US Sales & Use Tax Tips
Every US state has its own combination of sales and use taxes, property taxes, and sometimes other surcharges it assesses on business aircraft based in, or even just flying to, the state. So how do you know where to arrange delivery of an aircraft to make best use of these? Chris Kjelgaard asks the experts…
n addition to accounting for sales and use taxes on business aircraft, some states have generous exemptions too, so it’s fair to say that a tax consultant should always be one of the first team members hired by business aircraft buyers in the US to ensure the purchase is handled professionally, smoothly, and concludes successfully.
“The most important thing is to call [the tax advisor] first, so you don’t make bad decisions,” says Daniel Cheung, Principal of aviation accountancy firm Aviation Tax Consultants. “Make your tax planning proactively – call in a tax consultant in advance,” before the aircraft transaction gets under way.
Another reason why a tax consultant should be a core member of any US-based business aircraft acquisition team is that “the [US] tax code is not friendly in terms of complexity,” adds Cheung. “You have to deal with the IRS, the FAA, and even the Securities and Exchange Commission if you’re a public company.”
Cheung explains “proper planning obviously is the key” for any owner buying a business aircraft to minimize their tax exposure to the purchase. Assessments of sales and use taxes depend on where the aircraft is based or hangared, “particularly if the aircraft lives in two or three places”, in which case it may be subject to sales and use taxes in more than one state.
For instance, he notes, “Chicago, Illinois is extremely difficult in terms of tax, but Gary, Indiana [just over the Illinois-Indiana state border a few miles south of Chicago] is not.”
According to Cheung, “80% of the tax planning is based on IRS requirements”. These requirements should be a more immediate concern for the buyer’s purchase advisory team than compliance with FAA regulations, he says, because compliance is ongoing but the tax payment is one-time.
“So the primary discussion is focused on income tax requirements and ownership structure, because the key to the planning is ownership structure”, says Cheung.
“Who owns the aircraft is the key in terms of getting the bonus depreciation rights” which can be offset against tax liability, and “the corporate structure of the client will determine the structure of the ownership of the aircraft”.
Business Aircraft Taxes: Every State is Different
What makes the presence of at least one aviation tax consultant on any aircraft buyer’s negotiation team even more vital is the fact that every state has different tax rules.
“Most US states and some counties, municipalities and cities, effectively as sub-divisions of state governments, have [their own levels of] sales tax and use tax, and some have property tax,” says Scott Burgess, Partner at Aviation Lawyers Association.
Additionally, “some states also have a registration requirement – Massachusetts, for example – and you have to pay a small registration fee annually of $3,000-$5,000, give or take, usually depending on the jet’s maximum gross takeoff weight.”
If an owner decides to base their business aircraft at a certain airport and uses the aircraft to fly frequently to certain places, this can have important implications for the amounts of aircraft- associated sales, use and property tax for which the owner is liable – implications which can be either positive or negative.
Some states don’t have sales taxes for business aircraft at all, and some have partial or full exemptions on sales and use taxes, often known as ‘flyaway exemptions’ or ‘interstate commerce exemptions’.
When negotiating a business aircraft purchase, an important part of the planning is to look at where the sale will be consummated, says Burgess, “to make sure the point of delivery is somewhere which either has an exemption, or doesn’t have sales and use taxes.”
In this respect New York, Connecticut and Massachusetts are useful delivery jurisdictions, because they don’t impose sales taxes on aircraft, according to Burgess. “To a limited extent”, South Carolina also can be a useful delivery jurisdiction because its sales and use taxes on business aircraft are low.
Quite apart from where the delivery location is agreed for the purposes of minimizing tax – that location is not always the same as the one where the Pre-Purchase Inspection (PPI) takes place – the location where the aircraft will be based is also important for tax purposes.
“How and where you operate, and where the aircraft is based, is important, because it is possible to trigger sales or use tax in more than one state,” adds Burgess. “The assessment of use tax, and the obligation, depends on the location of the consumption of the [services provided by the] aircraft.
“And there’s also property tax. If the aircraft is to be used in several jurisdictions, especially for a company which has facilities in those states, do you pay property tax in one state, or pro-rate?”
Burgess offers three hypothetical examples of business aircraft acquisitions and the subsequent intended use of the aircraft to show just how important the owner’s decisions regarding delivery location, base and usage can be in terms of taxation impact.
Example 1: Planning the BizJet Delivery Location on Tax
In the first scenario, an owner decides to purchase a European- registered Cessna Citation jet which Gulfstream Aerospace has taken in part trade against the sale of a new Gulfstream jet to a European customer.
The aircraft is flown to Gulfstream’s headquarters in Savannah, Georgia.
The aircraft meets the European Union’s deregistration and export requirements and also clears the US Customs importation process satisfactorily. Now the buyer has a pre- purchase inspection performed on the imported Cessna Citation in Georgia and is prepared to complete the purchase.
However, the buyer’s negotiating team strongly advises against taking delivery of the aircraft at any Georgia location, even though it is already in Savannah. This is because Georgia has a relatively high percentage sales tax for aircraft.
The state does offer a “flyaway” exemption against sales tax, but that is valid only for aircraft manufactured in Georgia and delivered by the manufacturer to a customer in Georgia. Essentially, the flyaway exemption only extends to new aircraft manufactured by Gulfstream and delivered in-state.
So, the buyer and seller agree to fly the aircraft out of Savannah to an airport in another state which has a lower sales tax rate. For used, non-Gulfstream aircraft which are bought in Georgia, this typically means flying the aircraft a relatively short distance to an airport in either South or North Carolina, both of which have very low rates of sales tax on business aircraft.
Usually, owners buying aircraft located in Savannah fly the aircraft on a 10 to 20-minute hop to Charleston, which lies just over the South Carolina border 120 miles’ flying distance from Savannah. It is very easy for a Gulfstream mobile maintenance team then to drive to Charleston to perform all the work on the aircraft needed for it to obtain its FAA Certificate of Airworthiness.
…The Florida Complication…
Continuing with this first scenario, let’s now assume the new owner wants to bring the aircraft to Florida and base it there. According to Burgess, the owner now faces two choices in terms of tax liability, one of which – if it can be arranged in accordance with all legal and airworthiness regulations – appears financially preferable.
The simpler of the two choices, but almost certainly far costlier in terms of tax liability, is to pay the 6% use tax that Florida levies on business aircraft. (Florida does not levy a property tax on aircraft.) Every Florida county also levies a discretionary surtax on based aircraft, but this is usually in the $50-$75 range, according to Burgess.
If the aircraft in our scenario cost $20 million, the 6% Florida use tax would be $1.2m.
Alternatively, let’s imagine the owner’s tax team advises them to lease the aircraft to a company – which may be related to the owning company but for FAR Part 91 certification purposes must also be an ongoing company which operates the aircraft.
This then necessitates the aircraft owner to procure a Florida annual resale certificate for sales tax, then pay sales tax on the lease revenue levied at a rate of 6%. Importantly, however, the owning company is no longer liable for the 6% Florida use tax – so it doesn’t have to hand over a $1.2m lump sum to the State of Florida.
If, theoretically, the fair market value of the monthly lease rental paid by the operator to the owner is $180,000, then each month the owner remits 6% of $180k as sales tax to the state – a payment of $10,800. Thus, in a year its sales tax payments to Florida on the lease revenues will total $129k – a far cry from the $1.2m lump sum it would otherwise have to pay to Florida’s Department of Revenue.
And Burgess says if the lessor is qualified it can calculate and remit the sales tax assessed on the rental payments using a mileage-apportionment method (i.e., flight in Florida airspace prorated against all flights made by the aircraft), significantly reducing the sales tax due on the rental payments.
Example 2: Post-Acquisition Business Jet Sales & Use Tax Implications
The specialist aviation accountants and lawyers hired by aircraft buyers also contribute value to the transactions in knowing exactly what the implications of the aircraft’s post-purchase pattern of operations are for exposure to use taxes on a state- by-state basis.
If a buyer isn’t careful, operating an aircraft to, from and within some states, or basing it for even a relatively short time in some states, can generate hefty usage tax assessments by the state(s) in question.
Our next scenario featuring a buyer’s planned activities with an aircraft they have newly bought provides a good illustration. Here, Burgess posits that a North Carolina resident purchases a new business jet for $20m from Textron and takes delivery in Wichita, Kansas.
Since North Carolina’s sales tax on business aircraft is capped at a maximum $1,500, the buyer is content to pay sales tax on the aircraft in North Carolina and initially base it there. But they have an office in Florida and intend to use the aircraft to make visits to that office.
In this case the buyer’s tax advisors will inform the buyer that if they fly the aircraft to Florida within six months of purchasing it, and if during that period it spends more than 21 days cumulatively (not necessarily in one continuous stretch) in Florida, the state will then assess 6% use tax – $1.2 million on a $20 million purchase price – on the aircraft, less the $1,500 sales tax which the buyer paid in North Carolina.
In such a scenario, Burgess cautions that buyers should not hope that the Florida Department of Revenue will not notice that their aircraft has visited one or more airports within the state. Via scrutiny of ATC flight plans and airport records, the Department keeps a close eye on aircraft movements and temporary basings at all Florida airports.
Buyers must also be very mindful of the potential taxation exposures – at state, county and municipal levels – of operating their business aircraft to and within other US states, according to Burgess.
For example, even if an aircraft qualifies for California’s Interstate Commerce Exemption on aircraft sales and use taxes (because the owner uses it for flights to or from California and other states), the owner must still be aware that the aircraft may incur California county or city property taxes depending on the airports it uses and at which it spends time on the ground within the state.
In Texas, similarly, which for taxation-administration purposes has created a structure of “appraisal districts”, owners need to be aware of local property taxes assessed by the appraisal district(s) to and from which their aircraft are flying, Burgess adds.
Example 3: Out-of-State Business Jet Owner Tax Gotcha
Out-of-state owners should be particularly aware that even if they immediately fly an aircraft purchased in Texas to another state, thus qualifying for the flyaway exemption on taxation that Texas allows for aircraft departing the state within a certain period, if they fly their aircraft back to Texas for even a temporary visit within a year, Texas may assess use tax on the aircraft.
Burgess offers a third hypothetical example in which a resident of New York state purchases a Bombardier business jet from the manufacturer’s facility at Addison Field, Texas.
The new owner flies the aircraft out of Texas within the time required for the aircraft to meet the state’s flyaway exemption and bases the aircraft in New York State.
(New York is a very good state in which to base an aircraft, according to Cheung, because it has not assessed any taxes on aircraft for the past decade – though there is some political pressure within the state legislature to change that situation. That pressure is being strongly resisted by various aviation and political bodies and communities.)
But should the New York-based owner consider flying their jet to Texas for any reason within 12 months of the purchase closing, Burgess says the Texas Department of Revenue can take the position that the aircraft returning to Texas triggers the 6.25-8.25% use tax which would have been assessed on the aircraft had it remained in-state after the owner bought it.
BizAv Sales & Use Tax Clarity: Communication Is Key
As with every other aspect of pursuing the purchase of a business aircraft, frequent, clear communication between the buyer and their aviation tax/legal experts is key to obtaining the best possible taxation result from the deal, says Burgess.
Only by knowing exactly how the buyer (advised by their negotiating team) intends to handle the mechanics of the transaction can their tax advisors learn where the pre-purchase inspection is planned to be performed.
Armed with that knowledge, the tax specialists can advise the buyer where to arrange delivery of the aircraft. If the airport at which the inspection is being conducted is in a state which has little or no sales tax, or has a flyaway exemption, then delivery can take place at that airport.
However, if the inspection is being conducted in a state with less favorable tax rules, for delivery to occur the aviation tax experts can advise the buyer to negotiate with the seller to fly the aircraft from the pre-purchase inspection location to an airport in a state in which delivery would be more suitable for tax purposes.
Additionally, says Burgess, “It’s important to talk about where the aircraft is going to spend most of its time. You’re looking for utilization patterns, so you can assess all the different exposures [by likely destination state] and mitigate them.”
In-House Business Aircraft Charter Ops and Federal Excise Tax
Aviation tax experts also need to know if there are potentially other factors affecting the purchase taxation-wise.
“One of the things we look for, especially for a client who is inclined to allow the aircraft to be used for Part 135 charters to generate revenues, is if we’re in a jurisdiction with a commercial use exemption,” says Burgess. If the aircraft is delivered or based in such a jurisdiction, then it may be exempt from state sales and property tax.
Moreover, will the buyer’s own missions be operated under Part 135 rules? If so, is it possible for the buyer to lease the aircraft to an operator with which it has a direct financial relationship. That operator could be a subsidiary of the buyer’s company but it would need to be an ongoing company in its own right, and genuinely be operating the aircraft itself, Burgess highlights.
If those conditions are met, then the operator need not collect from the buyer the 7.5% US Federal Excise Tax normally levied on the fair market value of each US domestic charter flight, says Burgess.
When the buyer of a business aircraft leases it to another entity, so that the buyer’s own operations can be performed under Part 135 charter regulations, the need for a direct financial relationship between the buyer and the entity operating the aircraft rules out the operator carrying passengers on behalf of a third party, according to Burgess.
So, if the buyer were a car manufacturer, the charter operator could carry the car OEM’s own employees – but it would not be allowed to fly managers of third-party car dealerships around, even if they were flying on the aircraft buyer’s own business.
Some Final Sales & Use Tax Thoughts
Cheung says the role of an aviation accountant in a buyer’s negotiating team is an important one – and the owner should retain the relationship on a continuing basis after the purchase closes.
“Combating bad information and correcting errors [during the transaction process] is a key part” of the aviation accountant’s role in the team, he says, adding that one key task for the accountant and lawyer within the team is “to do the structure of ownership [of the aircraft] to mitigate audit risk”.
However, after the purchase closes, as the buyer, “You had better be keeping the records of the deal and following their advisors’ recommendations to continue to mitigate audit risk, Cheung warns. If the owner of the aircraft does that, they will find that “some states’ audits are friendly if you follow the rules” on ownership structure, tax reporting and other key areas of interest to state revenue departments regarding the aircraft.
Overall, says Cheung, while most US states have sales and use taxes and sometimes also personal property taxes as well (or alternatively to use taxes), “Most states have some sort of exemption available. Very few of our clients have to pay the sales or use tax.”
Would-be aircraft buyers who are NBAA members can undertake useful preliminary research into the taxation aspects of their planned purchases by consulting the ‘NBAA State Aviation Tax Report’. Visit: https://nbaa.org/flight-department- administration/tax-issues/state-taxes/
More Information From:
Aviation Lawyers Association
Aviation Tax Consultants
