Can a leasing LLC buy an aircraft tax-free and pass the commercial-aircraft sales tax exemption through to the affiliated and unrelated companies that lease and operate it?

Plain-English summary

M Ventures, LLC ("Ventures") and Arrow Operations, LLC ("Arrow") are both single-member LLCs owned by the same media company (Wenner Media, publisher of Rolling Stone and Men's Journal), operating as separate "brother/sister" entities. Ventures' only activity is buying an aircraft and leasing it out — either to Arrow, or to an unrelated charter operator ("CharterCo") — based on availability, with Ventures handling insurance, hangar space, and maintenance and having final say over the lease schedule. Arrow leases the plane from Ventures (paying by flight hour) and then uses it to fly employees, officials, and guests of the Wenner media companies, charging them a cost-based fee under FAR Part 91 that's meant to just cover Arrow's own leasing and operating costs; Arrow keeps full operational control of the plane while it has it. CharterCo separately leases the same plane from Ventures (paying Ventures 85% of its hourly charter revenue) and, operating under the more heavily regulated FAR Part 135, charters it out to unrelated third parties at market rates, likewise retaining full dominion and control while it's in CharterCo's possession.

The Department worked through three linked questions. First, since Ventures' only activity is leasing the plane out to others, its purchase of the aircraft qualifies as an exempt purchase for resale — buying something you're only ever going to lease out, never use yourself, is treated the same as buying inventory to resell. Second, whether Arrow's and CharterCo's lease payments to Ventures are themselves exempt turns on whether the plane counts as a "commercial aircraft": if more than half its use goes toward transporting people for hire, and the fee charged reasonably reflects the cost of operating it, that test is met — and it was met here for both lessees (Arrow's cost-based fee to Wenner-affiliated flyers, and CharterCo's market-rate third-party charters), so both leases are exempt (with each lessee furnishing Ventures an Exempt Use Certificate). Third, because both Arrow and CharterCo retain complete operational dominion and control over the plane while they have it, their own downstream charges to the people they fly are treated as nontaxable transportation service fees, not taxable equipment rentals.

The Department flagged one important limit: all of this assumes Ventures, Arrow, and their related Wenner entities are respected as genuinely separate legal entities. If an examination showed the companies were so commingled or dominated by their common parent that they were really operating as each other's alter egos, the entire structure would collapse for tax purposes — Ventures' purchase would then be treated as a purchase for its own (or the group's) use rather than for resale, losing the resale exemption entirely, even though CharterCo's own separate commercial-aircraft exemption could still survive independently.

What this means for you

Corporate groups structuring aircraft ownership through a separate leasing entity

A single-purpose leasing LLC that never itself uses the plane — only ever leases it out — can buy the aircraft tax-free as a purchase for resale, as long as its lease payments are themselves exempt (commercial aircraft test) or otherwise taxed appropriately.

Affiliated flight departments billing cost-based fees to sister companies

Charging Wenner-style affiliates a fee that's genuinely tied to your actual cost of leasing and operating the aircraft (not an arbitrary markup) supports treating the plane as a "commercial aircraft" for the leasing exemption, as long as more than half its use goes to transporting people for compensation.

Groups relying on related-entity structures for tax treatment

Keep real operational and financial separation between the leasing entity and its lessees — genuinely distinct insurance, accounting, decision-making, and financial responsibility. If the entities are so intertwined that they're functioning as one, the whole exemption chain can unravel, even though each entity was set up on paper as separate.

Common questions

Q: Can a company that only leases out an aircraft (and never flies it itself) buy that aircraft tax-free?
A: Yes — if leasing to others is its sole activity, the purchase qualifies as an exempt purchase for resale.

Q: What makes an aircraft a "commercial aircraft" for New York's leasing exemption?
A: More than 50% of its use must go toward transporting people or property for hire, and the compensation charged must reasonably reflect the cost of operating the aircraft.

Q: What happens if the related companies in a structure like this are found to be alter egos of each other?
A: The leasing entity's purchase would no longer qualify as a purchase for resale (since it would really be for the group's own self-use), though a genuinely unrelated lessee's separate commercial-aircraft exemption could still hold up on its own.

Citations and references

Statutes and rules:

• Tax Law § 1101(b)(4) (retail sale; resale exclusion)
• Tax Law § 1101(b)(5) (sale, selling, or purchase; includes rentals and leases)
• Tax Law § 1101(b)(17) (definition of commercial aircraft)
• Tax Law § 1105(a) (retail sales of tangible personal property)
• Tax Law § 1115(a)(21) (commercial aircraft exemption)
• 20 NYCRR 526.7 (sale/rental/lease definitions; transfer of possession)

Prior advisory opinions relied on:

• John B. Pike and Son, Inc., TSB-A-85(29)S (resale exclusion requires property purchased exclusively for resale)
• Pasquale & Bowers, TSB-A-96(49)S; CB Applications, LLC, TSB-A-00(6)S; Philip Morris Management Corp, TSB-A-00(38)S (over-50%-for-hire commercial aircraft test)
• Harfred Operating Corporation, TSB-A-86(28)S (alter ego / disregarded entity doctrine)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a04_11s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(11)S
Sales Tax
April 27, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S030825A

On August 25, 2003, the Department of Taxation and Finance received a Petition
for Advisory Opinion from M Ventures, LLC and Arrow Operations,LLC, c/o Ernst & Young, LLP,
5 Times Square, New York, New York, 10036. Petitioners, M Ventures, LLC and Arrow
Operations, LLC, submitted additional information pertaining to the Petition on November 7, 2003,
December 12, 2003, and March 8, 2004.
The issues raised by Petitioners relating to the purchase, lease, and ultimate use of an aircraft
under the following circumstances, are:
1.

Whether M Ventures, LLC (“Ventures”) may purchase the aircraft exempt from
New York sales and use taxes since it will lease the aircraft 100% of the time to
other entities, as described below.

2.

Whether lease payments to Ventures will qualify for exemption under the
commercial aircraft exemption pursuant to section 1115(a)(21) of the Tax Law.

3.

Whether payments to the lessees by third parties will be exempt from sales and use
taxes as charges for the provision of a nontaxable transportation service.

Petitioners submitted the following facts as the basis for this Advisory Opinion.
Ventures and Arrow Operations, LLC (“Arrow”) are single member LLC’s, wholly owned
by Wenner Media LLC (“Wenner”). Business operations of the group are conducted through
Wenner, and Wenner’s wholly owned single member LLCs, Rolling Stone LLC (“Rolling Stone”)
and Men’s Journal LLC (“Men’s Journal”). Ventures and Arrow are, in effect, brother/sister entities
of Rolling Stone and Men’s Journal. Ventures and Arrow are separate and distinct legal entities that
operate independently of one another and of their affiliates.
Ventures will purchase an aircraft that it will lease to Arrow or an unrelated Air Charter Co.
(“CharterCo”) based on availability. This is Ventures’ only activity. Ventures is responsible for
insurance, acquiring hangar space, and the costs to maintain and repair the aircraft. Ventures is also
responsible for and has final authority over scheduling the lease of the aircraft. Both Arrow and
CharterCo are required to notify Ventures in advance when they have a need to lease the aircraft.
In the event of a conflict, the request which is received first is the one which is honored.
The lease fees paid by each lessee to Ventures are based upon hourly rates. Arrow will pay
a lease fee to Ventures based upon the number of hours the plane is leased. CharterCo’s lease fee

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to Ventures is based upon a percentage of charter revenue, which is similarly based upon the number
of flight hours related to each charter.
Arrow will provide transportation services to affiliates for compensation. Arrow will be
responsible for its costs relating to operating the plane (such as making lease payments, employing
pilots, fueling the airplane and accounting or administrative functions associated with its operation
of the airplane). As is currently the case with other members of the affiliated group, accounting and
administrative functions will be performed by a related entity and charged to Arrow based on costs
incurred. Arrow will enter into a fuel and services agreement with CharterCo to purchase fuel and
services (such as weather forecasting).
Arrow will charge Wenner, Rolling Stone or Men’s Journal an amount which reflects the
cost of operating the airplane. Arrow will operate the aircraft under Part 91, Subpart F of Federal
Aviation Regulations (hereinafter FAR), for operations described herein, and is not required to
obtain an Air Carrier Operating Certificate under FAR Part 135. Arrow will utilize the plane to
provide transportation services to the employees, officials and guests of Wenner, Rolling Stone or
Men’s Journal for compensation as allowed under FAR Part 91. It will have full dominion and
control of the aircraft while in its possession.
Pursuant to a written transportation service agreement, Wenner, Rolling Stone and Men’s
Journal will be charged a fee which under FAR Part 91 may not exceed Arrow’s fixed and variable
costs of leasing and operating the aircraft. The costs allocated to these users will be in accordance
with a formula based on flight hours. It is the intention that charges to Wenner, Rolling Stone and
Men’s Journal, in total, will cover all of Arrow’s fixed and variable costs of leasing and operating
the aircraft.
Ventures will also lease the plane to CharterCo, which will utilize the plane for the
transportation of third parties (not employees, officials or guests of Wenner, Rolling Stone or Men’s
Journal) for a fee. CharterCo is an air taxi operator authorized to charter aircraft to third parties.
It will operate the aircraft under FAR Part 135 when it leases the aircraft from Ventures. It will have
full dominion and control of the plane while in its possession. CharterCo will be responsible for its
costs of operating the plane (such as making lease payments, arranging for pilots and fuel) when
leasing and using the aircraft. CharterCo will charter the aircraft to third parties for a market rate
fee (hourly rate) and it will pay Ventures a lease payment equal to 85% of these hourly charter fees
less direct operating expenses (including fuel) incurred by CharterCo.
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:

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*

*

*

(4) Retail sale. (i) A sale of tangible personal property to any person for any purpose,
other than (A) for resale as such or as a physical component part of tangible personal
property. . . .
*

*

*

(5) Sale, selling or purchase. Any transfer of title or possession or both, exchange
or barter, rental, lease or license to use or consume (including, with respect to computer
software, merely the right to reproduce), conditional or otherwise, in any manner or by any
means whatsoever for a consideration, or any agreement therefor, including the rendering
of any service, taxable under this article, for a consideration or any agreement therefor.
*

*

*

(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 provides an exemption for:
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.
Section 526.7 of the Sales and Use Tax Regulations provides, in part:
(a) Definition.
(1) The words sale, selling or purchase mean any transaction in which there is a
transfer of title or possession, or both, of tangible personal property for a consideration.
(2) Among the transactions included in the words sale, selling or purchase are
exchanges, barters, rentals, leases or licenses to use or consume tangible personal property.
*

*

(c) Rentals, leases, licenses to use.

*

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(1) The terms rental, lease and license to use refer to all transactions in which there
is a transfer for a consideration of possession of tangible personal property without a transfer
of title to the property. Whether a transaction is a "sale" or a "rental, lease or license to use"
shall be determined in accordance with the provisions of the agreement. . . .
*

*

*

*

*

(e) Transfer of possession.
*

(4) Transfer of possession with respect to a rental, lease or license to use, means that
one of the following attributes of property ownership has been transferred:
(i) custody or possession of the tangible personal property, actual or
constructive;
(ii) the right to custody or possession of the tangible personal property;
(iii) the right to use, or control or direct the use of, tangible personal property.
Opinion
Section 1105(a) of the Tax Law imposes a sales tax on the receipts from every retail sale of
tangible personal property, except as otherwise provided. Section 1101(b)(4) provides, in relevant
part, that a retail sale is a sale of tangible personal property to any person for any purpose, other than
for resale. The resale exclusion applies only when the tangible personal property is purchased
exclusively for resale. See John B. Pike and Son, Inc., Adv Op St Tx Comm, July 26, 1985,
TSB-A-85(29)S; P-H Fine Arts, Limited et al, Dec Tax App Trib, October 13, 1994. Since
Ventures’ only activity is the rental or lease of an aircraft to either Arrow or CharterCo, it may
purchase the aircraft exempt from sales and use tax as a purchase for resale.
The taxability of the subsequent rental or lease of the aircraft to Arrow or Charterco is
dependent on whether the aircraft qualifies as commercial aircraft as defined by section 1101(b)(17)
of the Tax Law.
Arrow will be responsible for its costs relating to operating the plane (such as making lease
payments, fueling the aircraft, employing the pilots, and any accounting or administrative functions
associated with its operation of the airplane). Arrow will charge the users an amount which reflects
Arrow’s costs of leasing and operating the aircraft. The costs allocated to the users will be in
accordance with a formula based on flight hours. Where over fifty percent of an aircraft’s use is
devoted to transporting customers for compensation, and the compensation reasonably reflects the

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cost of operating the aircraft, such aircraft will be considered a commercial aircraft primarily
engaged in intrastate, interstate or foreign commerce for purposes of section 1115(a)(21) of the Tax
Law. Therefore, the purchase (via rental and lease) of the aircraft by Arrow, assuming more than
fifty percent of its use of the aircraft is in the provision of air transportation services for hire, would
qualify for the exemption provided by section 1115(a)(21) for commercial aircraft. See Pasquale
& Bowers, Adv Op Comm T & F, August 1, 1996, TSB-A-96(49)S; CB Applications, LLC, Adv Op
Comm T&F, February 1, 2000, TSB-A-00(6)S; Philip Morris Management Corp, Adv Op Comm
T&F, October 11, 2000, TSB-A-00(38)S.
CharterCo will utilize the plane for the transportation of third parties for a fee. CharterCo
is an air taxi operator authorized to charter aircraft to third parties. It will operate the aircraft under
Part 135 of Federal Aviation Regulations when it leases the aircraft from Ventures and will have full
dominion and control of the plane while in its possession. It will pay Ventures 85% of the hourly
charter fees less direct operating expenses. Where over fifty percent of an aircraft’s use is devoted
to transporting customers for compensation, and the compensation reasonably reflects the cost of
operating the aircraft, such aircraft will be considered a commercial aircraft primarily engaged in
intrastate, interstate or foreign commerce for purposes of section 1115(a)(21) of the Tax Law.
Therefore, the purchase (via rental and lease) of the aircraft by CharterCo, assuming more than fifty
percent of its use of the aircraft is in the provision of air transportation services for hire, would
qualify for the exemption provided by section 1115(a)(21) for commercial aircraft. See Pasquale
& Bowers, supra; CB Applications, LLC, supra; Philip Morris Management Corp, supra.
It appears, therefore, that Arrow and CharterCo will each use the aircraft primarily to
transport persons for hire. Since the aircraft will qualify as a commercial aircraft under section
1101(b)(17) of the Tax Law, charges paid by Arrow and CharterCo to Ventures will be exempt from
sales tax, provided that Arrow and CharterCo submit a properly completed Exempt Use Certificate,
Form ST-121, to Ventures.
In addition, since Arrow and CharterCo retain complete dominion and control over the
operation of the aircraft, Arrow’s charges to the employees, officials, and guests of related entities
and CharterCo’s charges for air taxi services are charges for the provision of nontaxable
transportation services.
The above analysis presumes treatment of CharterCo, Arrow, Ventures, and the related
companies as separate legal entities. It also presumes that the accounting and administrative
functions are performed on behalf and in the name of Arrow. However, if the activities of Ventures,
Arrow, or their related companies were so dominated and controlled by the parent or each other, or
their activities were so commingled, that they would be considered to be operating as alter egos of
each other rather than separate legal entities, then the limited liability company and corporate
structures would be disregarded and the conclusions reached in this opinion would not apply. See
Harfred Operating Corporation, Adv Op St Tx Comm, July 18, 1986, TSB-A-86(28)S.

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If an examination showed that the related entities in the present case should be disregarded
as separate legal entities for purposes of sales tax, the aircraft would not be considered to be
purchased exclusively for resale but rather purchased for self use by the related limited liability
company and/or corporation. Under such circumstances, Ventures’ purchase of the aircraft would
not qualify as a purchase for resale, and would not qualify for the commercial aircraft exemption.
The rental of the aircraft to CharterCo, however, could still qualify for exemption under section
1115(a)(21) of the Tax Law.

DATED: April 27, 2004

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.