Is buying and leasing an aircraft interest through a fractional-style program a taxable property purchase or a nontaxable transportation service?
Plain-English summary
Two affiliated Delaware LLCs (LLC2 owns LLC1) participated in a manager's "Flexjet One" aircraft program. LLC1 bought a one-third interest in an aircraft and leased that interest to LLC2; the manager flies and operates the plane. The petitioners asked whether the deal is a nontaxable transportation service or a taxable purchase of property, and how the exemptions apply.
1. It's a purchase of tangible personal property, not a transportation service. The line between a taxable property purchase and an exempt transportation service is dominion and control (TSB-A-09(23)S; Chanel 08(23)S; The Gap 00(3)S). Although the manager supplies pilots, insurance, and operations, the purchasers can sell the aircraft before the 36-month point (subject to the manager's right of first refusal) and can retain or dispose of it afterward. That's enough dominion and control to make participation a taxable purchase of property, unlike conventional fractional-ownership programs.
2. LLC1's purchase = exempt for resale. A purchase is exempt for resale only if made exclusively for resale (M Ventures, TSB-A-04(11)S; 20 NYCRR 526.6(c)). LLC1 bought its interest solely to lease it to LLC2 and makes no other use of it -- so LLC1's purchase is exempt.
3. LLC2's lease = taxable. LLC2's lease of the interest is not exclusively for resale: LLC2 uses the aircraft for its own purposes, even though it also leases to the manager. So LLC2's lease is subject to sales/use tax. Because the aircraft was delivered outside New York, use tax becomes due when it's first used in New York (measured under 1111(b)).
4. The manager's lease/repurchase = possibly exempt commercial aircraft. Under 1115(a)(21)/1101(b)(17), a commercial aircraft used primarily to transport persons or property for hire (or the owner's own property in business) in intrastate/interstate/foreign commerce is exempt. The Department can't decide on these facts, but if the manager's use meets the definition, its lease (or repurchase) is exempt -- and the petitioners needn't collect tax if they timely accept a good-faith Exempt Use Certificate (ST-121) from the manager.
What this means for you
Aircraft buyers in fractional/managed programs
Don't assume a managed-flight program is a tax-free "transportation service." If you can sell, retain, or dispose of the aircraft, you likely have dominion and control -- a taxable purchase of property. Map each entity's role: a pure pass-through owner that buys only to lease can be resale-exempt, but the affiliate that actually uses the plane is taxed, even if it subleases to the operator.
The commercial-aircraft exemption
A lease or purchase by an operator that flies the plane for hire in commerce can qualify under 1115(a)(21); the documentation hook is a properly completed ST-121.
Common questions
Q: Isn't a flight program just a nontaxable transportation service?
A: Only if dominion and control of the aircraft stays with the operator. Here the buyers could sell, retain, or dispose of the plane, so it was a taxable purchase of property.
Q: Why is one LLC's purchase exempt but the other's lease taxable?
A: LLC1 bought its interest exclusively to lease it out (resale-exempt). LLC2 uses the aircraft itself, so its lease isn't exclusively for resale and is taxable.
Q: When does the use tax hit if the plane was delivered out of state?
A: When the aircraft is first used in New York; the tax is measured under Tax Law 1111(b).
Citations and references
- Tax Law section 1105(a) (sales tax on tangible personal property; leases)
- Tax Law section 1110 (compensating use tax)
- Tax Law section 1101(b)(4)(i) (retail sale excludes sales for resale)
- Tax Law section 1115(a)(21) (exemption for commercial aircraft in commerce)
- Tax Law section 1101(b)(17) (definition of commercial aircraft)
- Tax Law section 1111(b) (use tax measure)
- 20 NYCRR section 526.6(c) (purchase for resale)
- M Ventures, LLC & Arrow Operations, LLC, TSB-A-04(11)S (purchase must be exclusively for resale)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2010.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a10_48s.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-10(48)S
Sales Tax
September 29, 2010
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. S080820A
Petitioners name redacted (“LLC2”) and name redacted (“LLC1”), address redacted request an
Advisory Opinion about whether their purchase of an interest in an aircraft is subject to New York State and
local sales and use taxes. We conclude that it is. We further conclude that LLC1’s purchase of an interest in
the aircraft is an exempt purchase for resale, but LLC2’s lease of the aircraft from LLC1 is not, because it is
not leased exclusively for resale. Finally we conclude that the Manager’s lease or purchase of the aircraft
may be exempt as the purchase of a commercial aircraft.
Facts
Petitioners are both Delaware limited liability companies and both have offices located in New York
State. LLC2 owns 100% of the membership interests in LLC1. Petitioners have separate books and records
and separate bank accounts.
Petitioners participate in name redacted’s (“Manager”) “Flexjet One Program” (Program). The
Program is similar to Manager’s conventional fractional ownership program, but with two differences: (1)
the participants in the Program typically acquire an entire aircraft, whereas participants in conventional
fractional ownership programs typically acquire an undivided fractional interest in an aircraft and hold that
undivided interest as tenants-in-common with other participants; and (2) participants in the Program typically
have the option upon the expiration or termination of the contract to either retain the aircraft and remove it
from the program, or to require Manager to repurchase the aircraft.
LLC1, along with two other individuals unrelated to Petitioners, jointly entered into an agreement to
purchase a 100% interest in the Aircraft from Manager. The purchasers have title to, and are the registered
owners of, the Aircraft. Upon acquiring the Aircraft, Purchasers also entered into a co-ownership agreement,
which, among other things, provides that each purchaser will own approximately a one-third undivided
interest in the Aircraft as tenants-in-common. The co-ownership agreement also governs matters such as
scheduling and use of the Aircraft, and termination of the Program agreements.
Upon acquiring its one-third interest in the Aircraft, LLC1 leased its interest to LLC2. LLC1 neither
has made nor intends to make any use of the Aircraft other than to lease its interest to LLC2.
The Aircraft was delivered by Manager to the purchasers outside New York State. The Aircraft will
be operated to and from many airports in many states, and will be unlikely to be based and/or hangared
permanently in any specific jurisdiction. LLC2 and the other lessees will not have any control over the
locations to which Manager causes the Aircraft to be flown when the Aircraft is not in use by LLC2 or the
other lessees.
The various agreements between the parties are described below:
(1) Purchase Agreement – This agreement conveys 100% of the Aircraft to LLC1 and the two other
purchasers. The Purchase Agreement gives the purchasers the option to sell the Aircraft back to Manager,
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upon giving 6 months notice, at any time after 24 months. However, after 36 months and upon giving 6
months notice, purchasers may terminate the program agreements, remove the Aircraft from the Dry Lease
Exchange Program and may retain or otherwise dispose of the Aircraft. The purchasers may sell the aircraft
within the 36 month period; however, Manager is entitled to a 10 day right of first refusal. After 60 months,
if the purchasers do not request repurchase by Manager and do not terminate the agreements and remove the
Aircraft from the Dry Lease Exchange Program, the purchasers may, upon 6 months notice, negotiate a 24
month extension, or terminate the agreements and remove the Aircraft from the Dry Lease Exchange
Program. If the Aircraft is removed from the Dry Lease Exchange Program, purchasers are responsible for
the costs of removal, including repainting, repositioning, crew, inspections, Federal Aviation Administration
(FAA) regulatory actions, and an administrative fee for the removal process.
(2) Aircraft Co-Ownership Agreement – This agreement is between the purchasers of the Aircraft
and governs the purchasers’ rights and obligations with respect to ownership and operation of the Aircraft.
This agreement also provides the terms upon which each Purchaser can buy or sell their interest in the
Aircraft to a third party. The agreement includes a provision that allocates to each purchaser one third of the
300 flight hours per year of air transportation services to be provided under the Management Agreement.
(3) Aircraft Interest Lease Agreement – Under this agreement, LLC1 leased its undivided ownership
interest in the Aircraft to LLC2. LLC2 is required to make fixed monthly lease payments to LLC1, and is
solely responsible for all costs associated with the use, operation, and maintenance of the Aircraft during the
lease period.
(4) Management Agreement – Under this agreement between Manager, LLC2, and the two
unrelated owners, Manager provides management services related to the operation of the Aircraft at its
expense. LLC2 and the two unrelated owners are required to pay a fixed monthly management fee, plus
hourly rates for each hour flown. The agreement provides that LLC2 and the two unrelated purchasers are
collectively entitled to 300 flight hours per year of use of the Aircraft or other aircraft in the program. The
Management Agreement also provides that Manager is responsible to arrange for the Aircraft to be used,
operated, inspected, maintained, serviced, repaired, overhauled, and tested in accordance with all applicable
laws and regulation, and other standards and guidelines established by the FAA. Manager is also responsible
for paying operating expenses (including fuel, pilots and crew salaries, and travel expenses), providing and
paying for hangar space, tie down, and similar expenses. Manager must provide qualified pilots, maintain all
required records and logs, and make all necessary take off, flight slot, and landing arrangements. While
LLC2 and the two unrelated purchasers may select the date, time, point of departure, and destination of
particular flights, pilots may select their own routes, and use their own discretion in performing flight
services. Both Manager and the pilots have the right to terminate flights at their discretion. Manager is
responsible for obtaining hull insurance and third-party passenger liability insurance, naming both Manager
and the purchasers as loss payees. In the event of damage or less than total loss of the Aircraft, proceeds of
the insurance will be paid to Manager, in trust, to repair or restore the aircraft to good working order. In the
event of a total loss, Manager has the option to replace the Aircraft with the same make and model. If
Manager opts not to replace the aircraft, the Program will terminate and the insurance proceeds will be paid
to LLC2 and the two unrelated purchasers, net of any unpaid amounts due.
(5) Lease Agreement – Under this agreement, and without limiting name redacted’s Management
duties under the Management Agreement, LLC2 and the two unrelated purchasers agree to lease their
undivided interests in the Aircraft to Manager for up to 299 occupied flight hours per year, which may be
used to fly the Aircraft under the Dry Lease Exchange Program or used as part of Manager’s conventional
fractional share program. Manager must make fixed monthly lease payments, in the form of credits to LLC2
and the two unrelated purchasers’ account.
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(6) Program Benefits Agreement – This agreement establishes the policy and procedures governing
the purchaser’s use of the Aircraft. It sets forth the primary and secondary service areas and the different
amount of lead times required for flights to each. This agreement also establishes the rules for days when
more than one of the purchasers or their lessees require use of the Aircraft, upgrade and downgrade requests,
and other program details. This agreement also provides LLC2 and the other two lessees a method to sell
unused program hours or purchase extra hours above the 300 flight hour limitation provided for in the
Management Agreement.
(7) Dry Lease Exchange Agreement – In this agreement, LLC2 and the other two lessees agree that
the Aircraft can be shared with other persons who participate in the Program, or the conventional fractional
ownership program.
(8) Sideletter Agreement – This agreement includes negotiated modifications to the Program.
Among the provisions in this agreement is a requirement that all flights for or on behalf of the LLC2 or the
other lessees shall be operated under FAA regulations governing on-demand commercial air charters. This
requires Manager to have possession, command and control of the Aircraft at all times and during all phases
of flights conducted for or on behalf of LLC2 or the unrelated purchasers, and that Manager will be
providing transportation services to LLC2 and/or unrelated purchasers.
Petitioners ask the following questions:
(1) Is Petitioners’ participation in the Program excluded from New York State and local sales and
use taxes as the sale of a nontaxable transportation service?
(2) If the transaction between Petitioners and Manager is considered to be the sale of tangible
personal property:
(a) Is Petitioners’ purchase of an interest in the Aircraft exempt from sales and use tax as a
purchase for resale?
(b) Does Manager’s use of the Aircraft to transport persons and property for hire qualify its
lease or purchase of the aircraft for exemption under Tax Law section 1115(a)(21) as the purchase of a
commercial aircraft?
Analysis
We conclude that Petitioners’ participation in the Program constitutes the purchase of tangible
personal property for sales and use tax purposes. Tax Law sections 1105(a) and 1110 impose sales and use
tax on sales, rentals and leases of tangible personal property. Sales and use tax is also imposed on certain
enumerated services. The provision of an air transportation service is not an enumerated service upon which
sales or use tax is imposed.
Whether the purchase of an interest in the Aircraft under the Program constitutes a taxable purchase,
rental or lease of tangible personal property or the purchase of an exempt transportation service depends on
whether dominion and control of the Aircraft is transferred to the program participants. See TSB-A-09(23)S;
Chanel, Inc., TSB-A-08(23)S; In the Gap, Inc., TSB-A-00(3)S; see also Bus Company Transactions –
Transportation Service v. Equipment Rental. TSB-M-84(7)S.
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Under the various agreements governing the use and operation of the Aircraft, Manager is
responsible for providing pilots, maintaining all required records and logs, and obtaining insurance.
Although LLC2 has the right to select the time, date, point of departure and destination of a particular flight,
Manager is responsible for all necessary take-off, flight slot, and landing arrangements, and pilots may select
their own routes, and use their own discretion in performing flight services. Under the Management
Agreement, Manager is compensated for these management services for a fixed monthly fee. In addition,
under the Dry Lease Exchange Agreement, Manager may use the Aircraft to provide air transportation
services to other participants of the Program and the conventional fractional ownership program, and may
substitute another aircraft for use by LLC2 or the other lessees if the Aircraft is unavailable.
However, the purchasers here have the right to sell the aircraft before the expiration of the 36 month
period, subject to Manager’s right of first refusal. At the end of the 36 month period, the purchasers may
elect to retain or otherwise dispose of the aircraft, or require Manager to repurchase the aircraft. These facts
distinguish the Petitioners’ situation from the fractional ownership programs described in the Advisory
Opinions referred to above. Because the purchasers have the right to sell the aircraft before the end of the 36
month period, and the right to retain or otherwise dispose of the aircraft at the end of that period, we
conclude that the purchasers have sufficient dominion and control of the aircraft to constitute the purchase of
tangible personal property subject to sales and use tax.
LLC1’s purchase of an interest in the Aircraft qualifies as a purchase for resale, but LLC1’s lease of
the Aircraft to LLC2 does not. Section 1105(a) of the Tax Law imposes sales tax on every retail sale of
tangible personal property. As relevant here, “retail sale” does not include sales of tangible personal
property for resale as such. See Tax Law § 1101(b)(4)(i). Sales and Use Tax Regulation section 526.6(c)
further provides:
Where a person, in the course of his business operations, purchases tangible personal
property or services which he intends to sell, either in the form in which purchased, or as a
component part of other property or services, the property or services which he has
purchased will be considered as a purchase for resale and therefore not subject to tax until he
has transferred the property to his customer.
In order to qualify as an exempt purchase for resale, the tangible personal property must be purchased
exclusively for resale. See M Ventures, LLC & Arrow Operations, LLC, TSB-A-04(11)S. According to
Petitioners, LLC1 purchased its interest in the aircraft for the sole purpose of leasing its interest to LLC2.
LLC1 has not made, and does not intend to make, any use of the aircraft. Because LLC1’s purchase of the
aircraft is exclusively for resale, it is exempt from sales tax. Conversely, LLC2’s lease of an interest in the
aircraft is not exclusively for resale. Although LLC2 leases its interest in the Aircraft to Manager, the
Aircraft is used for LLC2’s own use. Accordingly, LLC2’s lease of an interest in the Aircraft from LLC1 is
subject to sales and use tax. Because the aircraft will be delivered to Petitioners outside New York State, use
tax will become due when the Aircraft is first used in New York State, and will be computed according to the
provisions of section 1111(b) of the Tax Law.
Manager’s lease of LLC2’s interest in the Aircraft may qualify for exemption from sales tax as the
purchase of a commercial aircraft under Tax Law section 1115(a)(21). That section exempts commercial
aircraft “primarily engaged in intrastate, interstate or foreign commerce.” “Commercial aircraft” means:
Aircraft used primarily:
(i)
to transport persons or property for hire;
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(ii) by the purchaser of the aircraft to transport such person’s tangible personal
property in the conduct of such person’s business; or
(iii) for both such purposes.
Tax Law §1101(b)(17). We cannot conclude on the basis of the facts provided by Petitioner if Manager’s
lease of the aircraft would qualify for this exemption. However, if Manager’s use of the Aircraft meets this
definition, and it primarily uses the Aircraft in intrastate, interstate or foreign commerce, its lease of the
Aircraft from LLC2 would be exempt under Tax Law section 1115(a)(21). Similarly, if the definition and
exemption criteria are met, Manager’s repurchase of the aircraft, whether by exercise of its right of first
refusal within 36 months or at the purchasers’ option after the expiration of the 36 month period, would also
be exempt under Tax Law section 1115(a)(21). Petitioners will not be required to collect sales tax on the
sale or lease of their interest to Manager, provided that they timely accept in good faith a properly completed
Exempt Use Certificate, Form ST-121 from Manager.
DATED: September 29, 2010
NOTE:
/S/
DANIEL SMIRLOCK
Deputy Commissioner and 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.