owners or operators.’ They do not possess, run, control,

20
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
VICE CHIEF JUSTICE TIMMER, joined by CHIEF JUSTICE BRUTINEL, Dissenting

manage, or direct the functioning of a hotel or rental agency.”). 8 And
hotels, which take reservations outside the OTC-process, do not depend on
OTCs to operate their businesses. OTCs indisputably facilitate transactions
between hotels and travelers by conveying reservation requests and
processing payments (and any later cancellations). But these functions—
even though important to hotels—do not transform OTCs into operators of
hotels. Indeed, “[w]e would not say that when a hotel contracts with a
cleaning service that orders supplies and hires, schedules, and pays
workers, the cleaning service becomes an operator of the hotel.” Village of
Bedford Park v. Expedia, Inc., 876 F.3d 296, 304 (7th Cir. 2017) (applying the
ordinary meaning of “operator”).

¶50 The majority accepts the above-cited definitions but is
persuaded to give § 444 a more expansive meaning in light of MCTC § 447,
which provides:

In addition to the taxes levied as provided in [§ 444], there is hereby
levied and shall be collected an additional tax in an amount equal to
___ percent (___%) of the gross income from the business activity of
any hotel engaging or continuing within the City in the business of
charging for lodging and/or lodging space furnished to any
transient.

According to the majority, because the MCTC drafters “used specific
language to limit the additional tax liability of § 447 to the gross income of
‘hotels,’” and chose not to do so in § 444, the drafters must have intended
that “the tax liability of § 444 extends beyond the hotels’ owners and
operators.” See supra ¶ 16. It then concludes that § 444 broadly applies to
anyone who “engages for profit in business activities that are central to
keeping brick-and-mortar lodging places functional or in operation.” See
supra ¶ 18. I disagree for several reasons.

8The majority dismisses these cases because the statutes at issue applied to
“operators” (Pitt County) and “owners or operators” (Mont. Dep’t of
Revenue) while § 444 applies to persons engaged in “the business of
operating a hotel.” See supra ¶ 15. This razor-thin semantic distinction is
meaningless. Both cases gave plain meaning to what it means to “operate”
a hotel, which is the issue here. Regardless, I rely primarily on the same
dictionary definitions of “operate” and “operation” used by the majority.
See supra ¶ 18.
21
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
VICE CHIEF JUSTICE TIMMER, joined by CHIEF JUSTICE BRUTINEL, Dissenting

¶51 First, the majority misapprehends § 447, which leads it to
misinterpret § 444. Section 447 does not identify the taxpayer as “hotel
owners and operators” by referring to “any hotel,” as the majority asserts.
See supra ¶ 17. “Any hotel” does not identify the taxpayer but instead
describes, in part, the calculation for the additional tax. See MCTC § 447
(setting the tax as a percentage of “the gross income from the business
activity of any hotel”). A brick-and-mortar hotel is not a taxpayer; only
individuals and entities are taxpayers. See MCTC § 100 (defining
“taxpayer” as “any person” liable for privilege taxes and defining “person”
as individuals, legal entities, and government); see also MCTC § 300
(confining transaction privilege and use tax licensing requirements to
“person[s]”).

¶52 The taxpayer required to pay the additional tax required by §
447 is the same taxpayer identified in § 444— “every person engaging or
continuing in the business of operating a hotel.” No other taxpayer is
identified in § 447. By providing that the taxes are “[i]n addition to” the
taxes levied by § 444, the provision is most reasonably interpreted as
imposing additional taxes on the taxpayer identified in § 444. This
interpretation is further supported by considering that § 447 is an optional
“add on” for cities to impose additional taxes on hotel revenues that can be
dedicated to specific uses. See MCTC § 447. For example, the City of
Scottsdale imposes a 1.75% tax under § 444 to defray general city expenses
and imposes a 5% tax under § 447 to be used for tourism-related purposes.
See Scottsdale Revised Code, Appendix C, Transaction Privilege & Use Tax
Code, §§ 300, 444, 447. Also, although § 447 does not repeat § 444’s tax
exclusions, the Arizona Department of Revenue applies those exclusions to
§ 447 taxes, thereby demonstrating the department’s view that § 447 is an
“add on” to § 444. See Arizona Tax Matrix for Hotel/Motel Lodging Industry,
Ariz. Dep’t of Revenue Tax Ruling TPR 06-1,
https://azdor.gov/sites/default/files/RULINGS_TPT_2006_tpr06-1-
matrix.pdf. (“TPR 06-1”) (applying §§ 444 and 447 taxes to the same
revenue sources); see also Scottsdale Healthcare, Inc. v. Ariz. Health Care Cost
Containment Sys. Admin., 206 Ariz. 1, 8 ¶ 27 (2003) (noting that agency
interpretation of a statute is given weight). Finally, this interpretation of
§ 447 aligns with all other MCTC privilege tax categories, which impose tax
liability on persons or entities “engaging or continuing in” particular
businesses. See MCTC art. IV.

22
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
VICE CHIEF JUSTICE TIMMER, joined by CHIEF JUSTICE BRUTINEL, Dissenting

¶53 In sum, the same taxpayers are liable for taxes imposed by §§
444 and 447. The majority therefore errs by concluding that §§ 444 and 447
apply to different taxpayers and then defining the § 444 taxpayer more
expansively in a misguided attempt to distinguish § 447.

¶54 Second, by interpreting § 444 as taxing the gross income of
anyone who “engages for profit in business activities that are central to
keeping brick-and-mortar lodging places functional or in operation,” then
sweeping OTCs into that category, the majority necessarily imposes the tax
on persons and entities no reasonable person would conclude engage in
“the business of operating a hotel.” For example, as the Cities
acknowledged at oral argument here, the majority’s interpretation means
airlines, credit card companies, brick-and-mortar travel agents, and others
who offer hotel booking services for a profit and accept payments directly
from customers also “operat[e] hotels” and must now secure privilege tax
licenses and pay taxes in every city in which they book hotel rooms and
collect payment directly from customers. The majority agrees. It points out
that hotels currently pay taxes on the full amount paid directly to them by
customers, even though some portions are later remitted to brick-and-
mortar travel agents and credit card companies (e.g., American Express
Travel) as service fees. See supra ¶ 21. That is also what occurs when
customers directly pay hotels in full upon arrival for an OTC-booked room
and amounts are remitted to OTCs. But although hotels remit taxes on
customer payments representing OTCs and brick-and-mortar travel agents’
fees and commissions—not an issue here—agents and credit card companies
have not paid privilege taxes when they have directly collected their fees
and commissions from customers when booking. The opinion today
changes the status quo and requires these agents, credit card companies,
and others to secure licenses and pay municipal taxes for the privilege of
“operating hotels.”

¶55 The majority’s broad interpretation also means that third-
party entities who provide maintenance, housekeeping, gardening and like
“central” services to hotels are now also subject to taxation under § 444—
surely an unintended result under the MCTC. The majority attempts to
side-step this result by limiting “central” services to those “essential” to
furnish lodging, presumably reservations, payment processing, and front-
desk operations, and then concluding that services like housekeeping do

23
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
VICE CHIEF JUSTICE TIMMER, joined by CHIEF JUSTICE BRUTINEL, Dissenting

not fit within that definition. 9 See supra ¶¶ 18, 21. My colleagues in the
majority would presumably (and hopefully) consider the fresh sheets
placed by housekeeping on their hotel room beds to be “essential” to their
lodging. Regardless, the MCTC provides that “lodging” includes not just a
hotel room but “the furnishings or services and accommodations”
accompanying it, meaning § 444 applies to a broader category of business
activity than the majority credits. See MCTC § 100 (defining “lodging”).
Indeed, the Arizona Department of Revenue maintains that items such as
onsite childcare and hotel-arranged transportation are taxable under § 444.
See TPR 06-1.

¶56 Third, at a minimum, § 444’s applicability, when considered
in context with § 447, creates an ambiguity about the identity of the
taxpayer subject to § 444. Ambiguities in tax provisions are construed
“liberally in favor of the taxpayer and strictly against the state.” See Ebasco
Servs. Inc. v. Ariz. State Tax Comm’n, 105 Ariz. 94, 97 (1969); see also City of
Peoria v. Brink’s Home Sec., Inc., 226 Ariz. 332, 333 ¶ 6 (2011) (“We read tax
provisions ‘to gain their fair meaning, but not to gather new objects of
taxation by strained construction or implication.’” (quoting Ariz. State Tax
Comm’n v. Staggs Realty Corp., 85 Ariz. 294, 297 (1959))). This principle
further confirms that § 444 applies no more broadly than does § 447.

¶57 The majority is also persuaded to apply § 444 to OTCs because
otherwise “illogical and unjustifiable tax consequences” would occur
depending on whether an OTC-customer directly paid a hotel (paying more
tax) or paid the OTC (paying less tax). See supra ¶ 26. But a municipal
privilege tax is an excise tax on the privilege of doing business; it is not a
sales tax on customer transactions. See Ariz. Dep’t of Revenue v. Mountain
States Tel. & Tel. Co., 113 Ariz. 467, 468 (1976) (noting that a state privilege
tax “is an excise tax on the privilege or right to engage in an occupation or
business in the State of Arizona”). Thus, it is not “illogical or unjustifiable”
to tax only the gross income of persons privileged to operate hotels in the
taxing cities rather than tax the total amount paid by the hotel guest. Any
inequity—a windfall to the cities or a disadvantage to the hotel operators—

9
The majority also asserts that such entities are distinguishable because
they are not “brokers.” See supra ¶ 21. That is irrelevant. Third-party
companies that provide housekeeping and the like are “persons” under the
MCTC and thus subject to taxation under § 444 if they engage in the
operation of hotels.
24
 CITY OF PHOENIX ET AL V. ORBITZ WORLDWIDE, INC. ET AL
VICE CHIEF JUSTICE TIMMER, joined by CHIEF JUSTICE BRUTINEL, Dissenting

is a matter of policy that should be left to the MCTC drafters, not this Court.
Cf. Pitt County, 553 F.3d at 314 (the potential for a tax loophole “does not
compel a broader interpretation” of the code’s language); Louisville/Jefferson
Cty. Metro Gov’t v. Hotels.com, L.P., 590 F.3d 381, 388–89 (6th Cir. 2009)
(refusing to entertain loophole hypotheticals and pointing out that the
legislature, “not the court, is the proper entity to close any such potential
loophole.”). In fact, after the imposition of the taxes at issue here, the
legislature addressed taxation of persons and entities engaging in “the
business of operating an online lodging marketplace.” See A.R.S. § 42-
5076(A); see also A.R.S. § 42-6009 (delineating circumstances in which a city
can tax an online lodging marketplace).

¶58 For these reasons, I disagree with the majority’s interpretation
of § 444 and its application to OTCs. Because § 447 is also inapplicable to
OTCs, I would reverse the tax court’s judgment and remand for entry of
judgment in the OTCs’ favor. I respectfully dissent.

25