Idaho Determines that Flight School’s Aircraft Lease is Subject to Sales Tax

June 29, 2018

This Idaho ruling demonstrates that wet leases and dry leases are treated differently for sales tax purposes, and that a taxpayer may not rely on a resale exemption when engaging in wet leases.

By Jess Johannesen, SALT Manager

For sales and use tax purposes, the rental or lease of tangible property is generally taxable.  If the property requires an operator (such as an aircraft, an automobile, a crane, etc.), then the sales tax implications can change depending upon whether the rental is a “dry” lease or a “wet” lease.  In short, a wet lease includes crew in addition to the rental property, whereas a dry lease does not include a crew.  For example, a rental car company will charge you sales tax since you are only renting the car alone (a type of dry lease).  However, if the car comes with a driver, then that turns into a service (e.g., a limousine service or transportation service), which may or may not be taxable depending upon state law.

The dry/wet lease scenario is also significant from a sales tax perspective because it determines whether or not the lessor/operator can purchase or lease the item for resale.  For example, if a crane leasing company solely leases the equipment to its customers, then the company can purchase/lease the crane from its vendor/lessor for resale without payment of sales tax.  However, if the crane leasing company enters into wet leases with its customers and provides an operator with the crane, then the company is providing a service and cannot rely on the resale exemption (i.e., it must pay tax to its vendor).

A recent Idaho State Tax Commission ruling illustrates these principles.[1]  The Petitioner primarily operates as a flight school in Idaho.  The owners of the aircraft (referred to as the “Owners”) lease the aircraft to the Petitioner, and the Petitioner then charges its customers for the flying lessons (these are essentially structured as aircraft leases).  The Petitioner did not collect sales tax from its students on the aircraft rental nor did it pay any use tax on the rental payments to the Owners.

The Petitioner asserted that no sales tax should be due for flight instruction while citing Idaho regulations stating that a fully operated equipment rental (i.e., a wet lease of the aircraft with an operator) is a service rather than a taxable retail sale.[2]  Petitioner noted that the supplied aircraft is of no value to the flight students without the operator in order to provide flying lessons.  Idaho agreed as the rental of aircraft between the flight school and the flight students was not held to be taxable.

However, as between the Owner and Petitioner, the state determined that it was a taxable dry lease, and Petitioner could not claim a resale exemption since it was not re-leasing the aircraft under a dry lease to its students.  Thus, Petitioner owed use tax on the rental amounts paid to the Owners.

This case illustrates the importance of distinguishing between a dry lease and a wet lease.  The general rule is that if a business enters into a dry lease of property with a lessor, and then turns around and dry leases (i.e., subleases) that property to its customers, the initial dry lease should be eligible for a resale exemption and the second dry lease should be taxable (absent another applicable exemption).  On the other hand, if a business enters into a dry lease of property with its vendor, and then turns around and wet leases that property to its customer, then the dry lease is typically not eligible for the resale exemption because the business is viewed as providing a service (i.e., a wet lease), and is thus the end user of the property.  Therefore, the dry lease is taxable (absent another applicable exemption).[3]

Aprio’s SALT team has experience with these types of sales and use tax issues and can advise businesses on the proper sales and use tax treatment of their lease transactions.   We constantly monitor these and other important state and local tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT manager, at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the June 2018 SALT Newsletter.

[1] Idaho State Tax Commission Ruling, No. 1-762-365-440, 12/29/2017.

[2] ID Admin. Rules §

[3] These scenarios would play out the same way if instead of an initial dry lease, the business purchased the property.  A business could purchase for resale if it turned around and dry leased the property to its customers, but if the business wet leases to its customers, then the initial purchase would be taxable.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Jess Johannesen

Jess Johannesen, Senior Tax Manager at Aprio, is a state and local tax advisor with expertise in sales/use tax and state income tax matters, state tax credits and incentives, and state and local tax M&A due diligence. Known for quick response times and technical expertise, Jess helps business leaders and decision makers in an array of industries maximize state tax benefits, and minimize risks and exposures while keeping in compliance. Defined by kindness and passion for Georgia sports, Jess is a thoughtful, curious and detail-oriented advisor.