"if you drive a car, I'll tax the street;
 if you try to sit, I'll tax your seat;
 if you get too cold, I'll tax the heat;
 if you take a walk, I'll tax your feet."

- George Harrison, 1966

Add to that "if you try to fly, I'll tax the sky."   

In these lean economic times, states and other local revenue authorities tend to get remarkably creative in scaring up revenues for depleted state coffers.  Some have taken to taxing lemonade stands and pumpkin patches.  Of course, any comptroller can tell you that aircraft owners and operators are a great source of tax revenue since it is a matter of common understanding that most cannot sit down because the girth of their wallets.

Those in the business know differently.  They know that flight requires two (2) things - lift and money; and not necessarily in that order.  Indeed, it takes a whole lot of the latter to make a little bit of the former and there is often precious little left over for what is euphemistically if not optimistically called "profit."  And yet, the revenuer's eye gleams at the prospect of taxing flying machines and those that operate them.  Enter Congress.

As part of a comprehensive effort to assume overall responsibility for the development of airports and runways, the Federal Government initiated a series of taxes to fund these activities, including a fuel tax, transportation tax and a "head tax."  It is, in part, why a gallon of AvGas/Jet A costs nearly five dollars ($5.00) per gallon.

In 1973, the Congress acted to prevent the states from imposing duplicate aviation taxes by enacting the Anti-Head Tax Act ("AHTA").   49 U.S.C. § 40116.   AHTA, among other things, prohibits states from imposing taxes, direct or indirect, upon air transportation, including sales taxes or other gross receipts taxes.  49 U.S.C. § 40116(b).

Like much legislation, AHTA is no model of statutory draftsmanship and its provisions are obtuse.   AHTA provides in relevant part: 

§ 40116.  State taxation.

(a)       Definition. In this section, "State" includes the District of Columbia, a territory or possession of the United States, and a political authority of at least 2 States.
 
(b)        Prohibitions. Except as provided in subsection (c) of this section and section 40117 of this title [49 USCS § 40117], a State, a political subdivision of a State, and any person that has purchased or leased an airport under section 47134 of this title [49 USCS § 47134] may not levy or collect a tax, fee, head charge, or other charge on --       

(1) an individual traveling in air commerce;
(2) the transportation of an individual traveling in air commerce;
(3) the sale of air transportation; or
(4) the gross receipts from that air commerce or transportation.
Simple enough?  Well, not really. 

AHTA then goes on and provides that:

(c)       Aircraft taking off or landing in State. A State or political subdivision of a State may levy or collect a tax on or related to a flight of a commercial aircraft or an activity or service on the aircraft only if the aircraft takes off or lands in the State or political subdivision as part of the flight.

AHTA too enumerates in subsection (e) that a State may levy or collect -

(1) taxes (except those taxes enumerated in subsection (b) of this section), including property taxes, net income taxes, franchise taxes, and sales or use taxes on the sale of goods or services; and
 
(2) reasonable rental charges, landing fees, and other service charges from aircraft operators for using airport facilities of an airport owned or operated by that State or subdivision.

Upon a cursory read, it would be reasonable to conclude that under subsection (c) AHTA permits the states to tax intrastate air commerce, including "gross receipts on air commerce or transportation," so long as the aircraft takes off or lands" in the state as part of a flight.   In early 2008, Baltimore County, Maryland concluded just that and levied a tax upon the Up Up Away Hot Air Balloon Company, Inc.  ("HABC"), citing § 11-4-601(a) of the Baltimore County Code, which provides:

"Amusements.  There is a tax levied and imposed at a rate of 10% of the gross receipts of any person obtained from any admissions or amusement charge within the county, derived from the amounts charged for: (1) Admission to a place, including any separate charge for admission within an enclosure; (2) Use of a game of entertainment; (3) Use of a recreational or sports facility; (4) Use or rental of recreational or sports equipment; and (5) Merchandise, refreshments, or a service sold or served in connection with entertainment at a nightclub or room in a hotel, restaurant, hall, or other place where dancing privileges, music, or other entertainment is provided. 

See also Maryland Tax-General Article §4-101(b) (authorizing Maryland counties to impose such amusements taxes).  In the County's view, a hot air balloon ride constituted the "use or rental of recreational or sports equipment." 

For its part HABC, a long established hot air balloon operator providing flights to its customers in the Mid-Atlantic region for many years, challenged the assessment claiming, among other things, that AHTA precluded the State and Baltimore County from imposing such a tax because an amusement tax is, by definition, a tax upon "gross receipts."

In a contested hearing, the Comptroller conceded that point in a written ruling, holding that "Maryland's admissions and amusement tax is a gross receipt tax."  The Comptroller continued, "[h]owever, the admissions amusement tax assessment against [HABC] is only attributable to the gross receipt [of HABC operations] derived from flights that takeoff and land in Maryland.  Thus, the admissions and amusement tax on the taxpayer's gross receipt is not subject to federal preemption under [AHTA]" - again, a reasonable conclusion and a conclusion that is utterly incorrect.

In 1983 - nearly three decades ago - the United States Supreme Court addressed this issue in the matter of Aloha Airlines v. Director of Taxation, 464 U.S. 7 (1983).   Construing the pre-cursor statute to AHTA, the Court held that AHTA "proscribes the imposition of  state and local taxes on gross receipts derived from air transportation or the carriage of persons in air commerce."  Aloha, 464 U.S. at 14 (Emphasis added.).  This broad holding left little doubt that states and their instrumentalities were precluded from engaging in the taxation of air commerce, the sale of air transportation, or gross receipts derived from the sale of either, even if the associated flights were wholly intrastate.

While the Aloha holding suggested that the several States could not impose a gross receipt tax on air commerce under any circumstance, the language of subsection (c) of the AHTA left, albeit slim, room for debate.   The question, however, was answered in 2009 by the United State Court of Appeals for the Third Circuit in the matter of Township of Tinicum v. U.S. Dep't of Transportation, 582 F.3d 482 (3d Cir. 2009).
Philadelphia International Airport's runways lies partially in the Township of Tinicum.  

After failing to reach an agreement with the City of Philadelphia concerning the lease of Township property, the Town attempted to levy a tax upon commercial airlines for their "use" of that same property.   Refusing to pay the tax, the airlines and other industry groups complained to the United States Department of Transportation ("DOT") who is legally charged with administering AHTA.  Tincium, 582 F.3d at 484.   Declaring the tax impermissible under AHTA, the Township petitioned the court for a review of the DOT's order.  582 F.3d at 484.

On appeal, the Township argued, "that the text of subsection (c) ... indicate[s] that ...[it] ... saves from the categorical ban [set forth in subsection (b)] any tax on a subject flight that has a ground nexus to the taxing locale."  Id. at 488.   Surveying the history of AHTA, the court rejected that Township's argument. 

Citing Congressional concern that "the [United States Supreme] Court's decision [in an earlier case permitting states to tax air commerce] opened the floodgates for a hodgepodge of local head taxes and similar taxes that could complicate  interstate air travel," the Tinicum court specifically rejected the notion that subsection (c) of AHTA is a "saving clause" permitting States to levy gross receipt taxes, directly or indirectly on the sale of intrastate air commerce.  Rather, it noted that it merely permits States to levy otherwise permissible taxes set forth in subsection (e)(1) of AHTA so long as there is a geographical nexus to the State.   582 F.3d at 488-89.   Taxes (except those enumerated in subsection (b) of AHTA), including "property taxes, net income taxes, franchise taxes, and sale or use taxes on the sale of good or services" are otherwise permissible taxes.  49 U.S.C. § 40116(e)(1). 

To put a fine point on the matter, state direct or indirect taxes on gross receipts resulting from the sale of air commerce and the transportation of individuals in it are never permissible under AHTA.  Of course, the ingenuity or, the ignorance of, State revenuers should not be underestimated.  

Confronted with these rulings, the Maryland Comptroller argued: (1) that a balloon is not an "aircraft" an therefore could not be engaged in air commerce; and (2) "while the hot air balloon rides contain a transportation component, the dominant purpose of the [HABC]'s business is to provide its customers with an entertainment experience, as the purpose of a hot air balloon flight is to ride in a hot air balloon, not to transport people from one place to another place." 

In other words, if you or your passengers are having fun, you are not engaged in air commerce!  Sir Richard Branson, Burt Rutan, Snoopy and others may disagree.  The Comptroller's specious reasoning aside, his argument ignores federal law and numerous provisions of the federal aviation regulations.

First, Title 14 of the Code of Federal Regulations - the Federal Aviation Regulations ("FARs") - defines "air commerce" as:

"...interstate, overseas, or foreign air commerce or the transportation of mail by aircraft or any operation or navigation of aircraft within the limits of any Federal airway or any operation or navigation of aircraft which directly affects, or which may endanger, safety in, interstate, overseas, or foreign air commerce."  14 C.F.R. § 1.1.  While Federal Government regularly frowns upon fun, the FARs do not appear to make "fun" determinative of the question of whether an individual is engaged in "air commerce."

Second, an "aircraft" under the FARs "means a device that is used or intended to  be used for flight in the air.   And a "balloon" is a "lighter-than-air aircraft that is not engine driven, and that sustains flight through the use of either gas buoyancy or an airborne heater."  14 C.F.R. § 1.1.

With that said, and in all fairness, some tax authorities do recognize the limitations imposed upon them by AHTA.   In particular, both the State of Arizona and the State of New Mexico have ruled in separate decisions that those offering balloon rides operating in federally controlled airspace are engaged in "air commerce" and as such, their revenues are not subject to gross receipts tax, their passengers' fun notwithstanding.  See New Mexico Rev. Ruling 422-98-1 (1998) and Arizona Dept. of Revenue, TPR 92-1 (1992).

These rulings too were brought to the attention of the Comptroller of Maryland.  Dismissing them, he merely observed that "[s]imply because other states have chosen not to tax, or, as in the case of the Arizona Department of Revenue held that they are preempted from taxing, the gross receipt of hot air balloon activities, has no bearing on whether gross receipt of hot air balloons are subject to tax in Maryland[.]"

While it may be legally accurate to suggest that Maryland is not bound by the ruling or decisions of tax authorities in other states, in the context of gross receipt taxes on air commerce, it is largely irrelevant.  Neither Arizona nor New Mexico choose not to tax commercial hot air balloonists; quite to the contrary.  Rather, their own tax courts concluded, following a contested hearing, that despite the states' desire do to so, they could not, consistent with AHTA, tax the gross receipts of hot air balloon operators.  

The Maryland Comptroller failed to address the issue as to why those authorities reached the decisions that they did.  The answer, of course, was AHTA and associated federal authority expressly precluded gross receipt taxes on air commerce of the type engaged in by commercial hot air balloon operators.

So what of HABC?   The owners appealed the Comptroller's decision to the Maryland Tax Court, where the Attorney General of Maryland eventually entered his appearance on behalf of the Comptroller.  After a meeting between counsel and a more reasoned discussion of the issues and applicable law, the Attorney General agreed to dismiss the matter and ordered the Comptroller to abate the tax.  While HABC would have preferred to have an opinion issued in its favor, it ultimately decided a win by forfeit is still a win. 

Still, the issue arguably remains open in Maryland and likely in other states as well, despite well-established federal precedent.

From beginning to end, the entire matter took over two (2) years to resolve.  The amount at stake was a mere Two Thousand Nine Hundred Dollars ($2,900.00).  Legal fees were well in excess of that.   In that regard, the question "why bother" is begged.

The owners of HABC felt that to write a check to the State for an illegal tax was no different than paying protection money.   These principled individuals concluded that responsible citizenship required them to stand their ground and challenge the State, even though it cost them dearly.  Often, doing the right thing hurts and bestows benefits not upon ourselves, but on our neighbors and upon our democracy.

Even so, the owners of HABC will not be the last to face this issue.  The fact is, because modern aviation is largely a creature of federal regulatory authority and by design intrudes upon and often excludes state sovereignty, especially in the area of taxation, state revenuers are largely unfamiliar with the Federal Aviation Regulations, AHTA and its implications.   Counsel properly serving their aviation clients must not be.

This phenomena obviously is not limited to hot air balloons.  Any legal person owning and/or operating aircraft for hire, regardless of the purpose of the flight, may have the taxman come knocking is search of additional revenues, especially in these times of woeful government deficits.   Practitioners should be prepared for rather inventive arguments with little legal support and generous citation to any authority supporting the states' right to tax, well, anything.

President Coolidge once observed "collecting more taxes than is absolutely necessary is legalized robbery."  And sometimes, it is just plain illegal.  The trick, of course, is avoiding getting shot by the robber.