The conversation typically revolves around how to lessen the taxes or avoid them altogether. And one idea we sometimes hear is registering the aircraft in a state other than the one the aircraft will be based in. For instance, although the aircraft will be kept in Nebraska, a member will create a Delaware LLC and register it in that company’s name. This, the member believes, will prevent any state from assessing a sales or use tax.
This, however, is rarely the case. Most states, in drafting their sales and use tax statutes and regulations, have developed their own series of exemptions to these common taxes. And the residency of the potential taxpayer rarely, if ever, figures into the application of an exemption. Rather, exemptions are more often tied to how the property is used. In short, registering an aircraft in another state is unlikely to result in any sales or use tax savings. And doing so may create unnecessary expense and complications.
To explain why this is, let’s start with some background. Sales and use taxes are imposed by almost all states. Sales taxes are generally imposed by the state in which a transaction takes place. A use tax, on the other hand, is a tax on the privilege of using, storing, or otherwise consuming tangible personal property or services within a state. If a state is not able to impose a sales tax because the sale occurred outside of the state, the state may still impose a use tax on the property when it is brought into the state.
Use taxes exist to protect state revenue streams and in-state merchants. If state residents could avoid taxes and obtain cheaper goods or services by crossing state lines, then states would lose revenue and in-state merchants would be unable to fairly compete. Use taxes are an effort by the state to level the playing field and protect its coffers. It discourages residents from attempting to purchase goods and services that may not be subject to sales tax outside the state by nevertheless imposing a tax when the goods are brought back in. A use tax aims to eliminate the incentive that an out-of-state sale not subject to sales tax might create.
Each state has established a unique regime governing sales and use taxes and exemptions to those taxes. Perhaps the most common exemption for sales taxes on aircraft is the “flyaway exemption,” exempting an aircraft transaction from the sales tax if the aircraft leaves the state within a certain period. Use taxes have a different set of exemptions and many are tied to how the aircraft will be used within the state.
But if the property is used or stored in one state, registering an aircraft in another state is not going to bring it within any use tax exemption. Indeed, the residency of the taxpayer is generally irrelevant to the imposition of a sales or use tax. For instance, a Nebraska resident is not exempt from paying a Missouri sales tax when he or she visits Missouri because he or she is not a Missouri resident. Nor would a Nebraska resident be exempt from a use tax on property he or she stored in the state simply because he or she is a non-resident of Missouri.
True, some people who register aircraft in other states may be successful in evading use tax. But the tax is still legally owed—those evading the tax simply have not been caught yet. Most likely, those state taxing authorities simply do not realize there is a taxable use of the aircraft within the state. But beware, some states are more aggressive in determining whether there is a taxable use within the state. In fact, some state taxing authorities send representatives to airports to copy tail numbers to determine whether the presence of the aircraft is taxable. Others may use ADS-B data to monitor aircraft activity.
Tax evasion is not without risk. If the state revenue departments catch on, you will owe the taxes. And you may owe interest and penalties on top of the tax.
And whether you are really saving money is another question. To register and maintain a limited liability company or corporation, you must pay fees to a state secretary of state. In addition, an out-of-state business entity usually must register with a secretary of state to do business in the state, which may require an additional fee to that state. And you are likely hiring expensive lawyers to help you do this. In sum, if you pay $200 to set up an LLC and pay an annual assessment to several states every year after, any tax savings due to the evasion could be eaten up in administrative costs over time.
Maintaining an LLC may create other problems. For instance, if the LLC is not in good standing, it may void any insurance coverage the LLC would otherwise be entitled to. And last but certainly not least, an LLC operating an aircraft could fall within the flight department trap and require an operating certificate.
In short, whether to place an aircraft in an LLC is a decision to discuss with a lawyer and an accountant. There may be valid reasons for doing so. Generally speaking though, avoiding a state’s sales or use tax is not going to be one of them. And putting an aircraft into an LLC creates several administrative tasks that, over time, may render any perceived tax savings illusory.
