Sales Tax and Aircraft: Intangible Benefits

The owner normally pays sales tax at the time the aircraft is purchased. By having the aircraft purchased by an LLC, the owner is setting up the next sale of the aircraft—technically the sale of the LLC—to potentially not be subject to sales tax. (Placing the aircraft in other types of legal entities, such as a corporation, produces the same results.)

Here’s how the sales tax benefits work. States normally tax tangible personal property, which are generally things that are perceptible to the senses. Typically, tangible personal property can encompass the sale of sofas, cars—and, of course, aircraft. However, membership interests in LLCs are considered to be an “intangible” asset. The sale of the membership interest in an LLC generally is not taxable.

Usually, these intangible assets do not fit within the definition of tangible personal property, although certain types of intangibles can be taxable. When selling an LLC membership, the LLC membership is the sale of a nontaxable asset because it is only the membership interest being sold. The aircraft ownership is not changing hands; the LLC owns the aircraft before, during, and after the sale of the LLC. The aircraft registration will show the LLC as the owner of the aircraft no matter who owns the LLC. Only the owner of the LLC changes.

When selling an LLC membership, the membership is the sale of a nontaxable asset because it is only the membership interest being sold.But why should this be considered a planning opportunity? When a purchaser is considering aircraft sold by two different sellers, the prospective buyer will look carefully at the two options. If the aircraft are identical, another consideration involves sales tax. Suppose seller A has an LLC owning the aircraft and is offering to sell the LLC membership interest. Seller B is selling the exact same aircraft at the exact same price, but the aircraft is in seller B’s name. The purchaser would most likely choose seller A. If a purchaser can save thousands of dollars in sales tax simply by purchasing the LLC membership interest, and all other aspects are equal, why not save the money?

Thus, if your aircraft is in an LLC, you have a strategic advantage over other sellers in terms of selling the aircraft. But if you are looking to place the aircraft in an LLC after you’ve already purchased it, then you have to be careful. Placing the aircraft in the LLC after purchase (and not directly at purchase) can trigger another taxable transaction. In other words, you could end up having to pay sales tax on the aircraft—again.

David Brennan is an attorney at Moffa, Sutton, and Donnini, P.A. Contact Brennan by email at [email protected] or telephone 850-250-3830.