Mo. SC denies American Airlines' $5M refund claim

By Nathan Bass | Jan 22, 2013

JEFFERSON CITY, Missouri (Legal Newsline) - The Supreme Court of Missouri unanimously rejected American Airlines claim for a refund of over $5 million dollars in fuel tax from the Missouri Department of Revenue.

Judge Zel M. Fischer authored the Jan. 8 opinion.

American Airlines entered into an Air Services Agreement with two regional airlines, Chautauqua and Trans-States, where the regional airlines would operate flights for American out of St. Louis under the AmericanConnection brand name.

"Chautauqua and Trans-States were, under the terms of the Agreement, independent contractors for all purposes, assumed all risk of financial losses resulting from the provision of AmericanConnection flights, and were not agents of American or AMR.," the opinion states.

"Similarly, Chautauqua and Trans-States were responsible for all costs incurred in providing the AmericanConnection flights unless expressly provided for in the Air Services Agreements.

In addition to requiring American approval on all branding and colors for AmericanConnection flights, there were sweeping restrictions placed on the Regionals regarding advertising, signage, customer service guidelines and many other aspects of the operation of the AmericanConnection business.

"Chautauqua and Trans-States were prohibited from using the aircraft designated for AmericanConnection flights on any other routes and were prohibited from operating any flights for other carriers on routes that competed with the AmericanConnection routes."

American was responsible for contracting for the aircrafts used and the personnel who operated the aircrafts, for scheduling AmericanConnection flights, pricing the flights, and advertising and promoting the flights.

American compensated the Regionals by paying them an agreed upon rate based on hours flown. The hourly compensation structure figured in a set price per gallon for fuel with an arrangement to reimburse the Regionals for fuel price differences on a monthly basis if the fuel was higher than allowed for in the Agreement. If the fuel was less that the base cost, the difference would be credited to amounts due from American to the Regionals.

"On October 1, 2004, pursuant to an oral contract, Chautauqua and Trans-States began purchasing fuel from American. American could provide fuel at a lower cost than Chautauqua and Trans-States could purchase it from other suppliers because American bought fuel at a bulk rate, not available to Chautauqua and Trans-States, and then sold them the fuel at cost," the opinion states.

"From October 1, 2004, to September 30, 2007, American charged Chautauqua and Trans-States sales tax on their purchases of fuel and remitted the collected tax to the Missouri Department of Revenue."

During this period, the cost of fuel always exceeded the agreed upon base amount in the agreements with the Regionals and so American was reimbursing the two airlines for the amount above the cost as mandated by their agreement.

"The amounts reimbursed to Chautauqua and Trans-States included the entire amount of Missouri state and local sales tax collected by American - and remitted to the department of revenue - from Chautauqua and Trans-States on all sales of fuel from October 1, 2004, through September 30, 2007."

"In February 2008, American filed a sales tax refund claim with the director of revenue, requesting a refund of $5,179,361.62 in sales tax that it had collected from Chautauqua and Trans-States and remitted to the director from October 1, 2004, to September 30, 2007.

The Director of the Department of Revenue denied the claim from American on March 20, 2008. American appealed to the administrative hearing commission and on January 6, 2012, the commission decided American was not entitled to a refund because its sales to the Regionals were retail sales and did not qualify for sales tax exemption.

American, having exhausted its administrative remedies, appealed to the state's highest court.

"American argues that the commission erred in finding that the sales of fuel constituted a sale at retail," Fischer wrote. "American asserts that it never transferred title or ownership of the fuel to Chautauqua and Trans-States because American, at all times, maintained complete control over the fuel.

"In the typical transaction, a purchaser of tangible personal property pays money, or some other valuable consideration, and receives title and ownership of property. Title and ownership are usually, but not always, acquired simultaneously by the purchaser.

"Passage of title or ownership ordinarily occurs upon delivery, unless otherwise agreed by the parties ... The key is the intent of the parties, as evidenced by all relevant facts, including custom or usage of trade ... Ownership is the right to exercise dominion or control over a thing

"Except for the agreement to use the fuel only on AmericanConnection routes, American's transactions with Chautauqua and Trans-States were identical to transactions with any other supplier of fuel.

American asserted that the fuel transactions with the Regionals were not sales at retail, that American never transferred "dominion and control" of the property to the Regionals.

"American asserts that it exercised absolute discretion over "how, when, and where" the fuel could be used because it limited use of the fuel to only AmericanConnection flights, controlled branding, scheduled the flights, selected the type of aircraft to be used, and controlled aspects of flight operations.

"The limitations concerning branding, ticketing, scheduling, aircraft selection, and flight operation do not give American any dominion or control as to the use of fuel. They merely indicate that Chautauqua and Trans-States were contractually obligated to perform the flights in a specified manner," Fischer wrote.

"Moreover, these limitations would have applied whether Chautauqua and Trans-States purchased fuel from American or any other supplier.

"The only provision in the agreements specifically concerning the use of fuel was the oral agreement stating that the fuel was to be used in planes designated for AmericanConnection routes. In all other respects, the fuel sales transaction is exactly the same as if Chautauqua and Trans-States had purchased the fuel from any other supplier.

"The Air Services Agreements put the risk of financial losses resulting from the provision of AmericanConnection flights on Chautauqua and Trans-States. These agreements did not contemplate that American would maintain, receive, or keep title to any fuel purchased for the AmericanConnection flights.

"The record, viewed as a whole, clearly demonstrates that, once the fuel was delivered to Chautauqua and Trans-States, it was under their control.

"Reviewing the whole record, this Court concludes that the evidence supports the commission's finding that American transferred title and ownership of the fuel to Chautauqua and Trans-States.

"Therefore, the sales to Chautauqua and Trans-States constituted sales at retail and were subject to taxation under ยง 144.020. The decision of the commission is affirmed."

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