STATE OF WISCONSIN
TAX APPEALS COMMISSION
G & G TRUCKING, INC.
9780 S. 60th Street
Franklin, WI 53132,
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8907
Madison, WI 53708,
|DOCKET NO. 99-S-195
RULING AND ORDER
This matter is before us on cross-motions for summary judgment. Both parties have submitted supporting briefs with affidavits and exhibits. Attorneys Robert A. Schnur and Kristina E. Somers, of Michael Best & Friedrich LLP, represent the petitioner ("G & G"). Attorney Linda M. Mintener represents the respondent ("the Department").
Having considered the entire record, the Commission hereby finds, concludes, and orders as follows:
UNDISPUTED MATERIAL FACTS
1. The Department issued a Notice of Field Audit Action on February 15, 1999, assessing G & G additional sales/use taxes in the amount of $404,017.14, including interest, penalty, and late filing fees, for the years 1990 through 1997 (the "period under review").(1)
2. G & G petitioned the Department for redetermination, which was denied, and G & G timely appealed to this commission.
3. G & G contests only that portion of the assessment relating to its purchase of two aircraft and aircraft maintenance services and repair parts.
4. G & G is a Wisconsin corporation located at Franklin, Wisconsin, and is primarily engaged in the business of interstate trucking and delivery of metal products, machinery, and other cargo to 48 of the United States. It holds a Wisconsin sales/use tax seller's permit.
5. G & G owned four different aircraft ("the aircraft"), although it never owned more than two at a time. G&G also purchased maintenance services and repair parts for the four aircraft.
6. G & G filed no sales or use tax returns and paid no sales or use tax on the purchase of parts or the maintenance of these aircraft. G&G also did not pay any sales tax or provide an exemption certificate when it purchased its aircraft.
7. G & G had no facilities to store these aircraft and no employees who could fly them. G & G was not licensed to charter its aircraft and was not licensed or certified to use them to carry people or property in interstate commerce.
8. Prior to purchasing each aircraft, G & G entered into an oral lease agreement with Wisconsin Aviation. The aircraft remained subject to these leases for all periods after their acquisition, except that, beginning mid-September 1996, the fourth aircraft was leased by G & G to Milwaukee General Aviation, Inc. ("Milwaukee General"), with which G&G also entered into an oral agreement for the aircraft's use. (2)
9. G&G had dual purposes in leasing its aircraft to the charter companies. First, G&G wanted to generate a net profit from the transactions. Second, G&G wanted to reduce its cost when it chartered the aircraft for its own business transportation.
10. Wisconsin Aviation leased three aircraft from G&G. It also leased a fourth aircraft from G&G from the time of its acquisition through mid-September 1996, when Milwaukee General leased that aircraft from G&G exclusively.
11. The oral lease agreements(3) generally provide, in pertinent part, as follows:
A. Each charter company must take possession of the aircraft it leases and keep the aircraft in its hangar in Watertown, Wisconsin.
B. The charter companies are responsible for keeping their leased aircraft in a safe and secure location and for all insurance, registration and licensing, cleaning, and maintenance.
C. The charter companies must make reasonable efforts to charter the aircraft to people needing the service and must pay G&G a negotiated rental fee based on the number of hours each aircraft is chartered.
D. The charter companies are solely responsible for scheduling the use of their leased aircraft and for selecting, training, and paying pilots. They may bill G&G for some items, such as maintenance. G&G pays a special monthly fee to have its lessees house the aircraft indoors year-round.
E. Either party may terminate the agreement by giving a 30-day notice to the other party.
12. When a third party chartered an aircraft from Wisconsin Aviation, a flight was scheduled and an initial charter fee was paid. The third party also paid a pilot fee of $350 and a per-hour fee of $850. Gasoline was included in the per-hour fee.
13. G&G did not charter aircraft from Milwaukee General. It did, however, charter aircraft from Wisconsin Aviation to transport its employees on business trips. To do so, it contacted Wisconsin Aviation to reserve an aircraft. It paid no initial charter fee. When an aircraft it owned was not available, G&G had no special "bumping rights" and had to either arrange alternate transportation or not send its employees on the desired trip. Alternate transportation might consist of "trading hours" with the owner of an aircraft which Wisconsin Aviation leased from another owner. G&G traded hours approximately 28 times during the period under review. G&G had a special hourly rate, equal to the hourly rate that the owner of the other aircraft paid to G&G. Wisconsin Aviation did not separately bill its charges to G&G. Instead, they were paid by offsetting them against Wisconsin Aviation's monthly rental fee to G&G. In addition, G&G paid the cost of fuel used for its chartered trips. In other respects, G&G paid amounts typically charged to third party charter customers, such as the pilot fee.
14. The total number of hours for which the aircraft in question were chartered by Wisconsin Aviation in each year under review, and the number and percentage of those hours for which G&G was the chartering party, were as follows:
1997 1996 1995 1994 1993 1992 1991 1990
Total Charter 661.9 809.8 701.1 525.4 643.3 838.8 717.6 711.8
G&G Charter 72.0 87.8 88.3 103.2 132.1 147.7 103.8 119.6
G&G Charter % 10.9% 10.8% 12.6% 19.6% 20.5% 17.6% 14.5% 16.8%
APPLICABLE WISCONSIN STATUTES
77.51 Definitions. Except where the context requires otherwise, the definitions given in this section govern the construction of terms in this subchapter.
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(14) "Sale", "sale, lease or rental", "retail sale", "sale at retail", or equivalent terms include any one or all of the following: the transfer of ownership of, title to, possession of, or enjoyment of tangible personal property . . . for use or consumption but not for resale as tangible personal property . . . and includes:
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(j) The granting of possession of tangible personal property by a lessor to a lessee, or to another person at the direction of the lessee. Such a transaction is deemed a continuing sale in this state by the lessor for the duration of the lease as respects any period of time the leased property is situated in this state, irrespective of the time or place of delivery of the property to the lessee or such other person.
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(22)(a) "Use" includes the exercise of any right or power over tangible personal property . . . incident to the ownership, possession or enjoyment of the property . . ., including installation or affixation to real property and including the possession of, or the exercise of any right or power over tangible personal property by a lessee under a lease . . . .
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77.53 Imposition of use tax.
(1) . . . an excise tax is levied and imposed on the use or consumption in this state of taxable services under s. 77.52 purchased from any retailer, at the rate of 5% of the sales price of those services; on the storage, use or other consumption in this state of tangible personal property purchased from any retailer, at the rate of 5% of the sales price of that property; and on the storage, use or other consumption of tangible personal property manufactured, processed or otherwise altered, in or outside this state, by the person who stores, uses or consumes it, from material purchased from any retailer, at the rate of 5% of the sales price of that material.
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APPLICABLE WISCONSIN ADMINISTRATIVE CODE
Tax 11.29 Leases and rentals of tangible personal property.
(1) GENERAL RULE. Gross receipts from the lease or rental of tangible personal property shall be subject to the sales and use tax to the same extent that gross receipts from the sale of the same property would be subject to the tax. Because a lease is a continuing sale for the duration of the lease while the leased property is situated in Wisconsin under s. 77.51(14)(j), Stats., a lessor shall pay tax on rental receipts for any period of time leased property is in Wisconsin, even though the property may have been acquired, used or both previously by the lessee in another state.
(2) PURCHASES FOR RENTAL.
(a) A lessor's purchase of tangible personal property to be used solely for lease or rental shall be exempt as a purchase for resale.
(b) A lessor's purchase of lubricants, repair parts and repair services on personal property used solely for leasing shall also be exempt as a purchase for resale. However, if the same items are purchased by a renter or lessee, the purchases shall be taxable.
(c) Charges by a lessor to a lessee under a maintenance contract on leased personal property shall be taxable.
(3) PROPERTY BOTH RENTED AND USED PERSONALLY. If tangible personal property is purchased by a person who uses it part of the time and rents it out part of the time, the sale of the property to the person shall be taxable. The lessor's rental receipts shall also be taxable, unless the transaction is specifically exempt by statute.
(4) SERVICE VS. RENTAL OF EQUIPMENT.
(a) A person who uses the person's own equipment to perform a job and who assumes responsibility for its satisfactory completion shall be performing a service.
(b) A person who furnishes equipment with an operator to perform a job which a lessee supervises and is responsible for the satisfactory completion of, shall be a lessor renting out the equipment. If it is customary or mandatory that the lessee accept an operator with leased equipment, the entire charge is subject to the tax. However, the operator's services shall not be taxable if billed separately and if a lessor customarily gives a lessee the option of taking the equipment without the operator.
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Did petitioner use its aircraft "solely for lease or rental", or did petitioner otherwise use its aircraft in such a manner that the purchase of the aircraft, parts, and maintenance services became subject to use tax under Wis. Stat. § 77.53(1) and Wis. Admin. Code § Tax 11.29(3)?
CONCLUSIONS OF LAW
1. There is no genuine issue of material fact, and this case is appropriate for summary judgment.
2. G&G's use of its aircraft was more than "solely for lease or rental," thereby subjecting the purchase of the aircraft, parts, and maintenance services to the use tax.
The Department's motion for summary judgment is granted, and respondent's action on the petitioner's petition for redetermination is affirmed.
Dated at Madison, Wisconsin, this 3rd day of October, 2001.
WISCONSIN TAX APPEALS COMMISSION
Don M. Millis, Acting Chairperson
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
DON M. MILLIS, ACTING CHAIRPERSON:
Section 802.08(2) of the Wisconsin Statutes provides that summary judgment "shall be rendered if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."
Both parties have moved for summary judgment and have supported their motions with sworn affidavits and exhibits. Each party has also provided extensive legal arguments.
Section 77.53(1) imposes the use tax on the use in this state of tangible personal property, regardless of where it is purchased, if sales tax has not been paid. It is clear, however, that "use" does not include the ownership of tangible personal property that is used solely for lease or rental. Wis. Admin. Code TAX § 11.29(2)(a). This is consistent with the definition of "retail sale" and its synonyms as not including the resale of tangible personal property. Wis. Stat. § 77.51(14)(intro.). See also, Department of Revenue v. Milwaukee Refining Corp., 80 Wis. 2d 44, 50 (1977) (holding that the definition of retail sale now found in § 77.51(14) "defines a sale at retail as being a sale to one who uses or consumes, but in any event does not resell the property").
The issue in this case is whether G&G used the aircraft at issue. There is no exemption statute involved. TAX 11.29(2)(a) and § 77.51(14)(intro.) simply define the limit of the concept of "use," not exempt activity that would otherwise fall under the definition of "use." "Use" includes the "exercise of any right or power over tangible personal property or taxable services incident to the ownership, possession or enjoyment of the property. . . ." Wis. Stat. § 77.51(22)(a).
In Rowe v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶ 202-895 (WTAC 1987), the Commission considered the situation in which the purchaser of a boat leased it to a charter company. Under the terms of the lease, the owner of the boat had the right to the personal use of the boat when it was not under charter. Id. at 13,553. However, the owner had never taken advantage of this right, although he did enter upon the boat to perform certain maintenance activities. Id. The Commission held that, since the owner had not in fact personally used the boat,(4) there was no use as contemplated by § 77.53(1) and TAX 11.29(2) and (3). Id. at 13,554. This is consistent with the definition of "use" which is the "exercise of any right or power over tangible personal property. . . ." Wis. Stat. § 77.51(22)(a)(emphasis supplied).
In Rowe, the owner had the right or power to use his boat, but did not exercise this right or power. G&G would have us believe that the opposite is true here: it is a lessor who lacks that right to use, but nevertheless uses tangible personal property at the discretion of the lessee. G&G tries to argue
that it lacked the right or power over the aircraft by narrowly defining the concept of "use." G&G points to the fact that it did not have the right to select pilots, control the performance of the aircraft or take responsibility for the completion of the trip to an extent greater than any other charter customer. These factors are not indicative of use. The definition of "use" set forth in the statute is much broader and simpler: the (1) exercise of (2) any right or power over tangible personal property. Wis. Stat. § 77.51(22)(a).
It is clear from the undisputed facts that G&G had the right to use the aircraft at issue and, in fact, used them. Contrary to G&G's assertions, G&G was not treated like any other charter user. For G&G to be treated like any other charter user, the charter company would have to possess the absolute right to deny G&G access to G&G's aircraft for any reason whatsoever. Only in such a case could I conclude that G&G did not have the right or power over the aircraft.
One cannot reasonably infer from the undisputed facts of this case that G&G lacked the right to use the aircraft even if no other charter had been scheduled. G&G's brief concedes that its "lease agreements further contemplated that G&G could and would on occasion charter the aircraft for its own use. . . ." Pet. Brief at 4. In fact, one purpose for entering into the leases was to reduce G&G's cost when it needed to charter an aircraft for its own business.(5) If the charter companies had the right to deny G&G use of these aircraft, this purpose would have been utterly defeated. Therefore, I conclude that, because G&G not only possessed the right or power over the aircraft but also exercised this power, G&G used the aircraft at issue during the period under review.
Don M. Millis, Acting Chairperson
THOMAS M. BOYKOFF, COMISSIONER:
Wisconsin law imposes a sales tax for the privilege of selling, leasing or renting tangible personal property in this state. Wis. Stat. § 77.52(1). If tangible personal property is purchased outside Wisconsin and then brought into this state, a use tax is imposed on the "storage, use or other consumption in this state of tangible personal property . . . ." Wis. Stat. § 77.53(1). There are many exceptions to these statutes. One is discussed below.
Because G&G purchased its aircraft outside Wisconsin, Wisconsin's sales tax did not apply. When the aircraft were brought into Wisconsin, the use tax generally would apply. However, one exemption from the use tax is that no tax is due if the property is purchased solely for resale. Wis. Stat. § 77.51(14)(intro). Resale includes lease and rental. Wis. Stat. § 77.51(14)(j) and Wis. Admin. Code § Tax 11.29(2)(a). Also exempted from the tax are repair parts and maintenance services used for the exempt aircraft. Wis. Stat. § 77.51(14)(intro) and Wis. Admin. Code § Tax 11.29(2)(b).
The exemption does not apply, however, if the aircraft are not used solely for lease or rental but are used personally by the purchaser. The use tax is then due. Wis. Admin. Code § Tax 11.29(3).
The Commission must determine whether the subject aircraft were purchased by G&G solely to lease or rent them to aircraft charter services or whether the aircraft were used by G&G. If the aircraft were solely leased by G&G and not personally used, the use tax does not apply. If, however, G&G used the aircraft, the use tax does apply.
G&G states that its aircraft were purchased solely for the purpose of leasing them to Wisconsin Aviation. This was done, it states, until mid-September 1996, when one aircraft was leased by G&G to Milwaukee General.
While the record contains the above statement, it also reflects G&G clearly having a second reason for purchasing the aircraft: to reduce its cost of business transportation for its employees.(6) Therefore, the aircraft purchases were not "solely for lease or rental."(7)
Having concluded that G&G had a dual purpose in purchasing the aircraft, what was G&G's use of its aircraft? Specifically, did any event occur in Wisconsin constituting a taxable "use" of the aircraft by G&G under § 77.53(1)?
G&G asserts that it was "treated no differently than any other Wisconsin Aviation customer" when it chartered one of its own aircraft for business use. However, the facts show otherwise.
G&G received preferential treatment which was not available to others. First, G&G was not required to pay an initial charter fee when making a reservation. Second, G&G paid a special hourly rate for chartering its own aircraft, lower than third parties paid and equal to the hourly rent that Wisconsin Aviation paid G&G for charter hours, plus the cost of gasoline. Third, when a G&G aircraft was unavailable, it was permitted to "trade" hours with owners of other aircraft leased by Wisconsin Aviation and pay for those hours at a preferential, lower hourly rate.(8)
The Department asserts that the word "solely" in the phrase "solely for lease or rental" means purely for lease or rental, to the exclusion of all other use. It cites Wisconsin Dep't of Revenue v. Parks-Pioneer Corp., 170 Wis. 2d 44 (Ct. App. 1992) for distinguishing between "solely" and "exclusively" when, citing Pabst Brewing Co. v. City of Milwaukee, 125 Wis. 2d 437 (1985), the Court of Appeals stated "'exclusively' does not have to mean 'solely' or 'purely' but rather 'principally and primarily.'" 170 Wis. 2d at 49.
However, in Pabst, discussing the phrase "exclusively and directly," the Supreme Court states "we do not deem it inconsistent with the rule of strict construction to reject an over-literal approach . . . .", 125 Wis. 2d at 448, and "Our supreme court has avoided hypertechnical applications of property tax exemption statutes", 125 Wis. 2d at 449.
I reject a hypertechnical application of the word "solely," and recognize that allowing incidental or de minimus other use does not automatically trigger the use tax. This is consistent with prior cases decided by this commission. In Rowe v. Wisconsin Dep't of Revenue, Wis. Tax Rptr. CCH ¶ 202-895 (WTAC 1987), the taxpayer purchased a boat and leased it to a charter company. The Commission deemed the taxpayer's use of the boat for four days in a 3-year period for purposes of performing maintenance as not constituting personal use. In Brown v. Wisconsin Dep't of Revenue, Wis. Tax Rptr. CCH ¶ 202-896 (WTAC 1987), the taxpayer purchased and leased a boat to a charter company. The Commission held that taxpayer's use of the boat for 10 days for maintenance work, during which he or his son or both took the vessel out for testing and slept in it overnight, did not constitute personal use.
G&G chartered its aircraft from Wisconsin Aviation between 10.8% and 20.5% of the total hours chartered per year during the period under review. G&G's use of its aircraft in each of those years exceeded any reasonable incidental or de minimus use standard.
G&G's preferential payments and its frequent chartering of its own aircraft constitute "use" under § 77.53(1). In Dep't of Revenue v. Horne Directory, Inc., 105 Wis. 2d 52, 59-62 (1981), the Wisconsin Supreme Court held that Horne, a Wisconsin corporation which contracted to have telephone directories printed outside of Wisconsin and delivered directly to Wisconsin subscribers, has not stored, used or otherwise consumed the directories in Wisconsin.
The Supreme Court examined the word "use" as defined in § 77.51(22)(a) [§ 77.51(15) 1977 Stats.]. There are two elements in the definition. The first "is that the taxpayer own, possess or enjoy the property in Wisconsin." Horne, 105 Wis. 2d at 61. In the instant case, G&G clearly owned the subject aircraft in Wisconsin. It also enjoyed the aircraft by chartering them for business purposes not on the same basis as any other charterer, but under preferential terms and between 10.8% and 20.5% of the total hours chartered. The Supreme Court stated that the "second element [in defining "use"] is that the taxpayer must exercise some right or power over the tangible personal property in Wisconsin." Supra. G&G exercised its right and power over its aircraft by chartering the aircraft at preferential terms and between 10.8% and 20.5% of the aircraft's total hours chartered each year.
Both parties cite Leeson Electric Corporation v. Wisconsin Dep't of Revenue, Wis. Tax Rptr. CCH ¶ 400-032 (WTAC 1993). In that case, a Wisconsin corporation was not entitled to the "purchase for lease or rental" exemption from the use tax on two aircraft it purchased outside of Wisconsin. The Commission held that there was no valid, exclusive lease agreement between Leeson and a charter service for either aircraft during the entire period under review. In addition, Leeson "used" both aircraft on a repeated and continuing basis for its own business purposes, estimated at 80% of the total flight hours.
The parties here agree that Leeson holds that for the use tax exemption to apply, a valid lease agreement between the aircraft owner and charter companies is required. In Leeson this requirement was not met, while in the instant case this requirement is met.
Beyond that, Leeson is distinguishable from the instant case. For example, Leeson had priority use and "bumping rights" to its aircraft; the charter company could lease the aircraft only when Leeson was not using it; Leeson had to approve the charter company's pilots; and Leeson got 85% of the gross revenues for chartering its aircraft to third parties. None of those facts are present in the instant case.
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
October 30, 2001 Appealed to Dane County Circuit Court(01CV2962)
3 In a letter dated January 5, 1999, a Department employee asked a bookkeeper/accountant of Wisconsin Aviation for copies of any written lease agreements between G&G and Wisconsin Aviation. At unspecified times, the bookkeeper/accountant gave the Department a blank document captioned "Aircraft Lease Agreement" and copies of completed agreements dated April 18, 1997 and August 18, 1998. The completed agreements are signed by a Wisconsin Aviation employee. However, the names of the other party or parties were redacted, and the record does not show who else signed them. The record does not indicate that these agreements were binding on G&G, making their use of no evidentiary value.
6 There is no evidence in the record to quantify G&G's savings. However, benefits to G&G may be presumed or G&G would not have continued to charter its aircraft during the entire 8 years under review.
8 The Department points out that G&G never received a bill for its charters and concludes that the charters from Wisconsin Aviation were "free". Rather, G&G paid Wisconsin Aviation a per-hour fee and gasoline costs which, instead of being separately billed, were offset against the periodic payments it received from Wisconsin Aviation. The Department asserts that this is a special privilege, constituting "enjoyment" in Wis. Stat. § 71.51(22)(b). I disagree. I believe this is a mere accounting procedure.