U-Stor Bell, L.L.C. v. Maricopa County

Citations: 204 Ariz. 79; 59 P.3d 843; 389 Ariz. Adv. Rep. 44; 2002 Ariz. App. LEXIS 202Docket: No. 1 CA-TX 01-0013

Court: Court of Appeals of Arizona; December 26, 2002; Arizona; State Appellate Court

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The appellee taxpayers own self-storage facilities that include apartments for on-site managers, which are required as part of their employment. For the tax years 1998 to 2001, Maricopa and Pima Counties classified these facilities, including the manager apartments, as class one commercial property. Upon challenge from the taxpayers, the tax court ruled in favor of the taxpayers, classifying the manager apartments as class four residential property. This classification was based on the apartments being used solely for residential purposes.

The counties appealed the tax court's decision, and the current court found the tax court's classification to be erroneous, reversing its decision. The taxpayers operate their self-storage facilities for profit, renting storage units to the public, and have on-site managers whose residency in the apartments is tied to their employment responsibilities, including facility management and security. 

The core issue on appeal is whether the manager apartments qualify as 'leased or rented property for residential purposes' under A.R.S. 42-12004(A)(1). The taxpayers referenced the case Krausz v. Maricopa County to support their argument for classifying the apartments as residential. However, the court determined that while Krausz offered a relevant comparison, it was not directly applicable to the current case, leading to the conclusion that the manager apartments do not meet the criteria for class four classification.

The court upheld the class one commercial classification of a taxpayer's property leased to the government, noting that the taxpayer's commercial use of the property was decisive in determining its tax classification. In contrast, the taxpayer's situation differs as it is the landlords' use of the property that dictates its classification. The taxpayers lease their building for profit, qualifying it as commercial use under A.R.S. section 42-12001(12), while the tenant, ADEQ, utilizes the space for governmental purposes, which does not fall under any overriding tax classification.

Regarding the classification of managers' apartments, the court examined whether they qualify for a class four statutory tax classification, which requires that the apartments be used solely for residential purposes. It concluded that the apartments do not meet this criterion, as they are not available for public occupancy and are occupied exclusively by employed managers. The stipulation indicates that the managers must reside in these apartments to manage and secure the self-storage facilities, which aligns with precedent stating that employer-required living quarters are considered part of the employment relationship. Consequently, the managers' use of the apartments is incident to their employment duties, and the taxpayers maintain a significant 'use' of the apartments for operational purposes, disqualifying them from being classified as solely residential under A.R.S. 42-12004(A)(1).

The tax court did not find that the manager apartments were used solely for residential purposes, as asserted by the taxpayers. Instead, it relied on precedents indicating the property had indicators of residential use, but this alone does not meet the criteria for a class four property tax classification. According to A.R.S. 42-12004(A)(1), the property must be used solely for leased or rented residential purposes. The court noted that the apartments are not solely rented for residential use and that occupancy by on-site managers does not create a landlord-tenant relationship, as per the Tenth Circuit's ruling in Moreno v. Stahmann Farms, Inc. Additionally, Arizona law excludes employee occupancy from the definition of a landlord-tenant relationship under the Arizona Residential Landlord and Tenant Act. Employer-provided housing for convenience does not count as part of wages for unemployment insurance calculations. The case distinguishes the taxpayers' commercial use of the apartments from the ordinary rental practices the statute intended to protect from commercial classification. Consequently, the manager apartments do not qualify for the class four classification, leading to the conclusion that the tax court's decision was erroneous. The judgment is reversed and remanded for further proceedings. The classification of this property will be referred to as 'commercial' or 'class one' property moving forward.

The classification of taxable property is essential for determining tax liability. Class one properties are taxed at a rate applied to 25% of their full cash value, while class four properties are taxed at 10%. In Hayden Partners, the court ruled that the classification of unsold and partially completed residences is based on an objective standard of intended use, not the current owner's intent. However, this analysis is not relevant in the current case, where the actual use of manager apartments is clear, leading to a focus on statutory classification. The taxpayers reference Myrtle Manor Apartments v. City of Phoenix to argue for a landlord-tenant relationship due to employment conditions. However, Myrtle Manor establishes that the employer benefits from the employee's residency, attributing the fair rental value of the quarters to the employer for tax purposes, thus not supporting the taxpayers' argument regarding a landlord-tenant relationship.