Texas Addresses Occasional Sale Exemption for Like-Kind Aircraft Exchange
The occasional sale exemption is a little-known exemption that created big problems for one Texas company.
One of the exemptions from sales/use tax that is not well known is the occasional sale exemption (it may also be referred to as a casual and/or isolated sale exemption). This exemption typically exempts the following types of sales (specific requirements vary by state): (1) sales made by taxpayer that is not engaged in the business of selling and that makes less than a few sales each year; (2) sales of property that the seller is not in the business of selling in the regular course of business; (3) sales that arise from internal restructuring where the ultimate ownership of the property is substantially unchanged; and (4) sales/liquidations of entire businesses.
The occasional sale exemption is what allows someone to sell something on eBay, Facebook, or to his/her neighbor without having to worry about collecting and remitting sales tax. In addition, it allows companies to restructure or sell a business without a significant sales tax liability. Since states typically do not require documentation to claim the occasional sale exemption, sellers and buyers don’t even realize that the exemption applies. Texas is one state that has a document – Statement of Occasional Sale (Form 01-917) – that a purchaser can obtain from sellers to document the occasional sale, although there is no requirement to do so. However, as addressed in a Texas Comptroller’s Decision issued on Dec. 18, 2017, when a like-kind exchange is determined to not qualify for the state’s occasional sale exemption, the purchaser’s reliance on the form does not relieve him of the liability.
Company C wanted to engage in a like-kind exchange of its aircraft in order to obtain the income tax benefits under Internal Revenue Code § 1031. Therefore, Company C entered into an agreement with Company B, whereby Company B agreed to purchase Company C’s aircraft and then re-sell that aircraft to Company A. Company B would then acquire a different aircraft from a third-party and re-sell it to Company C. Upon the sale of the aircraft to Company A, both Company C and Company B issued a Statement of Occasional Sale to Company A, representing that they did not have sales tax permits and had not made more than one other taxable sale within the past 12 months. Company A registered the aircraft using a Texas address and flew the plane into the state.
Three years later, Texas audited Company A’s purchase of the aircraft and determined that the occasional sale exemption did not apply. Company A requested a redetermination. Since it is undisputed that the aircraft was flown into Texas for use, Company A had the burden of proof to show that the assessment was erroneously made.
Company A argued that the purchase of the aircraft was an occasional sale and as such should be exempt from use tax. Texas defines an occasional sale to include “one or two sales of taxable items at retail during a 12-month period by a person who does not habitually engage, or hold himself out as engaging, in the business of selling taxable items at retail.” Additionally, the following requirements must be met: (1) the seller does not habitually engage or hold himself out as engaging in the business of selling taxable items at retail; (2) the seller makes two or fewer sales of taxable items during the 12-month period in which the sale occurred; (3) the seller does not hold a sales tax permit; and (4) the purchaser does not hold a sales tax permit.
In applying the requirements to the facts of this case, the Comptroller looked at the bill of sale. Company C transferred its aircraft to Company B who took title to the aircraft. Company B then transferred the aircraft to Company A. Due to those transactions, two sales already occurred. Thus, the Comptroller found that Company B was in the business of selling taxable items (i.e., aircraft), and relied on prior guidance that someone that purchases goods for the purpose of reselling them is engaged in the business of selling taxable items and does not qualify to make an occasional sale. Therefore, Company A’s purchase did not qualify as an exempt occasional sale.
Company A made an alternative argument based on good faith reliance. Company A argued that since it received Statements of Occasional Sale from both Company C and Company B, it relied in good faith that the transaction was indeed an occasional sale. However, the Comptroller explained that while there is a statutory good-faith safe harbor that exists when accepting a resale certificate, there is no good-faith safe harbor for the acceptance of a Statement of Occasional Sale. Instead, the buyer should look to the above four prong test and the related guidance in order to determine whether or not the sale truly is an occasional sale.
The requirements for meeting an occasional sale exemption vary by state and its application is not always straightforward. Aprio’s SALT team has extensive experience advising sellers and purchasers on the requirement of this exemption, particularly in the context of business acquisitions, so that the parties do not create significant exposure when the transaction is completed. 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.
This article was featured in the March 2018 SALT Newsletter.
 In most states, both the sale and use are exempt, so the purchaser does not have to self-remit use tax.
 Due to federal tax reform, exchanges of aircraft no longer qualify for like-kind exchange treatment.
 Although it is not specifically stated in the facts of the hearing, it appears that Company B acted as a qualified intermediary.
 Tex. Tax Code §151.304(b)(1); 34 Tex. Admin. Code §3.316. There are other transactions that qualify for the occasional sale exemption.
 Tex. Tax Code §151.304(b)(1),(f),(g).
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