March 10, 2023 – A sales tax exemption for aircraft parts and repairs does not apply to portions of lease payments attributable to the purchase of parts and repairs, the Wisconsin Supreme Court has ruled.

In Citation Partners, LLC v . Wisconsin Department of Revenue, 2023 WI 16 (March 1, 2023), the supreme court also held (4-3) that an aircraft leasing company was not acting as an agent for its lessees when it purchased parts and repairs.

Justice Rebecca Dallet wrote the majority opinion, joined by Justices Ann Walsh Bradley, Brian Hagedorn, and Jill Karofsky. Justice Patience Roggensack wrote a dissenting opinion, joined by Chief Justice Annette Ziegler and Justice Rebecca Bradley.

Company Changes Lease Charges

Citation Partners, LLC (Citation Partners) owns a corporate jet that it leases to customers. The company’s lease requires it to pay for repairs and maintenance on the jet and requires each lessee to reimburse it for a share of its repair and maintenance costs.

Prior to the enactment of Wisconsin Act 185 in July 2014, Citation Partners collected sales tax on the total price that 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 for the repair or modification of aircraft, were exempted from the state sales tax.

Beginning in November 2014, Citation Partners stopped collecting sales tax on the portion of lessee payments attributable to the aircraft’s maintenance. The company also began itemizing aircraft and engine maintenance costs on the invoices it sent 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.

Audit, then an Appeal

DOR audited Citation Partners and issued an assessment for the sales tax that the company had failed to collect for aircraft and engine maintenance from Nov. 1, 2014 through Dec. 31, 2015.

Citation Partners appealed the assessment. The Tax Appeals Commission determined that the full amount of the lease was subject to the state sales tax.

Citation Partners appealed the commission’s decision to the Dodge County Circuit Court. The circuit court reversed the commission and the DOR appealed to the Wisconsin Court of Appeals.

The court of appeals reversed the circuit court. Citation Partners appealed to the supreme court.

Payments are Consideration

Justice Dallet began her opinion by explaining that section 77.52(1)(a) imposes a five percent sales tax on the “sales price” for tangible personal property, with “sales price” defined by section 77.51(15b)(a) as “the total amount of consideration … for which tangible personal property … [is] sold, licensed, [or] leased.”

Citation Partners argued that the portion of lease payments attributable to aircraft repairs and maintenance fell outside section 77.52(1)(a) because they weren’t consideration – it simply handed those amounts over to the vendors who performed the repairs and maintenance.

But Dallet reasoned that the payments were consideration because Citation Partners benefited from the payments by passing the cost of repairs and maintenance along to its lessees instead of bearing those costs themselves.

She also pointed out that accepting Citation Partner’s argument would make the relevant part of section 77.51(15b)(a) meaningless.

“After all, if Citation Partners is right, it is not clear what section 77.51(15b)(a) means when it says that the ‘sales price’ – the ‘total amount of consideration’ – is calculated without any deduction for Citation Partners’ costs,” Justice Dallet wrote.

Only Direct Payments Exempt

Citation also argued that section 77.54(5)(a)3 exempts the sale of “parts used to modify or repair aircraft,” and section 77.52(2)(a)10 exempts the sale of “repairs, service, … and maintenance of any aircraft or aircraft parts.”

But neither section applied to the portion of lessee payments, Justice Dallet reasoned, because Citation didn’t sell its lessees aircraft parts or aircraft repair and maintenance service.

“When Citation Partners … buy aircraft repairs or engine maintenance directly, those transactions are tax-exempt,” Dallet wrote. “But when Citation Partners passes those costs along to its customers as part of the total amount of consideration in a lease, that transaction is taxable.”

Citation Partners Not An Agent

Citation Partners also argued that it was acting as an agent for its lessees when purchasing aircraft repairs and maintenance, and that therefore the purchase of those services was the same thing as the lessees purchasing them directly.

But Justice Dallet pointed that under the lease terms, it was Citation Partners and not the lessees who were obligated to schedule and pay for all repairs and maintenance. Additionally, she noted, under the lease the lessees have only limited authority to purchase repairs and maintenance.

Dallet acknowledged that a side agreement executed in 2015 makes lessees responsible for aircraft operation and maintenance expenses. But, she pointed out, nothing in the side agreement suggested that the lessees had any control over Citation Partner’s maintenance activities.

Dissent: Majority Interprets the Wrong Statutes

In her dissent, Justice Roggensack argued that the majority failed to interpret section 77.52(2)(a)10 or section 77.54(5)(a)3.

The legislature worded Section 77.52(2)(a)10 broadly, Roggensack argued.

“There is no statutory limitation on the statute’s use that refers to whether the ‘selling, licensing, performing or furnishing’ of aircraft parts or services are set out in a written agreement or performed without a written agreement,” Roggensack wrote. “There is no limitation on whether the person responsible for that financial obligation pays the vendor directly or pays another who has paid the vendor on that person’s behalf.”

The same was true for section 77.54(5)(a)3, Roggensack argued.

She also pointed out that prior to the enactment of Act 185 in 2014, aircraft parts and maintenance were not exempt from the sales tax unless the aircraft was used by carriers of persons or property in interstate or foreign commerce.

“Clearly, the legislature knew how to limit exemptions from sales tax for aircraft if it chose to do so,” Justice Roggensack wrote.