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It’s No Longer Where You Are Based, It’s Where You Fly

As state treasuries aggressively seek new avenues for revenue, several have unleashed their tax department on owners of transient aircraft. Out-of-state owners of transient aircraft offer special benefits to these taxing authorities: they don’t vote in the state; they illicit little sympathy from the public; tax assessments are expensive to defend; and lien procedures simplify collection. With new computer tools to track IFR flight plans, a notice frenzy is emanating from several states. The new case outlined below highlights both the complexity and the gravity of the problem.[1]

How 4% Use Creates 100% Taxability

Irwin Industrial Tool Corporation is a large tool manufacturer and distributor principally located in Nebraska. The company has subsidiaries throughout the world including manufacturing plants in Nebraska, Arkansas, Indiana, New York, Maine, and Wisconsin. One of those subsidiaries owned and operated the aircraft and had seven employees all of who lived and worked in Nebraska. The parent had a small office in Illinois for the convenience of three of its employees, but had no other significant presence there. The aircraft was a Hawker 800XP purchased from Raytheon in Wichita, Kansas. Delivery and acceptance of the aircraft was in Little Rock, Arkansas which was immediately followed by transfer to the Lincoln, Nebraska hangar and office. The aircraft was not subject to Nebraska sales and use tax under a state exemption.

The aircraft flew about 300 hours a year throughout the United States. It spent 4% of its time in Illinois but its legs landed in Illinois about 18% of the time (substantially all in connection with interstate trips). The Illinois Department of Revenue billed and collected use tax on the entire value of the aircraft.

The taxpayer protested and asserted that the aircraft did not have “substantial nexus” to Illinois and was therefore non-taxable. The taxpayer asserted in the alternative that if nexus was found the tax should be fairly apportioned to Illinois, based on the aircraft’s 4% presence. The trial court found substantial nexus did exist, but agreed that the tax should be apportioned, imposing tax on only 4% of the value of the aircraft. The taxpayer appealed the finding of nexus, and the Department appealed the apportionment requirement to the Appellate Court of Illinois.

Federal Constitution Limitation State Tax Burdens and Interstate Commerce

The first issue before the appellate court relates to Article 1 Section 8 of the United States Constitution which expressly authorizes Congress to “Regulate commerce with foreign Nations, and among the several States.” The court recognized that the “United States Supreme Court has consistently interpreted this express grant of congressional authority as implicitly containing a negative command, known as the dormant commerce clause. This limits the power of the state to tax interstate commerce even in the absence of congressional legislation”.[2] The appellate court discussed the evolution of the dormant commerce clause into a 4-part test, requiring that taxes: (1) be applied to an activity that has substantial nexus with the taxing state; (2) be fairly be apportioned; (3) not discriminate against interstate commerce; and (4) be fairly related to the services provided by the state.[3]

Substantial Nexus

The taxpayer properly asserted that a burden on interstate commerce requires substantial nexus not merely any nexus; “for a use tax to meet the substantial nexus requirement, so that the taxing state has sufficient connection with the use of property being taxed,” the “taxpayer must substantially avail itself of the privilege of doing business within the taxing state,” by having some physical presence there.[4] The court found that although the nexus must be substantial the physical presence need not be; it found that “to satisfy the substantial nexus requirement, physical presence inside the taxing state need not be substantial, but must be more than “slight”.[5] The court then analyzed two other cases; one where a plane was hangared in Illinois and a second where a tugboat spent 50% of its working time on waterways contained within the State of Illinois. Both of these prior cases had found substantial nexus. The court then follows these analysis up with the following statement “while we acknowledge that all these decisions rely on relatively extensive physical presence of the property within the state as a factor in establishing nexus, none of them reject the notion that other factors, in addition to time spent, may be considered to determine the extent of physical presence, e.g. the use of property in the state. Indeed, physical presence is not gauged simply by its duration, but by its significance in relation to the overall use and function of the properties of the state.” The court went on to determine that one of the principal purposes of buying the aircraft was to fly the corporate executives from their office in Illinois. They also noted that initially the aircraft bill of sale and registration filed with the FAA listed Illinois corporate office as ATC Air’s primary address. Although this was obviously an error, and was corrected in the first few months of ownership, it was a factor considered by the court in determining nexus.

Fair Apportionment

The fair apportionment test is designed to prevent multiple taxation.[6] The Supreme Court has stated multiple taxation “is threatened whenever one State’s act of overreaching combines with the possibility that another State will claim its fair share of the valued tax: the portion of value by which one State exceeds its fair share will be taxed again by the State properly laying claim to it. In order to determine whether a state tax is fairly apportioned, the courts examine whether the taxes internally and externally consistent.”[7] The appellate court states “According to the United States Supreme Court, to be internally consistent, a tax must be so structured that if every state in the United States were to impose an identical tax, it would not result in an object being burdened by multiple taxation. However, the United States Supreme Court has repeatedly held that this requirement is solved by a system of credits, which exempts the taxpayer to the extent that he has already paid the same tax in another state.”[8]


This court found that the use tax need not be apportioned as long as a credit provision is in place. The court found that an attempt to apportion would prove both burdensome and impractical.

Why the Credit System Does not Prevent Multiple Taxation

The sales and use tax system is far from uniform throughout the country. Conceptually the sales tax is imposed on sales culminated within the state, and use tax is imposed on property purchased outside the state that is brought into the state for use.

The special challenges with aircraft:

1) The right of a state to tax the interstate movement of non-resident aircraft is determined by “substantial nexus”. In Irwin Industrial Tool, the court held that it required merely more than a slight physical presence. Nexus appears to be a growing challenge.

2) Aircraft are core instruments of Interstate Commerce. Some states, (e.g. California), attempt to tax aircraft for flight in their airspace. Without nexus protection, aircraft could easily be subject to tax in dozens of states.

3) The credit process allowed by most states will not prevent multiple taxation. It is generally allowed for sales tax (often not use tax) properly paid. Consider that Virginia doesn’t have a sales tax, but a registration fee; Mississippi taxes rental for departures from their state; Kentucky taxes rental for departures from any state for Kentucky based aircraft; California allows taxpayers to pay sales tax on either the lease or the purchase price at their election; Indiana will charge tax on both if the rent isn’t high enough; Illinois has no rental exemption so use tax is due on the entire value of the aircraft. Therefore, a taxpayer who buys an aircraft in Virginia to be based in Kentucky that periodically flies into Mississippi and Illinois could owe tax to Virginia and Illinois on the entire value of the aircraft and Kentucky and Mississippi on the rental stream. If the airplane catches fire over Indiana, try and dead stick it to another state—you certainly don’t want to land there.

How Do Aircraft Operators Protect Themselves?

1) Understand where you fly and the tax exemptions for those states. If your aircraft is held in a leasing structure, it may be necessary to obtain resale certificates in multiple states to qualify for an exemption.

2) Review your “nexus” with states other than where the aircraft is based. States generally look to both the controlled group of entities as well as officers and key shareholders in determining presence.

3) Don’t assume that because you received a notice you owe tax. Notices are generated based on your perceived presence in the state, not on a determination that tax is due.

4) Take care in registering your aircraft with the FAA. The FAA will allow you to register the aircraft at the office address of your choice. State taxation departments will use this information to send notices. Courts may consider it a factor in determining nexus.

5) Suppress your N number from reporting services. In addition to FAA records, states often use FAA tracking services to discover aircraft landing at their airports. There are many valid reasons to suppress public dissemination of your flights. See Protecting the Confidentiality of Your Flights at

To the extent that you properly owe state and local tax, of course you should pay it. However, often this tax is controllable or avoidable through planning.

[1] Irwin Industrial Tool v. Department of Revenue, 1-08-0750 Ap.Ct of IL First District (9/11/09)

[2] Quill Corp. v. North Dakota 504 U.S. 298, 309 (1992).

[3] Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)

[4] Quill Corp. v. North Dakota 504 U.S. 306, 308 (1992)

[5] Browns Furniture, Inc., 171 Ill.2d 423

[6] Complete Auto Transit

[7] Jefferson Lines, 514 U.S. 184

[8] Goldberg, 488 U.S. 261,

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