REGIONAL SALES & USE TAX UPDATE (MID-WEST STATES 2009)
Category: Business Aircraft - Tax
Author: Christopher B. Younger
STATE SALES AND USE TAX FORUM
Regional update on the Mid-Western United States.
This month sees the third in our ongoing series of quarterly columns that describe recent changes to aviation related state sales and use taxes and, where pertinent, other aviation related tax issues in various regions of the United States. Each quarterly column will focus on a particular region of the United States - including the Northeastern, Southern, Mid-Western and Western States.
This time, we review any recent changes to state sales and use taxes in the states located in the mid-western region of the United States, namely Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, West Virginia and Wisconsin.
Without further ado, here’s a lowdown on state sales and use taxes within the individual states and any changes introduced, or due, within said state:
Illinois has a state sales tax (referred to in Illinois as Retailers Occupation Tax (ROT)) and use tax imposed at a rate of 6.25%, plus potential additional local taxes, which can amount to a combined total sales/use tax of up to 9.25% of the purchase price or value of an aircraft.
The 95th Illinois General Assembly enacted several aircraft related exemptions from its sales tax and use taxes effective August 22, 2007. The first of these exemptions is a “fly-away” exemption, under which an aircraft that is purchased in Illinois by a nonresident is exempt from the Illinois sales tax if the following conditions are met:
i) The aircraft leaves Illinois within 15 days after the later of the issuance of the final billing for the purchase or sale of the aircraft or the authorized approval for return to service, completion of the maintenance record entry, and completion of the test flight and ground test for inspection, as required by 14 C.F.R. 91.407, and;
ii) The aircraft is not based or registered in Illinois after the purchase or sale.
The purchaser must complete Illinois Department of Revenue Form RUT-60, Certification for Aircraft Exemption, and certify that the requirements for the exemption are met. Form RUT-60 must include the purchaser’s name and address, location where the aircraft will be titled or registered, and the primary physical location of the aircraft.
Another exemption enacted at the same time relates to aircraft pre-purchase evaluations. In such an event, an aircraft will not be subject to ROT (or use tax) if it is temporarily located in Illinois for a pre-purchase examination and the aircraft is not based or registered in Illinois after the conclusion of the pre-purchase evaluation. The aircraft purchaser must complete and file a Form RUT-60 and certify that the requirements for exemption are met.
Finally, another exemption that was simultaneously created relates to post sale customization of an aircraft in Illinois if it is temporarily located in Illinois for such post-sale customization and;
i) the aircraft leaves Illinois within 15 days after the authorized approval for return to service, completion of the maintenance record entry, and completion of the test flight and ground test for inspection, as required by 14 C.F.R. 91.407 and;
ii) it is not based or registered in Illinois before or after the post-sale customization.
Again, the owner of the aircraft must complete and file Form RUT-60, certifying that these requirements have been met.
The current Illinois legislature is considering a new tax on aircraft owners and operators that would impose a 5% ‘luxury’ tax on the purchase of aircraft valued at over $500,000. This tax would be in addition to the current Illinois state and local use taxes.
As of the date of this article, the proposed tax had not yet moved out of committee review. Illinois-based aircraft purchasers will need to follow this legislation closely and monitor its progress in the legislature carefully.
Indiana has a state sales and use tax imposed at a rate of 7%. In recent years, the Indiana Department of Revenue had aggressively challenged the use of leases between related parties to qualify for the state’s sale for re-sale exemption from its sales and use tax on the purchase of an aircraft.
These challenges have focused on many factors, the most important of which related to the use of less than fair market value lease rates for the lease of aircraft. Subsequently, the sales tax law was amended July 1, 2008 to state that a “transaction in which a person acquires an aircraft for rental or leasing in the ordinary course of the person's business (emphasis added) is not exempt from the state gross retail tax unless the person establishes, under guidelines adopted by the [Department of Revenue]…that the annual amount of the lease revenue derived from leasing the aircraft is equal to or greater than;
i) ten percent (10%) of the greater of the original cost or the book value of the aircraft, if the original cost of the aircraft was less than one million dollars ($1,000,000);
ii) or 7.5% of the greater of the original cost or the book value of the aircraft, if the original cost of the aircraft was at least one million dollars ($1,000,000).”
It remains to be seen how the Indiana DOR will view sale for re-sale structures that fit within the parameters established in the new law.
Effective July 1, 2007, an aircraft brought to Indiana to be repaired, remodeled, refurbished, remanufactured, or that was subject to a pre-purchase evaluation is exempt from Indiana use and/or aircraft excise tax.
A “repair station” is defined as a person who holds a repair station certificate issued by the FAA. However, the aircraft must be properly titled or registered in another state. The purchase of parts used to repair the aircraft is subject to Indiana sales tax.
Iowa has a sales and use tax imposed at a rate of 6% with an additional optional local sales tax only imposed at a rate of 1%-2%. Aircraft subject to registration in Iowa are typically subject to Iowa use tax rather than Iowa sales tax. In addition, the state imposes a registration fee on aircraft as follows:
• 1st year’s fee = 1% x manufacturer’s list price;
• 2nd year = 0.75% x manufacturer’s list price;
• 3rd year = 0.50% x manufacturer’s list price;
• 4th year and older = 0.25% x manufacturer’s list price. The minimum annual aircraft registration fee is $35 and the maximum fee is $5,000.
Kansas has a state sales and use tax imposed at a rate of 5.3%. In addition, Kansas counties, localities and transportation development districts may impose additional sales and use taxes at rates up to 3%.
The Kansas Department of Revenue has announced that the combined state and local sales and use tax rates in various cities, counties, and transportation development districts will increase effective April 1, 2009. Except with respect to these tax increases, there have been no recent material changes to Kansas’ sales and use tax laws with respect to aircraft and aviation related matters.
Michigan has a state sales and use tax at a rate of 6%. In a recent court case, the Michigan Court of Appeals held that a taxpayer's purchase of a partial interest in an aircraft was subject to Michigan use tax because it was to be treated as a purchase of tangible personal property rather than of services.
The tax applied even though the actual airplane purchased never entered Michigan because the taxpayer ‘used’ its fractional ownership interest in the airplane in Michigan for purposes of the use tax law.
Michigan is one of a number of states that is considering a tax amnesty that would allow delinquent taxpayers to pay sales and/or use taxes owed without interest or penalties for a 30-60 day period ending on or before September 30, 2009. The legislation approving such an amnesty is still under consideration and has not yet been voted on.
There have been no recent material changes to Minnesota’s sales and use tax laws with respect to aircraft and aviation related matters. Minnesota imposes a state-wide sales and use tax at a rate of 6.5%.
Missouri imposes a state-wide sales and use tax at a rate of 4.225% plus local county/city sales tax at rates up to 3.375%. Effective January 1, 2009, Missouri repealed its sales tax on aircraft repair parts.
There have been no recent material changes to Nebraska’s sales and use tax laws with respect to aircraft and aviation related matters. Nebraska imposes a statewide sales/use tax at a rate of 5.5%.
There have been no recent material changes to North Dakota sales and use tax laws with respect to aircraft and aviation related matters. North Dakota imposes a state-wide excise tax on the purchase price or market value of aircraft registered in North Dakota at a rate of 5%. If the aircraft is purchased for lease or rental, the tax may be imposed on the lease or rental cost of the aircraft.
Ohio imposes a statewide sales tax at a rate of 4.225% plus local county/city sales tax at rates between 0.25% and 3%. The Ohio General Assembly recently enacted a sales and use tax exemption for aircraft maintenance and repair transactions performed at an FAA Part 145 repair station. Furthermore, the law was amended, effective as of February 1, 2009, to delete the phrase “at a Federal Aviation Administration certified repair station.” The tax exemption applies to aircraft of more than 6,000 pounds maximum takeoff weight or used exclusively in general aviation operations. The exemption also includes the purchase of materials, machinery, parts, tools or engines used in the repair of aircraft or avionics as well as the sale of repair, remodeling, replacement or maintenance services regardless of whether or not these services are conducted at an FAA-certified Part 145 repair station.
The amendment makes it possible for mechanics working as independent contractors or not working at a Part 145 repair station, as well as mechanics working on their own aircraft, to qualify for the tax exemption.
There have been no recent material changes to Oklahoma sales and use tax laws with respect to aircraft and aviation related matters. Oklahoma imposes a statewide excise tax in lieu of sales tax on the purchase price or market value of aircraft registered in Oklahoma at a rate of 3.5%.
There have been no recent material changes to South Dakota sales and use tax laws with respect to aircraft and aviation related matters. South Dakota imposes a statewide registration tax in lieu of sales tax on the purchase price or market value of aircraft registered in South Dakota at a rate of 4%.
Likewise, there have been no recent material changes to West Virginia’s sales and use tax laws with respect to aircraft and aviation related matters. West Virginia imposes a statewide sales/use tax at a rate of 6%.
There have been no recent material changes to Wisconsin’s sales and use tax laws with respect to aircraft and aviation related matters. Wisconsin imposes a statewide sales tax at the rate of 5% plus local county/city sales tax at rates between 0.1% and 0.6%.
In the July 2009 issue of World Aircraft Sales Magazine, we will take a state-by-state look at the western United States, including: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Texas, Utah, Washington and Wyoming.
Christopher B. Younger is an attorney at Ober|Kaler, and a member of the firm’s Aviation Tax and Transactions group. He is a tax and FAA specialist concentrating in the areas of corporate aircraft transactions and aviation taxation. Ober|Kaler’s Aviation Tax and Transactions group provides full-service tax and regulatory planning and counseling services to corporate aircraft owners, operators and managers. The group’s services include Code Section 1031 taxfree exchanges, federal tax and regulatory planning, state sales and use tax planning, and preparation and negotiation of transactional documents commonly used in the business aviation industry, including aircraft purchase agreements, leases, joint-ownership and joint-use agreements, management and charter agreements, and fractional program documents.
Mr. Younger can be reached at the Baltimore office of Ober|Kaler located at 120 East Baltimore Street, Baltimore, Maryland 21202, telephone +1 (410) 685 1120, email: firstname.lastname@example.org