Did an out-of-state aircraft lessor create Utah corporate income-tax nexus when its lessee brought the aircraft into Utah, and how was the lease income apportioned?

Plain-English summary

Utah Private Letter Ruling 91-014 addressed an out-of-state corporation that leased aircraft to an unrelated lessee.

The lessor transferred possession outside Utah and did not control where the lessee used or landed the aircraft.

The Commission said the lessor nevertheless had Utah corporate income-tax nexus when the lessee brought the aircraft into the state during the tax period.

Aircraft presence created nexus

The lessor argued that it had relinquished control of the aircraft to the lessee.

The Commission focused on the tangible property's physical presence instead.

An aircraft's presence in Utah during the tax period created sufficient nexus to subject the lessor to Utah corporation income tax.

UDITPA factors

The requester also asked how to apportion lease payments after nexus was established.

The Commission said all three UDITPA factors were used in calculating the Utah apportionment fraction.

Under the described facts, however, only the property factor had an includable amount in the Utah numerator.

Time-in-state measurement

Rule R865-6-8F(G)(4) controlled the aircraft's value in the Utah property numerator.

The Commission said that value was determined based on the aircraft's total time within Utah during the tax period.

Holding

Under the stated lease facts:

• The lessee's act of bringing the aircraft into Utah created nexus for the lessor.
• The lessor's lack of control over aircraft travel did not prevent nexus.
• All three UDITPA factors applied to the apportionment fraction.
• Only the property-factor numerator had a Utah amount.
• The aircraft's Utah property value was based on total time in the state.

What this means for you

Aircraft lessors and aviation finance companies

Leased property can create state tax nexus through the lessee's use even when the lessor does not direct the property's movements.

Multistate corporate tax teams

Track aircraft location and time in each state. Physical-presence and property-factor calculations may depend on the lessee's operational records.

Accountants and tax professionals

Verify current nexus standards, factor formulas, and special transportation-property rules before applying this 1991 opinion.

Common questions

Q: Did the aircraft lessor have Utah tax nexus?

A: Yes, when the lessee brought the aircraft into Utah during the tax period.

Q: Did the lessor need to control the aircraft's travel?

A: No.

Q: Which apportionment factors applied?

A: All three UDITPA factors, although only the property-factor numerator had a Utah amount under the stated facts.

Q: How was the Utah aircraft value measured?

A: By the aircraft's total time within Utah during the tax period.

Key source language

• Nexus: “the presence of the tangible property in Utah during the tax period would create sufficient nexus.”
• Apportionment: “All of the three UDITPA factors would be used.”
• Utah numerator: “the only factor that would have any includable Utah numerator amount is the property factor.”
• Aircraft value: determined “on the basis of total time within the state during the tax period.”

Citations and references

• Utah Admin. Rule R865-6-8F(G)(4)
• Uniform Division of Income for Tax Purposes Act apportionment factors, cited generally in the response

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 91-014
• Scope note: the lessor transferred possession outside Utah and said it did not control where the leased aircraft were used or landed.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

August
26, 1991 Response from Tax
Commission

July
16, 1991 Letter from XXXXX
of XXXXX

XXXXX

Re:
Nexus for Lessor of Aircraft

This
letter is in response to your recent request for a Tax Commission ruling on whether a corporation in the business of leasing aircraft would have a Utah nexus created because it leased property brought into the state by the lessee. Your concerns related to whether the lessor would have nexus in view of the fact that control of the property has been relinquished to the lessee.

In
response to your specific questions,

(a)
If the lessee brings the aircraft into the state of Utah, the presence of the tangible property in Utah during the tax period would create sufficient nexus to subject "XXXXX" to Utah's corporation income tax.

(b)(l)
All of the three UDITPA factors would be used in the calculation of the Utah apportionment fraction. However, the only factor that would have any includable Utah numerator amount is the property factor.

(b)(2)
According to Utah Administrative Rule R865-6-8F(G)(4), the value of the aircraft for purposes of the Utah property numerator is determined on the basis of total time within the state during the tax period.

For
the Commission,

Joe
B. Pacheco

Commissioner

Mr.
XXXXX

Utah
State Tax Commission

160
East 300 South

Salt
Lake City, Utah 84134

I
am writing this letter respectfully requesting a ruling on the corporate income or franchise tax consequences of the transaction described below.

Facts

XXXXX
("XXXXX") is incorporated in, leases office space, and has one part-time employee located within the State of XXXXX. XXXXX is involved in leasing aircraft to Y corporation, organized and formed under the laws of the State of XXXXX, within the United States. Moreover, although XXXXX currently leases only to Y corporation, it plans to lease to other third parties in the future. XXXXX also leases one parcel of improved real property in XXXXX to Company X. Y and X corporations are not affiliated with XXXXX or any of XXXXX's affiliates. XXXXX has no control over where its leased aircraft are to be used and/or landed; however, the aircraft leases specifically prohibit the aircraft from landing in or being used within the State of XXXXX. At the beginning of each lease, the lessor transfers possession of the leased aircraft to the lessee at the XXXXX plant in the State of XXXXX.

Based
on the foregoing facts, we respectfully request the following rulings:

(a)
whether XXXXX (Lessor) has sufficient nexus with the State of Utah so as to subject XXXXX to the State of Utah's income or franchise tax;

(b)
if XXXXX (Lessor) has sufficient nexus, how are the lease payments to be apportioned?

Specifically:

(1)
what apportionment factor or factors should be used in determining the apportionment fraction, and

(2)
how should the apportionment factor or factors be calculated in apportioning the lease payments?

If
you wish to discuss this matter in further detail, or if additional facts are needed, please contact me.

Sincerely,

XXXXX