Were percentage payments to aircraft owners taxable rent when a charter company managed and operated their planes?

Plain-English summary

Florida treated percentage payments to aircraft owners as their share of charter-flight proceeds, not taxable consideration for renting the aircraft to the charter company.

Under the management agreement, the owners retained the right to control the company's management and supervision of their aircraft. The company therefore lacked the possession, use, direction, and control that would make it a lessee or licensee under Florida's tangible-personal-property rental rules.

The agreement also expressly created a management relationship. The charter company acted on the owners' behalf in making the aircraft available for the described nontaxable charter flights and returned a fixed percentage of operational proceeds to them.

What this means for you

Aircraft owners and charter operators

The allocation of operational control matters more than a percentage-payment formula. A management arrangement can avoid rental treatment only when the owner genuinely retains the relevant control and the agreement operates accordingly.

Accountants and tax professionals

Compare the whole contract, not isolated clauses. The Department distinguished this agreement from another aircraft arrangement in which owner payments were taxable rental consideration.

Common questions

Were the owner payments taxable rent? No. They were the owners' shares of charter proceeds.

Why was the charter company not a lessee? The aircraft owners retained control over management and supervision, leaving the company without sufficient possessory or directional rights.

Did the agreement's stated intent matter? Yes, together with the actual control provisions and the agreement read as a whole.

Citations and references

• Fla. Stat. § 212.02(10)(g)
• Fla. Stat. § 212.05(1)(c)
• Fla. Admin. Code R. 12A-1.071(1)
• Fla. Stat. § 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-020

Original ruling text

SUMMARY

The Taxpayer, an aircraft charter service provider, entered
into an aircraft management agreement to manage personal
aircraft owned by other persons, for use in nontaxable
charter flights. The Taxpayer paid the aircraft owners a
fixed percentage of the proceeds earned from the charter
flights. The Taxpayer requested a ruling concerning whether
the payments made by them to the aircraft owners represent
the return of the owner's nontaxable share of the
operational proceeds from the charter flights, or whether
they represent taxable consideration for the rental of
tangible personal property. The Department ruled that
under the specific terms of the agreement, the Taxpayer is
acting on behalf of the aircraft owners in leasing the
aircraft for the nontaxable charter flights and the
payments made to the owners represent the owners share of
the nontaxable proceeds from the charter flights, and not
taxable consideration for the rental of the aircraft. The
Department ruled that the aircraft management agreement is
factually distinguishable from the agreement in Personal
Jet Charter, Inc., v. D.O.R., DOAH Case No. 95-2527,
wherein a hearing officer ruled that payments made by
Personal Jet Charter, Inc., to individual aircraft owners
represented the consideration for the use of their aircraft
and were subject to sales tax as the lease or rental of
tangible personal property.

May 18, 1999

Re: Technical Assistance Advisement (99A-020)
XXX ("Taxpayer")
Sales and Use Tax - Aircraft Management Agreement
Sections 212.02(10)(g), 212.05(1)(c), F.S.
Rule 12A-1.071, F.A.C.

Dear :

This response is in reply to your letter dated February 11,
1999, requesting the Department's issuance of a Technical
Assistance Advisement ("TAA") pursuant to s. 213.22, F.S., and
Chapter 12-11, F.A.C., regarding the referenced matter and
parties. An examination of your petition has established that
you have complied with the statutory and regulatory requirements
for issuance of a TAA. Therefore, the Department is hereby
granting your request for issuance of a TAA.

FACTS

The Taxpayer owns and operates an aircraft charter service. As
part of its service the Taxpayer manages personal aircraft owned
by other persons or entities (herein "Owners"). As part of its
services provided to the Owners, the Taxpayer places the
aircraft on its Air Carrier Certificate on behalf of the Owners,
schedules and utilizes the aircraft for charter flights provided
to third parties, maintains the aircraft, stores the aircraft,
and provides flight crews for the aircraft charters. The
relationship between the Taxpayer and the Owners will be
governed by an Aircraft Management Agreement which you have
attached as Exhibit "A" of your request for technical
assistance.

The Aircraft Management Agreement that you have submitted for
our review is factually distinguishable from the contract in
Personal Jet Charter, Inc., v. Department of Revenue, DOAH Case
Number 95-2527, wherein a hearing officer ruled that payments
made by Personal Jet Charter, Inc., to individual aircraft
owners constituted the consideration for the use of their
aircraft and were subject to sales tax as the lease or rental of
tangible personal property. In Personal Jet Charter, Inc.,
supra, the responsibilities of Personal Jet Charter, Inc.,
included operating the air charter service under its own air
carrier certificate number, overseeing all aircraft maintenance
records, providing the flight crew, scheduling the charter
flights, and paying the aircraft owner a stipulated amount per
charter hour for the aircraft utilized in its air carrier
operations. Personal Jet Charter, Inc., was also responsible
for providing the aircraft owners with a monthly aircraft
statement and activity report. The aircraft owners were

responsible for all direct costs incurred in its utilization,
all direct costs incurred in the maintenance test flights, and
for the cost of maintaining the aircraft.

The differences between the Taxpayer's Aircraft Management
Agreement and the agreement in Personal Jet Charter, Inc.,
supra, are presented as follows:

1. In Personal Jet Charter, Inc., supra, the individual
   aircraft owners were paid a flat rate per flight hour for the
   use of the aircraft by Personal Jet Charter, Inc., in its air
   carrier operations. Pursuant to Article V of the Taxpayer's
   Aircraft Management Agreement, the Taxpayer will receive a
   percentage of rental fees earned through leasing the individual
   owner's aircraft for charter flights. You state that by
   receiving a fixed percentage of the proceeds generated by the
   aircraft charter services, the Taxpayer is compensated for
   management services based upon profits generated by the charter
   activities and the Owners' benefit from the charter services
   based upon the profitability of those services.

2. Under the Taxpayer's Aircraft Management Agreement, the
   Owner is responsible for all costs of the operation from the
   charter flights. In Personal Jet Charter, Inc., supra, the air
   carrier/operator (Personal Jet Charter, Inc.) was responsible
   for the costs incurred in the air carrier flights, in addition
   to the stipulated per hour amount paid to the owners. You state
   that under the Taxpayer's Aircraft Management Agreement, the
   Taxpayer is providing charter services to customers on behalf of
   the Owner, and the Owner pays the expenses incurred during these
   services.

3. The Taxpayer's Aircraft Management Agreement reflects that
   the intention of the parties is to enter into an agreement for
   the management and operation of a charter service. Under the
   agreement, the Owners will be entering an express contract which
   entrusts to the Taxpayer the management of the aircraft, and the
   Taxpayer will assume the obligation to manage the aircraft and
   make an accounting to the Owners for the business conducted on
   the Owners' behalf. You state that this establishes a
   principal/agent relationship, and a true management relationship

results. In Personal Jet Charter, Inc., supra, there was no
evidence that this issue was contemplated by the parties before
the commencement of that audit nor was there any record that the
parties consulted a legal or tax professional prior to
structuring the agreements. Personal Jet Charter, Inc., supra,
at paragraph 40.

4. Pursuant to the Taxpayer's Aircraft Management Agreement,
   the Owner has the authority to control the performance of the
   Taxpayer. The Owner has the ability to determine how the
   aircraft will be used in the event there is a conflict between
   the chartered flights and the Owner's use of the aircraft. The
   Owners have the right to inspect the Taxpayer's books during
   normal business hours; The Owner has the authority to direct the
   Taxpayer not to sue a party for an incident concerning the
   aircraft, and the agreement is not assignable by the Taxpayer
   unless the assignment is to a company that has merged or
   consolidated with the Taxpayer. You state that the Taxpayer's
   lack of control over the aircraft establishes that the Taxpayer
   lacks both possessory rights and the operational control
   accompanied by a lease. In Personal Jet Charter, Inc., supra,
   the individual owners gave up their exclusive possession,
   control, and dominion of their aircraft pursuant to the terms of
   the agreement. The air carrier controlled the use of the
   aircraft, subject to the terms of the agreement, which set forth
   the rights of the owners.

5. The Owners have the ability to terminate the relationship
   during the term of the agreement, without cause, upon thirty
   days notice provided that any amounts due the Taxpayer are paid.
   You state that this arrangement is typical in a management
   agreement because the principal needs the ability to terminate
   the relationship if the performance by the agent is not
   satisfactory. You state that it is not typical for the lease of
   an aircraft to be terminable at will.

REQUESTED RULING

Whether payments made to the individual aircraft owners pursuant
to the Aircraft Management Agreement entered into with the
Taxpayer, constitute the return of the Owner's nontaxable share

of the operational proceeds from the charter flights, and not
taxable consideration received for the rental of tangible
personal property.

DISCUSSION

As provided in Section 212.05(1)(c), F.S., sales tax at the rate
of 6 percent is imposed on the gross proceeds derived from the
lease or rental of tangible personal property. As defined in
Section 212.02(10)(g), F.S., the term "lease," "let," or
"rental" includes the leasing or rental of tangible personal
property and the possession or use thereof by the lessee or
rentee for a consideration, without transfer of the title to
such property, except as expressly provided to the contrary
therein.

Rule 12A-1.071(1), F.A.C., provides in pertinent part as
follows:

(a) For the purpose of this rule, the term "lease" includes
any rental or license to use tangible personal property,
unless a different meaning is clearly indicated by the
context in which it is used. The term refers to all
transactions that are not bailments in which there is a
transfer of possession of tangible personal property,
without regard to limitations upon use, for a
consideration, without a transfer of title to the property.
It is not essential for a transfer of possession of
tangible personal property to include the right to move the
tangible personal property. It includes a transaction
under which a person secures for a consideration the
temporary use of tangible personal property which, although
not on his premises, is operated by or under the direction
or control of the person or his employees. All leases of
tangible personal property other than conditional-sale type
leases as described in paragraph (1)(d) of this Rule are
operating leases....

(b) Transfer of possession with respect to an operating
lease means that one of the following attributes of
tangible personal property ownership has been transferred:

1. Custody or possession of the property, actual or
constructive;

2. The right to custody or possession of the property; or,

3. The right to use and control or direct the use of the
   property.

The terms of the Taxpayer's Aircraft Management Agreement are
factually distinguishable from agreement in Personal Jet
Charter, Inc., supra. Under the terms of the Taxpayer's
Aircraft Management Agreement, the individual aircraft owners
have the right to control the Taxpayer's performance of the
management and supervision of the aircraft, and therefore the
Taxpayer is denied the requisite control and direction of
business operations and the sufficient possessory rights to the
aircraft to achieve the status of a lessee or licensee.

Also, the Taxpayer's Aircraft Management Agreement clearly
provides that the intention of the parties is to create a
management relationship between the individual aircraft owners
and the Taxpayer, and the agreement does not evidence an
intention to create a lease or license to use tangible personal
property by the Taxpayer. As provided in American Home
Assurance Company v. Larkin General Hospital LTD., 593 So. 2d
195, 197 (Fla. 1992), intent of the parties to a contract should
govern the construction of a contract. Also, in determining the
intention of the parties, individual terms of a contract are not
to be considered in isolation, but as a whole and in relation to
one another. Jerry's Inc., v. City of Miami, 591 So. 2d 1000,
1001 (Fla. 3rd DCA 1991).

CONCLUSION

It is our determination that the proceeds received by the Owners
under the Aircraft Management Agreement are not subject to sales
tax. Pursuant to the terms of the agreement, the Taxpayer is
acting on behalf of the Owners in leasing the aircraft for
nontaxable charter flights and the payments made to the Owners
constitute their share of the operational proceeds from the

charter flights, and not consideration received for the rental
of tangible personal property.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory and
administrative rule changes or that judicial interpretations of
the statutes or rules upon which this advice is based may
subject similar future transactions to a different treatment
than expressed in this response.

You are further advised that this response and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure.

Sincerely,

Richard R. Parsons
Tax Law Specialist
Technical Assistance & Dispute Resolution
(850) 922-4838

Ctrl. No. 36691