In a case of homecourt advantage may not be worth much, the Hawaii Intermediate Court of Appeals ruled that a vendor’s aircraft-part sales to local company Hawaiian Airlines, Inc. (“Airlines”) do not qualify for the exemption for sales of aircraft parts because the gross proceeds received by the vendor were not “received from the servicing and maintenance of aircraft.” In re Tax Appeal of Hawaiian Airlines, Inc. v. Hawaii Dep’t of Taxation, Dkt. No. CAAP-24-0000496 (HI Ct. App. Nov. 10, 2025).
Airlines agreed with its parts vendor that it (Airlines) would be responsible for the payment of General Excise Tax (“GET”) due on its purchases of aircraft parts from vendor. The Hawaii Department of Taxation (“Department”) audited vendor and determined that vendor owed GET on the sales to Airlines. Airlines paid the GET to the Department under protest, sought a refund with a claim that the aircraft parts are exempt maintenance costs, and pursued an action to recover monies paid under protest (“Payment Under Protest Action”). When the Department failed to respond to the refund claim, Airlines sued for a refund in Tax Appeals Court. The trial court ruled for the Department, and Airlines appealed.
Hawaii’s GET is a levy on business and other activities in Hawaii “measured by the application of rates against values of products, gross proceeds of sales, or gross income, whichever is specified,” including specifying as taxable engaging in the “business of selling tangible personal property” and engaging in a “service business[.]” HIRS § 237-13. There is an exemption for “amounts received from the servicing and maintenance of aircraft….” HIRS § 237-24.9(a). The terms “service business” and “aircraft service and maintenance” are defined by statute.
Essentially, the Department argued that the amounts were exempt from the GET if Airlines paid someone else to perform the service but not exempt if Airlines bought the parts and conducted its own servicing. The court noted that the statute provides that “‘[a]ircraft service and maintenance’ means all scheduled and unscheduled tasks performed within an aircraft service and maintenance facility” and “‘[a]ircraft service and maintenance facility’ means a facility for aircraft service and maintenance that is not less than thirty thousand square feet in area . . . .” HIRS § 237-24.9(b). Further, the court noted, service businesses pay the GET unless exempt under one of the exemption provisions, but the statute provides that:
“Service business or calling” includes all activities engaged in for other persons for a consideration which involve the rendering of a service, including professional and transportation services, as distinguished from the sale of tangible property or the production and sale of tangible property.
HIRS § 237-7.
The Court of Appeals read the above provisions together and concluded that the exemption: “applies only to taxpayers who service and maintain multi-engine jet aircraft for others (within a thirty-thousand-square-foot-or-more facility), ‘as distinguished from the sale of tangible property or the production and sale of tangible property.’” Slip Op at 13-14. It ruled that vendor’s gross proceeds from its sale of aircraft parts to Airlines was not for servicing, vendor owed the tax and no exemption applied, and the fact that Airlines had to pay the GET on parts for which it did its own servicing was a function of its agreement with vendor and not a function of the GET.
Airlines asserted that if it owed the GET, the statute would violate the Commerce Clause of the United States Constitution and was discriminatory because Hawaii has a use tax exemption for parts imported and used for aircraft maintenance and service. HIRS § 238-1(8). It is axiomatic, though some courts still do not seem to accept, that a transaction violates the Commerce Clause when it “‘tax[es] a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State.’” Fulton Corp. v. Faulkner, 516 U.S. 325, 331 (1995). The Court of Appeals ruled that the existence of the use tax exemption did not mean that the absence of a similar GET exemption was a violation of the Commerce Clause. Slip Op at 17. That ruling ignores Fulton and should be reversed on appeal.
It is interesting to note that prior to addressing the substantive issue, the Court of Appeals ruled for Airlines that it could indeed proceed with its action. The Department asserted that Airlines, having chosen the Payment Under Protest Action route, could not proceed in the Tax Appeals Court with a claim that “an unlawful government realization” had occurred and that Airlines was due a refund. The Court of Appeals ruled that Airlines could indeed proceed with its challenge.
The takeaway is that the Department attempted to knock its local company out of court, essentially asserted that doing the work yourself is a bad idea if you want the tax exemption, and that it is fine to give relief to Airlines’ competitors who use parts by bringing them in from out of State, but not give relief to Hawaii’s own. Shameful treatment.
Don’t feel too comfortable at home!