In short, sales tax is a tax imposed when the sale occurs in the state. A use tax occurs when sales tax is not paid in the state or when the aircraft is imported into a state. As the states become hyper-aggressive with relentlessly pursuing the tax from new aircraft owners, purchasers must be cognizant of potential sales and use tax considerations.
Purchasing an aircraft usually triggers a sales or use tax obligation no matter the cost of the aircraft. The same usually holds true for experimental aircraft. There may be instances where the aircraft purchase is exempt, but the burden to affirmatively prove the exemption is on the purchaser. The tax could be owed in the state of acquisition or the home state. If you are not careful, tax could be owed in both states! When purchasing an aircraft in one state and moving the aircraft to another state, many states will require the buyer to complete a form to be exempt from tax in the state of acquisition. The form usually asks where the aircraft will be stored. While somewhat benign, the question can prompt the state to forward the form to the state where the aircraft is to be stored. The “home” state can and often will pursue the aircraft owner for tax. It is something that is seen frequently.
There are a few ways mitigate the exposure. First, you may be able to pay the tax at purchase or directly to the home state. Doing so helps the new owner to avoid having to pay interest or penalties on the acquisition. Second, a leasing strategy might be appropriate to legally avoid sales tax on the acquisition but charge sales tax on the dry lease. While this situation is not for everyone, the result can be a huge sales or use tax savings for the buyer. The buyer would have to go through certain administrative steps before and after the purchase of the aircraft and be careful to follow specific procedures. If not carefully navigating the minefield, the whole thing could blow up.
If you find yourself having not planned in advance of the purchase and are now staring down the barrel of a tax audit from a state, there still could be hope! In certain circumstances, the state may have a provision that allows for an exemption from the sales or use tax ordinarily due on the aircraft purchase. A very detailed review of the purchase and state law would be required to reach a conclusion. Even if there are no provisions to get out of paying the tax, there are some instances where the auditor can be convinced to waive penalties. Interest, however, is almost never waived.
There might be an instance where you discover you owe sales or use tax on your aircraft purchase, did not pay it, and have not yet been contacted by the state. This can present a worrisome situation for an owner having to look over his/her shoulder until contacted. There are ways an owner can come forward, cut off their liability, pay the tax and interest, and have penalties reduced or eliminated. The key to such a solution is to ensure the state does not contact you before you have a chance to come clean. If the state does contact you first, then this option is off the table. Time is of the essence!
You might think a state will never find out about you for an audit. Unfortunately, this could not be farther from the truth. In addition to states sharing information with each other to extort aircraft owners, there are other ways the state can and will find out about the aircraft being in the state. One way is via the FAA Registry. States have individuals who will spend their days combing through the FAA Registry to see if there are any aircraft with an address listed in the state. If so, you can expect to receive an audit notice. Another way is getting a tip from a third party. There will sometimes be people at the end of a runway writing down tail numbers of aircraft. Moreover, sometimes individuals at the airport or elsewhere will note aircraft tail numbers. These individuals then turn in the tail numbers to the state taxing agency. The reason is simple – money. If the state taxing authority collects money from the aircraft owner, then the person who turned them in might get a cut of the proceeds. All of this will be, of course, at your expense!
In sum, the best time to account for sales or use tax considerations is before you acquire an aircraft. If you find yourself in a situation of owing sales or use tax but the state has not contacted you yet, you may be able still to get the matter cleaned up. Otherwise, the state will be all too happy to help you get the matter paid in full regardless of whether you are ready.
David J. Brennan, Jr., Esq., LL.M. (Tax), is a partner at Moffa, Sutton, and Donnini P.A., a Florida based law firm, which has a primary focus on state and local taxes nationwide. He was a senior attorney at the Florida Department of Revenue from 2014 to 2016 and has degrees in accounting and finance. David may be contacted at 850-250-3830 or [email protected]. You may read his full biography HERE.
The opinions expressed in this article are those of the author.
