If a private corporation buys an airplane to lease it to a charter operator, is the purchase tax-free, and is the lease and the charter revenue taxable in Utah?

Plain-English summary

A Utah-based commercial charter aircraft operator asked whether a private corporation or individual could buy an airplane tax-free in order to lease it back to the operator for charter flying, with the operator then charging its charter customers use tax and remitting it.

The Commission separated the arrangement into its component transactions and answered each:

1. The purchase of the airplane by the private buyer: Tax-free under the resale exemption -- but only if the airplane is bought with the intent to lease it out and it is actually leased. If the buyer instead buys the plane for its own use and only later decides to sell or lease it, the resale exemption doesn't apply.
2. The lease of the airplane to the charter operator: Leases of tangible personal property are normally taxable, but Utah exempts leases of (or use of) vehicles by an "authorized carrier" -- someone holding an FAA operating certificate or an air carrier's operating certificate. Since the requesting operator held an air carrier certificate, its lease of the plane was exempt.
3. Charges to charter customers for flights: All charges for intrastate air transportation are taxable. Charges for interstate transportation are taxable only if the transaction occurs in Utah and some of the air service happens in Utah; sales made outside Utah may instead be subject to another state's tax.
4. The operator, as the vendor collecting and remitting tax on transportation charges, needed a Utah sales tax license.

What this means for you

Aircraft owners and investors considering a purchase-and-leaseback

The resale exemption on the purchase hinges entirely on intent at the time of purchase -- buy intending to lease, and actually lease, to keep the purchase tax-free. Buying for your own use first and leasing later doesn't qualify, a pattern that shows up across several other Utah leaseback rulings (see companion PLR 96-062, an LLC equipment leaseback).

Charter and air carrier operators

If you hold an FAA or air carrier operating certificate, your lease-in of aircraft is exempt from sales tax as a matter of Utah law -- separate and apart from how you tax your own charter customers. Don't conflate the two: the lease-in exemption doesn't exempt your outbound charter charges.

Accountants structuring aircraft ownership

This ruling is a clean three-transaction breakdown (purchase / lease / transportation charge) worth using as a checklist whenever a client proposes buying an asset to lease back to their own operating business -- each leg can have a different taxability answer.

Common questions

Q: Is buying a plane to lease it out always tax-free?
A: Only if you intend to lease it (not use it yourself) and it's actually leased, per this ruling. Using it first and leasing it later forfeits the resale exemption.

Q: Is the lease payment to a charter company taxable?
A: Not if the lessee is an "authorized carrier" holding an FAA or air carrier operating certificate, per this ruling -- that lease is exempt.

Q: Are charter flight charges to customers taxable?
A: Intrastate (within-Utah) charter flights are always taxable. Interstate flights are taxable only if the transaction occurs in Utah and part of the service happens in Utah.

Q: Does the charter operator need a sales tax license?
A: Yes, per this ruling, since it's responsible for collecting and remitting tax on its transportation charges.

Q: Can another aircraft-leasing arrangement rely on this ruling?
A: Not automatically -- it binds the Commission only for the specific taxpayer and facts described (a certificated charter carrier leasing a plane bought for that purpose).

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-041.pdf

Original ruling text

96-041

Response
March 6, 1996

XXXXX:

I
am requesting an advisory opinion on the following:

My
company is an operator of commercial aircraft operating under XXXXX. A private corporation or an individual is
interested in purchasing an aircraft for the purpose of leasing the aircraft to
my company for commercial charter flying.
The aircraft would be based in Utah and would fly both interstate and
intrastate commercial flights. It is my
understanding that the private corporation or individual would not have to pay
sales tax on the purchase of the aircraft.
My company would charge my charter customers a use tax on their flights
and I would remit this to the Utah State Tax Commission.

I
would appreciate it very much if you could respond to this request at you
earliest convenience.

Thank
you.

XXXXX

XXXXX

RE:
Advisory Opinion - Sales tax on purchase of an airplane

Dear
XXXXX

We
have received your request for an opinion as to whether a private corporation
may purchase an airplane tax free if that airplane will be leased to your
company for commercial charter service.
We find as follows:

Your
arrangement involves to transactions that raise sales tax issues. One transaction is the purchase of the
airplane by a private corporation. The
other is the lease of that airplane to your company. With regard to the initial purchase of the airplane, the buyer
may purchase the airplane tax free under the resale exemption so long as the
airplane was purchased with the intent to lease it to another party and so long
as the airplane actually is leased. If
the buyer purchases the airplane for its own use, then at some later time
decides to sell or lease the airplane to another party, resale exemption does
not apply.

Leases
of tangible personal property are normally subject to sales tax. However, sales or leases of vehicles to, or
use of vehicles by an authorized carrier are exempt from sales and use tax. An
�authorized carrier� is one who holds an FAA operating certificate or an air
carrier's operating certificate. Since
XXXXX holds an air carrier certificate, its lease is exempt from sales tax.

With
regard to charges to your customers for air transportation, all charges for
intrastate air transportation are subject to sales tax. Charges for interstate transportation are
subject to tax if the transaction occurs in Utah and some of the air services
occur in Utah. If XXXXX sells
transportation services outside of Utah, its sales may be subject to sales tax
in other states.

As
a vendor who is responsible for collecting and remitting sales tax, XXXXX must
have a sales tax license. If you do not
already have a license, you may use the enclosed form to apply for one.

Please
let us know if we can be of further assistance.

For
the Commission,

Alice
Shearer

Commissioner