During past budget shortfalls, aircraft have been the target of securing additional revenues through the aggressive collection of sales, use, and property tax.
The portability of aircraft can make it easy to avoid sales tax on the purchase by closing in a jurisdiction with little or no tax, or an applicable exemption, but that is only the first step. Use tax generally becomes a significant hurdle in the state or states in which the aircraft is based.
What is a sales tax vs. a use tax? Although sales and use tax are not universally defined, for purposes of this discussion a sales tax is a privilege or license tax on persons engaged in the business of making retail sales by which ownership of tangible personal property is transferred for consideration—a tax on the act of selling. Use tax compliments sales tax and is a tax on the consumer for the privilege of storing, using, or consuming within the state any tangible personal property—a tax on the end user. Sales tax and use tax generally are mutually exclusive in that any sales tax already paid on the transaction will be credited against use tax owed.
Because aircraft are easily transportable, sales tax can be eliminated by transacting the transfer in a state such as Oregon or Massachusetts, which have no sales tax. Other states have little or no sales tax and use tax on aircraft purchases, including North and South Carolina. Finally, more than a dozen remaining states have “fly-away exemptions” that provide an aircraft will not be subject to tax if it is promptly removed from the state and registered elsewhere.
However, these exemptions often have technical requirements that must be carefully considered before relying upon them. Aircraft sales/use tax is an area of extreme differentiation from state-to-state, so parties must exercise extreme care in determining the point of delivery and closing of the transaction.
Use tax, however, is more of a complex challenge, and generally will be imposed by the state of domicile (and possibly even in other states with nexus to the aircraft) if sales tax would have been imposed had the transaction occurred within the state. Therefore, culminating the sale in a tax-free state generally is only the initial step in controlling sales and use taxes. The purchaser should also plan for avoiding or minimizing use tax through one of the various exemptions that may be available on a state-by-state basis. Examples of common exemptions (which may or may not be present in any particular state) include:
- Common Carrier Exemption. Common carrier exemptions, if present, are often not unique to aircraft, but may apply more broadly to transportation equipment used in the movement of persons and property for hire. Several states have common carrier exemptions that apply only to commercial airlines. However, many states exempt charter operators operating under FAR Part 135, provided certain threshold use tests are met. Under certain circumstances, certain states will even extend the common carrier exemption to aircraft operators serving members of their controlled group and operating under FAR Part 91.
- Casual Sale. These exemptions apply to the sale of aircraft by individuals or companies not regularly engaged in the aircraft sale business. One potential hazard is that a number of state laws that include a casual sale exemption specifically carve out aircraft from the exempt property designation, and therefore tax it. Other states, like Texas, impose significant burdens on a purchaser to vet a casual seller.
- Resale Exemption. Because the sales and use tax is a tax at retail, the purchase of a property will generally not be subject to tax if it is acquired in a wholesale transaction. This wholesale transaction exemption generally would apply when the aircraft is acquired for purposes of resale or lease. Therefore, when a dealer acquires an aircraft for the purpose of selling it to another, tax is imposed on the dealer sale but not the purchase. Likewise, when property is acquired for lease to another, the acquisition of the property generally is exempt from sales tax, while the lease payments are then subject.
- Interstate Exemption. Certain states recognize that if an aircraft is used primarily in interstate commerce, it is not subject to either sales or use taxes. The scope of this exemption generally turns on the level of interstate use and the degree to which it resides in the state. Some states, such as California and Maryland, have defined testing periods after which the aircraft is deemed exempt; others do not. Strict compliance with state requirements is a must when using this exemption.
- Corporate Transactions. In a number of states there are exemptions for bulk sale of property as part of the sale of an ongoing trade or business, statutory mergers, dividends to shareholders, tax-free contributions of property to partnerships or corporations, and other similar transactions. In some cases, it may be possible to structure transactions pursuant to these exemptions and thereby effectively limit the applicability of sales/use taxes.
Sales and use tax law applicable to aircraft is exceedingly complex and is often not uniformly clear. As states’ tax appetites continue to grow, they appear to be increasingly aggressive, even in areas previously thought to be exempt from tax. Purchasers are therefore cautioned to carefully plan their transactions and be cognizant of potential risks. Most business aircraft are eligible for use tax exemption or reduction in some form in most, but not all, states. Through proper planning, structuring, and filing, you can avoid a surprise use tax bill and instead use those funds to keep your business aircraft in the skies.
This article introduces a complex and often ambiguous area of law. Knowledgeable people may disagree as to the outcomes in particular cases. Always consult with your advisor. Suzanne Meiners-Levy, Esq. is a Shareholder in Advocate Consulting Legal Group, PLLC, which serves the needs of general aviation clients throughout the country. For more information see www.advocatetax.com.
