My company bought a corporate jet out of state and dry-leased it to an affiliate that operates it entirely outside New York — do we owe New York sales or use tax now, and would it change if we later brought the plane to New York and used it to provide 'for hire' air transportation to that same affiliate?

Plain-English summary

Romex Examinations, Inc. and an affiliated company ("Affiliate") share a common corporate parent. In March 2008, Romex bought an aircraft, took delivery in Connecticut, and put nominal title into a trust while retaining the right to use, possess, and lease the plane. Romex never operated the aircraft itself — it immediately dry-leased it to Affiliate (meaning Affiliate supplies its own flight crew and maintains operational control), and Affiliate separately hired a third-party management company for crew and management services. The aircraft has always been based in Connecticut and has never flown in New York; Romex has no plans to operate it in New York during the lease term.

Romex asked three questions: (1) does sales/use tax apply to its purchase and lease-out of the aircraft under these facts; (2) if it later restructures, would the aircraft qualify for New York's commercial-aircraft exemption; and (3) what costs must it factor into its charges to satisfy the "for hire" requirement of that exemption.

On the current facts, no tax is due. New York's sales tax is a destination tax keyed to where possession transfers — since the aircraft was delivered in Connecticut, no sales tax applies, and since it's never been used in New York, no use tax applies either.

Romex then described a proposed future restructuring: terminate the lease with Affiliate, relocate the aircraft to a New York hangar, hire its own third-party crew/management company, operate the aircraft less than 50% of the time for its own business, and use it more than 50% of the time to provide paid intrastate/interstate/foreign air transportation to Affiliate — charging Affiliate based on a formula that apportions the aircraft's operating costs by percentage of use.

The Department held that under this proposed structure, the aircraft would qualify for the commercial-aircraft exemption in Tax Law §1115(a)(21), assuming two conditions hold: Romex's charges to Affiliate must reasonably reflect the actual costs of operating the aircraft, and Romex must retain dominion and control over the aircraft at all times (i.e., it's genuinely providing a transportation service to Affiliate, not just handing the plane over). New York's "commercial aircraft" definition requires the aircraft be used "for hire" — and when the transportation service is sold to a related company, the Department's long-standing rule (citing three prior opinions) is that the "for hire" requirement is satisfied only if the charges reflect real operating costs, not just a nominal or below-cost fee.

Finally, on what costs must go into that cost-reflective charge: everything — both the direct costs of each flight (fuel, landing fees) and a pro-rata share of indirect variable costs (maintenance) and indirect fixed costs (the cost of the aircraft itself, hangar rent, insurance, pilot salaries, and management fees).

What this means for you

Companies buying and leasing aircraft to affiliates

An out-of-state aircraft purchase and lease-out generally avoids New York sales/use tax entirely, as long as delivery and use stay outside New York. But the moment you plan to bring the plane into New York and use it to provide transportation services to a related company, you need the commercial-aircraft exemption — and that exemption is conditioned on genuinely cost-reflective billing and retained operational control, not just paperwork.

Corporate flight departments billing an affiliate for aircraft use

If you're relying on the commercial-aircraft exemption for affiliate transportation, your cost allocation needs to include the full economic cost of the aircraft — direct trip costs, pro-rata maintenance, and pro-rata fixed costs including depreciation-equivalent aircraft cost, hangar, insurance, and crew. Charging only incremental/direct costs risks failing the "for hire" test.

Accountants and tax professionals

This opinion is a useful checklist for the "for hire" requirement under Tax Law §1101(b)(17) in related-party aircraft arrangements — cite it alongside its three predecessor opinions (Pasquale & Bowers, CB Applications, Philip Morris Management Corp) when advising on cost allocation formulas.

Common questions

Q: Do I owe New York sales tax if I buy an aircraft out of state and lease it to an affiliate that never flies it in New York?
A: No — sales tax is keyed to where possession transfers (destination tax), and use tax requires actual use in New York. Neither applies if the purchase, delivery, and all use occur outside the state.

Q: What does "for hire" mean when I'm charging a related company for use of my aircraft?
A: The Department requires that the charges reasonably reflect the real costs of operating the aircraft — including a pro-rata share of fixed costs like the aircraft's cost, hangar rent, insurance, and pilot salaries, not just fuel and landing fees.

Q: Do I need to give up control of the aircraft to make the exemption work?
A: No — the opposite. The exemption analysis assumes the aircraft owner retains dominion and control at all times while providing the transportation service; giving that up would undercut the "for hire" transportation-service characterization.

Q: Does this ruling apply to my aircraft-leasing arrangement?
A: Not automatically. This is an Advisory Opinion binding only on the petitioner and only as to the facts it described — the exact cost-allocation formula, control arrangements, and usage percentages all matter, and your facts may differ.

Citations and references

Statutes and regulations:

• Tax Law §1101(b)(17) (definition of "commercial aircraft")
• Tax Law §1105(a) (tax on tangible personal property)
• Tax Law §1110 (compensating use tax)
• Tax Law §1115(a)(21) (commercial aircraft exemption)
• Sales Tax Regulation §525.2(a)(3) (destination tax; point of possession transfer)
• Sales Tax Regulation §531.1(a)(1) (use tax on out-of-state purchases used in New York)

Prior opinions referenced:

• Pasquale & Bowers, TSB-A-96(49)S
• CB Applications, LLC, TSB-A-00(6)S
• Philip Morris Management Corp, TSB-A-00(38)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_57s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-08(57)S
Sales Tax
October 1, 2008

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S080430B

Petitioner, Romex Examinations, Inc., asks the following questions: (1) whether the sales and
compensating use tax applies to petitioner’s purchase of a new aircraft and its subsequent lease of the aircraft to an
affiliated company under the circumstances described below; (2) whether the aircraft would qualify for the
commercial aircraft exemption in Tax Law section 1115(a)(21) after the proposed re-structuring described below;
and (3) what costs it would need to take into account in determining the charge for its transportation service to
satisfy the “for hire” requirement in the definition of “commercial aircraft” in Tax Law section 1101(b)(17).
We conclude that, under the facts here, (1) the sales and use tax does not apply to either petitioner’s
purchase of the aircraft or its subsequent leasing of the aircraft to its affiliate, because there was no sale or use in
New York; (2) after the proposed restructuring, the aircraft would qualify for the commercial aircraft exemption,
assuming petitioner’s charges to its affiliate for its transportation service reasonably reflect its costs of operating the
aircraft and it retains dominion and control of the aircraft at all times; and (3) in order to satisfy the “for hire”
requirement, petitioner must take into account all the expenses of operating the aircraft, including the cost of the
aircraft, in determining the charges for its transportation service.
Facts
A.

Purchase and Actual Use of the Aircraft

A corporation (corporation X) owns all the issued and outstanding stock and is the parent company of both
petitioner and another corporation (Affiliate). In March, 2008, petitioner purchased an aircraft. Delivery of the
Aircraft occurred in the State of Connecticut. At the time of delivery, petitioner entered into a trust arrangement
with a bank, under which nominal title to the Aircraft was put into a trust and the trust and petitioner entered into an
operating agreement that authorized petitioner to use, possess, and lease the aircraft to third-parties. To date,
petitioner has not operated the Aircraft. Rather, immediately upon accepting delivery of the Aircraft, petitioner
leased the Aircraft to Affiliate while the Aircraft was still in the State of Connecticut. The lease of the Aircraft
from petitioner to Affiliate is of a type commonly referred to in the aviation business industry as a “dry lease,”
meaning that the Aircraft is leased without a flight crew to operate the Aircraft, and that the lessee is responsible for
providing its own flight crew and for maintaining operational control of the Aircraft. Affiliate has separately
contracted with an unrelated third-party aircraft management company for the provision of executive aircraft
management and flight crew services. The Aircraft is currently based and hangared in the State of Connecticut.
Affiliate operates the Aircraft solely for its own business purposes. At no time since petitioner accepted delivery of
the Aircraft and leased the Aircraft to Affiliate has the Aircraft been operated within the State of New York.
Further, petitioner has no intention of operating the Aircraft within the State of New York during the term of the
dry lease.

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B.

TSB-A-08(57)S
Sales Tax
October 1, 2008

Proposed Restructuring
At some indeterminate future date, petitioner wants to restructure operations of the Aircraft as follows:
(1) the lease of the Aircraft to Affiliate would be terminated, and petitioner would commence operating the
Aircraft itself;
(2) Petitioner would relocate the Aircraft to a hangar facility in the State of New York;
(3) Petitioner would contract with a third party for the provision of executive aircraft management and
flight crew services;
(4) Petitioner would operate the Aircraft less than 50% of the flight hours for its own business purposes;
(5) Petitioner would operate the Aircraft primarily (i.e., more than 50% of the flight hours) to provide
intrastate, interstate and foreign air transportation services to Affiliate; and
(6) Petitioner would charge Affiliate for those air transportation services. The amount charged would be
based on a formula that apportions the costs of operating the Aircraft to petitioner and Affiliate based
on the respective percentages of use of the Aircraft (i) for petitioner’s own business purposes, and (ii)
to provide intrastate, interstate and foreign air transportation services to Affiliate.

Analysis
The first question asked by petitioner is whether its purchase and subsequent lease of the Aircraft to
Affiliate is subject to sales and use tax in New York. The sales and use tax is a destination tax, and the incidence of
tax and the tax rate depends on the point at which possession is transferred (Sales Tax Reg. sec. 525.2[a][3]). Here,
because the Aircraft was delivered out-of-state, no sales tax is due. Moreover, because the Aircraft has not been
used in New York, there is no use tax due for that aircraft (Tax Law section 1110; Sales Tax Reg. 531.1[a][1]).
The second question concerns the sales and use tax consequences of the restructuring plan discussed above.
Under that plan, petitioner would terminate its lease with Affiliate, relocate the Aircraft to a hangar in New York,
and use the Aircraft more than 50% of the time to provide air transportation services to Affiliate for hire, while also
using it for its own business purposes. Sales tax is imposed on the sale of tangible personal property delivered in
New York and use tax is imposed on the use of tangible personal property purchased out-of-state and used by the
purchaser in the State (Tax Law sections 1105[a]; 1110[a]). Tax Law section 1115(a)(21) exempts from sales and
use tax “[c]ommercial aircraft primarily engaged in intrastate, interstate or foreign commerce.” The Tax Law
defines “commercial aircraft” as “[a]ircraft 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” (Tax Law section 1101[b][17]). The Department has interpreted
the “for hire” requirement to mean that, when a transportation service is provided to a related company, the charges
for the service must reflect the costs of operating the aircraft (see, e.g., Pasquale & Bowers, Advisory Opinion,
August 1, 1996, TSB-A-96(49)S; CB Applications, LLC, Advisory Opinion, February 1, 2000, TSB-A-00(6)S;
Philip Morris Management Corp, Advisory Opinion, October 11, 2000, TSB-A-00(38)S). Because, upon its entry
into New York, over 50% of the aircraft’s use will be devoted to providing transportation services, for
compensation, to Affiliate, and the compensation will reasonably reflect the cost of operating the Aircraft, the
Aircraft will be considered a commercial aircraft primarily engaged in intrastate, interstate or foreign commerce,
thus qualifying for the exemption in section 1115(a)(21) of the Tax Law. The conclusion that petitioner will be
using the Aircraft to provide transportation services to Affiliate assumes that petitioner will maintain dominion and
control over the Aircraft at all times.

TSB-A-08(57)S
Sales Tax
October 1, 2008

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Finally, petitioner asks what expenses it must take into account to ensure that its charges reasonably reflect
the costs of operating the Aircraft, thereby satisfying the “for hire” requirement in the definition of “commercial
aircraft” in Tax Law section 1101(b)(17). The charges should reflect all expenses that petitioner incurs in order to
provide those services, including (1) direct costs (e.g., fuel costs, landing fees, etc.) of operating the Aircraft to
provide transportation services to Affiliate, and (2) a pro-rata portion of its indirect variable costs (e.g.,
maintenance costs) and indirect fixed costs (e.g., the cost of the Aircraft, hangar rent, insurance, pilot salaries, and
aircraft management fees) (see Philip Morris Management Corp, Advisory Opinion, supra).

DATED: October 1, 2008

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts
set forth therein and is binding on the Department only with respect to the person or entity
to whom it is issued and only if the person or entity fully and accurately describes all
relevant facts. An Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific time period at issue
in the Opinion.