If an unpermitted company sells a third airplane within 12 months of two earlier sales, is the third sale taxable in Texas, and are the first two sales retroactively taxed?

Subject

Retailer — Nonpermitted — Occasional Sale Qualification / Disqualification

Plain-English summary

A company without a Texas sales tax permit sold one airplane and was in the process of selling a second, with the proceeds going toward buying more aircraft. It asked the Comptroller what would happen if a third plane was sold within the same 12-month period as the first two.

The Comptroller's Tax Administration Division answered two questions:

1. Would a third sale within the same 12-month period be taxable? Yes, under Rule 3.316(b)(2), the "occasional sale" provision.
2. Would the first two sales be taxed retroactively? Not if Rule 3.316(b) genuinely applied to them — but that rule does not apply to anyone in the business of selling, leasing, or renting tangible personal property.

The letter noted that the company's letterhead suggested it used its airplanes to perform pipeline patrols. If the two planes sold were older aircraft that had been bought tax-paid and used for those patrol services, tax would not be due on the first two sales. But if the company was instead branching out into airplane sales or rentals and using its own planes to get that new business started, Rule 3.316(b) would not apply at all — meaning even the earliest sales could fail to qualify as occasional sales, because businesses that should hold a sales tax permit (because they sell, lease, or rent property) don't get occasional-sale treatment even when they are just starting out.

The Comptroller stressed that this opinion was based only on the facts presented, and could change if the facts were different or incomplete.

What this means for you

Businesses without a sales tax permit selling used equipment

If you don't hold a Texas sales tax permit and are selling off property (like aircraft) that you used in your own operations, a sale can typically be treated as an "occasional sale" and escape tax — but only up to a point. Under Rule 3.316(b)(2), a third qualifying sale within the same 12-month period as two earlier sales becomes taxable.

Companies transitioning into selling, leasing, or renting as a new business line

If you're using your own equipment to launch a new sales or rental business, the occasional-sale exception in Rule 3.316(b) does not apply to you at all — not even to your very first sale. Businesses that should be permitted because they're in the business of selling, leasing, or renting tangible personal property don't get occasional-sale treatment, even at the very onset of that business.

Accountants and tax professionals

The determinative fact here is why the property is being sold. If a client sold older, tax-paid equipment that had been used to perform its actual services (here, pipeline patrols) and is not otherwise in the business of selling, leasing, or renting property, the first two sales in a 12-month window can stay untaxed as occasional sales under Rule 3.316(b), while a third sale in that same period becomes taxable under Rule 3.316(b)(2). If instead the sales reflect the start of a new selling/leasing/rental line of business, none of the sales qualify for occasional-sale treatment.

Common questions

Q: Is a third sale within 12 months of two prior sales automatically taxable?
A: Yes. The ruling states that if the third sale occurs within the same 12-month period as the previous two sales, it is taxable under Rule 3.316(b)(2).

Q: Will the Comptroller go back and tax the first two sales once a third sale happens?
A: Not necessarily. The ruling says that if the provisions of Rule 3.316(b) genuinely applied to the first two sales, retroactive taxation of those sales will not occur.

Q: When does Rule 3.316(b) not apply at all?
A: It does not apply to persons who are in the business of selling, leasing, or renting tangible personal property. The ruling explains that such persons may not have occasional sales even at the onset of the business.

Q: What made the difference in this specific situation?
A: The company's letterhead suggested it used its airplanes for pipeline patrol services. If the planes sold were older aircraft bought tax-paid and used in performing those services, tax would not be due on the first two sales. But if the company was instead starting an airplane sales or rental business using its own planes to get started, the occasional-sale provisions would not apply.

Q: Can I rely on this letter for my own situation?
A: This letter was addressed to a specific taxpayer based on the facts that taxpayer presented, and the Comptroller noted its opinion could change with different or additional facts. See the disclaimer below about reliance on STAR letters.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.316(b)(2) (occasional sales)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209L1193G12

Original ruling text

September 24, 1992

Dear **:

I am responding to your letter questioning the application of tax to sales made
through "occasional sales." You explained that ** does not have a
sales tax permit and has already sold one plane.

You added that the company is in the process of selling another plane, and the
proceeds for both sales will be used to purchase more aircraft now and in the
future. There is a possibility that a third plane may be sold within the same
twelve-month period as the first two.

You asked:

(1) Will the third sale be taxable if the sale is made within the same
12-month period as the previous two sales?

Response: Yes. Please refer to Rule 3.316(b)(2).

(2) Verify retrospective action in the form of sales tax will not be taken on
the first two sales.

Response: If the provisions of Rule 3.316(b) truly apply to the first two
sales, then retroactive application of sales tax to the first two sales will
not occur. However, Rule 3.316(b) does not apply to persons who are in the
business of selling, leasing, or renting tangible personal property.

Based upon your company letterhead, it appears that your company uses the
airplanes to perform the pipeline patrols. If so, and you are selling off older
airplanes that were purchased tax paid and were used in the performance of
these services, then tax will not be due on the first two sales. Please read
the example in (b)(2).

However, if your company is branching out into airplane sales or rentals and is
using its own planes to get started, the provisions of Rule 3.316(b) will not
apply. Persons that should hold permits because they are in the business of
selling, leasing, or renting tangible personal property may not have occasional
sales even at the onset of the business. 3

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

Sincerely,

Tax Administration Division