2. GENERAL TERMS AND CONCEPTS
2.03 Aircraft Leases
An aircraft lease can take the form of:
- A true lease (a dry lease or an operating lease);
- A sale (a financing lease); or
- A transportation service (a wet lease).
These different kinds of leases can have markedly different state tax consequences.
In some cases, the lease of an aircraft can end up being classified as a sale (or financing lease). In making this determination, most states appear to rely on the same kind of "facts and circumstances" test as is used for federal income tax purposes. This generally involves consideration of factors such as the term of the lease, the amount financed, and the presence of any bargain purchase options.1 However, there is at least one state which has adopted the present value tests used by the accounting profession.2 A few other states have adopted a test based solely on the term of the lease.3 The use of these alternate tests means that a lease can end up being considered a sale for some purposes of some state taxes and not for others.
The FARs distinguish between wet leases (plane and pilot) and dry leases (aircraft only). The states make a similar distinction between the lease of an aircraft (an operating lease) and the providing of a transportation service. Both the FAA and the states appear to consider many of the same kinds of factors in making this determination, such as whether the pilots are employees of the lessor and who has control over the conduct of the flight.4
- The factors considered by the IRS are listed in Rev. Rul. 55-540.
- Tex. Reg. 3.294(a)(1). The accounting rules are contained in FAS 13.
- See, e.g., S.D. Law 50-11-35. Va. Reg. 630-11-1501(6)(b).
- See, e.g., Air Methods, Inc., Minn. Tax Ct., No. 5127 (9/19/1989). However, the author has been advised that Iowa treats all aircraft leases as transportation services, including dry leases.