IN THE COURT OF APPEALS OF THE STATE OF MISSISSIPPI
NO. 2013-SA-01548-COA
MISSISSIPPI DEPARTMENT OF REVENUE APPELLANT
F/K/A MISSISSIPPI STATE TAX COMMISSION
v.
JOHNNY REB AVIATION, LLC APPELLEE
DATE OF JUDGMENT: 08/20/2013
TRIAL JUDGE: HON. PERCY L. LYNCHARD JR.
COURT FROM WHICH APPEALED: TATE COUNTY CHANCERY COURT
ATTORNEYS FOR APPELLANT: ABIGAIL MARSHALL MARBURY
GARY WOOD STRINGER
ATTORNEYS FOR APPELLEE: JOHN THOMAS LAMAR III
JOHN THOMAS LAMAR JR.
NATURE OF THE CASE: CIVIL - STATE BOARDS AND AGENCIES
TRIAL COURT DISPOSITION: VACATED ASSESSMENT OF USE TAX AND
ORDERED REFUND OF ASSESSMENT PLUS
STATUTORY INTEREST
DISPOSITION: REVERSED AND RENDERED - 10/14/2014
MOTION FOR REHEARING FILED:
MANDATE ISSUED:
BEFORE GRIFFIS, P.J., MAXWELL AND FAIR, JJ.
MAXWELL, J., FOR THE COURT:
¶1. The Mississippi Department of Revenue (MDOR) determined Johnny Reb
Aviation LLC (Johnny Reb), an airplane dealership, was also chartering the airplanes it was
offering for sale, which meant it had to pay a use tax. Johnny Reb disagreed and appealed to
the chancery court.
¶2. The only question before the chancellor was whether MDOR’s decision to assess a use
tax was arbitrary and capricious or unsupported by substantial evidence. And in this case, the
chancellor confirmed that substantial documentary evidence—including Johnny Reb’s
operating agreement, federal tax returns, invoices, and general ledger—supported MDOR’s
conclusion that Johnny Reb had been using for charters the airplanes it was trying to sell. Yet
the chancellor still vacated the assessment. The chancellor accepted an alternative explanation
and made his own determination that, contrary to the company’s records and documentary
evidence, Johnny Reb had not been using the planes for charters.
¶3. After review, we find, according to the Mississippi Supreme Court’s recent decision in
Equifax, Inc. v. Mississippi Department of Revenue, 1 this determination was outside the
chancery court’s appellate purview, which was limited to deciding if MDOR’s decision was
supported by substantial evidence or was arbitrary and capricious. Because substantial
evidence supported MDOR’s decision, it was clear error for the chancellor to vacate MDOR’s
decision. We thus reverse and render, reinstating MDOR’s assessment.
Background
I. Audit and Decision by MDOR
¶4. Michael Massey owns Tate Air LLC, and John Roebuck owns JR-MS Aviation. Their
two entities partnered in March 2005 to form Johnny Reb. Johnny Reb holds a license to buy
and sell airplanes. And between 2005 and 2008, Johnny Reb bought three airplanes, selling
the first two and losing the third in a fire.
¶5. MDOR decided to conduct a sales-tax audit for Johnny Reb’s first three years in
business. But once the auditor began investigating Johnny Reb’s records, she quickly realized
1
Equifax, Inc. v. Miss. Dep’t of Revenue, 125 So. 3d 36 (Miss. 2013).
2
a use-tax audit would be more appropriate.
¶6. Mississippi imposes a use tax on personal property—including aircraft—“for the
privilege of using . . . [the aircraft] within the state[.]” Miss. Code Ann. § 27-67-5 (Rev.
2010). The use-tax rate is the same as the sales-tax rate, which for aircraft is three percent of
the purchase price. Miss. Code Ann. § 27-67-5(a); Miss. Code Ann. § 27-65-17(1)(d) (Rev.
2010). No use tax will be imposed, however, when the three-percent sales tax has already been
paid on the aircraft—or when another state has already levied a sales or use tax. Miss. Code
Ann. § 27-67-7(a) (Rev. 2010). Here, Johnny Reb paid no sales taxes when it purchased its
three airplanes. So if it used the planes for anything other than to try to sell them, each plane
used was subject to a use tax at the rate of three percent of the purchase price.
¶7. Combing through the invoices Johnny Reb had provided, the auditor noticed that, while
a few invoices clearly stated that the purpose of the flight was to demonstrate the aircraft to a
potential buyer, many more invoices listed Massey, Roebuck, or companies owned by them
as the customer—indicating Massey and Roebuck were using the planes for their personal use
and not to further sale. Additionally, the company’s general ledger had multiple references to
“wet leases”—i.e., chartered flights. And references to “charter income,” “charter service,”
and specific charter destinations were listed throughout Johnny Reb’s profit-and-loss
statements. Further, its federal tax returns for the years 2005, 2006, 2007, and 2008 each
indicated Johnny Reb was a “charter” business, and each depreciated the value of the airplanes,
consistent with the planes being used for charter services.
¶8. The auditor also reviewed Johnny Reb’s operation agreement, which stated Johnny Reb
was “being formed to operate a general aviation business that will provide air transportation
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for various businesses and individuals.” And the website for Massey’s related farm business,
Lyndale Farms, advertised Johnny Reb as “an airline leasing business” and listed information
about the cost of leasing the planes but did not mention the sales prices of the aircraft. The
auditor also noted that Johnny Reb’s insurance policy claimed the covered aircraft were to be
flown for personal use. From all of this evidence, the auditor concluded Johnny Reb had been
using its planes for non-sales-related flights, subjecting each plane to a three-percent use tax
totaling $138,470. See Miss. Code Ann. § 27-67-5; Miss. Code Ann. § 27-65-17(d).
¶9. Johnny Reb appealed to MDOR’s Board of Review. After a hearing, the Board
affirmed the assessment. Johnny Reb then appealed to MDOR’s full Commission, which
likewise affirmed after a second hearing. MDOR then ordered Johnny Reb to pay the
assessment, plus statutory interest—$163,388 total.
II. Appeal and Decision by Chancery Court
¶10. Johnny Reb paid MDOR the $168,388 assessment under protest and then perfected an
appeal to the Tate County Chancery Court. See Miss. Code Ann. § 27-77-7(1) (Rev. 2010).
In line with the procedures of section 27-77-7(5), trial was held in March 2013.
¶11. Four months later, the chancellor entered his opinion. In this opinion, the chancellor
stated section 27-77-7(5) gave him the “ultimate authority” to try the facts. And according to
him, the factual question he had to resolve was “whether [Johnny Reb] was chartering or
leasing airplanes as its principal business.” After listing the facts on which MDOR had relied
to assess the use tax, the chancellor agreed that “[t]hese facts standing alone and without
clarification or explanation by [Johnny Reb] indicated that [it] in fact was a business involved
predominantly in the chartering or leasing of aircraft.” The chancellor went even further,
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stating that if one were “to simply look at the written representations of websites, operating
agreements, tax returns[,] and insurance policies, perhaps no other conclusion could be reached
than that which [MDOR] reached.”
¶12. But the chancellor said he had not simply relied on these documents. Instead, he had
“peeled back the onion” and listened to Johnny Reb’s “clarification and explanation” of why
—contrary to its own records—its only actions were to market and sell airplanes. Massey
explained the operating agreement contained a “mistake”—that it should never have stated the
purpose of the business was to provide chartered flights. He testified he had asked the attorney
who prepared the agreement to correct it, but for some unexplained reason, no changes were
ever made. The federal tax returns were also allegedly wrong, based on a failure to
communicate with the certified public accountant who had prepared them. But by the time
Massey realized what the CPA had done, he opted not to file corrected returns since there
would have been no difference in the amount of federal taxes assessed. Johnny Reb’s general
ledger and invoices, which had been filled out by the company’s in-house bookkeeper, were
also supposedly incorrect. So was the Lyndale Farms website, which had been created by
Massey’s father-in-law.
¶13. Massey was equally adamant Johnny Reb could not have operated for-profit charter
flights, because that would have violated Federal Aviation Administration (FAA) restrictions
on airplane dealers.2 Rather, he insisted all the flights logged in the general ledger and
invoices were in furtherance of selling the planes, even though the ledger and invoices
2
According to Massey, aviation businesses that offer for-profit charter flights must
operate under a set of more stringent FAA regulations.
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evidenced otherwise.
¶14. In the end, the chancellor concluded that Johnny Reb only “[u]nder extremely limited
circumstances” transported passengers for hire. But he agreed with Massey that the “purpose”
of Johnny Reb’s business was to sell aircraft, having been most persuaded by the testimony
about the FAA restrictions. Thus, the chancellor declared the use tax erroneous. A month
later, the chancellor entered his final order vacating the assessment.
¶15. MDOR timely appealed.
Discussion
¶16. On appeal, we find the Mississippi Supreme Court’s recent opinion Equifax, Inc. v.
Mississippi Department of Revenue, 125 So. 3d 36 (Miss. 2013), mandates reversal of the
chancellor’s decision.
I. Chancery Court’s Role on Appeal
¶17. In his opinion, the chancellor had described his role as appellate arbiter under section
27-77-7 as that of the “ultimate authority” on the factual question “whether [Johnny Reb] was
chartering or leasing airplanes as its principal business.” But in Equifax, Inc.—which was
handed down after the chancellor had entered his opinion but before he entered his final
order—the supreme court clarified that a chancellor must give deference to MDOR’s decision,
just as it must to any other agency decision. Equifax, Inc., 125 So. 3d at 42 (¶9).
¶18. While section 27-77-7(5)3 directs the chancery court to “give deference to the decision”
3
Equifax, Inc. dealt with a previous version of section 27-77-7. In that version, the
relevant judicial-review language was codified in subsection (4) but has since been
renumbered as subsection (5). Compare Equifax, Inc., 125 So. 3d at 41 (¶8) (quoting Miss.
Code Ann. § 27-77-7(4) (Rev. 2005)), with Miss. Code Ann. § 27-77-7(5) (Rev. 2010).
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of the MDOR, it also instructs the court to “try the case de novo and conduct a full evidentiary
judicial hearing on the issues raised.” This language has understandably led many chancellors,
including the present one, to believe the chancery court should retry the underlying facts
supporting/contradicting the assessment with no deference to MDOR’s conclusion. However,
in Equifax, Inc., the supreme court resolved the “disagreement . . . over the practical
application” of this seemingly conflicting language. Equifax, Inc., 125 So. 3d at 41 (¶8). The
supreme court expressly rejected the notion that section 27-77-7(5) 4 somehow gives the
chancery court authority to “adjudicate the wisdom/sageness of the agency’s decision[.]”
Equifax, Inc., 125 So. 3d at 41 (¶8).
¶19. Instead, the supreme court made clear that a chancery court’s appellate function “is
limited to examining the legality of the decision.” Id. The supreme court then listed the four
bases upon which chancellors may declare an MDOR decision illegal—the decision was (1)
unsupported by substantial evidence, (2) arbitrary and capricious, (3) beyond the power of the
administrative agency to make, or (4) in violation of the petitioner’s statutory or constitutional
right. Id. (citing Buffington v. Miss. State Tax Comm’n, 43 So. 3d 450, 453-54 (¶12) (Miss.
2010)). Here, while the chancellor’s final order tracked the language of Equifax, Inc. and
stated that he found MDOR’s assessment “unsupported by substantial evidence and . . .
arbitrary and capricious,” it is clear from his previously entered opinion that his decision to
reverse the assessment was based on his own disagreement with the “wisdom/sageness” of
MDOR’s decision—not his finding the decision was illegal.
II. Substantial Evidence Supporting MDOR’s Decision
4
See note 3, supra.
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¶20. Based on the chancellor’s own acknowledgment of the record evidence, MDOR’s
decision to assess a use tax was neither unsupported by substantial evidence nor arbitrary and
capricious. “Substantial evidence” refers to “more than a ‘mere scintilla’ or suspicion.”
Wright v. Pub. Emps. Ret. Sys. of Miss., 24 So. 3d 382, 386 (¶17) (Miss. Ct. App. 2009)
(citation omitted). And here, MDOR did not base its conclusion that Johnny Reb was
chartering airplanes it was trying to sell on mere suspicion. Rather, it based its conclusion on
a variety of separately sourced evidence—including Johnny Reb’s invoices, general ledger,
federal tax returns, operating agreement, and financial statements. These documents all
showed Johnny Reb was both chartering and using the planes for its members’ personal use.
¶21. It is true that Johnny Reb offered the chancellor explanations why those documents did
not accurately reflect what it had really been doing with its airplanes. But the existence of an
alternate explanation or conclusion does not render MDOR’s determination “arbitrary or
capricious.” An “arbitrary” decision is “not done according to reason or judgment, but
depending on the will alone.” Id. at 388 (¶29). A “capricious” decision is similarly done
“without reason.” Id. And here, even the chancellor agreed that MDOR had reason to assess
the use tax. The chancellor had found that “[u]nder extremely limited circumstances, [Johnny
Reb] did in fact transport passengers for hire.” So based on the chancellor’s own factual
findings, the use-tax assessment was not arbitrary, capricious, or unsupported by substantial
evidence.
III. No “Principal-Business” or “For-Profit” Requirements in Use-Tax Statute
¶22. The primary reason the chancellor rejected the imposition of the use tax was that he had
determined that transporting passengers for hire was not Johnny Reb’s “principal business.”
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But imposition of the use-tax statute is not limited to “principal-business” use. See Miss. Code
Ann. § 27-67-5. MDOR has never asserted Johnny Reb’s principal business was chartering
flights but instead freely concedes that Johnny Reb was in business to sell planes. Still,
because Johnny Reb, before selling the planes, used them for charters and personal use, it had
to pay a use tax.
¶23. The chancellor also relied heavily on the FAA airplane-dealer regulations, which
prohibit for-profit flights, concluding Johnny Reb would not have used its planes in violation
of the FAA. But MDOR has never suggested Johnny Reb was violating FAA rules. Rather,
MDOR has maintained that these federal regulations are irrelevant to whether the state use-tax
is appropriate.
¶24. We agree with MDOR. Just as there is no “principal-business” requirement, there is
also no “for-profit” requirement in the use-tax statute. See Miss. Code Ann. § 27-67-5. That
Johnny Reb maintains it strictly complied with FAA rules and never earned a profit off of any
of its flights does not mean it never used its planes in a manner that subjected the planes to
Mississippi’s use tax. Evidence of any non-sales-related use—whether personal or for a
charter in which Johnny Reb only recouped its operating costs—would sufficiently justify
MDOR’s use-tax assessment. And as we have already stated, there was substantial evidence
of such use.
Conclusion
¶25. Our review shows Johnny Reb gave multiple indications that it was using the airplanes
it was trying to sell for charters and personal use. So MDOR’s decision that Johnny Reb
should be taxed for chartering and using the planes for personal business was reasonable,
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supported, and thus not subject to reversal on appeal to the chancery court. We thus reverse
the chancery court’s decision and reinstate MDOR’s tax assessment.
¶26. THE JUDGMENT OF THE TATE COUNTY CHANCERY COURT IS
REVERSED AND RENDERED. ALL COSTS OF THIS APPEAL ARE ASSESSED TO
THE APPELLEE.
IRVING AND GRIFFIS, P.JJ., BARNES, ISHEE, ROBERTS, FAIR AND
JAMES, JJ., CONCUR. CARLTON, J., DISSENTS WITHOUT SEPARATE
WRITTEN OPINION. LEE, C.J., NOT PARTICIPATING.
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