Were an aircraft manufacturer's executive-transport, engineering-test, and certification flights nontaxable demonstration or display?

Plain-English summary

An aircraft manufacturer argued that use of a particular plane qualified as demonstration or display. Its flight records included executive and employee transportation, engineering tests, photography, ferry flights, and certification activity.

The Board concluded that the aircraft's use went beyond sections 6094 and 6244. Executives and other people traveled on one-way trips without being potential purchasers. Engineering flights tested components such as a proposed brake and influenced later models. Extensive flying also obtained civil-aviation certification that benefited future production by avoiding separate certification flights for later aircraft.

Because those operational and production uses were additional to any demonstration, the Board was not prepared to remove the plane's material costs from the tax measure.

What this means for you

Aircraft manufacturers

Classify each flight by its real objective. Passenger transportation, engineering development, and fleetwide certification benefits are not converted into demonstrations merely because the aircraft is also shown to customers.

Flight-test and engineering teams

Tests that affect future design or production are strong evidence of operational engineering use rather than sales demonstration.

Accountants and tax professionals

Flight-log labels matter but need explanation. The letter questioned entries such as “Test,” “Special,” “Photo,” “Ferry,” and “Demonstration” and looked beyond the label to the passengers and purpose.

Common questions

Q: Were executive one-way trips demonstrations?
A: No. The passengers were not potential purchasers.

Q: Why were engineering flights taxable?
A: They tested designs and components and influenced specifications for later aircraft.

Q: How did certification flights benefit production?
A: Flying this plane for many hours led the civil-aviation authority to waive comparable certification flights for future planes.

Q: Did the Board remove the aircraft's material costs from tax?
A: No. Based on the stated information, counsel would not recommend that adjustment.

Q: Could the manufacturer correct factual errors?
A: Yes. The letter invited the taxpayer to identify any inaccurate audit information.

Citations and references

• California Revenue and Taxation Code §§ 6094 and 6244
• California Attorney General Opinion 53/210 (November 22, 1954), regarding a separate sale held taxable
• Taxpayer's October 4, 1954 letter and supplemental information — described but not reproduced in the official PDF
• Aircraft flight log and auditor's account — selected entries and uses quoted or described; complete records not reproduced in the official PDF
• Exhibit C — returned to the taxpayer as requested; exhibit not reproduced in the official PDF
• Enclosed copy of Attorney General Opinion 53/210 — enclosure not reproduced in the official PDF
• Copy to a redacted Tax Administrator — copy recipient listed; no separate transmittal record supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0580
• Original supporting opinion: 210.0580 PDF

Original ruling text

210.0580

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

January 12, 1955

D--- A--- C---, Inc.
XXXX --- --- Boulevard
--- ---, California
Attention:

-- -X-XXXX

Mr. P--- S. F--Treasurer’s Staff Assistant
[Now: SY – XX-XXXXXX]

Gentlemen:
The undersigned has reviewed your letter of October 4, 1954, and the supplemental information submitted therewith, and discussed the contents thereof with Mr. Harry L. Say, Sales Tax Administrator. We are of the opinion that the use made of the plane H-XXXXX went beyond a reasonable interpretation of “demonstration or display” as used in Sections 6094 and 6244 of the Sales and Use Tax Law. It appears from your letter that on certain flights personnel were aboard for a purpose other than demonstration or display of the plane. For example, on page 6, it is stated that certain employees were on board on flight 188 from Oakland to Wright Field “whose purpose in being aboard was to assist in the negotiation for potential air cargo contracts with the military at Wright Field and Washington”. We note from the flight log that the object of this flight was designated as “XC”. We do not know the meaning of this designation. Other flights were designated as “Test”, “Spec.” or “Special”, “Photo”, Demonstra.” Or Demonstration”, “Test Ferry” or “Ferry”. We, of course, do not know the technical meaning of those terms, but would assume that those terms other than “Test” or “Demonstration” would mean some other or additional purpose. You will note that Sections 6094 and 6244 do not permit of any use other than retention, demonstration or display if tax is not to apply to the cost of the property or its component materials. The auditor states that the plane was used for the following purposes, clearly other than or in addition to demonstration or display: “Transported D--- executives, other people on one-way trips, such people not potential purchasers.

D--- A--- C---, Inc
Account No. -- - X - XXXX

-2-

January 12, 1955
210.0580

“Plane used extensively for engineering tests. Results of these tests influenced design and production of later models; i.e., tests of a new brake. Plane was flown repeatedly to determine adequacy of a proposed new brake. This brake was included in future specifications after successful tests. “C.A.A. certification accomplishes a purpose which benefits future production. C.A.A. requirements are such that taxpayer could be asked to fly each plane for 500 hours to prove the airworthiness of the design and specifications. However, by using this plane and flying a great number of hours, C.A.A. waived requirements on other planes, and certified all future DC-6’s without requiring certification flights.” If any of this information is in error, we shall, of course, be glad to be so informed. Accordingly, we are not in a position to recommend that the material costs of the plane in question be deleted from the measure of the tax. We are returning herewith Exhibit C as requested by you. Page 6, item 7, Sales to Q--- E--- A---, $17,621.55, was to be held in abeyance pending the issuance of an Opinion of the Attorney General requested on sales to Q--- by various vendors. This Opinion, 53/210, was issued November 22, 1954, holding the tax to be applicable. A copy is enclosed. Very truly yours,

E. H. Stetson
Tax Counsel

EHS:tj

cc:

--- --- – Tax Administrator