Does New York tax an aircraft engine warranty-repair contract, and where — the repair site or the aircraft's base?

Plain-English summary

Garrett Turbine Engine Co. (Phoenix, Arizona) sells engine warranties priced by a number of flying hours; the customer pays Phoenix monthly, based on hours actually flown. A customer can get warranty repairs at any Garrett General Aviation Services facility — including one in New York — and pays nothing directly to the repair facility. Instead, the facility that does the work submits a warranty claim to Phoenix for an inter-company credit (a book entry). Sometimes the parts are shipped to Phoenix for repair and returned to New York for installation. The petitioner asked whether warranty repairs performed in New York are taxable.

The Department reached two conclusions.

• This is a taxable service contract, not free warranty work. Section 1105(c)(3) taxes maintaining, servicing, or repairing tangible personal property. Under 20 NYCRR 527.5, a maintenance/service contract is taxable, while repairs rendered without charge under a warranty are not. Because the customer pays for this coverage, it is a taxable service contract, not an exempt free warranty. (The opinion also notes that services on commercial aircraft that are exempt under § 1115(a)(21) are excluded from § 1105(c)(3) tax.)
• The tax follows where the aircraft is hangared. New York sales tax is a destination tax (20 NYCRR 525.2(a)), but this contract has no single destination — payments go to Arizona, repairs may be done in either state, and the monthly charge is based on hours flown, not on any particular repair. Courts have held that use tax on an aircraft is imposed where the aircraft is hangared unless it is principally used elsewhere (Xerox Corp. v. State Tax Commission). The Department applied that same rule to the service contract:
  • Collect New York tax on contracts for aircraft hangared in New York — even if some service is performed out of state.
  • Don't collect on contracts for aircraft hangared outside New York — even if some service is performed in New York.
  • A customer may still owe tax if its aircraft, though hangared elsewhere, is principally used in New York.

What this means for you

A warranty you pay for is a taxable service contract. New York exempts only repairs done at no charge under a warranty. Once the customer pays for the coverage — even monthly, even by the flying hour — it's a taxable service contract under § 1105(c)(3), and the fact that no cash changes hands at the repair shop doesn't make it free.

For mobile property, the tax can follow the property's home base, not the repair site. When a service contract covers property that moves and has no single delivery point, New York looks to where the property is based. For aircraft, that means the hangar location controls (unless the aircraft is principally used somewhere else) — so identical repairs can be taxable or not depending on where the plane is hangared.

Watch the commercial-aircraft exemption. Services on aircraft that qualify for the § 1115(a)(21) exemption are carved out of the § 1105(c)(3) tax entirely; confirm whether that exemption applies before assuming a contract is taxable.

Common questions

Q: Our warranty repairs are "free" to the customer at the shop. Is the contract taxable?
A: If the customer paid for the warranty coverage, yes — it's a taxable service contract. Only repairs genuinely rendered without charge under a warranty are exempt (20 NYCRR 527.5(d)).

Q: Repairs happen in several states. Which state taxes the contract?
A: For aircraft, New York taxes based on where the plane is hangared, not where the repair is done, because the contract has no single destination — following the Xerox rule.

Q: The plane is hangared out of state but flies mostly in New York. Any New York tax?
A: Possibly — the customer may owe tax if the aircraft is principally used in New York even though it is hangared elsewhere.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(3) — taxes maintaining, servicing, or repairing tangible personal property
• Tax Law § 1115(a)(21) — exempts certain machinery and services for commercial aircraft (excluded from the § 1105(c)(3) tax)
• 20 NYCRR 527.5 — maintenance/service contracts are taxable; repairs rendered without charge under a warranty are not; manufacturer reimbursement of warranty work is not taxable (for resale)
• 20 NYCRR 525.2(a) — New York sales tax is a destination tax; destination controls the tax incidence and rate

Decision cited:

• Xerox Corp. v. State Tax Commission, 71 AD2d 177 — use tax on an aircraft is imposed where it is hangared unless principally used elsewhere

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_40s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86-(40)S
Sales Tax
September 18, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S860203A

On February 3, 1986, a Petition for Advisory Opinion was received from Garrett General
Aviation Services, 2221 Smithtown Avenue, Ronkonkoma, New York 11779.
The issue raised is whether warranty repairs performed in New York State are subject to tax.
Garrett Turbine Engine Co., an engine manufacturer, located in Phoenix, Arizona, sells
engine warranties. The warranty is based on a specific number of flying hours. Payment is made
directly to the Phoenix company on a monthly basis and is based on the actual hours flown for the
month.
Each customer has the right to obtain warranty repairs from any of the Garrett General
Aviation Services facilities, including one located in New York State. The customer does not pay
any money directly to the facility performing the services. Instead, the facility doing the repair work
submits a warranty claim to the manufacturer in Phoenix for an inter-company credit. This is a book
entry only.
In some instances, the warranty repairs are done by the Phoenix facility. In these instances,
the parts are shipped by the New York facility to the Phoenix facility for repair. Upon completion
of the repairs, the Phoenix facility returns the parts to New York for installation. The billing
procedure remains the same.
Section 1105(c)(3) of the Tax Law imposes a tax upon every sale, except for resale of the
services of maintaining, servicing or repairing tangible personal property. However, it should be
noted that services performed upon commercial aircraft that are exempt under Section 1115(a)(21)
of the Tax Law are excluded from the tax imposed under Section 1105(c)(3) of the Tax Law.
Section 527.5 of the sales and use tax regulations of the State Tax Commission provides as
follows with respect to service contracts and warranty work:
(c)
Maintenance and service contracts. (1) The purchase of a maintenance or
service contract is a taxable transaction.
(2) The vendor making sales of such contracts may purchase for resale any tangible
personal property which is transferred to his customer in connection with the services
rendered.
(3) Any charge made for services rendered in addition to the purchase price of the
maintenance or service contract is taxable.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-86-(40)S
Sales Tax
September 18, 1986

Example l:

A vendor selling home appliances also offers a 12­
month extended service contract with unlimited parts
and labor. The charge for the service contract is
taxable.

Example 2:

The same vendor also offers a service contract for the
price of $50 under which the purchaser will receive
one service call at no additional charge, including
parts and labor, and each additional service call will
cost the purchaser $5 for parts and labor. All the
charges are receipts subject to tax.

(d)
Warranty work. (1) Repair or maintenance services rendered, without charge to a
customer under a warranty agreement are not taxable.
(2) The vendor performing the warranty services may purchase for resale any tangible
personal property which is transferred to his customer in connection with the services
rendered.
(3) Charges for services rendered which are not covered by the warranty are taxable.
(4) Where a manufacturer reimburses a vendor or repairman performing warranty work,
the reimbursement is not taxable, as it was for resale. 20 NYCRR 527.5.
Since Petitioner charges its customers for services rendered, Petitioner's contracts with its
customers are not considered exempt warranty contracts but are, instead, taxable service contracts.
Section 525.2(a) of the regulations of the State Tax Commission provides that the New York
sales and use tax is a "destination tax", that is, the destination controls both the tax incident and the
tax rate of a transaction. However, a question arises in this regard because the transaction involved
herein does not have a single clear destination. Payments on the service contract are made to the
company in Arizona for repairs performed partly or wholly in New York. When necessary, repair
work to be ultimately furnished to customers in New York may be actually performed in Arizona.
It is likely that some aircraft will require no repairs at all during some months. Furthermore, the
provisions of the warranty contract are such that the payments bear no relation to the actual repairs
performed but, instead, are based upon hours flown during the month.
It has been established by judicial decision in New York State that use tax may only be
imposed upon an aircraft at the location at which the aircraft is hangered unless it is principally used
elsewhere. (Xerox Corp. v. State Tax Commission, 71 AD 2d 177). It follows that the incident and
rate of sales and use tax on a service contract on such an aircraft should be determined on the same
basis.

-3­
TSB-A-86-(40)S
Sales Tax
September 18, 1986

Accordingly, Petitioner is required to collect sales and use tax on all receipts from service
contracts for all aircraft hangered in New York State even if some of the service is performed at a
different location. Petitioner is not required to collect sales and use tax on service contracts for
aircraft hangered outside of New York State even if some service is performed on the aircraft in the
state. However, Petitioner's customer may be liable for tax under the contract if it is determined that
the aircraft is principally used in New York State even though it is hangered elsewhere.

DATED: September 18, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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