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Under
Section 1031
© 1999 KEITH G.
SWIRSKY
Besides
the many issues discussed above relating to the federal tax
treatment of like-kind exchanges, such transactions also
merit consideration from the perspective of state tax
issues. The most prominent of these is state sales and use
tax. In the case of aircraft, all but six states impose such
a tax, with rates ranging from 2% to more than 8% (inclusive
of local taxes).
Generally,
property that is sold in a state and used there by the
purchaser will be subject to sales tax, while property that
is sold in one state for use in a second state will be
subject to use tax in the latter state, and may be subject
to sales tax in the former state. Within a single state,
however, the sales tax and use tax are virtually identical
in every respect except name. Many states provide a variety
of exemptions from sales and use tax; a common exemption in
most states is one for aircraft that is used by a licensed
air carrier which transports persons for hire in interstate
commerce.
Another
useful exemption, and one that could apply to most like-kind
exchanges is the trade-in exemption. The trade-in exemption
reduces the amount of tax imposed on a transaction, as
follows: State sales and use tax is generally computed as a
percentage of the purchase price of the property.
However,
where trade-in property is paid as part of the purchase
price, the value of such trade-in property is deducted from
the purchase price. As a result, in a like-kind exchange,
the sales and use tax would generally be imposed only on an
amount representing the difference in value between the
relinquished property and the replacement property.
Unfortunately, this favorable exemption may not always be
available in an exchange involving a qualified intermediary.
Some states have indicated that they would grant a trade-in
exemption to such an exchange, while other states have
determined that they would deny a trade-in exemption in a
transaction involving a qualified intermediary. See,
Hutton v. Johnson, 1997 Tenn. LEXIS 569 (Filed Nov. 17,
1997).
There
are some other exemptions from state sales and use taxes
that may be available for transfers of aircraft depending on
the facts and circumstances of the particular transaction
and the jurisdictions in which the transfer occurs and the
aircraft is utilized. State tax planning, however, will have
to be reconciled with federal tax and regulatory planning.
In short, in some jurisdictions, a taxpayer engaging in a
like-kind exchange may be forced to choose between
benefiting from a state tax exemption and achieving the
certainty of federal tax relief under Section 1031.
Fortunately, taxpayers do possess certain planning tools,
such as single member LLCs and deferred exchanges, to
address some of their concerns.
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