State Rules Aircraft sales and use taxes

If you're thinking about buying (or selling) an aircraft, take some time to learn a little about your state's sales and use tax system. The state sales and use tax system is complicated because each state has its own way of doing things. And when it comes to aircraft, matters can get particularly sticky because of an airplane's inherent mobility.

A number of questions arise upon the prospective sale of an aircraft. Which state's tax applies to the sale? The state where the aircraft is purchased or the state of ultimate destination (where the aircraft will be based)? Or is it the state of residence of the seller, or of the buyer? What if the aircraft will have a long post-purchase stopover in some other state for extended maintenance? If the aircraft is not purchased, but is leased, does a lease tax apply? Are aircraft maintenance, labor, and parts state taxable?

Even the intended use of the aircraft can affect the tax applicability, because it seems that for every sales and use tax out there, there's also a complex exemption, such as a "fly away provision," that may apply. Some states (Delaware, Montana, New Hampshire, and Oregon) don't impose a sales tax. But this doesn't necessarily mean that buying an aircraft in those states will result in a no-tax transaction.

Generally, in brokered aircraft transactions, the broker is familiar enough with the system to apply the proper sales or use tax and see that it is collected from the appropriate party. However, that's not always the case. Some transactions may have added layers of complexity such as intended commercial use of the aircraft, a sale-lease back transaction, or maintenance requirements, that even the most experienced broker is ill-equipped to handle.

Private party sales transactions are also fraught with potential problems because the parties may not even think about the fact that someone may be responsible for a sales or use tax. After all, they don't sell airplanes for a living, why should they know all the rules? Worse yet, some well-intentioned individuals may end up paying a tax they don't owe. You can't depend on a state department of revenue to monitor these transactions for overpayment of taxes.

To learn a little about the sales and use tax system, we need to define a few terms first. A sales tax is a one-time tax imposed by a state or local revenue-collecting body on the sale of tangible personal property. A use tax is the "opposite" of a sales tax and is a tax imposed on the "use" of the personal property in the state imposing the tax.

When a sales tax is imposed, there won't be a use tax, and vice versa. The two are mutually exclusive and act as a "safety net" so the state can catch all potentially taxable transactions. In other words, if a sale of an airplane in a particular state, and under a particular set of circumstances would not trigger the state's sales tax, it could trigger the use tax.

Because the nationwide sales and use tax system is complex, a complete overview is not possible in these pages, but we can discuss some important questions to ask when buying or selling an aircraft.

Where does the actual "sale" take place?

Another way to ask this question is "Where will delivery of the aircraft take place?" because it's not always the state where the paperwork is signed that is the state of "sale." Usually, where the purchaser takes delivery or possession of the aircraft is considered to be the place of "sale." And, the place of delivery is often negotiable between buyer and seller, which can provide an opportunity for some tax planning.

Study the tax regulations of the state of delivery to learn if a tax applies or an exemption exists. Approximately one-third of the states, e.g. Connecticut and Illinois, have "fly-away" exemptions that may help you avoid a sales tax. In other words, the sale will not trigger a state sales tax if the buyer flies the aircraft away to another state. These exemptions differ substantially from state to state, so be sure to check the applicability for your state of intended delivery.

Where will the aircraft be ultimately based and/or used?

Some states, potentially the buyer's home state, tax a sales transaction based on use of the aircraft in that state (the "use" tax). Exemptions to this tax can also apply in this situation depending on such things as commercial use of the aircraft, length of stay in the state, purchaser's residency, etc. This can be important to individuals who live close to the border of their state and choose to hangar and base the aircraft in the neighboring state. Some very clever tax planning and a little research may help a buyer reduce or avoid a tax altogether here.

What value is taxed?

If you ultimately get stuck paying a sales or use tax, be sure to determine precisely how much tax to pay. Is the tax based on the aircraft's value, sales price, cost plus improvements, etc.? Most states allow a reduction to the taxable cost of the aircraft equal to the value of a trade-in, if any, so don't short change yourself if you have a trade-in..

Maintenance issues.

Although it's not necessarily related to the sale of an aircraft, maintenance can be a taxable event in some states, but numerous exemptions also exist. Some states exempt parts, some exempt labor, and some exempt all maintenance. Some states apply the tax to maintenance and parts only if the aircraft weighs less than 12,500 pounds, some if it weighs more. Some states don't tax maintenance on out-of-state aircraft. Most repair shops are familiar with the rules because they deal with them every day. It pays to ask questions first.

Aircraft leases.

Lease taxes have surprised many aircraft owners. The theory behind the tax on a lease transaction is that many states view a lease as a continuous sale. No two lease tax statutes are the same, and exemptions also abound.

Some states only tax leases of air carrier aircraft, and some states apply the tax to everything but air carrier aircraft. Many states apply the tax or exempt the transaction based on aircraft weight, and some only tax the lease if a flight crew is provided. Some states look at the length of the lease term as well. Lease taxes apply in some way or another in almost every state, but many people choose to ignore the tax until the department of revenue says otherwise.

It's hard to believe that sales taxes can be so complicated, but not when you realize that each state and/or locality creates and manages its tax systems. With 50 states there are 50 different sets of rules, all with their own special applications.

For example, some states periodically check the FAA aircraft registry in Oklahoma City for aircraft sales between in-state buyers and sellers to see if a taxable transaction has occurred. In Colorado, for example, it takes about six months from the date of sale for the Department of Revenue letter to arrive notifying the parties that a tax should have been paid.

Because the system is so complex, national aviation organizations such as the Aircraft Owners and Pilots Association are ready to help you sort out the rules. Many state taxing authorities have departments that handle aviation matters only, and they can also be a source of information.

You can also visit your local library for resource material if you are contemplating a complex transaction, but otherwise, an aircraft broker may be able to answer some questions about your particular state. At any rate, a little planning might help save a lot of tax.