When a company that bought an aircraft tax-free for leasing dissolves and distributes the aircraft to its parent for no payment, does Texas sales or use tax become due?

Plain-English summary

The Texas Comptroller ruled that no sales or use tax is due when a Texas LLC that originally bought an aircraft tax-free for lease-and-resale purposes later dissolves and distributes the aircraft to its parent company for no payment, through a corporate liquidation.

The LLC bought the aircraft in 2015 under the aircraft-specific resale exemption in Section 163.002, intending to lease it out to its limited partner and other parties. During the required first year of ownership, the aircraft was under the operational control of lessees under written leases more than 50% of the time — meeting the statutory threshold that preserves the resale exemption even though the buyer itself never personally used the aircraft. When the LLC's corporate parent restructured, it became the sole owner of the LLC, dissolved it, and — under a formal liquidation plan — took ownership of the aircraft directly, paying nothing and assuming no liabilities in exchange. Two separate legal principles combined to keep this tax-free: first, the LLC's original resale exemption wasn't disturbed because the 50%-lease threshold had already been met; second, a transfer requires "consideration" to count as a taxable "sale" under Texas law, and a distribution in complete liquidation for no payment simply isn't a sale at all.

What this means for you

Aircraft owners, lessors, and leasing companies

If you buy an aircraft under the resale exemption and lease it out (rather than personally using it) for more than 50% of the aircraft's departures in the first year of ownership, your resale exemption survives even after that first year — later personal use, or even a later ownership change, doesn't retroactively void it, as long as the first-year leasing threshold was met.

Businesses restructuring or dissolving entities that hold titled assets

A genuine liquidating distribution — where an asset moves to the parent/owner for no consideration, as part of formally winding down the subsidiary — is not a taxable sale under Texas law, because Texas requires consideration for a transaction to be a "sale." This applies to aircraft and, more broadly, other tangible personal property moved in a true liquidation.

Accountants and tax professionals

Two threads support the "no tax due" conclusion: the aircraft-specific resale-preservation rule in Section 163.002(c)-(d) (which doesn't apply the general resale-certificate liability rule of Section 151.154(a) to aircraft), and the general "sale" definition in Section 151.005 requiring consideration, as confirmed in Gifford-Hill & Co. v. State (Tex. 1969) and STAR Accession No. 200110530L (2001).

Common questions

Q: If a company that bought an aircraft tax-free for resale later distributes it to its owner for free, does that trigger tax?
A: Not if the original resale exemption was already preserved (by meeting the 50%-first-year-lease threshold under Section 163.002) and the distribution genuinely happens for no consideration as part of a liquidation — Texas law requires consideration for a transfer to count as a taxable "sale."

Q: Does a change in corporate ownership affect an aircraft's earlier resale exemption?
A: Not based on this ruling — once the first-year leasing requirement is met, the exemption isn't disturbed by a later change in who owns the entity or by that entity's dissolution.

Q: Can another company rely on this ruling for its own asset liquidation?
A: No. It's binding on the Comptroller only for the requesting taxpayer and facts presented, and cannot be relied on by any other taxpayer — every liquidation's consideration (or lack of it) needs independent review.

Citations and references

Statutes and rules:

• Tex. Tax Code § 163.002 (Resale of Aircraft — first-year 50% lease-use threshold)
• Tex. Tax Code § 151.154(a) (Resale Certificate: Liability of Purchaser — inapplicable to aircraft per § 163.002(d))
• Tex. Tax Code § 151.005 ("Sale" or "Purchase" — requires consideration); § 151.006 (Sale for Resale)
• STAR Accession No. 200110530L (Oct. 2, 2001) (liquidation transfers without consideration aren't taxable sales)
• Gifford-Hill & Co. v. State, 442 S.W.2d 320, 323 (Tex. 1969) (statutory definitions bind the court)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201804013L

Original ruling text

April 20, 2018

RE: Private Letter Ruling No. 20170914153918

** Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: 1] We are responding to your requests dated Sept. 6, 2017 and Oct. 11, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You request guidance on the taxability of an aircraft that was purchased and used for resale purposes, and has changed ownership through liquidation distribution.

Facts Presented

** (Taxpayer) is a limited liability company located in **, Texas. Taxpayer purchased an aircraft from a manufacturer in November 2015 for the purpose of leasing or renting the aircraft to Taxpayer’s sole limited partner, COMPANY A (LP) and possibly other unrelated parties in the United States. Since Taxpayer acquired the aircraft, the aircraft has been hangered in COUNTY, Texas.

Upon acquiring the aircraft in November 2015, Taxpayer entered into written leases (Leases) for the aircraft with LP and other unrelated parties in subsequent years. Taxpayer provided the Comptroller with copies of the Leases for review. Taxpayer did not use the aircraft while the aircraft was under the Leases. All use of the aircraft had been under the operational control of lessees pursuant to the Leases. Taxpayer had been collecting and remitting Texas sales tax on the rental charges due under the Leases.

COMPANY B (LLC) acquired the ownership interests in LP and LP’s General Partner, COMPANY C (GP) on June 23, 2017. LLC paid LP’s outstanding liabilities as part of the agreement to obtain ownership interests in LP and GP. LLC paid the remaining balance on LP’s credit line and the remaining financing for the aircraft. LLC is owned by COMPANY D (Parent).

Parent, through LLC’s ownership interests of LP and GP, became the beneficial owner of 100% of the equity interests in Taxpayer. Federal Aviation Administration regulations do not allow for Taxpayer to be indirectly owned by Parent and be the registered owner of the aircraft. To resolve the issue, Parent chose to own the aircraft directly.

Taxpayer, Parent and Parent’s subsidiaries all entered into an agreement to transfer all of the membership interest of Taxpayer to Parent. Once Parent became the sole member of Taxpayer, Taxpayer adopted a Plan of Complete Liquidation and Dissolution of Taxpayer (Plan). Taxpayer provided the Comptroller with copies of the agreement, relevant bank statements, and the Plan.

The Plan requires Taxpayer to resolve any balance of liabilities and set aside funds for any future issues on its own. The Plan also requires Taxpayer to distribute the aircraft to the sole member of the company for no other consideration and free and clear of any lien or encumbrance. Taxpayer also provided documents establishing the transfer of ownership of the aircraft free and clear of any liens or encumbrances.

Prior to the distribution of the aircraft, Taxpayer used its remaining funds and some funds from LP to pay off remaining liabilities. Taxpayer also terminated the Leases before distribution of the aircraft. As of July 28, 2017, Taxpayer’s account reflected a small cash balance, the aircraft as equity and no liabilities. In accordance with the Plan, Parent took ownership of the aircraft for no consideration and free and clear of any lien or encumbrance on July 28, 2017. No liabilities were assumed by Parent as part of the liquidating distribution by Taxpayer.

The aircraft will now be exclusively used by Parent and its subsidiaries for corporate purposes.

Questions, Rulings, and Analysis

Our restatements of your questions are shown below, followed by our responses and analysis.

Question One: Is Texas sales or use tax due on Taxpayer’s divergent use of the aircraft resulting from the liquidating distribution of the aircraft by Taxpayer and termination of the Leases?

Ruling One: No sales or use tax will be due on Taxpayer’s use of the aircraft.

Question Two: Will the original resale exemption be affected by Parent’s or Taxpayer’s use of the aircraft?

Ruling Two: Use of the aircraft by Taxpayer will not affect the original resale exemption.

Question Three: If the aircraft is transferred to Parent in complete liquidation of Taxpayer for no consideration, are sales and use taxes due?

Ruling Three: No sales and use taxes will be due on the transfer of the aircraft as a result of a complete liquidation of Taxpayer.

Analysis:

Section 163.002 (Resale of Aircraft) states:

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 or a possession or territory of the United States of America or in the United Mexican States in the form or condition in which it is acquired.

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 is fixed, variable, or periodic. For purposes of this 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.

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).

Section 151.154(a) does not apply to a purchaser of an aircraft.

Section 163.002(c) explains the requirements for an aircraft’s use during the first year of ownership. The purchase of the aircraft will continue to qualify as a sale for resale, even if the purchaser uses the aircraft, as long as the requirements of this subsection are met. First, the purchaser of the aircraft must have acquired the aircraft for the purpose of leasing, renting, or reselling the aircraft. Second, the aircraft must be under operational control of a lessee pursuant to one or more written agreements for more than 50% of the aircraft’s use during the first year of ownership. Third, the purchaser’s use of the aircraft must be less than 50% use of the aircraft during the first year of ownership. After meeting the leasing and use requirements during the first year of ownership, there are no statutory restrictions on the use of the aircraft. The statute makes clear that the required tax payments for non-resale use present in Section 151.154(a) (Resale Certificate: Liability of Purchaser) does not apply to aircraft purchases. See Section 163.002(d).

All of the use of the aircraft was made by its lessees pursuant to the Leases during and beyond the first year of ownership, which is more than the required 50% level of use. See Section 163.002(c). Therefore, Taxpayer may use the aircraft without owing tax.

Additionally, Taxpayer requests confirmation that the original resale exemption will not be affected by use of the aircraft by Taxpayer or Parent. Taxpayer met the requirements of Section 163.002(c). Since Section 151.154(a) does not apply to the purchase of aircrafts, Taxpayer may use the aircraft without owing sales tax for its use of the aircraft. See Section 163.002(d). However, Parent did not utilize a sale for resale exemption in acquiring the aircraft. Parent took ownership of the aircraft through complete liquidation for no consideration. Parent’s use of the aircraft will not affect Taxpayer’s initial sale for resale.

Taxpayer also seeks guidance regarding the effects of the liquidation transfer of the aircraft. Taxpayer and Parent entered into agreements for Parent to gain all membership interests in Taxpayer. Parent, as the sole member of Taxpayer, then gained ownership of the aircraft. Under the terms of the Plan, Taxpayer did not receive consideration for the aircraft. Parent also did not assume any liabilities of Taxpayer for the aircraft.

The transfer of tangible personal property from one entity to another in a complete liquidation is not a taxable transaction. See STAR Accession No. 200110530L (Oct. 2, 2001). Section 151.005 (“Sale” or “Purchase”) requires that a sale be done or performed for consideration. See Gifford-Hill & Co. v. State, 442 S.W.2d 320, 323 (Tex. 1969) (underscoring that a word defined by statute is binding on the court). Accordingly, a transfer of tangible personal property without consideration does not meet the definition of a “sale.” Since there is no sale, no sales or use tax may be collected when Parent acquires the aircraft.

STAR documents cited are available on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20170914153918.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.