While tax reform at the federal level remains unclear and 100% bonus depreciation appears on the verge of phasing down at year end, aircraft purchasers are well aware that a major cost in the purchase of any aircraft is the possible applicability of sales and use tax to the transaction. As States remained concerned about the economic impact of inflation and political instability globally, they are seeking additional sources of funding. During past budget shortfalls, aircraft have bene the target of securing additional revenues through the aggressive collection of sales, use and property tax. The portability aircraft make it generally 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. The sales tax and use tax are generally 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 and use tax on aircraft purchases, including North and South Carolina. Finally, over 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 complex a challenge, and will generally 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 is generally only the initial step in control- ling 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 applies 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, selected states will even extend the common carrier exemption to aircraft operators serving members of their con- trolled 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 which 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 the property will generally not be subject to tax if it is acquired in a wholesale transaction. This wholesale transaction exemption would generally apply when the aircraft is acquired for purposes of resale or for 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 his purchase. Likewise, when property is acquired for lease to another, the acquisition of the property is generally exempt from sales tax, while the lease payments are then subject.

Resale Exemption. Because the sales and use tax is a tax at retail, the purchase of the property will generally not be subject to tax if it is acquired in a wholesale transaction. This wholesale transaction exemption would generally apply when the aircraft is acquired for purposes of resale or for 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 his purchase. Likewise, when property is acquired for lease to another, the acquisition of the property is generally exempt from sales tax, while the lease payments are then subject.

Corporate Transactions. In a number of states there are exemptions for bulk sales of property as part of the sale of an on-going trade or business, statutory mergers, dividends to shareholders, tax-free contributions of property to partnerships or corporations, and other similar trans- actions. In some cases, it may be possible to structure transactions pursuant to these exemptions and thereby effectively limit the applicability of sales/use taxes.

The sales and use tax law applicable to aircraft is exceedingly complex, and is often not uniformly clear. As the 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 use those funds to keep your business aircraft in the skies.

This article provides an introduction to a complex, and often ambiguous, area of law. Knowledgeable people may disagree as to outcomes in particular cases. Always consult with your advisor.

Skytech’s Owner Pilot Advantage Magazine is geared for both owners and pilots with content aimed to promote safety, increase awareness on maintenance topics and enhance the overall aircraft ownership experience.