For a Texas aircraft engine repair company, which charges are taxable, and does it matter whether the customer is a commercial airline, a repair shop, or a privately/corporately owned aircraft?

Plain-English summary

A Texas-based jet turbine engine repair and overhaul company ("Company A") serves commercial airlines, small privately-owned repair shops, privately-owned aircraft, and corporate-owned aircraft. Because it bills a wide variety of revenue categories -- sometimes as a flat/lump-sum charge, sometimes as separately-stated line items -- it asked the Comptroller for a comprehensive ruling covering nearly every charge type it uses.

The overarching pattern: taxability depends on (1) who the customer is, and (2) whether the charge is billed lump-sum or separately.

• Commercial airlines / licensed certificated carriers: Repair, remodeling, and maintenance charges are generally not taxable under Rule 3.297, which exempts these services when purchased by the aircraft owner/operator, the manufacturer, or a licensed/certified repair facility.
• Small privately-owned repair shops: These customers can give Company A a resale certificate (since they'll resell the repair service to their own customers), per Rule 3.285.
• Privately-owned and corporate-owned aircraft: This is where most tax applies. Labor to repair or remodel is itself not taxable (Rule 3.292(i)(1)(a)). But materials/parts are taxed differently depending on contract structure:
  • Under a lump-sum contract, Company A is the ultimate consumer of materials -- it must pay tax to its own suppliers and does NOT collect tax from the customer on any part of the lump-sum charge, even for an otherwise-exempt customer.
  • Under a separated contract, Company A is a retailer -- it can buy materials tax-free with a resale certificate, but must then collect tax from the customer on the contract price of the materials (which can't be less than what Company A paid its supplier).

Other specific rulings on individual charge types:

• Testing/inspection services (special-process x-rays, plasma spray, test cell fees) are not taxable, but Company A owes tax on the supplies it uses to perform the testing.
• Fuel and oil Company A uses to test engines are always taxable purchases by Company A, even when the cost is separately passed through to the customer with a markup.
• Trade-in allowances (credit for used parts taken in trade) are excluded from the taxable sales price under Sec. 151.007, if separately identified to the customer.
• Foreign insurance and shipping tied to a proven export to a foreign location are not taxable (Rule 3.323(c)).
• Freight charges are taxable if tied to an otherwise-taxable sale (Sec. 151.007).

Purchases Company A makes for its own overhaul operations:

• Machinery, equipment, replacement parts/accessories (useful life over six months) and certain specified supplies used in overhauling, retrofitting, or repairing jet turbine aircraft engines are exempt under Sec. 151.318(n), fully (state and local) for purchases on or after January 1, 1995 (phased-in before that).
• Consumables used up in the process (like cleaning solvents) or transferred to the customer (like plasma applied to blades/vanes) can be purchased tax-free with an exemption certificate, as long as they're used/consumed in the overhaul/retrofit/repair process.

What this means for you

Aircraft engine repair and overhaul companies

Your tax treatment turns heavily on customer type and billing structure. Work for airlines/certificated carriers is largely exempt; work for private/corporate aircraft owners is largely taxable on materials (though never on labor), and whether you or your customer bears that materials tax depends on whether you bill lump-sum or separately. Your own testing fuel/oil purchases are always taxable to you, regardless of how you bill the customer.

Small repair shops that subcontract engine work

You can give your aircraft-engine-repair subcontractor a resale certificate for work you'll resell to your own customers.

Accountants and tax professionals

This letter is a comprehensive worked reference for the lump-sum vs. separated aircraft repair contract framework (Rule 3.292(i)) layered on top of the certificated-carrier exemption (Rule 3.297) and the jet-turbine-overhaul machinery/supplies exemption (Sec. 151.318(n)) -- useful whenever a client's aircraft MRO business serves a mix of airline and private/corporate customers.

Common questions

Q: Is aircraft repair labor ever taxable in Texas?
A: Per this letter, labor to repair or remodel a private aircraft is not taxable, regardless of lump-sum or separated billing (Rule 3.292(i)(1)(a)).

Q: Who pays tax on parts under a lump-sum aircraft repair contract?
A: Per this letter, the repair company itself is the ultimate consumer and pays tax to its own suppliers -- it does not collect tax from the customer on any part of the lump-sum charge.

Q: Are fuel and oil used to test a customer's engine taxable?
A: Yes, per this letter -- Company A owes tax on fuel and oil used in testing, even when separately billed and marked up for the customer.

Q: Can a repair company buy overhaul supplies and machinery tax-free?
A: Yes, per this letter, under Sec. 151.318(n) for machinery/equipment/qualifying supplies used in jet turbine engine overhaul, and via exemption certificate for consumables used or transferred to the customer as part of that overhaul.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.318(n) (machinery/equipment/supplies exemption for jet turbine aircraft engine overhaul)
• Tex. Tax Code § 151.328(d) (repair/remodeling/maintenance exemption for certificated carriers, FAA flight instruction aircraft)
• Tex. Tax Code § 151.007 (sales price exclusions for trade-ins; freight taxability tied to underlying sale)
• 34 Tex. Admin. Code Rule 3.297(a)(1), (d)(1)(b) (aircraft repair exemption for licensed certificated carriers)
• 34 Tex. Admin. Code Rule 3.292(i)(1), (i)(1)(a) (lump-sum vs. separated repair contracts; labor not taxable)
• 34 Tex. Admin. Code Rule 3.285 (resale certificates)
• 34 Tex. Admin. Code Rule 3.323(c) (proof of export)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9806661L

Original ruling text

June 2, 1998

Dear Mr. **:

This is in response to your request for a ruling on the sales tax
responsibilities of services provided by COMPANY A. COMPANY A is in the
aircraft engine repair and overhaul business. I have restated the information
and questions that you provided regarding the performance of these services,
followed by my response:

FACTS:

COMPANY A, which is qualified to do business in Texas, is primarily engaged in
the repair and overhaul of turbine engines for business aircraft worldwide. The
customers serviced by COMPANY A generally consist of commercial airlines, small
privately owned repair shops, privately owned aircraft, and corporate owned
aircraft. When an engine needs to be overhauled or requires major repair it is
removed from the aircraft at its regular maintenance location and secured for
shipment to COMPANY A's repair facilities located in Texas. When repairs are
completed the engine or engine module is again secured for shipment and
returned F.O.B. shipping point to COMPANY A's customer in Texas.

As a part of COMPANY A's repair and overhaul services, turbine engines must be
tested to determine that a repaired or overhauled engine is functioning
properly. To do this, COMPANY A purchases fuel and oil to be used in testing
engines and then charges its customers for the fuel and oil used. All fuel is
consumed at the repair facility in Texas. Any excess is removed from the engine
prior to shipment to the customer. The customer is charged cost plus mark-up by
product line of approximately 5 - 25%. In most cases, COMPANY A separately
states the cost of the fuel on the repair invoice to its customer. However, in
some cases, COMPANY A performs repair or overhaul services on lump-sum basis.

In many cases, COMPANY A furnishes a replacement rental engine to the customer
during the period required to repair or overhaul the engine. In addition,
COMPANY A uses a variety of revenue classifications to account for each of the
various services it performs. COMPANY A's normal invoice for an engine repair
includes a number of these revenue class classifications as separately stated
charges.

REQUEST FOR A LETTER RULING:

You are requesting a letter ruling on the sales and use tax treatment for the
following categories of revenue, along with cites supporting my response. I
have listed your categories of different revenues along with the tax treatment
if billed separated or lump-sum where applicable.

(Please refer to my footnote summaries of the various exemptions available to
businesses engaged in the repair and overhaul of turbine engines.)

1. SPECIAL PROCESS: A flat rate charge for labor, materials, and overhead used
   in the performance of special process functions such as x-rays for internal
   engine cracks or plasma spray. The billings for special process activities are
   lump-sum.

Response: Charges for x-rays for internal engine cracks or plasma spray are
considered nontaxable testing or inspection services. You must pay tax on
supplies used to perform this testing.

2. TIME & MATERIALS LABOR: A charge for labor billed on an hourly rate instead
   of a flat rate usually used in repair work. This classification constitutes
   labor only.

Labor Charge - Commercial airlines: NT (1)
Labor Charge - Small privately owned repair shops: R (3)
Labor Charge - Privately owned aircraft: NT (2)
Labor Charge - Corporate owned aircraft: NT (2)

3. SUB-CONTRACT: A component of an engine is sent to a third party to be
   serviced or repaired. This charge is marked up and re-invoiced to the customer.

Commercial airlines
Separated Charge: NT (1)
Lump Sum Charge: NT (1)

Small privately owned repair shops
Separated Charge: R (3)
Lump Sum Charge: R (3)

Privately owned aircraft
Separated Charge: T (5)(2)
Lump Sum Charge: (4)(2)

Corporate owned aircraft
Separated Charge: T (5)(2)
Lump Sum Charge: (4)(2)

4. FREIGHT: Separately stated charge for shipping to/from customers. COMPANY A
   does not mark-up he amount charged by the freight company.

Response: Taxable if in relation to a taxable sales. See Subsection 151.007.

5. CUSTOMER FURNISHED PARTS & SUPPLIES FEE: A handling fee charged to a
   customer when the customer provides the parts for COMPANY A to use in a repair
   service. The handling fee is above and beyond the charge for labor.

Commercial airlines
Separated Charge: NT (1)
Lump Sum Charge: NT (1)

Small privately owned repair shops
Separated Charge: R (3)
Lump Sum Charge: R (3)

Privately owned aircraft
Separated Charge: NT
Lump Sum Charge: NT

Corporate owned aircraft
Separated Charge: NT
Lump Sum Charge: NT

6. AIRFRAMES, INTERIORS, & AVIONICS: A charge for work done to the interior,
   exterior, electrical, or electronics parts of an aircraft that are not directly
   related to the engine.

Commercial airlines
Separated Charge: NT (1)
Lump Sum Charge: NT (1)

Small privately owned repair shops
Separated Charge: R (3)
Lump Sum Charge: R (3)

Privately owned aircraft
Separated Charge: T (5)
Lump Sum Charge: T (4)(2)

Corporate owned aircraft
Separated Charge: T (5)
Lump Sum Charge: T (4)(2)

7. TRADE-IN SERVICE CHARGE (ROTABLE FEE): A fee paid by customers who use parts
   from COMPANY A's rotable inventory, which is inventory of reconditioned parts.
   The fee is calculated as a percentage of the parts list price and is done to
   expedite customer work.

Commercial airlines
Separated Charge: NT (1)
Lump Sum Charge: NT (1)

Small privately owned repair shops
Separated Charge: R (3)
Lump Sum Charge: R (3)

Privately owned aircraft
Separated Charge: T (5)
Lump Sum Charge: NT (4)

Corporate owned aircraft
Separated Charge: T (5)
Lump Sum Charge: NT (4)

8. TRADE-IN ALLOWANCE (EXCHANGE): A credit allowed by COMPANY A for used parts
   taken in trade when a customer purchases new parts.

Response: Texas Tax Code º151.007, provides that "sales price" or "receipts"
does not include the value of tangible personal property taken by a seller in
trade as all or part of the consideration for a sale of a taxable item if
separately identified to the customer.

9. LEASE RENTAL FEES: A rental fee charged for the lease of an engine or engine
   module while the customer's engine or module is being repaired. COMPANY A may
   furnish a replacement rental engine to a customer while the customers engine is
   being serviced.

Commercial airlines
Separated Charge: NT (1)

Small privately owned repair shops
Separated Charge: R (3)

Privately owned aircraft
Separated Charge: T

Corporate owned aircraft
Separated Charge: T

10. FOREIGN INSURANCE: A charge passed through to the customer from an outside
    insurance company when an engine is transported to a foreign location. COMPANY
    A does not mark-up the charge for foreign insurance.

Response: The charge for the engine repair and related charges (i.e.,
insurance, shipping) are not taxable with proof of export to a foreign
location. See Rule 3.323 (c).

11. FUEL AND OIL USED IN TESTING ENGINES: A charge passed through to the
    customer for fuel and oil used in testing customer engines. All fuel is
    consumed at the repair facility or removed from the engine prior to shipment to
    the customer. The charge is for cost plus a mark-up by product line of
    approximately 5 - 25%. Should COMPANY A be the consumer of the fuel and oil
    only when it performs repair services on a lump-sum basis? In cases where
    COMPANY A separately states the charge for fuel and oil to the customer, should
    they be considered the retailer of the fuel and thereby be obligated to collect
    Texas sales tax on charges for such fuel and oil to its Texas customers.

Response: COMPANY A is the consumer of the fuel and oil used in testing and
owes tax on these purchases even when separately stated to the customer.

12. PARTS: A charge for aircraft parts sold to customers.

Commercial airlines
Separated Charge: NT (1)

Small privately owned repair shops
Separated Charge: R (3)

Privately owned aircraft
Separated Charge: T

Corporate owned aircraft
Separated Charge: T

13. TEST CELL FEES: A fee for the use of COMPANY A's test cell. A test cell is
    a special facility used to test engines against the original manufacturers
    standards for power, vibration, and heat.

Response: Testing or inspection services are not taxable. You must pay tax on
supplies used to perform this testing.

You also asked about the sales and use tax treatment of purchases as outlined
below:

1. Purchases of machinery & equipment for use in the overhaul process.

Response: Texas Tax Code Subsection 151.318 (n), provides an exemption to
persons engaged in overhauling, retrofitting, or repairing jet turbine aircraft
engines and their component parts for the purchase of machinery, equipment,
replacement parts or accessories with a useful life in excess of six months, or
supplies, including aluminum oxide, nitric acid, and sodium cyanide, used in
electrochemical plating or a similar process that are used or consumed in the
overhauling, retrofitting, or repairing. Qualifying purchases on or after
January 1, 1995 are exempt from both state and local sales and use taxes.
Purchases prior to 1995 were subject to a phased-in exemption from state sales
tax.

Texas Tax Code Subsection 151.328 (d), provides an exemption from tax on the
purchase of machinery, tools, supplies, and equipment used or consumed
exclusively in the repair, remodeling, or maintenance of aircraft, aircraft
engines, or aircraft component parts by or on behalf of:

(1) Licensed certificated carriers

(2) Aircraft used in providing FAA recognized flight instruction under a FAA
certified flight instructor.

2. Purchase of consumables (parts which are used up in the overhaul and repair
   process or transferred to the customer).

a. Consumables 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: Plasma used or consumed in the overhauling, retrofitting, or
repairing of jet turbine engines, can be purchased tax free by COMPANY A by
giving a properly completed exemption certificate to COMPANY A's supplier.

3. If the purchases of #2 are taxable, could the sales invoice be modified to
   exempt the purchase?

Response: N/A

This opinion is based on the facts presented. Other facts though similar may
provide a different result. I hope this information answers your questions. If
you need additional information, please call me toll-free at 1-800-531-5441,
extension 3-4502. The direct line is 512/463-4502. You may also write to Tax
Policy Division, Comptroller of Public Accounts. You may also e-mail our tax
help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division

FOOTNOTES TO LETTER RULING:

R - customer may issue COMPANY A a resale certificate for the repair or
remodeling
T - Taxable
NT - Not taxable

(1) Repair, remodeling, and maintenance services performed on licensed
certificated carriers or aircraft engines or component parts by or for a person
qualified under subsection (a)(1), of Rule 3.297, are exempt if purchased by
the aircraft owner or operator, by the aircraft manufacturer, or by a repair
facility licensed and certified by the appropriate regulatory agency. 3.297
(D)(1)(b).

(2) Labor to repair or remodel private aircraft is not taxable. Rule
3.292(i)(1)(a).

(3) Sales to privately owned repair shops. You may accept a resale certificate
for aircraft engine repairs and overhauls that your company performs on behalf
another repair shop who will resell the repair service. See Rule 3.285 -
concerning resale certificates.

(4) Under a lump-sum contract, the repairman or remodeler is the ultimate
consumer of consumable supplies, tools, equipment, and all materials
incorporated into the private aircraft. The lump-sum repairman or remodeler
must pay the tax to suppliers at the time of purchase. The repairman will not
collect tax from customers on the lump-sum charge or any portion of the charge.
Under this type of contract, the repairman will pay the tax on materials even
when the property is repaired for an exempt customer. Rule 3.292 (i)(1).

(5) Responsibilities under a separated repair or remodeling contract. Under a
separated repair contract, the repairman of a private aircraft is a retailer
and may issue a resale certificate in lieu of tax to suppliers for materials
that will be incorporated into the private aircraft of the customer; the
repairman must then collect tax from the customer on the agreed contract price
of the materials, which must not be less than the amount the repairman paid to
suppliers. The repairman must obtain a tax permit to be able to issue a resale
certificate in lieu of tax when materials are purchased. The repairman may also
use materials from inventory upon which tax was paid to the supplier at the
time of purchase. In these instances, tax will be collected from the customer
on the agreed contract price of the materials as if the materials had been
purchased with a resale certificate; however, the repairman will remit tax to
the comptroller only on the difference between the agreed contract price and
the price paid to the supplier.