Who’s In Charge Here? (And when does federal excise tax apply?)

The most important factor to consider when you consider whether federal excise tax is due on aircraft rentals is whether the owner-lessor of the aircraft transfers “possession, command and control” of the aircraft to the lessee.

Where an S corporation leased an aircraft (its sole asset) to a related C corporation, and the S corporation employed a pilot and crew to operate and maintain the aircraft, and was also responsible for providing alternative aircraft if its aircraft were unavailable, the S corporation retained possession, command, and control of the aircraft. The C corporation’s lease payments were therefore subject to the air transportation tax.

Rent paid for a bare (or “dry”) aircraft lease, where the payee doesn’t exercise such possession (that is, for more than a temporary period typical of a lease, hours or perhaps a few days), “command” (usually, in the form of providing pilots), or “control” (as in “operational control”) isn’t a taxable payment for transportation.

Assuming you have a taxable flight the question then becomes which charges are taxable.  In one case the rent a lessee paid to an airline for the lease of a plane to transport company personnel was an amount paid for taxable transportation.  The “amounts paid” for such transportation, however, excluded nontransportation charges such as food and certain expenses of painting and modifying the plane, in part because such charges were separable and are shown separately in the lessor’s records.  All air transportation companies (or dry lessors) should make it a practice to break out these types of charges as specifically as possible, both internally and in invoices given to the customer.

In another case rent for helicopter service paid by an oil company using the helicopter for oil exploration is payment for transportation if the helicopter company provides the pilots, retains command, control and possession of the helicopter and performs the operational services.

Amounts paid to a helicopter rental company for the hourly, per diem, and 30-day charges for the furnishing of helicopters with pilots to a company for the transportation of employees to and from job sites was subject to tax.  The Court of Claims held that the air transportation tax is imposed on both the monthly charge paid to a helicopter rental company to insure the availability of helicopter service, and the hourly charge paid for the actual use of the helicopter.

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