If a customer buys an aircraft under an exemption certificate for use outside Texas, does having it refurbished in Texas before removal make the aircraft taxable?

Subject

Aircraft — Testing/Processing Before Acceptance And Delivery — Aircraft Purchased For Use Outside Texas

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9401L1283G12

Plain-English Summary

A business asked the Comptroller about a proposed sale and refurbishing of an aircraft in Texas. The aircraft was going to be purchased under an exemption certificate because it would be used exclusively outside Texas. The question: if the customer had the aircraft refurbished in Texas before taking it out of state, would that refurbishing work make the aircraft taxable?

The Comptroller's answer was "no." Even before a recent statutory amendment, the Comptroller had taken the position that a foreign (out-of-state) resident could bring an aircraft into Texas for refurbishing or processing without owing tax on the aircraft itself, as long as the aircraft was later taken out of Texas — relying on Sec. 151.011 (f) (2), Tex. Tax Code. That interpretation had not changed.

The letter also addressed Sec. 151.155, Tex. Tax Code, which makes sales tax due on property bought under an exemption certificate if the person who gave the certificate later uses the property in a way inconsistent with that certificate. Because the Comptroller has treated refurbishing and processing of aircraft as excluded from the definition of "use" (so long as the aircraft is subsequently removed from Texas), there is no taxable use triggered when the aircraft is refurbished before the customer removes it from the state. The letter cites two prior Comptroller's Hearings Decisions, H-14,776 (1984) and H-19,036 (1987), as the basis for this treatment.

That said, the refurbishing work itself is not automatically tax-free:

• If the customer has the aircraft refurbished under a separated contract (parts billed separately from labor), the customer owes tax on the parts.
• If the refurbisher bills under a lump-sum contract instead, the refurbisher — not the customer — owes tax on the taxable items used in the refurbishing.

The letter also addressed an alternative the taxpayer raised: transferring title and possession of the aircraft in Kansas instead of Texas. The Comptroller said that doing so would not change the taxable transactions described above.

What This Means For You

If you are selling or brokering an aircraft to an out-of-state buyer: The buyer's exemption certificate (based on exclusive use outside Texas) is not voided just because the aircraft is refurbished or processed in Texas before being flown or shipped out of state. You can rely on the certificate for the aircraft sale itself.

If you are the buyer/customer having the aircraft refurbished in Texas: Expect to pay Texas sales tax on the parts if you're billed under a separated contract for the refurbishing work. If your refurbisher instead charges a lump sum, the tax obligation on the taxable items used shifts to the refurbisher rather than you.

If you are a refurbisher or aircraft maintenance provider: How you structure your billing (separated parts-and-labor vs. lump sum) determines who owes the tax on materials used in the job — plan your contracts accordingly.

If you are considering closing the sale outside Texas to avoid tax questions: This letter specifically found that transferring title and possession in another state (Kansas, in this case) would not change the taxable transactions — so that alone is not a workaround.

Q&A

Q: Does refurbishing an aircraft in Texas before it leaves the state break an out-of-state-use exemption certificate?
A: No. The Comptroller confirmed that refurbishing or processing an aircraft in Texas, prior to its removal from the state, is treated as excluded from the definition of taxable "use." The exemption certificate for the aircraft purchase remains valid.

Q: Who owes tax on the refurbishing work itself?
A: It depends on how the work is billed. Under a separated contract, the customer owes tax on the parts. Under a lump-sum contract, the refurbisher owes tax on the taxable items used in the job, not the customer.

Q: Would closing the sale (transferring title and possession) in another state like Kansas avoid the Texas tax issues described here?
A: No. The letter states that doing so would not affect the taxable transactions — the tax treatment of the refurbishing work stays the same regardless of where title and possession are formally transferred.

Citations

• Sec. 151.011 (f) (2), Tex. Tax Code (basis for treating refurbishing/processing of an aircraft, before its removal from Texas, as excluded from taxable use)
• Sec. 151.155, Tex. Tax Code (sales tax becomes due on exemption-certificate property if the certificate holder makes a use inconsistent with the certificate)
• Comptroller's Hearings Decisions H-14,776 (1984) and H-19,036 (1987) (prior administrative decisions applying this treatment to aircraft refurbishing/processing)

Original ruling text

January 26, 1994

Dear **:

On January 25, 1994, you asked several questions concerning a proposed
sale and refurbishing of an aircraft in Texas. The aircraft may be
purchased under an exemption certificate because it will be used
exclusively outside Texas. You wanted to know if the aircraft would
become taxable if the customer had it refurbished in Texas prior to
removal. The answer is "no."

Previous to the amendment last session, we had taken the position
that a foreign resident could bring an aircraft into Texas for
refurbishing or processing without being required to pay tax on the
aircraft if it was thereafter taken out of Texas. We relied on Sec.
151.011 (f) (2), Tex. Tax Code to reach this conclusion. This
interpretation has not been changed.

Sec. 151.155, Tex. Tax Code provides that the sales tax will become
due on property purchased under an exemption certificate if the
person giving the exemption certificate makes a use of the property
inconsistent with the exemption certificate. Because we have treated
the refurbishing and processing of aircraft as transactions excluded
from the definition of use if the aircraft is subsequently removed
from the state, there is no taxable use when the aircraft is
refurbished prior to removal from Texas by your client's customer.
See Comptroller's Hearings Decisions H-14,776 (1984) and H-19,036
(1987).

If the customer has the aircraft refurbished in Texas, it will owe
tax on the parts sold under a separated contract. If the refurbisher
bills under a lump sum contract, tax on the taxable items used in the
refurbishing will be owed by the refurbisher, not the customer.

You also suggested an alternative of transferring title and possession
of the aircraft in Kansas. If this was done, the taxable transactions
would not be affected.

I hope this satisfactorily answers your inquiry. Should you have
further questions, please call me at 463-4004.

Sincerely,

Wade Anderson
Assistant Director
Tax Administration

NOTE: Previous Accession Number 9402013L.2 and/or 9402013L