Did selling or trading an aircraft after an FRV election create extra use tax when reported rentals were below its purchase price?

Plain-English summary

A Delaware company's only business was reportedly leasing one aircraft bought outside California. Around completion of refurbishment, it leased the aircraft to parties contemplating a California airport base. The lessor intended to make a timely fair-rental-value election and asked what would happen if it later ended the business and sold, disposed of, or traded in the aircraft.

California said the FRV election was an alternative tax-computation method, not an installment plan toward tax on the aircraft's purchase price. If the aircraft was disposed of during its useful life while aggregate reported rentals were below the purchase price, that difference alone did not trigger additional use tax.

An out-of-state sale, disposition, or trade-in would not create additional California sales or use tax merely by virtue of disposal. A California sale would be taxable. Withdrawing the aircraft from lease inventory for another use could also create additional tax. The letter also said the lessor needed a seller's permit to make the election.

Permit question, future events, and source wording

The CPA had submitted a seller's-permit application to a named Van Nuys employee after Board personnel said one was required, but asked whether a consumer-use-tax account was more appropriate. Counsel required the seller's permit even though the liability was use tax, explaining that in ordinary circumstances it allowed a lessor to issue a resale certificate. The application, agency response, permit, account, and any certificate are absent.

The source does not establish that the aircraft entered California, the contemplated airport became its base, the return due date arrived, the election was made timely, FRV tax was reported, aggregate FRV fell below cost, leasing stopped, the aircraft was withdrawn for other use, or an outside or California disposition occurred. It provides no aircraft identity, purchase price or cost, refurbishment record, lease, rent, FRV measure, return, tax payment, sale price, trade-in value, or final tax amount.

Counsel's no-additional-tax answer is narrow: a shortfall between aggregate FRV measure and aircraft cost, followed by sale or other outside disposition including trade-in, did not itself create catch-up use tax. The letter separately says withdrawal for another use produced additional tax and a California sale was taxable, without calculating either result.

The live 335.8000 annotation says initial tax is measured by “purchase price,” aggregate “rental receipts” may be lower, and the election is to pay tax on “rental receipts.” The PDF instead says initial “cost,” aggregate measure on the “fair rental basis,” and an election to pay on “fair rental value.” The live page omits the Delaware lessor, outside purchase, refurbishment, contemplated California base, planned-not-proven election, permit/account question, ordinary resale-certificate rationale, and California-sale distinction. It also carries “M98–3,” which the PDF does not explain.

Common questions

Did California require a final catch-up payment to the purchase-price measure on disposal?

No. The letter said the FRV method was not an installment election.

Was every later aircraft sale outside California's tax?

No. The letter expressly said a California sale would be taxable.

Did the source show that the election or aircraft disposal actually occurred?

No. The election was intended and the disposal was a future possibility; the return, election, FRV reporting, withdrawal, sale, and trade-in records are absent.

Citations and references

• California Revenue and Taxation Code section 6244
• California Sales and Use Tax Regulation 1661(b)(2)
• Requester's September 25, 1997 facsimile — referenced and summarized but not included
• Seller's-permit application submitted to Mr. Tran of the Van Nuys office — referenced but not included
• Aircraft purchase, refurbishment, lease, California basing, certificate, return, FRV election and reporting, withdrawal, sale or trade-in, and tax records — not included
• Live annotation's M98-3 maintenance note — not explained in the PDF

Verbatim support

From the official September 29, 1997 letter:

In situations where the aircraft is disposed of during its useful life, the aggregate measure of tax on the fair rental basis may be less than the purchase price. This alone does not trigger application of additional use tax.

The election is not true “installment” election, but is an alternative method of tax computation.

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/335-8000.pdf

Original ruling text

335.8000

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET - SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE: (916) 445-3723
FAX: (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG,
JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
_______

September 29, 1997

JOHN CHIANG
Acting Member
Fourth District, Los Angeles
_______
E. L. SORENSEN, JR.
Executive Director

Mr. J--- S--S--- & C---, CPA
XXXX --- -----, CA XXXXX
Sent via facsimile transmission
to (XXX) XXX-XXXX
Re:

Mobile Transportation Equipment

Dear Mr. S---:
This is in reply to your facsimile transmission of September 25, 1997. We understand that your client, B--- A---, L.L.C., a Delaware company, purchased an aircraft outside of California. B--- is a lessor of a single aircraft. This is its only business. On or about the time refurbishment was completed, the aircraft was leased to parties who contemplated bringing the aircraft to [city] airport, which will serve as its base. B--- intends to make an election under Sales and Use Tax Regulation 1661(b)(2) to “elect to pay its use tax liability measured by the fair rental value” by making an election before the due date of the return. You have been advised by State Board of Equalization personnel that B--- would be required to obtain a seller’s permit. You submitted an application for such a permit to Mr. Tran of our Van Nuys office. You inquired as to whether an application for a consumer use tax account would be more appropriate for the purpose of making the election. While the tax in question is a use tax, we do require that the lessor obtain a seller’s permit. In ordinary circumstances, this enables the seller to issue a resale certificate to its vendor, in order to acquire the aircraft tax free.

Mr. J--- S---

-2-

September 29, 1997
335.8000

Your real question, however, concerns application of the tax when the aircraft is taken out of lease service and resold. An aircraft is regarded as mobile transportation equipment under the California Sales and Use Tax Law. The lessor is required to pay tax measured by the cost at the time of acquisition, or the lessor may elect to pay tax on the fair rental value basis. In situations where the aircraft is disposed of during its useful life, the aggregate measure of tax on the fair rental basis may be less than the purchase price. This alone does not trigger application of additional use tax. The election is not true “installment” election, but is an alternative method of tax computation. The election provided by Revenue and Taxation Code section 6244 is available when the use of the property is limited to leasing. If the property is withdrawn from lease inventory for other use, additional tax will be due. We understand at some point your client may decide to discontinue its leasing business and sell or otherwise dispose of (including trade-in) the aircraft out of state. No additional sales or use tax would be due by virtue of such disposal. If the aircraft were sold in California, that transaction would be subject to tax. Very truly yours,

Gary J. Jugum
Assistant Chief Counsel
GJJ:sr