AOPA fields a lot of questions from members regarding sales and use taxes related to aircraft. The questions always take on a special urgency when the tax collector calls and wants to know why these taxes haven't been paid. Sales and use taxes can take a hefty bite out of your flying budget, and in most cases, they can't be avoided. But they can be planned for.
This guide is intended to acquaint you with the basics of sales and use tax laws. Any such attempt is fraught with difficulties because the laws change periodically and can vary widely from state to state, so for the most part, our discussion must be rather general.
There are, however, some common threads that run throughout the various state laws.
Our hope is that you will gain an awareness of potential problems and prepare for them when you plan your next aircraft purchase, or if you move your aircraft to another state.
If you have an option where you may buy an aircraft and where you may then base it, a careful examination of the specific state's tax laws might save you some money.
We've used two approaches to present the basic information. First, we'll discuss the nature of sales and use taxes, how they are collected, and some of the more common exemptions to the taxes. In the second part of this section, we'll answer some frequently asked questions relating to sales and use taxes.
The classic definition of a sales tax is a tax imposed on the sale of tangible personal property within a state. Most of us are quite familiar with the concept of a sales tax. We pay sales taxes on our smallest purchases up to our big-ticket items like cars, boats - and yes, aircraft. So if you buy an aircraft in a state that imposes a sales tax--and the vast majority do--you will be subject to the tax unless you qualify for an exemption. If you take the aircraft to another state, you may be faced with a use tax.
A use tax typically applies to the use, storage, or consumption of tangible personal property in a state. The wording of the laws indicates that a use tax could be imposed on everything that you might bring into a state. Although you may have brought whole truckloads of personal property into a state when you moved from one to another, you probably didn't have to deal with a use tax. Because of the tremendous problems in trying to police the payment of the tax, states choose to focus their efforts on big-ticket items, and an aircraft certainly is considered big-ticket.
To illustrate how the use tax works, let's say you buy an aircraft in State A, which has no sales tax. So far, so good - you don't owe any tax. You then move your aircraft to State B where it will be kept at a local airport that you use as a home base. If State B has a use tax, you will be liable for that tax unless you qualify for an exemption.
The use tax has a similar impact when you purchase an aircraft in a state that has a low sales tax rate. If State A imposes a 3-percent sales tax, which you paid, you are not off the hook if State B has a 5-percent use tax. State B should [see Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)] credit you for the 3-percent tax you paid to State A and require you to pay the 2-percent difference between the tax rates.
As you can see, State B's use tax has the effect of negating the advantage of buying aircraft in a state with no sales tax or a low sales tax rate. In most states, the sales and use tax rates are the same, so your purchases of in-state and out-of-state goods will usually wind up taking the same tax bite.
Sometimes it isn't easy to determine whether your use of an aircraft in a particular state will trigger use tax liability. The law generally requires that your use of an aircraft creates a sufficient nexus or connection with the taxing state before use taxes can be imposed. In most cases, the state in which you base your aircraft is probably going to be able to assess you for a use tax. There is a case where the State of New York went so far as to try to impose use tax liability on an aircraft owner who was forced to make an emergency landing in that state. Thankfully, the state was unsuccessful in this attempt. It has also been ruled in several states that pilot training, routine maintenance, and warranty work will not trigger use tax liability. As a general rule, it is fair to say that, if your aircraft remains in a state for some extended period, the state may consider it part of your property in that state, and you may be subject to a use tax.
Once it is established that a sales or use tax is owed, the aircraft purchaser is normally responsible for payment of the tax. In some cases, a seller will be liable for collection of the sales tax, especially in cases where the seller is licensed to sell aircraft (i.e., an aircraft dealer). This does not, however, relieve the purchaser of the ultimate liability for sales or use taxes.
Usually the aircraft purchaser is responsible for obtaining the proper forms from the state in order to pay the appropriate sales or use tax. Often the tax is payable as of the date of the aircraft sale. Some states have requirements that the tax be submitted, along with proper documentation, within a specified number of days (typically 15 to 30 days) from the sale of an aircraft. Late payments are usually subject to interest and penalties.
How does a state track aircraft transactions? Some states require that you register your aircraft. This is an easy way for them to track the ownership of an aircraft. Other states regularly obtain information from the FAA regarding aircraft newly registered by residents. Sometimes it is as simple as sending a tax collector out on the airport ramp to record N numbers or review control tower log sheets, so they can later be cross-checked with state tax records. You should be aware that states have become more and more aggressive in collecting sales and use taxes on aircraft. Many state budget deficits are growing, and aircraft are an easy target for tax collectors.
As you can see, it is difficult to escape sales and use taxes; however, there are exemptions scattered throughout the states that might offer some relief in specific cases. Some states provide relief to aircraft owners by taxing aircraft at a lower than standard rate or by placing a limit or cap on how much the tax can be.
One limited exemption allows you to avoid the sales tax in the state where you purchased an aircraft if you take delivery of it out of state or intend to ship it out of the state within a specified time frame. This exemption is often referred to as a "fly-away" exemption.
However, as you recall, this exemption will not be helpful if you bring the aircraft into a state that has a use tax. Some states permit an exemption for "casual, isolated, or occasional sales." What constitutes a casual, isolated, or occasional sale is not always easy to determine and isn't the same in all states. Certainly, a sale by a person regularly engaged in the business of selling aircraft is not casual, isolated, or occasional. But a sale from a private owner who used the aircraft for his own business or pleasure would be considered casual, isolated, or occasional. There can be many factual variations, and each one must be looked at in the light of applicable state law. While the casual sales exemption seems attractive at first glance, a closer look shows that its usefulness has diminished over the years. For instance, some states that have a general exemption for casual, isolated, or occasional sales specifically exclude sales of aircraft. In other states, the exemption only applies to sales under $1,000 or some other low dollar amount. So before you jump to the conclusion that you are exempt because you purchased an aircraft through a private seller, you ought to check the applicable state laws very carefully.
Another exemption worth mentioning is what we will call the interstate commerce exemption. This exemption is specifically carved out in some states for aircraft, motor vehicles, railroad cars, etc., that are used principally in interstate or foreign commerce. So if you purchase an aircraft that you use regularly across state lines for business, this exemption might be applicable. This exemption applies regularly to situations where an aircraft will be used for commercial operations in a Part 135 or Part 121 operation.
If you are going to purchase your aircraft with the intention of leasing it to a flight school or FBO, you may qualify for a full exemption from sales tax. Many states consider leases to be "sales." That means that if you purchase your aircraft for the purpose of leasing it to others, you are purchasing the aircraft for the purpose of resale-a common exemption from sales tax. However, once you start collecting money for the leased aircraft, you will typically need to pay sales tax on the lease revenue received. Taking advantage of this exemption often requires pre-registration for a resale certificate or license and careful planning by tax professionals.
Now that we've gone over the basics, let's take a look at some specific questions we frequently get from members relating to sales and use taxes.