Tax Considerations When Buying An Aircraft
By Gregory J. Reigel
© September, 2017 All rights reserved.
Among the many factors aircraft buyers need to evaluate when they are considering purchasing an aircraft, one of the most important may be tax. Frequently aircraft buyers tell me they want to purchase an aircraft BUT they don’t want to pay any tax on the purchase. Unfortunately, while it certainly may be possible to reduce an aircraft buyer’s tax liability, it isn’t always possible to completely avoid all tax liability associated with the purchase of an aircraft.
As you may know, most states charge sales tax on the purchase of tangible property, including aircraft. Ordinarily the seller is required to collect and remit sales tax to the taxing authority. So, one of the first tax issues an aircraft buyer must address is whether the state in which the buyer intends to take delivery of the aircraft has any applicable exemptions from that state’s sales tax. In the absence of an exemption, sales tax would otherwise be due on the purchase/sale with either the seller collecting and remitting the sales tax or the buyer paying the sales tax directly. And since a seller does not want to be responsible for the sales tax, the seller will require the buyer to provide satisfactory proof of an applicable exemption, usually in the form of a signed exemption certificate.
But keep in mind that in some states, such as South Carolina, the sales tax assessed on an aircraft transaction may be so minimal that it may not make sense to relocate the aircraft for delivery in another state with an acceptable exemption. Rather, it may be more economical and convenient to simply pay the sales tax on the transaction.
However, that is not the case, here are a few examples of sales tax exemptions an aircraft buyer may be able to use to avoid paying sales tax in the delivery state. But be aware that all states do not allow for all of these exemptions. So, an aircraft buyer will need to evaluate the tax laws for each state to determine what exemptions may be available.
Fly Away Exemption. One example of an exemption from sales tax on an aircraft purchase is the “fly away exemption.” If the purchased aircraft is sold/delivered in one state for use and registration in another state before any use of the aircraft is made in the delivery state then the purchase is exempt from sales tax. Some states with a fly away exemption will permit limited post-closing use of the aircraft in the delivery state for the purposes of (i) training, (ii) maintenance, repairs, completion etc., or (iii) to fly the aircraft out of the delivery state. However, each state has its own unique requirements to take advantage of the fly away exemption, including the acceptable documentation to support the exemption (which a savvy seller will require).
Sale for Resale Exemption. Many states also allow for a “sale for resale” or “purchase for resale” exemption from sales tax. This exemption applies to a buyer’s purchase of an aircraft for the purpose of leasing, rental, or reselling the aircraft to another person. Here again, states applying this exemption may have specific requirements in terms of what is considered a “sale” or “leasing”, as well as the qualifications of the buyer (e.g. requiring the buyer to have a valid sales and use tax permit). Additionally, although the buyer may avoid paying sales tax on the purchase price of the aircraft, the buyer would then be required to collect and remit sales tax on either the lease or rental price, or the sale price of the aircraft to another person (unless an exemption applies to that transaction).
Commercial Use Exemption. Other states provide an exemption from sales to air carriers that purchase an aircraft. This would include persons certificated by the FAA under 14 C.F.R. Parts 121, 125, 133 and/or 135 to operate an aircraft to transport persons or property. The exemption may also apply to the air carrier’s leasing of the aircraft as a lessee. In order to qualify for the exemption, and to satisfy the seller, the air carrier needs to issue an applicable tax exemption certificate detailing its status and tax-exempt use of the aircraft at the time of the transaction.
Casual/Occasional/Isolated Sale Exemption. This exemption applies to transactions in which the seller’s sale of the aircraft is a “casual” or “occasional” sale. A common form of “occasional sale” with respect to an aircraft is one made by a person who does not habitually engage in the business of selling taxable items (of any kind, not just aircraft) and who sells no more than two such taxable items during the preceding twelve-month period.
To document an exemption of this type, a purchaser should ask the seller to provide a signed statement that the transaction qualifies for the occasional sale exemption as defined by the delivery state’s statutes or regulations. However, buyers need to be careful. Oftentimes this exemption applies to sellers who habitually engage in business of selling taxable items of any kind, NOT just aircraft. So a seller that doesn’t habitually engage in the sale of aircraft but does sell other taxable items would likely not qualify for this exemption.
Use tax, which is different from sales tax (although often assessed at the same rate), is imposed by a state for use of any material, including aircraft, in that state. The tax applies to out-of-state purchases in transactions where sales tax is not collected, or is collected but is underpaid compared to the sales tax that would be paid in-state. In the aircraft scenario, use tax is assessed by a state into which the aircraft is relocated post-delivery when sales tax was either not paid, or under paid, in the delivery state.
When an aircraft is brought into a state and a nexus is established by basing the aircraft in that state or otherwise operating the aircraft within the state for a minimum amount of time or trips/departures, then use tax is imposed. For example, some states require that the aircraft be operated within the state for a minimum amount of time. Other states look to the percentage of operation within the state. The specific rules in each state must be analyzed to determine the state’s requirements for establishing that nexus.
So, how does an aircraft buyer take advantage of these exemptions to minimize or avoid paying tax on the purchase of an aircraft? Well, the buyer will need to consider a number of factors including where the aircraft’s pre-purchase inspection will be performed, where the buyer may want to take delivery, where the aircraft will be operated post-delivery, by whom it will be operated and in what manner. Based upon the answers to those questions, the buyer will then need to review the tax laws for the relevant states to determine what exemptions may be available. Let’s look at a couple of examples using Texas law:
Example 1 - An aircraft buyer takes delivery of an aircraft in a state with a fly-away exemption (so no sales tax is collected or remitted) and then relocates the aircraft to Texas. If the buyer can show that in the following 12 months the aircraft’s non-Texas (out-of-state) departures are more than 50% of the total departures, then no use tax would be assessed against the aircraft. (In this scenario it is wise for the buyer to add an extra stop on trips outside the state to meet the 50% requirement on an ongoing basis in order to prevent getting stuck at the end of year if the aircraft is down for maintenance and unable to “catch-up” on out-of-state departures.)
Example 2 - An aircraft buyer takes delivery of an aircraft in a state using a Texas sale for resale exemption (again, no sales tax is collected or remitted) and then relocates the aircraft to Texas. If the buyer leases the aircraft to one or more lessees, no use tax would be assessed against the aircraft. However, the buyer would need to collect and remit sales tax on the lease/rental rate, unless the leasing was exempt from sales tax (e.g. a lease to a Part 135 air carrier).
One other tax issue an aircraft buyer will also want to consider is whether the state in which the aircraft is to be located or operated will assess personal property or ad valorum tax on the aircraft. In some states this tax is assessed and paid on annual basis. It may be separately assessed by the state or county, or it may be included along with an aircraft’s annual registration. However, as with sales and use tax, some states also provide exemptions from personal property tax depending upon location and use of the aircraft.
Although taxes are a fact of life, in aircraft transactions they can be a very significant fact when a buyer is spending millions of dollars on an aircraft. Aircraft buyers need to analyze their situations to identify the strategies and exemptions that may allow them to minimize or avoid assessment of tax on their aircraft acquisitions. Buyers should also work with their aviation and tax counsel to properly structure their transactions in a way that accomplishes their goals and complies with applicable laws and regulations.