Is a corporate aviation subsidiary's acquisition of a temporary 'interim' aircraft and a permanent replacement aircraft, plus the third-party financing lease used to fund both purchases, exempt from New York sales and use tax?

Plain-English summary

ABC is a wholly owned subsidiary that provides ground and air transportation services to its Parent company, Parent's other subsidiaries and affiliates, and unrelated third parties doing business with them (dealers, customers, suppliers). ABC is genuinely separate from Parent in every practical sense: its own officers and board (including an independent director), its own vendor relationships and credit, its own general ledger and bank account for both receipts and disbursements including payroll, its own employer ID number, and its own dedicated flight staff (three pilots and a maintenance person). ABC will buy a used "Interim Aircraft" to use temporarily while awaiting delivery of a "New Aircraft" from the manufacturer, then trade in the Interim Aircraft. Both aircraft will be delivered to ABC outside New York and then brought into the state, where they're based at ABC's own leased hangar (separate from Parent's facilities) when not flying. A third-party finance company will fund both purchases, holding title as security and "leasing" the aircraft to ABC until the loan is paid off through lease payments plus ABC's purchase option.

ABC charges related companies a pro-rata hourly rate approximating the aircraft's operating cost, plus a periodic retainer covering fixed costs, and charges unrelated third parties (mainly Parent's dealers bringing customers for plant tours) at similarly cost-reflective rates. ABC alone handles scheduling, fueling, maintenance, recordkeeping, pilots, and flight clearances, and exercises full possession, dominion, and control over the aircraft at all times.

Because more than 50% of the aircraft's use is devoted to transporting people for compensation that tracks operating cost, both the Interim Aircraft and the New Aircraft qualify as "commercial aircraft primarily engaged in intrastate, interstate or foreign commerce" under § 1115(a)(21) — so their purchase and use in New York are exempt from sales and use tax. The financing structure adds a wrinkle the Department resolved cleanly either way: if the finance company's "lease" to ABC is really just a financing device securing a loan (not an actual equipment rental), the lease payments aren't taxable rental receipts in the first place. But even if the arrangement is treated as a genuine lease of tangible personal property, the same § 1115(a)(21) commercial-aircraft exemption extends to cover those lease payments too. Either way, none of ABC's payments to the finance company are subject to sales or compensating use tax.

What this means for you

Corporate aviation subsidiaries acquiring or upgrading aircraft

A temporary "bridge" aircraft used only until a permanent replacement arrives can qualify for the same commercial-aircraft exemption as the aircraft it replaces — the exemption doesn't require a single, permanent aircraft, as long as each one independently meets the more-than-50%-compensated-transport test while it's in service.

Companies financing aircraft purchases through sale-leaseback or similar arrangements with a finance company

Don't assume a financing "lease" automatically creates a taxable rental — if it's genuinely just a financing mechanism, there's no taxable rental receipt at all; and even if it is characterized as a true lease, the underlying commercial-aircraft exemption travels with the asset and covers the lease payments too.

Accountants and tax professionals

This is a useful companion citation to TSB-A-03(17)S and TSB-A-03(12)S (the IBM Credit Corp and "XYZ" aviation-subsidiary opinions from the following year) — all three apply the same dominion-and-control/cost-based-compensation framework to a wholly owned aviation subsidiary, this one adding the financing-lease wrinkle.

Common questions

Q: Does a temporary "bridge" aircraft get the same tax treatment as the permanent aircraft it's replacing?
A: Yes, as long as it independently meets the commercial-aircraft test (more than 50% compensated transport use) during the period it's in service — the exemption isn't limited to a single permanent aircraft.

Q: Are aircraft financing-lease payments always taxable as equipment rental?
A: Not necessarily — if the "lease" is really just a mechanism for financing the purchase (with the finance company holding title merely as security), it isn't a taxable rental at all; and even a genuine lease of a qualifying commercial aircraft carries the same exemption as an outright purchase.

Q: Does charging affiliates a cost-based hourly rate support the commercial-aircraft exemption?
A: Yes — compensation that reasonably reflects the aircraft's operating cost (rather than an unrelated flat fee or free use) supports treating the arrangement as a genuine transportation service, which is part of what makes the aircraft "commercial" for exemption purposes.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(17) (commercial aircraft definition)
• Tax Law § 1105(a) (retail sales tax)
• Tax Law § 1115(a)(21) (commercial aircraft exemption)

Prior rulings referenced:

• Pasquale & Bowers, TSB-A-96(49)S
• Citiflight, Inc., TSB-A-00(30)S
• Philip Morris Management Corp., TSB-A-00(38)S
• CNY Equipment Rental and Sales Corp., TSB-A-96(47)S
• Matter of Aero Instruments & Avionics, Inc., TSB-D-95(43)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a02_47s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(47)S
Sales Tax
September 18, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S020111A

On January 11, 2002, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Ernst & Young, LLP, 1400 Key Tower, 50 Fountain Plaza, Buffalo,
New York 14202. Petitioner, Ernst & Young, LLP, provided additional information with respect
to the Petition on May 17, 2002.
The issue raised by Petitioner on behalf of its client, ABC, is whether, under the
circumstances presented, ABC’s acquisition and use of the interim aircraft and the new aircraft in
New York State are exempt from sales and compensating use tax under Section 1115(a)(21) of the
Tax Law.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner’s client, ABC, a wholly owned subsidiary of Parent Co. (Parent), is a service
company responsible for providing ground and air transportation services to Parent and its
subsidiaries and affiliates. ABC also provides transportation services to unrelated third party
dealers, customers, suppliers and various other parties doing business with Parent and its
subsidiaries and affiliates.
ABC is a separate legal entity from Parent and Parent’s other subsidiaries and affiliates.
ABC operates under its own name and has its own officers and Board of Directors (which includes
a director who is not an employee of either ABC or Parent). ABC has its own business relationships
and has established credit under its own name with vendors that are unique to its operations.
ABC maintains a separate general ledger and maintains its own bank account for day-to-day
operations. The account is used for depositing receipts from transportation fees and making check
disbursements for all operational expenses, including payroll.
ABC has four employees dedicated to flight services, consisting of three aircraft pilots and
one aircraft maintenance person. ABC has its own payroll separate from any related parties. ABC
has its own employer identification number. ABC contracts with an unrelated third party payroll
processing company to distribute payroll, withhold and remit payroll taxes and file all payroll
returns. Payroll and payroll tax expenses are paid from ABC’s bank account.
ABC will acquire a previously owned aircraft (“Interim Aircraft”) from an aircraft dealer to
be used for a short period until a new aircraft (“New Aircraft”) is available from the manufacturer.
ABC will acquire the New Aircraft from the aircraft manufacturer and trade in the Interim Aircraft.

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Sales Tax
September 18, 2002

Delivery of the Interim Aircraft and the New Aircraft to ABC will occur outside of New York State.
ABC will bring the aircraft into New York State, where the aircraft will reside when not in use.
ABC’s Chief Pilot is responsible for the acquisition, including negotiations with the aircraft
dealer and manufacturer, as well as selection of the Aircraft, additional equipment and accessories.
Neither Parent nor any of the subsidiaries or affiliates will have an ownership interest in the
aircraft. A third party finance company will provide financing for the acquisition of both aircraft.
As security, the finance company will hold title to the aircraft and “lease” such aircraft to ABC until
the loan is paid in full via the “lease” payments and the exercise of ABC’s purchase option.
ABC operates its air transport services from an airport hangar facility in New York State at
a separate location from Parent and its affiliates. The hangar is leased from an unrelated party.
ABC will operate the Aircraft under Part 91 of the FAA regulations. ABC also owns motor vehicles
to provide ground transportation services to its subsidiaries and affiliates. ABC insures these
vehicles and aircraft under its corporate name.
ABC will use the Aircraft to transport individuals employed by Parent, related companies
and their customers, third party dealers and their customers, suppliers and other parties transacting
business with Parent and subsidiaries. ABC will transport such individuals, for a fee, on intrastate,
interstate, and international flights. If the individuals are employees of Parent, its subsidiaries and
affiliates, ABC will charge the individual’s corporate employer an inter-company charge at a pro
rata flat rate per hour. The rate is intended to approximate the per hour operating cost of the
Aircraft. Parent, its subsidiaries and affiliates will also pay ABC a periodic retainer in an amount
that reflects fixed costs of the Aircraft.
Unrelated third parties (primarily Parent’s dealers) who may use the Aircraft to transport
customers to Parent’s manufacturing facilities for plant tours will be charged for flight services at
rates reflective of the Aircraft’s operating costs. ABC issues fee invoices for transportation services
to all customers, both third parties and related parties. Checks for payment of invoices are made out
to ABC. Some customers, particularly related parties, may make payments by wire or electronic
transfer from bank to bank.
ABC will be responsible for all flight services and operation of the Aircraft, including
scheduling, fueling, maintenance and repairs, flight and maintenance record keeping, providing
pilots, obtaining flight clearance and making appropriate landing arrangements. ABC personnel
handle all purchasing of goods and services related to the transportation operations. The Chief Pilot,
an employee of ABC, approves all expenses for payment. ABC has a definitive arrangement with
a related party to provide accounts payable processing services and bookkeeping.
ABC will at all times exercise possession, dominion and control over the Aircraft.

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TSB-A-02(47)S
Sales Tax
September 18, 2002

Applicable Law and Regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section
eleven hundred ten, the following terms shall mean:
*

*

*

(17) Commercial aircraft. Aircraft used primarily (i) to transport persons or
property, for hire, (ii) by the purchaser of the aircraft primarily to transport such
person’s tangible personal property in the conduct of such person’s business, or (iii)
for both such purposes.
Section 1105(a) of the Tax Law imposes sales tax on the receipts from every retail sale of
tangible personal property, except as otherwise provided.
Section 1115(a)(21) of the Tax Law exempts from the sales tax imposed by Section 1105(a)
of the Tax Law and from the compensating use tax imposed under Section 1110:
Commercial aircraft primarily engaged in intrastate, interstate or foreign
commerce, machinery or equipment to be installed on such aircraft and property used
by or purchased for the use of such aircraft for maintenance and repairs and flight
simulators purchased by commercial airlines.
Opinion
Since over fifty percent of the use of ABC’s aircraft is devoted to transporting employees,
dealers, customers, suppliers of Parent, its subsidiaries and affiliates for compensation as described
above, and the compensation reasonably reflects the cost of operating the aircraft, the aircraft are
commercial aircraft primarily engaged in intrastate, interstate or foreign commerce, within the
meaning of Section 1115(a)(21) of the Tax Law. See Pasquale & Bowers, Adv Op Comm T & F,
August 1, 1996, TSB-A-96(49)S; Citiflight, Inc., Adv Op Comm T & F, August 3, 2000,
TSB-A-00(30)S; and Philip Morris Management Corp., Adv Op Comm T & F, October 11, 2000,
TSB-A-00(38)S. Accordingly, the purchase and use of the Interim Aircraft and New Aircraft are
exempt from New York State and local sales and compensating use taxes.
The finance company will provide financing for the acquisition of both aircraft and will hold
title to the aircraft. If the “lease” by the finance company to ABC is merely a financing
arrangement, the payments made would not be subject to sales and compensating use tax as they

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TSB-A-02(47)S
Sales Tax
September 18, 2002

would not be considered receipts from the rental or lease of tangible personal property. If the lease
transaction is truly a rental of tangible personal property by the finance company to ABC, the
exemption provided by Section 1115(a)(21) of the Tax Law would apply to the lease payments. See
CNY Equipment Rental and Sales Corp., Adv Op Comm T&F, July 23, 1996, TSB-A-96(47)S; and
Matter of Aero
Instruments & Avionics, Inc., Dec Tax App Trib, October 5, 1995, TSB-D-95(43)S. In either case,
the payments made by ABC to the finance company are not subject to sales and compensating use
tax.

DATED: September 18, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.