Could an aircraft lessee buy repair parts for resale because its lease transferred title to the lessor and the lessor allegedly leased the parts back?

Plain-English summary

An aircraft lessee sought a refund by arguing that repair and maintenance parts were sold to the lessors when the lease agreements passed title, then leased back as part of aircraft leases exempt under section 6366.1.

Staff rejected that structure. The lessee had the obligation to repair aircraft in its possession and keep them operable for its own use and benefit. It therefore consumed the installed parts rather than selling them to the lessors for resale.

Passing title by contract did not convert the purchases into resale transactions or create exempt leasebacks of the parts. The 1972 staff document recommended denying the refund claim, and a 1996 Legal Division memorandum expressly agreed with that conclusion.

Citations and references

• California Revenue and Taxation Code section 6366.1 (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/105-0170.pdf

Original ruling text

SALES AND USE TAXES PRESENTED TO THE BOARD
FOR ACTION ON CLAIM FOR REFUND

105.0170

[U], Inc.
Tax Department
P.O. Box XXXXX
---, Illinois XXXXX
Account No. SY --- XX-XXXXXX
A claim for refund filed October 8, 1970 for the period January 1, 1967 through September 30, 1970, and subsequently amended to extend the period through November 22, 1970, for a total claim of
$1,625,350.82, was taken under consideration on September 12, 1972 to afford the staff an opportunity to re-examine the contentions advanced by the claimant. The claimant contended that the parts it installed to repair or maintain aircrafts leased to it, constituted sales to the lessor since title to these parts passed to the lessor, as provided by the lease contracts. The lessor then resold the parts back to [U] in the form of a lease, exempt under Section 6366.1, which exempts leases of aircrafts to common carriers. Therefore, the initial purchase of the parts by [U] were exempt as being for resale and entitled to a tax paid purchases resold credit. After review of the contentions presented by the claimant, the staff concluded that [U] was the consumer and not the seller of repair parts it installed on aircrafts leased to it. As a lessee, [U] had the statutory obligation to make the necessary repairs to the aircraft in its possession, and to maintain them in operable condition for use and benefit of [U]. No new or additional evidence have been submitted to support the claimants contentions, therefore, it is recommended that the claim for refund be denied. Should the recommendation of the staff be approved, notification to the taxpayer of the Board's decision will be as follows: The Board concluded that [U] Inc., was the consumer of parts installed on aircrafts leased by it and was not selling the parts to the lessors for resale by the lessors back to [U] by way of the exempt leases. Accordingly, the claim for refund was denied.

HK:jh
9-28-72

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
105.0170

To:

Mr. Glenn Bystrom

From:

Gary Jugum

Subject:

Non-Attorney Opinions

Date:

May 29, 1996

I have reviewed H. K. Lackmann’s Notice of Proposed Action of September 28, 1972 to the Board. We are in agreement with his conclusion, as follows:

Leased Aircraft – Repair Parts. The lessee of an aircraft has the statutory obligation to make the neessary repairs to the aircraft in its possession, and to maintain them in operable condition. Therefore, parts installed by the lessee to repair or maintain the aircraft are not sales to the lessor of the aircraft, notwithstanding the lease provision passing title to such parts to the lessor. The purchase of such parts by the lessee are not exempt as sales for resale to the lessor, nor sold back to the lessee by the lessor in the form of a lease exempt under section 6366.1. The lessee is the consumer of the parts. 9/28/72.