American Airlines, Inc. v. Com., Bd. of Finance and Revenue
| Decision Date | 01 November 1995 |
| Citation | 665 A.2d 417,542 Pa. 1 |
| Parties | AMERICAN AIRLINES, INC., Appellee, v. COMMONWEALTH of Pennsylvania, BOARD OF FINANCE AND REVENUE, Appellant. USAIR, INC., Appellee, v. COMMONWEALTH of Pennsylvania, BOARD OF FINANCE AND REVENUE, Appellant. |
| Court | Pennsylvania Supreme Court |
Bart J. DeLuca, Jr., Senior Deputy Attorney General, for Appellants.
Ralph S. Snyder, Steve D. Shadowen, Philadelphia, for Appellee at No. 89.
John M. Enos, III, Harrisburg, for Appellee at No. 90.
Before NIX, C.J., and FLAHERTY, ZAPPALA, PAPADAKOS, CAPPY, CASTILLE and MONTEMURO, JJ.
The primary issue raised in these consolidated appeals is whether food, non-alcoholic beverages and related non-food supplies furnished by appellees to passengers and crew members during commercial flights are "directly used" in the supply of a public utility service, thereby qualifying for an exclusion under the "use tax" provisions in accordance with 72 P.S. § 7201(o ). 1 This Court finds that the Commonwealth Court erred in its determination that such items are "directly used" for purposes of the use tax in the supply of a public utility service and, accordingly, we reverse.
In December of 1985, the Pennsylvania Department of Revenue (Department) notified appellee, USAir, Inc., that effective February 1, 1986, all food, beverages and non-food supplies for flights originating in Pennsylvania would be subject to taxation pursuant to the use tax, 72 P.S. § 7201, et seq. 2 After complying for approximately two years, USAir filed for a refund with the Department's Board of Appeals in the amount of $2,167,817.76. Following a hearing on the matter, the Board of Appeals denied USAir's claim for a refund. Thereafter, USAir filed for a petition for review before the Board of Finance and Revenue, which after notice and a hearing, issued an order and opinion denying the petition.
USAir appealed the decision to the Commonwealth Court which reversed the order of the Board of Finance and Revenue holding that food and beverages were directly used in the rendition of appellee USAir's air transportation service. The Commonwealth Court also ordered that USAir was entitled to a refund in the amount of $2,167,817.76, plus statutory interest. USAir v. Commonwealth, 157 Pa.Commw. 303, 629 A.2d 300 (1993).
On August 2, 1988, the Board of Finance and Revenue issued a notice of audit assessment against appellee, American Airlines, in the amount of $367,739.15 including interest and penalties, for the period from April 1, 1985 through January 31, 1988. American Airlines filed a timely petition for reassessment with the Board of Appeals which sustained the assessment after a hearing. 3 American Airlines appealed this decision by filing a petition for review with the Board of Finance and Revenue. The Board of Finance and Revenue upheld the Board of Appeals' ruling, thereby sustaining the imposition of the use tax, plus interest and penalties. Subsequently, American Airlines appealed to the Commonwealth Court, which, relying on its decision in USAir, supra, reversed the decision of the Board of Finance and Revenue. American Airlines v. Commonwealth, 157 Pa.Commw. 315, 629 A.2d 306 (1993). A summary of the pertinent facts giving rise to the instant dispute is as follows.
The parties stipulated to the following facts. Appellees are both public utilities that provide intrastate, interstate and international passenger and freight airline service. During some of these flights, appellees serve food, beverages and related non-food items including plates, napkins, condiments, cups, and plastic utensils (collectively referred to herein as "related non-food items") to their passengers and crew members. 4
In order to obtain "ready-to-eat meals" to serve on their flights, appellees contract with local food vendors for the purchase and preparation of food and beverages at or near various airports throughout the United States and abroad. The related non-food items are purchased separately by appellees who then give them to the vendors to be used in the preparation of the individual meals and snacks. While the vendor purchases the food from the wholesalers, appellees select the wholesalers and dictate certain price and quality specifications. The vendors prepare and deliver the meals for flights departing from Pennsylvania. Appellees do not charge their passengers or crew members separately for the food and non-alcoholic beverages served on "meal flights." Rather, the cost of the meals for both the passengers and crew members is included in the cost for the airline ticket regardless of whether the passengers or staff eat or drink the items provided by the airlines' meal service.
Generally, Section 7202 of the Tax Reform Code of 1971 (Tax Code) requires that a six percent use tax be levied on all tangible personal property purchased at retail. 72 P.S. § 7202(b). Specifically, section 7202(b) provides, in pertinent part, that:
There is hereby imposed upon the use ... within this Commonwealth of tangible personal property purchased at retail ... and on those services ... purchased at retail ... a tax of six per cent of the purchase price....
72 P.S. § 7202(b). The Board of Finance and Revenue argues that, accordingly, the food and beverages purchased at retail by the airlines and served to their patrons and employees should be subject to the six percent tax.
Section 7201(o ) of the Tax Code, however, excludes from taxation the use of tangible personal property if it is used "directly" in the operations of a public utility in rendering the public utility service. 5 Specifically, § 7201(o )(4)(B)(iii) governing the taxation of items used by public utilities, provides, in pertinent part, that "use" shall not include:
(B) The use or consumption of tangible personal property, including but not limited to machinery and equipment and parts therefor, and supplies or the obtaining of the services described in subclauses (2), (3) and (4) of this clause directly in any of the operations of--
* * * * * * (iii) The producing, delivering or rendering of a public utility service, or in constructing, reconstructing, remodeling, repairing or maintaining the facilities which are directly used in producing, delivering or rendering such service.
72 P.S. § 7201(o)(4)(B)(iii) (emphasis added). The guidelines promulgated by the Department regarding sales and use taxes also specifically provide that:
The purchase or use by a public utility of tangible personal property or services performed thereon to be predominantly used directly by it in producing, delivering or rendering of a public utility service ... is exempt from tax.
61 Pa.Code § 32.34(a) (emphasis added). The exclusion, however, does not apply to:
tangible personal property or services to be used or consumed in managerial sales or other nonoperational activities, nor to the purchase or use of tangible personal property or services by any person other than the person directly using the same in the operations described....
72 P.S. § 7201(o)(4)(B) (emphasis added).
Appellees claim that the service of food and the supply of non-alcoholic beverages and related non-food items are "directly used" in the production, delivery or rendition of appellees' public utility service and that, therefore, under these provisions, such items should be excluded from the use tax. The crux of the parties' dispute regards the definition of "directly used" for purposes of determining whether the food, beverages and non-food related items are taxable.
In determining whether certain items are "directly used" in the rendering of a public utility so as to be excluded from the use tax, this Court has held that the key determinative inquiry is whether the items are used in the direct operational function of the public utility's rendering of the public utility service. Commonwealth v. Equitable Gas Co., 415 Pa. 113, 116, 202 A.2d 11, 13 (1964). See also Ernest Renda Contracting Co. v. Commonwealth, 516 Pa. 325, 532 A.2d 416 (1987); Commonwealth v. Equitable Gas Co., 85 Pa.Commw. 577, 584, 483 A.2d 1021, 1024 (1984), affirmed per curiam, 510 Pa. 503, 510 A.2d 337 (1986); Equitable Gas Co. v. Commonwealth, 18 Pa.Commw. 418, 423, 335 A.2d 892, 895 (1975), affirmed per curiam, 464 Pa. 541, 347 A.2d 674 (1975). Only if such items are used directly in the public utility's operations in rendering the public utility service can such items be excluded from the use tax.
The guidelines set forth by the Department defining "direct use" provide:
(1) Direct use. In determining whether a particular structure or article is used directly in producing, delivering or rendering a public utility service, consideration shall be given to the following:
(i) The physical proximity of the items while in use and the proximity of time of their use to the production, rendition and delivery of the utility service.
(ii) The causal relationship between the use of the item and the production, delivery and rendition of the utility service.
(iii) The character of the item, as to whether it is in the nature of a general improvement of the premises that would serve various users or is particularly designed or constructed for public utility use. The fact that particular property may be considered essential to the rendering of a public utility service because its use is required either by law or practical necessity, does not, of itself, mean that the property is used directly by a public utility.
61 Pa.Code § 32.34(a)(1). The guidelines further state that tangible property used in "nonoperational" activities is not considered to be "directly used" and is therefore subject to taxation. 61 Pa.Code. § 32.34(a)(3)(iii). Significantly, one of the "nonoperational" activities specifically subject to tax thereunder is tangible personal property used by the public...
To continue reading
Request your trial
-
Crawford Cent. School Dist. v. Com.
...v. Commonwealth, 860 A.2d 1155, 1157-58 n. 4 (Pa.Cmwlth.2004); Adelphia House Partnership, at 970 (citing American Airlines, Inc. v. Commonwealth, 542 Pa. 1, 665 A.2d 417 (1995) (describing 72 P.S. 7204(29) as tax exemption for food and beverages sold for human consumption); Magazine Publis......
-
STREET RD. BAR & GRILLE, INC. v. PLCB
...interpretation of Liquor Code entitled to deference unless clearly erroneous), citing American Airlines, Inc. v. Commonwealth, Bd. of Finance and Revenue, 542 Pa. 1, 665 A.2d 417, 420 (1995) (administrative agency's interpretation of statute given controlling weight unless clearly 9. The Co......
-
Concentric Network Corp. v. Com.
...resale exemption hold that items transferred with a service or product are not resold to a customer. See Am. Airlines, Inc. v. Bd. of Fin. & Revenue, 542 Pa. 1, 665 A.2d 417 (1995) (cost of food and beverages part of price of airline ticket and part of service of transportation; food and be......
-
Adelphia House Partnership v. Com.
...the Tax Code, 72 P.S. § 7204, has been consistently interpreted as setting forth exemptions to taxation. See American Airlines, Inc. v. Commonwealth, 542 Pa. 1, 665 A.2d 417 (1995) (72 P.S. § 7204(29) provides an exemption for food and beverages sold for human consumption); Magazine Publish......