201012949H



SOAH DOCKET NO. 304-10-3918.26
CPA HEARING NO. 102,730

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: August 1, 2004 THROUGH August 31, 2004

Limited Sales, Excise, And Use Tax/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

TREVOR MOORE
Representing Tax Division

**************
Representing Petitioner


COMPTROLLER’S DECISION

The Texas Comptroller of Public Accounts (Comptroller) assessed sales and use 
taxes against ************** (Petitioner) due to its purchase of an aircraft.  
Petitioner requested redetermination contending that the purchase was exempt as 
an occasional sale.  In his Proposal for Decision (PFD), the Administrative Law 
Judge (ALJ) recommends that Petitioner’s contention be granted and that the 
assessment be dismissed.

I. PROCEDURAL HISTORY, NOTICE & JURISDICTION

Comptroller Staff (Staff) referred the case to the State Office of 
Administrative Hearings.  A hearing convened on October 4, 2010, before ALJ 
Alvin Stoll.  Staff was represented by Assistant General Counsel Trevor Moore.  
Petitioner was represented by ************** of the **************.  The record 
closed on the same day.

There are no issues of notice or jurisdiction in this proceeding, and those 
matters are set out in the Findings of Fact and Conclusions of Law without 
further discussion here.

II. REASONS FOR DECISION

A. Evidence Submitted

Staff submitted the following exhibits: (1) Audit Adjustment Report; (2) Texas 
Notification of Exam Results; (3) a 60-Day Notice Letter; (4) Aircraft Purchase 
Agreement; (5) Federal Aviation Administration (FAA) Aircraft Bill of Sale; (6) 
Texas Notification of Amended Exam Results; (7) Corporate Filings with the 
North Carolina Secretary of State; and (8) Articles of Incorporation for 
************** (COMPANY A).  Petitioner’s exhibits, in addition to some of the 
documents submitted by Staff, included an occasional sale certification 
executed by the seller of the aircraft.  All the exhibits were admitted into 
the record without objection.

Staff called as witnesses Albert Alvarez and Christina Heath of the 
Comptroller’s Audit Division.  Petitioner presented the testimony of INDIVIDUAL 
A, Petitioner’s vice president, and INDIVIDUAL B, an aviation consultant.  In 
addition, Petitioner presented the telephone testimony of INDIVIDUAL C, a 
former chief financial officer of the seller of the aircraft, COMPANY A.

B. Background and Issues Presented

Petitioner, a Texas limited liability corporation with its principal office in 
CITY A, Texas, purchased a King Air B200 aircraft from COMPANY A pursuant to an 
Aircraft Purchase Agreement dated August 27, 2004.  Petitioner inspected and 
accepted the aircraft in CITY B, Texas, on August 30, 2004.  Texas sales and 
use tax was not charged or paid on the transaction.  The Comptroller’s Audit 
Division contacted Petitioner and requested information regarding the aircraft 
purchase in May of 2008.  On October 17, 2008, the Audit Division notified 
Petitioner: “We have not received any response to our questionnaire or any of 
the correspondence previously sent to you inquiring into the above aircraft.  
Therefore, based on the information we have obtained through the FAA, we must 
take the position that this was a taxable transaction and that Texas Use Tax is 
due on the purchase.”  A Texas Notification of Exam Results was enclosed that 
assessed tax based on the estimated purchase price of the aircraft, a 10% 
penalty, and accrued interest.  Petitioner requested redetermination on 
November 14, 2008.  On July 14, 2009, on the basis of the purchase price stated 
in the Aircraft Purchase Agreement, the Audit Division issued a Texas 
Notification of Amended Exam Results.

Petitioner and the seller did not collect or pay sales and use tax because they 
considered the sale to be exempt under Tax Code Section 151.304(b)(1), which 
exempts an occasional sale of a taxable item if the following requirements are 
met:  (1) the seller does not “habitually engage, or hold himself out as 
engaging, in the business of selling taxable items at retail”; (2) the seller 
makes two or fewer sales of taxable items during the 12-month period in which 
the sale occurred; (3) the seller does not hold a sales tax permit; and (4) the 
purchaser does not hold a sales tax permit.  TEX. TAX CODE ANN. Section 
151.304(b)(1), (f), and (g).  Contemporaneous with the sale of the aircraft, 
the seller issued a signed certification to Petitioner that stated:

The undersigned, COMPANY A, Seller, represents and warrants the following: 

(A) it is the current registered owner of a 1985 King Air 200, **************, 
**************; and

(B) it (1) has not made more than two sales of aircraft during the past 12 
months, (2) does not hold itself out as engaging in the business of selling 
taxable items at retail, and (3) does not hold a seller’s permit or sales tax 
license.

Petitioner contends that this certificate sets forth all the qualifications for 
the occasional sale exemption.

COMPANY A is a North Carolina limited liability company with its principal 
office in CITY C, Tennessee.  After redetermination was requested, Staff 
obtained reports that COMPANY A filed with the North Carolina Secretary of 
State.  In these reports the business purpose of COMPANY A was stated as 
“aircraft leasing.”  Staff contends that these statements establish that 
COMPANY A held itself out as engaged in the business of leasing tangible 
personal property, namely aircraft.  The definition of a taxable sale for sales 
tax purposes includes a lease or rental of tangible personal property.  TEX. 
TAX CODE ANN. Section 151.005(2).  Based on this evidence, Staff contends that 
the occasional sale exemption must be denied.

Petitioner contends that the term “aircraft leasing” as used in the aviation 
industry has several possible meanings, and that it does not necessarily mean 
the lease or rental of tangible personal property on a stand-alone basis.  
Petitioner presented the testimony of INDIVIDUAL B, a pilot, attorney, 
certified public account, and aviation consultant with more than 30 years 
experience in the aviation industry.  Mr. INDIVIDUAL B assisted in the 
incorporation of Petitioner, which was formed as a single-purpose entity to 
hold aircraft for the benefit of related entities.  Such entities are formed 
with a view towards limiting the liability incident to aircraft ownership and 
to facilitate aircraft transfers.  A single-purpose entity often provides an 
aircraft to a related entity, while at the same time providing a pilot and 
other crew members, all necessary maintenance, and assuming all expenses.  In 
the aircraft industry such leases are called “wet leases.”  A single-purpose 
entity may also provide an aircraft on a stand-alone basis, an arrangement 
referred to as “dry lease.”  Entities formed for the purpose of holding an 
aircraft generally operate under Federal Aviation Regulation, Part 91.  Section 
510(b)(5) of Part 91 specifically relates to aircraft held in corporate 
subsidiaries or similar arrangements.  Entities operating under Part 91 also 
engage in aircraft time sharing or in interchange agreements.  Mr. INDIVIDUAL B 
testified that in the aviation industry the term “aircraft leasing” could refer 
to any one of these various arrangements.  Petitioner cites 14 CFR 91.23(e), 
which provides that “a lease means any agreement to furnish an aircraft to 
another person for compensation or hire, whether with or without flight 
crewmembers. . . ”  Mr. INDIVIDUAL B testified that the term “aircraft leasing” 
as used in the corporate reports of COMPANY A was entirely consistent with an 
intent to provide nontaxable air transportation services.

Petitioner also presented the testimony of INDIVIDUAL C, the chief financial 
officer of COMPANY A at the time of the aircraft sale.  Mr. INDIVIDUAL C stated 
that COMPANY A was formed in 2003 as a single-purpose entity for the purpose of 
holding ownership to the King Air B200, and that it operated under Federal 
Aviation Regulations, Part 91.  He stated that the aircraft was for the use of 
the parent corporation, CORPORATION, and that COMPANY A hired the pilots, 
provided maintenance, and assumed all responsibilities for operating the 
aircraft.  He stated that the reports filed with the North Carolina Secretary 
of State, which he prepared, required a statement of corporate purpose, and 
that the description “aircraft leasing” referred to the “wet leases” between 
COMPANY A and the parent corporation.  He stated that the aircraft was only 
provided with a pilot and never as the bare rental of an aircraft.  He stated 
that COMPANY A did not advertise or hold out the aircraft for lease or rental 
to others, and that its insurance agreements would have prohibited any use 
except by the parent corporation.  On cross-examination, Mr. INDIVIDUAL C 
stated that COMPANY A at one time had lease agreements, insurance agreements, 
tax returns, and other documents, but that those documents were no longer 
retained after three or four years had passed, at which time all reporting and 
tax matters were resolved and the corporation had been dissolved.

C. Analysis and Recommendation

Petitioner as the party claiming the occasional sale exemption bears the burden 
to prove exemption by clear and convincing evidence.  34 TEX. ADMIN. CODE 
Section 1.40(2)(A).  Petitioner’s evidence begins with the certification issued 
by the seller to Petitioner at the time of the aircraft purchase.  The 
certification generally states the qualifications required for an occasional 
sale under Tax Code Section 151.304(b)(1) – that the seller does not engage in, 
or hold itself out as engaging in, the sale of taxable items, that the seller 
made two or fewer sales of taxable items during the 12-month period in which 
the sale occurred, and that neither the seller nor the buyer holds a sales tax 
permit.  Petitioner cites State Tax Automated Research System (STAR) Document 
No. 200711090L (November 14, 2007), which states:  “Although not required by 
statute, we recommend that a purchaser ask the seller to provide a signed 
statement that the transaction qualifies for the occasional sale exemption in 
order to document the exemption and retain the statement for four years 
following the date of the purchase.”  The letter ruling cites the fact that the 
Comptroller has promulgated an occasional sale form that can be used for the 
purpose of documenting exemptions.  Although Petitioner is correct in stating 
that purchasers are encouraged to obtain certificates or signed statements from 
sellers claiming the occasional sale exemption, the fact a statement was 
obtained does not in and of itself establish the exemption.  The underlying 
facts must be supported by the evidence, and the occasional sale exemption may 
be denied if there is evidence that disproves the exemption.  See COMPTROLLER’S 
DECISION NO. 29,853 (1993).

Staff in this case has challenged the validity of the Petitioner’s certificate. 
 Staff’s main objection is that COMPANY A, by stating its corporate purpose as 
“aircraft leasing” in reports filed with the North Carolina Secretary of State, 
holds itself out as engaging in the sale of taxable items.  However, that 
objection is not found persuasive in view of Petitioner’s evidence that 
aircraft leasing in the aircraft industry and in the applicable federal 
regulations may mean a nontaxable transportation service.  The lease or rental 
of an aircraft complete with pilot or crew for a fee is considered to be the 
charter of an aircraft and is a nontaxable service.  STAR Document No. 
200804190L (April 7, 2008); COMPTROLLER’S DECISION NO. 40,812 (2003).  The ALJ 
finds that the statement of purpose on the corporate reports does not mean that 
COMPANY A held itself out as being in the business of taxable rentals or leases 
of tangible personal property.  For this reason, it is not necessary to address 
Petitioner’s additional argument that filing a report with a Secretary of State 
does not constitute a representation to the public that one is engaged in a 
particular business.

Staff has also challenged the sufficiency of Petitioner’s evidence that the 
seller made two or fewer sales of taxable items at retail.  Staff points out 
that the seller’s lease, insurance, and employment contracts, which according 
to the hearing testimony once existed, were not produced at the hearing.  The 
chief financial officer for COMPANY A testified that the records were not 
retained after three or four years had passed, the corporation was dissolved, 
and all tax issues and other outstanding business had been resolved.  The 
assessment in this case was issued more than four years after the aircraft 
purchase date, and Petitioner was not requested to produce the seller’s 
records, either before or after the assessment. [ENDNOTE] Petitioner obtained 
the occasional sale certificate at the time of the transaction, and witnesses 
associated with both the buyer and the seller appeared at the hearing and 
presented detailed and credible testimony in support of the facts stated in the 
certificate.  Staff has not produced evidence to the contrary.  The evidence is 
found to be clear and convincing evidence of exemption, and Petitioner’s 
contention should be granted and the assessment be dismissed.  Accordingly, 
Petitioner’s alternative contentions regarding penalty and interest waiver need 
not be addressed.

III. FINDINGS OF FACT

1. The Texas Comptroller of Public Accounts (Comptroller) assessed sales and 
use taxes on the purchase of an aircraft by ************** (Petitioner).  
Petitioner timely requested redetermination.

2. On April 29, 2010, Comptroller Staff (Staff) referred the case to the State 
Office of Administrative Hearings for oral hearing.

3. Staff issued a Notice of Hearing to Petitioner that contained a statement of 
the nature of the hearing; a statement of the legal authority and jurisdiction 
under which the hearing was to be held; a reference to the particular sections 
of the statutes and rules involved; the date, time, and place of the hearing; 
and a short, plain statement of the matters asserted.

4. A hearing convened on October 4, 2010.  The record closed on the same date.

5. On or about August 27, 2004, Petitioner purchased a King Air B200 from 
**************. (COMPANY A).  The aircraft was delivered to Petitioner in 
Texas.

6. By Texas Notification of Exam Results October 17, 2008, Staff assessed tax, 
penalty, and interest based on the estimated retail value of the airplane.  A 
Texas Notification of Amended Exam Results was issued on July 14, 2009.

7. Petitioner obtained a completed certificate of occasional sale at the time 
of the aircraft purchase.

8. Petitioner does not hold a sales and use tax permit.

9. COMPANY A does not hold a sales and use tax permit.

10. COMPANY A did not engage in, or hold itself out as engaging in, the sale of 
taxable items at retail.

11. COMPANY A made two or fewer sales of taxable items during the 12-month 
period in which the sale occurred.

IV. CONCLUSIONS OF LAW

1. The Comptroller has jurisdiction over this matter pursuant to TEX. TAX CODE 
ANN. ch. 111.

2. The State Office of Administrative Hearings has jurisdiction over matters 
related to the hearing in this matter, including the authority to issue a 
proposal for decision with findings of fact and conclusions of law pursuant to 
TEX. GOV’T CODE ch. 2003.

3. The Comptroller provided proper and timely notice of the hearing pursuant to 
TEX. GOV’T CODE ch. 2001.

4. Petitioner met its burden of proof under 34 TEX. ADMIN. CODE Section 
1.40(2)(A) to present clear and convincing evidence that the aircraft purchase 
was exempt as an occasional sale under TEX. TAX CODE ANN. Section 
151.304(b)(1).

5. Based on the foregoing Findings of Fact and Conclusions of Law, the assessed 
tax, penalty, and interest should be dismissed.


Hearing No. 102,730

ORDER OF THE COMPTROLLER

On October 7, 2010, the State Office of Administrative Hearings’ (SOAH) 
Administrative Law Judge, Alvin Stoll, issued a Proposal for Decision in the 
above referenced matter.  The parties were given fifteen days from the date of 
the Decision to file exceptions with SOAH.  No exceptions were filed, and the 
Comptroller has determined that the Administrative Law Judge’s Proposal for 
Decision, except for minor changes to correct typographical or clerical errors, 
should be adopted as written.

The above Decision resulting in Petitioner’s liability as set out in 
“Attachment A,” which is incorporated by reference, is approved and adopted in 
all respects.  This Decision becomes final twenty days after the date 
Petitioner receives notice of this Decision.  If either party desires a 
rehearing, that party must file a motion for rehearing, which must state the 
grounds for rehearing, no later than twenty days after the date Petitioner 
receives notice of this Decision.  Notice of this Decision is presumed to occur 
on the third day after the date of this Decision.

Signed on this 8th day of December 2010.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller


ENDNOTE:
Testimony of Albert Alvarez and Christina Heath.




ACCESSION NUMBER: 201012949H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 12/08/2010
TAX TYPE: SALES