Balloons Over the Rainbow, Inc. v. Dir. Revenue

• Decision Date: 15 April 2014
• Docket Number: No. SC 93039.,SC 93039.
• Citation: 427 S.W.3d 815
• Parties: BALLOONS OVER THE RAINBOW, INC., Appellant, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

427 S.W.3d 815

BALLOONS OVER THE RAINBOW, INC., Appellant,

v.DIRECTOR OF REVENUE, Respondent.

No. SC 93039.

Supreme Court of Missouri, En Banc.

April 15, 2014.

Limited on Preemption Grounds

V.A.M.S. § 144.020.1(2)

Aaron French, Jesse B. Rochman, Apollo D. Carey, Sandberg Phoenix & von Gontard PC, St. Louis, for Balloons.

James R. Layton, Solicitor General, Jeremiah J. Morgan, Deputy Solicitor General, Attorney General's Office, Jefferson City, for the Director.

PATRICIA BRECKENRIDGE, Judge.

Balloons Over the Rainbow, Inc., a Missouri corporation, seeks review of the administrative hearing commission's (AHC) denial of its claim for a refund of sales taxes paid and its challenge to the assessment of sales and use taxes. In its petition for review, Balloons claims that the AHC erred in concluding that it owed sales taxes under section 144.020.1(2),¹ on gross receipts of hot air balloon rides because such taxes are prohibited by the federal Anti–Head Tax Act (AHTA), 49 U.S.C. § 40116. Balloons also claims that sales taxes assessed on the sale of balloon rides through flight certificates sold by out-of-state third party vendors are not taxable because they are not “sales at retail” in Missouri, as defined in section 144.010(11), and qualify for the resale exemption in section 144.210.1. Balloons further claims that the AHC erred in concluding that it owed use taxes under section 144.030.2 on its out-of-state purchase of a hot air balloon and inflator fan from Texas because Balloons is a “common carrier” under section 144.032.2 and exempt from paying such taxes.

This Court reverses the ruling of the AHC as to the assessment of sales taxes on all sales of hot air balloon rides—those purchased directly from Balloons in Missouri and those purchased by flight certificate from the out-of-state third-party vendors—because the taxes on those gross receipts are state taxes on “air commerce,” which are prohibited by the AHTA. This Court rejects, however, Balloons' claim that it does not owe use taxes on the hot air balloon and inflator fan purchased in Texas because Balloons is not a common carrier for purposes of use tax exemptions under section 144.030.2.(3). Accordingly, the decision of the AHC is affirmed in part and reversed in part, and the case is remanded.

Factual and Procedural Background

Balloons Over the Rainbow, Inc., is a Missouri corporation that sells rides on untethered hot air balloons in the St. Louis area. At the time of their scheduled balloon rides, Balloons' customers meet at the Jefferson County Library in High Ridge, Missouri. From there, they are transported to a launch point that varies depending on prevailing wind directions.

Each flight lasts about an hour and is piloted by a commercial pilot licensed by the Federal Aviation Administration. The pilot typically tries to confine the balloon flights to Missouri. However, the flight path ultimately is dictated by prevailing wind patterns, which cause flights occasionally to enter into Illinois' airspace. According to Balloons, this happens less than 10 percent of the time. Balloons' pilots also attempt to steer clear of airports, but if wind patterns do carry flights over airports, pilots fly at an altitude of more than 10,000 feet ² to avoid the airports' airspace, which extends from 0 to 10,000 feet. At the end of each flight, pilots attempt to land the balloons in Missouri as close to the launch site as possible. Regardless of the landing location, all passengers are shuttled back to the Jefferson County Library upon landing.

To ride with Balloons, customers either must purchase rides in Missouri directly from Balloons or buy a flight certificate on the internet through out-of-state third-party vendors with a contractual relationship with Balloons. All customers buying directly from Balloons pay the same rate, while customers purchasing flight certificates from an out-of-state third-party vendor pay a price set by the vendor. When a customer presents a flight certificate to Balloons, the customer receives a balloon ride if Balloons decides to fly that customer. Subsequently, the third-party vendor pays Balloons a flat fee for the redeemed flight certificate based on its contract with Balloons. No payment is exchanged between Balloons and the third-party vendor prior to the customers presenting Balloons with the flight certificate, and Balloons never collected or remitted sales taxes on the payment it received for those flights. Balloons did collect sales tax, however, on receipts of balloon rides purchased in Missouri by customers directly from Balloons from October 2007 through March 2010.

In January 2011, Balloons requested a refund of those sales taxes in the amount of $7,761.51 from the director of revenue. It claimed that it was entitled to a refund of those taxes because the federal AHTA prohibits Missouri from assessing sales taxes on the sale of hot air balloon rides; therefore, section 144.020—the Missouri statute under which Balloons paid the Missouri sales tax—is preempted by the AHTA. The director denied Balloons' refund request.

Prior to Balloons' January 2011 refund request, the department of revenue audited Balloons for sales and withholding taxes for the period of January 1 2007, through December 31, 2009, and for use taxes during the period of January 1, 2005, through December 31, 2009. After the audit, the director of revenue assessed Balloons for unpaid sales taxes of $2,729.76, plus additions and interest, and use taxes of $1,184.44. The sales taxes were for the gross receipts from rides sold through the internet by out-of-state third-party vendors. The use taxes were assessed on, among other items, a $1,000 inflator fan purchased in Texas in May 2008 and an $18,000 hot air balloon purchased in Texas in June 2008.³

Balloons sought the AHC's review of the director's decisions in two complaints. In its first complaint filed in April 2011, Balloons appealed the director's denial of its request for a refund of the sales taxes on rides purchased in Missouri directly from Balloons. In its second complaint filed in June 2011, Balloons challenged the director's assessment of sales taxes on the amount paid to Balloons by third-party vendors and use taxes on the balloon and inflator fan purchased in Texas.

After a hearing, the AHC ruled partially in favor of the director on both complaints.⁴ Balloons now petitions this Court for review of the AHC's decision. Because review of the AHC's decision involves construction of the revenue laws of the state, this Court has jurisdiction. Mo. Const. art. V, sections 3, 18.

Standard of Review

This Court reviews the decision of the AHC pursuant to section 621.189, which directs this Court to uphold the AHC's decision if it is “authorized by law and supported by competent and substantial evidence upon the record as a whole unless clearly contrary to the reasonable expectations of the General Assembly.” Street v. Dir. of Revenue, 361 S.W.3d 355, 357 (Mo. banc 2012). This Court reviews the AHC's interpretation of revenue law de novo. Id.

Section 144.020(2) is Preempted by the Federal Anti–Head Tax Act

Balloons first challenges the AHC's decision that Balloons was not entitled to a refund of the sales taxes it paid and was liable for additional sales taxes assessed, pursuant to section 144.020.1, on the hot air balloon rides it sold. Balloons claims that it does not owe sales tax because the plain language of the AHTA prohibits states from taxing proceeds from the sale of untethered hot air balloon rides.

Balloons concedes that, if not for the AHTA, it would owe taxes under section 144.020.1. Section 144.020 imposes a tax on “all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state.” The tax imposed on Balloons was “equivalent to four percent of the amount paid for admission and seating, accommodations, or fees paid to, or in any place of amusement, entertainment or recreation, games and athletic events.” Section 144.020.1(2). Balloons claims, however, that the federal AHTA prohibits the director's assessment of taxes under section 144.020.1 on its sales of untethered hot air balloon rides. Pursuant to the Supremacy Clause of the United States Constitution, the imposition of sales tax under section 144.020 is preempted by the AHTA when the tax imposed is in conflict with the AHTA. SeeUnited States Const. art. VI, cl. 2; see also State ex rel. Proctor v. Messina, 320 S.W.3d 145, 148 (Mo. banc 2010).

Originally codified at 49 U.S.C. § 1513(a), and now codified at 49 U.S.C. § 40116, the AHTA prohibits a state from imposing a tax, fee, head charge or other charge on an individual traveling in air commerce or the sale of air transportation to an individual. The prohibitions read:

(b) Prohibitions. Except as provided in subsection (c) of this section ... a State ... may not levy or collect a tax, fee, head charge, or other charge on—(1) an individual traveling in air commerce; (2) the transportation of an individual traveling in air commerce; (3) the sale of air transportation; or (4) the gross receipts from that air commerce or transportation.

(c) A State or political subdivision of a State may levy or collect a tax on or related to a flight of a commercial aircraft or an activity or service on the aircraft only if the aircraft takes off or lands in the State or political subdivision as part of the flight.

49 U.S.C. § 40116.⁵ Because Balloons is disputing state taxes levied on the gross receipts of its hot air balloon rides, the applicable prohibition in this case is section 40116(b)(4), which pertains specifically to taxes on gross receipts from air commerce.⁶ The parties did not cite any cases, and no cases were found, determining whether the sale of rides on untethered hot air balloons falls within these provisions of the AHTA. Therefore, as a matter of first impression, this Court considers whether...