Did federal customs law prevent California from taxing alcohol a foreign airline sold or served free over California?

Plain-English summary

Federal law did not prevent California from applying sales tax to alcoholic drinks the foreign airline sold to coach passengers or use tax to complimentary drinks served while its aircraft flew over California.

Although customs rules gave qualifying in-flight liquor duty-free and tax-free treatment, the beverages at issue had been removed from bond before the taxable sale or use. They were no longer in federal custody and control when consumed over California.

The recommendation found no express federal preemption or actual conflict. It relied in part on Wardair Canada, which upheld state taxation in international aviation, and recommended redetermining the two audit periods without further adjustment after the parties had resolved the measure-of-tax issues.

Common questions

Were complimentary and paid drinks treated the same way?

Both were taxable, but under different concepts: paid coach drinks involved sales tax, while complimentary drinks involved the airline's taxable use.

Why did customs-bond treatment not control?

The liquor was no longer held in bond when the California taxable events occurred.

Did the recommendation find Congress had preempted state tax?

No. It found no clear congressional intent to displace the state taxes at issue.

Citations and references

• 19 U.S.C. section 1309 — federal supplies-for-aircraft provision analyzed
• U.S. Customs Directive No. 3200-04 — duty-free and tax-free in-flight liquor treatment discussed
• Wardair Canada, Inc. v. Florida Department of Revenue, 477 U.S. 1 (1986) — preemption and foreign-commerce authority applied
• West India Oil Co. v. Domenech, 311 U.S. 20 (1940) — bonded-property state-tax authority discussed

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/500-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/500-0029.pdf

Original ruling text

500.0029

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

STATE OF CALIFORNIA
BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION

In the Matter of the Petition for
Redetermination Under the Sales
and Use Tax Law of:

)
)
)
)
)
)

Petitioner

DECISION AND RECOMMENDATION

The Appeals Conference in the above-referenced matter was held on January 7, 1992, by Senior Staff Counsel W. E. Burkett in San Francisco, California. Appearing for Petitioner:

Appearing for the
Sales and Use Tax Department:

Mr. Morris Verna, Jr.
Supervising Tax Auditor

Protested Items
The protested tax liability for the period July 1, 1982 through March 31, 1984 is measured by: State, Local Item and County D.

E.

Coach class beverage service
revenue not reported.

$33,812

Cost of complimentary beverage
service not reported

$70,877

500.0029

Contentions of Petitioner
D.

Federal law prohibits the application of the California sales tax.

E.

Federal law prohibits the application of the California use tax.

Summary
The underlying facts and circumstances for the taxpayer's protest for this period are the same as set forth in the decision prepared on this date for the petition filed by the taxpayer for the period April 1, 1984 to June 30, 1985. Reference should be made to that decision in reviewing the decision for the petition filed for this period.

Analysis & Conclusions
The analysis and conclusions for the companion decision prepared on this date for petitioner's protest for the period April I, 1984 to June 30, 1985 are hereby incorporated herein by reference and adopted as the decision for this separate period.

Recommendation
It is recommended that the taxes be redetermined without further adjustment as computed by the reaudit dated September 27, 1989.

W. E. BURKETT, SENIOR STAFF COUNSEL

DATE: 1-27-1992

500.0029

STATE OF CALIFORNIA
BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION

In the Matter of the Petition for
Redetermination Under the Sales
and Use Tax Law of:

)
)
)
)
)
)

Petitioner

DECISION AND RECOMMENDATION

The Appeals Conference in the above-referenced matter was held on January 7, 1992, by Senior Staff Counsel W. E. Burkett in San Francisco, California. Appearing for Petitioner:

Appearing for the
Sales and Use Tax Department:

Mr. Morris Verna, Jr.
Supervising Tax Auditor

Protested Items
The protested tax liability for the period April 1, 1984 through June 30, 1985 is measured by:

D.

E.

Item

State, Local
and County

Coach class beverage service
revenue not reported.

$22,388

Cost of complimentary beverage
service not reported

$55,434

500.0029

Contentions of Petitioner
D.

Federal law prohibits the application of the California sales tax.

E.

Federal law prohibits the application of the California use tax.

Summary
The petitioner is a foreign-based air carrier engaged in flights over the airways of the State of California. A prior audit of petitioner was conducted through June 30, 1979. Protested item D consists of the computed price of drinks served to coach class customers while passenger aircraft operated by petitioner were in flight over the state of California. Protested item E consists of the cost of complimentary drinks served while passenger aircraft were in flight over the State of California. All objections relating to the Ii1easure of tax have been resolved by reaudit and the protest of both items relates solely to a claim that taxation of the sale or use of the property is prohibited by federal law. Specifically, it is contended that the provisions of 19 USCA section 1309 operate to prohibit state taxation because it interferes with the Federal government's regulation of foreign commerce. It is submitted that the liquor constitutes supplies for consumption in flight and that these may be accorded duty free and tax free status provided they are used by the airline in the course of international trade. Customs directive No. 3200-04 is cited in support of this conclusion. The petitioner has also filed a letter brief detailing its position. The position of the Sales and Use Tax Department (Department) is that the preferences granted under federal law do not preclude the application of the sales and use tax because the liquor had been removed from the bond and was not otherwise exempt from state taxation at the time the taxable events occurred. On flights from Canada to California, petitioner purchased the liquor in Canada. Under relevant customs regulations, petitioner was required to lock and seal its in-flight bars prior to landing in California. The bars remained locked and sealed during the entire ground stop. Each of the authorities cited by the petitioner deal with property that was in a bonded facility while sold for use in foreign commerce. They are therefore distinguishable from the facts of this case. This includes the state exemption statute cited by petitioner. While it is argued that the on-site control required is equivalent to being held in bond, it is nevertheless clear that the property consumed over California is not at that time in the custody and control of the united States government.

500.0029

In addition to this distinction, the absence of express preemption provides strong evidence that Congress did not intend to preclude state taxation. In Wardair Canada, Inc. v. Florida Department of Revenue, 477 U.S. 1, the U.S. Supreme Court set out in its decision that the first and fundamental inquiry in any preemption analysis is whether Congress intends to displace state law, and where a congressional statute does not expressly declare that state law is to be pre-empted and there is no actual conflict between what federal and state law prescribe, then there must be clear evidence of a congressional intent to preempt the specific field covered by the state law. There is no evidence of congressional intent to pre-empt in this case either in the wording of the statute or in the available legislative history. In the Wardair Canada. Inc. case the court concluded that the tax did not violate the foreign commerce clause, because the United States by negative implication arising out of its various agreements with foreign countries had acquiesced in state taxation of fuel used by foreign commerce in international travel, because in most of these agreements, the united States committed itself to refrain from imposing national taxes on aviation fuel and in none of these agreements did the United States agree to deny the states the power asserted by Florida in that case. Finally, we believe the U.S. Supreme Court’s decision, West India Oil Co. v. Domenech, 311 U.S.20; 85 L. Ed.15, is noteworthy because it held that the territory of Puerto Rico was entitled to apply its sales tax to sales of property withdrawn from bonded storage without cover of Section 1309 because the enabling act which created the territory of Puerto Rico reserved this right to tax. Certainly the right to tax as reserved by this enabling act is of no greater import than the right to tax reserved to the states by the 10th Amendment to the Federal Constitution. It is our conclusion that federal law does not preclude the application of the sales or use tax to the transactions in question.

Recommendation
It is recommended that the taxes be redetermined as computed by the reaudit dated September 27, 1989.

W. E. BURKETT, SENIOR STAFF COUNSEL

DATE: 1-27-1992