Tax Type
Retail Sales and Use Tax
Description
Airline; Common carrier
Topic
Exemptions
Property Subject to Tax
Date Issued
10-26-2000
October 26, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek correction of retail sales and use tax audit assessments issued to **** (the "Taxpayer"), for the period October 1991 through January 1995. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is an international airline that services the major airports in Virginia. The Taxpayer operates as a common carrier and qualifies for the exemption from the sales and use tax provided under Code of Virginia § 58.1-609.3(6). The Taxpayer was audited and assessed tax in several areas. The Taxpayer contends the assessments are erroneous, and cites the airline common carrier exemption above, Commonwealth of Virginia v. United Airlines. Inc., 219 Va. 374, 248 S.E. 2d 124 (1978) (hereinafter "United Airlines"), and the Virginia Administrative Code (specifically 23 VAC 10-210-370 and 23 VAC 10-210-380 through 382) to support its position.
The Taxpayer was audited under separate registration numbers. I will address the audits and the issues individually.
DETERMINATION
Generally
Code of Virginia § 58.1-609.3(6) provides an exemption from the sales and use tax for tangible personal property sold or leased to an airline operating in intrastate, interstate or foreign commerce as a common carrier providing scheduled air service on a continuing basis to one or more Virginia airports at least one day per week. To qualify for the exemption, the property must be for use or consumption by such airline directly in the rendition of its common carrier service.
In United Airlines, the Virginia Supreme Court stated that the airline common carrier exemption parallels the exemption applicable to common carriers of property or passengers by motor vehicle. Title 23 VAC 10-210-100 ("Airlines operating in interstate commerce") does not provide a detailed explanation of exempt and taxable property used in the rendition of airline common carrier service. However, 23 VAC 10-210-370 ("Common carriers of property by motor vehicle") provides guidance in this case. In addition, the department has indicated that 23 VAC 10-210-380 ("Common carriers of property or passengers by railway") is applicable to the airline common carrier exemption. See Public Document (P.D.) 88-25 (1/14/88), copy enclosed.
Title 23 VAC 10-210-380 provides that items of tangible personal property that are used or consumed directly in the rendition of common carrier service by a railway are those that are both indispensable to the actual provision of the transportation service and used or consumed immediately in the performance of such service. The regulation in 23 VAC 10-210-370, relating to motor vehicle common carriers, provides that tangible personal property for use or consumption directly in the rendition of its public service means only essential tangible personal property used immediately and principally by a common carrier of property to keep its motor vehicles operating on the road in the performance of its public service.
Audit A - Registration
Fixed Assets
Haz-Storage 4 Drum Hazardous Material Storage Building
The Taxpayer has submitted documentation that confirms the payment of the Virginia sales and use tax on the purchase of this item. Therefore, this item will be removed from the audit.
GDC 4 Pack Unit
This is a rackmount configuration of four modems. The modems are used for remote data communications with the Taxpayer's central reservation and flight operations system. The modem unit is used to support the reservation and flight operations system terminals at ticket counters and gates. The Taxpayer believes that the unit is used directly in the rendition of its common carrier service and qualifies for exemption under Code of Virginia §58.1-609.3(6). The Taxpayer also believes its position is consistent with the ruling in United Airlines.
In United Airlines, the Virginia Supreme Court found that equipment used in the actual reservation and ticketing of passengers and to provide certain flight information to the airline's crews to be exempt of the tax. The Court held that an integrated information system is critical and essential to the effective rendition of an airline's common carrier service. Since the Taxpayer's reservation and flight operations systems are deemed to be used directly in the rendition of the Taxpayer's common carrier service, tangible personal property used for communicating data to the reservation and flight operations system terminals at ticket counters and gates should be treated similarly. Therefore, the modem unit is deemed to be used directly in the Taxpayer's rendition of its common carrier service and is exempt. This item will be removed from the audit.
Wrenn Handling Ramp Vacuum Cleaners
The Taxpayer uses these gasoline-powered vacuum cleaners to clean and maintain the outdoor ramp areas immediately around the boarding gates where aircraft are serviced and the passengers and freight are boarded. The Taxpayer asserts that these vacuums are used to ensure that foreign objects are not ingested into the jet engines of the aircraft. The Taxpayer contends that the vacuum cleaners are similar to the exempt snowplow equipment described in 23 VAC 10-210-382(2).
The exempt snowplow equipment cited by the Taxpayer under 23 VAC 10-210-382(2) serves to clear the railway track to allow for the passage of revenue equipment. This is essential to the provision of railway common carrier service. The same regulation clearly states that snowplow equipment for maintenance and general yard use is taxable. The vacuum cleaners, in this instance, serve a maintenance function, as they are used to clean debris and objects from the boarding areas. They are not used on the taxiways or the runways that are integral parts of the airline transportation system. While the vacuum cleaners may be a practical necessity, they are not indispensable to the rendition of the Taxpayer's common carrier service. Therefore, I do not find a basis to remove them from the audit.
Leased Computer Equipment for Reservation System
The Taxpayer contends that it leased multi-host reservation equipment to one of its connection carriers. The equipment allows the connection carrier to access the Taxpayer's centralized reservations and flight operations system. The Taxpayer believes the purchase of the equipment and the gross proceeds from the lease of such equipment are exempt under Code of Virginia § 58.1-609.3(6) and United Airlines. The Taxpayer provided documentation that includes an amended lease agreement between the Taxpayer and the connection carrier to support its position.
The documentation provided does not identify the contested equipment as the equipment actually leased to the connection carrier. Additionally, the auditor did not find evidence of gross proceeds derived from the lease of the contested equipment. The Taxpayer, therefore, has not proven that the contested equipment was the subject of a lease arrangement. Based on this, I do not find a basis to remove the contested equipment from the audit.
Purchase Exceptions
Teri Plus Brag Box Towels
These are lint free paper towels used by the Taxpayer to clean and maintain the aircraft cabins and galleys. The Taxpayer contends the paper towels are exempt under 23 VAC 10-210-370(B)(2), as cleaning supplies used on revenue or service vehicles. The Taxpayer provides invoices and a sample to distinguish these towels from towels purchased for taxable usage. Based on the information provided, the purchase of these paper towels will be removed from the audit.
Peter Pepper Products
This is a single line item transaction in the audit and represents the purchase of ash urns, clocks, tables, and trash cans for a capital improvement project at a Virginia airport. The transaction was included in the audit test sample as a recurring expense and extrapolated over the audit period. The Taxpayer admits the products are taxable, but contends that it is not appropriate to include the transaction in the audit test sample, as these products were purchased infrequently for use in Virginia. The Taxpayer asserts that the transaction skews the audit results and increases the error factor by almost 50%. The Taxpayer requests the item be removed from the audit sample and taxed separately.
According to the auditor, the Taxpayer was engaged in a number of capital improvement projects at Virginia airports during the audit period. The Taxpayer applied capitalization guidelines to each project. Because the Taxpayer treated the transaction at issue as an expense under its capitalization guidelines, the auditor held it as a recurring expense consistent with the department's ruling in P.D. 96-36 (4/3/96), copy enclosed.
In P.D. 96-36, a taxpayer failed to capitalize a fixed asset that was included in an audit sample and extrapolated over the audit period. The department agreed to separately itemize the item in the audit, provided the taxpayer capitalized the item. If the Taxpayer, in this instance, agrees to capitalize the items that are the subject of the transaction, the department will separately itemize and tax the transaction in the audit.
Shipping and Handling Charges
The Taxpayer contracts with a company for transportation and warehouse services. The Taxpayer purchases catering and cabin service equipment and instructs the vendors to drop ship the equipment to the company's warehouse facilities. The equipment is then delivered by the company to the Taxpayer's caterers. The Taxpayer believes the shipping and handling charges invoiced by the company represent exempt transportation charges in accordance with Code of Virginia §58.1-609.5(3) and 23 VAC 10-210-6000. The Taxpayer provided the contract with the company and supplemental information to support its position.
Code of Virginia §58.1-609.5(3) provides an exemption for separately stated transportation charges. Title 23 VAC 10-210-6000 interprets the exemption and provides that exempt transportation and delivery charges do not include handling changes.
A review of the invoice from the company to the Taxpayer indicates a lump sum charge for freight and handling. The transportation charge is not separately stated as required in the statute. Therefore, the exemption does not apply, and the auditor properly assessed the tax on the charges invoiced during the audit period.
Miscellaneous Purchase Exceptions
Bar Services
The Taxpayer purchases food, beverages, and related services from a number of caterers and vendors. As part of the bar service, caterers provide ice, lemons, and limes and perform certain services such as beverage cart preparation, stocking, and cleaning. The Taxpayer asserts that the majority of the charges for bar service are attributable to the rendering of services. In addition, a portion of the ice and fruit are provided in beverages that are resold to passengers. The Taxpayer believes the majority of the bar service charges should not be subject to the tax. The Taxpayer has provided an estimation of the percentage of bar charges that should be taxable.
The department's policy regarding sales of food and services by caterers is well established. Generally, caterers are deemed to provide a taxable service and the total charge for food and services is subject to the tax. Moreover, in United Airlines the Court held that food and related items boarded and used for service to passengers during flight are not exempt under Code of Virginia § 58.1-609.3(6).
Notwithstanding the above, the department recognizes that a portion of the tangible personal property purchased from caterers is resold to passengers. As such, it is reasonable to apply the tax on a proportionate basis to the bar service charges. The Taxpayer's estimate, however, is not acceptable because it subjects only the tangible personal property portion of the bar service charges to the tax. The estimate does not assume the total usage of ice on a system-wide basis. For purposes of administrative ease and fairness, the department will apply the tax to 50% of the Taxpayer's bar service charges. The tax will be applied in this manner after any allowances for local taxes paid by the Taxpayer.
Catering Adjustments
These adjustments represent payments to the Taxpayer's caterers for missing or rejected invoices that are not accounted for in the Taxpayer's dining services system. The Taxpayer requests a proration of the tax on these charges, which include the provision of tangible personal property and services.
The adjustments represent sales of food and related services provided by caterers. These charges are fully taxable as charges by caterers as discussed above, with the exception of the bar services, which will be taxed at 50%.
City and System Timetables
The Taxpayer provides timetables to the traveling public in cities where it provides its common carrier service. The timetables include time and frequency of flight departures and arrivals, connecting flight information, and other flight-related information. The timetables do not contain fare information. The Taxpayer contends that these publications are an integral component of its reservation and passenger service functions and should qualify for exemption under Code of Virginia §58.1-609.3(6) and United Airlines.
A review of the timetable indicates that it serves as an information source to potential passengers. The timetable is administrative in nature, as it is a convenient or facilitative item that is not essential to the operation of the Taxpayer's common carrier service. The timetable is similar to a motor freight guide that provides information on the points serviced by a particular motor freight carrier. The guides are deemed taxable under 23 VAC 10-210-370(B)(1). The Taxpayer's timetables are taxable in accordance with the regulation.
Penalty
The Taxpayer contends that the issue of in-flight liquor sales was not covered in a prior audit. Therefore, the Taxpayer requests waiver of the penalty associated with the tax assessed on in-flight liquor sales.
Title 23 VAC 10-210-2032 sets forth the department's policy regarding audit penalty and provides that penalty generally will not be applied to audit deficiencies occurring in new areas not covered by a prior audit. In accordance with the regulation, the penalty will be removed from the audit.
Audit B - Registration
Fixed Assets
4 Pack Units and Standalone Units (modems)
These units will be removed from the audit, consistent with the discussion of the GDC 4 Pack Unit in Audit A.
Shipping and Handling Charges
These charges are taxable, as previously discussed above regarding Audit A. Shipping and handling charges will remain in the audit.
Bar Services
The tax will be prorated as discussed in the determination for Audit A.
Catering Adjustments
The tax will be applied in accordance with the discussion in Audit A.
City and System Timetables
The timetables will not be removed from the audit consistent with the discussion in Audit A.
Refund/Credits
Hoky Sweepers
Hoky sweepers are used for light cleaning of the aircraft cabin between flights. The Taxpayer contends the sweepers are exempt under 23 VAC 10-210-382(2), as tangible personal property used in cleaning and painting revenue equipment. Based on the information provided, the sweepers qualify for exemption and will be removed from the audit.
Fire Extinguisher
This fire extinguisher is a wheeled unit stationed in the ramp areas to provide initial fire protection for the aircraft and passengers while on the ground. The Taxpayer asserts that the units are used directly in the rendition of its common carrier service. The Taxpayer believes the Court's ruling in United Airlines regarding anti-hijacking surveillance equipment broadens the exemption for airlines to include any equipment that is used for passenger and aircraft safety.
In United Airlines, the Court reasoned that a common carrier of passengers by air is under a duty to exercise the highest degree of care for the safety of its passengers. Therefore, the Court determined that anti-hijacking surveillance equipment deployed to prevent hijackers from boarding aircraft was used directly in United Airlines' rendition of its common carrier service and qualified for exemption under Code of Virginia § 58.1-609.3(6).
I cannot agree with the Taxpayer's reasoning regarding the applicability of the Court's ruling on the anti-hijacking equipment. Such equipment is intended to prevent hijackers from boarding aircraft and therefore protects the passengers and the aircraft. This is consistent with 23 VAC 10-210-382(2), which exempts fire extinguishers used on revenue equipment. The fire extinguisher unit at issue is not used on board revenue aircraft, but instead serves a general purpose use at the airport facility. Based on the regulation, there is no basis to exempt the fire extinguisher unit in this instance.
Teri Plus Brag Box Towels
These towels will be removed from the audit, consistent with the determination for Audit A. A credit will be granted in Audit B for taxes paid on these purchases.
Penalty
Penalty will be waived, for the reasons set forth in the determination for Audit A.
Summary
The audit will be revised within 60 days to reflect the adjustments set forth in this letter. The Taxpayer will receive a revised audit report and assessments. The balance of the assessments should be paid within 30 days to avoid the accrual of additional interest charges. Questions regarding the audit revisions should be directed to the auditor, **** at ****. Questions regarding the policy set forth in this letter may be directed to **** in the Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13165J
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letter in which you seek correction of retail sales and use tax audit assessments issued to **** (the "Taxpayer"), for the period October 1991 through January 1995. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is an international airline that services the major airports in Virginia. The Taxpayer operates as a common carrier and qualifies for the exemption from the sales and use tax provided under Code of Virginia § 58.1-609.3(6). The Taxpayer was audited and assessed tax in several areas. The Taxpayer contends the assessments are erroneous, and cites the airline common carrier exemption above, Commonwealth of Virginia v. United Airlines. Inc., 219 Va. 374, 248 S.E. 2d 124 (1978) (hereinafter "United Airlines"), and the Virginia Administrative Code (specifically 23 VAC 10-210-370 and 23 VAC 10-210-380 through 382) to support its position.
The Taxpayer was audited under separate registration numbers. I will address the audits and the issues individually.
DETERMINATION
Generally
Code of Virginia § 58.1-609.3(6) provides an exemption from the sales and use tax for tangible personal property sold or leased to an airline operating in intrastate, interstate or foreign commerce as a common carrier providing scheduled air service on a continuing basis to one or more Virginia airports at least one day per week. To qualify for the exemption, the property must be for use or consumption by such airline directly in the rendition of its common carrier service.
In United Airlines, the Virginia Supreme Court stated that the airline common carrier exemption parallels the exemption applicable to common carriers of property or passengers by motor vehicle. Title 23 VAC 10-210-100 ("Airlines operating in interstate commerce") does not provide a detailed explanation of exempt and taxable property used in the rendition of airline common carrier service. However, 23 VAC 10-210-370 ("Common carriers of property by motor vehicle") provides guidance in this case. In addition, the department has indicated that 23 VAC 10-210-380 ("Common carriers of property or passengers by railway") is applicable to the airline common carrier exemption. See Public Document (P.D.) 88-25 (1/14/88), copy enclosed.
Title 23 VAC 10-210-380 provides that items of tangible personal property that are used or consumed directly in the rendition of common carrier service by a railway are those that are both indispensable to the actual provision of the transportation service and used or consumed immediately in the performance of such service. The regulation in 23 VAC 10-210-370, relating to motor vehicle common carriers, provides that tangible personal property for use or consumption directly in the rendition of its public service means only essential tangible personal property used immediately and principally by a common carrier of property to keep its motor vehicles operating on the road in the performance of its public service.
Audit A - Registration
Fixed Assets
Haz-Storage 4 Drum Hazardous Material Storage Building
The Taxpayer has submitted documentation that confirms the payment of the Virginia sales and use tax on the purchase of this item. Therefore, this item will be removed from the audit.
GDC 4 Pack Unit
This is a rackmount configuration of four modems. The modems are used for remote data communications with the Taxpayer's central reservation and flight operations system. The modem unit is used to support the reservation and flight operations system terminals at ticket counters and gates. The Taxpayer believes that the unit is used directly in the rendition of its common carrier service and qualifies for exemption under Code of Virginia §58.1-609.3(6). The Taxpayer also believes its position is consistent with the ruling in United Airlines.
In United Airlines, the Virginia Supreme Court found that equipment used in the actual reservation and ticketing of passengers and to provide certain flight information to the airline's crews to be exempt of the tax. The Court held that an integrated information system is critical and essential to the effective rendition of an airline's common carrier service. Since the Taxpayer's reservation and flight operations systems are deemed to be used directly in the rendition of the Taxpayer's common carrier service, tangible personal property used for communicating data to the reservation and flight operations system terminals at ticket counters and gates should be treated similarly. Therefore, the modem unit is deemed to be used directly in the Taxpayer's rendition of its common carrier service and is exempt. This item will be removed from the audit.
Wrenn Handling Ramp Vacuum Cleaners
The Taxpayer uses these gasoline-powered vacuum cleaners to clean and maintain the outdoor ramp areas immediately around the boarding gates where aircraft are serviced and the passengers and freight are boarded. The Taxpayer asserts that these vacuums are used to ensure that foreign objects are not ingested into the jet engines of the aircraft. The Taxpayer contends that the vacuum cleaners are similar to the exempt snowplow equipment described in 23 VAC 10-210-382(2).
The exempt snowplow equipment cited by the Taxpayer under 23 VAC 10-210-382(2) serves to clear the railway track to allow for the passage of revenue equipment. This is essential to the provision of railway common carrier service. The same regulation clearly states that snowplow equipment for maintenance and general yard use is taxable. The vacuum cleaners, in this instance, serve a maintenance function, as they are used to clean debris and objects from the boarding areas. They are not used on the taxiways or the runways that are integral parts of the airline transportation system. While the vacuum cleaners may be a practical necessity, they are not indispensable to the rendition of the Taxpayer's common carrier service. Therefore, I do not find a basis to remove them from the audit.
Leased Computer Equipment for Reservation System
The Taxpayer contends that it leased multi-host reservation equipment to one of its connection carriers. The equipment allows the connection carrier to access the Taxpayer's centralized reservations and flight operations system. The Taxpayer believes the purchase of the equipment and the gross proceeds from the lease of such equipment are exempt under Code of Virginia § 58.1-609.3(6) and United Airlines. The Taxpayer provided documentation that includes an amended lease agreement between the Taxpayer and the connection carrier to support its position.
The documentation provided does not identify the contested equipment as the equipment actually leased to the connection carrier. Additionally, the auditor did not find evidence of gross proceeds derived from the lease of the contested equipment. The Taxpayer, therefore, has not proven that the contested equipment was the subject of a lease arrangement. Based on this, I do not find a basis to remove the contested equipment from the audit.
Purchase Exceptions
Teri Plus Brag Box Towels
These are lint free paper towels used by the Taxpayer to clean and maintain the aircraft cabins and galleys. The Taxpayer contends the paper towels are exempt under 23 VAC 10-210-370(B)(2), as cleaning supplies used on revenue or service vehicles. The Taxpayer provides invoices and a sample to distinguish these towels from towels purchased for taxable usage. Based on the information provided, the purchase of these paper towels will be removed from the audit.
Peter Pepper Products
This is a single line item transaction in the audit and represents the purchase of ash urns, clocks, tables, and trash cans for a capital improvement project at a Virginia airport. The transaction was included in the audit test sample as a recurring expense and extrapolated over the audit period. The Taxpayer admits the products are taxable, but contends that it is not appropriate to include the transaction in the audit test sample, as these products were purchased infrequently for use in Virginia. The Taxpayer asserts that the transaction skews the audit results and increases the error factor by almost 50%. The Taxpayer requests the item be removed from the audit sample and taxed separately.
According to the auditor, the Taxpayer was engaged in a number of capital improvement projects at Virginia airports during the audit period. The Taxpayer applied capitalization guidelines to each project. Because the Taxpayer treated the transaction at issue as an expense under its capitalization guidelines, the auditor held it as a recurring expense consistent with the department's ruling in P.D. 96-36 (4/3/96), copy enclosed.
In P.D. 96-36, a taxpayer failed to capitalize a fixed asset that was included in an audit sample and extrapolated over the audit period. The department agreed to separately itemize the item in the audit, provided the taxpayer capitalized the item. If the Taxpayer, in this instance, agrees to capitalize the items that are the subject of the transaction, the department will separately itemize and tax the transaction in the audit.
Shipping and Handling Charges
The Taxpayer contracts with a company for transportation and warehouse services. The Taxpayer purchases catering and cabin service equipment and instructs the vendors to drop ship the equipment to the company's warehouse facilities. The equipment is then delivered by the company to the Taxpayer's caterers. The Taxpayer believes the shipping and handling charges invoiced by the company represent exempt transportation charges in accordance with Code of Virginia §58.1-609.5(3) and 23 VAC 10-210-6000. The Taxpayer provided the contract with the company and supplemental information to support its position.
Code of Virginia §58.1-609.5(3) provides an exemption for separately stated transportation charges. Title 23 VAC 10-210-6000 interprets the exemption and provides that exempt transportation and delivery charges do not include handling changes.
A review of the invoice from the company to the Taxpayer indicates a lump sum charge for freight and handling. The transportation charge is not separately stated as required in the statute. Therefore, the exemption does not apply, and the auditor properly assessed the tax on the charges invoiced during the audit period.
Miscellaneous Purchase Exceptions
Bar Services
The Taxpayer purchases food, beverages, and related services from a number of caterers and vendors. As part of the bar service, caterers provide ice, lemons, and limes and perform certain services such as beverage cart preparation, stocking, and cleaning. The Taxpayer asserts that the majority of the charges for bar service are attributable to the rendering of services. In addition, a portion of the ice and fruit are provided in beverages that are resold to passengers. The Taxpayer believes the majority of the bar service charges should not be subject to the tax. The Taxpayer has provided an estimation of the percentage of bar charges that should be taxable.
The department's policy regarding sales of food and services by caterers is well established. Generally, caterers are deemed to provide a taxable service and the total charge for food and services is subject to the tax. Moreover, in United Airlines the Court held that food and related items boarded and used for service to passengers during flight are not exempt under Code of Virginia § 58.1-609.3(6).
Notwithstanding the above, the department recognizes that a portion of the tangible personal property purchased from caterers is resold to passengers. As such, it is reasonable to apply the tax on a proportionate basis to the bar service charges. The Taxpayer's estimate, however, is not acceptable because it subjects only the tangible personal property portion of the bar service charges to the tax. The estimate does not assume the total usage of ice on a system-wide basis. For purposes of administrative ease and fairness, the department will apply the tax to 50% of the Taxpayer's bar service charges. The tax will be applied in this manner after any allowances for local taxes paid by the Taxpayer.
Catering Adjustments
These adjustments represent payments to the Taxpayer's caterers for missing or rejected invoices that are not accounted for in the Taxpayer's dining services system. The Taxpayer requests a proration of the tax on these charges, which include the provision of tangible personal property and services.
The adjustments represent sales of food and related services provided by caterers. These charges are fully taxable as charges by caterers as discussed above, with the exception of the bar services, which will be taxed at 50%.
City and System Timetables
The Taxpayer provides timetables to the traveling public in cities where it provides its common carrier service. The timetables include time and frequency of flight departures and arrivals, connecting flight information, and other flight-related information. The timetables do not contain fare information. The Taxpayer contends that these publications are an integral component of its reservation and passenger service functions and should qualify for exemption under Code of Virginia §58.1-609.3(6) and United Airlines.
A review of the timetable indicates that it serves as an information source to potential passengers. The timetable is administrative in nature, as it is a convenient or facilitative item that is not essential to the operation of the Taxpayer's common carrier service. The timetable is similar to a motor freight guide that provides information on the points serviced by a particular motor freight carrier. The guides are deemed taxable under 23 VAC 10-210-370(B)(1). The Taxpayer's timetables are taxable in accordance with the regulation.
Penalty
The Taxpayer contends that the issue of in-flight liquor sales was not covered in a prior audit. Therefore, the Taxpayer requests waiver of the penalty associated with the tax assessed on in-flight liquor sales.
Title 23 VAC 10-210-2032 sets forth the department's policy regarding audit penalty and provides that penalty generally will not be applied to audit deficiencies occurring in new areas not covered by a prior audit. In accordance with the regulation, the penalty will be removed from the audit.
Audit B - Registration
Fixed Assets
4 Pack Units and Standalone Units (modems)
These units will be removed from the audit, consistent with the discussion of the GDC 4 Pack Unit in Audit A.
Shipping and Handling Charges
These charges are taxable, as previously discussed above regarding Audit A. Shipping and handling charges will remain in the audit.
Bar Services
The tax will be prorated as discussed in the determination for Audit A.
Catering Adjustments
The tax will be applied in accordance with the discussion in Audit A.
City and System Timetables
The timetables will not be removed from the audit consistent with the discussion in Audit A.
Refund/Credits
Hoky Sweepers
Hoky sweepers are used for light cleaning of the aircraft cabin between flights. The Taxpayer contends the sweepers are exempt under 23 VAC 10-210-382(2), as tangible personal property used in cleaning and painting revenue equipment. Based on the information provided, the sweepers qualify for exemption and will be removed from the audit.
Fire Extinguisher
This fire extinguisher is a wheeled unit stationed in the ramp areas to provide initial fire protection for the aircraft and passengers while on the ground. The Taxpayer asserts that the units are used directly in the rendition of its common carrier service. The Taxpayer believes the Court's ruling in United Airlines regarding anti-hijacking surveillance equipment broadens the exemption for airlines to include any equipment that is used for passenger and aircraft safety.
In United Airlines, the Court reasoned that a common carrier of passengers by air is under a duty to exercise the highest degree of care for the safety of its passengers. Therefore, the Court determined that anti-hijacking surveillance equipment deployed to prevent hijackers from boarding aircraft was used directly in United Airlines' rendition of its common carrier service and qualified for exemption under Code of Virginia § 58.1-609.3(6).
I cannot agree with the Taxpayer's reasoning regarding the applicability of the Court's ruling on the anti-hijacking equipment. Such equipment is intended to prevent hijackers from boarding aircraft and therefore protects the passengers and the aircraft. This is consistent with 23 VAC 10-210-382(2), which exempts fire extinguishers used on revenue equipment. The fire extinguisher unit at issue is not used on board revenue aircraft, but instead serves a general purpose use at the airport facility. Based on the regulation, there is no basis to exempt the fire extinguisher unit in this instance.
Teri Plus Brag Box Towels
These towels will be removed from the audit, consistent with the determination for Audit A. A credit will be granted in Audit B for taxes paid on these purchases.
Penalty
Penalty will be waived, for the reasons set forth in the determination for Audit A.
Summary
The audit will be revised within 60 days to reflect the adjustments set forth in this letter. The Taxpayer will receive a revised audit report and assessments. The balance of the assessments should be paid within 30 days to avoid the accrual of additional interest charges. Questions regarding the audit revisions should be directed to the auditor, **** at ****. Questions regarding the policy set forth in this letter may be directed to **** in the Office of Tax Policy at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13165J
Rulings of the Tax Commissioner