Is the 'finish-out' work completing an unfinished ('green') aircraft -- installing interior, avionics, and paint -- exempt manufacturing, or taxable repair/remodeling labor?

Plain-English summary

A U.S. subsidiary of a foreign aircraft manufacturer buys new aircraft from its parent in an unfinished ("green") condition -- flyable, but missing custom interior, avionics, communications, and auxiliary power equipment -- and completes them ("finish-out") at its Texas facility over 3-4 months before delivering them to third-party customers. Title to the aircraft can pass to the customer at different points: after finish-out is complete, before it's complete (with finish-out happening afterward), or even outside Texas before the plane is flown to Texas for finishing. The subsidiary structures its sales in two contracts or one two-part contract, but the finish-out work is always contractually required under the original deal.

The Comptroller's answer: as long as the original sales contract obligates the seller to perform the finish-out work, that work is part of the manufacturing process and exempt from sales tax -- regardless of whether title to the aircraft passes before or after the finish-out is done. Early transfer of title to the unfinished aircraft doesn't change the fact that the seller remains the manufacturer completing a contractually-required product.

On two related questions: the 3-4 months the finish-out takes doesn't affect the separate out-of-state registration exemption in Rule 3.297(c)(9) (the seller just needs to get an exemption certificate from the customer within 30 days of the sale -- which occurs at transfer of title or possession for consideration under Tax Code § 151.0048); and letting the customer test-fly the aircraft in Texas before final delivery doesn't jeopardize that exemption either.

What this means for you

Aircraft manufacturers and completion centers

If your sales contract obligates you to finish an aircraft (interior, avionics, paint, etc.) after an initial title transfer, that finish-out work still counts as exempt manufacturing labor -- the timing of title transfer doesn't convert it into taxable repair/remodeling, as long as completion remains your contractual duty.

Sellers relying on the out-of-state aircraft exemption

A multi-month completion process and a pre-delivery test flight in Texas don't disqualify the buyer's out-of-state registration exemption under Rule 3.297(c)(9) -- but you still must obtain the exemption certificate within 30 days of the sale.

Accountants and tax professionals

The controlling fact is whether finish-out work is a contractual OBLIGATION of the original sale, not when title passes -- structure and timing of title transfer are secondary to that contractual-obligation question.

Common questions

Q: If I sell an unfinished aircraft and then complete it under a separate contract, does the finish-out stay exempt?
A: Yes, per this letter, as long as the finish-out is required under (or contemplated by) the original sales contract -- even across two separate contracts.

Q: Does a multi-month completion timeline affect the out-of-state aircraft registration exemption?
A: No, per this letter, a 3-4 month finish-out period doesn't affect the Rule 3.297(c)(9) exemption.

Q: Does letting a customer test-fly the aircraft in Texas before final delivery cause a problem?
A: No -- this letter confirms pre-delivery testing doesn't impact the exemption.

Citations and references

Rules and statutes:

• 34 Tex. Admin. Code Rule 3.297(c)(9) (out-of-state aircraft registration exemption)
• Tex. Tax Code § 151.0048 (when a sale occurs -- transfer of title or possession for consideration)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911891L

Original ruling text

November 16, 1999

Dear **:

Thank you for your recent letter concerning the sale and installation of
avionics.

Your client, a subsidiary of a corporation headquartered outside of the United
States, is in the business of selling new aircraft purchased from its parent to
third party customers. Your client's pilots take possession and title of the
new aircraft at the parent's location and fly the aircraft into the United
States. At the time your client takes possession of the new aircraft, the
airplanes are in an unfinished condition. The parent manufactures the aircraft
to a flyable condition, although the interior, certain avionics, communications
and auxiliary power equipment have yet to be installed.

In order to complete production on an unfinished aircraft, your client flies
the aircraft to its Texas-based facility. At the Texas facility, the
"finish-out" of the aircraft occurs. Included in the "finish-out" are the
following activities: installation of custom interior (including all seats),
painting the aircraft, avionics installation and installation of communications
and auxiliary power equipment. The installation of the avionics enables the
aircraft to fly at night, in inclement weather, at higher altitudes, at faster
speeds and with more agility. The "finish-out" activities typically take 3-4
months to complete. After your client has completed its "finish-out" of the
aircraft, the third party customer may test the aircraft in Texas before taking
final possession of it.

Title to a new aircraft passes from your client to third party customers in
three ways:

1) Title and possession to a finished aircraft may pass to the third party
customer in Texas.

2) Title and possession to an "unfinished" aircraft may also pass to the third
party customer in
Texas.

3) Alternatively, title to the "unfinished" aircraft may pass to the third
party customer outside of Texas. When title passes outside of Texas, the
aircraft is flown into Texas for the "finish-out" process. The third party
customer takes possession of the finished aircraft in Texas.

Your client structures its sales contracts in two ways:

1) Under the first method ("Method A") your client separates the sales
contract into two parts in order to recover costs more quickly. With the first
part of the contract, title to the new, unfinished aircraft passes to the third
party customer. Under the second part of the sales contract, your client
performs the "finish-out" activities.

2) Method B utilizes two separate contracts. Title to a new aircraft passes
to a third party customer in the first contract. The second contract
encompasses the "finish-out" activities to be performed. It is important to
note that the "finish-out" activities detailed in the second contract are
required pursuant to the original contract.

Issues

1. Your client wishes to confirm that under Methods A and B, when title to a
   finished aircraft passes to a third party customer, the activities necessary to
   complete the aircraft are considered part of the manufacturing process and
   therefore exempt from sales tax.

Response. When the initial contract stipulates that the work will be performed
and is a responsibility of the seller of the aircraft, the parent is a
manufacturer and the finish out is part of the manufacturing process.

2. Your client wishes to confirm that under Methods A and B, when title to an
   "unfinished" aircraft passes to a third party customer, the activities
   necessary to complete the aircraft are considered part of the manufacturing
   process and therefore exempt from sales tax.

Response. When the initial contract stipulates that the work will be performed
and is a responsibility of the seller of the aircraft, the parent is a
manufacturer and the finish out is part of the manufacturing process. The fact
that transfer of title to the unfinished aircraft is transferred prior to
contract completion does not change the fact that the client is the
manufacturer and seller of a completed aircraft.

3. Your client wishes to confirm that the 3-4 months required to complete the
   aircraft will not affect the tax exemption described in Texas Regulation, 34
   TAC Section 3.297(c)(9), for aircraft that is registered and used in another
   state.

Response. Your client should obtain an exemption certificate from the
customer, as outlined in this section, within 30 days of the sale. The sale
occurs when there is a transfer of title or possession for consideration. See
Texas Tax Code 151.0048.

4. Your client wishes to confirm that a third party customer's testing of the
   aircraft in Texas before taking final delivery will not impact the tax
   exemption described in Texas Regulation, 34 TAC Section 3.297(c)(9), for
   aircraft that is registered and used in another state.

Response. This testing prior to acceptance and delivery of the completed
aircraft will not effect the exemption in Rule 3.297(c)(9).

This opinion is based on the facts presented. Different facts though similar,
may result in different answers. If you have any questions or need more
information, you may call me toll free at 1-800-531-5441, extension 5-0613.
You may also write to Tax Policy Division, Comptroller of Public Accounts, Post
Office Box 13528, Austin, Texas 78711.

Sincerely,

Kevin Koller
Tax Policy Division