Dec. 7, 2021 – A statute that exempts aircraft repair services from the state’s sales tax does not allow a company to deduct from the amount of sales tax it collects on an aircraft lease the portion attributable to repairs.
In
Citation Partners, LLC v. Wisconsin Department of Revenue, 2020AP1683 (Nov. 23, 2021), the Court of Appeals District I interpreted Wis. Stat. sections
77.52(2)(a)10. and
77.54(5)(a)3, holding that while the purchase of aircraft repair services or aircraft parts qualify for a sales tax exemption, the cost of the services or parts may not be deducted from the price of an aircraft lease.
Change in Lease Charges
Citation Partners owns a corporate jet that it leases to customers. The terms of the lease require Citation Partners to pay for repairs and maintenance on the jet and require each lessee to reimburse Citation Partners for its share of repair and maintenance costs.
Jeff M. Brown is a legal writer for the State Bar of Wisconsin, Madison. He can be reached by email or by phone at (608) 250-6126.
Prior to the enactment of Wisconsin Act 185 in July 2014, Citation Partners collected sales tax on the total price it charged for the lease of the aircraft.
Under Act 185, the repair, service, and maintenance of aircraft and aircraft parts – as well as the sale of parts to modify or repair aircraft – were exempted from the sales tax.
Beginning in November 2014, Citation Partners stopped collecting sales tax on the portion of lessee payments that was attributable to the aircraft’s maintenance.
The company also began identifying aircraft and engine maintenance costs on the invoices that it sent to lessees.
Citation Partners applied to the Department of Revenue (DOR) for a refund of the sales tax that it had collected for aircraft and engine maintenance between July 1, 2014, and Oct. 31, 2014. DOR granted the request.
Appeals Follow Audit
After DOR audited Citation Partners, it issued an assessment for the sales tax the company had failed to collect for aircraft and engine maintenance from Nov. 1, 2014, through Dec. 31, 2015. Included in the assessment was the amount of the refund the agency had granted Citation Partners.
Citation Partners appealed the assessment. The Tax Appeals Commission determined that the full amount of the leases was subject to the sales tax.
Citation Partners appealed the commission’s decision to Dodge County Circuit Court. The circuit court reversed the commission, and DOR appealed from that decision.
Total Amount of Consideration
In a decision written by Presiding Judge Joseph Donald, the appellate panel looked to the plain language of the statutes at issue to decide the case.
Section 77.52(1)(a) applies the five percent sales tax to the “sales price” of a lease, and “sales price” is defined by
section 77.51(15b)(a) as the “total amount of consideration” paid for the lease of the property.
Nothing in the wording of either section allows any deduction for expenses from the sales tax that must be collected, Donald wrote, and splitting out such costs in the invoices for the leases couldn’t change that.
“Citation Partners cannot avoid taxation by dividing up its lease price into categories and affixing labels,” Judge Donald wrote. “If this were the case, parties could avoid taxation merely by changing how they labeled their transactions.”
Citation Partners argued that the payments made by lessees for aircraft and engine maintenance should not be included in the price of the lease subject to sales tax because it had received no benefit or profit from the payments.
But the company did receive a benefit, wrote Donald – a working aircraft that could be leased out.
As far as whether the company received a profit from the portions of lessee payments attributable to maintenance, nothing in the statutes says that the sales tax is assessed only against profit, wrote Donald.
No Exemptions
The appellate panel also held that nothing in Act 185 allowed Citation Partners to exempt lessee payments for maintenance from the sales tax.
Under Wisconsin law, Judge Donald wrote, statutes that grant tax exemptions are to be narrowly construed. Furthermore, the party seeking the exemption bears the burden of proving that it’s entitled to the exemption, with any ambiguity as to the exemption resolved in favor of its non-application.
Given those ground rules, Donald wrote, Citation Partners’ argument failed.
Section 77.52(2)(a)10. exempts “the repair, service, alteration, fitting, cleaning, painting, coating, towing, inspection, and maintenance of any aircraft or aircraft parts” from the sales tax. It says nothing about leases.
The same is true of section 77.54(5)(a)3, which exempts the sale of parts used to repair aircraft.
“While the direct purchase of a repair or maintenance service or of an aircraft part may qualify for a sales tax exemption, leases are not exempt from sales tax under the statutes,” wrote Judge Donald. “It would be error for us to read into the statutes an exemption that the legislature did not include.”
Citation Partners argued that the legislative history of Act 185 supported its argument. Even if the court were to look to that history, wrote Donald, it wouldn’t help Citation Partners.
“Citation Partners asserts that the legislature intended that the sales tax exemption includes small businesses. Citation Partners, however, does not point to anything establishing that the exemptions were meant to expand to include leases.”
