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Minimizing
Sales Tax Exposure In Aircraft Acquisitions - An Ever More
Difficult Endeavor.
By:
Keith G. Swirsky
& Christopher B. Younger
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Galland, Kharasch, Greenberg, Fellman & Swirsky, P.C.
As we described in our series
of “Mission Possible” articles, which World Aircraft Sales
magazine published in its recent editions, one of the
primary considerations when structuring the acquisition of a
business aircraft is potential state sales and use tax
liabilities. Although most deliveries of new and used
aircraft occur in states with either no sales tax or an
applicable fly away exemption, resulting in no sales tax
being collected by the seller at closing time, the
subsequent hangaring of the aircraft in the purchaser’s home
state will cause a use tax to become due to such home state.
The use tax is equal to the sales tax as if the transaction
had actually closed in the home state. On a large cabin
class aircraft, this liability could in many cases exceed
$3,000,000. The good news is that, many times, if properly
structured, this liability can be avoided. The bad news is
that, very often, aircraft owners do not seek proper advice
from knowledgeable aviation tax professionals and
unknowingly have this liability. This article will help
identify good and bad planning considerations.
Many states, faced with
increasingly large budget shortfalls and decreasing sources of
new tax revenue, are more thoroughly and carefully scrutinizing
aircraft physically located in their state to determine if they
are owed a sales or use tax on such aircraft. Currently,
California will send out notification to all aircraft owners
requiring supporting documentation for any claimed exemption. In
Indiana, it is now routine for the state to issue to the owner a
proposed tax assessment, despite the fact that such owner has
correctly followed Indiana’s procedure for establishing an
exemption from its sales and use tax on the basis of using a
“sale for resale” structure.
Based on recently issued Indiana
Department of Revenue rulings on the issue, it appears that
aircraft dry leases between related parties will always be
treated as “sham” transactions to which the sale for resale
exemption from Indiana sales and use tax is now almost
automatically denied. Indiana, like all states, looks for
evidence of an “arm’slength” transaction between the lessor and
the lessee. In related party transactions, where a special
purpose entity has been created to own the aircraft, and lease
it to the related operating companies, good planning techniques
would include such things as having a written executed lease
agreement (with all blanks filled in), having a “fair market
value” rent reflected in the lease, and actually having the
lessee pay the rent to the lessor, even though both companies
are owned by the same person.
There is now a growing trend all
across the country for states to make compliance with these
strategies administratively difficult, overly time consuming,
and confusing. States often insist that, to qualify for a
particular exemption from sales or use tax, a taxpayer must
follow precisely each intricate step involved in such compliance
in exactly a particular order. For example, in Florida and New
York, this may involve having certain items, such as dry leases
or retail sales registrations, in place prior to the acquisition
of the property in question. It may also involve a requirement
by the state that applicable sales tax exemption forms be filed
within a certain time period prior to or following the
acquisition or in a certain specific number or with numerous
agencies within the state bureaucracy. In many instances, it is
impossible or nearly impossible to know what a state requires
without having previously encountered and engaged in the process
designed by those states.
Setting up an internal dry lease
between related parties (i.e. a sale for resale transaction) is
now a very common planning technique. However, there are
numerous “gotchas.” For example, in Florida, the state law
provides that sales tax is calculated in the rental payment
amount, and cannot be “included” in the rental payment. In New
Jersey, as in many other states, sales tax is calculated on an
“accelerated” basis, meaning that the tax is due at the time of
lease signing and is calculated on all the rent that will accrue
during the lease term. Other states distinguish whether
liability accrues under a lease on the basis of whether the
closing occurred inside or outside of their state borders.
Naturally, all of this reinforces
the need for thorough tax planning prior to the purchase of an
aircraft. A purchaser of a business aircraft should consult well
known experts in the area of aviation sales and use tax
planning; not the purchaser’s local CPA or tax attorney, but
instead someone who regularly handles aircraft transactions.
Avoid cavalier planning, planning that is not based on a
specific statutory exemption or procedural structure or planning
that is based on something done on your prior aircraft purchase,
as laws often change. Most importantly, avoid planning based on
“cocktail party” talk where you hear that “everyone is doing it
this way or that way.”
Having planned sales and use tax
strategies for thousands of these transactions, the team of
business aviation attorneys at Galland, Kharasch, Greenberg,
Fellman & Swirsky are fully versed in the intricacies of state
sales and use tax planning. The result is a properly planned and
implemented strategy that is devised to reduce or eliminate
sales and use tax exposure within a particular state to the
fullest extent possible within the context of the state’s law.
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