Ohio: Sale for resale exception does not apply to airplane leased to related party

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Last week the Supreme Court of Ohio issued a ruling denying sales and use tax relief to a company that purchased an airplane and leased it to a related party. In Pi In The Sky v. Testa, a company, Mitchell’s Salon and Day Spa, Inc., created a single member LLC named Pi In The Sky, LLC to hold and lease an airplane.

In December 2011, Pi In The Sky purchased an airplane for $1,217,460. No sales tax was paid at the time of sale. The president of Mitchell’s, Deborah Mitchell Schmidt, obtained a personal loan in the amount of $973,963 to help fund Pi In The Sky’s purchase of the airplane. Pi In The Sky guaranteed the loan.

On May 14, 2012, Pi In The Sky entered into a “dry lease” agreement with Mitchell’s for nonexclusive use the aircraft. A dry lease is one in which an airplane is leased but an operator is not provided. The lease set forth a rental rate of $80 per flight hour and required Mitchell’s to provide for the airplane’s operation, maintenance, and storage. Schmidt signed the lease for both Mitchell’s and Pi In The Sky.


Joe W. Testa, the Ohio tax commissioner, assessed Pi In The Sky as liable for use tax on its purchase of the airplane. Pi In The Sky petitioned for reassessment on the basis that its purchase of the plane and lease to Mitchell’s satisfied the requirements of the sale for resale exception to the sales tax.

The tax commissioner rejected Pi In The Sky’s argument on the basis that the entity was not “engaging in business” within the meaning of the sales tax law and therefore could not satisfy the sale for resale exception as codified in O.R.C. 5739.01(E). The tax commissioner did not view the business as legitimate because Pi In The Sky’s sole member was the only customer (lessee) and there were not marketing or advertising efforts.

The tax commissioner further questioned the terms of the lease, which Schmidt signed for both parties. The tax commissioner argued that the lease did not provide Mitchell’s with a defined right to use the airplane, yet put all operation, maintenance, and storage obligations on Mitchell’s. And the commissioner argued that the $80 rental rate was far too low to turn on a profit on the airplane.  Still further, the tax commissioner scrutinized flight logs for the airplane and argued that it was for Schmidt’s personal use rather than a business purpose.

For all these reasons, the tax commissioner ruled that Pi In The Sky was not “engaging in business” and that the sale for resale exception to the sales tax was thus inapplicable. The commissioner further held that the whole purpose for the arrangement was to avoid tax and found that the lease to Mitchell’s was a “sham transaction” that may be disregarded.


Pi In The Sky appealed to the Ohio Board of Tax Appeals. There was no hearing before the BTA, however, because the parties waived hearing. The BTA affirmed the tax commissioner’s ruling, in large part because there was no additional testimony or evidence presented to rebut the presumptive validity of the tax commissioner’s findings.


The sales tax applies to retail sales to consumers of tangible personal property in Ohio.  The sale for resale exception to the sales tax excludes sales for resale from the statutory definition of “retail sale.” Specifically, O.R.C. 5739.01(E) provides that “retail sales” exclude “those in which the purpose of the consumer is to resell the thing transferred or benefit of the service provided, by a person engaging in business, in the form in which the same is, or is to be, received by the person.” (emphasis added).

The Supreme Court found that Pi In The Sky was not “engaging in business” and failed to satisfy the sale for resale exception for many of the same reasons as the tax commissioner and BTA. The court questioned the substance of the lease because the arm’s length nature of the $80 rental rate was “doubtful,” Mitchell’s bore significant responsibility without defined rights of use, and Schmidt signed the lease for both parties. The court additionally considered that the only lessee of the plane was Pi In The Sky’s sole member (Mitchell’s), there were no third party lessees or marketing efforts, flight logs suggested that the plane was for Schmidt’s personal use, and Pi In The Sky had no business location other than Schmidt’s personal residence.

With these considerations in mind, the court found that Pi In The Sky was not engaging in an activity “with the object of gain, benefit, or advantage, either direct or indirect.” And the court affirmed the BTA’s findings that Pi In The Sky “did not purchase the subject aircraft for purposes of leasing it to others, as part of a business enterprise.” Having made these findings, however, the court stopped short of finding a “sham transaction” because it had already determined the sale for resale exception was inapplicable for other reasons. Ultimately, the court upheld the commissioner’s assessment and rejected Pi In The Sky’s claim to the sale for resale exception to sales and use taxation.

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