Avoid Turbulent Tax Woes by Understanding Sales and Use Tax on Aircraft

Many aircraft purchasers do not consider the substantial state sales and use tax implications involved with the transaction, at least not before it’s too late.   If the airplane or helicopter is purchased outside of state, the state sales tax is often not charged.  However, upon bringing the aircraft home to the state, state sales tax is generally due thanks to specific sales and use tax laws around aircraft purchases.  Ignoring the state sales and use tax rules can often result in a collection letter from the state revenue agency for unpaid use tax on the aircraft.  

Surprisingly, each state is relatively efficient at catching aircraft owners looking to thwart sales and use tax. The state has access to the Federal Aviation Administration’s (“FAA”) Aircraft Registry, which lists all registered aircraft and provides a local address for the owner.  If state sales and use tax was not paid on the plane or helicopter, you will likely receive a notice from the state requesting sales and use tax.  More archaically, state revenue representatives will actually visit local airports and note the tail numbers of new resident aircraft, then issue notices to the owners that did not pay sales and use tax based on tail numbers.  

There are several planning techniques to avoid state sales and use tax on your winged companion.  For example, many owners opt to form a company and register for the state sales and use tax.  Along with registration comes the designation as a dealer.  As a dealer, the company can purchase the aircraft tax-free for resale or re-rental and only owe tax on the nominal rental charge to the owner and other users.  

Unfortunately, some states have mechanisms to prevent aircraft purchasers from engaging in state sales and use tax-saving techniques.  For example, in Ohio, a company was created and purchased a 2012 Socata TBM 700 for just under $3 million.  The single-engine turboprop aircraft was only dry-leased to its owner and done so at a mere $500 per hour.  Because the auditor did not believe the lease was at fair market value and the creation of the business did not meet Ohio’s definition, which requires that it be an activity for the object of gain, benefit, or advantage.  

Ultimately, the taxpayer appealed the assessment to the Ohio Board of Tax Appeals. Unlike most states, Ohio had a Supreme Court ruling on the books (Pi in the Sky 155  Ohio St 113) with virtually identical facts.  In the case, the court found that the plane was never marketed to anyone besides the member, the rental rate was not reasonable, and the plane was used primarily for personal reasons, the special purpose entity was not a “business” for Ohio sales and use tax purposes.  Based on the pi in the sky case, the Board of Tax Appeals ruled in favor of the agency.  

Despite most states lacking an unfavorable opinion like Ohio, the case serves as some guidance when forming a special purpose entity to avoid sales and use tax.  The Taxpayer could consider marketing the plane to others, making the rental amount commercially reasonable, and not using the plane solely for personal reasons.  Had this been followed, even in Ohio, a different outcome is possible. 

More importantly, if you are purchasing an aircraft, there are some sales and use tax planning opportunities for you.  If, however, you did not plan ahead, what can be done if the state sales and use tax is due on your previously purchased aircraft? 

If the state has not already contacted you or your client’s business, you are likely eligible for the state’s Voluntary Disclosure program.  By taking advantage of the Voluntary Disclosure Program, you can come forward and pay your past-due state sales and use tax and avoid costly penalties.  It can also provide critical peace of mind so the state sales and use tax doesn’t keep you awake at night.  It is crucial, however, that you file for the voluntary disclosure IMMEDIATELY.  If the state reaches out first, voluntary disclosures are generally off the table.

Some aircraft owners unexpectedly receive a state sales and use tax audit notice or even an assessment.  In this case, there are usually opportunities to fight the assessment by filing an appeal or protest.  Imperatively, the protest or appeal must be timely filed, and it is critical to have a state sales and use tax attorney or professional on your team.  

Like most industries, state sales and use tax rules on aircraft purchases can be incredibly complex.  Knowing and understanding the rules can save you by planning ahead.  However, if you did not consider sales and use tax implications before purchasing, you can strike first by filing a voluntary disclosure or challenge the state if you have already been assessed.  More importantly, having a sales tax team on your side can save you thousands of dollars.  Contact us today for a free consultation.  

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