In July 2021, the Nebraska Supreme Court decided an important case on the Nebraska sales and use tax and how it is applied to aircraft. In the case, Big Blue Express, Inc. v. Neb. Dep’t of Rev., 309 Neb. 838 (2021), the supreme court concluded that the “sale for resale” exemption found at Neb. Rev. Stat. § 77-2701.34 did not exempt an aircraft from sales and use taxes when the owner failed to show that it had purchased the airplane to lease it in the normal course of business with the intent to result in gain, benefit, or advantage to the owner.
As with all legal questions, the case turned on the unique facts presented by the situation. The taxpayer, Big Blue Express, was a Nebraska corporation with the same individual serving as the corporation’s president, treasurer, and director. The corporation was wholly owned by another corporation and the sole shareholder of that corporation was the same individual who was Big Blue’s president, treasurer, and director. The sole shareholder also had business relationships with several other entities.
Big Blue purchased a two-thirds interest in a business jet from a seller in Kansas without paying any sales or use tax in Kansas. Another entity, Robinson’s Hanger, purchased the remaining one-third interest. Big Blue and Robinson’s Hangar entered into a joint ownership agreement. When Big Blue applied for insurance on the aircraft, it indicated that the plane would not be operated for hire or reward.
After purchasing the aircraft, Big Blue entered into use agreements with other entities that were affiliated with its president. The use agreements all provided that the plane would be rented at $1,300 per flight hour and the lessees would be responsible for providing a pilot and crew and expenses such as fuel, insurance, and hangar costs. The agreements provided that Big Blue would send invoices to the lessees and that those invoices would accrue interest if not paid within 15 days. Big Blue, however, often sent invoices in a lesser amount than the agreement dictated and did not send them until the end of the year. Even more, the lessees did not pay the invoices until the Department of Revenue contacted Big Blue about its sales tax returns. Indeed, evidence presented to the court showed that many invoices went more than a year without being paid and that when the invoices were paid, they were paid with funds from an investment account owned by the president of Big Blue and his wife.
Testimony showed that Big Blue would have had to lease the aircraft for 200 hours a year at a rate of $1,300 an hour to break even on operating costs. The evidence, however, showed that Big Blue invoiced about 237 hours of flight time over the course of two years, or about one-half of what was necessary to break even on the plane. Despite the obvious lack of business necessary to break even on the plane, Big Blue made no efforts to market the aircraft for lease.
In 2014, after an investigation, the Nebraska Department of Revenue issued a deficiency determination after concluding that the purchase of the aircraft was not exempt from taxation. The Department’s deficiency was calculated at 7% of two-thirds of the purchase price of the aircraft plus penalties and interest. Big Blue protested the determination and sought administrative review. The Tax Commissioner found that Big Blue was liable for the tax and affirmed the Department’s assessment. Big Blue then appealed to the district court, which affirmed the Tax commissioner’s decision, and then to the Nebraska Supreme Court.
The supreme court began by explaining that Nebraska imposes a tax on each item of tangible personal property in the state at some point, unless the item is specifically excluded from taxation. For items purchased in Nebraska, a sales tax applies. For items purchased outside of the state, a use tax applies. Because it was agreed that Big Blue purchased the airplane in Kansas without paying tax in that state, the question before the court was whether an exemption to the use tax applied in Nebraska.
The principal argument of Big Blue was that it did not owe use tax because its purchase of the airplane was a “sale for resale.” Because a “sale for resale” is not a retail sale as defined in the statutes, sales for resale are exempt from sales and use tax. See Intralot, Inc. v. Neb. Dep’t of Rev., 276 Neb. 708 (2008). Neb. Rev. Stat. § 77-2701.34 defines “sale for resale” to mean “a sale of property or provision of a service to any purchaser who is purchasing such property or service for the purpose reselling it in the normal course of his or her business, either in the form or condition in which it is purchased or as an attachment to or integral part of other property or service.” As an example, the statute indicates that a sale for resale includes “a sale of property to a purchaser for the sole purpose of that purchaser renting or leasing property to another person, with rent or lease payments set at a fair market value.”
In reaching its decision, the supreme court relied on cases that had interpreted similar statutory language in analogous situations in Ohio and Michigan. Drawing from these cases, the supreme court explained that to determine whether the aircraft was being leased in the normal course of the taxpayer’s business, a court may consider factors such as whether the leases are entered into with consumers who are related to or associated with the taxpayer, whether terms of the leases and the parties’ conduct reflect an arm’s-length business transaction, whether the leases produced reasonable revenue for the taxpayer’s business in relation to operating expenses, and whether the taxpayer held itself out to the public as being in the business of leasing the property.
Applying these factors to the evidence before it, the supreme court concluded that the taxpayer was not entitled to the exception under § 77-2701.34. The court found that the taxpayer’s purchase and leasing of the aircraft was not pursued with the object of its gain, benefit, or advantage. Among the salient facts, the aircraft was leased principally to the sole member of Big Blue or his related entities. Big Blue made little effort to regularly invoice customers and collect amounts due on those invoices. When Big Blue did lease the aircraft to other entities, Big Blue’s sole member paid those invoices from his investment account. Big Blue made little effort to market the airplane as available to others. Further, the evidence showed that the revenue generated by leasing the aircraft was substantially less than the costs incurred in owning the airplane. And finally, Big Blue indicated that the plane would be used for pleasure and disclaimed any use for operation and hire when procuring insurance for the plane.
In sum, the evidence led to the conclusion that Big Blue had failed to show “that it purchased the airplane to lease it in the normal course of business in an activity designed to result in gain, benefit, or advantage to Big Blue.” Rather, the facts suggested that Big Blue had purchased the aircraft for the benefit of only its president and his family of companies. As a result, the use of the aircraft was not exempt from sales and use tax.
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