State taxes are often overlooked in general aviation. Whether you use your plane for business or just for personal pleasure, there are state taxes that may apply to your plane in one or more forms. Forty-four states impose sales and use tax on planes. In addition, 42 states impose annual personal property tax and/or registration tax on planes.
I often hear, “I took delivery in Oregon, so I don’t have to worry about sales and use tax.” Another favorite, “I own my plane in a Montana LLC, so I don’t have to pay tax anywhere.” The craftiest is, “I don’t owe tax to any state because my plane is not really based anywhere, it’s always moving around.” Unfortunately, none of these statements is true, and a brief outline of the various state taxes will explain why.
“Sales and use tax” is actually two separate taxes that should be generally seen as two sides of a coin, and one side of the coin always applies. Taking delivery of your plane in a tax-free state or “fly-away” state only deals with one side of the coin (sales tax). Sales tax applies where you purchase your plane, the location where you take physical delivery of the plane from the seller. The sales tax that applies to a plane purchase is the same as the sales tax you pay when you buy an item from your local store.
Use tax is the other side of the coin and it applies in most states for the privilege of using or storing your plane in that state. Therefore, unless you qualify for some type of exemption or credit in the state where you will ultimately base your plane, you may owe use tax. Like sales tax, use tax is based on your plane’s purchase price. In addition, the use tax rate is usually the same rate as your state’s sales tax rate.
Forming an entity in a tax-free state to own your plane will not shield you from use tax in the state where you actually base your plane. There is a tax concept known as “nexus,” which in simple terms means the state will focus on physical presence or contact within the state to determine if you owe tax to the state. In other words, “hangar here, pay tax here” is the motto most states follow when it comes to planes.
This nexus concept leads to two more often overlooked state taxes, property tax and registration tax. Some states impose both, but most require one or the other. Property tax is applied in a manner similar to the property tax on your home in that it is based on the value of your plane. It generally applies to planes in the state as of a certain date each year (“lien date”), but may also apply if your plane is regularly in the state, even if absent on that particular lien date. Property tax varies from state to state, with the average annual amount being 2 percent of the value of the plane.
Registration tax may be imposed in place of, or in addition to, property tax. States with registration requirements require planes within the state to be registered with a specific state agency. This state registration is addition to FAA registration requirements. The registration fees range from as little as $10 per year to as much as several thousand dollars per year, and states cast a wide net for registration. In fact, you may be required to register your plane in a state even if you do not reside or have a hangar space in the state. You could also be subject to registration requirements in multiple states. For example, several states require non-residents to register if the plane is in the state at least 60 days during a calendar year. The days do not have to be consecutive, and even a few minutes in the state is considered a full day. Therefore, frequent weekend visits or training flights to a state could require you to register your plane in that state.
You may be shrugging off the impact of state taxes. You would not be the first to wonder, “How will the state even know my plane is there?” Well, states have several methods for discovering and taxing planes. State aircraft registration is one of those methods. The registration applications sometimes require you to either pay state sales or use tax or provide proof of payment or exemption in order to register the plane. Failure to register the plane may be a criminal offense. Some states also impose hefty penalties for planes discovered in the state but registered with the FAA using an out-of-state address in an attempt to avoid state taxes.
States also rely on external resources to seek out planes for unpaid taxes. A copy of the FAA registry is downloaded by an increasing number of states on a regular basis to locate all new registrations with an address within the state. Inquiry letters are then sent to the owners to determine if taxes have been properly paid on the plane. Letters are also sent to local FBOs requesting a listing of all tail numbers frequenting the FBO. State and county agencies will even send plane spotters to airports to write down tail numbers, or use flight tracking websites to capture tail numbers regularly entering the state.
There is a silver lining in all this state tax gloom. In most states, the law provides various ways to reduce or eliminate taxes. Proper planning and compliance are key and can often lead to significant savings and peace of mind.
Letisha D. Bivins, Esq. is a Managing Attorney at Advocate Consulting Legal Group, PLLC, which serves the tax, legal, and compliance needs of general aviation clients throughout the country. For more information, visit www.advocatetax.com.
