Opinion
No. CV 06 4009597
December 5, 2007
MEMORANDUM OF DECISION
The central issue in this tax appeal is whether job-related pilot training services purchased by the plaintiff, Key Air, Inc. (Key Air), are excluded from the payment of sales and use taxes as set forth in General Statutes § 12-407(a)(37)(J)(iii). This statutory provision excludes from sales and use taxation "business analysis, management, management consulting and public relations services when such services are rendered in connection with an aircraft leased or owned by a certificated air carrier or in connection with an aircraft which has a maximum certificated take-off weight of six thousand pounds or more."
Key Air is a Connecticut corporation doing business at Waterbury-Oxford Airport in Oxford. It is a certificated air carrier that contracts with owners of various mid-size cabin jet aircraft to operate their aircraft under its air carrier certificate issued by the Federal Aviation Administration (FAA). Key Air provides trained and FAA-authorized [Page 1] pilots to fly aircraft owned by its owners/clients. In the process of providing qualified pilots to operate the aircraft of owners/clients, Key Air undertakes to purchase pilot training, as required by FAA regulations. Key Air then pays the cost of training and, in turn, charges the training fees back to the owners/clients. All of the relevant aircraft Key Air manages or operates have a take-off weight in excess of six thousand pounds. To accomplish the periodic training required by the FAA, Key Air, during the audit period, engaged vendors located in various states to properly train its pilots to fly the aircraft of its owners/clients.
The commissioner conducted an audit of Key Air's business and concluded that, for the audit period of July 1, 1997 through June 30, 2000, Key Air failed to pay sales or use taxes on its purchase of job-related pilot training services during the audit period.
However, Key Air contests the imposition of sales and use tax on their purchase of pilot training services for three reasons:
(1) Pilot training is excluded from sales and use tax because it is considered to be business management consulting services rendered in connection with aircraft having take-off weights in excess of six thousand pounds, and therefore, exempt from taxation pursuant to § 12-407(a)(37)(J)(iii).
(2) Pilot training fees were the legal and contractual obligation of Key Air's owners/clients, the cost of which was initially paid for by Key Air and subsequently reimbursed to Key Air by its owners/clients.
(3) The imposition of the sales and use tax on the purchase of pilot training services is preempted by federal law which specifically prohibits a state from assessing tax, directly or indirectly, on gross receipts derived from interstate air transportation.
See plaintiff's post-trial brief dated July 12, 2007 (hereinafter plaintiff's 7/12/07 brief), p. 2.
Key Air's argument, that the subject pilot training services constitute "business management consulting services," is based on the commissioner's definition of this term under § 12-407(2)(i)(J)-1(f) of the Regulations of Connecticut State Agencies (hereinafter referenced as the agency regulations) which includes "human resource management activities" and § 12-407(2)(i)(J)-1(i)(1) which further provides that "human resources management activities" includes "job-related training." See plaintiff's 7/12/07 brief, p. 4.
The commissioner defines "human resources management activities" to include "job-related training" and contends that pilot training services fall within the definition of "human resources management activities" rendering them taxable as business management services. See defendant's post-trial memorandum of law dated July 16, 2007 (hereinafter defendant's 7/16/07 MOL), n. 1. The commissioner further acknowledges that business management services, such as job-related training services, are excluded from the scope of the sales and use tax when rendered in connection with an aircraft leased or owned by a certificated air carrier or in connection with an aircraft which has a maximum certificated take-off weight of six thousand pounds or more. See defendant's 7/16/07 MOL, p. 2.
However, the parties differ with respect to the commissioner's position that the subject job-related training services were "used and consumed" by Key Air, and therefore, these services were not rendered in connection with a qualifying aircraft as required by § 12-407(a)(37)(J)(iii). As a result, it is the commissioner's position that because these services do not qualify for exclusion, Key Air is liable for sales and use tax on its purchase of pilot training services. See defendant's 7/16/07 MOL, p. 3.
The standard agreement used by Key Air with its owners/clients is an "Aircraft Operating Agreement." See plaintiff's Exhibit J which describes Key Air as the "Operator" and the owners/clients as the "Company." The agreement recites that the Operator "is in the business of managing, operating and maintaining aircraft; and Whereas, Company hereby engages the services of Operator and Operator hereby agrees to provide such services, in accordance with the terms and conditions set forth herein." The agreement further provides that the Operator will "employ and assign to the operation of the Aircraft a minimum of two pilots acceptable to Company. In the event that a pilot is unable to perform pilot duties for a requested flight, Operator shall supply other qualified flight personnel acceptable to Company within a reasonable period of time."
The agreement also provides as follows:
2(b) All pilots will be qualified with respect to all FAA regulations and Owner's and Company's insurance requirements and will be available for all requested flights when the aircraft is in an airworthy status. Company agrees that Operator's discretion, subject to all FAA regulations, shall be used in determining crew duty limits and when pilot relief is appropriate.
2(c) Operator shall supervise and monitor pilot flight and passenger service performance to ensure that all flight personnel conduct themselves in a exemplary manner and maintain a professional standard of personal appearance for all passenger flight activity.
With regard to independent contractors, the agreement provides as follows:
The parties hereby acknowledge that Operator is an independent contractor, which will perform services under this Agreement and all persons furnished by Operator for the performance of services or work under this Agreement shall at all times and for all purposes be considered Operator's employees or agents, and Operator shall be responsible for payment of all federal, state and other applicable governmental, social security, social insurance, unemployment and sickness disability insurance and other payroll taxes with respect to Operator's employees, including contributions from them when and as required by law. Operator agrees to indemnify and save Company harmless from any and all claims that may be made by Operator's employees under Workers' Compensation statutes and other claims arising directly out of the employment relationship.
(Plaintiff's Exhibit J, p. 10.)
Upon a fair reading of the agreement, Key Air has contracted with its owners/clients to provide qualified pilots to operate their aircraft, and consistent with this understanding, the agreement provides that Key Air will provide up-to-date training for its pilots, with training expenses charged to its owners/clients. Pilot training is part of the business of Key Air in providing FAA-authorized pilots to operate the aircraft of its owners/clients. As the plaintiff notes in its 7/12/07 brief, p. 4, "[i]n the testimony of David Brainard, Key Air's Vice President and Director of Maintenance, he established that the pilot training at issue was job-related training that Key Air's pilots were required to obtain in order to be authorized to fly the aircraft operated by Key Air."
The focus in § 12-407(a)(37)(J)(iii) is not on who pays for the job-related training; the focus is on whether the purchase of job-related training, encompassed within the term of management consulting services, was used in connection with "an aircraft . . . leased or owned by a certificated air carrier or in connection with an aircraft which has a maximum certificated take-off weight of six thousand pounds or more." In the agency regulations, § 12-407(2)(i)(J)-1(c)(1), "[i]t is the nature of the services being rendered, and not what those services are called or termed by the service provider or service recipient, that determines whether services described in section 12-407(2)(i)(J) of the general statutes are being rendered." The services provided in this case were pilot training services given to Key Air's employee pilots by various out-of state vendors, in order to keep the pilots qualified to perform their jobs as required by FAA regulations. See, e.g., Message Center Management, Inc. v. Commissioner of Revenue Services, 50 Conn.Sup. 317, 324-25, 927 A.2d 378 (2006), aff'd, 282 Conn. 706, 923 A.2d 735 (2007).
In meeting these training requirements, Key Air arranged for pilot training by various out-of-state vendors and paid for these services. The fact that Key Air is reimbursed for this payment does not alter the fact that it was Key Air that contracted for and paid for the training services provided to Key Air's pilots.
Key Air objected to the commissioner's assertion that the purchase of pilot training services by Key Air was for Key Air's own use and consumption, but that is exactly what the pilot training was for. As the purpose of the subject pilot training services was to maintain the qualifications of Key Air's pilots, this training comes within the definition of human resources management activities in the agency regulations, § 12-407(2)(i)(J)-1(i)(1), which includes "job-related training."
The commissioner argues that the fact that the pilot training services were used and consumed by Key Air takes the pilot training services out of being performed in connection with the aircraft, excluding the pilot training services from the benefits of § 12-407(a)(37)(J)(iii). See defendant's 7/16/07 MOL, p. 10.
In order for Key Air to qualify for the exemption pursuant to § 12-407(a)(37)(J)(iii), the training of its pilots must be performed in connection with an aircraft having a maximum certificated take-off weight of six thousand pounds. This statutory exemption is stated in the disjunctive. Either the services, and in this sense, the pilot training, are rendered in connection with (1) an aircraft leased or owned by a certificated air carrier or (2) in connection with an aircraft which has a maximum certificated take-off weight of six thousand pounds or more.
The mere fact that Key Air arranges for the pilot training and pays for this type of training in order for the pilots to be qualified under FAA regulations does not take away the fact that the training is done in connection with the operation of the aircraft, and not for any other purpose. As noted in Bryan A. Garner, A Dictionary of Modern Legal Usage (2d Ed.), p. 434, "in connection with is always a vague, loose connective . . . it should always be used as a last resort." In State v. Jesser, 501 P.2d 727, 95 Idaho 43 (1972), the court noted that the legislature used the term "connected therewith" as an elastic device to afford courts judicial discretion. Here, in connection with can only mean that there must be a causal relationship between the pilot training and the operation of an aircraft to meet the qualifications contained in the subject statute. In this case, there was such a causal connection.
Key Air raises two additional points in claiming that purchases of pilot training services from out-of state vendors are not subject to the sales and use tax. The first point is that Key Air's payment for the pilot training services and the reimbursements by the owners/clients to Key Air renders the reimbursements as the obligation of the owners/clients, and therefore, exempt from sales and use tax. Although the plaintiff, in its 7/12/07 brief recites that this argument is in accordance with controlling case law, a general reference to "case law" is not adequate authority for the court to consider, nor is reference to the commissioner's "own publications" without citing the publications or the authority for its position. The reimbursement to Key Air by its owners/clients is simply a charge by Key Air to cover the costs it incurs to train its own personnel. The pilots, being employees of Key Air, are Key Air's responsibility for training, not the obligation of the owners/clients.
The plaintiff's second point is that, because Key Air engages in interstate commerce, the imposition of sales and use tax is "a thinly disguised attempt to avoid the Constitutional and federal statutory prohibitions which bar state taxation of interstate air commerce." (Plaintiff's 7/12/07 brief, pp. 9-10.)
As a general proposition, "state taxes on interstate commerce or foreign commerce that conflict with federal legislation enacted pursuant to Congress's power to regulate commerce, are invalid." II J. Hellerstein W. Hellerstein, State Taxation (3d.Ed. 2003) § 4.24, p. 4-206. However, a state sales tax is not a tax on gross receipts of airlines engaged in interstate commerce, but rather an intrastate tax on goods or services used or performed in this state. As noted in Hellerstein Hellerstein, "[h]istorically, there has been relatively little federal legislation restricting state taxing power . . . Id. The sales and use tax on the performance of the pilot training services in this case does not impact upon interstate commerce. There was no evidence introduced in this case to suggest otherwise. See American Trucking Ass'ns. v. Michigan Pub. Serv. Comm'n, 545 U.S. 429, 434, 125 S.Ct. 2419, 162 L.Ed.2d 407 (2005).
"A sales tax is a tax on the freedom of purchase . . . A use tax is a tax on the enjoyment of that which was purchased . . . [G]enerally a sales tax is imposed on items acquired within the state and a use tax is imposed on items acquired outside the state for use within this state." (Internal quotation marks omitted.) Sharper Image Corp. v. Miller, 240 Conn. 531, 536, 692 A.2d 774 (1997). See also General Statutes § 12-411(2).
The commissioner also argues that the services purchased by Key Air outside the state of Connecticut were brought back to Connecticut, and therefore, were consumed in Connecticut. This assumes that the education or training obtained outside of Connecticut not only could be carried back to Connecticut, but that it would be subject to a Connecticut use tax as if it were a fungible commodity. It would be more plausible to say that the training the pilots received in other states was training that was consumed in those states, not in Connecticut. Pilots receiving the education or training in other states would be fully qualified to operate the aircraft upon successfully completing the training program outside Connecticut, not when the pilots return to Connecticut.
For the above stated reasons, the court concludes that the job-related pilot training services purchased by Key Air from out-of-state vendors, during the audit period, were exempt from the imposition of sales and use taxes pursuant to § 12-407(a)(37)(J)(iii).
Accordingly, the plaintiff's appeal is sustained without costs to either party.