NOTICE: Under IC 4-22-7-7, this document is required to be published in the Indiana Register and is effective on its date of publication. It shall remain in effect until the date it is superseded or deleted by the publication of a new document in the Indiana Register. The publication of this document will provide the general public with information about the department's official position concerning a specific issue.

Sales and Use Tax - Aircraft Maintenance Contracts

Authority: IC 6-2.5-1-11.5; IC 6-2.5-2-1; IC 6-2.5-4-1; IC 6-2.5-4-15; IC 6-2.5-5-46; Sales Tax Information Bulletin #2 (January 2013); Sales Tax Information Bulletin #74 (April 2016); Sales Tax Information Bulletin #94 (June 2020).

A taxpayer ("Company") seeks a ruling regarding whether an optional maintenance contract for an aircraft that will be repaired and maintained in Indiana would be subject to Indiana sales tax.

Company is an Indiana LLC that owns an aircraft. It is Company's understanding that in the aircraft industry, much of the maintenance work (particularly with respect to aircraft engines) is done pursuant to optional maintenance plans or contracts (or service contracts as they are called in some situations). In these situations, the maintenance contracts are almost never made with the manufacturer selling the aircraft. Rather, the owner of the aircraft will independently purchase a maintenance/service contract with respect to some component of the aircraft for a set price from a third party. For example, one of the most common arrangements is that an aircraft owner will contract with an engine company to provide maintenance/service on the engine. In some cases, the engine maintenance can be fairly significant.

Company requests the Department issue a Ruling regarding the taxability of these optional maintenance contracts. Indiana imposes an excise tax called "the state gross retail tax" (or "sales tax") on retail transactions made in Indiana. IC 6-2.5-2-1(a). A person who acquires property in a retail transaction (a "retail purchaser") is liable for the sales tax on the transaction. IC 6-2.5-2-1(b). IC 6-2.5-4-1 defines "retail transactions" stating in part as follows:

Further, IC 6-2.5-4-15 provides that "[a] person is a retail merchant making a retail transaction when the person sells tangible personal property as part of a bundled transaction." IC 6-2.5-1-11.5 defines "bundled transaction" as follows:

The Department's position on the taxability of "optional maintenance contracts" relies on this definition of bundled transactions. This position is explained in Sales Tax Information Bulletin #2 (January 2013), which provides the following:

Thus, an optional maintenance contract is presumed taxable because it is a bundled transaction. One of the exceptions to the definition of a bundled transaction is the ten percent rule discussed in subsection (d), subpart (2), meaning that if the taxable products in a transaction do not exceed ten percent of the total purchase price or the total sales price of the bundled products, then the transaction is not a bundled transaction, and is therefore nontaxable. This is also referred to as the "de minimis rule," as discussed in the Sales Tax Information Bulletin #94 (June 2020), which provides the Department's interpretation of IC 6-2.5-1-11.5. The bulletin provides that "nontaxable products" would include "tangible personal property that meets a specific exemption from sales and use tax."

Company contends that if the supplies, materials, and equipment utilized in maintenance on an aircraft as part of the maintenance contract qualify for the exemption under IC 6-2.5-5-46, then it would stand to reason that the tangible personal property portion of the optional maintenance agreement would be nontaxable. Therefore, this would satisfy the de minimis rule, and as no other portion of the contract would be taxable, the optional maintenance agreement that facilitates such work would not be considered a taxable bundled transaction. Company further contends that if there was no maintenance contract/service agreement, sales tax would still not be paid even if tangible personal property was utilized in the process when work was completed on the aircraft, so long as the underlying maintenance activities performed under the contract meet the exemption requirements detailed in IC 6-2.5-5-46(b) above. Company also claims that this result would also appear to further the legislative purpose of the exemption, which is to encourage aircraft maintenance work to occur in Indiana.

Regarding the necessity for the underlying maintenance activities performed under the contract to meet the exemption requirements detailed in IC 6-2.5-5-46(b), Company points to federal regulations that regulate persons authorized to perform repair or maintenance on aircraft. A repair station that has a certificate issued under 45 CFR 145 may perform maintenance, preventive maintenance, and alterations on an aircraft. See 14 CFR 43.3(e). This corresponds with IC 6-2.5-5-46(b)(1). Further, mechanics or repairmen that work on aircraft that have a certificate issued by the FFA under 45 CFR 65 may perform maintenance, preventive maintenance, and alterations on an aircraft; or, if they don't have a certificate, they must work only when supervised by someone who does have a certificate. See 14 CFR 43.3(b) - (d). This corresponds with IC 6-2.5-5-46(b)(2). Because federal regulations require that the maintenance be completed by FFA licensed mechanics, repairmen, or repair stations,¹ Company asserts that the requirements of IC 6-2.5-5-46(b) would always be met.

However, IC 6-2.5-5-46(b)(2) would not be satisfied if maintenance was performed by a repairman and not a mechanic, as that term is not mentioned within the statute. Further, IC 6-2.5-5-46(b)(2) would not be satisfied if maintenance was performed by a mechanic at a facility that was not leased at a public use airport, and or if such facility did not meet the public use airport owner's minimum standards for an aircraft maintenance facility. It is not clear if there are other types of facilities (other than a repair station) where a FAA-certified mechanic might perform such repairs or maintenance.

With that being said, if the terms of the optional maintenance agreement comported with the terms of IC 6-2.5-5-46(b), such that maintenance had to be performed either at an FAA-certified repair station or by an FAA-certified mechanic operating at facility leased at a public use airport, then the Department would agree that the optional maintenance agreement would not be considered a taxable bundled transaction because the tangible personal property involved would be exempt. Instead, such contract would be considered a sale of a service, and not subject to Indiana sales tax.

While generally an optional maintenance contract is presumed to be a taxable bundled transaction, if the terms of Company's optional maintenance contract for aircraft maintenance comports with the qualifications of IC 6-2.5-5-46(b), the optional maintenance contract would meet the exception to a bundled transaction at IC 6-2.5-1-11.5(d)(2) because the tangible personal property involved in the contract would be exempt pursuant to IC 6-2.5-5-46, and therefore the contract would be nontaxable. This presumes that less than ten percent of the tangible personal property transferred might not qualify for the exemption under IC 6-2.5-5-46 or any other provision. If more than ten percent does not qualify the exemption under IC 6-2.5-5-46 or any other provision, then the purchase of the optional maintenance contract would be considered a taxable bundled transaction.

This ruling is issued to the taxpayer requesting it on the assumption that the taxpayer's facts and circumstances as stated herein are correct. If the facts and circumstances given are not correct, or if they change, then the taxpayer requesting this ruling may not rely on it. However, other taxpayers with substantially identical factual situations may rely on this ruling for informational purposes in preparing returns and making tax decisions. If a taxpayer relies on this ruling and the Department discovers, upon examination, that the fact situation of the taxpayer is different in any material respect from the facts and circumstances given in this ruling, then the ruling will not afford the taxpayer any protection. It should be noted that subsequent to the publication of this ruling a change in statute, regulation, or case law could void the ruling. If this occurs, the ruling will not afford the taxpayer any protection.

___________________

¹ It appears that the other types of persons authorized to perform repair or maintenance tasks under 14 CFR 43.3 are not applicable to this situation (e.g., an airline may use its own mechanics, which is not applicable to a privately owned aircraft).