Could an aircraft lessor obtain a refund for later common-carrier lease years after the aircraft's first three years were private leasing?

Plain-English summary

An aircraft lessor bought an aircraft in 1984 for private leasing, gave its seller a resale certificate, and reported tax on fair rental value. From July 1987 through June 1989, it leased the same aircraft to a common carrier and sought a refund for that later period.

Staff denied the refund because Regulation 1593's principal-use test looks only to the first 12 consecutive months beginning with the first operational use after purchase. The aircraft admittedly spent its first three years in non-common-carrier service, so later carrier use could not restart or replace the original test period.

The lessor's fair-rental-value election also continued throughout the 1984–1989 lease period. The memorandum said reporting on that basis was proper and legally required once elected.

Citations and references

• California Revenue and Taxation Code sections 6094(d), 6244(d), 6366, and 6366.1 (as cited)
• California Sales and Use Tax Regulations 1593 and 1661 (as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/105-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/105-0155.pdf

Original ruling text

State of California

Memorandum

To:

Audit Review and Refund Unit
(M. Kitchen)

From:

E. L. Sorensen, Jr.

Subject:

G--- P--SR -- XX-XXXXXX

Board of Equalization

105.0155
November 21, 1989

We understand the taxpayer, G--- P---(G---), purchased an aircraft in 1984 for the purpose of leasing it to private individuals. G--- gave its vendor a timely resale certificate and reported tax based upon fair rental value from the time of purchase in 1984 through June 1987. Between July 1987 and June 1989, G--- leased the aircraft to a common carrier and continued to report use tax based on fair rental value. G--- now seeks a refund for tax reported during the period the aircraft was leased to the common carrier. We indicated our opinion verbally that a refund was not due under these circumstances. You asked that we confirm our opinion in writing. This is to confirm our advice. Revenue and Taxation code Section 6366.1 provides for an exemption from sales and use taxes of certain leases of aircraft to common carriers. Regulation 1593, which interprets and clarifies Section 6366.1 and its companion Section 6366, provides for a twelve month principal use test (see Reg. 1593(b)). In order for the common carrier exemption to apply, the aircraft must be used in common carriage for more than half of the twelve month test period. The test period commences with the first “operational use” of the aircraft after its purchase. “Operational use” is defined in the regulation to include “… the actual time during which the aircraft is operated …” (Reg. 1593(b)(1)(A)). Here, the aircraft was admittedly operated in non common carriage service for the first three years after G&P purchased it and, accordingly, there is no basis for the Section 6366.1 exemption or claim for refund based thereon. We note that the taxpayer elected to report its tax liability based upon fair rental value. It reporting in this manner throughout the lease period under discussion (1984 – 1989), was proper and was required by law (See Rev. & Tax. Code §§ 6094(d), 6244(d); Reg. 1661(e)(2)).

ELS:jb