The Illinois Appellate Court denied a $162.7M refund claim from American Aviation Supply, LLC (American) after determining that a sales tax exemption for property bought and stored temporarily in Illinois did not apply to the company’s sales of aviation fuel. In doing so, the Court affirmed the Illinois Independent Tax Tribunal’s (Tribunal) decision, which found that the exemption did not apply because the fuel was not consumed solely outside of the state. Because approximately 2% of the fuel was consumed in Illinois, the entire sale is subject to tax.
“... the fuel at issue did not qualify for the ETS Exemption because, after being loaded into the Airlines’ planes in Illinois, it was consumed partly in Illinois.” ”
background
Between 2011 and 2016, American, a wholly owned subsidiary of American Airlines, Inc., operated as an aviation fuel retailer in Illinois selling fuel to American Airlines and U.S. Airways, Inc. (the Airlines). The Airlines temporarily stored the fuel at the O’Hare International Airport in Chicago, Illinois (O’Hare) before it was loaded into planes. The Airlines stated that 98% of the fuel was consumed outside of Illinois after the planes left O’Hare and obtained permits from the Illinois Department of Revenue (Department) certifying such statement. The purpose of the permit is to allow a seller to provide a blanket exemption certificate when he knows that a certain percentage of all sales will qualify for the exemption.
After obtaining the permits, American filed a claim for refund of Retailer’s Occupation Tax (ROT) in the amount of $162.7 million that it paid on fuel sales to the Airlines from 2011 thru 2016. The Department denied the claim, and the Tribunal affirmed its decision by granting the Department’s motion for summary judgement.
The issue
On appeal, the Court focused on the construction of the state’s Retailer’s Occupation Tax (ROTA) and Use Tax Act (UTA). The UTA contains an expanded temporary storage exemption (ETS) for tangible personal property that is acquired outside of Illinois and brought and stored in Illinois temporarily, to be ultimately used “solely” outside of Illinois. This Department has ruled that this exemption applies “only if the temporarily stored fuel is transported out of the state for use elsewhere by some means other than placing it in equipment which would consume it.”
In this case, American challenged the meaning of the word “solely” in the ETS exemption, first by claiming that the language of the exemption requires that fuel be used “solely” outside of Illinois only after it is transported out of Illinois. American’s interpretation of the word “solely” was that “fuel transported outside of Illinois [could not] be returned later to Illinois for use or consumption in Illinois.”
However, the Court stated that the statute is “clear and unambiguous” on this issue and stuck to a strict reading of the word “solely.” To qualify for the exemption, the Court asserted, temporary storage must be for future transportation outside of Illinois for use or consumption “solely and entirely” outside of the state. In interpreting the term “solely”, the Court stated, “. . . when [aviation] fuel is removed from its temporary storage, loaded into a plane at O’Hare, and then consumed partly in Illinois, that fuel does not qualify for the ETS exemption because it was not transported outside of the State for consumption ‘solely’ outside of Illinois.” To clarify, this means that although only 2% of American’s fuel sales were consumed within Illinois, the entire sale is not eligible for the exemption.
Further, American argued that a "timing rule" should limit the ETS exemption’s use of “solely” in a way that differed from previous interpretations. They contended that the word "thereafter" following "transporting" in the phrase "for the purpose of subsequently transporting it outside this State for use or consumption thereafter solely outside this State" indicated that the statute only required the fuel to be used solely outside Illinois after it was transported out of the state. According to American, this meant some fuel consumption in Illinois was permissible without nullifying the exemption for the fuel used entirely outside Illinois later.
The Court, however, interpreted the statute differently. In the Court’s opinion, the use of "thereafter" in the statute was consistent with the view that the entire use or consumption of the property must be outside Illinois. The Court explained that "thereafter" implied that the use or consumption would occur after transportation outside the state, and most importantly, it would be entirely outside the state. The Court stated, "in our view, however, the statute’s use of 'thereafter' is consistent with the Tribunal’s view that the entire use or consumption of the property at issue must be outside of the state of Illinois. As we read the statute, the meaning of 'thereafter' is that the use or consumption will be after transportation outside the state, not before, and that the use or consumption will be entirely outside the state."
The Court also rejected American’s arguments regarding the permits issued by the Department. The Court agreed that the permits allow purchasers to certify that a percentage of the sale will not be subject to tax. However, the Court did not believe that granting the permits was inconsistent with the requirement that fuel be used “solely” outside of Illinois. To illustrate, the Court said that the ETS exemption would apply if the Airlines had purchased fuel for temporary storage in Illinois, transported a portion of the fuel to another state and used the portion of fuel there. In this case, the permits would certify that the percentage of fuel transported to another state can qualify for the ETS exemption.
aviation industry in illinois
Previous rulings in Illinois have demonstrated that Illinois is not the most taxpayer-friendly state for the aviation industry. The ruling not only impacts American Aviation, but also sets a significant precedent for the aviation industry in Illinois. Companies should carefully evaluate their storage and usage practices to ensure compliance with the strict "solely" outside the state requirement. If you are in the aviation industry and do business in Illinois, be proactive in your tax strategy and cautious in your approach. For assistance understanding which business activities could expose you to tax liability in Illinois, contact us today.