United States

Arizona: Arizona Court of Appeals Upholds Transaction Privilege Tax Assessment on Helicopter Service Provider

Feb 09, 2015
From KPMG TaxWatch

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The Arizona Court of Appeals recently upheld the use tax assessment on a taxpayer's purchases of helicopter parts and components and an assessment of transaction privilege tax on the taxpayer's leased helicopters. The taxpayer provided on-demand and scheduled helicopter flights in Arizona and southern Nevada, including daily scenic air tours of the Grand Canyon. Helicopters were leased from several related entities, but the taxpayer was responsible for maintaining the helicopters, including purchasing and installing engines, rotors, turbines, blades, and other parts. The taxpayer did not remit use tax on the parts and did not pay tax on the lease of helicopters because it believed it was exempt from tax under an Arizona statutory exemption that applies to the “holder of a supplemental air carrier certificate under federal aviation regulations” followed by a parenthetical reference to Part 121 of the Federal Aviation Administration (FAA) regulations. After the Department assessed the tax and the tax court upheld the assessment, the taxpayer appealed to the Arizona Court of Appeals.

Arizona's transaction privilege tax is an excise tax on the right to engage in business in the state. The tax extends to businesses that lease or rent tangible personal property, and the tax is assessed against the income generated by the lease. It was undisputed that the taxpayer's purchased parts and the helicopters qualified for the aircraft exemption if the taxpayer had the requisite supplemental air carrier certificate under the FAA regulations. The Department argued that the exemption did not apply because the taxpayer was not a supplemental air carrier under Part 121 of the FAA regulations; instead, it operated under Part 135 of the federal regulations applicable to commuter and on-demand operations. The taxpayer, on the other hand, argued that the reference in the state regulations to Part 121 of the FAA regulations was not determinative and that it effectively operated as a supplemental air carrier.

The court first found that the parenthetical reference in Arizona law to Part 121 of the FAA regulations  needed to be given effect in its interpretation and that the exemption could be granted only to a carrier that is authorized to provide supplemental air carrier operations under Part 121. The taxpayer was not operating with a Part 121 certification, but instead a Part 135 certification. The court went on to find that Part 121 of the FAA regulations listed four types of airplanes that can be used in supplemental operations. That list did not include rotorcraft (helicopters) such as those used by the taxpayer. Accordingly, the court concluded that the taxpayer did not qualify for the exemption for holders of a supplemental air carrier certificate under Part 121 of the FAA regulations. For more information on this case, please contact Lorna Pederson at 480-459-3598.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.