Tax Type
Retail Sales and Use Tax
Description
Airline; Repair and refurbish aircraft
Topic
Exemptions
Date Issued
11-02-1990
November 2, 1990
Re: Request for Ruling: Sales and Use Tax
Dear***************
This will refer to our recent meeting in which we discussed the sales and use tax consequences of your corporation locating a new facility in Virginia.
FACTS
Your corporation is engaged in the rendition of air carrier service and enjoys an exemption from the sales and use tax under Va. Code §58.1-608 (3) (f) for property used directly in the rendition of its service. Your corporation is considering locating a facility in Virginia to repair and refurbish its own aircraft, as well as those of other carriers.
RULING
Virginia Regulation (VR) 630-10-2 (copy enclosed) provides that "any person who acts on a written ruling which is later revoked, set aside, or superseded by the courts or the (Tax) Commissioner will have acted in good faith during the period in which such ruling is in effect."
Airline Exemption Generally
The repair, rebuilding, and maintenance of aircraft in order to keep an airline's transportation system in operation is clearly an essential element of the airline' s overall common carrier service. As such, your corporation will enjoy the airline exemption provided in Va. Code §58.1-608 (3) (f) to the extent that machinery, equipment, tools, supplies, etc., are used directly in keeping its revenue generating aircraft in operation.
Industrial Manufacturing and Processing Exemption Generally
Eligibility for the industrial manufacturing and processing exemption provided in Va. Code §58.1-608 (3) (b) is determined in large part by a businesses' classification in the Standard Industrial Classification (SIC) Manual. Base on Va. Code §58.1-602, businesses listed in codes 10-14 and 20-39 of the SIC Manual are deemed to be industrial in nature and thus generally qualify for the exemption.
Although your operation appears to fall between various Standard Industrial Classification Codes, it nonetheless clearly qualifies for the industrial exemption. Businesses engaged in the repair and rebuilding of aircraft and aircraft engines on a factory basis are included in SIC Code 37, as are similar businesses engaged in shipbuilding and repair and the building or rebuilding of locomotives and rail cars on a factory basis.
Your corporation will enjoy the industrial exemption to the extent that it repairs and rebuilds aircraft and aircraft engines belonging to another airline. However, the exemption will not apply to routine maintenance services provided to other carriers as these services are not industrial in nature.
Exempt Property
VR 630-10-7 relating to airlines does not provide a detailed explanation of exempt and taxable property used in the rendition of common carrier service. However, VR 630-10-24.3, relating to motor carriers, and VR 630-10-24.4, relating to railways, do provide such listings. Copies of these regulations are enclosed, along with VR 630-10-63 relating to manufacturers.
In general, the airline and manufacturing exemptions will apply to all tangible equipment, tools, repair parts, supplies, etc., that physically are used in the repairing, rebuilding, and maintaining aircraft. Similarly, supports which are a component part of exempt equipment are not taxable, but other building and structural materials, foundations, etc. are deemed to be taxable based on their indirect use in production (see VR 630-10-63.C.2).
To the extent that items are used in both exempt (repair, rebuilding, and maintenance of your corporation's own revenue aircraft and the repair or rebuilding of other carriers' aircraft) and taxable (routine maintenance of other carriers ' aircraft) activities, the exemption will be prorated based on the percentage of exempt usage to total usage.
As we discussed, the final determination of the taxability of specific equipment and structures that will incorporated into the facility can be addressed in a separate ruling at a later time.
Computer Hardware and Software
Va. Code §§58.1-608 (5) (f) and (g) exempt from the tax "[a]n amount separately charged for labor or services rendered in connection with the modification of prewritten programs" and the entire cost of "[c]ustom programs."
Va. Code §58.1-602 defines "prewritten program" as "a computer program that is prepared, held, or existing for general or repeated sale or lease, including a computer program developed for in-house use and subsequently sold or leased to unrelated third parties." The same statute defines "custom program" as "a computer program which is specifically designed and developed for only one customer" and clarifies that "[t]he combining of two or more prewritten programs does not constitute a custom computer program" and that "[a] prewritten program that is modified to any degree remains a prewritten program and does not become custom."
Although custom software is exempt regardless of its use, prewritten software (other than separately stated charges for modifications) and computer hardware may be taxable depending upon its usage within the facility. To the extent used directly in repair and similar exempt functions, the software and hardware will be exempt. However, when used in product design, inventory control, payroll, billing, recordkeeping, managerial, and similar administrative functions, the exemptions do not apply.
In this regard, VR 630-10-63.C.2 specifically states that hardware and software "used to produce production reports, make production information available to plant personnel, (and) monitor the efficiency of production machinery" is used in a taxable administrative manner.
As with the issue above, the final determination on the taxability of software and hardware can be addressed in a future ruling.
Sales of Repair Services to other Carriers
The provision of repair and rebuilding services for other carriers' revenue equipment will be nontaxable assuming that the carriers qualify for the Va. Code §58.1-608 (3) (c) exemption and furnish your corporation a certificate of exemption.
If the work does not qualify for the airline exemption, e.g., work performed with respect to nonrevenue or privately owned aircraft, your corporation generally must collect the sales tax on the transaction. The tax will apply to the entire charge to the customer; however, repair labor charges may be separately stated on the invoice and excluded from the tax base.
The only exception to tax collection is when the aircraft or engine is delivered to the customer outside of Virginia. To qualify for exemption on this basis, the aircraft or engine must be delivered to the customer outside the state by your corporation's own employees or a third party contracted by your corporation. However, if an employee of the customer comes into Virginia to take delivery or the customer contracts with a third party to take delivery in Virginia on its behalf, the tax will apply.
Whether or not used in exempt repair jobs, all equipment and parts that will pass to the customer (other than items and supplies furnished in connection with routine maintenance services) may be purchased exclusive of the tax using a resale certificate of exemption.
I hope that this will answer all of your questions on the application of the Virginia tax. My staff and I are available in the event that you have further questions or require clarification of any of the issues addressed in this ruling. Based on your acquiescence at our meeting, I am providing a copy of this ruling to the Department of Economic Development.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner