Am. Helicopters, LLC v. Ariz. Dep't of Revenue

• Decision Date: 29 January 2015
• Docket Number: No. 1 CA-TX 14-0001,1 CA-TX 14-0001
• Parties: AMERICAN HELICOPTERS, LLC, License No. 20-081332; MONARCH ENTERPRISES, INC., License No. 03-007141; PAPILLON AIRWAYS, INC., License No. 03-025046; XEBEC, LLC, License No. 20-488245; ZUNI, LLC, License No. 07-618955; Plaintiffs/Appellants, v. ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.
• Court: Arizona Court of Appeals

AMERICAN HELICOPTERS, LLC, License No. 20-081332;MONARCH ENTERPRISES, INC., License No. 03-007141;PAPILLON AIRWAYS, INC., License No. 03-025046;XEBEC, LLC, License No. 20-488245; ZUNI, LLC,License No. 07-618955; Plaintiffs/Appellants, v. ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.

No. 1 CA-TX 14-0001

ARIZONA COURT OF APPEALS DIVISION ONE

January 29, 2015

NOTICE: NOT FOR OFFICIAL PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.

Appeal from the Superior Court in Maricopa County

No. TX2012-000231

The Honorable Dean M. Fink, Judge

AFFIRMED

COUNSEL

Kolesar & Leatham, Las Vegas, Nevada

By Scott R. Cook, Aaron R. Maurice

Counsel for Plaintiffs/Appellants

Arizona Attorney General's Office, Phoenix

By Scot Teasdale

Counsel for Defendant/Appellee

MEMORANDUM DECISION

Presiding Judge Patricia A. Orozco delivered the decision of the Court, in which Judge Randall M. Howe and Judge Maurice Portley joined.

OROZCO, Judge:

¶1 American Helicopters, LLC, Monarch Enterprises, Inc., Papillon Airways, Inc., Xebec, LLC, and Zuni, LLC (collectively, Taxpayers) appeal the summary judgment the tax court granted in favor of Arizona Department of Revenue (the Department) determining that Taxpayers are liable for use tax and transaction privilege tax. For the following reasons, we affirm.

FACTS AND PROCEDURAL HISTORY

¶2 Papillon Airways, Inc. (Papillon) provides on-demand and scheduled helicopter flights in Arizona and Southern Nevada, including daily scenic air tours of the Grand Canyon. Papillon leases helicopters from related entities, including American Helicopters, LLC, Monarch Enterprises, Inc., Xebec, LLC, and Zuni, LLC (collectively, the Lessor Entities). Pursuant to the lease agreements, Papillon is responsible for maintaining the helicopters, including the purchase and installation of "dynamic equipment," an industry term for engines, rotors, turbines, blades, and other aircraft parts.

¶3 The Department audited Taxpayers for the period from January 2003 through December 2006 and assessed use tax against Papillon in the amount of $531,636.32 arising from its purchase and use of dynamic equipment. The Department also assessed transaction privilege tax against the lease income earned by the Lessor Entities in the amount of $165,043.47 plus interest.

¶4 Taxpayers filed timely protests to the proposed assessments. Papillon argued that it was exempt from use taxation pursuant to Arizona Revised Statutes (A.R.S.) section 42-5159.B(7) (West 2015).¹ The Lessor Entities claimed they were exempt from transaction privilege tax underA.R.S. § 42-5061.B.7, as extended to lessors by A.R.S. § 5071.B.2(b). The Office of Administrative Hearings consolidated Taxpayers' protests and issued a decision determining that Taxpayers were liable for the assessed tax. Taxpayers appealed to tax court and the parties filed cross-motions for summary judgment. The tax court granted summary judgment in favor of the Department. Taxpayers timely appealed. We have jurisdiction pursuant to Article 6, Section 9 of the Arizona Constitution and A.R.S. §§ 12-120.21.A.1 and -2101A.1. (West 2015).

DISCUSSION

¶5 We review de novo the grant of summary judgment and construction of the applicable statutes. Wilderness World, Inc. v. Dep't of Revenue State of Ariz., 182 Ariz. 196, 198, 895 P.2d 108, 110 (1995); Ariz. Dep't of Revenue v. Cent. Newspapers, Inc., 222 Ariz. 626, 629, ¶ 9, 218 P.3d 1083, 1086 (App. 2009). "[L]aws exempting property from taxation are to be construed strictly." Conrad v. Maricopa Cnty., 40 Ariz. 390, 393, 12 P.2d 613, 614 (1932); see also Ariz. Dep't of Revenue v. Capitol Castings, Inc., 207 Ariz. 445, 447, ¶ 10, 88 P.3d 159, 161 (2004). Also, "[t]he presumption is against the exemption, and every ambiguity in the statute will be construed against it." Conrad, 40 Ariz. at 393, 12 P.2d at 614.

¶6 Arizona's transaction privilege tax is an excise tax on the right to engage in business in the state. See Ariz. Dep't of Revenue v. Mountain States Tel. & Tel. Co., 113 Ariz. 467, 468, 556 P.2d 1129, 1130 (1976). The tax extends to businesses that lease or rent tangible personal property and the tax is assessed against the income generated by the lease. A.R.S. § 42-5071.A-B. The use tax, which is complementary to the transaction privilege tax, applies to the storage, use or consumption of tangible personal property purchased from a retailer and is calculated as a percentage of the sales price. See A.R.S. § 42-5155.A. (defining the use tax); Ariz. Dep't of Revenue v. Care Computer Sys., Inc., 197 Ariz. 414, 420, ¶ 25, 4 P.3d 469, 475 (App. 2000) (Fidel, J., dissenting) (explaining that transaction privilege taxes and use taxes are complementary). Here, Taxpayers admit they are engaged in activities that fall within the scope of the transaction privilege tax and the use tax, but assert they are exempt from taxation because Papillon holds a "supplemental air carrier certificate under federal aviation regulations." See A.R.S. §§ 42-5061.B.7., -5071.B.2(b), -5159.B.7.

I. The Language of the Statutory Exemption

¶7 Both the transaction privilege tax and the use tax provide an exemption for "[a]ircraft, navigational and communication instrumentsand other accessories and related equipment," provided that the aircraft or equipment is sold to:

(a) A person holding a federal certificate of public convenience and necessity, a supplemental air carrier certificate under federal aviation regulations (14 Code of Federal Regulations part 121) or a foreign air carrier permit for air transportation for use as or in conjunction with or becoming a part of aircraft to be used to transport persons, property or United States mail in intrastate, interstate or foreign commerce.

A.R.S. §§ 42-5061.B.7(a), -5159.B.7(a) (Emphasis added.) If a sale of aircraft or related equipment is exempt under A.R.S. § 42-5061.B.7., then income realized from the lease of such property is likewise exempt. See A.R.S. § 42-5071B.2.(b).

¶8 There is no question that the subject of the assessed use tax (dynamic equipment) and the subject of the assessed transaction privilege tax (helicopters) qualifies as "aircraft, navigational and communication instruments and other accessories and related equipment." In order for Taxpayers' activities to be exempt from taxation, however, Papillon must hold: (1) a federal certificate of public convenience and necessity (CPCN); (2) a supplemental air carrier certificate under federal aviation regulations (14 Code of Federal Regulations Part 121); or (3) a foreign air carrier permit for air transportation. See A.R.S. §§ 42-5061.B.7(a) and -5159.B.7(a).

¶9 It is undisputed that Papillon did not hold a CPCN during the audited time period.² Likewise, it is undisputed that Papillon did not hold a foreign air carrier permit. Rather, the parties' dispute whether Papillon held a "supplemental air carrier certificate under federal aviation regulations (14 Code of Federal Regulations Part 121)." The Department argues that Papillon is not a supplemental air carrier and that it operates under Part 135 of the federal regulations, not Part 121. Conversely, Taxpayers argue that Papillon is a supplemental air carrier and that the statute's parenthetical reference to "Federal Regulations, part 121" is not determinative.

A. Papillon Is Not Authorized to Conduct Supplemental Operations Under 14 C.F.R. Part 121.

¶10 In order to operate as an air carrier or commercial operator, a person or entity must obtain an air carrier operating certificate from the Federal Aviation Administration (FAA). 49 U.S.C. § 44705. Papillon holds such a certificate. According to FAA regulations, the carrier must also obtain operations specifications that prescribe "the authorizations, limitations, and procedures under which each kind of operation must be conducted." 14 C.F.R. § 119.33(a)(3) (Emphasis added.); see also 14 C.F.R. § 119.7(a)(1). "Kind of operation" refers to "one of the various operations a certificate holder is authorized to conduct, as specified in its operations specifications, i.e., domestic, flag, supplemental, commuter, or on-demand operations." 14 C.F.R. § 110.2 (defining "kind of operation") (emphasis added).

¶11 The FAA regulations contain numbered parts setting forth the rules applicable to each "kind of operation" as follows:

Part 121 - Operating Requirements: Domestic, Flag and Supplemental Operations. 14 C.F.R. §§ 121.1 to -1500 (Emphasis added.)

. . .

Part 129 - Operations: Foreign Air Carriers and Foreign Operators of U.S.-Registered Aircraft Engaged in Common Carriage. 14 C.F.R. §§ 129.1 to -201.

Part 133 - Rotorcraft External-Load Operations. 14 C.F.R. §§ 133.1 to -51.

Part 135 - Operating Requirements: Commuter and on Demand Operations and Rules Governing Persons on Board Such Aircraft. 14 C.F.R. §§ 135.1 to -507 (Emphasis added.)

. . .

Part 137 - Agricultural Aircraft Operations. 14 C.F.R. §§ 137.1 to -77.

¶12 Carriers authorized to operate under Part 121 can conduct "supplemental operations." See 14 C.F.R. §§ 121.1 to -1500. Carriers authorized under Part 135 can conduct "commuter and on-demand operations." See 14 C.F.R. §§ 135.1 to -507. Papillon is not authorized underPart 121 to conduct supplemental operations.³ Rather, as recognized by the DOT, Papillon is authorized under Part 135 to conduct commuter and on-demand operations. It is also authorized under Parts 133 and 137 to provide rotorcraft external-load operations and agricultural aircraft operations.

Papillon provides daily air tour flights from Las Vegas McCarran International Airport, Boulder City Municipal Airport, Grand Canyon West, and Grand Canyon National Park Airport using its fleet of 39 helicopters, all of which are configured for six passengers. In addition, Papillon provides helicopter transportation services under a fee-for-service contract to several federal and state agencies. Moreover, in addition to conducting passenger flights under its Part

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