Can States Tax Your Hot Air Balloon Ride?

July 24, 2015

If you desire to travel in interstate commerce, first you must let go of the rope. That, at least, is the conclusion of the Missouri Department of Revenue with regard to the applicability of the state's sales tax to tethered (taxed) and untethered (untaxed) hot air balloon rides. The Missouri ruling is neither surprising nor unprecedented, but it's a fun illustration of the interplay of federal and state taxing authority where interstate commerce is concerned.

From the earliest days of the republic, courts have grappled with whether states may interfere with or discriminate against interstate commerce, and if not, what constitutes such interference. The dormant commerce clause doctrine arises from this question, the name suggested by Chief Justice Marshall’s dicta in Gibbons v. Ogden (1824). Cases like Quill Corp. v. North Dakota (1992) and, most recently, Comptroller v. Wynn, decided this year, apply the dormant commerce clause in setting parameters for state taxation reaching out-of-state economic activity.

The case which precipitated this ruling, Balloons Over the Rainbow, Inc. v. Director of Revenue, will never soar to the heights of prominence achieved by these cases—tethered or no. But when the Missouri Supreme Court ruled that somewhere over the rainbow, state taxes don't apply, the reasoning was not dissimilar. It all came down to what constituted interstate commerce, and in this case, what’s known as “air commerce.”

Although the interstate commerce clause has not been interpreted to prohibit taxes on air transportation as such, Congress has stepped into the breach to prohibit taxes on air transportation (the Anti-Head Tax of 1973), largely limit airport authority-levied taxes to the funding of airport improvements (the Airport and Airway Improvement Act of 1982 and the Airport and Airway Safety and Capacity Expansion Act of 1987), and dictate that airport charges, fees, and taxes must be reasonable and used for airport and aeronautical purposes (the Federal Aviation Administration Authorization Act of 1994).

The Anti-Head Tax, in particular, prohibits states and their subdivisions from levying “a tax, fee, head charge, or other charge” on air transportation. And there’s the rub: according to the Missouri Department of Revenue, while untethered hot air balloons fly in federal airways and participate in air commerce, tethered flights, which usually top out at 80 feet, do not. The conclusion? Unlike the untethered rides, which are a form of air travel, “[T]he fee for tethered hot-air balloon rides is a fee paid to a place of amusement and subject to sales tax.”

Missouri is not alone. Other state Departments of Revenue have issued similar rulings in recent years, and the Wisconsin Department of Revenue explains the rationale:

Un-tethered hot air balloon rides, sightseeing flights, using an aircraft to tow a hang glider, and airplanes carrying a skydiver to a jump point in the air all involve the operation of aircraft in "air commerce," because these activities directly affect, or may endanger the safety in, interstate commerce. Further, these events may operate within the limits of a Federal airway, and thus meet the definition of "air commerce" on this basis.

The statutory definition of "air commerce" is broad enough to include intrastate flights that may endanger the safety in interstate commerce.

Because un-tethered hot air balloon rides, sightseeing flights, using an aircraft to tow a hang glider, and carrying a sky diver to an in-air jump point all meet the definition of "air commerce," the State of Wisconsin and political subdivisions within the state are prohibited under the federal Anti-Head Tax Act from imposing state, county, and stadium sales and use taxes on the admissions charged for these activities.

Subsection (c) of 49 U.S.C. § 40116 does not provide an exception to the sales tax prohibition for aircraft that take off or land in the State. That section merely establishes the state geographical nexus as a minimum requirement that must be met for a state to impose a permitted tax relating to an aircraft activity, but does not itself grant permission to a State to impose any tax relating to an aircraft activity that is otherwise prohibited by subsection (b).

Because a tethered or moored hot air balloon does not travel in interstate commerce, the State of Wisconsin and political subdivisions within the state are not prohibited under the federal Anti-Head Tax Act from imposing state, county, and stadium sales and use taxes on the admissions charged for these activities.

Again, none of this is particularly novel, but it’s an interesting example of defining the threshold for interstate commerce—which, in this instance, is something higher than 80 feet.

We sometimes seek to answer the question “how high are taxes in your state?” In this case, it’s more a question of how high until there aren’t any taxes in your state. So release those tethers: it's the only true way to show me the Show-Me State.

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