Fall Creek Const. v. Director of Revenue

• Decision Date: 01 July 2003
• Docket Number: No. SC 84917.,SC 84917.
• Citation: 109 S.W.3d 165
• Parties: FALL CREEK CONSTRUCTION COMPANY, INC., Appellant, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 165

109 S.W.3d 165

FALL CREEK CONSTRUCTION COMPANY, INC., Appellant, v. DIRECTOR OF REVENUE, Respondent.

No. SC 84917.

Supreme Court of Missouri, En Banc.

July 1, 2003.

Bryan O. White, Kenneth N. Hall, Ginger K. Gooch, Springfield, Robert L. Hess, Jefferson City, for appellant.

Jeremiah W. (Jay) Nixon, Atty. Gen., James R. Layton, State Solicitor, Nikki L. Loethen, Missouri Department of Revenue, Jefferson City, for respondent.

WILLIAM RAY PRICE, JR., Judge.

I.

Fall Creek Construction Company seeks review of the decision of the Administrative Hearing Commission ("AHC") that Fall Creek is liable for $43,369.63 in use tax, plus accrued interest, on its fractional ownership interests in two aircraft enrolled in a fractional ownership program. The decision of the AHC is affirmed.

II.

The underlying facts are not in dispute. Fall Creek is a real estate development company with its principal place of business in Branson, Missouri. Fall Creek develops real estate in Missouri, Mississippi, Arizona, Virginia and Tennessee. Fall Creek's employees regularly travel to and from locations where it develops real estate.

On October 30, 1998, Fall Creek acquired fractional interests in two aircraft from Raytheon Travel Air Company, a Kansas Corporation. Fall Creek purchased a 1/16 (6.25%) undivided interest in a King Air B200 aircraft, tail number N713TA for $254,000 and a 1/8 (12.5%) undivided interest in a Beech Jet 400A aircraft, tail number N798TA for $772,500.¹ Delivery of these interests occurred in Wichita, Kansas and neither Fall Creek nor Raytheon paid any sales or use tax to either Kansas or Missouri.

In order to purchase these interests, Fall Creek was required to enter into a series of four separate agreements for each aircraft — an aircraft purchase agreement, a joint ownership agreement, a management agreement, and a master interchange agreement (these documents are collectively referred to as the "governing documents"). The purchase agreement indicates that Fall Creek "desires to purchase ... an undivided property interest in the aircraft" and also provides: (1) the buyer must execute the governing documents and must perform such actions as are required by the closing date; (2) no buyer may place a lien on the aircraft; (3) transfers to third parties are conditioned upon meeting strict requirements of Raytheon; (4) Raytheon has a right of first refusal on the transfer of interest; and (5) after 60 months, Raytheon must purchase the interest back from the buyer. Each owner also must execute an irrevocable power of attorney allowing Raytheon to file the appropriate application with the Federal Aviation Administration ("FAA") on each occasion that a fractional interest in the aircraft is purchased.

While the purchase agreement places restrictions on the fractional owners, the bill of sale recites that Raytheon "does ... hereby sell, grant, transfer and deliver all rights, title, and interests in and to an undivided ... interest in such aircraft unto: Fall Creek Construction Company, Inc." The FAA recognizes Fall Creek and the other co-owners as legal owners of a partial interest in each particular aircraft. Additionally, Fall Creek depreciates the aircraft on its accounting ledgers.²

The joint ownership agreement provides that co-owners place the aircraft into the master interchange program and agree that they are all tenants in common with respect to the aircraft. The co-owners waive any right to partition and agree to divest themselves solely in accordance with the governing documents.

Under the management agreement, co-owners hire Raytheon to manage the aircraft. Owners pay a separate monthly management fee and a variable hourly rate for flight hours. Raytheon manages aircraft scheduling and must make reasonable efforts to obtain the owner's actual aircraft before providing a similar aircraft under the interchange program. Raytheon must also: (1) have the aircraft inspected, maintained, serviced, repaired, overhauled and tested; (2) maintain all required aircraft records and logs; (3) provide pilots, pilot training, pilot medical examinations and pilot uniforms; (4) provide hangaring and tie-down space, in-flight catering, flight planning, weather services, and communications; (5) maintain insurance on the aircraft; and (6) provide consulting regarding FAA issues, warranty claims, and insurance matters.

The master interchange agreement requires each owner to participate in the master interchange program by sharing its aircraft with other participants in the program. If an owner's aircraft is unavailable, Raytheon may substitute another similar aircraft from among the 110 aircraft in the program. Under the program, a participant informs Raytheon of the date and destination of the trip. Raytheon arranges for a program aircraft to carry the participant. Raytheon or the pilot determines whether the aircraft will fly to a location due to adverse weather conditions or other restrictions. However, the owner is in "operational control" of the aircraft while in the air and may direct the pilot to an alternate destination.

During the tax period, October 30, 1998, through December 31, 1999, aircraft 713TA made a total of 840 flights. Twenty-six flights were arrivals to or departures from Missouri. The aircraft remained overnight in Missouri thirteen times and Fall Creek used the aircraft in Missouri eight times.

Aircraft 798TA completed 897 flights during the tax period. Sixteen flights were arrivals to or departures from Missouri. The aircraft remained overnight in Missouri eleven times and Fall Creek used the aircraft in Missouri three times.

Fall Creek made a total of sixty-seven flights from or to Missouri during the tax period. These flights were made while traveling on a combination of its own aircraft and others from the interchange program. Fourteen of these sixty-seven flights were intrastate flights within Missouri.

The Director of Revenue conducted a sales and use tax audit of Fall Creek. After her audit, the Director assessed unpaid use tax in the amount of $60,453.42 and accrued interest totaling $8,120.67. The parties stipulated that, after allowing trade-in credit for aircraft 600TA, the total disputed amount is $49,928.79.³

III.

"This Court has jurisdiction pursuant to Mo. Const. art. V, section 3 and reviews the AHC's interpretation of revenue law de novo." Shelter Mut. Ins. Co. v. Dir. of Revenue, 107 S.W.3d 919, 920 (Mo. banc 2003) (citation omitted); Southwestern Bell Yellow Pages, Inc. v. Dir. of Revenue, 94 S.W.3d 388, 390 (Mo. banc 2002) (citation omitted). "This Court will uphold the AHC's decision if authorized by law and supported by competent and substantial evidence upon the whole record." Section 621.193;⁴ Shelter, 107 S.W.3d at 920; Southwestern Bell, 94 S.W.3d at 390 (internal quotations omitted).

IV.

Missouri's use tax, section 144.610, states:

1. A tax is imposed for the privilege of storing, using or consuming within this state any article of tangible personal property purchased on or after the effective date of sections 144.600 to 144.745 in an amount equivalent to the percentage imposed on the sales price in the sales tax law in section 144.020. This tax does not apply with respect to the storage, use or consumption of any article of tangible personal property purchased, produced or manufactured outside this state until the transportation of the article has finally come to rest within this state or until the article has become commingled with the general mass of property of this state.

This tax is a levy on the privilege of using within this state property purchased outside Missouri, where the property would have been subject to the sales tax if purchased locally. Dir. of Revenue v. Superior Aircraft Leasing Co., 734 S.W.2d 504, 505 (Mo. banc 1987). Its purpose is to "complement, supplement, and protect the sales tax." Id. at 506 (quotation omitted). This tax "eliminates the incentive to purchase from out-of-state merchants in order to escape local sales taxes thereby keeping in-state merchants competitive with sellers in other states, and it also provides a means to augment state revenues." Id. (quotation omitted).

Fall Creek calls on this Court to determine whether its fractional ownership of two aircraft is taxable under Missouri's use tax and asserts four reasons why its interests are not taxable.

1.

Fall Creek first contends that it does not owe use tax because its fractional ownership interest in each aircraft does not constitute a purchase of tangible personal property, but merely represents the right to use any aircraft in the interchange program for a specified number of hours per year.

"Purchase" is defined as "the acquisition of the ownership of, or title to, tangible personal property, through a sale, as defined herein, for the purpose of storage, use or consumption in this state." Section 144.605(5). "Sale" is:

any transfer, barter or exchange of the title or ownership of tangible personal property, or the right to use, store or consume the same, for a consideration to be paid, and any transaction whether called leases, rentals, bailments, loans, conditional sales or otherwise, and notwithstanding that the title or possession of the property is retained for security.

Section 144.605(7). "Tangible personal property" is defined as "all items subject to Missouri sales tax as provided in subdivisions (1) and (3) of section 144.020." Section 144.605(11). The non-exclusive list of tangible personal property includes "motor vehicles, trailers, motorcycles, mopeds, motortricycles, boats and outboard motors...." Section 144.020(1). An aircraft is an item subject to Missouri sales tax. See Westwood Country Club v. Dir. of Revenue, 6 S.W.3d 885, 887 (Mo. banc 1999) (Where aircraft are sold to non-exempt entities a sales or use tax is to be collected on the sale of the final product.).

Fall Creek cites a New York advisory opinion and an "FYI"...