                     NOTICE: NOT FOR OFFICIAL PUBLICATION.
 UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
                 AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.




                                    IN THE
             ARIZONA COURT OF APPEALS
                                DIVISION ONE


        AMERICAN HELICOPTERS, LLC, License No. 20-081332;
        MONARCH ENTERPRISES, INC., License No. 03-007141;
         PAPILLON AIRWAYS, INC., License No. 03-025046;
               XEBEC, LLC, License No. 20-488245;
               ZUNI, LLC, License No. 07-618955;
                      Plaintiffs/Appellants,

                                        v.

     ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.

                             No. 1 CA-TX 14-0001
                               FILED 1-29-2015


           Appeal from the Superior Court in Maricopa County
                          No. TX2012-000231
                   The Honorable Dean M. Fink, Judge

                                  AFFIRMED


                                   COUNSEL

Kolesar & Leatham, Las Vegas, Nevada
By Scott R. Cook, Aaron R. Maurice
Counsel for Plaintiffs/Appellants

Arizona Attorney General’s Office, Phoenix
By Scot Teasdale
Counsel for Defendant/Appellee
                       AMERICAN et al. v. ADOR
                         Decision of the Court



                      MEMORANDUM DECISION

Presiding Judge Patricia A. Orozco delivered the decision of the Court, in
which Judge Randall M. Howe and Judge Maurice Portley joined.


O R O Z C O, Judge:

¶1             American Helicopters, LLC, Monarch Enterprises, Inc.,
Papillon Airways, Inc., Xebec, LLC, and Zuni, LLC (collectively, Taxpayers)
appeal the summary judgment the tax court granted in favor of Arizona
Department of Revenue (the Department) determining that Taxpayers are
liable for use tax and transaction privilege tax. For the following reasons,
we affirm.

                FACTS AND PROCEDURAL HISTORY

¶2             Papillon Airways, Inc. (Papillon) provides on-demand and
scheduled helicopter flights in Arizona and Southern Nevada, including
daily scenic air tours of the Grand Canyon. Papillon leases helicopters from
related entities, including American Helicopters, LLC, Monarch
Enterprises, Inc., Xebec, LLC, and Zuni, LLC (collectively, the Lessor
Entities). Pursuant to the lease agreements, Papillon is responsible for
maintaining the helicopters, including the purchase and installation of
“dynamic equipment,” an industry term for engines, rotors, turbines,
blades, and other aircraft parts.

¶3             The Department audited Taxpayers for the period from
January 2003 through December 2006 and assessed use tax against Papillon
in the amount of $531,636.32 arising from its purchase and use of dynamic
equipment. The Department also assessed transaction privilege tax against
the lease income earned by the Lessor Entities in the amount of $165,043.47
plus interest.

¶4            Taxpayers filed timely protests to the proposed assessments.
Papillon argued that it was exempt from use taxation pursuant to Arizona
Revised Statutes (A.R.S.) section 42-5159.B(7) (West 2015).1 The Lessor
Entities claimed they were exempt from transaction privilege tax under


1    Unless otherwise noted, we cite the current version of all statutes
when no material revisions have occurred.


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                         AMERICAN et al. v. ADOR
                           Decision of the Court

A.R.S. § 42-5061.B.7, as extended to lessors by A.R.S. § 5071.B.2(b). The
Office of Administrative Hearings consolidated Taxpayers’ protests and
issued a decision determining that Taxpayers were liable for the assessed
tax. Taxpayers appealed to tax court and the parties filed cross-motions for
summary judgment. The tax court granted summary judgment in favor of
the Department. Taxpayers timely appealed. We have jurisdiction
pursuant to Article 6, Section 9 of the Arizona Constitution and A.R.S. §§
12-120.21.A.1 and -2101A.1. (West 2015).

                                DISCUSSION

¶5            We review de novo the grant of summary judgment and
construction of the applicable statutes. Wilderness World, Inc. v. Dep’t of
Revenue State of Ariz., 182 Ariz. 196, 198, 895 P.2d 108, 110 (1995); Ariz. Dep’t
of Revenue v. Cent. Newspapers, Inc., 222 Ariz. 626, 629, ¶ 9, 218 P.3d 1083,
1086 (App. 2009). “[L]aws exempting property from taxation are to be
construed strictly.” Conrad v. Maricopa Cnty., 40 Ariz. 390, 393, 12 P.2d 613,
614 (1932); see also Ariz. Dep’t of Revenue v. Capitol Castings, Inc., 207 Ariz.
445, 447, ¶ 10, 88 P.3d 159, 161 (2004). Also, “[t]he presumption is against
the exemption, and every ambiguity in the statute will be construed against
it.” Conrad, 40 Ariz. at 393, 12 P.2d at 614.

¶6             Arizona’s transaction privilege tax is an excise tax on the right
to engage in business in the state. See Ariz. Dep’t of Revenue v. Mountain
States Tel. & Tel. Co., 113 Ariz. 467, 468, 556 P.2d 1129, 1130 (1976). The tax
extends to businesses that lease or rent tangible personal property and the
tax is assessed against the income generated by the lease. A.R.S. § 42-
5071.A-B. The use tax, which is complementary to the transaction privilege
tax, applies to the storage, use or consumption of tangible personal
property purchased from a retailer and is calculated as a percentage of the
sales price. See A.R.S. § 42-5155.A. (defining the use tax); Ariz. Dep’t of
Revenue v. Care Computer Sys., Inc., 197 Ariz. 414, 420, ¶ 25, 4 P.3d 469, 475
(App. 2000) (Fidel, J., dissenting) (explaining that transaction privilege taxes
and use taxes are complementary). Here, Taxpayers admit they are
engaged in activities that fall within the scope of the transaction privilege
tax and the use tax, but assert they are exempt from taxation because
Papillon holds a “supplemental air carrier certificate under federal aviation
regulations.” See A.R.S. §§ 42-5061.B.7., -5071.B.2(b), -5159.B.7.

I.     The Language of the Statutory Exemption

¶7          Both the transaction privilege tax and the use tax provide an
exemption for “[a]ircraft, navigational and communication instruments



                                       3
                        AMERICAN et al. v. ADOR
                          Decision of the Court

and other accessories and related equipment,” provided that the aircraft or
equipment is sold to:

       (a) A person holding a federal certificate of public
       convenience and necessity, a supplemental air carrier
       certificate under federal aviation regulations (14 Code of
       Federal Regulations part 121) or a foreign air carrier permit
       for air transportation for use as or in conjunction with or
       becoming a part of aircraft to be used to transport persons,
       property or United States mail in intrastate, interstate or
       foreign commerce.

A.R.S. §§ 42-5061.B.7(a), -5159.B.7(a) (Emphasis added.) If a sale of aircraft
or related equipment is exempt under A.R.S. § 42-5061.B.7., then income
realized from the lease of such property is likewise exempt. See A.R.S. § 42-
5071B.2.(b).

¶8            There is no question that the subject of the assessed use tax
(dynamic equipment) and the subject of the assessed transaction privilege
tax (helicopters) qualifies as “aircraft, navigational and communication
instruments and other accessories and related equipment.” In order for
Taxpayers’ activities to be exempt from taxation, however, Papillon must
hold: (1) a federal certificate of public convenience and necessity (CPCN);
(2) a supplemental air carrier certificate under federal aviation regulations
(14 Code of Federal Regulations Part 121); or (3) a foreign air carrier permit
for air transportation. See A.R.S. §§ 42-5061.B.7(a) and -5159.B.7(a).

¶9            It is undisputed that Papillon did not hold a CPCN during the
audited time period.2 Likewise, it is undisputed that Papillon did not hold
a foreign air carrier permit. Rather, the parties’ dispute whether Papillon
held a “supplemental air carrier certificate under federal aviation
regulations (14 Code of Federal Regulations Part 121).” The Department
argues that Papillon is not a supplemental air carrier and that it operates
under Part 135 of the federal regulations, not Part 121. Conversely,
Taxpayers argue that Papillon is a supplemental air carrier and that the
statute’s parenthetical reference to “Federal Regulations, part 121” is not
determinative.




2    Papillon later obtained a CPCN in August 2011. Since that time,
Taxpayers have utilized this statutory exemption.


                                      4
                        AMERICAN et al. v. ADOR
                          Decision of the Court

       A.     Papillon Is Not Authorized to Conduct Supplemental
              Operations Under 14 C.F.R. Part 121.

¶10            In order to operate as an air carrier or commercial operator, a
person or entity must obtain an air carrier operating certificate from the
Federal Aviation Administration (FAA). 49 U.S.C. § 44705. Papillon holds
such a certificate. According to FAA regulations, the carrier must also
obtain operations specifications that prescribe “the authorizations,
limitations, and procedures under which each kind of operation must be
conducted.” 14 C.F.R. § 119.33(a)(3) (Emphasis added.); see also 14 C.F.R. §
119.7(a)(1). “Kind of operation” refers to “one of the various operations a
certificate holder is authorized to conduct, as specified in its operations
specifications, i.e., domestic, flag, supplemental, commuter, or on-demand
operations.” 14 C.F.R. § 110.2 (defining “kind of operation”) (emphasis
added).

¶11           The FAA regulations contain numbered parts setting forth the
rules applicable to each “kind of operation” as follows:

       Part 121 – Operating Requirements: Domestic, Flag and
       Supplemental Operations. 14 C.F.R. §§ 121.1 to -1500
       (Emphasis added.)
       ...
       Part 129 – Operations: Foreign Air Carriers and Foreign
       Operators of U.S.-Registered Aircraft Engaged in Common
       Carriage. 14 C.F.R. §§ 129.1 to -201.

       Part 133 – Rotorcraft External-Load Operations. 14 C.F.R. §§
       133.1 to -51.

       Part 135 – Operating Requirements: Commuter and on
       Demand Operations and Rules Governing Persons on Board
       Such Aircraft. 14 C.F.R. §§ 135.1 to -507 (Emphasis added.)
       ...
       Part 137 – Agricultural Aircraft Operations. 14 C.F.R. §§ 137.1
       to -77.


¶12          Carriers authorized to operate under Part 121 can conduct
“supplemental operations.” See 14 C.F.R. §§ 121.1 to -1500. Carriers
authorized under Part 135 can conduct “commuter and on-demand
operations.” See 14 C.F.R. §§ 135.1 to -507. Papillon is not authorized under




                                      5
                        AMERICAN et al. v. ADOR
                          Decision of the Court

Part 121 to conduct supplemental operations.3 Rather, as recognized by the
DOT, Papillon is authorized under Part 135 to conduct commuter and on-
demand operations. It is also authorized under Parts 133 and 137 to provide
rotorcraft external-load operations and agricultural aircraft operations.

      Papillon provides daily air tour flights from Las Vegas
      McCarran International Airport, Boulder City Municipal
      Airport, Grand Canyon West, and Grand Canyon National
      Park Airport using its fleet of 39 helicopters, all of which are
      configured for six passengers. In addition, Papillon provides
      helicopter transportation services under a fee-for-service
      contract to several federal and state agencies. Moreover, in
      addition to conducting passenger flights under its Part 135
      commuter authority ([nine] or less passengers) and on-
      demand authority, Papillon holds authority under 14 CFR
      Part 133 and Part 137 authorizing it to provide external load
      and agriculture operations.4


3       If Papillon wanted to conduct supplemental operations under Part
121, it would have to obtain “Part 121 certification from the FAA.” The
United States Department of Transportation (DOT) advised Papillon: “In
the event that [Papillon] wishes to institute operations that would require
Part 121 certification from the FAA, it must first be determined fit for such
operations.” (Emphasis added.)

4      Testifying in an unrelated case, Papillon’s Chief Operating Officer
and Director of Operations described Papillon’s authority under the FAA
regulations as follows:

      Papillon is a 135 on-demand charter company that
      specializes in chartered air tours over scenic areas, like the
      Grand Canyon, and other special areas and also has a
      contracting obligation to several government agencies for
      exclusive use.

      ...

      Part 135 are the rules that we operate under for the FAA. The
      FAA has Part 121, Southwest Airlines, Delta Airlines, that are
      on a scheduled route, and then you have On-Demand 135
      charter, which is what we do.




                                     6
                        AMERICAN et al. v. ADOR
                          Decision of the Court

(Emphasis added.)

¶13           Our goal in interpreting statutes is to give effect to each word
and phrase. Indus. Comm’n of Arizona v. Old Republic Ins. Co., 223 Ariz. 75,
77, ¶ 7, 219 P.3d 285, 287 (App. 2009). “The presumption is against the
exemption, and every ambiguity in the statute will be construed against it.”
Conrad, 40 Ariz. at 393, 12 P.2d at 614. With this goal in mind, we interpret
the language of A.R.S. §§ 42-5061.B.7. and -5159.B.7. to apply only to an air
carrier who: (1) holds an operating certificate and (2) who is authorized to
conduct supplemental operations under Part 121. Papillon did not have
such authority. Accordingly, during the audit period, Taxpayers did not
qualify for the statutory exemption set forth in §§ 42-5061.B.7. and -
5159.B.7.5

       B.     By   Definition,  Rotorcraft        Operations      Are     Not
              “Supplemental Operations.”

¶14           Because Arizona’s exemption statutes specifically incorporate
the “federal aviation regulations,” we apply the definitions found in those
regulations. Cf. Rios v. Symington, 172 Ariz. 3, 8, 833 P.2d 20, 25 (1992)
(interpreting a state statute in conjunction with the federal statute cited
therein). The FAA regulations define “supplemental operation” as follows:

       Supplemental operation means any common carriage
       operation for compensation or hire conducted with any
       airplane described in paragraph (1) of this definition that is a
       type of operation described in paragraph (2) of this definition.




(Emphasis added.)

5              Taxpayers contend that the phrase, “a supplemental air
carrier certificate” under federal aviation regulations 14 Code of Federal
Regulations part 121 is confusing because the FAA issues certificates under
Part 119, not Part 121. We disagree. Both the FAA and DOT use similar
terminology linking an air carrier’s certification to that part of the FAA
regulations under which the carrier has authority to operate. On its
website, the FAA refers “14 CFR Part 121 Air Carrier Certification.”
Likewise, the DOT utilizes the terminology “Part 121 certification from the
FAA.”



                                      7
                        AMERICAN et al. v. ADOR
                          Decision of the Court

14 C.F.R. § 110.2 (Emphasis added.) The regulation goes on to list four
types of airplanes. Id. Notably, the definition of “supplemental operation”
does not encompass rotorcraft operations. See id.

¶15            Conversely, the FAA defines “commuter operation” to
specifically include rotorcraft operations:

      Commuter operation means any scheduled operation
      conducted by any person operating one of the following types
      of aircraft with a frequency of operations of at least five round
      trips per week on at least one route between two or more
      points according to the published flight schedules:

      (1) Airplanes, other than turbojet-powered airplanes, having
      a maximum passenger-seat configuration of [nine] seats or
      less, excluding each crewmember seat, and a maximum
      payload capacity of 7,500 pounds or less; or

      (2) Rotorcraft.

14 C.F.R. § 110.2 (Emphasis added.). Likewise, the regulations define “on-
demand operation” to include “any rotorcraft operation.” 14 C.F.R. §
110.2.6



6      The FAA amended the regulations applying to air carrier operations
and certification in 1995. See Commuter Operations and General
Certification and Operations Requirements, 60 Fed. Reg. 65,832 (Dec. 20,
1995) (to be codified at 14 C.F.R. pts. 91, 119, 121, 125, 127 and 135). The
FAA’s stated intent was to include rotorcraft operations under Part 135, not
Part 121. See id. As noted in the Federal Register:

      The FAA proposed that part 121 requirements would apply
      to all scheduled passenger-carrying operations for
      compensation or hire in airplanes with a passenger-seating
      configuration of [ten] or more seats and to all scheduled
      passenger-carrying operations for compensation or hire in
      turbojet-powered airplanes regardless of seating capacity. . .
      Under the proposal, scheduled passenger-carrying
      operations in non-turbojet airplanes with [nine] or fewer
      passenger seats, on-demand operations with airplanes with
      [thrity] or fewer passenger seats, operations in single-engine



                                     8
                        AMERICAN et al. v. ADOR
                          Decision of the Court

¶16           Papillon provides scheduled and on-demand flights in
Arizona and Nevada using helicopters (rotorcraft).             By definition,
Papillon’s rotorcraft operations are not “supplemental operations” under
the FAA regulations. Rather, as evidenced by its authorization to operate
under Part 135 (not Part 121), Papillon’s rotorcraft operations are commuter
and on-demand operations. Accordingly, the statutory exemption for the
holder of a “supplemental air carrier certificate under federal aviation
regulations” cannot be applied to Taxpayers in this case.

II.    Legislative History

¶17          Taxpayers argue that the language of the statutory exemption
is ambiguous, and, therefore, we must determine the intent of the
Legislature by reference to legislative history.

¶18          We do not find the language of the statute ambiguous.
Moreover, we find that the legislative history reflects an understanding that
“supplemental operations” are authorized under Part 121 of the FAA
regulations. The minutes of a meeting by the Committee on Ways and
Means reflect as follows:

       [T]he [DOT] issues Certificates of Public Convenience and
       Necessity under Section 401, which contains the current
       exemptions 418 (domestic air cargo) and 298 (air tax
       operations). In addition, the [FAA] issues certificates. The
       supplemental air carrier is under Part 121, which is charter
       or cargo, and most of the small airlines in Arizona are under
       Part 121.

Minutes of Meeting on H.B. 2624, H.R. Comm. on Ways and Means, 44th
Leg., 2nd Reg. Sess. (2000) (Emphasis added.)

¶19          The legislative history does not refer to Part 135 or to
commuter and on-demand operations. That is not to say that the same
reasoning that prompted the Legislature to carve out an exemption for air
carriers authorized to operate under Part 121 would not also justify an
exemption for air carriers authorized to operate under Part 135. It well may.
Nevertheless, it is for the Legislature, not this court, to extend the scope of
this exemption. See Meyers v. Rosenzweig, 27 Ariz. 286, 289, 232 P. 886, 887

       airplanes, and operations in rotorcraft would continue to be
       under part 135.

Id. (Emphasis added.)


                                      9
                       AMERICAN et al. v. ADOR
                         Decision of the Court

(1925) (“We do not feel at liberty to extend by interpretation the exemption
asked for in this case.”).

                             CONCLUSION

¶20          For the foregoing reasons, we affirm the decision of the tax
court awarding summary judgment in favor of the Department.




                                   :ama




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