Am. Airlines, Inc. v. State ex rel. Okla. Tax Comm'n, 112489.

• Citation: 2014 OK 95,341 P.3d 56
• Decision Date: 18 November 2014
• Docket Number: No. 112489.,112489.
• Parties: AMERICAN AIRLINES, INC., Protestant/Appellant, v. STATE of Oklahoma, ex rel. OKLAHOMA TAX COMMISSION, Respondent/Appellee.
• Court: Oklahoma Supreme Court

341 P.3d 56

2014 OK 95

AMERICAN AIRLINES, INC., Protestant/Appellant

v.STATE of Oklahoma, ex rel. OKLAHOMA TAX COMMISSION, Respondent/Appellee.

No. 112489.

Supreme Court of Oklahoma.

Nov. 18, 2014.

Robert O. O'Bannon, Catherine L. Campbell, Fred A. Leibrock, and Chase H. Schnebel, Phillips Murrah P.C., Oklahoma City, Oklahoma, for Appellant.

Douglas B. Allen and Marjorie L. Welch, Oklahoma Tax Commission, Oklahoma City, Oklahoma, for Appellee.

Opinion

COMBS, J.

¶ 1 The main issue on appeal is whether the purchase of electricity and natural gas utility services qualifies for a sales tax exemption. The Appellant, American Airlines, Inc., (“AA”) was denied a refund for the sales tax it paid on its purchases of electricity and natural gas utility services during the 2006 calendar year. To address this issue we must determine whether the Oklahoma Sales Tax Code, 68 O.S. §§ 1350 –1354.6, and the Streamlined Sales and Use Tax Administration Act, 68 O.S. § 1354.14 et seq. (collectively the “Code”) provides for such an exemption. AA originally requested a refund of sales or use tax paid on its purchase of utility services and other items. On appeal, AA only contests the denial of its refund claim for sales tax it paid on the utility services.

I. Facts and Procedural History

A. The American Airlines Facility

¶ 2 The record reflects AA operates the world's largest private aircraft maintenance facility (“AA Facility”). The AA Facility is located at the Tulsa International Airport in Tulsa, Oklahoma. The Account Maintenance and Compliance Division (“Division”) of the Appellee, the Oklahoma Tax Commission (“OTC”) does not dispute that AA was a “qualified aircraft maintenance facility” during the 2006 calendar year. A “qualified aircraft maintenance facility” is currently and during the relevant periods of this case, defined as:

[A] facility operated by an air common carrier at which there were employed at least two thousand (2,000) full-time-equivalent employees in the preceding year as certified by the Oklahoma Employment Security Commission and which is primarily related to the fabrication, repair, alteration, modification, refurbishing, maintenance, building or rebuilding of commercial aircraft or aircraft parts used in air common carriage ...

Title 68 O.S.2006, § 1357(20) (also referred to herein as the Parts Exemption).

¶ 3 The AA Facility is a huge facility comprising over 3 million square feet and employs over 6,000 employees. It is also the only “qualified aircraft maintenance facility” in the state. Services performed at the AA Facility include entire airframe refurbishment, engine maintenance, painting, washing, part manufacturing, testing and other critical tasks. AA asserts the facility uses significant amounts of natural gas and electricity to run the thousands of tools, lathes, ovens, steam boilers, heating tanks and innumerable other pieces of energy-consuming equipment employed in aircraft repair.

¶ 4 The AA Facility is composed of four main areas of operation within the airport. The Mingo Facility, the Pine Facility, the Memorial Facility and the Apache Facility collectively compose the AA Facility. The administrative law judge (“ALJ”) found each of these facilities used electricity and natural gas in aircraft repair and maintenance.

¶ 5 The AA Facility has maintained a Federal Aviation Administration (“FAA”) Repair Station Certificate since 1961. To maintain this certification, AA is required to follow FAA regulations and guidelines established by original equipment manufacturers. AA asserts these regulations require it to maintain segregated and controlled workspaces for specific repair operations, segregated storage and protection of all aircraft materials and articles undergoing repair, and suitable permanent housing (i.e., aircraft hangars). The FAA regulations also require the facility to include “[v]entilation, lighting, and control of temperature, humidity, and other climatic conditions sufficient to ensure personnel perform maintenance, preventative maintenance, or alterations to the standards required by this part.”¹

B. Pre–Appeal History

¶ 6 In February 2009, AA filed a sales or use tax refund claim with the Division. The basis of the claim was for sales or use tax allegedly remitted in error on exempt purchases of electricity and natural gas utility services, aircraft parts, repair parts, supplies and tooling, including certain cleaners, chemicals and gases, for the 2006 calendar year.

¶ 7 AA asserted the utility services and other items were exempt pursuant to 68 O.S. Supp.2006, § 1357(20) and (28). Paragraph (20) (“Parts Exemption”) provided:

There are hereby specifically exempted from the tax levied by the Oklahoma Sales Tax Code:

....

20. Sales of aircraft and aircraft parts provided such sales occur at a qualified aircraft maintenance facility. As used in this paragraph, “qualified aircraft maintenance facility” means a facility operated by an air common carrier at which there were employed at least two thousand (2,000) full-time-equivalent employees in the preceding year as certified by the Oklahoma Employment Security Commission and which is primarily related to the fabrication, repair, alteration, modification, refurbishing, maintenance, building or rebuilding of commercial aircraft or aircraft parts used in air common carriage. For purposes of this paragraph, “air common carrier” shall also include members of an affiliated group as defined by Section 1504 of the Internal Revenue Code, 26 U.S.C., Section 1504 ; (emphasis added).

Paragraph (28) (“Services Exemption”) provided:

28. Beginning July 1, 2005, sales of aircraft engine repairs, modification, and replacement parts, sales of aircraft frame repairs and modification, aircraft interior modification, and paint, and sales of services employed in the repair, modification and replacement of parts of aircraft engines, aircraft frame and interior repair and modification, and paint; (emphasis added).

¶ 8 The total amount of the original refund claim was $840,880.50 of which $781,229.01 constituted utility services. On June 10, 2009, the Division allowed a refund in the amount of $3,463.56 net of remuneration and denied $837,345.22. None of the refund was for electricity and natural gas utility services. The reason given for the denial was:

Purchases were included in the request for items that do not become a part of the aircraft, aircraft frame, or aircraft engine per 68 OS 1357(20) and (28)

¶ 9 AA's main point of contention is that 68 O.S. Supp.2006, § 1357(28) (Services Exemption) does not require electricity and natural gas or aircraft parts, repair parts, supplies and tooling, to become part of the aircraft, aircraft frame, or aircraft engine. Rather, such items only need be “employed in” repair or maintenance. It was further asserted that absent these items the repair and maintenance of qualifying aircraft could not take place. The protest also requested a hearing before the OTC.

¶ 10 On October 14, 2011, through its response to interrogatories, AA increased the amount in controversy by $311,040.31. This increase was attributed only to electricity and natural gas utility services employed in the repair and maintenance of aircraft pursuant to 68 O.S. § 1357(28) during the 2006 calendar year. This increased the total amount in controversy concerning utility services to $1,092,269.32.

¶ 11 A hearing was scheduled for May 6, 2013. In its pre-hearing brief the Division asserted two new arguments in support of the denial. The first argument was, since 2003, electricity and gas² has become part of the definition of “tangible personal property” for purposes of the Code. Title 68 O.S. Supp.2005, § 1352(23).³ It asserted, sales of tangible personal property are not sales of services and therefore, as sales of tangible personal property, electricity and natural gas do not qualify for the Services Exemption (68 O.S. Supp.2006, § 1357(28) ). The Division also asserted if the court should find that purchases of electricity and natural gas constitute “sales of services” then AA has failed to document that all of the electricity and natural gas purchased were employed in the repair, modification and replacement of parts of aircraft engines, aircraft frame and interior repair and modification and paint.

¶ 12 The Division's second new argument was that a 2012 legislative amendment (“2012 Amendment”) enlarged the scope of the Parts Exemption beginning July 1, 2012, to exempt sales of machinery, tools, supplies, equipment and “related tangible personal property” and services. This amended version reads as follows:

20. Sales of aircraft and aircraft parts provided such sales occur at a qualified aircraft maintenance facility. As used in this paragraph, “qualified aircraft maintenance facility” means a facility operated by an air common carrier, including one or more component overhaul support buildings or structures in an area owned, leased or controlled by the air common carrier, at which there were employed at least two thousand (2,000) full-time-equivalent employees in the preceding year as certified by the Oklahoma Employment Security Commission and which is primarily related to the fabrication, repair, alteration, modification, refurbishing, maintenance, building or rebuilding of commercial aircraft or aircraft parts used in air common carriage. For purposes of this paragraph, “air common carrier” shall also include members of an affiliated group as defined by Section 1504 of the Internal Revenue Code, 26 U.S.C., Section 1504. Beginning July 1, 2012, sales of machinery, tools, supplies, equipment and related tangible personal property and services used or consumed in the repair, remodeling or maintenance of aircraft, aircraft engines, or aircraft component parts which occur at a qualified aircraft maintenance facility;

68 O.S. Supp.2012, § 1357(20), amended by 2012 Okla. Sess. Laws c. 230, § 2; the 2012 amendment language is underlined.

The Division argued that AA's claim...