When a company installs a custom VIP interior into a 'green' (interior-less) aircraft that a customer already bought from the manufacturer, is that manufacturing (with its sales-tax exemption) or taxable remodeling -- and does it matter that the FAA issues a new Standard Airworthiness Certificate only after the interior goes in?

Plain-English summary

A company (Company A) that designs, engineers, and installs custom VVIP aircraft interiors was hired by a foreign customer to install a fully custom interior modification into a Boeing 747-8. The customer had already bought this "green" aircraft — factory-built but without a cabin interior — directly from the manufacturer (Company B), taking title and possession at Company B's Washington State facility. Company A's contract was solely to design, engineer, and install the VVIP interior; Company A's own subsidiaries, not Company A itself, actually made the individual interior components (cabinets, lavatories, seating).

Company A argued it was completing the "last stage of manufacturing" that Company B started, pointing to the fact that the FAA doesn't issue a full Standard Airworthiness Certificate until after the interior is installed — before that, the aircraft flies only under a Special Airworthiness Certificate (a limited ferry permit).

The Comptroller disagreed on both fronts:

• Not manufacturing. Under § 151.318(d), manufacturing ends once tangible personal property reaches "the physical properties... it has when transferred by the manufacturer to another." The customer got exactly what it ordered from Company B — a green aircraft without a cabin — so Company B's manufacturing process was already complete at that point. Company A's later work is a wholly separate transaction. And even setting that aside, Company A didn't make the interior components itself (its subsidiaries did), and prior Comptroller decisions establish that fabricating parts used in a remodeling job doesn't turn the remodeler into a manufacturer.
• The airworthiness certificate proves nothing. The type of FAA certificate issued (Special vs. Standard) reflects licensing/certification status, not whether the aircraft's physical operation changed — and a federal agency's classification for its own purposes has no bearing on Texas sales tax classification (citing a 1993 Comptroller decision on the same point).

Instead, Company A is engaged in remodeling: modifying the "style, shape, or form" of an aircraft belonging to someone else, without changing its identity as an aircraft or how it functions — installing a custom interior into an already-flightworthy aircraft fits that definition exactly.

Tax consequences of the remodeling classification: Labor to remodel a private aircraft isn't taxable either way (lump-sum or separated contract). Under the amended separated contract here, Company A is treated as a retailer of the materials it incorporates into the aircraft — but because the finished aircraft was contractually delivered to the customer at a point OUTSIDE Texas, no Texas sales/use tax was actually due on those materials at all (Texas taxes items delivered in Texas). Company A still owes tax on its own consumable tools and supplies used in the job that aren't incorporated into the aircraft.

What this means for you

Aircraft completion centers and interior modification shops

Installing a custom interior into a "green" aircraft the customer already bought elsewhere is remodeling, not manufacturing — even if you fabricate some components yourself, and even if a federal certificate only issues after your work is done. Don't count on the manufacturing exemption for these jobs.

Companies delivering completed work outside Texas

If your remodeling contract has the finished item delivered to the customer at a point outside Texas, this ruling confirms no Texas sales/use tax is due on the incorporated materials — but you still owe tax on your own consumable tools/supplies used in Texas to do the job.

Anyone citing a federal license or certificate as proof of a state tax classification

This ruling is a clean, quotable example of the Comptroller refusing to let a federal agency's own certification categories (here, the FAA's airworthiness certificate types) drive a Texas tax outcome — the state looks at its own statutory definitions of manufacturing vs. remodeling, not at how another regulator classifies the same activity.

Common questions

Q: If I install a custom interior into an already-manufactured aircraft, does that count as finishing the manufacturing process?
A: Not per this ruling — once the customer takes delivery of the aircraft with the physical properties the manufacturer intended to transfer (even without an interior), manufacturing is complete; later interior work is a separate remodeling transaction.

Q: Does needing a new FAA Standard Airworthiness Certificate after installation mean the aircraft now "operates differently," making the work manufacturing?
A: No, per this ruling — the type of airworthiness certificate reflects licensing/certification, not a change in how the aircraft performs, and doesn't affect Texas tax classification.

Q: Do I owe Texas tax on materials if the finished item is delivered to my customer outside Texas?
A: Per this ruling, no — Texas sales/use tax applies to items delivered within Texas; delivery outside the state removes the materials from Texas tax even under a separated remodeling contract.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.318(d) (definition of manufacturing — ends when property has the physical properties it has when transferred by the manufacturer)
• Tex. Tax Code § 151.011(f)(2) (use/storage exclusion for manufacturing property, held inapplicable)
• Tex. Tax Code § 151.051 (sales tax applies to taxable items in this state)
• 34 Tex. Admin. Code Rule 3.300(a)(10)-(11) (processing/remodeling definitions)
• 34 Tex. Admin. Code Rule 3.292(a)(5) (definition of "remodel")
• 34 Tex. Admin. Code Rule 3.292(i) (remodeling of private aircraft — labor exempt; separated-contract retailer treatment)
• 34 Tex. Admin. Code Rule 3.291(a)(13) (separated contract definition)

Cited prior guidance:

• Comptroller's Decision No. 32,422 (1997) — fabricating parts for a remodeling job doesn't make the remodeler a manufacturer
• Comptroller's Decision No. 30,311 (1993) — an FAA (or other federal) classification has no bearing on Texas sales/use tax determination
• STAR Document 9601L1388G13 — interior installation FOR A MANUFACTURER can be the last stage of manufacturing (distinguished here, since Company A worked for the aircraft's owner, not its manufacturer)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201412989L

Original ruling text

December 19, 2014

RE: Private Letter Ruling # 141950599

Dear ****:

We issue this private letter ruling in accordance with Rule 3.1 in response to
your original request dated July 9, 2014, and supplemental information provided
thereafter. Detrimental reliance is provided in accordance with Rule 3.10, the
Taxpayer Bill of Rights, unless otherwise noted.

We issue this private letter ruling because the statutes, rules, and other
applicable authorities regarding the distinctions between manufacturing,
remodeling, and the installation of tangible personal property are not
sufficiently clear to provide guidance as to whether **** (“COMPANY A”)
is engaged in manufacturing under Tax Code Ann. Section 151.318 [ENDNOTE 1] and
Rule 3.300 and on the taxability of items purchased by COMPANY A to perform
such activities.

Relevant Facts

The relevant facts are based on the following redacted documents provided for
review by COMPANY A:

*Agreement on Installation of a VVIP Modification on a 747-8 Aircraft (“VVIP
Agreement”);

*Modification Specification – Program 1265, which is Appendix A of the VVIP
Agreement; and

*Services Agreement, which is the contract for services subcontracted back to
COMPANY B.

COMPANY A affirmatively stated that all redactions are identifying in nature
(e.g., customer name, country of registry, etc.), confidential (e.g., total
contract amount, hourly labor charges, etc.), or non-substantive information
(e.g., country of registry FAA equivalent). The Comptroller accepts this
statement for purposes of issuing this private letter ruling.

COMPANY A provided additional information and made various statements via email
as noted herein.

COMPANY A states in its original request that it is in the business of
designing, engineering, manufacturing, procurement, and installation of custom
aircraft interiors. Information provided in supplemental email correspondence
indicates COMPANY A subsidiaries, and not “the particular COMPANY A entity that
is requesting the ruling”, actually manufactures the individual component parts
of the cabin interior (e.g., cabinets, lavatories, seating, etc.).

COMPANY A also obtains, as part of its services, the certification of the
completed aircraft under the Federal Aviation Administration (FAA) or European
Aviation Safety Agency (EASA), often referred to as a Certificate of
Airworthiness or Standard Airworthiness Certificate. A Standard Airworthiness
Certificate is the FAA’s “official authorization allowing for the operation of
type certificated aircraft” in certain categories. See
http://www.faa.gov/aircraft/air_cert/airworthiness_certification/std_awcert/.

Prior to the services rendered by COMPANY A, the aircraft is capable of flight
and the FAA issues a Special Certificate of Airworthiness or Special
Airworthiness Certificate. A Special Airworthiness Certificate is a “special
flight permit that may not meet applicable airworthiness requirements, but is
capable of safe flight” for certain purposes. See
http://www.faa.gov/aircraft/air_cert/airworthiness_certification/sp_awcert/sp_fl
t_permit/.

The Special Airworthiness Certificate issued with respect to the aircraft in
this case allows the aircraft to be ferried from COMPANY B, the manufacturing
facility, to COMPANY A.

The owner of the aircraft is COMPANY A’s customer, who resides outside the
United States. The customer does not intend to register the aircraft with the
FAA for use within the United States but with its foreign equivalent for the
customer’s country of residence.

The “green” aircraft in this case was purchased by COMPANY A’s customer
directly from COMPANY B. COMPANY A refers to an aircraft that has been
manufactured but lacks an interior as a “green” aircraft.

COMPANY B manufactured the aircraft without the interior cabin configuration,
presumably per the customer’s specifications, as the contract between COMPANY B
and the customer was not provided.

The original request for this ruling states title to the aircraft passed to the
customer at the COMPANY B facility in Washington State. Possession of the
aircraft was transferred from COMPANY B to COMPANY A, on behalf of COMPANY A’s
customer, at the COMPANY B facility in Washington State.

COMPANY A specifically contracted with its customer “to perform, or cause to be
performed, the design, engineering, development and management services to
complete the VVIP Modification of the Aircraft in accordance with the
Specification [. . .] and [. . .] execute all services specified in the
Specification to install and make such VVIP Modification fully operative.” See
Exhibit 3, VVIP Agreement, paragraph 1.1.

Further, COMPANY A agreed to sell, assign, and transfer to its customer the
parts, components, and equipment comprising the VVIP Modification installed on
and in the Aircraft. See Exhibit 3, VVIP Agreement, paragraph 1.2.

RULINGS AND ANALYSIS

Whether COMPANY A is engaged in manufacturing, remodeling, or the sale and
installation of tangible personal property is not a question of first
impression; however, existing STAR documents appear to provide conflicting
guidance. Based on the application of applicable statutes, rules, and other
authorities as further explained to the relevant facts presented, we conclude
that COMPANY A is engaged in remodeling of the aircraft, not manufacturing.

COMPANY A IS NOT ENGAGED IN MANUFACTURING
Manufacturing is defined as “each operation beginning with the first stage in
the production of tangible personal property and ending with the completion of
tangible personal property having the physical properties (including packaging,
if any) that it has when transferred by the manufacturer to another.” See
Section 151.318(d).

COMPANY A argues that it is being hired to complete the last stage of
manufacturing that was started by COMPANY B. To determine whether COMPANY A is
performing the last stage in the manufacturing process, it must first be
determined that COMPANY A is manufacturing. COMPANY A asserts as a result of
its activities “the Customer’s property is transformed [. . .] to a fully
certified and completed aircraft [. . .],” suggesting the completed aircraft is
the item manufactured.

COMPANY A states it is “manufacturing the original interior and selling it to
the customer as a necessary part of the overall manufacturing process and the
delivery of a new, finished product.” COMPANY A is essentially arguing that the
aircraft is not a completed manufactured item because it does not have an
interior cabin and because the aircraft has a Special Airworthiness Certificate
instead of the Standard Airworthiness Certificate, which is issued after the
interior is installed.

This analysis fails to recognize that the customer previously purchased and
received from COMPANY B exactly what it ordered – an aircraft without a cabin
interior. At that point the green aircraft had “the physical properties that it
has WHEN TRANSFERRED BY THE MANUFACTURER TO ANOTHER.” See Section 151.318(d)
(Emphasis Added). The last stage of the manufacturing process, by definition,
has been reached. COMPANY A’s work on the aircraft is a completely separate
transaction from the manufacturing of the aircraft by COMPANY B as evidenced by
the contract presented by COMPANY A. COMPANY A’s contract with its customer is
only for the installation of the components that comprise the cabin interior.
COMPANY A, therefore, is not manufacturing or selling a completed aircraft.

With respect to the cabin interior, COMPANY A, by its own admission in
supplemental correspondence, is not manufacturing the individual components.
COMPANY A specifically stated in emails supplementing its request that COMPANY
A subsidiaries, and not “the particular COMPANY A entity that is requesting the
ruling”, actually manufactures the individual component parts of the cabin
interior (e.g., cabinets, lavatories, seating, etc.).

Even if COMPANY A did manufacture the component parts of the aircraft interior,
the comptroller has previously determined that manufacturing parts used in a
remodeling service does not transform the service provider into a manufacturer.
See, for example, Comptroller Decision No. 32,422 (1997) (explaining although
fabrication may take place, the tangible personal property fabricated is not
the item ultimately sold). Nonetheless, COMPANY A asserts that the installation
of the cabin interior components falls within the definition of processing in
Rule 3.300(a)(10) and various STAR Documents.

Several of the STAR Documents referenced by COMPANY A do not provide any
supporting facts or analysis, causing the confusion presented by this request.
See, e.g., STAR Document 200208398L, which addresses the completion of a green
aircraft but which fails to provide all relevant facts upon which the
determination was based. STAR Document 9601L1388G13, however, states that
installation of an interior in an aircraft FOR A MANUFACTURER remains the last
stage of the manufacturing process. (Emphasis added). In the present set of
facts, COMPANY A does not install the cabin for a manufacturer but for the
owner who purchased the aircraft from the manufacturer. Here, the installation
of the cabin interior is an entirely separate transaction from the
manufacturing of the aircraft itself.

COMPANY A IS ENGAGED IN REMODELING
Rule 3.292(a)(5) provides the term remodel means “to modify the style, shape,
or form of tangible personal property belonging to another without causing a
loss of identity or without causing the item to operate in a new or different
manner.” Rule 3.300(a)(11) similarly provides that “the making of tangible
personal property belonging to another over again, in a similar but different
way, or to change the style, shape, or form, without causing a loss of its
identity, or without causing the property to work in a new or different
manner.”

While activities which constitute remodeling may appear to come within, or
overlap, the definition of manufacturing, the addition of the phrase “belonging
to another” in the definition of remodeling provides a separation point.

Based on the contract terms, COMPANY A is engaged in remodeling because it is
making tangible personal property (the aircraft) belonging to another (the
customer) over again (by installing the cabin interior) in a similar but
different way (an aircraft with a generic, not completely finished interior to
an aircraft with a customized interior) without causing a loss of its identity
(it is still an aircraft) and without causing the property to work in a new or
different manner (the aircraft continues to function as an aircraft.)

For example, Section 1.2 (Aircraft Input) of Appendix A states, in part, “[t]he
Customer shall be responsible for ensuring the Aircraft, its parts and systems
are fully active and fully functional at the time the Aircraft is inducted at
[COMPANY A’s] modification facility. Further, any maintenance, warranty or
repair issue(s) with the as-delivered Aircraft, its parts or systems shall be
subject to [COMPANY A’s] Change Order (CO) additional work process unless
specifically noted herein.” The Aircraft, therefore, is fully functional at the
time of its delivery to COMPANY A and is required to be returned in the same
condition.

In addition, Section 3.2.10 (Area Lighting) of Appendix A states, in part,
“[a]rea lighting shall be provided by means of reconfiguring the COMPANY
B-supplied Diehl color LED ceiling and sidewall washlights mounted above and
below the valance panels.” This language demonstrates that such lighting is in
place within the Aircraft’s cabin interior but is being moved to accommodate
the design plans approved by COMPANY A’s customer.

The issuance of a Standard Airworthiness Certificate does not establish that
the aircraft works in a new or different manner. The difference is the
LICENSING OR CERTIFICATION of the aircraft not the PERFORMANCE of the aircraft.
The type of certificate of airworthiness issued by the FAA before or after
COMPANY A’s services has no bearing on the applicability of Texas sales and use
tax to those services. See, e.g., Comptroller Decision No. 30,311(1993)
(holding the fact the FAA treats the taxpayer’s process as “creating a new part
has absolutely no bearing on a determination under the Texas sales and use
tax.”).

TAXABILITY OF THE TANGIBLE PERSONAL PROPERTY USED IN REMODELING
Because we determine that COMPANY A is engaged in remodeling the aircraft and
is not a manufacturer, we also determine that Section 151.011(f)(2) (providing
that the definition of “use” or “storage” for use tax purposes does not include
tangible personal property for the purpose of manufacturing) and Section
151.318 (providing for the exemption of certain items used in manufacturing
from sales and use tax) are not applicable to COMPANY A’s activities under the
contract at issue.

The responsibilities of remodelers of private aircraft are addressed in Rule
3.292(i). Under both a lump-sum and separated contract, the labor to remodel a
private aircraft is not subject to Texas sales and use tax. See Rule
3.292(i)(1)(A).

COMPANY A submitted an executed amendment to the contract at issue in this
request which indicates the contract as amended is a separated contract as
defined by Rule 3.291(a)(13). Under a separated contract, the remodeler is
considered a retailer of the materials that are incorporated into the private aircraft
of the customer. A retailer may issue a resale certificate in lieu of paying sales tax to its
suppliers and must collect tax from the customer on the agreed contract price
of the materials which must not be less than the amount the remodeler paid to
suppliers. See Rule 3.292(i)(2). However, COMPANY A’s contract with its
customer provides that the Aircraft will be delivered to the customer at a
point located outside of Washington State. Because the aircraft is delivered to
the customer at a point outside the state of Texas, Texas sales and use tax is
not due on the materials. See Texas Tax Code Section 151.051 which provides for
the imposition of sales tax on each of a taxable item in this state.

A remodeler is the ultimate consumer of consumable supplies, tools, and
equipment used that are not incorporated into the private aircraft being
remodeled and must pay sales tax on these items at the time of purchase. See
Rule 3.292(i)(2).

If you have any questions about this private letter ruling, please email us at
https://www.window.state.tx.us/taxhelp/ and reference Private Letter Ruling

1141950599.

Sincerely,

Tax Policy Division

ENDNOTES:

1. References to Section are to Texas Tax Code Annotated (Vernon 1992).
   References to Rule are to sections of Title 34, Texas Administrative Code.