Could an aircraft lessor claim the common-carrier exemption after the aircraft's first years were private leases?

Plain-English summary

An aircraft lessor bought an aircraft for private leases, made a timely FRV election, and reported on that basis for about three years. It then leased the aircraft to a common carrier for two years and sought a refund of the FRV tax reported during that later lease.

The memorandum confirmed staff advice that no refund was due on those facts. The common-carrier exemption used a 12-month principal-use test beginning with the aircraft's first operational use after purchase.

Because the aircraft had been operated in private, non-common-carriage service throughout its first three years, it could not satisfy the opening 12-month test. The lessor therefore had to continue FRV reporting during the later common-carrier lease.

Dates, proof and live-summary differences

E. L. Sorensen, Jr.'s November 21, 1989 memorandum to the Audit Review and Refund Unit confirms earlier verbal advice. It describes a 1984 purchase with a timely vendor resale certificate, FRV reporting through June 1987, and common-carrier leasing from July 1987 through June 1989. It calls the first three years admitted non-common-carriage operation. The refund request, certificate, leases, flight hours and tax returns are not attached, and no claim amount or final administrative denial is provided.

The memorandum requires common carriage for more than half the first twelve-month period starting with first operational use after purchase. It cites Regulation 1593(b) and quotes actual aircraft operating time from subdivision (b)(1)(A). It says reporting on FRV throughout 1984–1989 was proper and required under sections 6094(d), 6244(d) and Regulation 1661(e)(2).

The live annotation instead describes two initial private-leasing years and cites Regulation 1593(c)(1), with “Am. 2004–2.” It provides no amendment document explaining the duration or subsection changes. This page preserves the PDF's three-year description and exact references without presenting either as a new current-law review.

Common questions

Did two years of later common-carrier use create a new test period?

No. The test began with the first operational use after purchase.

Could the lessor stop FRV reporting for the common-carrier lease?

No. The memorandum said continuing FRV reporting was proper and required.

Citations and references

• California Revenue and Taxation Code sections 6094(d), 6244(d), 6366, and 6366.1
• California Sales and Use Tax Regulations 1593 and 1661(e)(2)

Verbatim support

From the official memorandum:

In order for the common carrier exemption to apply, the aircraft must be used in common carriage for more than half of the twelve month test period.

The test period commences with the first “operational use” of the aircraft after its purchase.

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.pdf

Original ruling text

State of California

Memorandum

To:

Audit Review and Refund Unit
(M. Kitchen)

From:

E. L. Sorensen, Jr.

Subject:

G--- P--SR -- XX-XXXXXX

Board of Equalization

335.0043
November 21, 1989

We understand the taxpayer, G--- P---(G---), purchased an aircraft in 1984 for the purpose of leasing it to private individuals. G--- gave its vendor a timely resale certificate and reported tax based upon fair rental value from the time of purchase in 1984 through June 1987. Between July 1987 and June 1989, G--- leased the aircraft to a common carrier and continued to report use tax based on fair rental value. G--- now seeks a refund for tax reported during the period the aircraft was leased to the common carrier. We indicated our opinion verbally that a refund was not due under these circumstances. You asked that we confirm our opinion in writing. This is to confirm our advice. Revenue and Taxation code Section 6366.1 provides for an exemption from sales and use taxes of certain leases of aircraft to common carriers. Regulation 1593, which interprets and clarifies Section 6366.1 and its companion Section 6366, provides for a twelve month principal use test (see Reg. 1593(b)). In order for the common carrier exemption to apply, the aircraft must be used in common carriage for more than half of the twelve month test period. The test period commences with the first “operational use” of the aircraft after its purchase. “Operational use” is defined in the regulation to include “… the actual time during which the aircraft is operated …” (Reg. 1593(b)(1)(A)). Here, the aircraft was admittedly operated in non common carriage service for the first three years after G&P purchased it and, accordingly, there is no basis for the Section 6366.1 exemption or claim for refund based thereon. We note that the taxpayer elected to report its tax liability based upon fair rental value. It reporting in this manner throughout the lease period under discussion (1984 – 1989), was proper and was required by law (See Rev. & Tax. Code §§ 6094(d), 6244(d); Reg. 1661(e)(2)).

ELS:jb