Was an unattached aircraft engine leased and held on standby already mobile transportation equipment before installation?

Plain-English summary

Out-of-state audit staff asked whether unattached aircraft engines leased and stored in California as standby equipment were continuing taxable lease sales before the engines were installed on aircraft.

California concluded that, on and after November 23, 1970, a standby aircraft engine was mobile transportation equipment even before attachment. The source reasoned that MTE included property that is or becomes a component part of MTE and characterized classification as depending on the kind of property rather than its present use.

For the historical periods in the opinion, rental receipts attributable to unattached engines in California were taxable before November 23, 1970. On and after that date, tax was measured by the lessor's cost, with an offset for tax previously paid on rentals.

The source also said limited pilot-training use did not destroy the cited leased-aircraft exemption if the aircraft satisfied the principal-use test described for its first six months.

Historical example, unexplained cutoff, and missing records

The New York audit memo reportedly covered engines leased, stored, attached, and used on California aircraft before November 23, 1970 and continuing through the 1975 memorandum, with an audit period through March 31, 1971. That memo and all engine-level records are absent. The opinion gives no statute, regulation amendment, Board action, or other explanation for why November 23, 1970 changes the classification and measure.

After extended consideration and undocumented discussions with Thomas P. Putnam and Robert Nunes, counsel accepted New York's view that the property kind controlled before attachment. No engine model, serial number, aircraft, component compatibility, standby purpose, storage site, installation or removal record, lessor cost, lease, rent ledger, return, payment, offset computation, or final tax amount is included.

The illustration assumes an October 1, 1970 aircraft lease for $10,000 monthly plus a spare engine for $500 monthly; engine attachment on November 1; continued California presence of the removed engine; and the November 23 transition. It treats the $500 engine rentals as taxable continuing sales before the cutoff and the engine as MTE afterward, with use tax on lessor cost offset by prior rental tax. These are stated example facts, not documented transactions.

The pilot-training answer was also conditional. If the leased aircraft qualified under the six-month principal-use test cited to Annotation 105.0210, use for pilot training one-thirteenth of the time did not make rental receipts taxable. The underlying question, aircraft operations, test calculation, and exemption evidence are missing.

The official PDF first calls the aircraft exempt under section 6356.1, then twice uses section 6366.1. It gives no explanation. Annotation 335.0018 publishes substantially the same memorandum under a separate number. The live 335.0965 annotation preserves only the standby-engine MTE conclusion and component-part rationale; it omits the cutoff, pre- and post-cutoff tax measures, offsets, example amounts, pilot-training branch, inconsistent sections, duplicate publication, and absent records.

Common questions

Did the standby engine have to be physically attached first?

No. The opinion treated it as MTE before attachment because it was property that is or becomes an aircraft component.

How did the historical tax measure change?

Before November 23, 1970, California taxed the described rental receipts; afterward, it applied tax to lessor cost with an offset for prior rental tax.

Does the source give one consistent aircraft-exemption section number?

No. This official version prints both section 6356.1 and section 6366.1, so the page preserves that unresolved inconsistency.

Why did treatment change on November 23, 1970?

The memorandum does not say. It supplies no enactment, regulatory amendment, Board action, or other source for that date.

Citations and references

• California Revenue and Taxation Code sections 6356.1 and 6366.1, as printed inconsistently in this source
• California Sales and Use Tax Regulation 1661
• Business Taxes Law Guide Annotation 105.0210 — six-month aircraft principal-use test cited
• CDTFA Annotation 335.0018 — substantially the same memorandum published under a different annotation number
• New York audit memorandum and its final pilot-training question — referenced and summarized but not included
• Discussions with Thomas P. Putnam and Robert Nunes — referenced but not documented
• Engine leases, storage, installation and removal, aircraft use, rents, lessor costs, returns, offsets, pilot training, and tax records — not included

Verbatim support

From the official March 25, 1975 memorandum:

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.

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/335-0965.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---

335.0965

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. They 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
335.0965

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 6356.1. 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.

GLR:lb
cc:

Mr. Robert Nunes
Mr. T. P. Putnam