TX2024-000075 5/18/2026 Phoenix NAP LLC v. Arizona Department of Revenue

Clerk of the Superior Court
*** Electronically Filed ***
05/21/2026 8:00 AM
THE SUPERIOR COURT OF THE STATE OF ARIZONA
IN THE ARIZONA TAX COURT
TX 2024-000075 05/18/2026
Docket Code 926 Form T000 Page 1
CLERK OF THE COURT
HONORABLE ERIK THORSON M. R. Diaz
Deputy
PHOENIX NAP L L C JAMES G BUSBY JR.
v.
ARIZONA DEPARTMENT OF REVENUE BENJAMIN H UPDIKE
MINUTE ENTRY
The Court has received and reviewed the following, as well as all subsequent filings related
thereto, and considered the arguments of the Parties made on March 20, 2026.
1. Defendant Arizona Department of Revenue’s Motion for Summary Judgment, filed
December 5, 2025;
2. Plaintiff Phoenix NAP, LLC’s Motion for Summary Judgment, filed December 5, 2025;
and
3. Plaintiff’s Daubert Motion to Exclude Testimony of Tamal Bose and Limit Testimony of
Kevin O’Bryan and Lavelle Bland, filed December 5, 2025.
Plaintiff Phoenix NAP, LLC (“PNAP”) describes itself as an Internet Service Provider that
provides internet access services out of a data center. (Plaintiff’s Statement of Facts, filed
December 5, 2025 (“PSOF”), at ¶1.) Defendant, the Arizona Department of Revenue (the
“Department”), does not dispute that PNAP provides internet connections to some of its customers
and that some of what PNAP does is act as an Internet Service Provider, but Defendant does dispute
PNAP’s characterization of its business as internet access services. (Defendant’s Controverting
Statement of Facts, filed January 30, 2026 (“DCSOF”), at ¶1.)
PNAP provides services to its customers that include: (1) providing high-speed internet
connections; (2) providing uninterrupted power; (3) providing generator back-up services; (4)

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controlling temperature, humidity, and particulate matter in the data center; (5) securing the data
in the data center with electronic doors and gates, alarms, video monitoring, and security
personnel; (6) providing fire suppression services; and (7) retaining onsite technicians 24/7/365.
(PSOF ¶4, undisputed that these are provided at PNAP.)
PNAP’s customers pay for: (1) colocation services (utilization by customers of small
spaces within data center to set up servers); (2) infrastructure as a service (“IaaS”) services
(utilization by customers of PNAP-owned servers); (3) ancillary services (including additional
bandwidth, domain name use, managed services, non-recurring charges, other recurring charges,
and security services); and (4) office space and software. (PSOF ¶10, disputed as to
characterization as a service.)
The City of Phoenix under authorization from the Department audited PNAP for state,
county, and city transaction privilege tax (“TPT”) for the period of October 1, 2016 through August
31, 2020. (Defendant’s Statement of Facts, filed December 5, 2025 (“DSOF”), at ¶1, undisputed.)
ADOR issued a Notice of Proposed Assessment (the “Assessment”) and initially assessed a total
tax of $4,549,556.05. (DSOF ¶1, undisputed; PSOF ¶48, undisputed.)1
The Assessment included the following: (1) $528,288.69 for TPT under the state’s
commercial lease classification; (2) $1,096,327.97 for TPT under the state’s personal property
rental classification; (3) $2,537,075.23 for TPT under the City of Phoenix’s commercial lease
classification; (4) $402,007.16 for TPT under the City of Phoenix’s personal property rental
classification; (5) $1,137,389.43 for penalties; and (6) $1,156,686.94 for interest calculated from
October 31, 2023, which continues to accrue at a rate of over $1,000 per day. (PSOF ¶49,
undisputed.) On March 13, 2024, PNAP filed its Complaint appealing the Assessment. (Compl.,
filed March 13, 2024.)
The Department2 seeks summary judgment finding that renting space in a data center is
taxable rental of commercial real property and renting servers is a rental of tangible personal
property. (Def.’s Mot., at 17.) On the other hand, PNAP seeks summary judgment on all issues
raised in its Complaint. (See generally Pl.’s Mot.)
Summary judgment is appropriate if “there is no genuine dispute as to any material fact
and the moving party is entitled to judgment as a matter of law.” Ariz. R. Civ. P. 56(a); General
1 The tax was subsequently reduced by $537,386.54 due to a change during this case that treated
“bandwidth” charges as exempt interstate telecommunication. (DSOF ¶1, undisputed; see also
DSOF ¶10, undisputed.)
2 Although this case involves tax under the Phoenix City Code, the Department is tasked with
collecting and administering the tax pursuant to A.R.S. § 42-6001(A).

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Motors Corp. v. Maricopa Cty., 237 Ariz. 337, 339 ¶7 (App. 2015). “In the tax field, we liberally
construe statutes imposing taxes in favor of taxpayers and against the government, . . . but strictly
construe tax exemptions because they violate the policy that all taxpayers should share the
common burden of taxation.” State ex rel. Ariz. Dep’t of Revenue v. Capitol Castings, Inc., 207
Ariz. 445, 447 ¶10 (2004) (internal citations omitted).
The City of Phoenix imposes a privilege tax “equal to two and eight-tenths percent of the
gross income from the business activity upon every person engaging or continuing in the business
of leasing or renting real property located within the City for a consideration[.]” City Code § 14-
445(a). The City of Phoenix imposes “an additional tax in an amount equal to one-tenth of one
percent of the gross income from the business activity of any person engaged in rental, leasing or
licensing of nonresidential property or property units.” City Code § 14-446. Maricopa County also
imposes a tax under A.R.S. § 42-5069(A) on “the business of leasing for a consideration the use
or occupancy of real property.”
The City of Phoenix imposes a privilege tax “equal to two and eight-tenths percent of the
gross income from the business activity upon every person engaging or continuing in the business
of leasing, licensing for use, or renting tangible personal property for a consideration[.]” Phoenix
City Code (“City Code”) § 14-450(a). The state and county also impose taxes under A.R.S. § 42-
5071 on “the business of leasing or renting tangible personal property for a consideration.”
At issue is whether PNAP provided nontaxable services or is subject to the TPT applicable
to the rental of real property and tangible personal property for colocation and server rentals. (Pl.’s
Mot., at 1; Def.’s Mot., at 2.)
“In construing a statute, [the Court] look[s] to the plain language of the statute, giving
effect to every word and phrase, and assigning to each word its plain and common meaning.”
Ponderosa Fire Dist. v. Coconino Cty., 235 Ariz. 597, 602 (App. 2014) (citations omitted).
As to colocation, the Department contends that PNAP customers obtain space in cages and
racks. (Def.’s Mot., at 11.) PNAP contends that it does not charge for colocation services on a per-
square-foot basis but instead on the amount of data center services it provides the customer each
month. (Pl.’s Mot., at 12.) However, nothing in City Code §§ 445 and 446 and A.R.S. § 42-5069
requires that rental of real property be billed on a per-square-foot basis.
PNAP further contends that what it charges colocation customers is significantly more than
the rental rate for warehouse space or fully equipped data centers. (Pl.’s Mot., at 2.) The
Department contends that the nature of the transaction determines the tax classification—not the
price paid. (Def.’s Resp. to Pl.’s Mot., filed January 30, 2026, at 12.) The Court agrees. Here,
PNAP is renting out space in its data centers for customers to set up their servers.

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As to the server rentals, the Department asserts that there is no dispute that the computer
hardware (i.e., servers) and software are tangible personal property under A.R.S. § 42-5001(21).
(Def.’s Mot., at 12.) The Department contends that a customer paying to use PNAP’s servers is a
rental under State Tax Commission v. Peck, 106 Ariz. 394 (1970). (Def.’s Mot., at 12.)
In Peck, the Court found that taxpayers owning a laundromat and automatic carwash were
subject to TPT as businesses leasing or renting tangible personal property. 106 Ariz. at 395–96.
The Court found:
There is no question that when customers use the equipment on the
premises of the plaintiffs herein, such customers have an exclusive
use of the equipment for a fixed period of time and for payment of
a fixed amount of money. It is also true that the customers
themselves exclusively control all manual operations necessary to
run the machines. In our view such exclusive use and control comes
within the meaning of the term ‘renting’ as used in the statute.
Id. at 396. In Energy Squared, Inc. v. Ariz. Dep’t of Revenue, the Court of Appeals distinguished
Peck when evaluating a tanning salon business. 203 Ariz. 507, 511 ¶25 (App. 2002). The Court
found:
Unlike the owners of coin-operated, self-service laundries and car
washes, the taxpayer customizes each of its patrons’ use of UV-
radiation-generating devices to maximize customer safety and
optimize tanning results according to the customer’s wishes. It is
true that the owner of a coin-operated, self-service laundry or car
wash may have the raw power to interrupt its customer’s use of its
equipment. In the instant case, however, the taxpayer reserves
overall control over its customers’ use of tanning devices not merely
by virtue of its control over its premises, but rather as a part of the
business design by which it provides artificial tanning.
Id. The Court of Appeals found that the operating of tanning salons did not constitute the renting
of tangible personal property. Id. at 511 ¶27.
In Energy Squared, the tanning technicians exclusively controlled whether a tanning
session could commence, how long the session could last, and which tanning device was
appropriate. Id. at 510 ¶22. Additionally, the taxpayer had to obtain information from the customer,
assess the information, provide advice to the customer, determine the maximum exposure the

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customer could be allowed to undergo, and enforce its determination through the central control
of the tanning equipment. Id. at 511 ¶23.
As the Department contends, Energy Squared is distinguishable because PNAP does not
operate the servers or data center space—PNAP’s customers operate the servers they rent. (See
Def.’s Resp., at 18.)
More recently, in ADP, LLC v. Arizona Dep’t of Revenue, the Court of Appeals found that
use of remotely hosted software was a taxable rental. 254 Ariz. 417, 423 ¶15 (App. 2023).
Addressing the distinction between services and property, the Court found:
To the extent ADP argues there are services included within the
eTime charges, those services are secondary and necessary
components of its software rental. We agree with ADOR that the
services ADP provides (such as maintenance, troubleshooting,
customer service, software configuration and updates, and technical
fixes) are normal components of ADP’s software rental business.
Any “services” purportedly bundled are secondary to the taxable
component of the transaction, the fees charged for the County’s use
of eTime, and therefore taxable.
Id. at 425 ¶24. THE COURT FINDS that the services PNAP provides are akin to the services
ADP provided that the Court of Appeals found were secondary and necessary components of
software rental. Here, the services PNAP provides are also necessary components of colocation
and server rentals. (See PSOF ¶4.)
PNAP contends that it provided hundreds of employees and independent contractors to
operate its data center like in City of Phoenix v. Bentley-Dille Gradall Rentals, Inc., 136 Ariz. 289
(App. 1983). (Pl.’s Resp. to Def.’s Mot., filed January 30, 2026, at 2, 8.) The Department contends
that PNAP does not operate the rented servers nor is the data center space operated, but rather
PNAP houses customers’ servers and the customers operate the servers they rent. (Def.’s Resp., at
18.)
In Bentley-Dille, the Court of Appeals held “as a matter of law that appellant did not give
up possession and control of the Gradalls when it provided them to various construction projects
with operators and thus, such activity was not ‘renting’ within the meaning of the transaction
privilege tax.” 136 Ariz. at 292. Here, PNAP does not exercise the same control over the rented
space or servers as that exercised over the machinery provided along with trained operators in
Bentley-Dille.

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PNAP relies on Val-Pak East Valley, Inc. v. Ariz. Dep’t of Revenue, 229 Ariz. 164 (App.
2012) and Qwest Dex, Inc. v. Ariz. Dep’t of Revenue, 210 Ariz. 223 (App. 2005) which address
the “dominant purpose” and “common understanding” tests. (Pl.’s Mot., at 13–15.) The
Department contends that Val-Pak and Qwest Dex are irrelevant to taxable rentals of personal
property. (Def.’s Resp., at 14–17.) Val-Pak and Qwest Dex both involved printing services and use
tax rather than TPT.
The Department contends that the “dominant purpose” test analyzed in Val-Pak and Qwest
Dex has an inherent defect when applied to rental property because the customer’s needs often
cannot be satisfied without both the services and the tangible property. (Def.’s Resp., at 16–17.)
The Department also notes that the supplying of utilities to make the laundry machines functional
in Peck did not prevent a finding that the laundry machines were rented for purposes of TPT.
(Def.’s Resp., at 17.)
In Val-Pak, the Court of Appeals explained that there are three scenarios common in the
treatment of transactions involving both tangible personal property and services:
[F]irst, the service is the primary object of the transaction and the
property is incidental to or an inconsequential element of the service
and not separately charged; second, the tangible personal property
is the primary object of the transaction and the service is incidental
to the property acquired and not separately charged; and third, the
property and service are distinct and each is a consequential element
of the transaction and can be readily separated. In the first, the sale
is all nontaxable; in the second, the sale is all taxable; and in the
third, the property, but not the service component, is taxable.
229 Ariz. at 167 ¶11 (citation omitted). The Court of Appeals found Val-Pak fell into the first
scenario as the dominant purpose of Val-Pak’s business was design, printing, and mailing services
not the paper itself. Id. at 167–68 ¶14.
The Court of Appeals in ADP referenced these three approaches. 254 Ariz. at 424 ¶23.
There, the Court of Appeals rejected ADP’s argument that it fell into the first category because the
property and services provided were easily separable and documented in its invoices. Id. at 424–
25 ¶23. As referenced above, any charges for services bundled with the software rental were
secondary and taxable. Id. at 425 ¶24. Such is the case here.
PNAP also relies on ADOR Private Taxpayer Rulings on safe deposit box services (LR03-
001, LR05-009, LR07-003), moving services that include storage space (LR04-003), and
information technology that included use of a router (LR07-004). (Pl.’s Mot., at 5–6, and at its

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Exhs. B–D.) However, the Court does not give any weight to such rulings. See A.R.S. § 42-2101(F)
(“A private taxpayer ruling or taxpayer information ruling may not be relied on, cited or introduced
into evidence in any proceeding by a taxpayer other than the taxpayer who has received the private
taxpayer ruling.”)
PNAP contends there was confusion as to the taxes on real property rental and personal
property rental, and therefore the Assessment is unconstitutional and illegal. (Pl.’s Mot., at 7.) “An
act which imposes a tax must be certain, clear and unambiguous, especially as to the subject of
taxation and the amount of the tax.” Duhame v. State Tax Comm’n, 65 Ariz. 268, 272 (1947)
(citations omitted). Here, the Court does not find that the statutes at issue are ambiguous.
PNAP also contends that the Department’s Assessment is an unconstitutional act of
legislation. (Pl.’s Mot., at 7.) PNAP contends that the Department usurped power belonging to the
Legislature by imposing tax on a new category or type of business not designated by the
Legislature. (Pl.’s Mot., at 7.) The Department contends that auditing and assessing is not a
legislative act. (Def.’s Resp., at 8.) In Duhame, the Arizona Supreme Court explained:
[I]f under such a statute the Commission selected one of these
vague, or alternate and differing bases for a taxpayer, such a
selection would not only be a violation of due process of law as
regards that taxpayer, but would be an unconstitutional act of
legislation by a Commission to whom the power to legislate was not
delegated.
An excellent statement of the principle of law here involved appears
in Larabee Flour Mills Co. v. Nee, D. C., 12 F. Supp. 395 (remanded
on another point after the United States Supreme Court in United
States v. Butler, 297 U.S. 1, 56 S.Ct. 312, 80 L.Ed. 477, 102 A.L.R.
914 and Rickert Rice Mills v. Fontenot, 297 U.S. 110, 56 S.Ct. 374,
80 L.Ed. 513, held the Agricultural Adjustment Act
unconstitutional). There the Court said: ‘Congress cannot surrender
any part of the legislative power. The Constitution vests that power
exclusively in Congress. The power to tax is a legislative power. The
power to tax includes the power to say what shall be taxed, who shall
pay it, what the tax shall be.’ 12 F. Supp. at page 402. ‘* * * What
Congress cannot do is to delegate to an administrative official not
only the power to fix a rate of taxation according to a standard, but
also the power to prescribe the standard. Congress must prescribe
the standard * * * an intelligible standard, a definite standard. It must
be like a yardstick which is three feet long by whomsoever it is used,

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not one which in the hands of one man is three feet long, in the hands
of another two feet long, and in the hands of a third four feet long,
elastic at the will of the individual applying it.’ 12 F. Supp. at page
403.
65 Ariz. at 273–74. Here, the Court has found that the statutes at issue are not vague or ambiguous.
Therefore, the Court does not find auditing and assessing under those statutes to be a legislative
act. Auditing and assessing are activities that affix a rate of taxation according to a standard—not
the act of prescribing the standard itself. See Duhame, 65 Ariz. at 274.
PNAP’s argument that the tax violates Article IX § 25 of the Arizona Constitution is also
unpersuasive. Article IX § 25 prohibits imposing or increasing TPT for services performed in
Arizona not in effect on December 31, 2017. Ariz. Const. art. IX, § 25. PNAP contends that TPT
cannot be imposed now on colocation services, IaaS services, and ancillary services. (Pl.’s Mot.,
at 7–8.) The Department contends that Article IX § 25 did not eliminate taxes on real or tangible
person property rentals. (Def.’s Resp., at 8.) The Department also contends that PNAP cannot add
the word “services” to create an exemption. (Def.’s Resp., at 8.)
THE COURT FINDS that the tax on PNAP’s real property and server rentals does not
violate Article IX § 25 because it does not impose or increase TPT on services.
PNAP contends that the federal Internet Tax Freedom Act (“ITFA”) prohibits taxation of
PNAP for real property rental and personal property rental. (Pl.’s Mot., at 8.) ITFA prohibits
“Taxes on Internet access.” 47 U.S.C. § 151, note (ITFA § 1101(a)(1)). Internet access “means a
service that enables users to connect to the Internet to access content, information, or other services
offered over the Internet[.]” ITFA § 1105(5)(A). The Department contends that servers do not
access data on the internet but transmit it over the internet. (Def.’s Resp., at 9.) The Department
also contends that PNAP does not provide internet connections to all of its customers. (Def.’s
Resp., at 9.)
THE COURT FINDS that the tax on PNAP’s real property and server rentals does not
violate the ITFA because PNAP provides rental of real property and servers—not services to
access the internet.
PNAP contends that the Assessment violates Arizona’s Taxpayer Bill of Rights because
the Department seeks to retroactively apply TPT to “a new or additional category or type of
taxpayer.” A.R.S. § 42-2078(B). (Pl.’s Mot., at 9.) The Department contends that there is no
evidence that either the state or city had any prior formal interpretation that colocation rentals and
server rentals were not taxable. (Def.’s Resp., at 10.)

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A.R.S. § 42-2078(B) states:
If the department adopts a new interpretation or application of any
provision of this title or title 43 or determines that any of those
provisions applies to a new or additional category or type of
taxpayer, and the change in interpretation or application is not due
to a change in the law:
1. The change in interpretation or application applies prospectively
unless it is favorable to taxpayers.
2. The department shall not assess any tax, penalty or interest
retroactively based on the change in interpretation or
application.
3. The change 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.
The Department’s response focuses on the first part of the statute regarding “a new
interpretation or application” and ignores the portion of the statute PNAP relies on regarding the
application “to a new or additional category or type of taxpayer.” (Def.’s Resp., at 10.) Here, the
Department has applied the real property rental tax and personal property rental tax to data centers
as to colocation services and server rentals when before it had not had occasion to do so. THE
COURT FINDS that this violates A.R.S. § 42-2078(B), and the application may only apply
prospectively pursuant to A.R.S. § 42-2078(B)(1).
PNAP contends that if it is subject to TPT, it should receive a deduction for the
reimbursements PNAP customers paid for already-taxed electricity expenses. (Pl.’s Mot., at 17.)
PNAP also contends that the penalties included in the Assessment should be abated because PNAP
had a reasonable basis to believe the tax code did not apply and timely paid taxes. (PNAP’s Mot.,
at 17.) Given the Court’s findings above, these arguments are moot.
IT IS ORDERED granting in part Defendant Arizona Department of Revenue’s Motion
for Summary Judgment, filed December 5, 2025, that PNAP is subject to the TPT applicable to
the rental of real property and tangible personal property based on the colocation services and
server rentals.

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IT IS FURTHER ORDERED granting in part Plaintiff Phoenix NAP, LLC’s Motion
for Summary Judgment, filed December 5, 2025, as to the application of the TPT retroactively.
All other relief requested in the Motions is denied.
PNAP also filed a motion seeking to exclude the testimony of Defendant’s expert witness
Tamal Bose, limit the opinion of Defendant’s expert Kevin O’Bryan, and exclude the opinion of
fact witness Lavelle Bland. (PNAP’s Daubert Mot., at 1–2.) PNAP contends that Tamal Bose is
not qualified, Kevin O’Bryan is only qualified to offer opinions on leases of entire commercial
data centers, and Lavelle Bland is not qualified and not timely disclosed. (PNAP’s Daubert Mot.,
at 2.)
Given the Court’s rulings above, Plaintiff’s Daubert Motion to Exclude Testimony of
Tamal Bose and Limit Testimony of Kevin O’Bryan and Lavelle Bland, filed December 5, 2025,
is deemed moot. For the record, the Court did not consider the draft declaration of Lavelle Bland
in rendering these rulings, due to Plaintiff’s disclosure objection, which is sustained. Therefore,
IT IS FURTHER ORDERED denying as moot Plaintiff’s Daubert Motion to Exclude
Testimony of Tamal Bose and Limit Testimony of Kevin O’Bryan and Lavelle Bland, filed
December 5, 2025.
Because the Court finds the statutory interpretation issues addressed in this ruling to be of
general, public interest and likely to recur absent clear, binding legal precedent, the Court
designates this ruling for publication pursuant to A.R.S. § 12-171 and Rule 16 of the Arizona Tax
Court Rules of Practice. The published decision that results is not intended to operate as an
appealable judgment absent further order of the Court.