89 Hawai'i 51, Kamikawa v. Lynden Air Freight, Inc., 21434

• Decision Date: 25 November 1998
• Docket Number: No. 21434,21434
• Citation: 968 P.2d 653
• Parties: 89 Hawai'i 51 In the Matter of the Tax Appeal of Ray K. KAMIKAWA, Director of Taxation, State of Hawai'i, Appellant, v. LYNDEN AIR FREIGHT, INC., a Washington corporation, Appellee.
• Court: Hawaii Supreme Court

Page 653

968 P.2d 653

89 Hawai'i 51

In the Matter of the Tax Appeal of Ray K. KAMIKAWA, Director

of Taxation, State of Hawai'i, Appellant, v. LYNDEN AIR FREIGHT, INC., a Washington corporation, Appellee.

No. 21434.

Supreme Court of Hawai'i.

Nov. 25, 1998.

Josephine L. Chang and Girard D. Lau, Deputy Attorneys General, On the briefs, for appellant.

Roger H. Epstein and Milton Yasunaga (of Cades Schutte Fleming & Wright),and Gregg D. Barton (of Bogle & Gates, pro hac vice, Bellevue, WA),for appellee.

MOON, C.J., KLEIN, LEVINSON, NAKAYAMA, AND RAMIL, JJ.

OPINION OF THE COURT BY MOON, C.J.

This appeal arises from the Tax Appeal Court's order granting appellee Lynden Air Freight, Inc.'s, [hereinafter, Lynden] motion for summary judgment and denying appellant Ray K. Kamikawa, Director of Taxation, State of Hawaii's [hereinafter, Kamikawa or the State] motion for summary judgment. This case presents the issue of whether the Federal Aviation Act (FAA), which regulates "air transportation," preempts Hawai'i Revised Statute (HRS) § 237-13(6) (1985) ¹--Hawaii's general excise tax statute--as it applies to that portion of gross receipts that Lynden receives for the ground transportation and other non-air services of its freight forwarding business.

Specifically, Kamikawa contends on appeal that the Tax Appeal Court's order granting Lynden's motion for summary judgment, and denying his motion for summary judgment, should be reversed for the following reasons: (1) Hawai'i assessed general excise taxes on only that portion of Lynden's gross receipts that are properly allocated to the ground transportation and other non-air services of its freight forwarding business, and not on "air transportation" as defined by 49 U.S.C. § 40102 (1994); and (2) the Tax Appeal Court erred in concluding as a matter of law that, as applied, 49 U.S.C. § 40116 (1994) ² preempts Hawai'i from imposing general excise taxes on the portion of Lynden's revenues allocated to the ground transportation and other non-air services of its freight forwarding business.

Based on our recent decision in In re Tax Appeal of Kamikawa v. United Parcel Service [ (UPS) ], Inc., 88 Hawai'i 336, 338, 966 P.2d 648, 650 (1998) (holding that 49 U.S.C. §§ 1301 and 1513 did not preempt HRS § 239-6, Hawaii's Public Service Company tax statute, insofar as it applied to the gross receipts that UPS received for the ground transportation portion of packages that travel partly by air), we agree with Kamikawa's contentions on appeal. We, therefore, vacate the decision of the Tax Appeal Court and remand this case with instructions that the Tax Appeal Court enter summary judgment in favor of Kamikawa.

I. BACKGROUND

Lynden is a Washington corporation, headquartered in Seattle, Washington and registered to do business in Hawai'i. It is an air freight forwarder, providing door-to-door delivery of freight worldwide, including delivery between points within Hawai'i and between Hawai'i, the mainland United States, and other countries. Lynden delivers freight through independent airlines and motor carriers, which provide the actual aircraft transportation and ground transportation services.

Under these arrangements, third-party motor carriers pick up packages at the customer's location and deliver them to Lynden's warehouse. Lynden employees receive, handle, and sort the packages for particular flights and destinations. The packages are then transported to third-party airlines' freight facilities where they are loaded onto airplanes for delivery. This process is repeated, in reverse, once the packages arrive at airports local to the package recipients. Lynden charges customers for all services--air transportation, ground transportation, and package handling--on one bill.

Believing that Hawai'i could not legally assess general excise taxes on its freight forwarding business, Lynden paid no general excise taxes between 1986 and 1994. Based on the services Lynden provides in Hawai'i, however, the State issued final notices of assessment on May 19, 1997, in which it assessed general excise taxes on that portion of Lynden's gross receipts allocated to the ground transportation and other non-air services of its freight forwarding business for the years 1987 through 1994. The State assessed general excise taxes according to the following formula:

Lynden's Hawai'i Taxable

Lynden's Total x Ground Costs = Gross

----------------

Worldwide Revenue Lynden's Total Receipts

Worldwide Costs

The State used the above formula in an attempt to derive taxable gross receipts (i.e., the portion of Lynden's gross receipts that are not derived from the sale of air transportation). The formula multiplies Lynden's worldwide total revenue by a fraction, the numerator of which represents the Hawai'i ground costs and the denominator of which represents Lynden's worldwide total costs.

The above-stated formula derives from HRS § 237-21 (1985), which provides in relevant part:

§ 237-21 Apportionment If any person ... is engaged in business both within and without the State ... and if under the Constitution or laws of the United States the entire gross income of such person cannot be included in the measure of this tax, there shall be apportioned to the State and included in the measure of the tax that portion of the gross income which is derived from activities within the State, ... In other cases, if and to the extent that the apportionment cannot be accurately made by separate accounting methods, there shall be apportioned to the State and included in the measure of this tax that proportion of the total gross income, so requiring apportionment, which the cost of doing business within the State, applicable to the gross income, bears to the cost of doing business both within and without the State, applicable to gross income.

(Emphases added.) Because Lynden is engaged in business within and without Hawai'i, the State used this formula to determine general excise taxes attributable to Lynden's Hawai'i-based activities. Further, by including only ground-related costs, the State attempts to avoid taxing the air service that Lynden provides to its customers. The resulting "taxable gross receipts" figure was then multiplied by the four-percent tax rate found in HRS § 237-13(6), yielding total assessments of $515,832.88 for the tax years in question. Believing that most of the assessment was preempted, Lynden disputed $500,595.28 of the total assessment; however, Lynden agreed by stipulation that, "if the State can tax a portion of Lynden's gross receipts it claims are attributable to ground portions of the delivery service, the assessment of ... $500,595.28 is correct."

After being assessed, Lynden paid the $515,832.88 assessment, but protested $500,595.28 of the general excise taxes, penalties, and interest and sought a refund in the Tax Appeal Court. On December 16, 1997, Lynden filed a motion for summary judgment, arguing that 49 U.S.C. § 40116 preempted Hawaii's general excise tax statute, HRS § 237-13(6). At a January 13, 1998 hearing on Lynden's motion, the State orally moved for summary judgment and the Tax Appeal Court heard both Lynden's and the State's motions. On January 28, 1998, the Tax Appeal Court entered an order granting Lynden's motion for summary judgment and denying Kamikawa's cross-motion for summary judgment.

Following the entry of final judgment on February 19, 1998, Kamikawa timely appealed.

II. STANDARD OF REVIEW

This court reviews an award of summary judgment de novo, under the same standards applied by the trial court. See Crompton v. Tern Corp., 83 Hawai'i 1, 6, 924 P.2d 169, 174 (1996). Therefore, "[s]ummary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Id. (emphasis and internal brackets in original) (citation omitted).

Moreover, it is well settled that, "in reviewing the decision and findings of the Tax Appeal Court, a presumption arises favoring its actions which should not be overturned without good and sufficient reason. The appellant has the burden of showing that the decision of the Tax Appeal Court was 'clearly erroneous.' " Weinberg v. City and County of Honolulu, 82 Hawai'i 317, 322, 922 P.2d 371, 377 (1996) (citation omitted). Inasmuch as the facts here are undisputed and the sole question is one of law, we review the decision of the Tax Appeal Court "under the right/wrong standard." Id. (citation omitted); Maile Sky Court Co., Ltd. v. City and County of Honolulu, 85 Hawai'i 36, 39, 936 P.2d 672, 675 (1997) ("The interpretation of a statute is a question of law.").

III. DISCUSSION

The dispositive issue on appeal is whether the ground transportation and other non-air services that Lynden provides constitutes non-taxable "air transportation" under the FAA. We hold that it does not.

Based on our reasoning in United Parcel Service, we agree that the FAA preempts the State's ability to assess general excise taxes on revenues derived from the sale of "air transportation." See United Parcel Service, 88 Hawai'i at 338-40, 966 P.2d at 650-52. However, for the reasons discussed infra, we hold that the Tax Appeal Court erred when it concluded that "[t]he revenues received by Lnden [sic] Air Freight in the instant matter are derived from the sale of 'air transportation' as defined by 49 U.S.C. [§ ] 40102." Consequently, we hold that the State may assess general excise taxes on that portion of the gross receipts that Lynden receives for ground transportation and other non-air services it provides.

A. 49 U.S.C. § 40116 Preempts HRS § 237-13 Insofar As It Assesses General Excise Taxes On "Air Transportation."

Lynden relies on the United States Supreme Court's decision in Aloha Airlines v. Director of Taxation, 464 U.S. 7, 104 S.Ct. 291,...