Planning a Jet Delivery? 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...

Chris Kjelgaard  |  08th May 2024
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    Chris Kjelgaard
    Chris Kjelgaard

    Chris Kjelgaard has been an aviation journalist for more than 40 years and has written on multiple topics...

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    Aircraft Sales and Use Tax planning tips

    In 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, Daniel Cheung, Principal of aviation accountancy firm Aviation Tax Consultants highlights. “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 Legal Group.

    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 take-off 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?”

    Read the full article in the AvBuyer May digital edition for free, including 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.

    Click the link below to continue reading.

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