Title: Castle Aviation, Inc. v. Wilkins

State: ohio

Issuer: Ohio Supreme Court

Document:

[Cite as Castle Aviation, Inc. v. Wilkins, 109 Ohio St.3d 290, 2006-Ohio-2420.] 
 
 
CASTLE AVIATION, INC., APPELLANT AND CROSS-APPELLEE, v. WILKINS,  
TAX COMMR., APPELLEE AND CROSS-APPELLANT. 
[Cite as Castle Aviation, Inc. v. Wilkins, 
 109 Ohio St.3d 290, 2006-Ohio-2420.] 
Sales and use tax — Exception for purchases by public utility — Air carrier’s 
claim to be public utility rejected. 
(No. 2005-0304 — Submitted January 11, 2006 — Decided May 31, 2006.) 
APPEAL and CROSS-APPEAL from the Board of Tax Appeals, 
No. 2003-M-146. 
____________________ 
 
ALICE ROBIE RESNICK, J. 
{¶ 1} The Tax Commissioner has assessed a use tax against purchases of 
fuel, aircraft leases, maps, supplies, parts, repairs, and publications made by 
appellant and cross-appellee, Castle Aviation, Inc. (“Castle”), for the time period 
January 1, 1996, through December 31, 1999.  Castle contends that its operations 
qualify it as a public utility and, therefore, that the assessed purchases should be 
excepted from the use tax.  We disagree and affirm the decision of the Board of 
Tax Appeals (“BTA”). 
{¶ 2} Castle is a small air carrier operating out of the Akron/Canton 
airport, whose business consists mostly of transporting freight rather than 
passengers.  During the audit period, Castle operated eight single- and twin-
engine planes having at most nine seats. 
{¶ 3} Subsequent to the Tax Commissioner’s assessment, Castle filed a 
petition for reassessment.  The Tax Commissioner denied the petition for 
reassessment and affirmed his assessment, finding that Castle lacked the 
necessary characteristics to categorize it as a public utility. 
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{¶ 4} Castle appealed the Tax Commissioner’s final determination to the 
BTA.  At the BTA hearing, Castle presented three witnesses. 
{¶ 5} Castle’s first witness was Mike Weitzel, the regional circulation 
manager for the New York Times.  Weitzel testified that the Times had negotiated 
a fixed-price agreement with Castle to transport the Monday through Saturday 
editions of the Times, which are printed in Canton, to Louisville, Kentucky, and 
Toronto, Ontario. 
{¶ 6} Castle’s next witness was its owner and president, Michael 
Grossmann, who testified that during the audit period, Castle had an air carrier 
certificate from the Federal Aviation Administration (“FAA”), which authorized it 
to operate as an air carrier and to conduct common-carriage operations.  
Grossmann stated that Castle was a charter operator and that there were about 
3,000 other charter operators in the country. 
{¶ 7} Grossmann testified that Castle holds itself out to the public as 
being capable of handling cargo and charter services.  Castle lists its services in a 
trade publication known as the Air Charter Guide and in the Yellow Pages in 
Cleveland, Akron, and Canton.  During the latter part of the audit period, Castle 
also initiated a web site.  Although Castle listed prices in the Air Charter Guide, 
Grossmann pointed out that its rates are negotiable in certain situations and that 
freight brokers, from which Castle derives most of its freight business, are 
generally given a five to ten percent discount on the retail rates.  Castle does not 
post any of its rates with any governmental agency. 
{¶ 8} Castle’s final witness was Michael Fleming, a representative of a 
management-consulting firm.  Fleming, whose specialty is the aviation industry, 
testified primarily about applicable federal regulations to explain why Castle is 
classified as a “Part 135” air carrier and what that means. 
{¶ 9} The Board of Tax Appeals affirmed the Tax Commissioner’s 
determination that Castle did not meet the criteria of a public utility. 
January Term, 2006 
3 
{¶ 10} Castle’s operations are classified as those of an “air taxi operator,” 
which is a classification of air carrier that engages in the air transportation of 
persons or property, does not directly or indirectly use large aircraft, and does not 
hold a certificate of public convenience and necessity.  Section 298.3, Title 14, 
C.F.R.  The term “large aircraft” is defined by Section 298.2, Title 14, C.F.R. as 
any aircraft designed to have a maximum passenger capacity of more than 60 
seats or a maximum payload capacity of more than 18,000 pounds. 
{¶ 11} Before an aircraft owner can provide air-transportation service as 
an air carrier, it must obtain separate authorization or exemption from two 
different sections of the United States Department of Transportation: (1) 
economic authority from the Office of the Secretary of Transportation in the form 
of a certificate of public convenience and necessity, Section 41102, Title 49, 
U.S.Code, and (2) safety authority from the FAA in the form of an air carrier 
certificate and operations specifications issued under either Part 121 or Part 135, 
Title 14, C.F.R.  While Section 298.11, Title 14, C.F.R. provides that air taxi 
operations may be exempted from the economic requirement to obtain a 
certificate of public convenience and necessity, there is no prohibition against an 
air taxi operator voluntarily choosing to obtain a certificate of public convenience 
and necessity. 
{¶ 12} If a carrier chooses to obtain a certificate of public convenience 
and necessity, it must undergo certain reviews by the Department of 
Transportation, including meeting a requirement that it be found fit, and must 
submit periodic financial and traffic reports and maintain a higher level of 
insurance coverage.  Section 41102, Title 49, U.S.Code.  An air carrier that has 
obtained a certificate of public necessity and convenience is commonly referred to 
as a “certified air carrier.”  Castle has elected, under Section 298.11, Title 14, 
C.F.R. to be exempted from the requirement to obtain a certificate of public 
convenience and necessity.  As a result, Castle merely has to register with the 
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Department of Transportation and submit proof of insurance coverage.  Section 
298.3, Title 14, C.F.R. 
{¶ 13} Apart from the issue of the certificate of public necessity and 
convenience, which is controlled by the Department of Transportation, is the 
question of safety rules, which are determined by the FAA.  There are two classes 
of operating safety rules, Part 121 and Part 135 of Title 14, C.F.R.  The 
requirements set forth in Part 135 are less rigorous than those imposed under Part 
121. 
{¶ 14} Section 119.21, Title 14, C.F.R. sets forth the criteria to determine 
whether Part 121 or Part 135 rules are applicable to a given operation.  Because of 
the types of planes Castle operates and the way in which it operates, its operations 
are conducted under the less rigorous safety requirements of Part 135.  If Castle 
wished to do so, it could subject itself to the more rigorous Part 121 rules, but it 
has chosen not to do so. 
{¶ 15} Based on these facts concerning Castle’s operations, we must 
determine whether its operations meet the criteria of being a public utility for use 
tax purposes.  Although the tax assessed was a use tax, only the sales tax statutes 
will be referred to in this opinion, because R.C. 5741.02(C)(2) provides that the 
use tax does not apply to property or services the acquisition of which, if made in 
Ohio, would not be subject to the sales tax imposed by R.C. 5739.01 to 5739.31. 
{¶ 16} The relevant sales tax statute under which Castle contends that its 
purchases should be excepted is former R.C. 5739.01(E)(2), which stated: 
{¶ 17} “(E) ‘Retail sale’ and ‘sales at retail’ include all sales except those 
in which the purpose of the consumer is:  
{¶ 18} “(1) * * *  
{¶ 19} “(2) * * * to use or consume the thing transferred * * * directly in 
the rendition of a public utility service * * *.”  1995 Am.H.B. No. 61, 146 Ohio 
Laws, Part I, 407. 
January Term, 2006 
5 
{¶ 20} While the term “public utility” is defined in three titles of the 
Revised Code, it is not defined for the purposes of the sales tax provisions 
contained in R.C. Chapter 5739.  E.g., R.C. 1707.01(M), 4905.02, and 
5727.01(A).  In Vernon v. Warner Amex Cable Communications, Inc. (1986), 25 
Ohio St.3d 117, 119, 25 OBR 164, 495 N.E.2d 374, the court rejected the 
assertion that the concept of a public utility was limited to those types of entities 
defined as public utilities in the public utility statutes in R.C. Chapter 4905 or in 
the public utility tax statutes in R.C. Chapter 5727, stating that “those definitions 
are relevant solely to the statutory chapters in which they are located.”  All of the 
other definitions of “public utility” in the Revised Code are also limited to their 
chapters and are therefore irrelevant. 
{¶ 21} One of the first cases to consider the sales and use tax exception 
for public utilities was Midwest Haulers, Inc. v. Glander (1948), 150 Ohio St. 
402, 38 O.O. 261, 83 N.E.2d 53.  The taxpayer in Midwest Haulers was 
apparently a certified common carrier throughout the audit period.  However, the 
mere holding of a certificate to operate as a regulated common carrier was not 
sufficient, in and of itself, to except the taxpayer from the sales and use tax.  The 
court held that the sales and use tax exception was applicable to Midwest’s 
operations only after it began operations as a certified common carrier. 
{¶ 22} In a subsequent tax case, Pittsburgh & Conneaut Dock Co. v. 
Limbach (1985), 18 Ohio St.3d 320, 18 OBR 365, 481 N.E.2d 579, a taxpayer 
that was not regulated by any governmental agency sought to except its purchases 
from sales and use tax.  The taxpayer voluntarily filed its rates with the Interstate 
Commerce Commission.  The taxpayer claimed that it met the definition of a 
common carrier set forth by the court in Midwest Haulers, Inc. v. Glander 
because it served an indefinite public and the public had a right to demand its 
services.  However, the court held that the taxpayer was not a public utility for 
purposes of the tax exception, because the taxpayer did not need regulatory 
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approval to engage in its business and the public’s right to demand the taxpayer’s 
services was not comparable to the right to demand those of a public utility.  
Pittsburgh & Conneaut Dock Co., 18 Ohio St.3d at 323, 18 OBR 365, 481 N.E.2d 
579. 
{¶ 23} Castle places great reliance on this court’s decision in Trans World 
Airlines v. Porterfield (1970), 22 Ohio St.2d 177, 51 O.O.2d 238, 258 N.E.2d 
458, in which an airline was held to be a public utility for purposes of R.C. 
5739.01(E)(2).  Trans World Airlines was one of the first cases in which an entity 
that was not regulated by the state of Ohio claimed to be a public utility for sales 
tax purposes.  Trans World Airlines held a certificate of public convenience and 
necessity granted by the Civil Aeronautics Board; however, the court’s decision 
was not based on that fact.  The court’s decision was based on Tax 
Commissioner’s Rule TX-13-01, which defined “public utility service” for 
purposes of the sales and use tax to include “the furnishing of * * * airplane * * * 
services to, from, through or within this State, and any other activity which 
constitutes a public utility service in fact.”  Tax Commissioner’s Rule TX-13-01 
further required that “[i]n all cases, the service must be rendered so as to confer 
upon any member of the general public a legally enforceable right to demand 
same * * *.”  Because Tax Commissioner’s Rule TX-13-01 was rescinded in the 
mid-1970s, we place little value on Trans World Airlines as precedent for the 
purpose of determining whether Castle is a public utility for sales and use tax 
purposes. 
{¶ 24} In another tax case, Manfredi Motor Transit Co. v. Limbach 
(1988), 35 Ohio St.3d 73, 76, 518 N.E.2d 936, the court stated that “[t]he first 
question to be answered [in applying R.C. 5739.01(E)(2)] is whether the taxpayer 
is a regulated public utility service * * *.”  (Emphasis added.) 
{¶ 25} In Inland Refuse Transfer Co. v. Limbach (1990), 53 Ohio St.3d 
10, 558 N.E.2d 42, a private rubbish hauler claimed to be a public utility for sales 
January Term, 2006 
7 
and use tax purposes.  Inland’s claim was based on the fact that it contracted with 
the city of Cleveland, which regulated its business hours and inspected its 
vehicles.  The court explained Pittsburgh & Conneaut Dock Co., 18 Ohio St.3d 
320, 18 OBR 365, 481 N.E.2d 579, as having held that “only a public utility 
service that is so important to the public interest that special regulation and 
control [have] been imposed upon it may have its purchases excepted.”  53 Ohio 
St.3d at 11, 558 N.E.2d 42.  The court further explained, “[T]he required 
regulation equates to control of the taxpayer’s business,” and went on to state that 
since the taxpayer was not so regulated and could cease business at any time, the 
public could not demand and receive the taxpayer’s services, as it could if the 
taxpayer were specially regulated.  Id. at 12, 558 N.E.2d 42. 
{¶ 26} As an example of the requisite control, the court in Inland Refuse 
Transfer Co. cited R.C. 4921.04, which gave the Public Utilities Commission of 
Ohio the power to fix rates, to regulate service and the safety of operations, and to 
regulate the relationship between motor transport companies and the public.  As 
another example, the court noted R.C. 4921.07, which required companies to 
secure a certificate of convenience and necessity from the Public Utilities 
Commission.  The court found that the regulation required for public utility status 
by Pittsburgh & Conneaut Dock Co. did not exist in Inland’s case.  Inland Refuse 
Transfer Co., 53 Ohio St.3d at 12, 558 N.E.2d 42. 
{¶ 27} We acknowledge that there are many different criteria that can be 
used to determine whether an entity qualifies as a public utility in a given 
situation.  See, e.g., A & B Refuse Disposers, Inc. v. Ravenna Twp. Bd. of Trustees 
(1992), 64 Ohio St.3d 385, 596 N.E.2d 423 (involving local zoning restrictions).  
Nevertheless, the preceding review of tax cases shows that the court has 
consistently found that one of the most important criteria, if not the most 
important, for the application of R.C. 5739.01(E)(2) to the rendition of a public 
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utility service is special regulation and control by a governmental regulatory 
agency. 
{¶ 28} The evidence in this case fails to show that Castle’s operations 
meet the criterion of being under special regulation and control by a governmental 
regulatory agency.  Admittedly, Castle applied for and was granted an air carrier 
certificate.  However, the granting of the air carrier certificate was not shown to 
have been anything other than a perfunctory administrative function by the FAA.  
There was no evidence that any governmental agency set any requirements, other 
than safety, to govern Castle’s business operations.  Therefore, we find that 
Castle’s operations do not qualify it for the exception set forth in R.C. 
5739.01(E)(2). 
{¶ 29} Castle’s operations are similar to many other private business 
operations in that they must comply with various regulations, e.g., safety or 
environmental regulations, in order for the business to operate; however, those 
regulations do not control the relation between the business and the public as its 
customers.  In a nontax case, A & B Refuse Disposers, Inc., the court rejected the 
assertion that any business that simply claims that its services are open to the 
public can be categorized as a public utility, stating: “This view is an unduly 
expansive construction of our holding [in Marano v. Gibbs (1989), 45 Ohio St.3d 
310, 544 N.E.2d 635] in that such a definition encompasses traditional private 
business enterprises which are, in various degrees, regulated by diverse public 
authorities, e.g., dry cleaners, restaurants, and grocery stores.  They are not and 
should not be deemed public utilities.”  64 Ohio St.3d at 389, 596 N.E.2d 423. 
{¶ 30} In its notice of appeal to this court, Castle set forth its second claim 
of error as follows: 
{¶ 31} “2. The imposition of the use tax on Castle’s purchases 
described in paragraph 1 violates the Equal Protection Clause of the 
January Term, 2006 
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Fourteenth Amendment to the United States Constitution and the Equal 
Protection Clause of the Ohio Constitution, Article I, § 2.” 
{¶ 32} Castle contends that it was denied equal protection because—
according to Castle’s brief—airlines operating larger planes are treated as public 
utilities while it is not.  As a result, Castle argues that this is a tax classification 
that distinguishes between air carriers based on the size of the planes, rather than 
the nature of the service provided, and that the classification therefore does not 
further a legitimate state interest and cannot withstand an equal protection 
challenge. 
{¶ 33} Before considering Castle’s second claim of error we must 
consider the Tax Commissioner’s cross-appeal.  In his notice of cross-appeal, the 
Tax Commissioner contends, “The BTA erred by failing to dismiss Castle 
Aviation Inc.’s (Castle’s) broad, vague claim in numbered paragraph 2 (two) of 
Castle’s Notice of Appeal to the BTA * * *.  The BTA should have dismissed on 
the basis that such claim failed to specify error, as jurisdictionally required 
pursuant to R.C. 5717.02.”  The second claim of error in the notice of appeal 
Castle filed with the BTA is the same as the second claim of error in the notice of 
appeal it filed with this court, except for citation format. 
{¶ 34} The syllabus of Cleveland Gear Co. v. Limbach (1988), 35 Ohio 
St.3d 229, 520 N.E.2d. 188, sets forth the BTA’s jurisdiction to handle 
constitutional challenges: 
{¶ 35} “1. The Board of Tax Appeals is an administrative agency, a 
creature of statute, and is without jurisdiction to determine the constitutional 
validity of a statute. 
{¶ 36} “2. The question of whether a tax statute is unconstitutional on its 
face may be raised initially in the Supreme Court or the court of appeals, although 
not previously raised before the Board of Tax Appeals. 
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{¶ 37} “3. The question of whether a tax statute is unconstitutional when 
applied to a particular state of facts must be raised in the notice of appeal to the 
Board of Tax Appeals, and the Board of Tax Appeals must receive evidence 
concerning this question if presented, even though the Board of Tax Appeals may 
not declare the statute unconstitutional.”  (Citations omitted.) 
{¶ 38} The requirement for stating error to the BTA from a final 
determination of the Tax Commissioner is set forth in R.C. 5717.02, which 
provides that the notice of appeal “shall also specify the errors therein complained 
of.”  In Queen City Valves v. Peck (1954), 161 Ohio St. 579, 53 O.O. 430, 120 
N.E.2d 310, the court held at the syllabus that “a notice of appeal which does not 
enumerate in definite and specific terms the precise errors claimed but uses 
language so broad and general that it might be employed in nearly any case is 
insufficient to meet the demands of the statute [R.C. 5717.02].”  In Lenart v. 
Lindley (1980), 61 Ohio St.2d 110, 114, 15 O.O.3d 152, 399 N.E.2d 1222, the 
court stated, “In considering this question of specificity in the past, this court has 
held that R.C. 5717.02 is a jurisdictional enactment and that adherence to the 
conditions and procedure set forth in the statute is essential.” 
{¶ 39} The purpose of specifying error to the BTA, be the error 
constitutional or nonconstitutional, is to put the Tax Commissioner on notice as to 
the issues that will be contested.  As this court stated in Cleveland Gear Co., 
“[w]hen a statute is challenged on the basis that it is unconstitutional in its 
application, this court needs a record, and the proponent of the constitutionality of 
the statute needs notice and an opportunity to offer testimony supporting his or 
her view.”  35 Ohio St.3d at 232, 520 N.E.2d 188.  When a taxpayer merely 
makes an allegation in its notice of appeal to the BTA that the imposition of the 
use tax violates federal and state equal protection, there is no specificity and the 
allegation of error must fail under R.C. 5717.02.  This court has said that it “has 
no disposition to be hypertechnical and to deny the right of appeal on captious 
January Term, 2006 
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grounds[,] but it cannot ignore statutory language which demands that certain 
conditions be met to confer jurisdiction upon an appellate tribunal.”  Queen City 
Valves, 161 Ohio St. at 583-584, 53 O.O. 430, 120 N.E.2d 310. 
{¶ 40} Measured by the requirements of R.C. 5717.02, Castle’s claim of 
unconstitutionality at the BTA was not specific.  The assignment of error did not 
state which provision of the use tax violated the Equal Protection Clauses or how 
the application of the use tax violated its right to equal protection. 
{¶ 41} Castle contends that the lack of any statutory reference in the 
second claim of error is cured by reference to its first claim of error.  However, in 
its first claim of error Castle merely stated that it had been erroneously assessed a 
use tax on certain purchases that were exempt pursuant to R.C. 5739.01(E)(2) and 
other sales tax provisions.  Even combining the first and second assignments of 
error fails to yield a specific claim of how the imposition of the use tax denies 
Castle equal protection.  There is nothing in Castle’s second claim of error in its 
notice of appeal to the BTA that would tie the facts of this case to an equal-
protection-based constitutional claim.  The wording of Castle’s constitutional 
claim is so general that it could be used in almost every use tax case. 
{¶ 42} In Osborne Bros. Welding Supply, Inc. v. Limbach (1988), 40 Ohio 
St.3d 175, 178, 532 N.E.2d 739, the court stated: 
{¶ 43} “In its notice of appeal to the BTA, appellant did not specifically 
assign as error the failure of the Tax Commissioner to exempt transactions at 
issue pursuant to the packaging exemption.  Consequently, no reviewing court, 
including this one, has jurisdiction to hear this error, for it must be specifically 
assigned in the notice of appeal.” 
{¶ 44} This court can consider claims of error only when they were 
properly raised before the BTA.  Since the claim of constitutional error that Castle 
attempted to raise before the BTA did not meet the specificity requirements of 
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R.C. 5717.02, Castle did not successfully invoke the jurisdiction of the BTA as to 
that claim of error.  This court therefore has no jurisdiction to consider it. 
{¶ 45} For all of the reasons set forth above, we find the decision of the 
BTA to be reasonable and lawful and affirm it. 
Decision affirmed. 
MOYER, C.J., LUNDBERG STRATTON, O’CONNOR, O’DONNELL and 
LANZINGER, JJ., concur. 
PFEIFER, J., concurs in judgment only. 
__________________ 
Buckingham, Doolittle & Burroughs, L.L.P., Steven A. Dimengo and 
David W. Hilkert, for appellant and cross-appellee. 
Jim Petro, Attorney General, and Barton A. Hubbard, Assistant Attorney 
General, for appellee and cross-appellant. 
______________________