I appreciate your clear and prompt explanation. Thank you very much

To be honest, my original source was a CPA friend of mine. He is a pretty knowledgeable tax guy so I usually trust him. He told me it gets subtracted on AZ as US interest. I've never done that before, but I can't say I have seen accrued market discount's very often, and certainly not in the amounts that this particular client has. So I started reserching and couldn't find a clear answer. I found lots of people and forums that make arguments both ways. Some say it is treated as US Income for federal purposes, so it is treated that way for state purposses, too. Others make similar arguments to what you said (although you stated it much more succintly). But no one can cite a definitive source for the answer.  

I just found this in AZ Instructions

"U.S. Government obligations include obligations such as savings
bonds and treasury bills. You cannot deduct any interest or
other related expenses incurred to purchase or carry the
obligations."

I'm not sure if that second part of that instruction is refereing to AMD. I'm trying to research and understand more about how AMD and the secondary market works.