Aircraft are a complex piece of machinery. Aircraft tax issues are even more complex, creating a tax minefield for the unwary. If a taxpayer navigates carefully, they can potentially come out with a reduced, or zero, tax liability for the aircraft. However, the slightest wrong move will leave the most careful owner with a sizeable tax debt to fight. This article is a comprehensive guide concerning Texas sales and use tax issues relating to aircraft.

  1. Aircraft Transactions Subject to Texas Sales & Use Tax

For sales tax purposes, Texas includes in its general aircraft definition propeller and jet aircraft, helicopters, and certain aircraft flight simulators approved by the FAA. Specifically excluded from the definition are balloons, gliders, rockets, missiles, and unmanned aerial vehicles.

The sale, lease, or rental of aircraft is subject to sales tax unless there is a specific exemption applicable to the transaction. Sales tax is also owed on separately stated charges for any service or expense associated with the sale, lease, or rental of the aircraft. Transportation or delivery charges are included in taxable charges. Of course, any type of cash discount or trade-in accepted by the seller can reduce the amount subject to sales tax.  By way of a distinction, if the aircraft lease or rental is with a pilot or crew for a single charge, then the charge is for a nontaxable service, even when the charges for the aircraft and pilot or crew are separately stated.

For transactions in which the sale, lease, or rental of an aircraft was consummated outside of Texas, Texas has a use tax that may be imposed in lieu of a sales tax. Texas takes the position the use, storage, or “other consumption” of an aircraft in Texas is subject to use tax for aircraft purchased, leased, or rented outside of Texas but subsequently brought into Texas. The state assumes if an aircraft is purchased from a seller and later brought into the state, then use tax is owed; however, aircraft not purchased directly from a seller but brought into Texas are not presumed to be for use in Texas or subject to use tax. If use tax is owed on the aircraft, Texas will allow for a credit against the tax bill for a legally imposed sales or use tax due and paid to another state or political subdivision.

Texas has a unique rule concerning “divergent” uses of aircraft, aircraft engines, and component parts. If one of the previously mentioned are purchased tax free pursuant to an exemption but is subsequently used in a way other than for which the exemption allows, then the transaction is fully subject to sales and use tax based on the fair market value of the property at the time of the taxable use. If the exemption was invalid at the time of issuance, tax is due on the original sales price.

  1. Exemptions from Texas Sales & Use Tax for Aircraft

An interesting distinction in Texas involves aircraft acquired outside of the state and brought into Texas but the predominate use is outside of Texas. This predominate use rule is for a period of one year beginning on the later of: (1) the date the aircraft was acquired by the person brining the aircraft into Texas; or (2) the date the aircraft was substantially complete in condition for its intended use and conducted its first flight for the carriage of persons or property. “Predominate” is defined to mean more than 50% of the aircraft’s total departures are from locations outside of Texas. The owner/operator is tasked with maintaining records showing each of the aircraft’s departures in order to qualify.

As it relates to use tax, aircraft acquired outside of Texas will not be subject to Texas use tax if the aircraft is solely brought into the state for completing, repairing, remodeling, or restoring the aircraft. This includes flights solely for troubleshooting, testing, or training, and flights between service locations under an FAA-issued ferry permit. Any other use of the aircraft may disqualify the aircraft from this exemption. Records must be kept showing all uses in Texas to maintain the exemption.

With aircraft, there is the high potential for related parties to be involved. Generally, the sale, lease, rental, or other transaction between a person and a member, owner, or affiliate of the person involving an aircraft that is nontaxable or exempt maintains its tax status. The aircraft’s use by an affiliate of the purchaser or an owner/member of the purchaser or affiliate is not subject to tax if the purchaser paid Texas sales or use tax on the aircraft acquisition or the purchase was exempt from Texas sales and use tax. However, the previously mentioned exemption does not apply if the aircraft was exempt as a sale for resale or an occasional sale, unless the owner, member, affiliate, or the owner or member of the affiliate leasing or renting the aircraft could have purchased the aircraft as an occasional sale.

Aircraft also have very specific exemptions. To have a vendor not charge tax on one of the below transactions, the vendor may accept an exemption certificate from the customer at the time of the transaction. If the exemption certificate is not provided at the time of the transaction, the customer may provide the documentation to the Comptroller to prove the exemption, with a minor exception.

In addition to the general exemptions for aircraft discussed above, Texas also offers additional, specific exemptions.

  1. Certificated or Licensed Carriers

Sales and use tax is not due on the rental of an aircraft or component parts of an aircraft to a certificated or licensed carrier. Likewise, sales and use tax is not applicable on tangible personal property necessary for the normal operation of, and is pumped, poured, or otherwise placed in, an aircraft owned or operated by a certificated or licensed carrier. A certificated or licensed carrier is one authorized by the FAA to operate an aircraft to transport people or property in compliance with certification and operations specifications requirements of 14 C.F.R. Parts 121, 125, 133, or 135.

Machinery, tools, and equipment supporting the overall operation of a certificated or licensed carrier (e.g., baggage loading, handling equipment, reservation or book machinery and equipment, garbage and other waste disposal equipment, and office supplies and equipment) are exempt from Texas sales and use tax. Additionally, tangible personal property will be exempt from Texas sales and use tax if transferred to a certificated or licensed carrier in Texas, if the carrier, which uses its own facilities, ships the items to a point outside of Texas under a bill of lading and the items are purchased for use by the carrier in the conduct of its business as a certificated or licensed carrier solely outside of Texas.

  1. Flight Schools, Instructors, & Students

Sales and use tax is inapplicable on the sales, lease, or rental of an aircraft to a person who: (1) holds a current flight school or flight instructor certificate issued by the FAA; (2) holds a current sales and use tax permit issued by the Comptroller; and (3) uses the aircraft to provide qualified flight instruction. Similarly, component parts of an aircraft owned or operated by a flight school or flight instructor to provide qualified flight instruction is exempt from Texas sales and use tax. Furthermore, tangible personal property necessary for the normal operation of, and is pumped, poured, or otherwise placed in, an aircraft owned or operated by a flight school or flight instructor to provide qualified flight instruction is exempt from sales and use tax.

Students enrolled in a program providing qualified flight instruction may claim an exemption from sales tax on the short-term hourly rental of an aircraft for qualified flight instruction, inclusive of solo and other flights. In the exemption certificate, the student must identify the flight school by name and address, or if the student is not enrolled in a flight school program, the student must identify the student’s flight instructor and the instructor’s address. The student is required to keep copies of written tests and instructor’s endorsements. If proof is not kept by the student seeking an FAA-certified pilot certificate or flight training, the aircraft rentals are subject to sales tax.

  1. Foreign Governments

A foreign government will not pay sales tax on the sale, lease, or rental of an aircraft. For aircraft owned by a foreign government, sales tax is due on the sale or lease of component parts or materials into an aircraft in Texas, unless another exemption applies.

  1. Fly-Away Exemption

Sales tax is not due on the sale or lease of an aircraft in Texas to a person for use and registration in another state or nation before any use in Texas. However, certain uses in Texas are allowed. One such use is the completing, repairing, remodeling, maintaining, or restoring the aircraft in Texas, including necessary flights for troubleshooting, testing, or flights between service locations under an FAA-issued ferry permit. Another use is flight training in the aircraft. If the aircraft is used for any other purpose in Texas, the sale or lease of the aircraft will be taxable.

If the aircraft is subsequently used in Texas after having left Texas, the aircraft will not be subject to tax on the purchase price if the aircraft is predominately used outside of Texas for a period of one year beginning on the later of: (1) the date the aircraft was purchased or leased by the person bringing the aircraft into Texas; or (2) the date the aircraft was substantially complete in the condition for its intended use and conducted its first flight for the carriage of persons or property. Again, an aircraft is predominately used outside of Texas if more than 50% of its total departures are from locations outside of Texas. The burden is on the owner or operator to keep records showing the aircraft’s departures.

It is worth noting the fly-away exemption does not apply to short-term hourly rentals of aircraft in Texas, regardless of intention to use the aircraft in another state.

To claim the fly-away exemption, the purchaser must provide the seller with a properly completed Texas Aircraft Exemption Certificate Out-of-State Registration and Use, Form 01-907. Within 30 days of the sale of the aircraft, a copy of the completed certificate signed by the seller and purchaser must be provided to the Comptroller. The certificate should be mailed to: Comptroller of Public Accounts, Business Activity Research Team, P. O. Box 13003, Austin, Texas, 78711-3003.

The Comptroller is authorized to provide a copy of the certificate to the state/nation in which the aircraft will be used and registered.

  1. Agricultural Use

Sales and use tax is not due on the sale, lease, or rental of an aircraft for use exclusively in connection with agricultural uses when used for: (1) predator control; (2) wildlife or livestock capture; (3) wildlife or livestock surveys; (4) census counts of wildlife or livestock; (5) animal or plant health inspection services; or (6) agricultural aircraft operations, such as crop dusting, pollination, or seeding. An aircraft will be considered exclusively for agricultural use is 95% of the use is for one of the aforementioned agricultural purposes. It is worth noting travel of less than 30 miles each way to a location to perform one of these described services will not disqualify the exemption.

Like other exemptions, component parts and necessary supplies are exempt from sales and use tax when used exclusively in agricultural aircraft operations. Tangible personal property necessary for the normal operations of, and is pumped poured, or otherwise placed in, an aircraft used exclusively in agricultural aircraft operations are exempt from sales and use tax too.

Selling the use of a gunner’s seat on an aircraft that qualifies for this exemption to a person participating in aerial wildlife management, as authorized by Parks and Wildlife Code, §43.1075 (Using Helicopters to Take Certain Animals), will not cause the exemption to be lost. However, the sale of the gunner seat is subject to sales tax as a taxable amusement service.

To claim the exemption, one must have a valid Texas Agricultural and Timber Exemption Registration Number issued by the Comptroller and must issue a completed Texas Agricultural Sales and Use Tax Exemption Certification, Form 01-924.

Anyone claiming this exemption must keep flight records for all uses of the aircraft; otherwise, the sales, lease, or rental of the aircraft may become taxable.

  1. Fractional Ownership Operations

Sales and use tax is not due on the sale, lease, or rental of an aircraft operated as part of a fractional ownership program under 14 C.F.R. Part 91, Subpart K – Fractional Ownership Operations. Yet, sales tax will be due on the sale or lease of component parts or materials incorporated into an aircraft that is part of an aircraft fractional ownership operation, unless of course another exemption applies.

  • Repairs, Remodeling, Maintenance, Restoration, & Completion

Labor to repair, remodel, maintain, or restore an aircraft in Texas is not subject to sales tax. The sale or use of materials incorporated into an aircraft in Texas is subject to Texas sales and use tax, unless otherwise exempt.

Materials incorporated into an aircraft could be taxable to the service provider or the customer. Ultimately, the distinction turns on whether the service provider is performing a separated contract or a lump-sum contract.

Separated contracts – if the services are provided under a separated contract, the service provider is the seller of the materials and must collect sales tax from the customer on (1) the price for the materials, or (2) the amount the service provider paid for the incorporated materials, whichever is greater. The service provider may also purchase the materials exempt from tax with a resale certificate. If the service provider has materials in inventory on which tax has been paid and uses said materials in the service, then sales tax is still collected from the customer on the contract price as if the materials had been purchased tax free.

Lump-sum contracts – if the services are provided under a lump-sum contract, the service provider is the ultimate consumer of the materials and must pay sales or use tax to the suppliers of the materials at the time of purchase. The service provider does not collect sales tax from the customer.

As it relates to tools, equipment, and consumable supplies, sales and use tax is due at the time of purchase by the service provider if the item is not incorporated into the aircraft. Even though a charge may be made to the customer for the service provider’s use of these items, the service provider may not collect sales tax from the customer, regardless of the type of contract.

The total charge to complete, repair, remodel, maintain, or restore an aircraft by or for a certificated or licensed carrier, flight school or instructor providing qualified flight instruction, or a person operating aircraft for agricultural use is exempt from sales tax, regardless of whether a separated contract or lump-sum contract. As a bonus, sales and use tax is not due on sale, lease, or rental of machinery, tools, supplies, and equipment used directly and exclusively in the repair, remodeling, maintenance, or restoration of aircraft by or for a certificated or licensed carrier, flight school or instructor providing qualified flight instruction, or a person operating aircraft for agricultural use. Equipment, such as battery charges and diagnostic equipment, used to sustain or support safe and continuous operations and to keep the aircraft in good working order are included in the exemption.

The tax consequences of completing, repairing, remodeling, maintaining, or restoring an aircraft brought into Texas by out-of-state owners or operators depends upon whether the contract is a separated contract or lump-sum contract. If a separated contract, sales and use tax is not owed on the separately stated charges associated with labor. The cost of the materials is (1) subject to sales tax when the owner or operator takes delivery of the aircraft in Texas, or (2) not subject to sales tax when the aircraft is delivered to an out-of-state location by the service provider. If a lump-sum contract, sales tax is not due by the aircraft owner or operator. However, the service provider still owes sales or use tax on the materials incorporated into the aircraft regardless of delivery occurring in Texas.

  1. Warranties

Sales or use tax is not due on the use of materials incorporated into an aircraft or services furnished by a manufacturer to repair an aircraft pursuant to a manufacturer’s written warranty or recall campaign. The service provider must keep records showing the materials or services were used to repair the aircraft in line with the manufacturer’s written warranty or recall campaign. Tax is not owed on the purchase of the materials by the service provider to effectuate the repairs. Also not subject to sales tax is the sale of an extended warranty or service policy covering an aircraft. Unless qualifying for an exemption elsewhere, the service provider must collect sales or use tax on the sale or use of the materials used in the repair under an extended warranty or service policy.

In conclusion, aircraft sales and use tax issues turn every general rule on its head. Knowing the rules can help to carefully plan the acquisition or use of an aircraft to mitigate Texas sales and use tax exposure. A failure to understand the rules can lead to an immense amount of heartache only discovered after the Comptroller’s initial contact during an audit.

AUTHORITY

Tex. Tax Code Ann. § 151.328

Tex. Tax Code Ann. §§ 163.001 – 163.009

34 Tex. Admin Code § 3.280

 

ADDITIONAL ARTICLES

What to Expect During A Texas Tax Audit, published August 7, 2018, by David J. Brennan, Jr., Esq.

About the author: David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. David worked for the Florida Department of Revenue as a Senior Attorney before entering private practice. You can read his BIO HERE. David may be contacted via his direct line of 850-250-3830 or by email at DavidBrennan@FloridaSalesTax.com.

 

Posted in Multi-state sales and use tax, Texas Sales Tax, Uncategorized