REGIONAL STATE SALES & USE TAX FORUM (VOL 2.3)
Category: Business Aircraft - Tax
Author: Christopher Younger
State Sales And Use Tax Forum
Regional update on the Mid-Western United States.
This column is the third installment in the second annual series of quarterly columns describing recent changes to aviation-related state sales and use tax issues and, where pertinent, other aviation related tax issues in various regions of the United States. As was the case with the last series of quarterly columns, each column will focus on a particular region of the United States – namely the Northeastern, Southeastern, Mid-Western and Western States.
In this column, 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.
Faced with severe budget shortfalls, states are raising sales and use tax rates, eliminating or narrowing sales and use tax exemptions and ramping up their efforts to collect sales and use taxes from taxpayers. Therefore, it is more important than ever, when considering the purchase of an aircraft, to be aware of the sales and use tax ramifications of that acquisition. 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’) 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. Illinois has enacted a new law, effective as of January 1, 2010, exempting parts used in aircraft repair from Illinois state sales and use tax. The new exemption applies to materials, parts, equipment, components and furnishings utilized in the modification, refurbishment or repair of an aircraft. The exemption does not include materials used to repair aircraft engines.
Only repair stations authorized under FAR Part 145 are eligible for the exemption for their purchases of such items on behalf of aircraft owners.
Indiana has a state sales and use tax imposed at a rate of 7%. As we stated in the prior series of this column last year, the Indiana Department of Revenue had aggressively challenged the use of leases between related parties to qualify for the state’s sale for resale 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 is related to the use of less than fair market value lease rates for the lease of aircraft.
In last year’s column, we described an amendment to Indiana sales tax law relating to the requirements to qualify an aircraft rental or leasing structure as an exempt sale for resale. Since then, the law has been further amended, effective July 1, 2009 but applicable as of January 1, 2008. Under the newly amended provisions, as described by the Indiana DOR in Information Bulletin #76, “an exemption will be granted on the purchase of an aircraft if the annual revenue derived from renting or leasing the aircraft is equal to, or greater than 7.5% of the net acquisition price for the aircraft or the book value of the aircraft as published in the Vref Aircraft Value Reference (VAVR) guide for the aircraft.
“If an aircraft is acquired below the VAVR guide book value, the person may appeal to the Indiana Department of Revenue (the Department) for a lower lease or rental threshold equal to the actual acquisition price paid if the person demonstrates that the transaction was completed in a commercially reasonable manner, based on the aircraft's age, condition and equipment.”
A recently issued Indiana DOR Letter of Findings gives us a view as to how the DOR will review sale for resale structures in the context of this new law. In Letter of Findings 09-0005, the Indiana DOR found that a taxpayer was not entitled to an exemption from Indiana use tax on its purchase of an aircraft because it was not occupationally engaged in renting the aircraft in the regular course of its business.
The DOR found further that, pursuant to applicable law (subsequently amended as described above), the taxpayer's annual rental revenue needed to amount to at least 10% of the purchase price of the aircraft. The taxpayer’s annual rental revenues fell short of this threshold.
The DOR’s findings were based on the application of Indiana law to the specific facts of the taxpayer’s case. Based on the findings of the DOR in this LOF, taxpayers in Indiana must be diligent in confirming that the facts of their case are in strict compliance with the requirements of any applicable exemption from sales and use tax on which they are relying.
There have been no recent material changes to Iowa’s sales and use tax laws with respect to aircraft and aviation related matters. Aircraft subject to registration in Iowa are typically subject to Iowa use tax rather than Iowa sales tax. Iowa has a sales and use tax imposed at a rate of 6% with an additional optional local sales tax imposed at a rate of 1%-2%.
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.
There have been no recent material changes to Kansas’ sales and use tax laws with respect to aircraft and aviation related matters. 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 generally impose additional sales and use taxes at rates up to 3%.
Michigan has a state sales and use tax at a rate of 6%. Effective June 23, 2009, the state enacted an exemption from sales tax for sales of new aircraft that took place after June 11, 2009 that are temporarily located in Michigan for the purpose of sale and pre-purchase evaluation, customization, or repair. The aircraft must leave Michigan within 15 days after the sale and the completion of the pre-purchase evaluation, customization, maintenance, improvement, or repair related to the sale, whichever occurs later.
Also, the aircraft must not be registered or based in Michigan prior to, or after the sale and any pre-purchase evaluation or customization related to the sale.
Effective July 1, 2009, Minnesota increased the rate of its statewide sales and use tax to 6.875% with potential local sales and use taxes of up to 1%.
With respect to leases entered into before July 1, 2009, the new tax rate applies to lease payments due on, or after that date if the entire amount of sales tax on the aggregate lease payments was not due at the inception of the lease.
There have been no recent material changes to Missouri’s sales and use tax laws with respect to aircraft and aviation related matters. Missouri imposes a statewide sales and use tax at a rate of 4.225%, plus local county/ city sales tax at rates up to 3.375%.
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%, plus local sales/use tax at rates up to 1.5%.
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 statewide 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.
There have been no recent material changes to North Dakota sales and use tax laws with respect to aircraft and aviation related matters. Ohio imposes a statewide sales tax at a rate of 5.5%, plus local county/city/transit authority sales taxes imposed at combined rates of up to 2.5%.
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 3.25%.
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 excise tax in lieu of sales tax on the purchase price or market value of aircraft registered in South Dakota at a rate of 4% in addition to aircraft registration fees that vary depending on the type of aircraft being registered and its MTOW.
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 2010 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 Younger is an attorney at the Law Offices of Christopher B. Younger, LLC. He is a tax and FAA specialist concentrating in the areas of corporate aircraft transactions and aviation taxation. He has extensive experience in planning and implementing unique aircraft ownership and operating structures on a global level. He has worked on numerous tax audits with the IRS and with various state taxing authorities. The firm’s services include Code Section 1031 tax-free 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 firm’s offices at 47 East All Saints Street, Frederick, Maryland 21701; telephone (301) 696 5735; email: email@example.com