Sales and use tax is a critical (read: inevitable) component of any aircraft purchase. While you can’t do away with the tax liability, you can certainly plan and prepare for it.
Maria Sklar is licensed to practice law in Florida and New York. She is an instrument-rated commercial pilot. Maria assists our members with various aviation-related matters, including aircraft transactions and corporate law issues.
Now, what exactly are sales and use taxes? We’re all familiar with sales tax - it’s that percentage levied on the purchase of any good (like airplanes) at the point of sale. Use tax, on the other hand, is quite similar to sales tax; however, it isn’t necessarily collected at the point of sale, but rather where that good (or airplane) is put to use. At the end of the day, the difference is a mere technicality to an aircraft owner - it’s simply more money out of your pocket.
Sales and use tax is quite convoluted because it’s a state tax (as opposed to federal tax). In other words, every state has a different opinion on how, when, and why to charge taxes on the purchase and use of aircraft. On top of that, as you’ll see below, several states may claim sales and/or use tax in any single transaction. This is because an airplane is a moving target - it may be purchased in one state, inspected and delivered in another, and put to use thousands of miles away in yet a different state.
It’s generally a buyer’s responsibility to assess where sales and use tax may be levied and to make the appropriate payments in a timely fashion.
This article will provide a few “rules” that you can apply to your purchase. We (obviously) cannot cover every single contingency; however, I hope this will give you some tools to better analyze your tax exposure.
Rule #1: Location. Location. Location.
The very first step is to identify which state tax authorities (usually called a “Department of Revenue”) may have a claim to sales and/or use tax on the purchase of your airplane. Determine the following:
Rule #2: Climb, confess, comply
This rule is (almost, if you ignore the “climbing” portion) as applicable to airplanes as it is to the Department of Revenue. To that end, after identifying the states that may have a stake in your transaction, you must determine whether your deal is subject to sales and/or use tax in any of those jurisdictions. Feeling lost? You can always contact the tax authorities to speak with a revenue agent. Confess the details of your transaction and comply with their instructions.
For reference, AOPA maintains a point-of-contact list for all state tax authorities.
Rule #3: Determine the amount subject to tax and the applicable tax rate(s)
The amount subject to tax is usually the entire purchase price, which includes all payments whether made in cash, check, loan, trade-in allowances, services bartered, etc. Each state may define the “tax base” differently.
The applicable tax rate may depend on the specific county where the airplane will be based (or alternatively, where it is purchased or delivered). Most states charge a base tax and each county may impose an additional discretionary surcharge over that base. Most tax authorities publish applicable sales and use tax rates online (see Georgia, for example).
Rule #4: Don’t pay twice
You may be eligible for a tax credit if you made sales or use tax payments to another state for your aircraft. Always keep proper documentation and identify available credits.
Rule #5: Ask whether the seller is a “broker” or “dealer”
Some tax authorities require certain registered aircraft brokers or dealers to handle the sales and use tax aspect of any transaction. Florida is an example, where seller broker/dealers are responsible for collecting and remitting sales and use tax payments. Always find out whether the seller has any special tax duties and with respect to which state(s).
Rule #6: Determine whether you’re eligible for an exemption
This is perhaps the most daunting step because a misstep could cost you tens of thousands of dollars in assessed taxes and penalties...or save you just as much.
Usually, each state’s Department of Revenue will publish information on available tax exemptions (see California, for example). But proceed with caution - the current tax code, and that state’s interpretation of the same, is the final authority on all tax matters.
I hope you found this useful. If you have any specific questions, your AOPA Panel Attorneys are here to ensure a smooth closing.