Document Number
12-111
Tax Type
Retail Sales and Use Tax
Description
Airline Exemption; Transports property using both aircraft and highway vehicles
Topic
Appropriateness of Audit Methodology
Exemptions
Records/Returns/Payments
Tangible Personal Property
Date Issued
07-09-2012


July 9, 2012



Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in response to your letter requesting correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the audit period April 2004 through December 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is an air carrier authorized by the Federal Aviation Administration to operate as an air carrier and conduct common carriage operations in accordance with the Federal Aviation Act of 1958. As a separate and distinct legal entity from any common carrier operated by motor vehicle, the Taxpayer transports property using both its aircraft and its highway vehicles. An audit resulted in the assessment of tax on purchases of assets and other tangible personal property. To prevent double taxation, the audit also includes a credit against the assessment for use tax remitted on estimated but taxable expensed purchases made during the audit period.

The Taxpayer contends that many purchases held in the audit are exempt pursuant to the retail sales and use tax exemption for airlines set out in Va. Code § 58.1-609.3 6. The Taxpayer also contends there is a miscalculation and understatement of tax payments. In addition, the Taxpayer asserts that certain items were first used outside Virginia.

DETERMINATION


Qualification for the Airline Exemption

Virginia Code § 58.1-609.3 6 provides an exemption from the retail sales and use tax for:
    • Tangible personal property sold or leased to an airline operating in intrastate, interstate or foreign commerce as a common carrier providing scheduled air service on a continuing basis to one or more Virginia airports at least one day per week, for use or consumption by such airline directly in the rendition of its common carrier service.

Thus, to qualify for the exemption, an airline must operate as a common carrier that provides air service consisting of regularly scheduled flights to one or more Virginia airports at least once a week. As a common carrier providing scheduled air service on a continuing basis to Virginia airports on at least a weekly basis, the Taxpayer satisfies the criteria for the exemption and is thus entitled to the exemption. This determination is consistent with a similar determination set out in Public Document (P.D.) 89-339 (11/29/89).

Scope of the Airline Exemption

In Commonwealth v. United Airlines, 219 Va. 374, 381, 248 S.E.2d 124, 128 (1978), the Virginia Supreme Court established that the airline exemption parallels the former exemption1 for common carriers of property by motor vehicles. The court also referenced its decision in Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973), which considered the scope of the exemption for common carriers of property by motor vehicles. The court held that “the word 'directly' (in the former exemption for common carriers of property by motor vehicles) narrowed the scope of the exemption to include only such essential tangible personal property used immediately and principally by a common carrier to keep its motor vehicles on the streets and highways in the actual transportation of passengers." [Insert added.] The court went on to state that "the 'direct use' exemption "excluded items merely convenient and facilitative to the business and items which are essential to the operation of the business as a whole but not an immediate part of actual performance of the public service."

Prior to the repeal of the exemption for common carriers of property by motor vehicles effective on September 1, 2004, it appears that the Taxpayer's highway revenue fleet would have qualified for such exemption. Because such exemption is no longer in effect, it must be determined whether the airline exemption would extend to highway vehicles used by the Taxpayer to transport customer packages destined for air transport by the Taxpayer or received from aircraft operated by the Taxpayer for delivery to customers.

In United Airlines, the court decided that other functions performed by the airline but not involving the actual air transportation of passengers and property would qualify for the airline exemption, provided the tangible personal property was essential to the common carrier service and used immediately and principally by the air carrier to perform its public service. For example, United Airlines exempted anti-hijacking surveillance equipment, reservation and ticketing equipment, and passenger and baggage service equipment. In P.D. 92-231 (11/9/92), the Department extended the airline exemption to the repair, rebuilding and maintenance of aircraft because such activities kept an airline's transportation system in operation and were thus considered essential to an airline's overall common carrier service.

While common carrier activities of airlines typically take place at the airport or in the air, the Taxpayer operates an integrated transportation system using aircraft, highway vehicles and other equipment to transport and handle customer cargo and packages. This transportation system entails the actual performance of common carrier duties, e.g., the receipt, pickup, over-the-road transport, cargo loading, unloading and handling at airports, air transport, sorting, delivery and protection of property and similar functions essential to the transport of property. This integrated transportation system is essential to the effective rendition of the Taxpayer's common carrier service. Tangible personal property used directly in the Taxpayer's integrated transportation system qualifies for the airline exemption. Although the exemption for common carriers of property by motor vehicles was repealed effective on September 1, 2004, the airline exemption would effectively extend to tangible personal property used directly by the Taxpayer in the operation of (revenue producing) highway transport services when such services constitute an integral part of an airline's common carrier services, provided the highway transport services are not part of any separately incorporated business whether related or not.

Burden of Proof

Virginia Code § 58.1-205 1 specifically declares that a tax assessment made by the Department is prima facie correct. As such, the burden is upon the Taxpayer to prove that the assessment is erroneous.

Guided by these principles, I will address the application of the tax to the specific items at issue.

Contested Assets

The Taxpayer contests a number of assets assessed in the audit. I find that the airline exemption applies to the following contested assets and other purchases:
    • Aircraft wheel changers used in the removal and installation of aircraft wheels on revenue generating aircraft.2
    • Belt loaders used to load and unload revenue generating baggage and freight to and/or from revenue generating aircraft, or to and/or from highway freight vehicles at the airport.
    • Conveyor units used to move and sort packages to the proper revenue generating aircraft through a hub/sort system that ensures the packages are loaded to the proper aircraft from highway freight vehicles at the airport:.
    • Forklifts used by aircraft personnel to lift revenue generating containers to and from revenue generating aircraft and/or from freight trucks at the airport.
    • Ground power units used to generate electricity for aircraft being prepared for flight or for performing repairs or maintenance to revenue generating aircraft.
    • Nitrogen carts used to service aircraft tires and hydraulic systems of revenue generating aircraft.
    • Machinery, equipment and repair parts used to repair and maintain non-highway vehicles and equipment used at the airport to support ground operations of revenue generating aircraft.
    • Drop boxes used in the receipt of cargo or packages from customers.
    • Vehicle maintenance equipment used to repair or lubricate trucks and vans licensed for highway use and used to transport revenue-generating cargo and packages.3
    • Vehicle maintenance parts used to repair revenue-generating trucks and vans (used for pick up and/or delivery of customer cargo or packages) that are part of the Taxpayer's integrated transportation system that uses both air and ground transportation to carry out its public services.

The above items will be removed from the audit unless also used in a taxable mariner. In such an instance, the tax due on the item must be perorated between the percentage of time the property is used in a taxable manner and the percentage of time used in an exempt manner. Tax proration is consistent with subsection C of former Title 23 Virginia Administrative Code (VAC) 10-210-370, as well as consistent with current Title 23 VAC 10-210-385. If the Taxpayer has paid the sales or use tax on any of the items exempted above and can establish such overpayment by documentary evidence, a credit for the net amount of overpayment received by the Department may be applied against the audit liability, or a separate refund for the net amount of overpayment received by the Department may be issued. For sales tax paid to a dealer on an exempt item, the dealer's discount taken by the dealer cannot be refunded because the Department never received such funds from the dealer. See Title 23 VAC 10-210-3040.

For the other assets and expensed purchases at issue, the airline exemption does not apply. Those taxable assets and expensed purchases are as follows:
    • Crew stairs used by aircraft personnel, including pilots, to move between ground level and the aircraft. Such use is for the personal convenience or use by employees and does not serve an immediate part in the actual repair or maintenance of aircraft or in the movement of freight.4.
    • Vehicle maintenance equipment used to repair and maintain trucks and vans licensed for highway use and used for administrative or managerial purposes or otherwise used in non-revenue generating activities.
    • Repair parts for highway or other motor vehicles when such vehicles are used for administrative or managerial purposes or otherwise used in non-revenue generating activities.

If any of the above taxable items are used in exempt activities, the tax may be prorated.

Real Property Issues

The Taxpayer claims that certain transactions are for real property network installations and should not be taxed. These contested charges consist of lifts that are claimed to be permanently attached to real property and used for loading and unloading of containers at airports, wiring of electronic devices used in route operations, and installation charges for wiring used to power hardware to run the Taxpayer's airline service system.

Pursuant to a telephone conversation with a member of the Appeals and Rulings staff, the Taxpayer furnished additional documentation for the contested assets to support its claims. A review of such documentation indicates the following:

Line item 3 of the audit's asset exception list is described as a miscellaneous purchase. While no voucher was made available during the audit, the Taxpayer has now furnished a copy of the vendor's invoice indicating that the transaction consisted of a labor charge for the removal of existing equipment and the installation of new equipment. Because the charge is labor only, line item 3 will be removed from the audit.

Line item 14 of the audit's asset exception list is described as a miscellaneous phone system. However, the invoice provided indicates a miscellaneous labor charge. Because the invoice is for exempt labor only, line item 14 will be removed from the audit.

Lime items 46 - 50 of the audit's asset exception list are described as materials or other costs. The Taxpayer claims that these items constitute wiring to power hardware and should be exempt as real property network installations. However, none of the documents provided establish a real property installation. Accordingly, these line items are treated as sales of tangible personal property with the following results:
    • The invoice for line item 46 shows separate charges for labor, materials, per diem and lodging. Labor was not assessed. The sales and use tax return along with its supporting records for such return indicate that use tax was paid on the labor charge. Line item 46 will be revised from ***** to ***** using the taxed labor charge to offset some of the untaxed charges.
    • Line item 47 is for materials only. The sales records provided indicate that use tax was paid on the materials charge. Line item 47 will be removed from the audit.
    • Based on the invoice provided, the amount assessed for line item 48 will be revised from ***** (materials and labor charge) to ***** (materials charge). The records provided do not establish payment of a use tax on this item.
    • For line items 49 and 50, the Taxpayer provides invoices that indicate separate charges for labor and materials. The auditor assessed the materials charges on these invoices. The sales tax records provided indicate payment of the use tax on the materials charges. Line items 49 and 50 will be removed from the audit.

First Use Outside Virginia

The Taxpayer maintains that tax was erroneously assessed on items that were shipped to and/or first used in other states. Specifically, the Taxpayer claims that simulator software was shipped from Virginia to ***** (state A) and tax was correctly reported to State A. The Taxpayer also claims that certain vehicle parts are subject to taxation in State A.

In regard to line items 56 - 74 of the contested purchases - CC exception list, it appears from the invoices provided that the Taxpayer took possession of these items in State A and was charged the State A sales tax. Accordingly, these items will be removed from the audit.

In regard to line items 120 - 338 of the contested purchases - CC exception list, the Taxpayer claims that these items (i.e., vehicle parts) were delivered to the Taxpayer outside Virginia and thus first used outside Virginia. According to the equipment/parts purchase agreement, title to such equipment or parts purchased from the vendor was to transfer to the Taxpayer upon pick up of the equipment by the Taxpayer or upon delivery of the equipment to the Taxpayer's designated transport or carrier. Although title to these items may have transferred to the Taxpayer out of state, it is my understanding that such items were delivered into Virginia for use in Virginia and subsequently became subject to the Virginia use tax in accordance with Va. Code § 58.1-604. As such, if no sales or use tax was paid to another state, the credit for taxes paid another state pursuant to Va. Code § 58.1-611 is not applicable. Absent proof of payment to another state, tangible personal property brought into Virginia for use is generally taxable in Virginia. Despite this, the auditor will re-examine these items to determine whether any of them qualify for the airline exemption in light of the determination in this case. For those items that do not qualify for the airline exemption, proof of State A sales or use tax payment must be furnished to justify removal of such items from the audit.

The Taxpayer indicates that line items 51 and 52 of the non-contested asset exception list were installed in State A. Based on the documents provided, these line items will be removed from the audit.

Credit for Estimated Tax Payments

The auditor provided a credit in the audit for estimated taxes paid on expensed purchases because all taxable transactions were held in the audit and it was not possible to identify which specific expensed purchases were taxed and which were not. The auditor allowed a credit of ***** based on 57 months at *****.

The Taxpayer contends that the auditor's credit is grossly understated and has presented a monthly breakdown of its estimated tax payments. Based on the Taxpayer's method of accruing use tax, it appears that the Taxpayer estimated its monthly use tax using the following measures: ***** for 36 months, ***** for one month, ***** for one month, ***** for 11 months, ***** for one month, ***** for 6 months, and ***** for one month. These amounts total to *****.

In regard to one month, i.e., November 2007, it does not appear to be an estimated amount because of its considerably higher use tax measure of *****. Of this amount, the Taxpayer contends that ***** is the estimated measure. Such measure does not appear to be an estimated amount as it is 15 to 35 times higher than the estimated measures preceding it. Furthermore, an estimated use tax measure of ***** was used for the periods preceding and following November 2007. Accordingly, it appears that the Taxpayer realized that more tax had to be reported for November 2007 than the usual estimated amount, presumably for specific and known purchases. In eleven other months of the audit period, I note that the Taxpayer accrued more tax than the estimated amount. To be consistent with the estimated tax reporting for the months immediately before and after November 2007, the estimated accruals paid measure used by the auditor for the month of November 2007 will be revised from ***** to *****. In addition, the periods from June 2007 to May 2008 will be revised from ***** to ***** and the periods from June 2008 to December 2008 will revised from ***** to *****. except November 2008 will be changed to *****.

CONCLUSION


The audit will be revised based on this determination. The audit may be further revised if the Taxpayer furnishes the additional documentation requested to the auditor. The auditor will contact the Taxpayer within 15 days of the date of this letter to arrange for the receipt of any additional documentation and information. Upon the auditor's receipt of such documentation within 60 days of the date of this letter, the audit will be revised, and a revised audit report will be sent to the Taxpayer.

After the adjustments, a revised bill, with interest accrued to date, will also be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges. The Taxpayer should remit its payment to: Virginia Department of Taxation, 600 East Main Street, 23rd Floor, Richmond, Virginia 23219, Attn: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.

The Code of Virginia sections, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****. If you have any questions about the audit revision or documentation needed for such revision, you may contact the auditor, ***** at *****.
                • Sincerely,


                • Craig M. Burns
                  Tax Commissioner






AR/1-4642417176.R
1. Formerly set out in Va. Code § 58-441.6(h) and Va. Code § 58.1-609.3 3.
2. The phrase "revenue generating aircraft" is used to refer to aircraft that are used directly to transport customer freight.
.3. Because tax was charged, line 8 may be changed to a credit if the Taxpayer establishes full payment of the invoice. Documentation provided for lines 9 - 13 of the asset exception list is insufficient to support a revision. Original invoices must be provided to establish the nature of these purchases. The invoice summaries provided have no adequate descriptions as to the nature of the purchases.
4. This tax treatment is consistent with P.D. 96-178 (7/9/96), in which a walkway installed around a conveyer system was held as not directly related to keeping a common carrier's vehicles on the road and thus not used directly in a public service function.

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46