Sales & Use Tax

 

Most states, but not all impose some form of a sales tax or transaction privilege tax as it is sometimes called.  This tax arises from the event of a transaction within the state. Sales tax rates vary widely among the states but typically range between 4 and 6 percent.  Within most states, the counties, districts, and some municipalities have the ability to impose a local sales tax in addition to the state sales tax.  After the imposition of these local taxes, the combined rates may exceed 8 percent. Companies and individuals contemplating an aircraft purchase transaction should carefully consider the sales tax ramifications early during the planning process to avoid adverse consequences.

 

Tax laws in most states also provide for a parallel taxing system imposed upon the consumption, use, or storage of an aircraft within the state.  This tax is commonly known as the “use tax”.  Use tax rules in most states typically tax transactions that escape tax under the sales tax rules; however, these taxes are mutually exclusive. If the sales tax applies, the use tax generally does not, and if the sales tax does not apply, the use tax most likely will.

Some state tax laws provide various exemptions from sales and use taxes depending on the use to which the aircraft is put.  Since sales and use tax are transaction driven, the uses, conditions, or circumstances which may qualify the transaction for an exemption must generally exist for a specified period of time or “test period”.  A brief description of several common forms of exemption is outlined below:

    ·  Common Carrier:  Many states offer some form of exemption for aircraft used for “commercial use” purposes.  In some states this exemption only applies to aircraft used in FAR Part 121 and 125 operations, while other states may allow this exemption for Part 135 operations as well.  See article on California Common Carrier Exemption.

    · Inter-state Commerce:  Many states offer what is commonly called an “inter-state commerce” exemption for aircraft that are predominately used in operations that are simultaneously “inter-state” and “commercial”.   A few states define “commercial use” to include ordinary business use.

    · Casual Sale:  Some states provide that a seller who is not a dealer and who only occasionally sells an aircraft may be exempt from the sales tax.  However, members should be aware that exemption from sales tax imposed upon the seller may not automatically extend to the use tax which may be imposed upon the buyer.

    ·  Related Party:  Some states provide exemptions for transfers of an aircraft within a controlled group of corporations or narrowly defined group of related parties occasioned by merger or reorganization.

    ·  Fly Away:  Many states provide an exemption from sales tax for aircraft purchasers who close an acquisition in the state when the closing is immediately followed by the removal of the aircraft from that state on the condition that the aircraft not return to the state in which it was purchased for a specified period of time.

    ·  Sale for Resale/Lease:  Most states provide an exemption for the sale of an aircraft to a dealer who will hold the aircraft as inventory or to a special purpose leasing entity.  In some states the leasing entity concept is used as a primary tax deferral strategy when outright exemption from the tax is not available.

 

Exemptions may be difficult to achieve.  Taxpayers should be extremely careful during the planning process should they decide to rely on any exemption as a strategy for avoiding tax.