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State Sales And Use Tax Dilemmas
Most states in North America impose a Sales & Use Tax based on a percentage of the purchase price of an aircraft. The exact amount depends on the state in which the aircraft will be based. Keith Swirsky and Chris Younger consider some of the Sales & Use Tax planning dilemmas facing an aircraft purchaser.

Let’s assume the Board of Directors has authorized the purchase of a corporate aircraft- and the company’s CEO has asked the Chief Financial Officer to kick off planning for the aircraft’s purchase.

The company has offices in Minnesota- California and New York. The CEO has a vacation home in Florida- and it is likely that the aircraft will spend significant amounts of time in each of these four locations. One of the first questions that arises in the acquisition process is where the aircraft will be based for sales tax purposes.

This is a common scenario that must be analyzed in connection with the purchase of a business aircraft. Most states impose sales taxes ranging from two to just over ten percent of an aircraft’s purchase price. For an aircraft with a $20 Million value- the potential sales tax liability is substantial.

Because aircraft are by their nature mobile assets- it is possible for two or more states to impose sales and use taxes on the vehicle. Also- the sales or use tax liability can arise several years after the purchase.

Concurrent with the purchase of the aircraft- a viable exemption structure could be created- but two years later the Board of Directors could determine to move the company’s headquarters or simply to move the aircraft’s base of operation. Either way- these scenarios may result in a new use tax liability related to the corporate aircraft.

Depending on the specific state law- credits for taxes paid to another state are not always available. For instance- the state where taxes were previously paid and any other relevant states may not be equal credit states. Or- if a leasing structure was created to defer the upfront sales tax liability- whereby tax is then collected on the rental stream- another state (even though it is an equal credit state) may not provide a credit for taxes paid on leases.

The determination of whether a state has the ability to tax an aircraft often involves a complex analysis based - in part - on whether that aircraft has a sufficient connection (referred to in legal parlance as “nexus”) with a particular state. Thus- where a state lacks the requisite nexus- it may not impose its sales and use tax on an aircraft.

On the other hand- if sufficient nexus exists- a state can impose the full amount of its sales and use tax on an aircraft unless an exemption applies. The legal standard for making such a determination is subjective- is based on constitutional and other legal principles that are not very clearly defined- and hinges on the specific facts of each individual situation.

States have differing standards for determining whether sufficient nexus exists for that state to tax an aircraft. In some states- the determination is fairly straightforward and turns on the number of days during the year or in a testing period the aircraft is located in that state. (For example- in Iowa- an aircraft that is located in the state for 30 days or more in any year is required to be registered with the Iowa Office of Aviation. That registration triggers an obligation to pay Iowa use tax on the aircraft.)

Unfortunately- in most states such as New York and California- the standard is not so straightforward. In our above scenario- the company considering buying an aircraft has offices in Minnesota- New York and California- and the company’s CEO owns property in Florida. Determining whether any or all of these states (or any surrounding states into which the jet is flown) will tax the aircraft’s purchase or use involves an analysis of the facts and the law- with the objective to create an ownership and operating structure that will meet the requirements of all of the states where nexus is likely.

Potential multi-state sales and use tax liability is a dilemma that is faced by nearly every aircraft purchaser. Only with careful and thoughtful planning in advance of the aircraft purchase can a company minimize or eliminate liability in such situations.

Such risks- which can be substantial- are best addressed with the assistance of a knowledgeable and reputable aviation tax advisor.

Do you have any questions or opinions on the above topic? Get it answered/published in World Aircraft Sales Magazine. Email feedback to: Jack@avbuyer.com


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