Is avionics installation, equipment addition, and interior modification/remodeling work on a privately owned aircraft taxable under Texas sales and use tax, and how is a lump-sum repair/remodeling contract taxed?

Subject

Aircraft — Adding Equipment/Replacing Avionics/Fuel Tank — Is Repair Or Remodeling

Plain-English summary

A Texas company (the Seller) performs avionics installation and upgrades, custom interior design/fabrication/installation, and routine repair and maintenance on aircraft. It had a contract to do interior modification/installation and avionics installation on a 747 for a customer (the Customer) who lives outside the United States. The aircraft was privately owned by a foreign company, foreign-registered, and operated by and for a foreign government official. All the work was done in Texas, but the finished aircraft was delivered to the Customer outside Texas.

The Comptroller answered four questions:

1. Is any sales or use tax imposed on this transaction? No -- but the Seller itself may owe tax on the parts and materials it affixes to or incorporates into the aircraft if the contract is a lump-sum contract.
2. Is the Customer a "licensed and certificated carrier" (Tax Code Section 151.328, Rule 3.297) or a "private aircraft" (Rule 3.359)? The Customer is treated as a private aircraft, not a licensed and certificated carrier.
3. Do the Section 151.328(a) exemptions apply to repair/remodeling services performed for an exempt category of customer, or only to aircraft sales? Only to aircraft sales. Performing repair or remodeling work on a customer's aircraft is a nontaxable service under Tax Code Section 151.0101(a)(5)(A) -- that nontaxable-service classification is what applies here, not the Section 151.328(a) exemption.
4. If this is repair/remodeling under Rule 3.359, is the contract lump-sum or separated, and how is it taxed? The Comptroller confirmed the work is repair or remodeling, but said the facts given weren't enough to determine whether the contract was lump-sum or separated (the sample invoice suggested some separation of materials and labor, but only for progress/partial payment purposes). The ruling then explains both possibilities: under Rule 3.359, if the contract is lump-sum, the Seller is treated as the consumer of the materials and parts it installs, so the lump-sum charge billed to the Customer is not taxable, but the Seller owes tax on the materials and parts itself -- regardless of the fact that the finished aircraft is delivered to the Customer outside Texas.

Bottom line: this is a nontaxable "repair or remodeling" transaction, not a taxable sale. The charge to the customer for the avionics/interior work is not subject to sales or use tax either way. The only tax exposure identified is on the Seller's own purchases of parts and materials, and only if the contract is structured as lump-sum.

Note: this letter does not separately analyze a fuel-tank replacement scenario in its facts or answers -- the facts described are avionics installation/upgrades and interior modification/installation/design/fabrication, plus "routine repair and maintenance" generally. Nothing in the original text discusses a fuel tank specifically, so this summary does not speculate about how that particular item would be classified.

What this means for you

Aircraft repair, avionics, and interior-modification shops working in Texas

If you install avionics, upgrade equipment, or do interior design/fabrication/installation work on someone else's aircraft, that work is a nontaxable service under Tax Code Section 151.0101(a)(5)(A) -- you don't charge your customer sales tax on the labor/service charge. But under Rule 3.359, if your contract with the customer is lump-sum (one all-in price, not separately stated materials and labor), you are treated as the consumer of the parts and materials you use, and you owe tax on those parts and materials yourself. That's true even if you ultimately deliver the finished aircraft to the customer outside Texas.

Businesses contracting to repair or remodel a privately owned aircraft

Whether your customer qualifies as a "licensed and certificated carrier" under Section 151.328/Rule 3.297, versus a "private aircraft" under Rule 3.359, matters for other exemptions -- but per this ruling, the Section 151.328(a) exemptions apply only to the sale of an aircraft, not to repair or remodeling services performed on one. So even a customer that would qualify for an exemption on an aircraft purchase does not extend that exemption to repair/remodeling work performed on its aircraft.

Contract drafters structuring lump-sum vs. separated repair contracts

Whether your invoice separately states materials and labor (a separated contract) versus billing a single lump-sum price affects who bears the tax on parts and materials under Rule 3.359. The Comptroller noted that separating charges only for progress-payment purposes did not, by itself, settle whether the contract was "separated" for tax purposes -- the facts here weren't sufficient to decide that question.

Common questions

Q: Is sales or use tax charged on the fee for installing avionics or remodeling the interior of a private aircraft?
A: No. The Comptroller ruled that no sales or use tax is imposed on this transaction, because the work is repair or remodeling, a nontaxable service under Tax Code Section 151.0101(a)(5)(A).

Q: If the service itself isn't taxed, is there any tax at all here?
A: Possibly, but it falls on the service provider, not the customer. If the repair/remodeling contract is lump-sum, the service provider is treated as the consumer of the parts and materials affixed to the aircraft and owes tax on those materials -- even though the lump-sum charge to the customer is not taxable.

Q: Does it matter that the aircraft is delivered to the customer outside Texas after the work is done?
A: No. The ruling states the service provider owes tax on the materials and parts under a lump-sum contract "notwithstanding the fact the service provider delivers the aircraft to the customer outside Texas."

Q: Was the customer treated as a "licensed and certificated carrier" or a "private aircraft"?
A: The Comptroller treated the customer as a private aircraft, not as a licensed and certificated carrier under Tax Code Section 151.328 and Rule 3.297.

Q: Do the exemptions in Tax Code Section 151.328(a) cover repair or remodeling services performed for an exempt type of customer?
A: No. The ruling states those exemptions apply only to the sale of aircraft, not to repair or remodeling services performed on a customer's aircraft (which is instead treated as a nontaxable service under Section 151.0101(a)(5)(A)).

Q: Was it clear whether the contract in this case was lump-sum or separated?
A: No. The Comptroller said the facts provided didn't give enough information to determine whether the contract was lump-sum or separated, though the sample invoice appeared to separate materials and labor for progress/partial-payment purposes.

Q: Is Rule 3.359 still the current rule to rely on?
A: No. The document carries an alert that Rule 3.359 has been repealed, and directs readers to Rule 3.280 for issues relating to aircraft.

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.328 (exemption for aircraft sold to a licensed and certificated carrier, among other categories)
• 34 Tex. Admin. Code Rule 3.297 (licensed and certificated carrier)
• 34 Tex. Admin. Code Rule 3.359 (repair and remodeling of private aircraft; per the document's own alert, this rule has since been repealed -- see Rule 3.280)
• Texas Tax Code Section 151.0101(a)(5)(A) (repair, remodeling, and restoration of aircraft is a nontaxable service)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9612986L

Original ruling text

ALERT: The cited rule, Rule 3.359 has been repealed. See Rule 3.280 for issues relating to Aircraft.

December 4, 1996

Dear **:

Thank you for your letter of November 22, 1996,
concerning your client's Texas sales and use tax responsibilities.

Facts: The Company (Seller) performs the following
repair and remodeling work on aircraft: avionics installation and/or upgrades;
custom interior design, fabrication, and installation, routine repair and
maintenance. Seller has a contract to perform interior
modification/installation and avionics installation on a 747 aircraft for a
customer who resides outside the United States. The aircraft is owned by a
private, foreign company (Customer), the aircraft is foreign registered and is
operated by and for a foreign government official. All of the work under the
contract will be performed in Texas. After completion of all work under the
contract, the aircraft will be delivered to the Customer at a point outside the
State of Texas.

Question 1. Would any sales or use tax be imposed on this transaction?

Answer: No. However, the service provider may incur a tax liability on the parts
and materials affixed to or incorporated into the aircraft if the contract term
is lump sum.

Question 2. Would the customer be treated as a "licensed and certificated
carrier" as set forth under Texas Tax Code Section 151.328 and Rule 3.297 or
as a "private aircraft" as described under Rule 3.359?

Answer: The customer will be treated as a private aircraft.

Question 3. Do the exemptions listed in Texas Tax Code Section 151.328(a) apply
only to the sale of aircraft or do these exemptions apply if the repair or
remodeling services to the aircraft are performed for a customer who fits in
one of the four exempted categories?

Answer: The exemptions apply only to the sale of aircraft. The activities
performed on the customer's aircraft is a nontaxable service [see Texas Tax
Code Section 151.0101(a)(5)(A)].

Question: If the transaction is treated as repair
and remodeling services on a private aircraft as set forth in Rule 3.359, would
the contract be treated as a separated contract or lump-sum contract and how
would the transaction be taxed?

Answer: The transaction constitutes repair or
remodeling. The facts provided do not provide enough information for us to
determine whether the contract is lump-sum or separated. The sample invoice
appears to require a separation of materials and labor for purposes of making
progress or partial payments.

Rule 3.359 sets out the responsibilities for persons
repairing and remodeling private aircraft under either a lump-sum contract or
separated contract. If the contract is lump-sum, the service provider is the
consumer of the materials and parts affixed to the customer's aircraft. The
lump-sum charge to the customer is not taxable, but the services provider owes
tax on the materials and parts, notwithstanding the fact the service provider
delivers the aircraft to the customer outside Texas.

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

You may call me toll free 1-800-531-5441, extension 3-4683. The direct line is
512/463-4683. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division