200702945L




February 1, 2007

**************
************** 
**************

Subject: Ruling request on aircraft transaction

Dear **************,

This is in response to your e-mail questions concerning the sales and use tax 
consequences of an owner of an aircraft who provides the aircraft to a licensed 
FAA Part 135 Carrier under the conditions of a proposed Agreement as set out 
below. 

Facts:

Owner recently purchased an aircraft outside of Texas.  Owner will bring the 
aircraft into Texas and enter into an Aircraft “Dry” Lease and Charter 
Management Agreement (“Agreement”) with an aircraft charter/management company 
(“Carrier”).

Under the Agreement, Owner will lease the aircraft to Carrier for Carrier to 
conduct charter operations.  Carrier will provide flight services to Owner and 
to third parties.  Carrier will also provide management, administration and 
maintenance of the aircraft under the Agreement.  Carrier holds an Air Carrier 
Operating Certificate issued by the FAA under Parts 119 and 135 of the Federal 
Aviation Regulations and is registered with the U.S. Department of 
Transportation as an on-demand air taxi operator in commercial operations.  For 
Texas sales/use tax purposes, Carrier is a licensed and certificated Carrier as 
defined by 34 TAC Sec. 3.297(a)(1).

The proposed Agreement will contain the following terms:

1. Carrier will provide flight services to third parties under FAR Part 135.  
Carrier will have operational control including possession, command and control 
of the aircraft during the third-party Part 135 flights.

2. Carrier will remit to Owner a percentage of all charter revenue, less 
federal excise tax as consideration for its lease of the aircraft.

3. Flights being conducted at the direction of or for the benefit of Owner 
(“Owner flights”) will be conducted under FAR Part 91.  For Owner flights, 
Carrier will retain operational control of the aircraft unless Owner 
specifically requests that Owner take operational control of the aircraft. 

4. Operational control is defined by the Agreement as having possession, 
command and control of the aircraft, including exclusive control over:

(a) Crew members
(b) Determining whether any particular flight may be safely operated
(c) Assigning crew members to particular flights
(d) Initiating and terminating flights
(e) Issuing directions to crew members to conduct flights
(f) Dispatch or release of flights

4. Carrier will employ the flight crews for all Owner and third-party flights.

5. Owner will reimburse Carrier on a monthly basis for the cost of the flight 
crews used on flights for Owner and third parties.  This reimbursement will 
include all expenses associated with the flight crew such as salaries and 
benefits, employment taxes and workers compensation, training and training 
expenses.

6. For Owner Flights in which Owner takes Operational Control, Carrier agrees 
to make flight crews available to Owner pursuant to a Pilot Services Agreement. 
 Flight crews made available to Owner by Carrier under the Pilot Services 
Agreement shall be deemed independent contractors and agents of the Owner, and 
shall be under the Operational Control of Owner.  Owner will pay the flight 
crews directly a specified daily amount for services under the Pilot Services 
Agreement. 

7.  Carrier will perform all maintenance for the aircraft, and Owner will 
reimburse Carrier for maintenance costs.

8. Carrier will provide various management services to Owner regarding the 
aircraft, and Owner will reimburse Carrier for management costs.

9. Owner will make a monthly payment to Carrier for the aircraft management 
services provided by Carrier.

10. The term of the Agreement will be one year, with provisions for successive 
one-year renewal periods as agreed on by both parties.

Question 1. Does the Agreement qualify as a lease for Texas sales/use tax 
purposes?

Response: No, the proposed Agreement in question is not considered an operating 
lease for sales and use tax purposes. The Agreement does not give exclusive 
control and possession of the aircraft to Carrier over the life of the 
Agreement since the Agreement permits Owner to take operational control for 
Owner flights in which Owner hires and pays the flight crews as independent 
contractors and agents of the Owner pursuant to a pilot services agreement, and 
thus the aircraft will be under the operational control and possession of Owner 
at times during the agreed contract period.  

34 TAC Sec. 3.294(a)(2) defines a lease or rental as a transaction, by whatever 
named called, in which possession but not title to  tangible personal property 
is transferred for a consideration for a certain time period. Comptroller’s 
Decisions have further defined the term lease to mean the exclusive possession, 
use and enjoyment of property for a specified period of time for a specified 
consideration. 

Generally, in order to ascertain the intention of the parties as to possession, 
the Comptroller looks to the written contract and all the facts and 
circumstances surrounding the transaction as a whole, with the emphasis being 
place on whether operational control over the tangible   personal property 
involved has been transferred to another by the owner of the property for a 
consideration.

There is consideration since the Agreement provides that the owner of the 
aircraft will receive compensation for the use of the aircraft in the form of a 
percentage of the receipts from the chartering of the aircraft. However, the 
essential prerequisite of a lease is the “exclusive possession” of the property 
by the lessee for a specified period of time. It is the transfer of absolute 
control and possession of property at an agreed price over a specified time 
period that differentiates a lease from any other agreement. Under the proposed 
Agreement, Owner does not relinquish absolute control and possession of the 
aircraft to the Part 135 Carrier in question since Owner reserves the right to 
make flights in the aircraft in which Owner takes operational control and 
possession of the aircraft when Owner hires and pays the flight crews as 
independent contractors/agents of Owner pursuant to a pilot services agreement. 
See Comptroller Decisions No. 13,848 (1985) STAR Document No. 8502H0624A11; 
26,144, (1990), STAR Document No. 9012H1064D01; and 40,812(2003), STAR Document 
No. 200310344H.    

In regards to aircraft, the Comptroller has a longstanding policy of 
distinguishing between nontaxable service agreements and taxable operating 
leases based on who has the ultimate operational control and possession of the 
aircraft. Operational control over an aircraft is presumed to be with the pilot 
who is in command of the aircraft, and consequently, with whoever is in control 
of the pilot of the aircraft (i.e. the one who hires and pays the pilot). In 
addition, the Comptroller takes into account that the FAA considers any 
aircraft maintained and piloted by an FAA certified carrier to be under the 
operational control of the carrier and thus the operator of the aircraft. On 
the other hand, if the owner of the aircraft retains or reserves operational 
control over the aircraft during the term of the agreement with the carrier, 
there is no transfer of exclusive control and possession and the transaction is 
not an operating lease for sales tax purposes. See Comptroller Decisions No. 
28,332 (1992); STAR Document No. 9207H1185F01 and 29,470 (1994); STAR Document 
No. 9404H1295E01

Thus, under 34 TAC Secs. 3.294 and 3.297, the Agreement is not an operating 
lease to an exempt FAA licensed carrier for Texas sales and use tax purposes, 
but appears to be merely an agreement in the nature of a use agreement, custody 
agreement or joint venture agreement whereby each party has certain 
responsibilities and shares in the revenues derived from the Part 135 Carrier’s 
charter bookings of the aircraft. 

Question 2. What are the Texas sales/use tax implications of the FAR Part 91 
Owner flights when Owner takes operational control of the aircraft?  If tax is 
due, which party (Owner or Carrier) incurs the tax liability?

Response: An aircraft purchased outside of Texas and brought into Texas for use 
in Texas within one year of its purchase is presumed to have been purchased for 
use in Texas and is subject to Texas state and local use tax, unless otherwise 
exempt. The use tax is the responsibility of the person/owner bringing the 
aircraft into Texas. Use tax is not applicable to, and the term "use" does not 
include, the sale, lease, or rental of an aircraft in the regular course of 
business; however, Owner, having failed to "lease" the aircraft via a valid 
lease arrangement to an exempt carrier, will be making a taxable use of the 
aircraft  for its own purposes when Owner takes operational control of the 
aircraft for its Part 91 flights and will be liable for use tax on the price it 
paid for the aircraft upon its bringing the aircraft into Texas within one year 
of the purchase of the aircraft. See Tex. Tax Code Sec. 151.101, Sec. 151.102, 
and 34 TAC Sec. 3.346, Use Tax.

The lease of an aircraft without a pilot to a person who is an FAA licensed and 
certificated Part 135 carrier and who uses the aircraft to transport persons or 
property for hire in the regular course of business is exempt from Texas sales 
and use tax pursuant to Section 151.328 of the Texas Tax Code, provided the 
owner/lessor does not make any personal use of the aircraft. Simply operating 
an aircraft under a third party’s FAA certificate does not make the owner of an 
aircraft an exempt licensed FAA carrier for sales tax purposes. See Rule 3.297 
Carriers.

Question 3. What are the Texas sales/use tax implications of the FAR Part 91 
Owner flights when Carrier retains operational control of the aircraft?

Response: When a licensed and certificated carrier furnishes the pilot to 
transport passengers for a fee (i.e. reimbursement for cost of flight crews on 
Owner flights,), the Carrier is using the aircraft in the performance of its 
duty as a licensed and certificated carrier of the general public, and the 
Carrier is performing a nontaxable charter service. Separating the charge for 
the aircraft from the charge for the pilot does not make the transaction the 
lease or rental of an aircraft when the pilot is under the control and 
supervision of the Carrier (operator) of the aircraft.

This opinion is based on the facts you submitted. Other facts, though similar, 
may yield different results. I hope this information helps. If you have further 
questions, please e-mail me at tax.help@cpa.state.tx.us, or you may reach me by 
phone at 1-800-531-5441, ext. 3-4986. 

Our goal is to provide you with prompt, professional service. Please take a 
moment to complete our on-line survey at 
http://aixtcp.cpa.state.tx.us/surveys/tpsurv2/index.html.

Sincerely,


Ken Koch
Tax Policy Division




ACCESSION NUMBER: 200702945L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 02/01/2007
TAX TYPE: SALES