How did South Carolina sales and use tax apply when a flight school leased aircraft from owners, used them for instruction, rented them to customers, and bought aviation fuel and repair parts?

Plain-English summary

South Carolina Private Letter Ruling 89-18 separated a flight school's aircraft transactions into several tax events:

• Payments to owners for aircraft that XYZ acquired for rental and also used for flight instruction were not themselves subject to sales or use tax.
• Using an aircraft for flight instruction triggered tax on its fair market value when first put to that use.
• Receipts from qualifying flight-instruction courses were not subject to sales tax.
• Receipts from renting aircraft to customers were taxable.
• Aviation gasoline and repair parts purchased from the airport were taxable.

The ruling also applied the aircraft maximum-tax rules then in effect differently depending on whether the event was first instructional use, sale, ordinary rental receipts, or a qualifying long-term lease.

XYZ's aircraft business

XYZ was a South Carolina corporation whose primary business was flight instruction and aircraft rental. It did not sell aircraft.

XYZ leased aircraft from one of its officers on a long-term basis and from other owners as needed. It did not collect sales tax on flight-instruction charges, but it did collect tax when renting planes to individuals. It also bought gasoline and repair parts from ABC Airport, whose employees installed the parts.

Lease payments to aircraft owners

The ruling treated leasing and renting tangible personal property as retail activity but recognized that property leased for subsequent rental could be acquired tax-free as a wholesale transaction.

It concluded that XYZ's lease payments to the aircraft owners were not subject to sales or use tax where the aircraft were both rented to other parties and used to provide flight instruction.

That did not make instructional use tax-free. When an aircraft acquired for rental was withdrawn and first used primarily for flight instruction, tax was due on its fair market value at that time.

Flight instruction versus aircraft rental

Regulation 117-174.254 distinguished instruction from rental:

• Receipts from courses leading students toward private, commercial, instrument, or instructor licenses were not subject to sales tax. The nontaxable instruction included dual and solo flights that were part of the course.
• Proceeds from leasing or renting aircraft were subject to tax.

XYZ's first use of an airplane for flight instruction was taxable on fair market value. A later sale or rental of an airplane used for instruction was also taxable.

The $300 aircraft cap in the ruling

Under section 12-35-516 as then written, the maximum tax on the first instructional use of an aircraft or its sale was $300.

Ordinary aircraft-rental receipts were taxable without the $300 cap. The ruling separately said that leases executed on or after September 1, 1985 for more than 90 days were subject to the $300 cap.

Gasoline and repair parts

Sales of gasoline for use in aircraft were taxable. The ruling quoted the statutory rule that aircraft gasoline was an exception to the general gasoline exemption.

Repair parts were also taxable. Regulation 117-174.254 said that when an invoice separately stated repair parts and service, tax applied only to the repair parts. The customer invoice had to show the separation.

What this means for you

Flight schools that also rent aircraft

Instructional services and aircraft rentals were not treated the same. The ruling looked separately at course receipts, customer rentals, acquisition of the aircraft, and withdrawal of an aircraft for instructional use.

Aircraft rental companies

Acquiring an aircraft for subsequent rental could avoid tax at acquisition, but using that aircraft in the business for another purpose could trigger tax on the withdrawal or use.

Fixed-base operators and repair shops

Aviation gasoline and repair parts were taxable under the ruling. Separately stating parts and labor determined whether tax applied only to the parts.

Readers applying the ruling today

PLR 89-18 applied 1989 statutes, a regulation, a 5% rate, and a $300 maximum-tax rule. Current rates, caps, definitions, exemptions, and sourcing rules must be checked under current law.

Common questions

Q: Were XYZ's payments to aircraft owners taxable?

A: No, where the leased aircraft were both rented to customers and used for flight instruction; first instructional use nevertheless triggered tax on fair market value.

Q: Were flight-instruction receipts taxable?

A: Not when they were receipts from qualifying license courses, including dual and solo flights forming part of the course.

Q: Were aircraft-rental receipts taxable?

A: Yes. Ordinary rental receipts were taxable without the $300 cap described in the ruling.

Q: What long-term leases received the cap?

A: Leases executed on or after September 1, 1985 for more than 90 days were subject to the $300 maximum tax.

Q: Were aviation fuel and repair parts taxable?

A: Yes. If parts and repair service were separately stated, tax applied only to the parts.

Q: Can another flight school rely on PLR 89-18?

A: No. The ruling says it applied only to XYZ's facts, had no precedential value, and was not intended for general distribution.

Citations and references

• S.C. Code sections 12-35-510 and 12-35-810 (1976) — sales and use taxes
• S.C. Code sections 12-35-110 and 12-35-30 (Supp. 1988) — retail sale, withdrawals, and gross proceeds
• S.C. Code sections 12-35-90 and 12-35-70 (1976) — retailer and purchase definitions covering leases and rentals
• S.C. Code section 12-35-516 (Supp. 1988) — aircraft maximum-tax rule
• S.C. Code section 12-35-550(16) — aircraft-gasoline exception
• Regulation 117-174.254 — airport fixed-base operators, aircraft rental, flight instruction, fuel, and repairs
• Edisto Fleets, Inc. v. South Carolina Tax Commission, 256 S.C. 350, 182 S.E.2d 713 (1971) — leases and rentals treated as taxable sales and purchases
• S.C. Code section 12-3-170 (1976) and SC Revenue Procedure 87-3 — PLR authority

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR89-18.pdf

Original ruling text

SC PRIVATE LETTER RULING #89-18

TO:

XYZ Company, Inc.

SUBJECT:

Aircraft - Flight Instruction/Rentals
(Sales and Use Taxes)

REFERENCE:

S.C. Code Ann. Section 12-35-510 (1976)
S.C. Code Ann. Section 12-35-810 (1976)
S.C. Code Ann. Section 12-35-110 (Supp. 1988)
S.C. Code Ann. Section 12-35-30 (Supp. 1988)
S.C. Code Ann. Section 12-35-90 (1976)
S.C. Code Ann. Section 12-35-70 (1976)
S.C. Code Ann. Section 12-35-516 (Supp. 1988)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer, upon
request, and it applies only to the specific facts or circumstances related in the
request. Private Letter Rulings have no precedential value and are not intended
for general distribution.

Questions:

1. Are charges for leasing of aircraft, paid by XYZ Company, Inc. to various owners,
   subject to the sales or use tax, pursuant to Code Sections 12-35-510 and 12-35-810?
2. Are sales of gasoline and repair parts to XYZ, by the ABC Airport, subject to the sales
   tax, pursuant to Code Section 12-35-510?
   Facts:
   XYZ Company, Inc. is a South Carolina corporation, whose primary business is flight instruction
   and rental of aircraft. The taxpayer does not sell aircraft. Aircraft used by the taxpayer are
   leased from an officer of XYZ, and from other individuals. The lease with the officer is on a
   long-term basis and those with others are on an "as needed" basis. XYZ does not collect sales
   tax on charges for flight instruction, but does collect the tax when planes are rented to
   individuals.
   Repair parts are purchased from the ABC Airport, as needed, and subsequently installed by ABC
   Airport employees. Gasoline is also purchased from ABC Airport.
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Discussion:

1. Code Section 12-35-510 imposes the sales tax and reads, in part:
   ...there is levied..., upon every person engaged or continuing within this State in the
   business of selling at retail any tangible personal property whatsoever, ..., an
   amount equal to [five] percent of the gross proceeds of sales of the business.
   The term "sale at retail" is defined at Code Section 12-35-110, in part, as:
   ...all sales of tangible personal property except those defined in this article as
   wholesale sales.....
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The terms "sale at retail" or "retail sale" shall also include (a) the withdrawal, use or
consumption of any tangible personal property by anyone who purchases it at
wholesale, except (i) property which has been previously withdrawn...and so used
or consumed and...the tax has been paid because of such previous withdrawal, use
or consumption.
The measure of the sales tax, "gross proceeds of sales", is defined at Code Section 12-3530, in part, as:
...the value proceeding or accruing from the sale of tangible personal property....
*

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The term shall also include the reasonable and fair market value of any tangible
personal property previously purchased at wholesale which is withdrawn or used
from the business or stock and used or consumed in connection with the business.....
Code Section 12-35-90 defines the term "retailer", in part, as "[e]very person engaged in
the business of renting or leasing...any tangible personal property for a consideration,...".
Subjecting rentals of tangible personal property to the tax is supported by Edisto Fleets,
Inc. v. South Carolina Tax Commission, 256 S.C. 350, 182 SE2d 713 (1971). In Edisto
Fleets, the State Supreme Court ruled:
It would be unreasonable to conclude that the General Assembly amended their
section [12-35-90] in 1955 to define as a retailer a person who leases or rents
tangible personal property and at the same time intended that such person be
exempt from the tax because the lease or rental was not a sale of tangible personal
property
In summary, the sales tax is imposed upon the retail sale, rental or lease of tangible
personal property. However, pursuant to Code Section 12-35-110, the tax is not
due on wholesale sales. Therefore, property leased from one party for subsequent
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rental to other parties may be acquired tax free. If property previously acquired tax
free (at wholesale) is subsequently withdrawn, or used, by the business, then the tax
is due, measured by the fair market value of the property.
The use tax is imposed at Code Section 12-35-810, which reads, in part:
An excise tax is imposed on the storage, use or other consumption in this State of
tangible personal property purchased at retail for storage, use or other consumption
in this State, at the rate of [five] percent of the sales price of such property,......
The term "purchase" is defined at Code Section 12-35-70, in part; as:
...acquired for a consideration, whether....such consideration be a price or rental in
money....
Quoting, again, from Edisto Fleets, supra., the State Supreme Court ruled "[t]he term
'purchase' specifically refers to the lease or rental of tangible personal property". The
Court also ruled "[t]he terms 'sale' and 'purchase' are inextricably related and bound
together and must be so construed".
In summary, the use tax is imposed upon the storage, use or consumption of property
purchased, rented or leased, at retail, for storage, use or consumption in this State; except,
property which is leased for the purpose of being rented to third parties.
Furthermore, Regulation 117-174.254, entitled "Airport Fixed Base Operators", reads, in
part:
Only aircraft purchased for resale or rental may be purchased tax free as for resale.
When an aircraft is withdrawn for use primarily in
flight instruction .......a tax is due measured by the reasonable and fair market value
(purchase price) of the aircraft and a tax is also due when the aircraft is
subsequently sold.
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Rental of aircraft. Proceeds derived from lease or rental of aircraft are subject to
the tax.
Flight instruction. Receipts from courses of instruction given to students seeking
private, commercial, instrument and/or instructor's licenses are not subject to the
sales tax. Included in such exempt services are receipts from dual and solo flights
which are a part of a course of instruction.
As for sales of gasoline and repair parts, Regulation 117-174.254 provides:
Sales of gasoline for use in aircraft are subject to the tax.

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Proceeds derived from the sale of repair parts and service are subject to the tax;
provided, however, that where a separation is made between the sale of the parts
and the sale of the service, the tax is due only on the sale of the repair parts. The
invoice to the customer must show this separation.
Furthermore, Code Section 12-35-550(16), which exempts gasoline from the sales tax,
provides an exception to the exemption, which reads, in part: "Gasoline sold or dispensed
for use in aircraft is subject to the retail sales and use tax".
Our discussion would not be complete without referring to Code Section 12-35-516,
which reads, in part: "[i]n case of the sale...of any (1) aircraft, ...., the maximum tax
levied....is three hundred dollars....". Furthermore, with respect to leases, the maximum
tax due is $300, for those leases executed after 9-1-85 for a period in excess of 90 days.
Conclusions:

1. Payments for leasing of aircraft, paid by XYZ Company, Inc., to various owners are not
   subject to the sales or use tax, where such aircraft are both rented to other parties and
   used to provide flight instruction.
   Flight instruction. The sales tax is due upon the first use of an airplane used for flight
   instruction, measured by the fair market value at the time of such use. The subsequent
   sale or rental of any airplane used for flight instruction would also be subject to the tax.
   The maximum tax due upon first use of an aircraft for flight instruction or upon being
   sold is $300.
   Rental. Amounts received from rentals of aircraft are subject to the sales tax, without
   regards to the $300 cap. However, leases executed on or after 9-1-85, for a period in
   excess of 90 days, are subject to the $300 cap.
2. Sales of gasoline and repair parts to XYZ, by the ABC Airport, are subject to the sales
   tax, pursuant to Code Section 12-35-510.
   SOUTH CAROLINA TAX COMMISSION
   s/S. Hunter Howard Jr.
   S. Hunter Howard, Jr., Chairman
   s/A. Crawford Clarkson Jr.
   A. Crawford Clarkson, Jr., Commissioner
   s/T. R. McConnell
   T. R. McConnell, Commissioner
   Columbia, South Carolina
   September 27
   , 1989
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