On June 16th, Governor Abbott signed SB 1396, which significantly impacts the Texas sales and use tax taxation of certain aircraft transactions. SB 1396 creates a new chapter of the Texas Tax Code—Chapter 163 (titled “Sales and Use Taxation of Aircraft”). This new chapter supersedes the general sales and use tax provisions of Texas Tax Code Chapter 151 to the extent the two chapters conflict, and addresses issues that have generated numerous controversies for aircraft owners over the past decade. SB 1396 takes effect on September 1, 2015. The Comptroller will likely promulgate administrative rules implementing SB 1396, but at this stage is unclear when such rules might be proposed or how broadly they may interpret certain provisions of SB 1396. Accordingly, general observations may be made about how the new provisions might impact the transaction types described below, but the facts of a specific transaction will need to be carefully analyzed in order to reach a more definitive conclusion about the impact of SB 1396 on that transaction.
Aircraft transaction categories likely impacted by SB 1396 include the following:
- Purchases for lease to certificated carriers (charter companies). The purchase of an aircraft is exempt under the sale-for-resale provisions of Chapter 151 where the purchaser resells, or leases, the purchased aircraft. Chapter 151 also exempts the sale or lease of an aircraft to a certificated carrier, including a charter company operating under Part 135 of the Federal Aviation Regulations. In a common aircraft acquisition structure, aircraft owners have claimed a sale-for-resale exemption on purchases of aircraft that are leased tax free to a Part 135 charter company, with the charter company chartering the aircraft both to the owner and to third parties, and the owner receiving a percentage of the third party charter fees as a lease payment. The Texas Comptroller has challenged an increasing number of these transactions, arguing in various administrative decisions and proposed rules that the sale-for-resale exemption does not apply to the aircraft purchase if the subsequent lease to the charter company requires the owner to pay maintenance and storage expenses, if the lease is for a variable rather than a fixed amount, if the owner is in operational control of the aircraft for any owner flights, or if an owner has the right to cancel third party charters in favor of owner charters. SB 1396 may make it easier for an aircraft owner to counter these arguments with a properly drafted lease agreement – SB 1396 provides that the sale-for-resale exemption is available even if the owner “uses” as well as leases the aircraft, so long as (a) the aircraft is leased for consideration, regardless of whether the consideration is in the form of a cash payment and regardless of whether the consideration is fixed, variable, or periodic, and (b) more than 50% of an aircraft’s departures in the year after purchase are made under the operational control of one or more lessees. “Operational control” for this purpose has the meaning assigned by the Federal Aviation Regulations and includes the exercise of authority over initiating, conducting, or terminating a flight.
- Purchases for lease to affiliated entities. In another common aircraft acquisition structure, aircraft owners have claimed a sale-for-resale exemption on purchases of aircraft that are leased to an affiliated entity, with sales tax paid on lease payments as they are made. The Comptroller’s recent policy has been to scrutinize leases between related parties more closely than leases between unrelated parties, taking the position that a purchase failed to qualify for the sale-for-resale exemption where the monthly rent paid by the affiliated entity is less than one percent of the purchase price, or where the rent is variable or periodic in nature. SB 1396 may make it easier for an aircraft owner to challenge these arguments (with a properly drafted lease) by providing that (a) aircraft leased for consideration (using the broad definition of consideration described above) qualify for the sale-for-resale exemption, and (b) a sale, lease, rental, or other transaction with an affiliate involving an aircraft that would not be subject to tax if the transaction were between unrelated persons remains not subject to tax to the same extent as if the transaction were between related persons.
- Use by affiliates after tax is paid. SB 1396 makes clear that the Comptroller cannot assess sales tax on the use of an aircraft by an affiliate of the aircraft owner after the owner has paid sales tax on the acquisition of the aircraft or has acquired the aircraft in an exempt purchase (other than a purchase that is exempt under the sale-for-resale or occasional sale exemptions).
- Aircraft not acquired by purchase. Chapter 151 provides that an aircraft brought into Texas by a purchaser is presumed to have been purchased for use in Texas and is therefore subject to use tax. SB 1396 provides that this presumption does not apply if the person bringing the aircraft into Texas did not acquire the aircraft directly from a seller by means of a purchase for consideration. It is unclear whether this provision will impact the Comptroller’s current treatment of aircraft acquired by means other than a purchase for consideration. For example, the Comptroller has for the past several years taken the position that a transaction is subject to use tax in which (a) the seller contributes an aircraft to a subsidiary entity for no consideration and (b) the purchaser acquires the ownership interests in the subsidiary entity, brings the aircraft to Texas (while in the subsidiary entity), and liquidates the subsidiary entity. The Comptroller’s position has been that the existence of the subsidiary entity should be ignored for sales tax purposes and the purchaser treated as having acquired the aircraft directly for use in Texas (thereby triggering use tax). Although SB 1396 does not directly address this scenario, a taxpayer might argue that it evidences an intent that such a transaction not be taxable (assuming the transaction is properly documented and executed).
- Aircraft operated under fractional ownership programs. SB 1396 provides that no sales or use tax is imposed with respect to the purchase, sale, or use of an aircraft that is operated pursuant to the fractional ownership provisions of Part 91, Subchapter K of the Federal Aviation Regulations.