To Tether or Not to Tether…That Is the Sales Tax Question

What may seem to be an inconsequential change in how a product or service is provided or delivered can have a significant effect on the tax result, as it did for a hot-air balloon provider in Missouri.

By Jess Johannesen, SALT senior associate

If your company sells services, you have a clear idea of how your service distinguishes your company from its competitors. However, have you considered how states will interpret and tax your services? While you may consider your service offerings to be software-as-a-service offerings, a state may consider such services to be a license of software, the sale of an information service or even the sale of data processing services. What may seem an inconsequential change in how a product or service is provided or delivered (think software delivered on a disk vs. that same software delivered electronically) may in fact have a significant effect on the tax result. In an interesting letter ruling recently issued by the Missouri Department of Revenue, the state explained that fees charged for untethered and tethered hot-air balloon rides have different sales tax consequences. [1]

The taxpayer is a Missouri corporation that offers both untethered and tethered hot-air balloon rides. The untethered hot-air balloon ride lasts about 45 minutes to an hour and ends with a champagne toast upon landing. The tethered hot-air balloon rides allow the hot-air balloon to ascend about 50 to 80 feet in the air while tethered to the ground by three strong ropes attached to posts in the ground, large trees or vehicles. The hot-air balloon hovers for a short period of time and then descends back to the ground.

The fees charged for the tethered hot-air balloon ride are subject to Missouri sales tax as a fee paid to a place of amusement, entertainment or recreation, or games and athletic event since the state views it as an amusement ride. [2] The fees charged for the untethered hot-air balloon ride should be taxed similarly since they are also amusement rides, right? Wrong! The Missouri Supreme Court determined that untethered hot-air balloon rides fall within the definition of “air commerce” and are regulated by the Federal Aviation Administration due to the potential danger in interstate commerce. [3] The Court noted that the Federal Anti-Head Tax Act prohibited state taxation of individuals traveling in air commerce, and therefore, the sale of untethered hot-air balloon rides are not subject to sales tax. [4]

This Missouri letter ruling highlights two important points when analyzing state tax issues. First, federal acts that address state taxation preempt state tax laws that may conflict with those federal laws. While the most commonly known federal act in the state income tax landscape is Public Law 86-272, there are countless federal acts to consider for state tax purposes. [5] Second, subtle differences in products or services can change how a state classifies and taxes such products or services. HA&W’s SALT team can assist taxpayers with understanding how state sales and use tax rules will apply to the sale of their products and services.

Contact Jess Johannesen, SALT senior associate, at [email protected] or Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at [email protected] for more information.

[1] Missouri Private Letter Ruling, No. LR 7607, 07/10/2015.

[2] Mo. Rev. Stat. Ann. § 144.020.1(2).

[3] See Balloons Over the Rainbow, Inc. v. Director of Revenue, 427 S.W.3d 815, 824 (Mo. Banc 2014).

[4] 49 U.S.C. § 40116.

[5] Public Law 86-272 generally provides that states cannot assert income tax nexus on a taxpayer that sells tangible personal property and whose only contact with a state is solicitation of orders for sales of tangible personal property.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.