Does Texas use tax apply to payments a company makes on an aircraft that will be delivered outside Texas and used predominantly out of state during its first year?

Plain-English summary

The Texas Comptroller ruled that no Texas use tax applies to a company's payments toward acquiring an aircraft, thanks to the state's out-of-state-use exemption. The transaction is structured as a financing arrangement: the taxpayer originally contracted directly with the manufacturer to buy the plane, then assigned its purchase rights (including progress payments already made) to a financing/leasing company, which in turn leased the aircraft back to the taxpayer with exclusive use and operational control. Monthly payments start small (as repayment of progress-payment advances) then jump to $360,000/month once the taxpayer takes possession, followed by a final $16,000,000 buyout after ten years.

The Comptroller found this arrangement is functionally a purchase, not a true lease — but the tax question is answered by a separate, narrower rule regardless of characterization: Texas's use tax doesn't apply to an aircraft brought into the state if it's predominantly used outside Texas for the first year after acquisition, defined as more than 50% of the aircraft's departures originating outside Texas during that year. Because delivery will happen outside Texas and the taxpayer represented that over half of the aircraft's departures in its first 12 months of use will be from out-of-state locations, the exemption applies — both to payments made before delivery and to the larger payments made after the taxpayer takes possession.

Notably, the Comptroller explicitly declined to rule on whether the OTHER party — the financing/leasing company that originally contracted to buy the plane from the manufacturer — owes tax on ITS purchase, since that company never itself requested a ruling. This ruling covers only the taxpayer's own payments.

What this means for you

Aircraft buyers using lease-to-own or assignment financing structures

If your acquisition involves assigning purchase rights to a financing company that then leases the aircraft back to you, the underlying economic substance (a de facto purchase) doesn't disqualify you from the out-of-state-use exemption — what matters is where the aircraft is delivered and where it predominantly operates (by departure count) during its first year in your hands.

Corporate flight departments and aviation counsel

The "more than 50% of departures outside Texas" test in § 163.005(b) is a bright-line, trackable metric — keep departure logs for the first 12 months after acquisition to substantiate the exemption if questioned later. Note this ruling covers only the taxpayer's payments; each party to a multi-party financing chain (manufacturer, financer/lessor, ultimate lessee/buyer) needs its own ruling or analysis if it wants certainty on its own tax exposure.

Accountants and tax professionals

This is a relatively short, clean application of § 163.005 without much doctrinal complexity — useful as a template citation for similar predominant-out-of-state-use aircraft fact patterns, but remember the ruling doesn't address whether the intermediate lessor/financing company owes tax on ITS OWN purchase from the manufacturer.

Common questions

Q: Does it matter that this is really a purchase disguised as a lease?
A: The Comptroller acknowledged the arrangement amounts to a financing/purchase structure, but that characterization didn't change the outcome — the out-of-state-use exemption in § 163.005 applies regardless, based on delivery location and departure patterns.

Q: What counts as "predominantly used outside Texas"?
A: More than 50% of the aircraft's departures occurring from locations outside Texas during the one-year period beginning when the aircraft is acquired (or substantially complete, if later).

Q: Does this ruling also cover the leasing/financing company's purchase from the manufacturer?
A: No. The Comptroller explicitly declined to rule on that separate transaction, since the financing company didn't request its own ruling.

Q: Can another aircraft buyer rely on this ruling?
A: No. It binds the Comptroller only as to the taxpayer and facts in this specific request and cannot be relied on by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 163.005 (out-of-state use exemption)
• Tex. Tax Code § 163.005(b) (predominant out-of-state use — 50% departure test)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201812005L

Original ruling text

December 21, 2018

RE: Private Letter Ruling No. 20180222121310

**, Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated Feb. 21, 2018, and subsequent information provided on May 2, 2018. Detrimental reliance relief is provided to ** (Taxpayer) in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability in Texas of an aircraft purchase by COMPANY A (Lessor) and subsequent lease to Taxpayer.

This ruling only applies to payments made by Taxpayer under the facts presented. We decline to issue a ruling regarding the taxability of an aircraft purchase made by Lessor, who has not requested a ruling from this agency.

Facts Presented

Taxpayer entered into an agreement to purchase an aircraft from the COMPANY B (Manufacturer) on Sept. 19, 2017 (Purchase Agreement). Under the terms of the Purchase Agreement, Manufacturer agreed to deliver the aircraft to Taxpayer at a location outside of Texas during the second quarter of 2019.

In November 2017, Taxpayer assigned its rights in the aircraft purchase, including its first priority security interest, to COMPANY A (Lessor). Lessor assumed responsibility for making future progress payments to Manufacturer, and also agreed to reimburse Taxpayer for progress payments Taxpayer had previously made to Manufacturer. Taxpayer issued a Progress Payment Promissory Note (Note) to Lessor agreeing to pay Lessor for progress payments paid by Lessor and for progress payments reimbursed by Lessor.

On Nov. 24, 2017, Taxpayer and Lessor entered into a lease agreement where Lessor agreed to transfer possession of the aircraft to Taxpayer upon taking delivery of the aircraft from Manufacturer. The lease agreement grants exclusive use and operational control of the aircraft to Taxpayer.

Under the terms of the lease agreement, Taxpayer will make monthly payments to Lessor in amounts ranging from $13,000 to $40,000 as payments against the Note.

Once Taxpayer takes possession of the aircraft, monthly payments will increase to $360,000. After ten years of monthly payments of $360,000, Taxpayer will make a $16,000,000 purchase payment for the aircraft.

Lessor will take delivery of the aircraft from Manufacturer in the year 2019 in a location outside of Texas. Taxpayer states that over 50 percent of all departures during the first twelve months of Taxpayer’s use of the aircraft will occur outside of Texas.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Is Texas sales or use tax due on payments that Taxpayer makes to Lessor?

Ruling: Texas sales and use tax is not due on payments Taxpayer makes to Lessor after Taxpayer has acquired physical possession of the aircraft. In addition, Texas sales and use tax is not due on payments Taxpayer makes to Lessor before Lessor takes delivery of the aircraft from Manufacturer.

Analysis: Taxpayer’s contractual agreements with Lessor amount to a financing arrangement. Taxpayer is purchasing the aircraft from Lessor.

Section 163.005 (No Imposition of Tax Following Out-of-State Use) states that use tax is not imposed on the purchase or lease of an aircraft brought into this state when certain requirements are met. The aircraft is predominantly used outside of this state for a period of one year, beginning on the later date of the aircraft being acquired, or the date the aircraft was substantially complete.

An aircraft is predominantly used outside of this state provided that more than 50 percent of the aircraft's departures are from locations outside of this state. Section 163.005(b).

Taxpayer plans to acquire an aircraft in 2019. If, for a period of at least one year following the aircraft acquisition date, more than 50 percent of the aircraft’s departures are outside of Texas, Taxpayer will satisfy the requirements of Section 163.005. In this case, use tax will not be imposed on the payments Taxpayer makes to Lessor because Taxpayer will predominantly use the aircraft outside the state for a period of one year from the date it acquires the aircraft.

The Texas Tax Code and Texas Administrative Code 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. 20180222121310.

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.