Par Damon N. Chronis
The Texas Comptroller of Public Accounts (“Comptroller”) recently released an administrative hearing holding that Chapter 163, Texas Tax Code, will not be applied retroactively irrespective of the Legislature’s stated intent that Chapter 163 was a clarification of the existing law. In Hearing Number 109,074, a lessor claimed a sale-for-resale exemption on the purchase of aircraft leased on a nonexclusive basis, i.e., the leases provided that the lessor reserved the right to:
- Approve each use of the aircraft;
- Use the aircraft; and
- Lease them to other parties.
The lessor argued that the purchase and subsequent lease of the aircraft satisfied the requirements of Tax Code Sec. 151.302 (the sale-for-resale exemption in the sales tax law) and Chapter 163, Sales and Use Taxation of Aircraft. Further, because Chapter 163 was intended to clarify the existing law, its provisions should have applied to transactions that occurred before September 1, 2015, the effective date of Chapter 163.
Texas allows a lessor to claim a sale-for-resale exemption on equipment (including aircraft) that will be leased. If a seller also uses lease equipment (makes a divergent use), the seller owes tax on the fair market rental value of the divergent use.
Comptroller Rule 3.294 (34 TAC Sec. 3.294 concerning lease agreements) provides that when equipment is leased with an operator (and the operator is not providing a taxable service), a lessee and lessor can establish that the agreement is a lease if the lessee exercises direct control or supervision over the operator. The Comptroller, however, uses a different standard for aircraft and vessels. Instead, the Comptroller requires that the lessor give the lessee “absolute control and possession” when the equipment leased is an aircraft or, in at least one circumstance, a vessel. A 2007 Comptroller letter ruling, cited in nine administrative hearings, disallowed a sale-for-resale exemption on the purchase of an aircraft because the lessor did not relinquish absolute control and possession of the aircraft.
To clarify that transactions involving aircraft are taxable or exempt in the same manner as transactions involving other personal property, the 2015 Texas Legislature created Chapter 163, Tax Code. Chapter 163 provides that leasing of an aircraft includes the transfer of operational control, and “operational control” means the authority to initiate, conduct, or terminate a flight.
During the hearing, the lessor placed in evidence officially recorded statements of legislative intent that Chapter 163 merely clarified pre-existing law. Noting that Chapter 163 provides that a lease includes the transfer of operational control of an aircraft and that this provision conflicts with the 2007 letter ruling, the administrative law judge concluded that Chapter 163 did not in fact codify existing sales tax law and, therefore, did not apply to transactions that occurred before September 1, 2015.
Based on the foregoing, a lessor of personal property other than an aircraft may be required to prove that it transferred “absolute control and possession” of the property to the lessee to validate a sale-for-resale exemption on the leased property.
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