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October 01, 2018

Using A "Fly-Away" Exemption To Avoid Paying Sales Tax On An Aircraft Purchase

When buying an aircraft, one of the issues a buyer must determine is whether the buyer will have to pay any sales tax on the transaction. As you may know, most states charge sales tax on the purchase of tangible property, including aircraft. In some cases, a buyer may be able to take advantage of an exemption such as a "fly-away exemption" to avoid having to pay sales tax to the state where the buyer takes delivery of the aircraft.

As an example, Texas provides a fly-away exemption when an aircraft is sold/delivered in Texas state for use and registration in another state before any use of the aircraft is made in Texas. Texas Tax Code ("TTC") Section 151.328(a)(4) exempts from sales tax aircraft "sold to a person for use and registration in another state or nation before any use in this state other than flight training in the aircraft and the transportation of the aircraft out of the state."

Use

In order to take advantage of this exemption, an aircraft sold in Texas may not be "used" in Texas after the buyer takes delivery of the aircraft. Unfortunately, the Texas Tax Code applicable to sales tax does not define what it means to "use" an aircraft in the state. However, TTC Section 151.011(a), which relates to the "use tax" in Texas, defines "use" as “the exercise of a right or power incidental to the ownership of tangible personal property over tangible personal property… ."

Additionally, TTC Section 151.011(f)(1) provides that "[n]either 'use' nor 'storage' includes the exercise of a right or power over or the keeping or retaining of tangible personal property for the purpose of: (1) transporting the property outside the state for use solely outside the state." So, at least in Texas, a buyer may be permitted limited post-closing use of the aircraft in Texas for the purposes of (i) training, (ii) maintenance, repairs, completion etc., or (iii) to fly the aircraft out of Texas.

Registration

The Texas fly-away exemption also requires that the aircraft be registered in another state or nation, but not Texas. So, while the transfer of ownership will be filed with the FAA, in order to satisfy the statute the aircraft also needs to registered in another state or country after it is removed from Texas.

To claim the fly-away exemption, the buyer must give the seller a Form 01-907, Texas Aircraft Exemption Certificate Out-of-State Registration and Use (“Exemption Certificate”). Both the buyer and the seller must sign the Exemption Certificate and the seller must send a copy to the Texas Comptroller’s office within 30 days of the sale’s occurrence in Texas. And in the event of a dispute with the Comptroller, the buyer has the burden of proving by clear and convincing evidence that the aircraft was not subject to Texas sales tax per TTC Section 151.328(a)(4).

It is important to know that, at least in Texas, each case is unique and even though it may appear that the buyer has satisfied all requirements of the fly-away exemption, the Comptroller could take a different view of the case. Although this may not be the case in all states, it is prudent for aircraft buyers in all states to work with their aviation and tax counsel to properly structure their transactions in a way that complies with/satisfies any requirements for taking advantage of a fly-away or any other type of exemption.

Posted by Greg

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