|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Sales and Use Tax
September 11, 2001
This is in reply to your request for certain rulings with respect to ********** ("Lessee").
STATEMENT OF FACTS
Lessee has its principal place of business in Boston, Massachusetts. On **********, Lessee contracted to purchase a newly manufactured ********** aircraft together with three ********** aircraft engines (together, the aircraft and the engines are referred to herein as the "Aircraft") from ********** (the "Vendor") for **********. The Vendor is a dealer in aircraft and holds a valid Massachusetts vendor's registration. On **********, Lessee and Vendor amended the purchase agreement to provide for a new purchase price of **********.
On **********, Lessee took delivery of the Aircraft from Vendor in Arkansas. On that date, Lessee filed Form 8050‑1, Aircraft Registration Application ("Form 8050-1") and Form 8050‑2, Aircraft Bill of Sale ("Form 8050-2"), with the Federal Aviation Administration (the "FAA") to record the purchase. The registration certified Lessee as the owner of the Aircraft. Shortly after taking delivery of the Aircraft, Lessee hangared it in Massachusetts. Lessee intends Massachusetts to be the primary hangar location of the Aircraft.
In **********, Lessee began negotiations with ********** ("Bank Leasing") to enter into a synthetic lease program for the Aircraft as well as other aircraft owned by Lessee. The program was described by Bank Leasing as an "Off-Balance Sheet Loan" and a "structured debt product" which would provide Lessee with the flexibility and economic benefits associated with ownership combined with an "off balance sheet, low cost financing structure."
During **********, Lessee continued negotiations regarding the synthetic lease of the Aircraft, first with ********** (successor to Bank Leasing), and then, through **********, with a syndicate of investors. This syndicate was organized in the form of a trust, with **********, as trustee.
On **********, Lessee transferred title to the Aircraft to **********, representing the syndicate of investors (the "Lessor") in exchange for ********** (the "Acquisition Cost"). The transfer of title was documented on an Aeronautical Bill of Sale on FAA Form AC 8050‑2 (the "Bill of Sale"). The Form 8050‑1, filed by Lessee with the FAA on ********** to record the sale and leaseback of the Aircraft, showed Lessee as the owner of the Aircraft.
Also on **********, Lessee entered into an Aircraft Lease Agreement with Lessor (the "Lease"). Pursuant to the Lease, Lessee agreed to lease the Aircraft from Lessor for a 120-month period (the "Initial Term") for a quarterly rental payment of **********. Under the Lease, at the end of the Initial Term, Lessee has the option of either purchasing the Aircraft for ***** percent of the Acquisition Cost (the "Initial Term Purchase Price") or surrendering the Aircraft to the Lessor. If Lessee surrenders the Aircraft to Lessor, Lessor must sell the Aircraft to the highest bidder, with Lessor retaining all sales proceeds up to the Initial Term Purchase Price, any amount in excess is paid over to Lessee. If Lessor sells the Aircraft for less than the Initial Term Purchase Price, Lessee is required to pay the difference between the sales price and the Initial Term Purchase Price to Lessor, with a cap, however, at ***** percent of the Acquisition Cost. The Initial Term Purchase Price is equal to the unamortized balance of the Acquisition Cost after the Initial Term, assuming an interest rate of ***** %.
The Lease also provides Lessee with the option of purchasing the Aircraft or returning the Aircraft to the Lessor after five years (the "Early Termination Date"). Under the Lease, Lessee has the option to either terminate the Lease upon the Early Termination Date and purchase the Aircraft for a price equal to the sum of ***** percent of the Acquisition Cost and a prepayment penalty (the "Termination Purchase Price"), or return the Aircraft to Lessor. If Lessee elects to terminate the Lease on the Early Termination Date and return the Aircraft to Lessor, Lessor must sell the Aircraft to the highest bidder. The proceeds of such sale are to be retained by Lessor to the extent that they do not exceed the Termination Purchase Price, with all sales proceeds in excess of the Termination Purchase Price paid over to Lessee. In the event that Lessor sells the Aircraft for less than the Termination Purchase Price, Lessee is required to pay the difference between the sales price and the Termination Purchase Price to Lessor, with Lessee's obligation capped at ***** percent of the Acquisition Cost. The Termination Purchase Price is equal to the unamortized balance of the Acquisition Cost as of the Early Termination Date plus a premium and a penalty for prepayment, assuming an interest rate of ***** %.
The Aircraft has an expected useful life of greater than ten years; resale prices for two- to eight-year old aircraft similar to the Aircraft range between ***** and ***** percent of their original price. Lessee expects the Aircraft to have a resale value substantially in excess of the Termination Purchase Price at the Early Termination Date, and a resale value substantially in excess of the Initial Term Purchase Price at the end of the Initial Term. Lessee's present intention is to exercise its right to repurchase the Aircraft at the end of the Initial Term.
The Lease is a "net lease." Under the terms of the Lease, Lessee is required, at its own cost and expense, during the Initial Term to: (i) maintain the Aircraft's registration with the FAA; (ii) maintain, inspect, service, repair, overhaul and test the Aircraft; (iii) replace all parts of the Aircraft which may, from time to time, become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever; (iv) affix or install, or cause to be affixed or installed any accessory, equipment or device to the Aircraft or make any improvement, modification, alteration or addition to the Aircraft as may be required from time to time to meet the mandatory standards of the FAA or any other governmental authority; (v) maintain aircraft liability and property damage insurance with respect to the Aircraft; (vi) maintain insurance against loss or damage to the Aircraft; and (vii) pay all personal property taxes or other taxes due with respect to the Aircraft or its use. In addition, under the Lease, Lessee agreed to indemnify Lessor from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, suits, demands, costs or expenses of any kind which may be imposed on Lessor in connection with the Aircraft or the Lease.
The Lease further: (i) grants Lessee the uninterrupted use and possession of the Aircraft during the Initial Term; (ii) obligates Lessee to pay Lessor upon total loss of the Aircraft an amount equal to the unamortized portion of the Acquisition Cost plus a prepayment premium (the "Stipulated Loss Value"); (iii) grants Lessee the right to all insurance proceeds or salvage value in excess of the Stipulated Loss Value, in the event of a total loss of the Aircraft; (iv) provides that Lessee shall pay rent on a daily basis for its continued possession of the Aircraft after the expiration of the Lease (due to a delay in the purchase or return of the Aircraft), with such rent determined based on the continued amortization of the Acquisition Cost; (v) prohibits Lessor's possession of the Aircraft absent a default under the Lease by Lessee; and (vi) assigns to Lessee all rights and powers of Lessor under any manufacturer's or servicer's maintenance service contract and/or extended warranties for the Aircraft, the engines and/or any parts (including, without limitation, any warranty of the manufacturer or supplier).
The Lease states that Lessee and Lessor intend to treat the Lease as a loan for federal income tax purposes, with Lessor treated as the lender and Lessee treated as the borrower. The Lease also provides that Lessee grants only a security interest in the Aircraft to Lessor to secure Lessee's payments under the Lease and that it is the intention of Lessee and Lessor that the Lease be treated as a finance lease as defined in Article 2A of the Uniform Commercial Code. Under the Lease, title will revert to Lessee upon Lessee's exercise of its option to repurchase the Aircraft either on the Early Termination Date or at the end of the Initial Term.
Pursuant to the Lease, Lessor treats the sale and leaseback as a financing for financial reporting purposes and files UCC‑ I financing statements with the Massachusetts Secretary of State, the Boston, Massachusetts City Clerk, and the Bedford, Massachusetts Town Clerk to perfect its security interest in the Aircraft. In addition, Lessee treats the Lease as an off balance sheet loan under FASB 13 for financial statement purposes, and claims deductions on the Aircraft for depreciation and for interest expense for federal income tax purposes.
On ********** Lessee paid ********** of use tax to the Massachusetts Department of Revenue (the "Department") in connection with its use and storage of the Aircraft in Massachusetts. On **********, Lessee made an additional Massachusetts use tax payment of ********** based on the final trade-in credit reflected on the final invoice.
The Taxpayer requests the following rulings with respect to the transactions described above:
1. Neither Massachusetts sales nor use tax will be imposed upon Lessee's rental payments to Lessor pursuant to the Lease.
2. Neither Massachusetts sales nor use tax will be imposed upon Lessee's sale of the Aircraft to Lessor nor upon Lessee's repurchase of the Aircraft from Lessor pursuant to the Lease.
General Laws chapter 64H, §2 imposes an excise upon sales at retail in the Commonwealth by any vendor of tangible personal property or telecommunications services, unless explicitly exempt. The excise is imposed at the rate of five percent of the gross receipts of the vendor from all such sales. Id. General Laws chapter 64I, §2 imposes an excise upon the storage, use or other consumption in the Commonwealth of tangible personal property or telecommunications services purchased from any vendor for such use. The excise is imposed at the rate of five percent of the sales price of the property or services. Id. Sales upon which taxes have been collected under chapter 64H are exempt from use tax. G.L. c. 64I, §7(a).
For sales and use taxes, "sale" is defined as "any transfer of title or possession, or both, exchange, barter, lease, rental, conditional or otherwise, in any manner or by an means whatsoever . . . . " G.L. c. 64H, §1, G.L. c. 64I, §1; see also Zayre Leasing Corp. v. State Tax Commission, 365 Mass. 351 (1974) ("sales" includes leases and rentals).
Leases are generally subject to Massachusetts sales or use tax. However, the Department will look to the facts and circumstances of each case when determining if a nominal sale-leaseback transaction is in fact a financing arrangement.  When making this determination, the Department has considered the following factors as generally dispositive, although no one factor is conclusive: (1) title and possession remain with the seller-lessee,  (2) the seller-lessee retains the benefits and burdens of ownership of the property such as risk of loss, entitlement to gain, maintenance of insurance, and responsibility for taxes; and (3) the seller-lessee is eligible to claim the federal income tax deductions and credits accorded an owner. See Letter Rulings 99-9 and 96-6.
The facts present here indicate that while Lessee formally transferred title to Lessor, the Lease grants Lessee the uninterrupted use and possession of the Aircraft during the term of the Lease barring a default under the Lease by Lessee. In addition, the Lease provides that Lessor assigns to Lessee "all rights and powers of Lessor under any manufacturer's or servicer's maintenance service contract and/or extended warranties for the Aircraft, the engines and/or any parts." In addition, Form 8050-1 lists Lessee as the "Person shown on evidence of ownership."
The intent of the parties as evidenced by the documents is that the transaction is a financing arrangement rather than a sale and leaseback. The UCC-1 Financing Statement executed by Lessee names the Lessor as the secured party with respect to the Aircraft and collateral equipment. In addition, the Lease states that there will be provided "an opinion of FAA Counsel . . . that, on the records of the Aircraft Registry of the FAA, (a) the [Aircraft and collateral equipment] is registered in the name of Lessee, (b) the Aircraft is free and clear of all other liens and encumbrances of record except as created by the Lease . . . , and (c) the Lease . . . creates a duly perfected security interest in the Aircraft in favor of Lessor." The Lease in addition provides that "there shall have been filed at the FAA Registry an Aeronautical Bill of Sale designating Lessor as the purchaser of the Aircraft and Lessor shall hold a first priority security interest therein free and clear of all [l]iens." Finally, the Lease provides that "the Aircraft has been duly registered with the FAA in the name of Lessee." All of these facts indicate that the parties treated the transaction as a financing rather than a sale and leaseback.
The Lease imposes substantially all the burdens, risks and responsibilities of the Aircraft upon the Lessee. In the event that the Lessee surrenders the Aircraft either at the end of the Initial Term or upon early termination of the lease, the Lessee receives any proceeds in excess of the Initial Term Purchase Price or Termination Purchase Price. In the event of a total loss of the Aircraft, Lessee is entitled to all insurance proceeds or salvage value in excess of the Stipulated Loss Value. Lessor will suffer a risk of loss only under extraordinary circumstances. The useful life of the Aircraft is expected to exceed the term of the Lease. The Lessee has stated its present intention to exercise its right to repurchase the Aircraft at the end of the Initial Term of the Lease.
The Lease requires the Lessee to undertake the responsibility of maintaining and operating the Aircraft. At its own cost and expense: (1) the Lessee must maintain the Aircraft, (2) replace damaged or destroyed parts, (3) make any improvements as required by the FAA, (4) maintain liability insurance, and (5) pay all taxes due with respect to the Aircraft. In addition, the Lessee agrees to indemnify the Lessor against all claims and actions imposed upon Lessor in connection with the Aircraft or the Lease. The risk of economic loss and physical damage to the Aircraft borne by Lessee is analogous to that of a property owner, while the Lessor's risk and obligation with regard to the property are consistent with those of a lender.
The Lease states that Lessor and Lessee intend to treat the Lease as a loan for federal income tax purposes, with Lessor treated as the lender and Lessee treated as the borrower. Accordingly, the Lessee will claim a federal income tax deduction on the Aircraft for depreciation expense and for interest expense.
Based upon the facts as stated in the request, and for the reasons discussed above, we determine that: (1) neither Massachusetts sales nor use tax will be imposed upon Lessee's rental payments to Lessor, (2) neither Massachusetts sales nor use tax will be imposed upon Lessee's sale of the Aircraft to Lessor nor upon Lessee's repurchase of the Aircraft from Lessor pursuant to the Lease, and (3) a use tax was properly imposed and paid upon Lessee's original purchase of the Aircraft.
Very truly yours,
/s/Bernard F. Crowley, Jr.
Bernard F. Crowley, Jr.
Acting Commissioner of Revenue
 In nominal sale and leaseback transactions, whether a transaction is a "sale, a lease, or a financing arrangement is a question of fact which must be ascertained from the intent of the parties as evidenced by the written agreements read in light of the attending facts and circumstances." Haggard v. Commissioner, 24 T.C. 1124, 1129 (1955) as cited in Technical Advice Memorandum 9802002 (January 9, 1998). See also Letter Ruling 99-9 (April 1, 1999).
 In the sale and leaseback context, retention by seller-lessee of title and possession is indicative of a financing arrangement, although the conveyance of title is not dispositive where "the conveyance of title . . . [is] actually given merely as security for a loan . . . ." Sun Oil Company v. Commissioner, 562 F.2d 258 (1977) (" Sun Oil") citing Helvering v. Lazarus, 308 U. S. 252, 255 (1939). "[I]n the field of taxation the courts are 'concerned with substance and realities, and formal written documents are not rigidly binding. ' " Id.