Tax Type
Retail Sales and Use Tax
Description
Transportation equipment; Vehicles, vessels, and aircraft; Tangible personal property used by airline
Topic
Taxability of Persons and Transactions
Date Issued
10-17-1994
October 17, 1994
Re: §58.1-1821 Application: Sales and Use Tax
Dear ****************
This is in reply to your letter of July 19, 1993, on behalf of***********(the "Taxpayer"), seeking correction of a sales and use tax assessment for the period of January, 1990 through September, 1992.
FACTS
The Taxpayer is a foreign flag carrier airline which has scheduled flights to Virginia two days per week. The Taxpayer was audited and assessed tax, penalty and interest on fixed assets (repair parts for aircraft) and general expense purchases (food and beverage for passengers, leased equipment and paper) stored and used in Virginia. The Taxpayer is taking exception to the Virginia sales and use tax application to these items as set forth below.
The Taxpayer feels they qualify for the sales and use tax exemption for commercial airlines set forth in Va. Code § 58.1-609.3.6, despite the fact they do not meet the required definition of "scheduled air service" set forth in Va. Code §58.1-1501, which requires regularly scheduled flights at least five days per week. The Taxpayer argues that due to the fact it operates one of the longest non-stop flights between the United States and a foreign point, the size of the aircraft used and the frequency of such flights are a factor that tends to discriminate against a specific segment of foreign commerce. In other words, a larger aircraft flying into Virginia twice a week is more cost effective than a smaller aircraft flying into Virginia five times a week.
The Taxpayer also feels that the Virginia statute further discriminates against long-haul, non-stop air carriers as exemplified in Va. Code § 58.1-609.3(4), which provides an exemption for ships and vessels operating in interstate commerce. Va. Code § 58.1-609.3(4) exempts ship and vessels operating in interstate or foreign commerce, however, it does not require regularly scheduled port stops in Virginia. The Taxpayer asserts that the interstate and foreign commerce exemption in the Virginia statute is not equitably applied.
With regard to the fixed assets, i.e., repair parts, the Taxpayer feels the temporary storage exemption provided to contractors in Va. Code §58.1-609.3(1) would be applicable to repair parts stored in Virginia by the Taxpayer for use in repairing its aircraft.
The Taxpayer is also of the opinion that due to the nature of their operation, i.e., length of flight and time spent aboard the aircraft, the application of the tax to food and beverages served to passengers, as provided in Virginia Regulation (VR) 630-10-7, should not be applicable to the Taxpayer. The Taxpayer takes the position that the food and beverages served are not a taxable amenity as provided by the Virginia Supreme Court decision in Commonwealth v. United Airlines. 219 Va. 374; 248 S.E. 2d 124 (1978), but is a necessity considering the time and distance involved in its operation.
In conclusion, the Taxpayer claims the exemptions provided in Va. Code §58.1-609.3(4) and 58.1-609.3(6) are discriminatory because they violate the Supremacy Clause, the Equal Protection Clause, and the Due Process Clause of the United States Constitution.
DETERMINATION
To begin, the Virginia Supreme Court ruled in Commonwealth v. Community Motor Bus Cos., 214 Va. 155, 198 S.E.2d 619 (1973), that when a tax statute is susceptible of two constructions, one granting an exemption and the other not granting it, courts adopt the construction which denies the exemption. This position was further upheld in Golden Skillet Corp. v. Commonwealth. 214 Va. 276,199 S.E.2d 511 (1973), where the Supreme Court ruled that the rule of strict construction would apply in determining whether an exemption was applicable and where there is any doubt, the doubt is resolved against the one claiming the exemption. Keeping this in mind, I will address the areas of contention set forth in your letter.
Va. Code §58.1.609.3(6) provides a sales and use tax exemption 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 as provided in Va. Code §58.1-1501. "Scheduled air service" is defined in Va. Code § 58.1-1501 as a service provided by a single air carrier consisting of regularly scheduled flights to one or more Virginia airports at least five days per week. As provided in your letter, the Taxpayer only provides two regularly scheduled flights to Virginia a week. Based on the rule of strict construction as set forth in Commonwealth v. Community Bus Cos. and Golden Skillet Corp. v. Commonwealth. I find the Taxpayer does not meet the exemption extended to airlines operating in intrastate, interstate, or foreign commerce as set forth in Va. Code §58.1-609.3(6).
The Taxpayer also claims the statutory exemption provided under Va. Code §58.1-609.3(4) is discriminatory in nature by allowing ships and vessels operating in interstate or foreign commerce an exemption even though they do not make regularly scheduled port stops in Virginia. Here again, based on the rule of strict construction as set forth by the Virginia Supreme Court, the Taxpayer is not a ship or vessel operating in interstate or foreign commerce, therefore, it does not enjoy the exemption set forth in Va. Code §58.1-609.3(4).
The Taxpayer also feels they qualify for the "temporary storage" exemption provided under Va. Code § 58.1-609.3(1) for repair parts stored in Virginia for use in repairing aircraft in Virginia. The intent of the exemption provided under Va. Code§ 58.1-609.3(1) is to allow "contractors" to purchase tangible personal property temporarily stored in Virginia for use solely in another state or foreign country exempt from the tax, provided such tangible personal property could be purchased tax free in the state or foreign country of it's intended use. In the present case, the Taxpayer is not a contractor, nor are the repair parts for use in another state or foreign country. Likewise, the exemption provided under Va. Code§ 58.1-609.3(1) would not be applicable.
With regard to the tax application to food and beverages served to the Taxpayer's passengers, I offer (VR) 630-10-7, copy enclosed. In addition, I have also enclosed a copy of PD 88-320 which denies the exemption, despite the identical argument regarding the length of non-stop flights offered by the Taxpayer.
The Taxpayer is of the opinion that the application of the Virginia sales and use tax exemptions set forth under Va. Code § 58.1-609 violates certain clauses of the U.S. Constitution. However, it should be noted that similar arguments against a Tennessee tax on cargo containers were rejected by the U.S. Supreme Court in Itel Containers v. Huddleston, 113 S.Ct. 1095, (1993).
The Taxpayer also notes that the United States and the Kingdom of Saudi Arabia entered into a Bilateral Agreement with regard to custom duties and other federal taxes, Article 11 of the Bilateral Agreement provides that airlines of the respective countries:
-
- Shall be exempt, on the basis of reciprocity, from all import restrictions, property taxes and capital levies. Custom duties. excise taxes and similar fees and charges imposed by the National authorities... (Emphasis added).
- Shall be exempt, on the basis of reciprocity, from all import restrictions, property taxes and capital levies. Custom duties. excise taxes and similar fees and charges imposed by the National authorities... (Emphasis added).
Further, the courts have long recognized that a state, through its legislature, may determine the persons, property, and privileges to be taxed and the mode, forms, and extent of the imposition, e.g., exemptions from the tax. See 71 AmJur2d, State and Local Taxation, § 82. Similarly, the courts have held that the mere intent to export goods does not immunize the goods from taxation when they are present within the state. See 71 AmJur2d, State and Local Taxation, §245 and Commonwealth v. Miller Morton, 220 Va. 852, 263 S.E.2d 413 (1980).
In this case, the Virginia General Assembly has merely exercised its constitutional right to impose a tax upon the sale or use of tangible personal property at rest in the state and to grant differing exemptions to two different modes of transportation. Also in response to the Taxpayer's constitutional arguments, I would point out that the exemption for airlines does not discriminate in any way based upon the origination or destination of flights, e.g., instate, interstate, or international -- rather, the test for exemption is the provision of air service to Virginia airports at least five days per week.
The department is sensitive to issues of international trade and will not intentionally take any action inconsistent with the federal Constitution or international treaties. In this case, however, the Taxpayer does not meet the statutory test for exemption and has not met the burden of proving that the Virginia tax is inconsistent with the Constitution or the applicable international treaty. Consequently, the department lacks the authority to honor the Taxpayer's refund request.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7340K
Rulings of the Tax Commissioner