If a company buys an aircraft tax-free for resale and leases it to its own parent company, does replacing that lease with a lower-payment lease -- or the company later using the plane itself -- undo the resale exemption?

Plain-English summary

The Texas Comptroller confirmed that an aircraft purchased tax-free under the resale exemption stays exempt through a related-party lease, a later lease replacement with lower payments, and even a switch to the owner's own personal use — as long as the aircraft spent more than half its first year under a lessee's operational control.

An Oregon LLC bought an aircraft in December 2015 for the purpose of leasing it out, and immediately leased it under a 10-year agreement to the Delaware limited partnership that wholly owns the LLC — a related-party structure that didn't disturb the resale exemption (Texas law specifically says related-party status doesn't affect this analysis). For over a year, 100% of the plane's flights were under the lessee's operational control, comfortably clearing the statutory 50%-in-the-first-year threshold that locks in the resale exemption for good. The company then asked three forward-looking questions, all answered favorably: replacing the original lease with an "Amended Lease" carrying nominal, lower monthly payments after the first year doesn't undo the exemption, because the amended lease still involves consideration; the LLC owes no tax if it later exercises operational control for some of its own flights, or even stops leasing the plane to anyone else entirely, because the first-year 50% threshold was already met; and — separately — sales/use tax still applies to whatever the lease payments actually are, original or amended, since leasing tangible personal property is itself a taxable transaction regardless of the underlying purchase's tax-free resale status.

What this means for you

Aircraft owners leasing to related-party entities

Related-party ownership (a leasing LLC wholly owned by its own lessee) doesn't disqualify an aircraft purchase from the resale exemption — Texas law specifically addresses this in Section 163.006(a). What matters is genuine operational control transfer to the lessee(s) for more than 50% of departures in the first year.

Companies planning to change lease terms or eventually use a leased aircraft themselves

Once the first-year 50%-lease threshold is met, you have real flexibility: you can replace the original lease with different (even much lower) payment terms, exercise your own operational control over some flights, or stop leasing the plane to anyone altogether — none of that retroactively disturbs the original resale exemption on the purchase.

Accountants and tax professionals

Two threads: the aircraft-specific resale-preservation rule under Section 163.002(b)-(d) (which locks in the exemption once the first-year 50% threshold is met, and specifically disapplies the general resale-certificate liability rule in Section 151.154(a) to aircraft), and the related-party carve-out in Section 163.006(a). Remember lease payments themselves remain separately taxable under 34 Tex. Admin. Code § 3.294, regardless of the underlying purchase exemption.

Common questions

Q: Does leasing an aircraft to a related party (like your own parent company) disqualify the resale exemption on the purchase?
A: No. Section 163.006(a) specifically provides that related-party status between the lessor and lessee doesn't affect the resale-exemption analysis.

Q: If I change my lease terms after the first year, does that undo my resale exemption?
A: No, as long as the amended lease still involves consideration (even a nominal amount) and the original first-year 50%-departures threshold was already met.

Q: Once I've met the 50% threshold, can I later use the aircraft myself without owing tax?
A: Yes. Once the first-year requirement is met, later personal use or even ceasing to lease the aircraft to anyone doesn't trigger sales or use tax on the original purchase.

Q: Do I still owe tax on the lease payments themselves?
A: Yes. The resale exemption covers the purchase; sales/use tax still applies to lease/rental charges under the general lease-taxation rule, for both the original and any amended lease.

Q: Can another aircraft owner rely on this ruling?
A: No. It's binding on the Comptroller only for the requesting taxpayer and facts presented, and cannot be relied on by any other taxpayer. A companion ruling issued the same day (201801016L) reaches the identical conclusion for a similarly structured aircraft purchased roughly three months earlier.

Citations and references

Statutes and rules:

• Tex. Tax Code § 163.002(a)-(d) (Resale of Aircraft — first-year 50% threshold, related-party leases, resale-liability carve-out)
• Tex. Tax Code § 163.006(a) (Certain Transactions Between Related Persons)
• Tex. Tax Code § 151.302(a) (Sales for Resale)
• Tex. Tax Code § 151.154(a) (Resale Certificate: Liability of Purchaser — inapplicable to aircraft)
• 34 Tex. Admin. Code § 3.294(b), (c)(1) (Rental and Lease of Tangible Personal Property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201801014L

Original ruling text

January 12, 2018

ADDRESS

CITY, TX 76102

RE: Private Letter Ruling No. 2017010145

**, Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: 1] We are responding to your request dated April 28, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on whether an aircraft purchase is a sale for resale exempt from Texas sales or use tax, the effect of a subsequent aircraft lease on the aircraft’s sale for resale exemption, the taxability of a purchaser’s divergent use of the aircraft, and the tax treatment for lease payments of the aircraft.

Facts Presented

** (Taxpayer), an Oregon limited liability company, purchased an aircraft on Dec. 23, 2015 (Aircraft Acquisition Date). Taxpayer provided a valid resale exemption certificate to the seller at the time of purchase. Taxpayer’s purpose in acquiring the aircraft was to lease, rent, or resell the aircraft to another person in the United States of America.

Taxpayer entered into a written lease agreement with a Delaware limited partnership (Lessee), which wholly owns Taxpayer, for a period of ten years beginning on Dec. 23, 2015 (Original Lease). Under the terms of the Original Lease, Taxpayer transferred operational control of the aircraft to Lessee for consideration in the form of a monthly payment of a fixed amount. Taxpayer collects Texas sales and use tax on each lease payment under the Original Lease and remits such tax to the Texas Comptroller of Public Accounts.

After execution of the Original Lease, Lessee hangered the aircraft in Texas. For a period of at least one year following Aircraft Acquisition Date, 100 percent of the aircraft’s departures were made under the operational control of Lessee pursuant to the Original Lease.

At a future date that is more than one year after Aircraft Acquisition Date, Taxpayer and Lessee may enter into a new lease (Amended Lease) with nominal monthly lease payments that would be less than the Original Lease requires.

Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by our responses and analysis.

Question One: Does the purchase of the aircraft by Taxpayer qualify for exemption from sales or use tax as a sale for resale?

Ruling One: Yes, Taxpayer’s aircraft acquisition is exempt from sales or use tax as a sale for resale pursuant to Section 151.302(a) (Sales for Resale).

Question Two: Can Taxpayer’s Original Lease agreement be terminated and replaced with an Amended Lease without affecting Taxpayer’s sale for resale exemption for the purchase of the aircraft if, for more than one year following Taxpayer’s aircraft purchase, more than 50 percent of the aircraft’s departures occur under the Lessee’s operational control pursuant to the Original Lease?

Ruling Two: Yes. Entering into the Amended Lease and terminating the Original Lease in the manner described will not affect Taxpayer’s qualification for exemption from sales or use tax as a sale for resale.

Question Three: If Taxpayer’s aircraft purchase is eligible for the sale for resale exemption, is sales or use tax due on Taxpayer’s divergent use of the aircraft, including Taxpayer’s operational control of the aircraft for certain flights or Taxpayer’s ceasing to lease the aircraft to any other party in favor of its own use of the aircraft?

Ruling Three: The aircraft purchase qualifies as a sale for resale under Section 151.302(a). Taxpayer does not owe sales or use tax when it exercises operational control of the aircraft for certain flights. Taxpayer would not owe sales or use tax when Taxpayer ceases leasing the aircraft, provided that it meets the requirements in Section 163.002(c) (Resale of Aircraft).

Question Four: If Taxpayer and Lessee enter into an Amended Lease more than one year after Taxpayer purchased the aircraft, will sales and use tax be due on the amended monthly lease payments (and any other applicable taxable and non-separately stated charges) under the Amended Lease?

Ruling Four: Yes, sales or use tax will be due on the amended monthly lease payments in accordance with Rule 3.294 (Rental and Lease of Tangible Personal Property).

Analysis:

Section 151.302(a) states, “The sale for resale of a taxable item is exempted from the taxes imposed by this chapter.”

Section 163.002(a) states in part, “For purposes of Section 151.006, ‘sale for resale’ includes the sale of an aircraft to a purchaser who acquires the aircraft for the purpose of leasing, renting, or reselling the aircraft to another person in the United States of America…in the form or condition in which it is acquired.”

Here, Taxpayer bought an aircraft for the purpose of leasing it to Lessee in the form or condition in which it was acquired, satisfying the requirements listed in Section 163.002(a), and qualifying for exemption from sales or use tax as a sale for resale. The fact that Lessee wholly owns Taxpayer does not affect this conclusion. Section 163.006(a) (Certain Transactions Between Related Persons).

In regard to the termination and replacement of the Original Lease, Section 163.002(b) states, “The leasing or renting of an aircraft under Subsection (a) includes the transfer of operational control of the aircraft from a lessor to one or more lessees pursuant to one or more written agreements in exchange for consideration, regardless of whether the consideration is in the form of a cash payment and regardless of whether the consideration is fixed, variable, or periodic. For purposes of the subsection, ‘operational control’ has the meaning assigned by the Federal Aviation Regulations and includes the exercise of authority over initiating, conducting or terminating a flight.”

Taxpayer transferred operational control as defined by Section 163.002(b) to Lessee pursuant to a written lease agreement in exchange for consideration in accordance with Section 163.002(b). Lessee entering into the Amended Lease and terminating the Original Lease will not affect Taxpayer’s qualification for exemption from sales or use tax as a sale for resale because the amended lease would also include consideration. Section 163.002(b).

Section 163.002(c) states, “Subsection (a) applies to a purchase of an aircraft regardless of whether the purchaser, in addition to leasing, renting, or reselling the aircraft to another person, also uses the aircraft if, for a period of one year beginning on the date the purchaser purchases the aircraft, more than 50 percent of the aircraft’s departures are made under the operational control of one or more lessees pursuant to one or more written agreements as described by Subsection (b).”

For a period of at least one year following the Aircraft Acquisition Date, more than 50 percent of the aircraft’s departures were made under the operational control of Lessee pursuant to the Original Lease. Taxpayer’s qualification for exemption from sales or use tax as a sale for resale remains unaffected because Taxpayer has already met the requirements described in Section 163.002(c).

In regard to sale for resale exemptions, Section 151.154(a) (Resale Certificate; Liability of Purchaser) states, “If a purchaser who gives a resale certificate makes any use of the taxable item other than retention, demonstration, or display while holding it for sale, lease, or rental in the regular course of business or for transfer as an integral part of a taxable service in the regular course of business, the purchaser shall be liable for payment of the sales tax on the value of the taxable item for any period during which the taxable item is used other than for retention, demonstration, or display.”

However, Section 163.002(d) states, “Section 151.154(a) does not apply to a purchaser of an aircraft.” Therefore, Section 151.154(a) would not apply to Taxpayer.

Taxpayer’s aircraft acquisition is exempt from sales and use tax because more than 50 percent of the aircraft’s departures were made under the operational control of one or more lessees pursuant to one or more written agreements for a period of one year beginning on the Aircraft Acquisition Date, as described by Section 163.002(b). In addition, when the aircraft purchase qualifies as a sale for resale, Taxpayer does not owe sales or use tax if it ceases to lease the aircraft to any other party in favor of its own use of the aircraft, provided that for one year from the Aircraft Acquisition Date more than 50 percent of its departures were made under operational control of a lessee.

Tax must be collected from Lessee on all charges contained in a lease, unless the charge is separately stated and is nontaxable. Rule 3.294(b). Receipts from a lease of tangible personal property without an operator are taxable. Rule 3.294(c)(1).

Just as sales and use tax was due on the lease payments under the Original Lease, if Taxpayer and Lessee enter into an Amended Lease more than one year after the Aircraft Acquisition Date, sales or use tax will be due on the amended monthly lease payments in accordance with Rule 3.294.

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling No.2017010145.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.