SUBJECT: Determination of Sales Tax for Leased Aircraft and for Flight Instruction

REFERENCES: IC 6-2.5-4-16 and IC 6-2.5-5-8.2

DISCLAIMER: Information bulletins are intended to provide nontechnical assistance to the general public. Every attempt is made to provide information that is consistent with the appropriate statutes, rules, and court decisions. Any information that is not consistent with the law, regulations, or court decisions is not binding on either the Department or the taxpayer. Therefore, the information provided herein should serve only as a foundation for further investigation and study of the current law and procedures related to the subject matter covered herein.

SUMMARY OF CHANGES

Aside from technical, nonsubstantive changes, the bulletin has been updated to reflect technical changes made in Senate Enrolled Act 382 (2022), as well as to remove references to legislation that are more than 10 years old.

I. INTRODUCTION

The purpose of this bulletin is to describe the specific requirements to qualify for the "purchase for rental" exemption, which is when a person acquires an aircraft for leasing or rental. This bulletin provides further guidance on the taxability of the lease or rental of aircraft when the aircraft is used to provide flight instruction.

II. ACQUISITION OF AIRCRAFT FOR RENTAL OR LEASING AND QUALIFICATION FOR EXEMPTION

A person who acquires an aircraft for rental or leasing in the ordinary course of the person's business is not automatically exempt from sales tax on the purchase. A purchaser of an aircraft for rental or leasing must meet certain requirements before the purchase is exempt from the Indiana sales or use tax. An exemption will be granted on the purchase of the aircraft if the annual revenue derived from renting or leasing the aircraft is equal to or greater than 7.5% of the net acquisition price for the aircraft or the book value of the aircraft as published in the Vref Aircraft Value Reference (VAVR) guide for the aircraft. The net acquisition price includes the value of any trade or exchange and excludes any sales commissions paid to third parties.

If an aircraft is acquired below the VAVR guide book value, the person may appeal to the Indiana Department of Revenue (the department) for a lower lease or rental threshold equal to the actual acquisition price paid. The person must demonstrate that the transaction was completed in a commercially reasonable manner based on the aircraft's age, condition, and equipment.

If the aircraft is placed in service on a date other than the first day of the month, and on or before the fifteenth day of the month, the aircraft will be considered to be placed in service on the first day of the month. If the aircraft is placed in service after the fifteenth day of the month, the aircraft will be considered to be placed in service on the first day of the subsequent month.

If the aircraft is taken out of service for nonroutine maintenance, repair, refurbishment, or remanufacture of the aircraft, the time that the aircraft is out of service will not be used to compute the annual revenue necessary to be exempt from the sales/use tax, but rather the 7.5% revenue requirement will be prorated for the balance of the year.

A person is required to meet the 7.5% revenue requirement until the earlier of the date the aircraft has generated sales tax on leases or rental income that equals the amount of the original sales tax exemption, or the elapse of 13 years. If the aircraft is sold before meeting one or both of the requirements above, the sale of the aircraft shall not result in the assessment of sales or use tax from the date of acquisition to the date of the sale.

The person is required to remit the sales tax on taxable lease and rental transactions no matter how long the aircraft is used for lease and rental.

The lessor of the aircraft shall annually report to the Aeronautics Section of the department's Tax Administration Division. The report shall be due annually 30 days after the end of the month in which the aircraft was originally placed in service for leasing.

The report shall include the name, address, and phone number of the lessor and the location of the aircraft when it is not in operation. The report must also include the year, make, model, and N number of the aircraft along with the original cost and VAVR book value of the aircraft. The lessor shall report the total revenue from taxable leases, the amount of sales tax collected, the total revenue from exempt leases, and the total revenue from leases to related parties.

If a person engaged in the business of leasing an aircraft does not meet the minimum annual revenue amount for the lease of the aircraft, the person will be subject to use tax in the amount of sales tax that would have been originally due based on the original cost or VAVR book value of the aircraft. However, if the aircraft is sold prior to the conclusion of 13 years, no additional sales or use tax is due from the seller on the seller's original purchase if the person has met the terms outlined above for all periods prior to the sale.

All use of the aircraft must be charged a lease or rental fee plus sales tax, including related parties.

III. PUBLIC TRANSPORTATION

A person who acquires an aircraft to rent or lease to another person for predominate use in public transportation by the other person is exempt from sales or use tax. To maintain the public transportation exemption, the taxpayer must submit an annual report documenting predominant use in public transportation.

IV. FLIGHT INSTRUCTION

Sometimes the lease or rental of an aircraft is combined with a flight instructor's services to provide in-flight training to a student pilot. If the instructor leases or rents an aircraft to the student and provides flight instruction to the student during the term of the lease or rental, the gross retail income that is subject to the sales tax is the amount charged by the instructor for the lease or rental of the aircraft used in conjunction with the flight instruction services provided to the student pilot. Any charges related to the instructor's service of instructing the student are exempt from the sales tax if the lease or rental of the aircraft and the charge for the instructor's services are separately stated.

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Robert J. Grennes, Jr.

Commissioner

Posted: 06/08/2022 by Legislative Services Agency