Does selling an airplane back to the original leasing company and leasing it back under a financing lease or operating lease trigger Texas sales tax?

Plain-English summary

A corporation asked the Comptroller about the tax consequences of several airplane sale-leaseback transactions.

In the first transaction, the corporation had originally purchased an airplane and paid tax on it, then sold the plane to a leasing company, which leased it back to the corporation under a financing lease. That lease has now ended, and the corporation is about to take title to the plane again, sell it to a leasing company, and lease it back once more under a new financing lease.

The Comptroller explained that if (1) the corporation originally paid tax on the plane, (2) the earlier lease was a financing lease, and (3) there is evidence the corporation actually retained ownership (for example, it got the depreciation benefit, and it was responsible for property tax, insurance, risk of loss, and other ownership-type risks and benefits), then that first financing lease was just a financing arrangement rather than a taxable sale of the plane. If the new, second financing lease meets those same criteria, it is also treated as a financing arrangement and not a taxable transfer.

The letter also addresses a second, separate plane that the corporation had been leasing under an operating lease (rather than a financing lease). That lease has ended, and the corporation is now buying the plane, planning to sell it to a leasing company and lease it back again under a new operating lease. For this transaction, the corporation may give the leasing company a resale certificate instead of paying tax on the sale, provided the corporation immediately resells the plane to the leasing company. The leasing company then gives the corporation a resale certificate in return and collects sales tax from the corporation on the ongoing lease payments instead.

The Comptroller noted that the answers are based on the facts as presented, and that different facts would produce different answers.

What this means for you

Businesses doing sale-leaseback transactions on equipment (like airplanes)

If you are unwinding an old financing lease and re-selling equipment to a leasing company under a new financing lease, whether the transaction is tax-free depends on real evidence that you kept the risks and benefits of ownership throughout — things like claiming depreciation, and being responsible for property tax, insurance, and risk of loss. Without that kind of evidence, the Comptroller may not treat the arrangement as a nontaxable financing arrangement.

Businesses doing sale-leaseback transactions under an operating lease

If your leaseback will be structured as an operating lease, you can potentially avoid paying sales tax up front on the sale to the leasing company by issuing a resale certificate, as long as you are immediately reselling the plane to that leasing company. In that structure, the leasing company collects sales tax from you on the periodic lease payments instead of on the sale price.

Accountants and tax professionals

This letter distinguishes financing leases from operating leases in the sale-leaseback context. For financing leases, the key question is whether the "seller/lessee" truly parted with ownership burdens and benefits — evidence like depreciation claims, property tax responsibility, insurance, and risk of loss matters. For operating leases, the resale-certificate-in-lieu-of-tax mechanism (with tax collected later on lease payments) is confirmed as available when the equipment is immediately resold to the leasing company. Because the Comptroller expressly says the answer depends on the facts presented, this letter is most useful as an illustration of the analytical framework rather than a categorical rule.

Common questions

Q: Does selling an airplane back to a leasing company and leasing it back always trigger sales tax on the sale?
A: Not necessarily. According to this letter, if the transaction is a financing lease and there is evidence the corporation retained the ownership risks and benefits (depreciation, property tax, insurance, risk of loss), the Comptroller treats it as a financing arrangement rather than a taxable transfer.

Q: What counts as evidence that the corporation "retained ownership" under a financing lease?
A: The letter gives these examples: the corporation enjoyed the benefit of depreciation on the plane, the corporation was responsible for property tax, insurance, and risk of loss, and the corporation was responsible for other risks and benefits associated with ownership of the plane.

Q: How is an operating-lease sale-leaseback treated differently?
A: For the operating lease scenario in this letter, the corporation may give the leasing company a resale certificate instead of paying tax at the time of sale, as long as it immediately sells the plane to the leasing company. The leasing company then collects sales tax from the corporation on the lease payments going forward.

Q: Can taxpayers rely on this exact reasoning for their own transaction?
A: The Comptroller stated the answers are based on the facts as presented and that other facts will result in different answers, so the specific outcome here should not be assumed to apply automatically to a different set of facts.

Citations and references

The original letter does not cite any specific statute or rule by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9404373L

Original ruling text

April 21, 1994

Dear Mr. **:

We discussed the tax consequences of several transactions.

Under the first transaction, the corporation purchased an airplane, paid tax on
the plane, and sold it to a leasing company. The leasing company then leased
the plane to the corporation under a financing lease. The lease is over, and
the corporation will now take title to the plane, sell the plane to a leasing
company and lease it back under a financing lease.

If:

• the corporation originally paid tax on the plane,
• the subsequent lease was a financing lease, and

• there is evidence that the corporation retained ownership; then the first
  financing lease was a financing arrangement-and not a taxable transfer of the
  plane. Here are some examples of evidence of ownership:

• the corporation enjoyed the benefit of depreciation on the plane,

• the corporation was responsible for property tax, insurance, risk of loss,
• and the corporation is responsible for other risks and benefits associated
  with ownership of the plane.

If the circumstances of the second financing lease also meet the same criteria,
then the subsequent financing lease is also a financing arrangement and not
taxable.

The corporation leased another plane via an operating lease. The lease is over,
and the corporation is now buying the plane. The corporation will sell the
plane to a leasing company and lease it back under another operating lease.

The corporation may give the leasing company a resale certificate in lieu of
tax provided the corporation will immediately sell the plane to the leasing
company. The leasing company will then give the corporation a resale
certificate and collect tax from the Corporation on the lease payments.

The answers are based on the facts as presented. Other facts will result in
different answers.

My number is 512/463-4614, if you have any questions.

Sincerely,

Adina Whittemore
Tax Administration Division