JM Aviation, Inc. v. Department of Revenue

• Decision Date: 02 June 2003
• Docket Number: No. 1-02-0379.,1-02-0379.
• Citation: 274 Ill.Dec. 741,791 N.E.2d 1152,341 Ill. App.3d 1
• Parties: JM AVIATION, INC., Plaintiff-Appellant, v. The DEPARTMENT OF REVENUE, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

791 N.E.2d 1152

341 Ill. App.3d 1

274 Ill.Dec. 741

JM AVIATION, INC., Plaintiff-Appellant, v. The DEPARTMENT OF REVENUE, Defendant-Appellee.

No. 1-02-0379.

Appellate Court of Illinois, First District, First Division.

June 2, 2003.

Bronson & Kahn LLC, Chicago (Marc W. O'Brien, G. Scott Snively, of counsel), for Plaintiff-Appellant.

Lisa Madigan, Attorney General, and Joel D. Bertocchi, Solicitor General, Chicago (Jerald S. Post, Assistant Attorney General, of counsel), for Defendant-Appellee.

Justice SMITH delivered the opinion of the court:

This is an action for administrative review of the Illinois Department of Revenue's (the Department) determination that plaintiff JM Aviation, Inc. (JM Aviation), owed state use tax on its purchase of a used airplane. The circuit court affirmed the Department. On appeal, JM Aviation contends that is does not owe any use tax, alleging that the purchase was an isolated or occasional sale and, thus, constituted an exception to the Retailers' Occupation Tax Act (35 ILCS 120/1 et seq. (West 1996)) (hereinafter ROTA) and Use Tax Act (35 ILCS 105/1 et seq. (West 1996)) (hereinafter UTA). Specifically, JM Aviation argues that it purchased the airplane from an entity that neither held itself out as a seller of aircraft nor habitually engaged in the selling of aircraft. No issues are raised on the pleadings. For the reasons that follow, we affirm.

FACTS

In Weber-Stephen Products, Inc. v. Department of Revenue, 324 Ill.App.3d 893, 258 Ill.Dec. 339, 756 N.E.2d 321 (2001), this court previously described the statutory framework of what is commonly known as the Illinois sales tax, which consists of two separate, complementary taxes, i.e., the retailers' occupation tax and the use tax.

"The ROTA imposes an occupational tax upon retailers, persons engaged in the business of selling at retail tangible personal property. [Citations.] Under ROTA, Illinois retailers are required to remit to the State a percentage of the gross receipts of every retail sale. [Citation.] The use tax is assessed the same way and on the same transactions, but the UTA imposes a tax on the purchaser-user of property for the privilege of using this property in Illinois, regardless of where the sale occurred. [Citations.] The State therefore benefits by taxing in-state retailers and purchases and also out-of-state purchases by consumers for use in Illinois which could not be reached by the ROTA.

When a single purchase occurs, Illinois retailers collect both forms of sales tax from the consumer. However, if the retailer pays the ROTA tax to the State, he or she does not have to pay, and may keep, the use tax. [Citations.] If the retailer is outside Illinois and therefore has no ROTA or UTA obligations, the purchaser-user in Illinois must pay the use tax directly to the State. [Citations.]

The UTA does not apply to out-of-state transactions that would be exempt under the ROTA if the sale occurred in Illinois. [Citations.] If a seller of personal property is excluded from paying the ROTA tax, despite all elements of the sale occurring in Illinois, then the user of that property is also excluded from the imposition of use tax. [Citations.] ROTA provides an exception:

`The isolated or occasional sale of tangible personal property at retail by a person who does not hold himself out as being engaged (or who does not habitually engage) in selling such tangible personal property at retail * * * does not constitute engaging in a business of selling such tangible personal property at retail within the meaning of the Act * * *.' [Citation.]

A nonretailer who makes an occasional or isolated sale does not incur ROTA liability and therefore the purchaser-user does not incur UTA taxes. 86 Ill. Adm.Code §§ 150.101(d), 130.110(a) (1985).

* * * [A] `sale at retail' under both the ROTA and the UTA is defined as `any transfer of the ownership of or title to tangible personal property to a purchaser, for the purpose of use * * * for a valuable consideration.' [Citation.] Illinois courts historically have focused on the transfer of title as indicative that a `sale at retail' has taken place." Weber-Stephen Products, Inc., 324 Ill. App.3d at 898-99, 258 Ill.Dec. 339, 756 N.E.2d 321.

JM Aviation is an Illinois corporation and was established by its owner, John Melk, to hold title to aircraft. In 1992, JM Aviation purchased a Westwind II airplane (Westwind) from Southern Aircraft Services, Inc. (SAS), a Florida corporation that owns, manages and maintains various aircraft which it then leases to various companies affiliated with SAS.

JM Aviation decided to replace its Westwind with a Gulfstream GII aircraft (Gulfstream) owned by Montgomery Ward & Company (Ward) and, in July 1995, entered into an agreement with Ward to purchase the Gulfstream for $3.2 million. Because JM Aviation had not yet found a buyer for its Westwind, JM Aviation structured the disposition of the Westwind in a manner that permitted JM Aviation to defer, for federal income tax purposes, the recognition of the gain that would be realized by selling the Westwind. Such a transaction, commonly referred to as a like-kind exchange, required the use of an intermediary titleholder for the Gulfstream until a buyer for the Westwind was found. SAS was used as the intermediary to facilitate the exchange.

In July 1995, JM Aviation and SAS entered into a contract whereby JM Aviation assigned its right to purchase Ward's Gulfstream to SAS; JM Aviation acquired an option to purchase the Gulfstream from SAS; and JM Aviation agreed to sell its Westwind to SAS in partial payment for the Gulfstream. Because SAS did not intend to acquire the Gulfstream for its own use, JM Aviation agreed to lease the Gulfstream from SAS until JM Aviation purchased it. Moreover, JM Aviation agreed not to exercise its option to purchase the Gulfstream until a buyer was found to purchase the Westwind from SAS. JM Aviation agreed to make a $1.7 million lease deposit with SAS and loan SAS $1.5 million (the expected sale price of the Westwind).

In September 1995, SAS used the $3.2 million it received from JM Aviation to purchase the Gulfstream, which it then leased to JM Aviation. In March 1996, a buyer purchased the Westwind from SAS, and JM Aviation exercised its option to acquire the Gulfstream from SAS in exchange for title to the Westwind and a $1.7 million credit for the lease deposit. JM Aviation did not pay Illinois use tax on its acquisition of the Gulfstream. In 1999, the Department notified JM Aviation that it owed $224,000 in past-due use tax for the purchase of the Gulfstream.

On November 22, 2000, a hearing was held before an administrative law judge (ALJ). JM Aviation contended that it was not liable for the use tax, alleging that it purchased the Gulfstream from Ward, a nonretailer, rather than SAS. In the alternative, JM Aviation contended that if SAS was deemed the seller, SAS was not a retailer and the Gulfstream transaction was not a retail sale. JM Aviation also contended that the Department overstated the amount of use tax due. The Department submitted its audit correction and/or determination of tax due, dated October 7, 1999, which established its prima facie case. See 35 ILCS 120/4 (West 1996); Elkay Manufacturing Co. v. Sweet, 202 Ill.App.3d 466, 470, 147 Ill.Dec. 718, 559 N.E.2d 1058 (1990). The Department and JM Aviation stipulated to numerous exhibits, including the Department's tax specialist's audit comments, which stated:

"The occasional sale exemption claimed by the taxpayer does not apply when a person purchased an item of tangible personal property with the intent of reselling it to a purchaser for use or consumption. In this case, SAS is a retailer who purchased the aircraft with the intent of reselling it to JM [Aviation]; consequently, the occasional sale exemption does not apply."

Evidence as to the nature of SAS's business was found in several exhibits stipulated to by the parties. A title search of the Westwind indicated that JM Aviation purchased that Westwind from SAS in 1992. When JM Aviation closed on its purchase of the Gulfstream in March 1996, SAS was listed as the seller in that transaction. SAS also sold three aircraft in 1997.

Further, a letter to the Department from the Florida Department of Revenue (Florida Department), dated October 30, 1998, stated that SAS "is a registered Sales and Use Tax business under kind code 23, which includes motor vehicle dealers, trailers, campers (sales and rentals)." However, a letter from the Florida Department dated May 31, 2000, explained that, because Florida treats lessors as dealers, an entity seeking a sales tax exemption with respect to a leasing business obtains a Florida dealer's license. The Florida Department also stated that Florida statutes, which tax leases based on the rental price, define "dealer" to include any person who leases or rents tangible personal property for a consideration.

In addition, schedule B of SAS's 1996 United States income tax return listed SAS's business activity as "Aircraft" and its product or services as "Leasing/Sales." Moreover, schedule K of SAS's 1995 United States income tax return listed SAS's business activity as "Aircraft Sales" and product or service as "Sales." However, SAS's 1996 depreciation and amortization schedule noted that the "business or activity to which this form relates" was "Aircraft Leasing Activity," and a form for reporting rental activity income or loss also listed "Aircraft Leasing Activity."

JM Aviation also presented the testimony of two witnesses. Cris Branden, SAS's vice-president, treasurer and assistant secretary, testified that from 1995 through 1997 SAS owned four or five aircraft and that its primary business was the leasing of aircraft to another leasing company, which then subleases the aircraft to various companies owned by SAS's owner, Wayne Huizenga. Branden testified that SAS staff occasionally, as an accommodation, helped...