Epic Aviation, L.L.C. v. Testa

• Decision Date: 15 June 2016
• Docket Number: No. 2014–1691.,2014–1691.
• Parties: EPIC AVIATION, L.L.C., Appellant, v. TESTA, Tax Commr., Appellee.
• Court: Ohio Supreme Court

149 Ohio St.3d 203

74 N.E.3d 358

2016 Ohio 3392

EPIC AVIATION, L.L.C., Appellant,

v.TESTA, Tax Commr., Appellee.

No. 2014–1691.

Supreme Court of Ohio.

Submitted Jan. 5, 2016.

Decided June 15, 2016.

Baker & Hostetler, L.L.P., Edward J. Bernert, Elizabeth A. McNellie, and Trischa Snyder Chapman, Columbus, for appellant.

Michael DeWine, Attorney General, and Daniel G. Kim and Daniel W. Fausey, Assistant Attorneys General, for appellee.

PFEIFER, J.

{¶ 1} In this case, the tax commissioner, appellee, denied a claim for a refund of sales tax brought by appellant, Epic Aviation, L.L.C. ("Epic"), a vendor of jet fuel, on behalf of its consumer, AirNet Systems, Inc. ("AirNet"), and the Board of Tax Appeals ("BTA") affirmed. Epic argues that AirNet purchased the jet fuel intending to use the fuel "directly in the rendition of a public utility service" under R.C. 5739.02(B)(42)(a) and that the purchases are therefore exempt from sales tax. AirNet does not hold a certificate of public convenience and necessity from the federal government, and the tax commissioner denied the exemption on the primary ground that AirNet's business was not sufficiently regulated to qualify as a "public utility service."

{¶ 2} Epic contends that the tax commissioner and the BTA placed too much emphasis on the lack of the certificate by essentially concluding that the certificate is a prerequisite to public-utility-service status. We agree with Epic. That portion of AirNet's business that consisted of providing regular package-delivery service at a reasonable and nondiscriminatory price according to preannounced schedules qualifies as "common carrier" service under our precedents and therefore as a "public utility service" under R.C. 5739.02(B)(42)(a) that is exempt from the sales tax. Accordingly, we vacate the BTA's decision and remand this cause to the tax commissioner with instructions that the tax commissioner allow evidence to be submitted to establish the portion of the fuel purchases pertaining to the common-carrier service.

I. The Statutes at Issue

{¶ 3} Unless an exemption applies, jet fuel is taxable under the sales-tax law as tangible personal property transferred for consideration, R.C. 5739.01(B)(1), and under the use-tax law as tangible personal property subject to being used in the state, R.C. 5741.02(A)(1). In this case, Epic sold jet fuel to AirNet, collected sales tax on it, and remitted the tax to the state. Epic, as the vendor, brought a refund claim, but the claim is on behalf of AirNet, and it is AirNet's operations that govern whether the exemption Epic seeks applies.

{¶ 4} R.C. 5739.02(B) states that the sales tax "does not apply to":

(42) Sales where the purpose of the purchaser is to do any of the following:

(a) * * * use or consume the thing transferred * * * directly in the rendition of a public utility service * * *.

{¶ 5} R.C. 5739.01(P) states that " ‘[u]sed directly in the rendition of a public utility service’ means * * * fuel or power used in the production, transmission, transportation, or distribution system." R.C. 5739.01(P) concludes by stating, "In this definition, ‘public utility’ includes a citizen of the United States holding, and required to hold, a certificate of public convenience and necessity issued under 49 U.S.C. 41102." This final sentence of R.C. 5739.01(P) was added to the statute in 2006. Am.Sub.H.B. No. 699, 151 Ohio Laws, Part IV, 8257, Part V, 8537.

II. Background

{¶ 6} Epic seeks a $1,727,790.27 refund of sales tax paid by AirNet on its purchases of jet fuel from Epic during the time period of January 1, 2006, through April 30, 2009. To support its claim, Epic provided a spreadsheet referencing invoice numbers and showing the dates and sale prices of fuel purchased, along with the tax amounts. Epic also submitted a "spaghetti map" showing AirNet's hub-and-spoke system of flights and a copy of the schedule of AirNet's regularly scheduled cargo service, showing take-off times at departure airports and landing times at destination points.

{¶ 7} At the BTA hearing, AirNet's vice president of operations, Thomas Schaner, testified that AirNet's operations are based on a "super expedited" air-cargo-delivery system using the hub-and-spoke model, which was reflected on the "spaghetti map" showing "all the connections where we have aircraft flying from airport to airport." He stated, "Anybody could * * * find our Web site, and they could book a shipment," after which "we would dispatch a courier, and we go pick up a shipment, bring it to the airport, put it on the airplane, get it out there, and then we would take it to the end point and then we would have couriers on the other end that would deliver the shipment."

{¶ 8} AirNet's delivery services are comprised of two primary segments—bank services and express services. The former include the immediate delivery of canceled checks, which has long been a core part of AirNet's business. Express services (described by Schaner as "everything that wasn't bank" service) include transporting time-sensitive radiopharmaceuticals (pharmaceuticals used in medical imaging and treatment that must often be used within hours of creation, before they break down), human tissue and organs for transplant, and blood for the American Red Cross. Schaner testified that AirNet received special approval and encouragement from the federal government after the terrorist attacks of September 11, 2001, to permit it to have access to air space to transport checks to maintain the operation of the country's banking system. AirNet also played a vital role in transporting emergency blood supplies immediately after those attacks.

A. AirNet's FAA certification is under Part 135 of Title 14 of the Code of Federal Regulations

{¶ 9} Kent Jackson, an active pilot and aviation lawyer and the author of a number of books explaining federal aviation regulations and other aviation-law matters, was qualified as an expert at the BTA hearing and testified on behalf of Epic. Jackson testified that the federal government's regulation of the aviation industry in this country can be generally divided into two broad categories: (1) economic regulation, which is administered by the United States Department of Transportation ("DOT"), through the Office of the Secretary of Transportation, as the successor to the former Civil Aeronautics Board and (2) safety regulation, which is administered by the Federal Aviation Administration ("FAA"), an agency of the DOT. He stated that obtaining a certificate of public convenience and necessity from the DOT is usually associated with obtaining safety certification under Part 121 of Title 14 of the Code of Federal Regulations ("Part 121") and that Part 298 of Title 14 of the Code of Federal Regulations ("Part 298") provides an exemption from the need for the certificate. As an "air taxi operator," 14 C.F.R. 298.3, AirNet was not required to obtain a certificate of public convenience and necessity.

{¶ 10} Exemption from the requirement of a certificate of public convenience and necessity is associated with safety regulation occurring under Part 135 of Title 14 of the Code of Federal Regulations ("Part 135") rather than under Part 121. Pursuant to its status as an "air taxi operator" under Part 298, AirNet operates as a Part 135 carrier. Part 135 regulations, like Part 121 regulations, impose numerous safety requirements, including limits on how long a pilot can be at the controls. In some respects, safety regulation under Part 135 involves more direct agency oversight than regulation under Part 121, because compliance measures for Part 121 regulations are often performed by the air carrier's own employees, as designated by the FAA.

{¶ 11} To obtain a certificate of public convenience and necessity, an applicant must prove its financial viability. Jackson (admittedly oversimplifying) testified that Part 121 regulation is "for Boeings"—i.e., for larger aircraft and passenger service—and that passenger airlines typically obtain the certificate and fall under the Part 121 regulations. Jackson testified that AirNet probably could not obtain such a certificate even if it applied, because the certificate of public convenience and necessity is not required for the cargo-transport services that AirNet provides and is not appropriate for the types of aircraft that AirNet uses.

{¶ 12} Jackson testified that at one time, economic aspects of airline-passenger service were heavily regulated as to matters such as routes flown and rates charged. Pursuant to federal deregulation legislation that was fully phased in by 1985, this type of economic regulation was substantially relaxed. By contrast, according to Jackson, "[t]he FAA and the DOT simply don't care if you create a schedule for cargo. They don't regulate that. They never have." But Jackson testified that the air-carrier certificate issued by the FAA nonetheless authorizes "common carrier" service by a cargo-service provider such as AirNet, and that means that "you earn the right to hold out to the public" that you are willing to furnish air-carrier services, "and part of the responsibility of earning that right is the responsibility to do so."

{¶ 13} The record contains AirNet's air-carrier certificate, which expressly authorizes AirNet "to operate as an air carrier and conduct common carriage operations" in accordance with applicable laws and regulations. AirNet's vice president testified that as a common carrier, AirNet must accept packages tendered to it that AirNet has legal authorization to carry and that it operates "without discrimination or any kind of preferential treatment."

B. The tax commissioner's determination

{¶ 14} The tax commissioner determined that AirNet's purchases of jet fuel did not qualify for exemption. The tax commissioner, relying on Castle Aviation, Inc. v. Wilkins, 109 Ohio St.3d 290, 2006-Ohio-2420, 847 N.E.2d 420, found that AirNet's lack of a certificate of public convenience and necessity, along with other...