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Southwest Airlines Co. v. Arizona Department of Revenue - 1/29/2008

Arizona Court of Appeals Division One Holds That Avionics Software Installed in Flight Computers on Commercial Aircrafts Can Be Included Within the Aircraft’s Valuation For Purposes of an Airline’s Personal Property Taxes.


During the 2004 tax year, the Arizona Department of Revenue (the “Department”) calculated a full cash value of $155,319,100 for Southwest Airlines Co.’s (“Southwest”) flight property. Southwest took issue with the Department’s calculation, contending that the avionics software loaded onto its aircraft was not taxable. As a result, Southwest appealed the Department’s calculation to the State Board of Equalization (the “Board”). On appeal, the Board similarly refused to deduct the value of the software from the full cash value of Southwest’s flight property. Southwest thereafter appealed to the tax court where Southwest and the Department filed cross motions for summary judgment. The tax court granted the Department’s motion, holding that the Department was not required to deduct the value of avionics software from the value of Southwest’s personal property. This appeal followed.

The Arizona Appeals Court held that the tax court correctly refused to deduct the value of the avionics software from the value of Southwest’s personal property. The Court reasoned that the Department, in valuing and taxing airline companies, is statutorily required to determine the full cash value of each airline’s “flight property” in use in the state, and “flight property” broadly means all airline company aircraft used in the state except aircraft that are permanently removed from operations. A.R.S. § 42-14251(6) (2006). Moreover, “aircraft” is statutorily defined as “any device that is used or designed for navigation or flight through the air.” Id. § 42-14251(2). The Court also explained that the Arizona statutes require the full cash value of flight property to be determined, in part, by the capitalized acquisition cost of the “airframes,” which include every component of an airplane with the exception of the airplane’s power plant. Thus, “airframes” necessarily include avionics software installed on airplanes at the time of purchase. In this case, the FAA required the software at issue to be installed in order for an airplane to be certified as “airworthy” and thus the tax court correctly concluded that the Department could include the software in its valuation of Southwest’s personal property. Finally, the Court distinguished its prior opinion in Honeywell Information Systems, Inc. v. Maricopa County, 118 Ariz. 171, 575 P.2d 801 (App. 1977), on grounds that Honeywell dealt more with the value of computer consulting services than it did with the value of software, and that the current air-property tax scheme clearly provides a procedural mechanism (e.g., an informal conference and several layers of appeal) for equalizing the taxation of avionics software.

Judge Johnsen authored the opinion; Judges Thompson and Ehrlich concurred.

Posted On: 2/5/2008