Is a long-term lease of aircraft to a Colorado operator that the FAA authorizes as an on-demand charter/air-taxi service exempt from Colorado sales and use tax under either aircraft exemption?
Plain-English summary
A company that makes long-term aircraft leases is thinking about basing its planes in Colorado to lease them to a Colorado operator. That operator is primarily an on-demand air-charter business; the FAA has also authorized it to run a limited air-taxi service (no more than four regularly scheduled flights per week on a route), but the FAA still classifies it as an "on-demand" operator, not a "scheduled" one. The company asked whether leasing its aircraft to that operator is exempt from Colorado sales/use tax.
First, the baseline: Colorado taxes sales and long-term leases of tangible personal property, including aircraft. A lease of more than three years is treated as a sale, and tax is calculated on the lease payments (§§ 39-26-104; 39-26-102(23)). So the lease is taxable unless an exemption applies — and Colorado has two aircraft exemptions, with which one (if any) applies hinging on the operator's FAA classification (scheduled vs on-demand):
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§ 39-26-711 — scheduled commercial airline exemption. Exempts sales and long-term leases of aircraft used by a commercial airline for interstate commerce, where "commercial airline" means carrying freight or passengers on regularly scheduled flights for a fee. Because the Colorado Operator is classified by the FAA as on-demand, not scheduled, the lease does not appear to qualify for this exemption.
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§ 39-26-711.8 — on-demand carrier exemption. Exempts sales and long-term leases of aircraft used for on-demand operations — but only if all three conditions are met: the aircraft is in Colorado only for final assembly, maintenance, modification, or completion; it is removed from the state within 120 days of the sale; and it is not present in the state more than 73 days in any of the three calendar years following the sale. The company's description suggests its planes (based in Colorado to be leased to a Colorado operator) won't meet those presence limits, so this exemption also does not appear to apply.
With neither exemption fitting, the long-term lease appears taxable on the lease payments.
What this means for you
Aircraft lessors and owners
The two Colorado aircraft exemptions are mirror images keyed to FAA status. The scheduled-airline exemption (§ 39-26-711) needs a regularly scheduled commercial airline as the user — an on-demand charter/air-taxi operator doesn't count, even one allowed a few scheduled flights a week. The on-demand exemption (§ 39-26-711.8) exists for that operator type, but it's really a transient-presence exemption: the plane has to be in Colorado essentially just for work on it and then leave (out within 120 days; ≤73 days/year for three years). A plane based in Colorado to be leased there generally blows those limits. Long-term leases (>3 years) are taxed like sales, on the stream of lease payments.
Charter and air-taxi operators
Your FAA classification drives the lessor's tax. Being authorized for a handful of scheduled flights doesn't convert you into a "scheduled" commercial airline for § 39-26-711. If you want the on-demand exemption to apply to aircraft you bring in, mind the 120-day removal and 73-day annual presence caps.
Accountants advising aviation clients
Pin down the FAA classification first (Part 121/commuter = scheduled; Part 135 on-demand = on-demand), then match it to the exemption: § 39-26-711 for scheduled commercial airlines, § 39-26-711.8 for on-demand carriers with the assembly/maintenance + 120-day + 73-day tests. See Rule 39-26-711.1(a) and FYI Sales 85. A long-term lease is a taxable sale on the payments. Note the home-rule-city caveat.
Common questions
Q: Is leasing aircraft to a charter/air-taxi operator exempt from Colorado sales tax?
A: On these facts, likely no. The scheduled-airline exemption (§ 39-26-711) requires a regularly scheduled commercial airline, and an FAA "on-demand" operator isn't one. The on-demand exemption (§ 39-26-711.8) could apply but only if the aircraft satisfies strict presence limits the company's planes likely won't meet.
Q: The operator runs a few scheduled flights a week — isn't it 'scheduled'?
A: No. The FAA still classifies it as on-demand. The § 39-26-711 exemption keys to being a regularly scheduled commercial airline, which this operator isn't.
Q: What are the conditions for the on-demand exemption (§ 39-26-711.8)?
A: The aircraft must be in Colorado only for final assembly, maintenance, modification, or completion; be removed within 120 days of the sale; and not be present in the state more than 73 days in any of the three following calendar years.
Q: How is a long-term aircraft lease taxed?
A: A lease of more than three years is treated as a sale, and Colorado sales tax is calculated on the lease payments.
Q: Can I rely on this letter?
A: Only as general guidance. A General Information Letter is not binding on the Department and uses "do not appear to qualify" language. For a binding answer on your facts, request a private letter ruling.
Citations and references
Statutes and rules:
- § 39-26-104, C.R.S. (tax on sales and long-term leases of tangible personal property, including aircraft)
- § 39-26-102(23), C.R.S. (lease over three years treated as a sale)
- § 39-26-102(7)(a), C.R.S. (purchase price)
- § 39-26-711, C.R.S. (exemption for aircraft used by a commercial airline in interstate commerce — scheduled)
- § 39-26-711.8, C.R.S. (exemption for aircraft used for on-demand operations; 120-day/73-day limits)
- 1 CCR 201-4, Rule 39-26-711.1(a); FYI Sales 85 ("Sales Tax Exemption on Aircraft and Aircraft Parts")
Source
- Landing page: Colorado Sales & Use Tax Letter Rulings
- Original PDF: GIL-16-019.pdf
Original ruling text
Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]
GIL-16-019
September 13, 2016
XXXXXXXXXXXXXXX
Attn: XXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: Leased On-Demand Aircraft
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXX (“Company”) a request for guidance regarding
the applicability of the sales tax exemption set forth in § 39-26-711, C.R.S. to Company’s lease
of its aircraft to a commercial airline company operating as an air-taxi in Colorado.
The Colorado Department of Revenue (“Department”) issues general information letters and
private letter rulings. A general information letter provides a general overview of the relevant tax
issues, but is not binding on the Department. A private letter ruling provides a specific
determination for a specific set of facts, is binding on the Department but not on the taxpayer,
and requires payment of a fee. For more information about general information letters and
private letter rulings, please see Department Rule 1 CCR 201-1, 24-35-103.5.
The Department treats this request as a general information letter. It is important to remember that
general information letters, such as this one, are general discussions of tax law and are not binding
on the Department. If Company would like the Department to issue a private letter ruling on the issue
raised here, Company can submit a request and pay the fee in compliance with Department Rule 1
CCR 201-1, 24-35-103.5.
Issue
Is the lease of aircraft by Company to a customer that is authorized by the FAA to provide
charter airline and air-taxi services exempt from sales and use tax?
Background
Company is in the business of making long term leases of aircraft. Company and its aircraft are
located outside Colorado but Company is contemplating basing its aircraft in Colorado for the
purpose of leasing them to a customer (“Colorado Operator”) located in Colorado. Colorado
Operator is primarily an on-demand air charter operator, but the FAA has granted it authority to
operate as an air-taxi operator that can make no more than four regularly scheduled flights on a
specific route between two or more points per week. Such an operator is classified by the FAA
as an on-demand operator, as opposed to a scheduled operator.1
Structure of Analysis
To determine whether the lease is subject to tax, the Department will examine the following
questions:
1. Are aircraft tangible personal property taxable under § 39-26-104, C.R.S.?
a. Is Company eligible for the exemption under §39-26-711, C.R.S. and Department
Rule 1 CCR 201-4, 39-26-711.1(a)?
b. Is Company eligible for the exemption under §39-26-711.8, C.R.S. for on-demand
carriers?
Discussion
Colorado imposes sales tax on the sale and long term lease of tangible personal property,
including aircraft.2 A lease of more than three years (long term lease) is treated as a sale for
Colorado sales tax purposes.3 Sales tax is calculated on the purchase price paid by the
consumer.4 The lease payments made by the lessee are the purchase price for long term
leases.
Colorado has two exemptions relating to sales and long term leases of aircraft and whether one
of the exemptions applies to Company will depend on how the Company’s operations are
classified by the Federal Aviation Administration (FAA). There are two basic FAA classifications
for aircraft - “scheduled” operations and “on-demand” operations. The first exemption under
which Company may qualify is in §39-26-711, C.R.S., which exempts sales and long term
leases of aircraft used by a commercial airline for interstate commerce.5 A commercial airline is
defined as an airline carrying freight or passengers on “regularly scheduled” flights for a fee
The FAA distinguishes between two types of operators under Part 135 of their regulations: on-demand carriers
and commuter carriers. Commuter carriers can operate 5 or more scheduled flights per week, and are classified as
scheduled operators. On-demand carriers are classified as on-demand operators. Operators under Part 121 of the
FAA regulations are scheduled operators.
2
§ 39-26-104, C.R.S.
3
§ 39-26-102(23), C.R.S.
4
§ 39-26-104, C.R.S. and § 39-26-102(7)(a), C.R.S.
5
§ 39-26-711, C.R.S.
1
(known as “scheduled” operations).6 Colorado Operator’s operations are not classified by the
FAA as “scheduled” operations but rather as “on-demand” operations. Company’s leases of the
planes to Colorado Operator do not appear to qualify for the exemption under §39-26-711,
C.R.S. because Colorado Operator is not a “scheduled” operator.
The second exemption under which Company may qualify is in §39-26-711.8, C.R.S., which
exempts sales and long term leases of aircraft used for “on-demand” operations. This
exemption applies if the aircraft is in the state only for final assembly, maintenance,
modification, or completion, the aircraft is removed from the state within 120 days after the date
of the sale, and the aircraft is not present in the state for more than 73 days in any of the three
calendar years following the sale.7 Company’s leases of the planes to Colorado Operator also
do not appear to qualify for the exemption under §39-26-711.8, C.R.S. because Company’s
description suggests that the planes will not meet the requirements of the on-demand carrier
exemption.
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the Department does not make a specific determination here on any
of the issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter
does not address sales and use taxes administered by home-rule cities and home-rule counties.
You may wish to consult with local governments which administer their own sales or use taxes
about the applicability of those taxes. Visit our web site at www.colorado.gov/tax for more
information about state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted
letter will be made public within 60 days of the date of this letter. Please let me know in writing
within that 60 day period whether you have any suggestions or concerns about this redacted
letter.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue
Department Rule 1 CCR 201-4, 39-26-711.1(a). See, also, FYI Sales 85 “Sales Tax Exemption on Aircraft and
Aircraft Parts”
7
§ 39-26-711.8 C.R.S.
6