Business aviation groups are urging the state of Texas to hold off on a proposed new tax rule, warning that the changes conflict with existing law and would harm the industry within the state.
NBAA, saying the draft rule would “drastically change the normal course of general aviation ownership” in the state, is weighing filing a lawsuit to ensure the proposed changes do not take effect.
The state first previewed the proposal to members of the Texas Comptroller’s Taxpayer Advisory Group in July but formally published a draft rule on October 31, saying it clarifies and codifies existing regulations and guidance. The proposal is intended to pull related tax provisions and guidance under single rule, a state spokesman told AIN. “To the extent rule provisions did not already exist, we wanted to outline the agency’s interpretation of the law and allow the public to review it and provide comments,” he said.
Bizav Groups: Wider Definition Needed
The state’s interpretation had already caused problems for aircraft owners and operators, leading to audits that threw into question certain aircraft ownership arrangements, said Scott O’Brien, senior manager of finance and tax policy for NBAA.
At issue for the bizav groups is a narrow definition that recognizes “only the most basic form of aircraft leasing.” This involves a finance lease from a bank or other entity that establishes a fixed monthly rental payment program.
William Deere, NATA senior vice president for government and external communication, notes this approach disregards “other accepted leasing regimes, including those allowing for the use of aircraft in charter operations.”
O’Brien agrees. “This completely ignores the actual, logical and well established normal course of business in this industry,” he says, citing dry leases as an example that is a “matter of law” but would not be recognized under the Texas approach. A dry lease involves the lease of an aircraft from the registered owner to a separate entity, such as a commercial operator.
Such an interpretation would disqualify other forms of leasing from the “sale for resale” exemption and raise the tax burden for alternative lease deals.
The state definition, the groups say, conflicts with federal tax law and aviation law and likely would not withstand court challenge.
Dan Brown, vice president of state government relations for the Equipment Leasing and Finance Association, notes that the Federal Aviation Regulations require leasing when an owner makes the aircraft available even to related parties. “More considerations come in operations administered under Part 135–as well as citizenship requirements and liability considerations between the company that owns the aircraft versus operational liability of the company providing pilots and flight operations,” Brown said.
The “entrepreneurial culture” of lease financing would be another casualty of a regulatory approach that recognizes only traditional fixed monthly rental payments, he added.
Also concerning the groups are changes in the applicability of the use tax to capture time an aircraft is spent on the ground, as well as in the aircraft to determine whether it has spent more than 50 percent of the time in the state, a threshold for the use tax.
“The comptroller’s proposal would impose use taxes on director owners who are taxpayers in other states but whose aircraft spend time in Texas for the purposes of services performed by our member companies, including maintenance and refurbishment,” Deere said.
The result of the proposal, O’Brien said, is the application of “arbitrary, vague and subjective standards, rules and definitions to the general aviation industry.” NBAA and NATA both told the comptroller that the proposal reflects a lack of understanding of common aviation business practices.
The comment period for the proposal ended on November 30. The state will sift through the comments before finalizing the draft rule. But the timing is unclear, especially since state Comptroller Susan Combs is retiring.
As for the NBAA lawsuit, O’Brien said the association is evaluating whether to file a pre-emptive lawsuit or to wait until the final rule is released to take action.