AOPA in the States: The 5-percent solution

Moving from last to one of the first in tax treatment of aircraft owners

November 1, 2011

When Steve Kahn of Bedford, Massachusetts, received a letter from the Maine Revenue Service in May 2007, asking him to complete a use tax certificate and pay tax to Maine on the 2002 Cirrus SR22 he kept at Laurence G. Hanscom Field, he thought it was a mistake.

Letter Steve Kahn displays the letter he received from the Maine Revenue Service.

"It was out of the blue," Kahn recalled. "I wrote back, 'This is a mistake - I live in Massachusetts.' When they wrote me and said, 'It’s not a mistake' - that's when I knew I had a real problem." His concern was validated two months later, when he got a bill for $25,318.83—$17,313.06 in taxes, plus $8,005.77 in interest.

Maine’s use tax is the same rate as its sales tax. Aircraft owners who had paid less sales tax than Maine levies—even if they only spent a short time in Maine—were taxed as if they lived there.

Kahn called Jon Block, a tax attorney with Pierce Atwood LLC in Portland, Maine, who specializes in state and local tax issues. “I started seeing people coming to me about these assessments,” Block said. “Some of these assessments were fairly small; some were much larger. They were doing something similar with boats.”

With Kahn’s appeal of the tax bill unsuccessful, a lawsuit seemed the only remaining option. Block researched several arguments as to why the out-of-state owners shouldn’t have to pay the use tax, divided the clients he’d accumulated into two groups—a Maine Supreme Court case from the 1970s regarding leased equipment led to differentiation between leased and owned aircraft—and picked one from each group to pursue.

Kahn’s case was selected for trial from the owned-aircraft group. “He didn’t have a large bill. We had them in the hundreds of thousands,” Block explained. “But his case was a very good test case for his category. And he was very vocal. He had some factors that were sympathetic—he uses his aircraft to do Angel Flights in Maine.”

Going public, and going to court

Beginning January 1, 2007, the Maine legislature exempted from the use tax aircraft that had at least one turbine engine, weighed at least 6,000 pounds, or were on an FAA Part 135 certificate. It also added a rule to the law specifying that the use tax would apply if, during the first year of ownership, an aircraft was used more than 20 days in Maine. Kahn said the Maine Revenue Service retroactively applied the 20-day rule to his aircraft usage in 2002 and 2003—some four years earlier. “From their point of view, it was a money grab. I think they rationalized it by saying, ‘These are out-of-state people, and they’ll be able to pay’” the tax bills, Kahn said. “The interesting thing about this tax is that it was primarily effective when nobody knew about it.”

That’s why Kahn decided to make his fellow pilots aware of the potential liability and went public with his tax bill. “A lot of pilots, even if they weren’t affected by the tax, said, ‘I’m not flying to Maine.’ The number of pilots they were going to catch was rapidly going to zero.” Had he known about the tax, Kahn said, he would not have flown into Maine for the first year he owned the airplane—even though he and his wife had built a second home on property in Camden that his family had owned for years. “It’s a beautiful, 50-minute flight over the coastline, versus a three-and-a-half-hour drive in traffic. We only built this house because I was flying, and I knew we could fly up for the weekend.”

Kahn’s lost in Superior Court and appealed to the Maine Supreme Court. Because he changed his email address, he didn’t know the Supreme Court hearing had been scheduled, so Block’s phone call was unexpected. “He said, ‘Steve, you’re not going to believe this—you won your case.’ I was just as surprised to hear that as I was to get the tax bill.”

The court found that the wording of the statute before 2007 was “ambiguous,” Block explained. Kahn’s win ended up resolving some of the individual cases favorably. The other case was not successful, however, and other pilots had to pay the use tax—and the tax was still on the books.

AOPA seeks a solution

By this point AOPA had been working the issue for years. “It was an issue for us when I came to AOPA in 2006,” said Greg Pecoraro, vice president of airports and state advocacy. “We became aware of the issue because members were complaining to us about Maine’s tax policy.” The state was gathering IFR flight-plan information and using the data to track the time aircraft spent in Maine, explained Pecoraro, who talked with legislators as well as the governor’s office. “They told us the use tax was very hard to fix because of their budget process—they had booked the revenue.”

“It became incumbent on AOPA to notify our members not to bring your airplane to Maine if you haven’t owned it for at least a year,” said Mark Kimberling, AOPA director of state government affairs.

Pilots stopped flying to Maine and aviation tourism there slowed significantly. “We realized Maine was now cut off from the general aviation public.” It’s important to protect pilots’ freedom to fly, he added. “We want people to be able to fly what they want, where they want, when they want.” Telling people not to fly to Maine was not desirable. “That’s a troubling precedent to set, as well.”

Urged on by AOPA, state legislators passed a bill two years earlier, but it didn’t survive a fiscal reconciliation at the end of the session. “The bill died because it could not get over that last hurdle,” Pecoraro said. The fact that Maine has a biennial budget cycle—passing budgets for two years at a time—contributed to a lull.

The November 2010 election brought changes to the legislature. “With the new majority in Maine, we saw a new opportunity to renew this effort,” said Kimberling, who met with Senate President Kevin Raye (R-Perry). “Although this was a completely bipartisan effort, here was a new leader who wasn’t a pilot or an aviator, but he took to the issue immediately. It seemed to sincerely bother him. He was committed, and it made a real difference in this case.”

The legislative turnover also necessitated educational outreach. “A lot of the people we’d educated on the issue the last time were no longer there,” Pecoraro noted.

AOPA worked with Block, the tax attorney, to craft the language and Raye filed the bill at AOPA’s behest. “I took it on because I just felt that it was really a black mark on our state,” Raye said. “It was a misguided policy that frankly never should have been on the books in the first place. It always bothered me. We had to negotiate it as part of the overall tax package contained within the budget, but in the final analysis it had very strong support.”

Within weeks, AOPA had secured as cosponsors Democratic and Republican leaders in both the House and Senate.

Adding in the sales tax

Maine also had a sales tax on aircraft parts that increased the cost of ownership to pilots in the state—and placed the state’s shops at a competitive disadvantage to others in the region. “We were very familiar [with sales tax issues] because we had worked to resolve similar sales tax issues,” Kimberling said. Sales taxes had been successfully eliminated in other states, including several in the Northeast.

Kestrel Aircraft helped draw attention to the sales tax. The new company started talking seriously about locating in Maine in early 2010, said Alan Klapmeier, its chairman and CEO. He said Kestrel also made sure policymakers understood how the use tax looked from outside the state.

Taxes were “one impediment that had been identified—the fact that pilots were being penalized for coming to Maine,” said Steve Levesque, executive director of the Midcoast Regional Redevelopment Authority, overseeing development of the former naval air station in Brunswick where Kestrel has located. “It was a real hurdle for us on the business development side.”

The original bill addressed only the use tax, because it wasn’t clear if Maine’s revenues would allow the sales tax to be removed. Midway through the session, however, Raye realized the numbers would allow a complete solution, and a sales tax exemption was added. “Senator Raye saw an opportunity to do something for the entire aviation industry in Maine and decided to go for it,” Pecoraro said. A similar bill filed by Sen. Stan Gerzofsky (D-Brunswick), whose district includes the former naval air station, was combined with Raye’s.

The exemption also found support in the legislature. “The comprehensive sales tax policy was about putting people back to work. With the airplanes go economic activity,” Kimberling said. “There was a hearing on the issue where not only AOPA testified, but the businesses told the legislature directly how the use tax hurt Maine and how the sales tax exemption would really help Maine.”

“A successful legislative effort is like a recipe. You have to have all the right ingredients,” Pecoraro said. “This time in Maine, we had all the right ingredients.”

Having a champion within the legislature is critical to making something big happen, they noted—and it takes work to keep an issue in the spotlight. “During any legislative session, they’ve got so many issues tugging them in so many ways, if there’s not somebody like AOPA playing a role—talking to all of the people all of the time, keeping the issue on their radar—things do slip away,” Pecoraro said.

“In the legislative process, you have to follow everything through to the end,” Kimberling agreed.

AOPA Northeastern Regional Representative Craig Dotlo also was a key part of the long-term team effort in Maine. “He’d worked on the issues before and maintained good relationships with the stakeholders,” Kimberling said. “You can’t underestimate the value of those relationships. Our regional representatives are invaluable for that.”

Visible benefits

The use tax “was awful,” said Mark Goodwin, vice president of Northeast Air, an FBO and repair station at Portland International Jetport. “Unfortunately, it bordered on the abusive.”

And the sales tax on parts made it hard for shops to compete, Goodwin said—an owner could fly 60 miles south for a repair and save the 5-percent tax expense. “Maine has been the stay-away state for major projects for years. And now I really believe that we will be considered where we never were before.” Goodwin has more jobs on his schedule, and he’s adding two mechanics, one replacement and one new position.

The use tax had forced Maine Aviation—also based at Portland International Jetport—to move its charter certificate, and several aircraft, to New Hampshire. About a third of its business is aircraft management and charter, said Al Caruso, president and CEO. The owners of those aircraft “certainly didn’t want to get a tax bill because they chose to do business with us.” Its charter
certificate has since been moved back to Maine.

A Cessna dealer, Caruso saw customers snared by the use tax. “We had customers say they’d never do business with us again,” he said. Now, the company plans to build two new hangars in Portland by spring. “We’ve got two airplanes in here from Florida right now [for Garmin panel installations] that are probably here because of the tax law change,” Caruso said.

“We got this comprehensive tax package through, the governor signed it, and with the stroke of a pen Maine went from the least friendly state to one of the most friendly, as far as general aviation taxes go,” Kimberling said. “Raye said Maine is open for business again. That was important to us.”

There is a four-year sunset, or expiration, on the sales tax exemption—a common legislative procedure—that will have to be addressed, Pecoraro said. “States review these all the time. We’re always there to explain why [the exemption] is good for them. That’s what we do.”

Email the author at mike.collins@aopa.org.