Can a company that overhauls and repairs jet turbine engines buy consumables like cleaning solvents and plasma tax-free, and does the machinery/equipment exemption apply even if some customers aren't certificated airlines?

Plain-English summary

The Texas Comptroller's Tax Policy Division answered questions from a company ("Company A") that repairs and overhauls jet turbine engines for business aircraft worldwide. Company A's customers include commercial airlines, small privately-owned repair shops, privately-owned aircraft, and corporate-owned aircraft — not just certificated or licensed carriers.

The letter addressed three questions. First, on utilities: when gas or electricity is used for both taxable and tax-exempt purposes, Company A must do a "predominant use study" listing the equipment under both exempt and taxable uses with appropriate time allocations — revenue generated is not a valid way to measure that allocation.

Second, on machinery and equipment: Tax Code Sec. 151.318 exempts machinery and equipment used in overhauling, retrofitting, or repairing jet turbine engines, and the Comptroller confirmed this exemption applies even for customers who aren't certificated or licensed carriers. That's different from the separate Sec. 151.317 exemption for gas and electricity used in overhaul/repair work performed specifically for certificated or licensed carriers. However, if machinery or equipment is put to "divergent use" — used both for exempt overhaul/repair work and for other, non-qualifying operations — Company A owes tax on that divergent use, either on the fair market rental value during the divergent-use period or on the original cost (and it can't later switch to paying tax on original cost and get credit for tax already paid on rental value).

Third, on consumables: cleaning solvents used up in cleaning the engine, and consumables like plasma that get transferred to the customer (such as plasma applied to blades and vanes), can both be purchased tax-free by Company A — as long as they're used or consumed in overhauling, retrofitting, or repairing jet turbine engines and Company A gives its supplier a properly completed exemption certificate.

What this means for you

Aircraft engine repair and overhaul businesses

If you overhaul, retrofit, or repair jet turbine engines, the Sec. 151.318 exemption for machinery, equipment, and consumables used in that work can apply regardless of whether your customers are certificated airlines or private aircraft owners. Consumables that are used up in the process (like cleaning solvents) or transferred to the customer (like plasma applied to blades and vanes) can be bought tax-free with a properly completed exemption certificate given to your supplier.

Businesses with mixed taxable and exempt equipment use

If the same machinery or equipment is used both for exempt overhaul/repair work and for other operations that don't qualify, you owe tax on that "divergent use" — calculated either on the fair market rental value during the divergent-use period or on the original cost. Choose carefully: you cannot later switch from the rental-value method to the original-cost method and get credit for tax already paid.

Businesses tracking utility exemptions

If gas or electricity is used for both taxable and exempt purposes, a predominant use study is required, and each piece of equipment must be listed under both exempt and taxable uses with time-based allocations. Revenue generated is not an acceptable substitute for measuring that split.

Common questions

Q: Can a jet turbine engine overhaul company buy cleaning solvents tax-free?
A: Yes, according to this letter, if the solvent is used or consumed in overhauling, retrofitting, or repairing jet turbine engines, it can be purchased tax-free with a properly completed exemption certificate.

Q: What about consumables that get transferred to the customer, like plasma applied to blades and vanes?
A: The letter says those can also be purchased tax-free under the same conditions — used or consumed in the overhaul/retrofit/repair of jet turbine engines, with a proper exemption certificate given to the supplier.

Q: Does the machinery and equipment exemption under Sec. 151.318 require the customer to be a certificated or licensed carrier?
A: No. The letter states the exemption still applies even when customers are not certificated or licensed carriers, which is different from the Sec. 151.317 exemption for gas/electricity that is tied to certificated or licensed carriers.

Q: What happens if machinery is used for both exempt overhaul work and other taxable purposes?
A: The company owes tax on that divergent use, based on either the fair market rental value during the divergent-use period or the original cost — and it cannot later switch methods to claim credit for tax already paid.

Q: How should a company allocate gas/electricity usage between exempt and taxable purposes?
A: A predominant use study is required, listing equipment under both exempt and taxable uses with appropriate time allocations. Revenue generated is not a valid measure for that allocation.

Q: Can another company rely on this letter?
A: No. The letter states this opinion is based on the facts submitted, and other facts, though similar, may yield different results.

Citations and references

Statutes and rules:

• Tax Code Sec. 151.318 (exemption for machinery/equipment used in overhauling, retrofitting, or repairing jet turbine engines)
• Tax Code Sec. 151.317 (exemption for gas/electricity used in off-wing processing, overhaul, or repair of jet turbine engines for certificated/licensed carriers)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9511731L

Original ruling text

November 16, 1995

Dear *****:

Thank you for your letter about the recent legislation regarding the repair and
overhaul of jet turbine engines.

In your scenario, you have a company (Company A) that is engaged in the repair
and overhaul of turbine engines for business aircraft worldwide. The customers
serviced by the Company A consist of commercial airlines, small privately
owned-repair shops, privately-owned aircraft, and corporate-owned aircraft.
The engines are shipped to Company A to be repaired and overhauled and then are
shipped to various locations within and outside Texas. You had the following
questions about the purchases by the company:

1. Sales or Use Tax Exemption on Utilities

Since Company A overhauls engines for a variety of customers (certified
carriers, corporate jets, etc.), how should they compute the percentage of
exempt usage for purposes of the utility study? A detailed analysis of each
machine would be very expensive and time consuming. An estimate of the usage
could be based on revenue.

Response: A predominant use study is required. When gas or electricity is
used for both exempt and taxable uses, the equipment is to be listed in the
study under both exempt and taxable uses with appropriate allocations of time
for each use. Revenue generated is not a valid measure for allocation.

2. Machinery & Equipment

Section 151.318 provides an exemption from sales tax for machinery and
equipment used in the "overhauling or repairing of jet turbine engines." Is
the exemption available for Company A in view of their customer base?

Response: Yes, machinery or equipment used in overhauling, retrofitting, or
repairing jet turbine engines for customers who are not certificated or
licensed carriers still qualifies under Sec. 151.318(n). The exemption for
machinery or equipment used in overhauling, retrofitting, or repairing jet
turbine engines found in Tax Code Sec. 151.318 is different from the exemption
found in Sec. 151.317 for gas and electricity used in the off-wing processing,
overhaul, or repair of a jet turbine engine or its parts for a certificated or
licensed carrier.

Company A would owe sales tax on the divergent use of any machinery or
equipment used both in overhauling, retrofitting, or repairing jet turbine
engines and in other operations that do not qualify under Sec. 151.318. Company
A may pay tax on the fair market rental value during the period of divergent
use or pay tax on the original cost. Credit cannot be given for tax previously
paid on fair market rental value if Company A later decides to pay tax based on
the original cost of the machinery or equipment.

3. Consumable (parts which are used up in the overhaul and repair process or
   transferred to the customer).

a. Consumable such as cleaning solvents used to clean the engine which are
used up in the process.

Response: If the solvent is used or consumed in the overhauling, retrofitting,
or repairing of jet turbine engines, the solvent can be purchased tax free by
Company A by giving a properly completed exemption certificate to the
supplier.

b. Consumables which are transferred to the customer (such as plasma applied
to blades and vanes).

Response: If the plasma is used or consumed in the overhauling, retrofitting,
or repairing of jet turbine engines, the plasma can be purchased tax free by
Company A by giving a properly completed exemption certificate to the supplier.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

I hope this explanation is helpful to you. Should you have any further
questions, please feel free to contact David Somerville in the Tax Policy
Division at 1-800-531-5441, extension 5-0030.

If I can be of any further assistance, please let me know.

Sincerely,

Karey W. Barton
Manager, Tax Policy