Were hourly aircraft-engine power charges taxable when they covered future inspection, maintenance, and repair costs?

Plain-English summary

The monthly aircraft-engine power charges were taxable payments for a service warranty. In exchange for a charge based on engine operating hours, the repairer bore covered inspection, maintenance, and repair costs, which indemnified the aircraft owner against those expenses.

Tax was due when the repairer received each power charge, not when an actual repair occurred. The Department rejected the owner's characterization of the payments as nontaxable prepayments because the warranty protection itself had already been issued and delivered.

The separate exemption for labor on repairs to qualifying aircraft did not reduce the tax on the warranty charge. Warranty consideration and a later repair transaction were distinct, so separately itemizing exempt repair labor could not generate a credit against tax paid on power charges.

What this means for you

Usage-based pricing does not prevent an agreement from being a service warranty. If the provider assumes future maintenance and repair costs in exchange for periodic payments, Florida can tax the protection when consideration is received.

Where repairs occur, who chooses the repair facility, and whether another state taxes repair work did not change the Florida tax on the separately issued warranty.

Common questions

Q: Why was the agreement a service warranty? It indemnified the aircraft owner against covered inspection, maintenance, and repair costs.

Q: When was tax due? When each power charge was received.

Q: Did tax wait until the aircraft was actually repaired? No. The warranty and repair were separate transactions.

Q: Could the aircraft-repair labor exemption offset tax on power charges? No. That exemption applied to repair labor, not to consideration for issuing the warranty.

Q: Did interstate aircraft operation create double taxation? The Department said no; another state's tax on repair work would concern a separate transaction.

Citations and references

• Fla. Stat. § 212.0506(1)-(3) — tax and definition of service warranties
• Fla. Stat. § 212.05 — separate tax on repair transactions
• Fla. Stat. § 212.08(7)(ff) — aircraft-repair labor exemption discussed in the ruling
• Fla. Admin. Code r. 12A-1.006 — aircraft repairs
• Fla. Admin. Code r. 12A-1.105 — service warranties and timing
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-051

Original ruling text

Aug 01, 1997

Re: Technical Assistance Advisement 97(A)-051 Aircraft Service Warranty XXX (herein Aircraft Owner) XXX (herein Repairer) XXX (herein Agreement) Sections 212.05, 212.0506(1), and (3), 212.08(7)(ff), F.S. Rules 12A-1.006, 12A-1.105(1)(b)1., F.A.C.

Dear :

This is a response, styled a Technical Assistance Advisement, to your letter dated February 5, 1997, wherein you asked whether payments made by Aircraft Owner to Repairer, in accordance with the Agreement, the terms of which require Repairer to inspect, maintain, and repair a Learjet 60 aircraft, are subject to sales tax. You contend that the Agreement is not a service warranty described in s. 212.0506, Florida Statutes. Consequently, you assert that the payments made by Aircraft Owner to Repairer in accordance with the Agreement are not subject to sales or use tax.

You have provided the Department with a copy of the Agreement. The sole issue is whether the monthly payments, designated as "power charges," which are paid by Aircraft Owner to Repairer, pursuant to the Agreement, are taxable. However, you have also asked three questions with respect to the Agreement to which the Department offers, at the close of this communication, its responses.

In Article 2.1, the scope of the Agreement is phrased in the following manner:

Subject to the mission profile and in consideration of the power charge for every eligible and support spare engine,
[Repairer] will supply the goods and services [as further provided in the Agreement]

The term "power charge" means the monthly billings to Aircraft Owner, which is determined by multiplying the number of hours each aircraft engine is operated, times an agreed figure for each such hour. In exchange for the payment of the monthly power charge, all costs associated with the inspection, maintenance, and repair of the aircraft engines are borne by Repairer, except if such work arises under certain exclusionary provisions which are not pertinent to any issues you raise in your letter. Repairer bills Aircraft Owner separately for the work when making repairs under such exclusions.

All work under the Agreement is performed at facilities designated or approved by Repairer. Aircraft Owner does not determine the location or the method of inspection, maintenance or repair.

You appear to bottom, principally, your contention of the nontaxability of the power charges required under the Agreement on the theory that they are really "prepayments" which precede the taxable event which is presumably the inspection, maintenance and repair of the aircraft. You express this theory on page 2 of your letter in the following manner:

[T]he payments made under this [Agreement] represent prepayments, and as such, service has not been rendered,
[which are] non-taxable until service has been performed.

You then supplement your position by adding that:

[T]axing the power charges monthly does not take into consideration various exemptions had [Aircraft Owner] been able to avail themselves of if service was performed as needed and payments remitted at such time.

Presumably, the exemption(s) to which you refer is the provision in s. 212.08(7)(ff), F.S., whereby labor is not subject to tax in a billing for the repair and maintenance of aircraft of more than 20,000 pounds of maximum certified takeoff weight.

Your final argument rests on what you consider as the dissimilarities between agreements to repair aircraft and those

to repair motor vehicles. You state that Rule 12A1.105(1)(b)1.b., F.A.C., which describes a motor vehicle warranty service agreement, may not be appropriately applied to an agreement which requires the inspection, maintenance and repair of an aircraft.

In support for this view you claim a motor vehicle, unlike an aircraft, is generally repaired in the state of purchase; that a motor vehicle owner, unlike Aircraft Owner, may select the dealership which is to effectuate the maintenance or repair; there is no specified exemption granted to motor vehicles, absent a service warranty, which is granted to the repair of aircraft as in s. 212.08(7)(ff), F.S., cited above; and, that Aircraft Owner might be subject to tax in several states which would not occur with respect to a service warranty on a motor vehicle.

In addition to the above arguments, you seek answers from the Department to three questions which appear on page 3 of your letter.

Department Position

Section 212.0506(1), F.S., levies sales tax on the privilege of engaging "... in the business of soliciting, offering, providing, entering into, issuing, or delivering any service warranty." Subsection (3) of the statute defines the term, "service warranty" in the following manner:

[A]ny contract or agreement which indemnifies the holder of the contract or agreement for the cost of maintaining, repairing, or replacing tangible personal property.

Rule 12A-1.105, F.A.C., interprets the statute and provides, in subparagraph (1)(b)1., examples of service warranties which include agreements indemnifying the warranty holder for the cost of parts or labor alone, or when the cost of both are specified. Section 212.0506(3), F.S., excludes only two classes of transactions from the meaning of "service warranty."

These exclusions are agreements with respect to tangible

personal property which would not be taxable if sold at retail, and tangible personal property which becomes a part of real property. Examples of these respective exclusions are service warranties of wheelchairs, and of central air conditioning systems.

Applying these statutory and administrative rule provisions to the Agreement, a determination is made that the Agreement is a service warranty, and the payment of the power charges in accordance with the Agreement is subject to sales tax, because the payment of the power charges indemnifies Aircraft Owner from the covered costs of inspection, maintenance or repair of the aircraft.

You argue that the power charges are prepayments for service yet to be performed. However, the power charges are payments given as consideration of the protection (or the indemnification) offered by the service warranty, and such charges should not be intermingled with any charges which may or may not be taxable when the actual inspection, maintenance or repairs are affected.

The power charges and the repairs are two separate transactions. The tax imposed by s. 212.0506, F.S., is imposed on the payments given as consideration of the solicitation, offer, provision, execution, issuance, or delivery of a service warranty. Here, at minimum, Aircraft Owner has been issued, and a delivery has been made, of a service warranty. The tax imposed by s. 212.0506, F.S., is properly levied on the power charges at issue.

You also object to the consideration of aircraft service warranties in the context of the examples in Rule 12A1.105(1)(b)1., F.A.C., of the various transactions which give rise to taxable payments under service warranties. You note, as expressed in this communication in preceding paragraphs, that there are important differences between the repair of motor vehicles and the repair of aircraft.

You state that motor vehicles are usually repaired in the state of purchase, that the vehicle owner may choose the location of repair, and you allege that to include aircraft under the same

provisions as motor vehicles could result in double or multiple taxation of aircraft because aircraft are intended for interstate travel.

The examples in Rule 12A-1.105(1)(b)1., F.A.C., are provided to alert taxpayers to the diverse transactions which give rise to taxable payments under service warranties. The inclusion in such examples of motor vehicle warranties is not meant to impose the characteristics of motor vehicles on those of aircraft. The examples are for illustrative purposes only.

Sales tax on repair of aircraft, motor vehicles or of any other tangible personal property is imposed by s. 212.05, Florida Statutes. The imposition of the tax on the payment made under a service warranty is provided in s. 212.0506, Florida Statutes. As a consequence, the operational differences between motor vehicles and of aircraft is of no relevance.

Similarly, the fact that Aircraft Owner does not choose, as does a motor vehicle owner, the location of the repair has no effect on the taxability of a service warranty. The terms of the Agreement which mandate that Repairer chooses the location for repair is merely a provision within the agreement. The taxability of a motor vehicle warranty would also not be affected should the agreement contain a similar provision.

As to the possibility of multiple taxation, you are reminded again that the repair and the payments made under the warranty are separate transactions. Any tax imposed on inspection, maintenance or repair in other states is not multiple taxation of the Florida sale of a service warranty because of the separate identity of the transactions. There is, as a consequence, no multiple or double taxation. See, in general, Ryder Truck Rental, Inc. v. Byrant 170 So.2d 822 (Fla. 1964), and American Video Corporation v. Lewis, 389 So.2d 1059 (Fla. 1DCA 1980)

Similarly, the exemption granted in s. 212.08(7)(ff), F.S., as to labor charges for the repair of aircraft with a takeoff weight of over 20,000 pounds is also not a counter to the taxability of power charges. Such an exemption applies to

repairs, and not to the consideration paid for issuance of a service warranty. The exclusions from the tax as discussed in the immediately preceding paragraph are not applicable to the Agreement because, absent the service agreement, the sale of aircraft, unlike the sale of wheelchairs, is taxable. Also, the repair of aircraft does not involve the annexation of tangible personal property to real property.

On page 3 of your letter you ask three questions. The Department's response appears after each question, and the answers should be considered in conjunction with the discussion provided by the Department in earlier paragraphs as to the application of the statutes, administrative rules and case law on the facts you have presented.

"1. In consideration of the entire set of facts surrounding the maintenance associated with the aircraft, would the
[Agreement] constitute a taxable service agreement under Florida Statutes Section 212.0506?"

As to question 1, the power charges are taxable as payments made pursuant to a service warranty.

"2. At what point has a taxable event occurred - when the monthly power charges are remitted, or when service has been performed on the aircraft?"

As to question 2, Section 212.0506(2), F.S., mandates that the "... tax is due and payable at the rate of 6 percent on the total consideration received or to be received by any person for issuing and delivering any service warranty." Rule 12A1.105(2)(b), F.A.C., states that the tax is due and payable "... at the time such consideration is received." Again, refer to the earlier discussion providing that the incidence of the tax on the service agreement is not dependent upon the moment of repair. The events are separate and distinct.

"3. If the [Agreement] is considered a taxable service agreement, can the taxpayer avail themselves of the labor exemption provided in Rule 12A-1.006, after a detailed invoice has been generated for service and report it to the State in the

form of a credit on subsequent tax returns?"

As to question 3, the separate itemization of the labor charges to gain the exemption in s. 212.08(7)(ff), F.S., has no relationship to the taxability of the power charges. Thus, Rule 12A-1.006, F.A.C., which interprets s. 212.05, F.S., as with the sale of tangible personal property in connection to the repair of tangible personal property has no relevance to the tax imposed on service warranties in s. 212.0506, Florida Statutes. Thus, any separate itemization of an exempt labor charge on the repair of aircraft weighing more than 20,000 pounds, as provided in s. 212.08(7)(ff), F.S., would have no effect on a billing of power charges pursuant to the Agreement.

This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., which is binding on the department only under the facts and circumstances described in the request for this advice as specified in s. 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules upon which this advice is based may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect the confidentiality of such information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or the response.

Sincerely,

Robert G. Parsons
Tax Law Specialist
Technical Assistance and Dispute

Resolution

Ctrl. No. 27989
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