Tax Type
Aircraft Sales and Use Tax
Description
Taxable Implication for Airline Charter Service
Topic
Taxability of Persons and Transactions
Date Issued
10-26-2001
October 26, 2001
Request for Ruling: Aircraft Sales and Use Tax
Dear *********
This is in reply to your letter of July 19, 2001, in which you seek a ruling on the application of the Virginia Aircraft ("A/C") Sales and Use Tax and the Retail Sales and Use Tax to a specific transaction involving ******* (the "Taxpayer"). I understand that a member of my staff has been in contact with the Taxpayer to discuss the aircraft lease you describe.
The Taxpayer is an airline operating in interstate commerce as a common carrier. The Taxpayer entered into an agreement with Lessor X for the lease of an aircraft. The lease agreement is for a term of ninety days with the Taxpayer having the option to renew the lease for a period of up to four years. The aircraft is based in Virginia and will be used approximately fifty percent in providing charter service for a specific client and the remaining use in the Taxpayer's common carrier service.
The Taxpayer has been collecting a two percent A/C sales and use tax from its charter customer on the monthly gross receipts since the beginning of the charter term. According to the Taxpayer, it was informed by the department that it had incorrectly collected the tax from its charter customer on gross receipts from the charter customer. The Taxpayer indicates that it has since refunded its charter customer for the tax erroneously collected. The Taxpayer requests a ruling on the proper application of the tax on the aircraft lease and subsequent charter agreement.
For purposes of the A/C sales and use tax, a "sale" includes a lease or rental for a period of time substantially equal to the remaining life of the aircraft as determined at the beginning of the lease term or a lease or rental in which the aggregate payments substantially equal the value of the aircraft. The term "substantially equal" means "equal to or exceeds eighty percent" of the value of the aircraft at the beginning of the lease term. See Title 23 of the Virginia Administrative Code (VAC) 10-220-5.
In the instant case, the Taxpayer leases the aircraft for an initial period of only 90 days. This initial transaction does not constitute a sale of aircraft because the lease payments under the original ninety-day term will not exceed eighty percent of the value of the aircraft.
The A/C sales and use tax is generally imposed on the owner of the aircraft. In your case, the Taxpayer has entered into a short-term lease with Lessor X. Because that lease is not a "sale," the owner of the aircraft (presumably Lessor X) is responsible for the tax. Further, the owner is responsible for the tax in one of two ways:
Two Percent (2%) of Sales Price: The owner is responsible for paying the A/C sales and use tax on 2% of the total purchase price of the aircraft, including any charges for attachments and accessories. Under this option, the owner is not required to pay tax on the gross receipts of any subsequent lease or rental of the aircraft to its customers.
Dealer Exclusion: Alternatively, if the aircraft owner qualifies as a "dealer in aircraft," the aircraft may be purchased exempt of the tax. A "dealer in aircraft" is: (1) any person the Tax Commissioner finds to be in the regular business of selling aircraft, and (2) who owns five or more aircraft at any time during the calendar year which are held for resale or used for compensation (such as charter).
If the purchaser elects to be a dealer, it must apply to the department for approval. Upon approval, the dealer must submit monthly returns to the department and remit the Virginia A/C sales and use tax upon the gross receipts from the charter or other compensatory use of the aircraft. Note that for purposes of the dealer election, the A/C sales and use tax upon the gross receipts from the charter is levied on the dealer and not as a separate tax imposed upon the charter customer.
Under the dealer election, any accessories or equipment purchased which become a component part of the aircraft at the time of the sale may also be purchased exempt of the tax.
Title 23 VAC 10-220-40(4) sets forth the exemptions available for aircraft and provides that "aircraft owned and used by an airline only in its operations as a common carrier... is exempt from the Virginia aircraft sales and use tax." Subsection (4)(b) of this regulation addresses the tax treatment of aircraft used in a dual capacity and provides that "the sale price or value of an aircraft owned by an airline and used in nonexempt intrastate operations as a contract carrier as well as exempt operations will be apportioned on the basis of such use." (Emphasis added.)
In the instant case, information provided by the Taxpayer indicates it uses the aircraft fifty percent in an exempt common carrier activity and fifty percent in a taxable activity (i.e., the charter service). Accordingly, if the Taxpayer purchases the aircraft, it will be subject to the two percent A/C sales and use tax prorated between the exempt use in common carrier operations and the taxable charter operations. Alternatively, if the Taxpayer qualifies as and elects to be a "dealer," the Taxpayer would remit to the department 2% of the gross receipts derived from the charter of the aircraft. As noted above, the gross receipts tax is not imposed on the charter customer, but is rather levied on the dealer.
Under the "two percent (2%) of sales price" option, repair and replacement parts and accessories are subject to the retail sales and use tax when installed in an aircraft based on the percentage of taxable use in charter operations. Maintenance materials such as oil, grease, soaps, cleaners, etc. used on the aircraft are subject to the retail sales and use tax. See Title 23 VAC 10-210-70 (D).
Under the "dealer exclusion" option, repair and replacement parts and accessories are exempt from the retail sales and use tax when installed on leased or rented aircraft when such aircraft are subject to the aircraft sales and use tax based upon the gross receipts. See Title 23 VAC 10-210-70.
Based on the information provided, it appears that the aircraft in question is required to be licensed in Virginia because the aircraft is based in Virginia for more than sixty days within a twelve-month period. However, the Virginia Department of Aviation is the proper authority to make a determination on licensing requirements. Assuming the aircraft in question is required to be licensed in Virginia, it appears that Lessor X is responsible for licensing the aircraft in Virginia and for the payment of the A/C sales and use tax. This is because the lease of the aircraft at issue to the Taxpayer does not meet the definition of a "sale."
I understand that the Taxpayer has contacted the Virginia Department of Aviation regarding the licensing requirements at issue in this case.
I trust this will respond to your inquiry. For your convenience, I have enclosed many of the statutes and regulations that govern the A/C sales and use tax. However, if you have additional questions regarding this matter, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at ******
Sincerely,
Danny M. Payne
Tax Commissioner
AR/36366T
Request for Ruling: Aircraft Sales and Use Tax
Dear *********
This is in reply to your letter of July 19, 2001, in which you seek a ruling on the application of the Virginia Aircraft ("A/C") Sales and Use Tax and the Retail Sales and Use Tax to a specific transaction involving ******* (the "Taxpayer"). I understand that a member of my staff has been in contact with the Taxpayer to discuss the aircraft lease you describe.
FACTS
The Taxpayer is an airline operating in interstate commerce as a common carrier. The Taxpayer entered into an agreement with Lessor X for the lease of an aircraft. The lease agreement is for a term of ninety days with the Taxpayer having the option to renew the lease for a period of up to four years. The aircraft is based in Virginia and will be used approximately fifty percent in providing charter service for a specific client and the remaining use in the Taxpayer's common carrier service.
The Taxpayer has been collecting a two percent A/C sales and use tax from its charter customer on the monthly gross receipts since the beginning of the charter term. According to the Taxpayer, it was informed by the department that it had incorrectly collected the tax from its charter customer on gross receipts from the charter customer. The Taxpayer indicates that it has since refunded its charter customer for the tax erroneously collected. The Taxpayer requests a ruling on the proper application of the tax on the aircraft lease and subsequent charter agreement.
RULING
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- The first issue in this case is whether the lease between the Taxpayer and Lessor X constitutes a sale of an aircraft.
For purposes of the A/C sales and use tax, a "sale" includes a lease or rental for a period of time substantially equal to the remaining life of the aircraft as determined at the beginning of the lease term or a lease or rental in which the aggregate payments substantially equal the value of the aircraft. The term "substantially equal" means "equal to or exceeds eighty percent" of the value of the aircraft at the beginning of the lease term. See Title 23 of the Virginia Administrative Code (VAC) 10-220-5.
In the instant case, the Taxpayer leases the aircraft for an initial period of only 90 days. This initial transaction does not constitute a sale of aircraft because the lease payments under the original ninety-day term will not exceed eighty percent of the value of the aircraft.
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- The next issue is to determine who is liable for the tax on the aircraft that the Taxpayer leases from Lessor X.
The A/C sales and use tax is generally imposed on the owner of the aircraft. In your case, the Taxpayer has entered into a short-term lease with Lessor X. Because that lease is not a "sale," the owner of the aircraft (presumably Lessor X) is responsible for the tax. Further, the owner is responsible for the tax in one of two ways:
Two Percent (2%) of Sales Price: The owner is responsible for paying the A/C sales and use tax on 2% of the total purchase price of the aircraft, including any charges for attachments and accessories. Under this option, the owner is not required to pay tax on the gross receipts of any subsequent lease or rental of the aircraft to its customers.
Dealer Exclusion: Alternatively, if the aircraft owner qualifies as a "dealer in aircraft," the aircraft may be purchased exempt of the tax. A "dealer in aircraft" is: (1) any person the Tax Commissioner finds to be in the regular business of selling aircraft, and (2) who owns five or more aircraft at any time during the calendar year which are held for resale or used for compensation (such as charter).
If the purchaser elects to be a dealer, it must apply to the department for approval. Upon approval, the dealer must submit monthly returns to the department and remit the Virginia A/C sales and use tax upon the gross receipts from the charter or other compensatory use of the aircraft. Note that for purposes of the dealer election, the A/C sales and use tax upon the gross receipts from the charter is levied on the dealer and not as a separate tax imposed upon the charter customer.
Under the dealer election, any accessories or equipment purchased which become a component part of the aircraft at the time of the sale may also be purchased exempt of the tax.
-
-
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- A third issue in this case concerns any potential exemptions available to the Taxpayer in the event that it purchases the aircraft that is currently leased from Lessor X.
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-
Title 23 VAC 10-220-40(4) sets forth the exemptions available for aircraft and provides that "aircraft owned and used by an airline only in its operations as a common carrier... is exempt from the Virginia aircraft sales and use tax." Subsection (4)(b) of this regulation addresses the tax treatment of aircraft used in a dual capacity and provides that "the sale price or value of an aircraft owned by an airline and used in nonexempt intrastate operations as a contract carrier as well as exempt operations will be apportioned on the basis of such use." (Emphasis added.)
In the instant case, information provided by the Taxpayer indicates it uses the aircraft fifty percent in an exempt common carrier activity and fifty percent in a taxable activity (i.e., the charter service). Accordingly, if the Taxpayer purchases the aircraft, it will be subject to the two percent A/C sales and use tax prorated between the exempt use in common carrier operations and the taxable charter operations. Alternatively, if the Taxpayer qualifies as and elects to be a "dealer," the Taxpayer would remit to the department 2% of the gross receipts derived from the charter of the aircraft. As noted above, the gross receipts tax is not imposed on the charter customer, but is rather levied on the dealer.
Under the "two percent (2%) of sales price" option, repair and replacement parts and accessories are subject to the retail sales and use tax when installed in an aircraft based on the percentage of taxable use in charter operations. Maintenance materials such as oil, grease, soaps, cleaners, etc. used on the aircraft are subject to the retail sales and use tax. See Title 23 VAC 10-210-70 (D).
Under the "dealer exclusion" option, repair and replacement parts and accessories are exempt from the retail sales and use tax when installed on leased or rented aircraft when such aircraft are subject to the aircraft sales and use tax based upon the gross receipts. See Title 23 VAC 10-210-70.
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-
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The final issue in this case concerns licensing requirements of the aircraft that the Taxpayer is leasing from Lessor X.
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-
Based on the information provided, it appears that the aircraft in question is required to be licensed in Virginia because the aircraft is based in Virginia for more than sixty days within a twelve-month period. However, the Virginia Department of Aviation is the proper authority to make a determination on licensing requirements. Assuming the aircraft in question is required to be licensed in Virginia, it appears that Lessor X is responsible for licensing the aircraft in Virginia and for the payment of the A/C sales and use tax. This is because the lease of the aircraft at issue to the Taxpayer does not meet the definition of a "sale."
I understand that the Taxpayer has contacted the Virginia Department of Aviation regarding the licensing requirements at issue in this case.
I trust this will respond to your inquiry. For your convenience, I have enclosed many of the statutes and regulations that govern the A/C sales and use tax. However, if you have additional questions regarding this matter, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at ******
Sincerely,
Danny M. Payne
Tax Commissioner
AR/36366T
Rulings of the Tax Commissioner