Com. v. United Airlines, Inc.

• Decision Date: 06 October 1978
• Docket Number: No. 761438,761438
• Citation: 248 S.E.2d 124,219 Va. 374
• Parties: COMMONWEALTH of Virginia v. UNITED AIRLINES, INC. Record
• Court: Virginia Supreme Court

Page 124

248 S.E.2d 124

219 Va. 374

COMMONWEALTH of Virginia v. UNITED AIRLINES, INC.

Record No. 761438.

Supreme Court of Virginia.

Oct. 6, 1978.

John G. MacConnell, Asst. Atty. Gen. (Anthony F. Troy, Atty. Gen., Glenn R. Moore, Asst. Atty. Gen., on brief), for plaintiff in error.

H. Brice Graves, Richmond (T. S. Ellis, III, William L. S. Rowe, Hunton & Williams, Richmond, on brief), for defendant in error.

Arlington County (Jerry K. Emrich, County Atty., on brief), amicus curiae for plaintiff in error.

Before I'ANSON, C. J., and CARRICO, HARRISON, COCHRAN, HARMAN, POFF and COMPTON, JJ.

I'ANSON, Chief Justice.

United Airlines (United) filed an application pursuant to Code § 58-1130 (Repl. Vol. 1974) for correction of sales and use taxes assessed against it by the Department of Taxation of the Commonwealth of Virginia and for a refund of the taxes paid. United alleged that the taxes assessed on food and related items, on anti-hijacking surveillance equipment, on reservations and ticketing equipment, and on passenger and freight handling equipment at all airports it serves in Virginia are erroneous because the items were "for use or consumption by (United) directly in the rendition of its common carrier service," and are thus exempted under the provisions of Code § 58-441.6(u). It further alleged that its purchases of food and related items are also exempt as purchases for resale under the provisions of Code § 58-441.2(c); that the Commonwealth had no jurisdiction to assess sales and use taxes on United's personal property at the Washington National Airport; and that the assessments violated the commerce clause (Article 1, Section 8) of the Constitution of the United States.

The trial court heard the evidence Ore tenus and, in a comprehensive written opinion, held that the food transferred by United to its passengers was not exempt as purchases for resale, but that all of United's personal property contested in this proceeding, including food, wherever located in Virginia, was tax exempt under the provisions of Code § 58-441.6(u) because "it was used or consumed by United directly in the rendition of its common carrier service"; that the Commonwealth lacked jurisdiction to tax United's tangible personal property at the Washington National Airport; and that, even if the Commonwealth had jurisdiction, the items were tax exempt under § 210(b) of the Airport and Airways Development Act. Accordingly, the trial court entered its order directing that the Commonwealth refund to United the sum of $536,930.71; that on assessments made before July 1, 1973, interest shall be paid at the rate of 8% Per annum from the date of this final order until refunded; and that on assessments made on and after July 1, 1973, interest shall be paid as provided by Code § 58-1140.1. Hence, the trial court did not reach the alleged violation of the commerce clause.

The pertinent evidence shows that United is a common carrier by air operating under a certificate of convenience and necessity issued by the Civil Aeronautics Board (CAB) and that United is subject to extensive regulation by the CAB and other federal agencies. United provides passenger and freight services to airports at Norfolk, Newport News, and Richmond, Virginia, and to northern Virginia, southern Maryland, and the District of Columbia through Dulles International and Washington National Airports.

United serves meals, snacks, and beverages to its passengers and crew during flight. However, meals are served only on scheduled meal flights.

All the activities of United pertaining to food and related supplies are carried on by United's Food Services Division. The Food Services Division is organized and maintained separately from the rest of United's activities, and it operates at a considerable profit.

At Washington National Airport, which is located in Arlington County, Virginia, United's Food Services Division operates a flight kitchen which prepares passenger meals. Some of the constituent parts of a meal are flown into National from United's flight kitchens in other states. Other constituent parts are purchased by United through system-wide contracts and others are purchased locally at the Newport News and Norfolk airports. Food and other related supplies are also boarded on United's aircraft by caterers with whom United maintains long-term contracts, except at Dulles where food and other related supplies are delivered to United personnel who transport the items to the aircraft. Final preparation for serving of the food occurs on the aircraft.

Airline fare includes the cost of food and related supplies. No separate charge is made for meals and the fare does not vary for meal or non-meal flights. If the passenger refuses a scheduled meal, he is not entitled to a refund. However, if a passenger is on a scheduled meal flight and he does not receive a meal, he can receive a refund voucher entitling him to a replacement meal in kind or a credit towards a replacement meal at specified airport locations.

United utilizes a highly sophisticated national communications network known as "Apollo." The center of the system is located in Denver, Colorado. The computerized system has a terminal service in all the airports served by United in Virginia and its reservations center located in McLean, Virginia. The terminals and units which make up the system are used for reservations and ticketing purposes and to provide flight information to United's crews. There was testimony that "when Apollo ceases to function, it stops the whole show."

United maintains anti-hijacking surveillance equipment, which is required by federal regulations, at each airport it serves in Virginia.

For the period in question, the Department of Taxation assessed United for sales taxes on the following categories of items here in dispute: (1) food and related items; (2) anti-hijacking surveillance devices; (3) reservation and ticketing equipment; and (4) passenger and baggage service equipment.

The issues presented are: (1) whether the items of tangible personal property which United claimed to be exempt from the payment of sales and use taxes were purchased and used by United directly in the rendition of its common carrier service; (2) whether the trial court erred in not holding that United's purchases of food and related items served its passengers were exempt from sales and use taxes, as contended by United on its cross-appeal, on the ground that the purchases were made for resale; (3) whether the Commonwealth lacked jurisdiction to assess sales taxes on United's tangible personal property at Washington National Airport; and (4) whether interest runs on refunds of erroneously assessed taxes from the date of judgment where the assessment occurred prior to July 1, 1973.

Code § 58-441.6(u) exempts "(t)angible personal property sold or leased to an airline . . . for use or consumption by such airline Directly in the rendition of its common carrier service." (Emphasis supplied). This subsection has not been previously considered by us. But the section, insofar as it is pertinent here, parallels § 58-441.6(h), which exempts "tangible personal property sold or leased to a public service corporation engaged in business as a common carrier of property or passengers by motor vehicle, for use or consumption by such common carrier Directly in the rendition of its public service." (Emphasis supplied).

In Commonwealth v. Community Motor Bus, 214 Va. 155, 198 S.E.2d 619 (1973), we considered the scope of the exemption under the provisions of Code § 58-441.6(h). There we held that statutes granting tax exemptions are construed strictly against the taxpayer and that the word "directly" in Code § 58-441.6(h) narrowed the scope of the exemption to include only such essential tangible personal property used immediately and principally by a common carrier to keep its motor vehicles on the streets and highways in the actual transportation of passengers. We also said the "direct use" exemption excluded items merely convenient and facilitative to the business and items which are essential to the operation of the business as a whole but not an immediate part of actual performance of the public service.

In addition to the principles set out in Community Motor Bus, certain other principles are firmly established in Virginia. A tax assessment made by proper authorities is Prima facie correct and the burden is on the taxpayer to show that such assessment is erroneous. Commonwealth v. Radiator Corp., 202 Va. 13, 18, 116 S.E.2d 44, 47 (1960). Exemptions granted under the sales and use tax statutes are construed strictly against the taxpayer, with doubts resolved against the exemption. Webster Brick Company, Inc. v. Department of Taxation, Commonwealth of Virginia, 219 Va. ---, 245 S.E.2d 252 (1978); Winchester TV Cable v. State Tax Commissioner, 216 Va. 286, 289-90, 217 S.E.2d 885, 889 (1975); Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 278, 199 S.E.2d 511, 513 (1973). The construction of a statute by a state official charged with its administration is entitled to great weight, but we, of course, are not bound by such construction if inconsistent with the applicable statutes. ¹ Webster Brick, 219 Va. at ---, 245 S.E.2d at 255; Winchester TV, 216 Va. at 290, 217 S.E.2d at 889; Dept. Taxation v. Prog. Com. Club, 215 Va. 732, 739, 213 S.E.2d 759, 763 (1975).

Guided by the above principles, we will consider whether United was erroneously assessed sales and use taxes on the items classified under the four categories.

I. Food and Related Items

The Commonwealth argues that meals served by United to passengers during flights of its aircraft are not exempt under the provisions of Code § 58-441.6(u) because the food and related items were "not used or consumed by United Directly in rendition of its common carrier service;" that the Department of Taxation's Rules and Regulations specifically state that food delivered...