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
cc: XXX