Was an aircraft's first flight from Delaware to California an exempt interstate use when the buyer's vice president and two nonemployees were aboard?

Plain-English summary

A California business's vice president was authorized to accept delivery of a Falcon 50 jet at the Wilmington, Delaware airport. He then flew to California aboard the aircraft with two passengers who apparently were not connected to the company.

The memorandum concluded that the delivery occurred in Delaware and the first functional use occurred outside California when the aircraft transported the authorized vice president back here. The additional passengers did not defeat the historical Regulation 1620(b)(2)(B) exemption.

Three later California flights for pilot ratings, crew training, and flight checks were incidental to continuous interstate use. A San Jose-to-Oakland leg that picked up passengers for Colorado also remained part of an interstate journey. The memorandum warned that dropping off a passenger in Oakland would instead have created an in-state flight and use-tax liability.

Because the aircraft qualified under the interstate-commerce provision, the memorandum did not decide whether it independently qualified under Regulation 1620(b)(3).

The four identified later flights were three California flights for pilot type ratings, crew training, or flight checks and a January 30, 1984 San Jose–Oakland–Fort Collins round trip that picked up Colorado-bound passengers in Oakland. Counsel warned that carrying and dropping a company employee from San Jose to Oakland would instead have made that leg intrastate and produced tax.

The same source also analyzed a Sabreliner bought in Oregon after a prior lease ended and answered four questions covering both aircraft. The August 6 and October 2 requests, attached purchase documents, authorizations, passenger manifests, flight logs, training and testing records, and tax calculation are absent. A handwritten source note says subdivision (b)(3) technically applies first; counsel did not decide it because another no-tax ground was clear.

Common questions

Why did the Delaware-to-California flight count as the buyer's interstate use?

The attached documentation, not reproduced, reportedly authorized the vice president to accept the aircraft for the company in Wilmington. Transporting that employee back to California after delivery was therefore the buyer's functional interstate activity.

Did the two nonemployee passengers defeat the result?

No under the memorandum. Counsel said their presence on the same return flight did not remove the historical continuous-interstate-commerce treatment.

Why were the three training and testing flights treated as incidental?

Counsel used Regulation 1593(c) and (e) only by analogy: the common-carrier rule did not count crew-training or aircraft-testing flights as operational flights. The source supplies no complete flight logs or facts applying every condition of that regulation.

Why did the Oakland leg remain interstate?

The January 30 flight went from San Jose to Oakland to pick up passengers bound for Fort Collins, then returned to San Jose. Counsel treated the pickup leg as part of a continuous interstate journey, while warning that a San Jose passenger dropped in Oakland would have created an in-state flight.

Did the lack of a company office in Delaware matter?

No. The response treated the vice president's documented authority to accept delivery as controlling and said a company location in the delivery state was immaterial.

Did California storage count under the alternative test?

The response said California storage would count as in-state use in Regulation 1620(b)(3)'s six-month analysis if that subdivision applied. It did not perform the calculation because it found the separate continuous-interstate-commerce provision sufficient.

Was this a final audit result?

No. The source provides a legal opinion to a district auditor but no aircraft prices, tax calculation, completed audit, assessment, claim, appeal, Board decision, or later outcome.

Citations and references

• California Sales and Use Tax Regulation 1620(b)(2)(B) and (b)(3) — applied or discussed for continuous interstate commerce, first use, entry, and California storage; complete authorities, calculation and proof rules, amendments, later history, and current law not supplied
• Sales and Use Tax Regulation 1593(c) and (e) — invoked by analogy for incidental training and testing; complete authority, common-carrier conditions, analogy limits, amendments, later history, and current law not supplied
• BTLG Annotation 570.0430 paragraph 4 — cited for an intrastate passenger drop-off; underlying opinion, complete facts and authority, history, later treatment, and current status not supplied
• 1987 district memoranda and attachments, earlier Sabreliner memorandum, and October 19 response — no underlying requests, documents, complete aircraft records, tax calculation, final audit, assessment, claim, appeal, Board decision, or later outcome supplied
• Official Annotation 325.0016's historical Falcon conclusion and date — omits most provenance, authority, dates, flight facts, records, joint analysis, sequencing note, later outcome, and reliance status and supplies no additional aircraft record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/325-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-0016.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. R. M. Gilbertson,
San Jose – District Principal Auditor

From:

John Abbott, Tax Counsel

325.0016

Date:

October 19, 1987

Subject: --- Aircraft Purchased out of state – use in interstate commerce

In your August 6, 1987 memo to Legal, you raise the question of whether tax applies to purchases of two aircraft by ---. One aircraft is a North American Rockwell Sabreliner, purchased in Oregon on January 13, 1983 from --- California partnership. The second aircraft is a Falcon 50 Jet, purchased from --- and delivered on August 3, 1983 to a --- vice-president at the Wilmington, Delaware airport. You attached to your memo various documents concerned with the purchases of these two aircraft. You also sent me a memo dated October 2, 1987, with additional facts concerning the Sabreliner. These two memos and attachments are summarized below. With respect to the Sabreliner, --- had previously leased the aircraft to ---, with the lease expiring on the date of purchase. On that date, --- pilots flew the plane with some --- employees as passengers to Corvallis, Oregon, where the lease terminated and the purchase occurred. The plane returned to California with other --- employees as passengers. I assume that for six months thereafter the plane was used for interstate flights only. With respect to the Falcon 50 Jet, when --- delivered the plane at Wilmington, Delaware, --vice-president, accepted delivery and returned to California on the plane together with two nonemployee passengers. For the next six months, all flights were from California to out-of-state locations, except four flights. Three flights were for type rating pilots, crew training, and pilot flight check, and one flight was from San Jose to Oakland to Fort Collins, Colorado, and return to San Jose. This flight carried passengers from Oakland to Fort Collins. You raise the following questions, which we will quote and answer below: Question “1. Do these aircraft qualify as exempt under Reg. 1620 (b) (2) (b) as claimed by the taxpayer?”

Answer. Our opinion is that the Sabreliner qualifies as exempt from use tax under Regulation 1620 (b) (2) (B), because this aircraft was purchased out of state, flown into California in an interstate commerce activity, and thereafter used continuously in interstate commerce for the next six months. Although the aircraft was flown from San Jose to Corvallis, Oregon, by --pilots on the purchase date, the taxpayer now asserts and you agree that the aircraft was previously leased by --- to --- until the date it was purchased by ---. Therefore, contrary to my May 23, 1984 memo to Mr. A. L. Cade, Occasional Sales Unit, related to this same aircraft, we can no longer assert use tax due on the grounds that --- took delivery in San Jose, not Corvallis, Oregon. With respect to the Falcon 50 Jet, our opinion is that --- purchase also qualifies as exempt under Regulation 1620 (b) (2) (B) since the delivery of the aircraft occurred in Wilmington, Delaware, the aircraft was accepted by a --- vice-president in Delaware, and the first functional use of the aircraft occurred out of state when the aircraft was used to fly that employee back to California. The exemption is not lost because other passengers not apparently connected to --- also flew on the airplane at the same time. The four flights you refer to in your memo do not cause the exemption to be lost because, while the flights occurred in California, they all qualify as incidental to --- continuous use of the aircraft in interstate commerce. Specifically, three of the flights were for training or testing purposes, and one portion of one flight, the January 30, 1984 flight from San Jose to Oakland, appears to be part of a continuous interstate journey where the flight was for the purpose of picking up passengers in Oakland and flying them to Colorado. However, we note that if on that flight --- had flown an employee from San Jose to Oakland, and dropped that employee off in Oakland, then we should conclude the plane was used for an in-state flight, not continuously in interstate commerce, even though the flight continued on to Colorado, and the use tax would apply. (See BTLG Annotation 570.0430, para. 4, 3/23/84). Although not directly applicable here, Regulation 1593 provides an analogy with respect to the training and testing flights. Subdivisions (c) and (e) of that regulation allow aircraft common carriers to not count as operational flights, flights which are for the purpose of training crews or testing the aircraft. These uses are considered incidental to the use of the aircraft as a common carrier. Question “2. How does Reg. 1620 (b) (3) apply to these aircraft?” Answer. Regulation 1620 (b) (3) (out-of-state purchases for use in state) would only apply to these aircraft purchases if the planes had not been used continuously in interstate commerce. However, since the purchases are exempt from use tax under subdivision (b) (2) (B), for the reasons stated above, it therefore makes no difference whether they would independently qualify under subdivision (b) (3).
*note: technically 1620 (b) (3) applies first! If not purchased for use in Cal, analysis over-no tax. It purchased for use, taxable unless exempt continues interstate commerce. Practically speaking if one or the other basis for no tax is clear, it may not be necessary to discuss other as here. DHL

Question
“3. Does storage time based in California count toward the 50% usage for the first six months?” Answer. If subdivision (b) (3) applied, storage time in California would count as in-state use in determining whether or not an aircraft was principally used in California in the six months following its entry into California. However, as noted above, we consider that subdivision (b)(3) does not apply to these aircraft. Question “4. Does the presence of the Corporate Vice President on the Initial flight qualify as being engaged in its (taxpayer) interstate business? --- does not have a location in Delaware.” Answer. Yes. According to the documentation you enclosed, the vice-president, --- was authorized to take delivery of the aircraft in Wilmington on behalf of ---. Therefore, his presence on the flight from Delaware to California constituted a functional use of the aircraft by --- in interstate commerce following the out-of-state delivery. It is immaterial that --- has no company location in Delaware.