After the November 23, 1970 change, did Regulation 1661 apply to a standby aircraft engine before installation?

Plain-English summary

Out-of-state audit staff asked whether unattached aircraft engines leased and held in California on standby became mobile transportation equipment only when installed on an aircraft.

The PDF holds that on and after November 23, 1970 an engine on standby in California was MTE before attachment, because classification depended on the kind of property rather than its use. The live annotation expresses this as Regulation 1661 applying from the initial lease rather than installation. That summary should not erase the PDF's different treatment before the historical cutoff.

For the historical periods analyzed, California had taxed rental receipts for unattached engines in California before that date. Afterward, tax applied to the lessor's cost, with an offset for tax previously paid on the rentals.

The opinion also said that limited pilot-training use did not defeat the cited leased-aircraft exemption when the aircraft otherwise satisfied the principal-use test during its first six months.

Historical example and evidence limits

The March 25, 1975 headquarters memorandum, initialed “GLR,” responds to an undated New York inquiry routed through Out-of-State Auditing concerning redacted A--- I---. Staff had treated California rents for unattached engines as continuing sales through an audit period ending March 31, 1971, then questioned the treatment after November 23, 1970. Counsel consulted Putnam and Nunes and agreed that post-cutoff standby engines were MTE. The request, audit schedules and consultation records are not attached.

The source gives an illustration: on October 1, 1970, A leased B an aircraft for $10,000 per month plus a spare engine for $500. The aircraft was assumed exempt under section 6366.1. On November 1 the spare was installed in California and the replaced engine remained here. At the November 23 transition, the aircraft and unattached engine became MTE. The aircraft's $10,000 rentals remained exempt, while the engine's $500 California rentals were continuing sales up to the cutoff and its cost became the use-tax measure afterward.

The preceding legal conclusion allows an offset for tax paid on rentals, but the example ends with “an offset for the previous rentals paid.” The original preserves both statements. No engine cost, rate, rental-tax payment or offset computation is supplied to resolve the difference; do not treat rental dollars as a verified tax credit.

A separate pilot-training question concerns an aircraft otherwise meeting section 6366.1's exemption using the first-six-month principal-use test cited to Annotation 105.0210. The author says training for 1/13 of the time in the request's example would not make rental receipts taxable if the aircraft qualified. No actual use log, purchase date or exemption documents are supplied.

The live annotation covers only standby status and initial-lease timing. It omits the pre/post-cutoff tax measures, illustrative amounts, offset wording and training answer. No later refund, assessment adjustment or Board disposition is reported.

Common questions

Did installation trigger MTE status?

No for the post-November 23, 1970 treatment discussed. The live annotation states initial-lease timing; the PDF separately preserves the pre-cutoff continuing-sale treatment.

Why was an unattached engine treated as MTE?

California characterized it as property that is or becomes a component part of mobile transportation equipment.

What tax measure did the historical opinion use after November 23, 1970?

It used lessor cost, with an offset for rental tax already paid.

Citations and references

• California Revenue and Taxation Code section 6366.1
• California Sales and Use Tax Regulation 1661
• Annotation 105.0210 — cited principal-use test; the underlying annotation is not reproduced
• New York inquiry and consultation records — referenced but not attached

Verbatim support

From the official March 25, 1975 memorandum:

This conclusion is consistent with our theory that mobile transportation equipment is determined by the kind of property rather than its use.

On and after November 23, 1970, the unattached engines will be considered mobile transportation equipment with tax being due on their cost with an offset for the tax paid on the rentals.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/335-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/335-0018.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Out-of-State – Auditing (DMA)

From:

HDQRS – Tax Counsel (GLR)

Subject:

A--- I---

335.0018

Date:

March 25, 1975

SR --- XX XXXXXX

Please excuse our delay in responding to New York’s inquiry. This particular problem has given me more trouble than usual. From reviewing New York’s memo, we understand that they are concerned with the tax application of the unattached engines. The engines in question were leased, stored, and attached and used on aircraft in California prior to November 23, 1970 and have continued to be used in this manner to the present date. New York states that through the audit period of March 31, 1971, rental charges pertaining to the unattached engines while they were in California were considered taxable as a continuing sale. The now have some second thoughts as to whether after November 23, 1970 the unattached engines should be regarded as continuing sales while they are in California. Their concern centers around that portion of Regulation 1661 which provides that the definition of mobile transportation equipment includes tangible personal property which is or becomes a component part of mobile transportation equipment. Evidently, they are under the impression that prior to the time such equipment is attached to mobile transportation equipment that it constitutes mobile transportation equipment. After considering this problem at great length and discussing it with Messrs. Putnam and Nunes, it is our opinion that the New York audit staff is correct. Accordingly, the aircraft engine that is in California on stand-by on and after November 23, 1970 is regarded as mobile transportation equipment even prior to its attachment to the aircraft. This conclusion is consistent with our theory that mobile transportation equipment is determined by the kind of property rather than its use. Accordingly, applying this precept to New York’s aircraft engines, it is our opinion that during the period prior to November 23, 1970 the rental receipts that are attributable to the unattached engines during the time they are in California are properly subject to tax as continuing sales. On and after November 23, 1970, the unattached engines will be considered mobile transportation equipment with tax being due on their cost with an offset for the tax paid on the rentals.

Out-of-State (DMA)
(SR --- XX XXXXXX)

-2-

March 25, 1975
335.0018

The following example illustrates the above conclusion.
On October 1, 1970, A leases to B an aircraft for $10,000 per month plus a spare engine for $500 per month. The leased aircraft is exempt under Section 6366.1. On November 1, 1970, the spare engine is attached to the aircraft in California and the replaced engine remains in California after its removal. On November 23, 1970 the aircraft and unattached engine becomes mobile transportation equipment. The $10,000 per month payments made for the leased aircraft remains exempt under Section 6366.1 even after November 23, 1970. The $500 per month payments for the unattached engine is regarded as a continuing sale and is subject to tax on the rentals while in California up to November 23, 1970. On and after November 23, 1970, the unattached engine being mobile transportation equipment would be subject to use tax measured by the lessor’s cost with an offset for the previous rentals paid. In regard to New York’s last question regarding pilot training, it is our opinion that if the leased aircraft qualifies for the exemption under Section 6366.1 (we use the principal use test during the first six months after purchase as set forth in annotation 105.0210), no tax would be due on the rental receipts even though in their example the lessee used the aircraft 1/13 of the time for pilot training. If you have further questions concerning this matter, we will be happy to discuss them with you.

GLR:lb

cc:

Mr. Robert Nunes
Mr. T. P. Putnam