Can an LLC buy an aircraft tax-free as a sale for resale and lease it back to its own parent company, and does later using the aircraft itself trigger sales tax?

Plain-English summary

An Oregon LLC bought an aircraft in September 2015, giving the seller a resale exemption certificate. The LLC's purpose was to lease the aircraft to a Delaware limited partnership that wholly owns the LLC. Under a 10-year lease, the LLC transferred operational control of the aircraft to that lessee in exchange for fixed monthly cash payments, and collected/remitted Texas sales tax on those lease payments. For more than a year, 100% of the aircraft's departures were under the lessee's control. More than a year after the purchase, the LLC and lessee might replace that lease with a new one calling for only nominal monthly payments. The LLC asked whether its original purchase still qualifies as an exempt sale for resale, whether switching leases preserves that exemption, whether any "divergent use" (its own use of the aircraft, or ceasing to lease it out) after that point triggers tax, and whether tax applies to the new, lower lease payments.

The Comptroller ruled yes to the exemption, with one key condition, walking through Texas's aircraft-specific statute (Tax Code Chapter 163):

1. The purchase qualifies as a sale for resale. Buying an aircraft to lease it to another person — even a related party that wholly owns the purchaser — is a sale for resale under § 163.002(a); the related-party relationship doesn't matter (§ 163.006(a)).
2. The exemption is confirmed by a one-year, 50%-departures safe harbor. Under § 163.002(c), the resale exemption holds even if the purchaser also uses the aircraft itself, AS LONG AS more than 50% of the aircraft's departures in the year after purchase occur under a lessee's operational control pursuant to a written lease. That condition was met here (100% of departures were under lessee control for over a year).
3. Swapping the original lease for an amended lease doesn't undo the exemption, as long as the 50%-in-year-one condition was already satisfied.
4. No tax on "divergent use" after the safe harbor is met. This is the aircraft-specific twist: the general rule (§ 151.154(a)) that using resale-certificate property yourself (beyond retention/demonstration/display) triggers use tax does NOT apply to aircraft (§ 163.002(d)). So once the one-year/50% condition is satisfied, the purchaser owes no tax even if it later uses the aircraft itself or stops leasing it out entirely.
5. Tax IS still due on the new lease's payments. Just like the original lease payments were taxed as a TPP lease, the amended lease's (lower) monthly payments remain taxable rental charges going forward.

What this means for you

Aircraft owners leasing to related or affiliated entities

Related-party leasing doesn't disqualify the sale-for-resale exemption for aircraft — but you still need a genuine written lease transferring operational control, and you need more than 50% of departures under the lessee's control for the first year to lock in the exemption.

Aircraft-holding companies planning to eventually use the plane themselves

Aircraft get materially better treatment than most resale-certificate property: once you clear the one-year/50%-departures threshold, you can later use the aircraft yourself, or stop leasing it out, without triggering the divergent-use tax that would apply to almost any other kind of resold tangible personal property under § 151.154(a).

Anyone restructuring an aircraft lease after the first year

Terminating and replacing the original lease with new terms (even sharply reduced payments) doesn't retroactively unwind an already-earned resale exemption — but don't assume the new lease itself is tax-free; ordinary lease payments continue to be taxable rental charges.

Common questions

Q: Does leasing a purchased aircraft to a related company (like a parent that owns the purchaser) disqualify the sale-for-resale exemption?
A: No — per this ruling and § 163.006(a), the fact that the lessee wholly owns the purchaser doesn't affect the resale exemption's availability.

Q: If the purchaser of a resale-exempt aircraft later uses it for its own flights, does that trigger use tax the way it would for other resale-certificate property?
A: No — per this ruling, § 163.002(d) specifically exempts aircraft from the general divergent-use tax rule in § 151.154(a), as long as the one-year/50%-departures condition under § 163.002(c) was met.

Q: Are payments under a replacement ("amended") aircraft lease taxable the same way the original lease payments were?
A: Yes — per this ruling, sales/use tax remains due on the amended lease's monthly payments (and other non-separately-stated taxable charges), just as it applied to the original lease.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.302(a) (Sale for Resale exemption)
• Tex. Tax Code § 163.002(a) (Aircraft sale for resale — leasing/renting/reselling to another person)
• Tex. Tax Code § 163.002(b) (Aircraft leasing — "operational control" transfer defined)
• Tex. Tax Code § 163.002(c) (Aircraft — one-year, more-than-50%-of-departures safe harbor for purchaser's own divergent use)
• Tex. Tax Code § 163.002(d) (Aircraft — general divergent-use tax under § 151.154(a) does NOT apply)
• Tex. Tax Code § 163.006(a) (Aircraft — common ownership between purchaser and lessee doesn't affect resale exemption)
• Tex. Tax Code § 151.154(a) (General divergent-use tax rule — inapplicable to aircraft per § 163.002(d))
• 34 Tex. Admin. Code Rule 3.294(b),(c)(1) (Lease of TPP — taxable unless separately stated and nontaxable; unoperated TPP leases taxable)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201702028L

Original ruling text

February 23, 2017

Re: Private Letter Ruling #162020921

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters, [ENDNOTE 1] in response to your request dated July 6, 2016, regarding the taxability of an aircraft purchase and subsequent aircraft leases. Detrimental reliance relief is provided in accordance with Rule 3.10, the Taxpayer Bill of Rights.

Facts Presented

** (“Purchaser”), an Oregon limited liability company, purchased an aircraft on Sept. 9, 2015. Purchaser provided a valid resale exemption certificate to the seller at the time of purchase. Purchaser’s purpose in acquiring the aircraft was to lease, rent, or resell the aircraft to a Delaware limited partnership (“Lessee”), which wholly owns Purchaser.

Purchaser entered into a written lease agreement (“Original Lease”) with Lessee for a period of ten years beginning on Sept. 9, 2015. Purchaser transferred operational control of the aircraft to Lessee for consideration. After entering into the Original Lease, Lessee hangared the aircraft in Texas. The Original Lease requires that Lessee pay a cash monthly payment of a fixed amount to Purchaser. Purchaser collects Texas sales and use tax (as applicable) on each lease payment under the Original Lease and remits such tax to the Texas Comptroller of Public Accounts.

For more than one year following Purchaser’s aircraft purchase, 100 percent of the aircraft’s departures are made under Lessee’s operational control pursuant to the Original Lease.

More than one year from Purchaser’s aircraft purchase, Purchaser and Lessee may enter into a new lease (“Amended Lease”), which would require nominal monthly lease payments.

Requested Rulings

1. The purchase of an aircraft by Purchaser qualifies for exemption from sales or use tax as a sale for resale.

2. Purchaser’s Original Lease agreement can be terminated and replaced with an Amended Lease without affecting Purchaser’s sale for resale exemption for the purchase of the aircraft if, for more than one year following Purchaser’s aircraft purchase, more than 50 percent of the aircraft’s departures occur under the Lessee’s operational control pursuant to the Original Lease.

3. If Purchaser’s aircraft purchase is eligible for the sale for resale exemption, no sales or use tax is due on Purchaser’s divergent use of the aircraft, including Purchaser’s Operational Control of the aircraft for certain flights or Purchaser’s ceasing to lease the aircraft to any other party in favor of its own use of the aircraft.

4. If Purchaser and Lessee enter into an Amended Lease more than one year after Purchaser purchased the aircraft, then sales and use tax will be due on the amended monthly lease payments (and any other applicable taxable and non- separately stated charges) under the Amended Lease.

Analysis and Private Letter Rulings

Response 1:

Section 151.302(a) states, “The sale for resale of a taxable item is exempted from the taxes imposed by this chapter.”

Section 163.002(a) states in part, “For purposes of Section 151.006, ‘sale for resale’ includes the sale of an aircraft to a purchaser who acquires the aircraft for the purpose of leasing, renting, or reselling the aircraft to another person in the United States of America…in the form or condition in which it is acquired.”

Purchaser bought an aircraft for the purpose of leasing it to Lessee in the form or condition in which it was acquired.

Section 163.002(b) states, “The leasing or renting of an aircraft under Subsection (a) includes the transfer of operational control of the aircraft from a lessor to one or more lessees pursuant to one or more written agreements in exchange for consideration, regardless of whether the consideration is in the form of a cash payment and regardless of whether the consideration if fixed, variable, or periodic. For purposes of the subsection, ‘operational control’ has the meaning assigned by the Federal Aviation Regulations and includes the exercise of authority over initiating, conducting or terminating a flight.”

Purchaser transferred operational control as defined by Section 163.002(b) to Lessee pursuant to a written lease agreement in exchange for consideration.

Section 163.002(c) states, “Subsection (a) applies to a purchase of an aircraft regardless of whether the purchaser, in addition to leasing, renting, or reselling the aircraft to another person, also uses the aircraft if, for a period of one year beginning on the date the purchaser purchases the aircraft, more than 50 percent of the aircraft’s departures are made under the operational control of one or more lessees pursuant to one or more written agreements as described by Subsection (b).”

For a period of at least one year following Purchaser’s acquisition of the aircraft, more than 50 percent of the aircraft’s departures were made under the operational control of Lessee pursuant to the Original Lease.

Purchaser’s aircraft acquisition is exempt from sales or use tax as a sale for resale pursuant to Section 151.302(a). The fact Lessee wholly owns Purchaser does not affect this conclusion. Section 163.006(a).

Response 2:

Section 163.002(c) states, “Subsection (a) applies to a purchase of an aircraft regardless of whether the purchaser, in addition to leasing, renting, or reselling the aircraft to another person, also uses the aircraft if, for a period of one year beginning on the date the purchaser purchases the aircraft, more than 50 percent of the aircraft’s departures are made under the operational control of one or more lessees pursuant to one or more written agreements as described by Subsection (b).”

If for more than one year following Purchaser’s acquisition of the aircraft, more than 50 percent of the aircraft’s departures occur under Lessee’s operational control pursuant to the Original Lease, entering into the Amended Lease and terminating the Original Lease will not affect Purchaser’s qualification for exemption from sales or use tax as a sale for resale.

Response 3:

Section 151.154(a) states, “If a purchaser who gives a resale certificate makes any use of the taxable item other than retention, demonstration, or display while holding it for sale, lease, or rental in the regular course of business or for transfer as an integral part of a taxable service in the regular course of business, the purchaser shall be liable for payment of the sales tax on the value of the taxable item for any period during which the taxable item is used other than for retention, demonstration, or display.”

However, Section 163.002(d) states, “Section 151.154(a) does not apply to a purchaser of an aircraft.”

As described in Response 1, Purchaser’s aircraft acquisition will be exempt from sales and use tax if, for a period of one year beginning on the date Purchaser acquires the aircraft, more than 50 percent of the aircraft’s departures are made under the operational control of one or more lessees pursuant to one or more written agreements, as described by Section 163.002(b).

If the aircraft purchase qualifies as a sale for resale under Section 151.302(a), Purchaser owes no sales or use tax when it exercises operational control of the aircraft for certain flights. In addition, if the aircraft purchase qualifies as a sale for resale, Purchaser would not owe sales or use tax if it ceases to lease the aircraft to any other party in favor of its own use of the aircraft more than one year from the date it purchased the aircraft. However, for a period of one year beginning on the date Purchaser acquires the aircraft, more than 50 percent of the aircraft’s departures are required to be made under the operational control of one or more lessees pursuant to one or more written agreements as described by Section 163.002(b).

Response 4:

Tax must be collected from a lessee on all charges contained in a lease, unless the charge is separately stated and is nontaxable.

Rule 3.294(b). Receipts from a lease of tangible personal property without an operator are taxable. Rule 3.294(c)(1).

Just as sales and use tax was due on the lease payments under the Original Lease, if Purchaser and Lessee enter into an Amended Lease more than one year after Purchaser acquires the aircraft, sales or use tax will be due on the amended monthly lease payments in accordance with Rule 3.294.

Additional sales tax information, including links to statutes, rules, forms, and publications, is available at comptroller.texas.gov/taxinfo/sales/.

The State Tax Automated Research (STAR) System is a searchable database of Comptroller letters, decisions, hearings, and other documents. STAR documents may be accessed online at http://star.cpa.texas.gov/. The “Help” tab located in the yellow banner near the top of the page provides instructions on using the STAR System.

Please email us at https://www.comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling #162020921 if you have any questions about this response.

Regards,

Tax Policy Division – Indirect Taxes Texas Comptroller of Public Accounts

ENDNOTE(S)

1. Unless otherwise noted, all references herein to “Section” are to Tex. Tax Code Ann. (Vernon 2015 and Supp. 2016) and all references to “Rule” are to 34 Tex. Admin. Code (2016).