Was an aircraft engine always MTE when leased, even if a movie studio used it only as a wind machine?

Plain-English summary

Audit staff asked how to treat property that could serve either as a component of mobile transportation equipment or for a different purpose. The example was an aircraft engine temporarily leased to a movie studio for use as a wind machine.

California said the lease's purpose controlled. An aircraft engine leased for use on an aircraft was MTE used to transport persons or property. The same engine leased as a wind machine was not leased as MTE.

If an engine had been bought under a resale certificate, leased first to the studio with tax reported on rental receipts, and then leased for aircraft use, the lessor owed use tax measured by the engine's purchase price but received credit for tax already paid on the rental-receipts basis.

The memorandum separately declined to create a fixed rule for when an incomplete aircraft remained an "aircraft" under Regulation 1610. For vehicles, it said registration requirements controlled even if the vehicle was not running or lacked essential parts.

The two questions and missing attachment

The May 6, 1975 memorandum from headquarters Tax Counsel “GJJ” answers Hollywood Auditing's April 30 request. Sections 6023 and 6274 appear in the subject. The request itself and any engine purchase, studio lease, aircraft lease, election or tax-return records are absent. The wind-machine sequence is an example, not a reported completed transaction.

The author expressly says tax at a given time depends on whether acquisition cost was tax paid, a resale certificate was used, and elections were timely. The stated purchase-price tax and rental-tax credit therefore concern the described resale-certificate/studio-rent/aircraft-use sequence, not every later use of any engine.

The second question asks how Regulation 1610 applies to a four-engine aircraft missing two engines and other functioning parts, or a vehicle missing an engine or two wheels. The source quotes general aircraft, vehicle and vessel definitions, but supplies no separate incomplete-vessel outcome. It endorses R. H. Anderson's July 17, 1967 memorandum and quotes that staff should not make a set rule for aircraft. Although called an attachment, that memorandum is absent from the two-page PDF, so its fuller guidelines are not supplied here.

For vehicles, the author states staff's understanding that a device required to be registered under the Vehicle Code remains a vehicle for Regulation 1610 even when nonrunning or missing essential parts. It provides no actual DMV determination or numbered Vehicle Code provision.

The live annotation summarizes only the engine's transportation versus wind-machine use and tax-credit example. The PDF's separate incomplete-aircraft/vehicle discussion remains limited by the absent Anderson attachment.

Common questions

Was the movie-studio wind-machine lease an MTE lease?

No. The engine was not being used in transportation of persons or property.

What happened when the same engine was later leased for aircraft use?

The lessor owed use tax on purchase price, with credit for tax previously paid on rental receipts under the stated sequence.

Did the source adopt one fixed test for incomplete aircraft?

No. It endorsed a separate memorandum's guidelines and quoted its rejection of a set rule, but that attachment is missing, so the complete guidelines are unavailable here.

Citations and references

• California Revenue and Taxation Code sections 6023 and 6274
• California Sales and Use Tax Regulations 1610 and 1661
• April 30, 1975 request and July 17, 1967 Anderson memorandum — referenced but absent

Verbatim support

From the official May 6, 1975 memorandum:

The application of the tax at any point in time would then depend on the usual variables -- was the property tax paid on cost? was the property purchased under a resale certificate? were elections timely made?

It is immaterial that the vehicle may not be running or that some essential parts may not be present.

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/335-0043-150.pdf

Original ruling text

State of California

Board of Equalization
Legal Division

Memorandum

To:

Hollywood – Auditing (JKG)

From:

HDQRS – Tax Counsel (GJJ)

Subject:

Sections 6023 and 6274

335.0043.150
Date:

May 6, 1975

This is in response to your memorandum of April 30, 1975.
You raised essentially two questions. The first question involves the leasing of tangible personal property which can be either a component part of mobile transportation equipment or used for some other purpose. For example, the lessor of aircraft engines may also lease the engines temporarily to a movie studio for use as wind machines. The terms “sale” and “purchase” do not include a lease of “mobile transportation equipment for use in transportation of persons or property….” In the example given, the aircraft engine would be leased as “mobile transportation equipment for use in transportation of persons or property” when leased for use on an aircraft. It would not be so leased when leased for another purpose. The application of the tax at any point in time would then depend on the usual variables -- was the property tax paid on cost? was the property purchased under a resale certificate? were elections timely made? In particular, if the property had been purchased under a resale certificate and had been leased to the movie studio (with the lessor collecting use tax from the lessee) and the property was then leased for use on an aircraft, the lessor would owe use tax measured by the purchase price of the engine but he would be entitled to a credit for tax paid on the rental receipts basis. Your second question involves the meaning of the terms “aircraft”, “vehicle”, and “vessel” as used in Regulation 1610. “Aircraft is defined to mean ‘any powered contrivance designed for navigation in the air, except a rocket or a missle.” “Vehicle” means essentially any device by which any person or property may by propelled, moved or drawn upon a highway. “Vessel” means essentially any boat, ship, barge, craft, or floating thing designed for navigation in the water. You ask as to the application of Regulation 1610 if a 4-engine aircraft is sold with two engines missing and other malfunctioning parts at the time of sale, of if a motor vehicle is sold without an engine or with two wheels missing, etc. We have attached for your reference a memorandum prepared by Mr. R. H. Anderson of this staff on July 17, 1967, with respect to the question as to what constitutes an “aircraft”. We agree

Hollywood – Aud. (JKG)

-2-

May 6, 1975
335.0043.150

with Mr. Anderson’s conclusion that we “…do not think we can or should make any set rule to follow.” We also endorse the guidelines set forth in Mr. Anderson’s memorandum. With respect to vehicles, it is our understanding that if a vehicle is “…required to be registered under the Vehicle Code…” then we have taken the position that the vehicle is a “vehicle” for purposes of Regulation 1610. It is our understanding that DMV follows the same kind of vague rule with respect to vehicles that we follow with respect to aircraft. It is immaterial that the vehicle may not be running or that some essential parts may not be present.

GJJ:lb
Attachment.

335.0043.150.doc