Does a multi-layered aircraft lease -- owner leases to an operator, who charters it through an agent to a single related company that gets exclusive use -- qualify for New York's commercial-aircraft sales tax exemption?

Plain-English summary

This ruling walks through a layered aircraft arrangement: Company A owns a jet and leases it to Company B for fixed monthly payments over a renewable three-year term, with Company B responsible for taxes, insurance, and maintenance. Company B, acting as agent for Company C (which holds an FAA Part 135 Air Carrier Operating Certificate), enters into a three-year Aircraft Charter Agreement with Company D. Under that charter, Company C has exclusive control over the aircraft as far as Company D is concerned, and the plane is used exclusively to transport Company D. The charter fee is calculated to cover Company B's actual costs -- estimated usage, insurance, the rental payment back to Company A, and quarterly true-ups to match direct and indirect operating costs. Notably, Company D owns a large stake in Company A, so these aren't unrelated strangers -- but Company B itself isn't related to any of the parties except in its role as Company C's agent.

New York exempts "commercial aircraft" -- aircraft primarily used to transport people or property for hire -- from sales and use tax. The Department's own prior guidance (Pasquale & Bowers) sets the practical test: if more than half of an aircraft's use goes to transporting people or property for compensation that reasonably reflects the actual cost of operating the plane, it counts as commercial aircraft primarily engaged in commerce, regardless of who's on board. Here, the aircraft is used 100% to fly Company D under the charter, and the charter fee is expressly designed to track Company B's real operating costs. That satisfies the test. The Department was explicit that it doesn't matter that the plane serves just one customer exclusively -- the exemption doesn't require serving the general public or multiple unrelated customers, just that the use is for-hire transportation priced at cost.

What this means for you

Aircraft owners and operators structuring lease/charter arrangements

A charter arrangement serving a single dedicated customer can still qualify for the commercial-aircraft exemption -- exclusivity to one customer isn't disqualifying. What matters is that the compensation genuinely reflects the cost of operating the aircraft (not, say, a nominal fee dressed up to look like a charter) and that the aircraft is primarily used for hire rather than the owner's own private use.

Related-party aircraft transactions

Common ownership between parties in the chain (here, the ultimate customer partly owns the aircraft-owning entity) didn't defeat the exemption on these facts, because the actual operating and charter arrangement was structured at arm's-length cost-based pricing through an independent operator (Company B) and a certificated carrier (Company C). Related-party structures should still be scrutinized on their own facts for whether the pricing genuinely reflects costs.

Accountants and tax professionals

This is a useful test-application example of the Pasquale & Bowers "over 50% for-hire use, cost-reflective compensation" standard for Tax Law § 1115(a)(21) -- worth keeping alongside that ruling as a template for any multi-party aircraft leasing/chartering structure, especially ones involving an agent-operator layer and related ownership between the ultimate lessor and lessee.

Common questions

Q: Does an aircraft need to serve multiple different customers to qualify as "commercial aircraft"?
A: No -- this ruling expressly holds it's immaterial that the aircraft is for the exclusive use of one customer, as long as the over-50%-for-hire and cost-reflective-compensation tests are met.

Q: Does the common ownership between Company D and Company A change the outcome?
A: Not on these facts -- the Department focused on the use of the aircraft and how the charter fee was calculated, not on ownership relationships between the parties in the chain.

Q: What would break this exemption?
A: If the aircraft's use fell below 50% for-hire, or if the compensation charged didn't reasonably reflect the actual costs of operating the aircraft (e.g., a nominal or non-arm's-length fee), the exemption likely wouldn't apply.

Citations and references

Statutes, regulations, and prior rulings:

• Tax Law § 1101(b)(17) (definition of commercial aircraft)
• Tax Law § 1115(a)(21) (exemption for commercial aircraft engaged in commerce)
• 20 NYCRR § 526.6(c)(1) (resale exclusion)
• Pasquale & Bowers, TSB-A-96(49)S (over-50%-for-hire test for commercial aircraft)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_20s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(20)S
Sales Tax
April 8, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S981130A

On November 30, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from John J. Bischoff, 15 Highlander Drive, Scotch Plains, New Jersey 07076.
The issue raised by Petitioner, John J. Bischoff, is whether the lease of an aircraft under the
following circumstances is subject to sales and compensating use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Company A, an LLC, owns a jet aircraft and enters into a three year renewable lease for fixed
monthly lease payments with Company B. Under the lease, Company B is responsible for all
applicable taxes, insurance, maintenance and other aspects of operating the aircraft.
Company B, as agent for Company C who holds an Air Carrier Operating Certificate under
Part 135 of the Federal Aviation Administration (FAA) regulations, enters into an Aircraft Charter
Agreement for three years with Company D for the provision of air transportation to Company D.
The Charter Agreement provides that with respect to the parties to the agreement, i.e., Company C
and Company D, Company C will have exclusive control over the aircraft. Company B will operate
the aircraft in accordance with FAA regulations as agent for Company C. The Charter Agreement
also provides that the aircraft is to be used exclusively to provide transportation for Company D.
The charter fee is computed as the total of the following: monthly payments to cover
estimated usage, insurance, rental payment to Company A and quarterly adjustments to make total
payments equal to direct and indirect costs incurred by Company B to maintain and fly the aircraft.
Company B is not related to any of the other parties to the agreements except as agent for
Company C. Company D owns a large part of Company A and the two entities are otherwise related
through common ownership.
Applicable Law and Regulations
Section 1101(b)(17) of the Tax Law defines the term "commercial aircraft" as:
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 1115(a)(21) of the Tax Law provides an exemption from sales and use tax for:

-2­
TSB-A-99(20)S
Sales Tax
April 8, 1999

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 526.6(c)(1) of the Sales and Use Tax Regulations provides:
Where a person, in the course of his business operations, purchases tangible
personal property or services which he intends to resell, 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 purchased for resale and
therefore not subject to tax until he has transferred the property to his customer.
Opinion
Petitioner has presented a transaction in which Company A will lease its aircraft to Company
B for a three year period for fixed monthly payments. Company B will then act as an agent for
Company C who holds an Air Carrier Operating Certificate. Company C will then enter into a three
year Aircraft Charter Agreement with Company D. Company D will have the exclusive use of the
aircraft. The charter payments are equal to direct and indirect costs incurred by Company B to
maintain and fly the aircraft.
Where over fifty percent of an aircraft’s use is devoted to transporting employees, customers
and potential customers for compensation, and the compensation reasonably reflects the costs of
operating the aircraft, such aircraft will be considered a 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. In this
case, the aircraft leased by Company B will be devoted entirely to providing transportation for
compensation to Company D under Company C’s agreement with Company D. The compensation
will reflect Company B’s costs of operating the aircraft. The lease by Company B of the aircraft
from Company A for use exclusively in providing charter service to Company D, therefore, qualifies
for the exemption provided by Section 1115(a)(21) of the Tax Law. It is immaterial that the aircraft
is for the exclusive use of one customer.

DATED: April 8, 1999

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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