Document Number
09-38
Tax Type
Aircraft Sales and Use Tax
Description
Tax on lease transactions of aircraft
Topic
Taxable Transactions
Date Issued
04-27-2009

April 27, 2009




Re: Ruling Request: Aircraft Sales and Use Tax

Dear *****:

This is in reply to your correspondence in which you request a ruling on behalf of an affiliate corporation, ***** (the "Taxpayer") on the application of the Virginia aircraft sales and use tax to lease transactions involving the Taxpayer's aircraft. I apologize for the delay in the Department's response.

FACTS


The Taxpayer, located in another state, owns more than forty aircraft and is engaged exclusively in buying, leasing, and selling aircraft throughout the United States. Currently, none of the aircraft owned by the Taxpayer is located in Virginia. You present several questions regarding lease transactions of the aircraft and request a ruling on the proper application of the tax to each. In addition, you seek confirmation as to the Taxpayer's qualification as an aircraft dealer.

The Taxpayer acquired an aircraft in another state for subsequent lease to a corporation under a ten-year lease agreement. The lessee will make annual lease payments to the Taxpayer over the ten-year term. The lessee anticipates subleasing the aircraft to a prospective third party that will hanger and operate the aircraft in Virginia. The prospective sublease will be for a term not to exceed thirty months. Under the terms of the sublease, the customer will make monthly lease payments and also pay a monthly variable rent per flight hour. You believe that neither lease qualifies as a sale because the aggregate payments under each separate lease do not equal to or exceed eighty percent of the value of the aircraft.

The Taxpayer believes it qualifies as a dealer in Virginia and intends to obtain a commercial fleet license from the Virginia Department of Aviation (the "VDOA") and register with the Virginia Department of Taxation (the "Department") as an aircraft dealer. As a dealer, the Taxpayer would elect to pay the tax on the gross receipts received from the lease of the aircraft.

RULING


Question 1. Does the Taxpayer qualify as an aircraft dealer in Virginia as defined in Title 23 VAC 10-220-5 and Va. Code § 58.1-1507?

Title 23 of the Virginia Administrative Code (VAC) 10-220-5 defines "dealer" to mean, "any person the Tax Commissioner finds to be in the regular business of selling aircraft and who owns five or more aircraft at anytime during the calendar year which are held for resale or used for compensation."

Virginia Code § 58.1-1507 states, "Any person holding a commercial dealer's license issued by the Department of Aviation who desires to be subject to the tax imposed by subdivision 3 of § 58.1-1502 shall notify the Commissioner in writing of such election. The election may be made at or before the time for filing a return as required by § 58.1-1506."

Based on the information provided, the Taxpayer would qualify as a dealer under Title 23 VAC 10-220-5 because it owns more than five aircraft that are held for resale or used for compensation. If the Taxpayer desires to be subject to the tax imposed by subsection 3 of Va. Code § 58.1-1502, the Taxpayer must first obtain a commercial fleet license from the VDOA. The Taxpayer must then apply to the Department for approval in writing at or before the time for filing a return as required by Va. Code § 58.1-1506.

Question 2. If the aircraft in question is subject to Virginia aircraft sales and use tax: (i) will the tax be imposed upon the lessor, sublessor, or the sublessee, (ii) what is the measure of the tax and (iii) who must report the tax?

The primary lease does not constitute a sale because the lease payments under the ten-year term will not exceed eighty percent of the value of the aircraft. The sublease likewise does not constitute a sale of the aircraft because the aggregate payments under the term of the sublease will not exceed eighty percent of the value of the aircraft. See Va. Code § 58.1­-1501 and Title 23 VAC 10-220-5.

For purposes of a lease that does not meet the definition of a "sale" under Title 23 VAC 10-220-5, the Taxpayer, as owner of the aircraft, is responsible for the tax on the lease of the aircraft in one of two ways:
  • The Taxpayer may pay the aircraft sales and use tax on two percent of the purchase price of the aircraft or two percent of the current market value of the aircraft licensed in Virginia six months or more after its acquisition. Under this option, the Taxpayer is not required to pay tax on the gross receipts of any subsequent lease of the aircraft to Virginia customers.
  • If the Taxpayer is a registered dealer in aircraft (as defined in Va. Code § 58.1-1501), the Taxpayer may elect to remit the tax to the Department on two percent of the gross proceeds of the lease payments received from the lease under the "dealer exclusion" provision. For purposes of the dealer exclusion, the tax upon the gross receipts from the sublease is levied on the dealer and not as a separate tax imposed upon the lessee. See Public Document 01-170 (10/26/01), which further addresses the dealer exclusion provision for qualified aircraft dealers.

The next issue to determine is whether the Taxpayer should remit the aircraft sales and use tax on the primary lease or sublease of the aircraft.

The Taxpayer is incorrect in its understanding that the primary lease is subject to taxation. Virginia Code § 58.1-1502 imposes the aircraft sales and use tax upon the retail sale of every aircraft sold in the Commonwealth and upon the use in the Commonwealth of any aircraft required to be licensed by the VDOA pursuant to Va. Code § 5.1-5. Based on the information provided, the primary lease is not required to be licensed in Virginia as no use of the aircraft under the primary lease is made in Virginia.

Under the terms of the lease agreement, the lessee shall not, without written consent of the lessor, sublet, charter or part with possession of the aircraft. The Taxpayer, as the lessor, is therefore notified of any sublease entered into by the lessee and the assignment thereof consented to by the Taxpayer. In this instance, the tax is triggered when the customer under the sublease brings the aircraft to Virginia for use in this state. Therefore, provided the Taxpayer obtains a commercial fleet license from VDOA and is approved as a dealer in aircraft, the Taxpayer would be required to file a gross receipts return on or before the twentieth day of the month following each reporting period and remit the tax upon the gross receipts from the sublease of the aircraft in accordance with Title 23 VAC 10-220-50 C.

Question 3. If the Taxpayer elects to remit the tax based on the gross receipts received from the primary lease of the aircraft, will the lessee be required to file a return and remit the tax on the gross receipts received from the sublease of the aircraft?

As previously discussed, the aircraft under the primary lease is not a taxable transaction in Virginia and is not subject to the aircraft tax. Rather, the sublease of the aircraft is the taxable transaction in this instance. The Taxpayer, as owner of the aircraft, would be required to remit the tax on gross receipts received from the sublease pursuant to Va. Code § 58.1-1502 3. The transaction between the lessee and the sublessee is not subject to the tax because the tax is imposed on the Taxpayer as owner of the aircraft and not the lessee.

Question 4. What type of registration (commercial fleet license or noncommercial license) should the aircraft obtain from VDOA?

The VDOA is the proper authority to make a determination on the licensing requirements of the aircraft.


Alternative facts. Assume the same facts above except that prior to the lessee entering into the sublease, the Taxpayer transfers all rights, title, and interest in the aircraft and the lease to another affiliate business. The affiliate corporation is a dealer as defined in Va. Code § 58.1-1501 and has elected to remit the aircraft sales and use tax on the gross receipts from the lease of the aircraft pursuant to Va. Code § 58.1-1502 3.

According to the Department's records, the affiliate is not registered as an aircraft dealer in Virginia. Therefore, the affiliate will have to follow the procedures outlined in response to Question 1 before it can elect to be a dealer. Upon approval by the Department, the affiliate, as owner of the aircraft, would register with the Department and remit the two percent tax upon the gross receipts from the sublease. If the affiliate were not deemed a dealer in aircraft, the affiliate would be required to pay the two percent tax on the transfer of the aircraft required to be licensed for use in Virginia because the Taxpayer did not pay the tax on the initial purchase of the aircraft. See Title 23 VAC 10-220-5 7 and Title 23 VAC 10-220-­10.

The responses in this letter are based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulations and the public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this ruling, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,


                • Janie E. Bowen
                  Tax Commissioner




AR/1-920381106.T


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46