When a company does lump-sum interior refurbishing, avionics upgrades, or performance modifications on a customer's private aircraft, is that taxable repair/remodeling labor, or nontaxable processing/manufacturing labor — and does it matter that the work is done on an unfinished ('green') aircraft versus one already in service?

Plain-English summary

This is an internal Tax Policy Division memo (from Eddie C. Washington to auditor Allen Zaiontz) resolving a completed audit of a company that does lump-sum interior refurbishing of large private aircraft — adding bedrooms, cabinets, custom furniture, wall coverings, carpet, bathroom fixtures, entertainment centers, exterior painting, and sometimes structural changes, new avionics, or modifications that let the aircraft land on shorter runways or fly farther. Contracts could exceed ten million dollars, with substantial labor components. The memo works through three questions:

Question 1 — Is interior refurbishment "remodeling" or a taxable "sale and installation"? Before an October 2, 1984 law change, refurbishing a customer's aircraft interior was treated as a taxable sale and installation of equipment. The 1984 amendment began taxing repair, remodeling, restoration, and maintenance of tangible personal property generally, but specifically excluded aircraft from that tax [Tex. Tax Code § 151.0101(a)(5)(A)]. So refurbishing the interior of an aircraft already owned by a customer is now repair or remodeling — not taxable — unless the work is actually the last stage of manufacturing a new aircraft (i.e., installing the interior in an unfinished/"green" airframe before that first sale is complete), in which case it's still treated as manufacturing.

Question 2 — Do performance-altering changes (new avionics, wing/fuel-tank modifications, shorter-runway capability, longer range) count as taxable "processing" instead of remodeling? No. Rule 3.300(a)(10) defines processing as physically modifying tangible personal property, but excludes repair (restoring property to its original condition) and excludes remodeling. Rule 3.300(a)(11) defines remodeling as making property over again in a similar but different way, or changing its style, shape, or form, without causing it to lose its identity or work in a new/different manner. Even though replacing avionics or modifying the wing span might let the plane fly higher or take off/land in a shorter distance, that doesn't cause the airplane to lose its identity — so it's still repair or remodeling, not processing. When it adopted Rule 3.359 (the prior aircraft-specific rule), the Comptroller deliberately dropped earlier positions that treated these aircraft activities as "processing."

Question 3 — How is a lump-sum contract taxed if it mixes nontaxable remodeling work with taxable modification/processing work, for an out-of-state customer? Unless the work is performed on a newly-manufactured aircraft, it's repair or remodeling, and under a lump-sum bill the refurbisher owes sales tax on all materials it incorporates into the job — but the total charge to the customer is not taxable. The refurbisher also owes sales tax on the equipment and supplies (including natural gas and electricity) it uses. If the same company also does manufacturing work, its electricity and natural gas usage is taxed or exempted based on predominant use (Rule 3.295); if it claims a manufacturer's exemption on dual-use equipment, it must either pay tax on the equipment or accrue tax on the fair market rental value for the time the equipment is used in repair/remodeling.

Note: the memo itself carries an editorial ALERT that Rule 3.359, the aircraft rule discussed throughout, has since been repealed — current aircraft issues are addressed under Rule 3.280.

What this means for you

Aircraft interior refurbishing / completion shops

If you refurbish or complete the interior of a customer's aircraft that's already been sold and delivered, that labor is exempt repair/remodeling under Tex. Tax Code § 151.0101(a)(5)(A) — but you still owe sales tax on the materials, equipment, and supplies you use in the job. If instead you're finishing an unfinished ("green") aircraft as the last step before its first sale to a customer, that same work is treated as manufacturing.

Shops doing performance modifications (avionics, wing/fuel-tank changes, etc.)

Even substantial performance changes — shorter takeoff/landing distance, longer range — are remodeling or repair, not "processing," as long as the aircraft doesn't lose its identity as that aircraft. Don't assume performance-altering work automatically becomes taxable processing.

Businesses with mixed manufacturing and repair/remodeling operations

If you do both, you need a predominant use study (Rule 3.295) to determine how much of your electricity and natural gas usage is exempt versus taxable, and you need to properly account for any manufacturer's exemption claimed on equipment also used in repair/remodeling work.

Anyone relying on Rule 3.359

Don't cite Rule 3.359 today — it has been repealed. Current aircraft-specific sales tax issues are addressed under Rule 3.280.

Common questions

Q: Is refurbishing the interior of a customer's private aircraft taxable in Texas?
A: No — the labor is excluded from sales tax under Tex. Tax Code § 151.0101(a)(5)(A), which excludes repair, remodeling, restoration, and maintenance of aircraft. The refurbisher still owes sales tax on the materials and equipment it uses in the job.

Q: Does installing an interior in a brand-new, unfinished ("green") aircraft get taxed the same way?
A: No. If the installation is the last stage of manufacturing a new aircraft before its first sale, it's treated as manufacturing, not repair/remodeling.

Q: If a refurbishment substantially changes the aircraft's performance (e.g., new avionics, longer range, shorter runway needs), does that make it taxable "processing"?
A: No, as long as the aircraft doesn't lose its identity as that aircraft. That's still repair or remodeling under Rule 3.300(a)(11), not processing under Rule 3.300(a)(10).

Q: How is tax handled on a lump-sum contract that mixes remodeling and manufacturing-type work?
A: The refurbisher owes sales tax on incorporated materials and on equipment/supplies (including electricity and natural gas) it uses, but doesn't charge sales tax on the total bill to the customer. If it also performs manufacturing, a predominant use study under Rule 3.295 determines the taxable/exempt split for electricity and gas.

Q: Can I still rely on Rule 3.359, which this memo discusses at length?
A: No — the memo itself flags that Rule 3.359 has been repealed; current aircraft rules are found at Rule 3.280.

Q: Can I rely on this letter for my own aircraft-refurbishing business?
A: No. This is an internal policy memo resolving one taxpayer's specific audit, based on the facts presented; if the facts differ, the outcome may differ, and it does not bind the Comptroller as to any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0101(a)(5)(A) (repair, remodeling, restoration, and maintenance of tangible personal property excluded from tax when performed on aircraft)
• 34 Tex. Admin. Code Rule 3.300(a)(10) (definition of processing)
• 34 Tex. Admin. Code Rule 3.300(a)(11) (definition of remodeling)
• 34 Tex. Admin. Code Rule 3.295 (predominant use studies for electricity and natural gas)
• 34 Tex. Admin. Code Rule 3.359(a)(4) and (9) (aircraft rule discussed in the memo; since repealed — see Rule 3.280)
• 34 Tex. Admin. Code Rule 3.292 (remodeling of tangible personal property, general rule)

Prior STAR documents referenced in the memo (not independently verified here): 8708T0838E07, 8308T0528C08, 8403L0557B03, 8308T0528C09 (TR #0746), Hearing No. 30,311, 9208L12185E13, 9003H0995A07, 9211H1209C01, 8712L0850D05.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9601878L

Original ruling text

ALERT: The cited rule, Rule 3.359 has been repealed. See Rule 3.280 for issues relating to Aircraft.

DATE: January 23, 1996

TO: Allen Zaiontz, Audit

FROM: Eddie C. Washington, Tax Policy Division

SUBJECT: Taxability of Interior Aircraft Refurbishing

FACTS: TP's audit is complete. Issues were settled in a DRO conference because
of TP's claim of detrimental reliance.

TP enters into lump-sum contracts to completely refurbish the interiors of
large private aircraft. Refurbishment could include the addition of bedrooms,
cabinets, special art, moving doors and windows, special furniture (couches,
tables, etc.), wall coverings, carpet, bathroom fixtures, entertainment
centers, exterior painting, etc. Some structural changes would also be
necessary to accommodate refurbishment. All changes would be designed to be
permanently affixed to the aircraft. In some situations, TP will also install
new avionics and actually modify the plane so it can land on shorter runways,
fly greater distances between fuel stops, etc. In all cases, the labor
components in these contracts are substantial. A typical contract could exceed
ten million dollars.

Current research indicates that complete interior refurbishment should be
treated as a sale and installation (8708T0838E07, 8308T0528C08, and
8403L0557B03). Policy in this area was written before the October 2, 1984 law
change that began taxing repairs to tangible personal property (TPP) and
resulted in adding the definition of remodeling to several rules. Above listed
research also indicates that modification to aircraft in such a manner as to
substantially alter its performance is considered processing.

Rule 3.359 (a)(9) defines remodeling of aircraft as modifying the style, shape,
or form of private aircraft belonging to another.

Rule 3.292 defines remodeling of tangible personal property as modifying the
style, shape, or form of tangible personal property belonging to another
without causing a loss of its identity or without causing the item to operate
in a new or different manner.

Hearing No. 30,311 (pages 4 and 5) discusses the changes in statute dealing
with remodeling. Microfiche documents 9208L12185E13, 9003H0995A07, 9211H1209C01
and 8712L0850D05 identify remodeling situation as they relate to motor vehicles
and other TPP.

Question 1. Should interior refurbishment of an aircraft be classified as
remodeling or as a sale and installation of equipment?

Answer: The interior refurbishment of an aircraft's interior is either repair
or remodeling, unless the "refurbishment" qualifies as processing or as
manufacturing. TR # 0746 (microfiche document 8308T0528C09) states that the
installation of an interior in a customer's airplane is a sale and
installation, but if the airplane is new, the installation of an interior is
manufacturing.

In 1984, the sales tax law was amended taxing the repair, remodeling,
restoration and maintenance of tangible personal property. These services are
excluded from tax when performed on aircraft [Section 151.0101(a)(5)(A)]. This
amendment supersedes the policy set out in TR #0746 and other documents that
classify the refurbishment or replacement of an interior in a customer's
airplane as a sale and installation. However, the "installation" of an interior
in an aircraft for a manufacturer remains the last stage of the manufacturing
process.

Question 2. If replacing avionics, modifying wing span, adding equipment,
replacing fuel tanks, etc., substantially change the performance or operation
of the aircraft, would this still be considered processing?

Answer: No, the activities described above are either a repair or remodeling.
Rule 3.300(a)(10) defines processing as:

"The physical application of the materials and labor necessary to modify or to
change the characteristics of tangible personal property. The repair of
tangible personal property, belonging to another, by restoring it to its
original condition is not considered processing of that property. The mere
packing, unpacking, or shelving of a product to be sold will not be considered
to be processing of that property. Processing does not include remodeling."

Remodeling as defined in Rule 3.300(a)(11) means:

To make tangible personal property belonging to another over again, in a
similar but different way, or to change the style, shape, or form, without
causing a loss of its identity, or without causing the property to work in a
new or different manner.

Replacing components of tangible personal property is repair or remodeling. It
is conceivable that the replacing of the avionics or modification of the wing
span may cause the airplane to fly at a higher altitude or to take-off and land
in a shorter distance; however, this does not cause the airplane to lose its
identity.

In promulgating Rule 3.359, the comptroller did not include any of the earlier
positions that certain activities performed on aircraft constitute
"processing". However, as the answer to question 1 points out, some activities
may constitute manufacturing when performed on newly manufactured aircraft.
When not performed on newly manufactured aircraft, these activities are either
repair or remodeling. See Rule 3.359(a)(4) and (9).

Question 3. If interior work is considered remodeling, how would we treat a
lump-sum contract that would involve both nontaxable remodeling work and
taxable modification or processing work for an out-of-state customer? Would tax
be due on all purchases used in the remodeling portion of the contract and then
no further tax consequences for the remodeling portion of the contract?

Answer: Unless performed on a newly-manufactured aircraft, these activities are
repairs or remodeling. Under a lump-sum billing, the services provider owes
sales tax on all incorporated materials, but the total charge to the customer
is not taxable. However, TP owes sales tax on all equipment and supplies,
including natural gas and electricity, used.

If TP engages in both manufacturing activities and repair or remodeling
activities, TP's electricity and natural gas will be taxable or exempt based on
predominant use as outlined in Rule 3.295. If TP claims a manufacturer's
exemption on equipment used in this dual operation, TP must either pay sales on
the equipment or accrue sales tax on the fair market rental value of the
equipment for the period of time the equipment is used in repair or remodeling
operations.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.