In addition to being concerned with the prospect of the federal government levying excise taxes on aircraft-management companies, jet owners also need to be aware of states’ increased efforts to collect use taxes, which apply to the use, consumption, or storage of products in a state when a sales tax has not been paid on that product. Use taxes are the same rate as sales taxes. Aircraft owners who hangar their aircraft in one state but fly in and out of another state on a frequent basis could be subject to that state’s use tax. Or they could be subject to a use tax if they have not paid any sales tax in the state where the aircraft is hangared. Many aircraft owners are shocked when they learn that they may owe a state use tax, says Keith Swirsky, president of the Business Aviation Group and Tax Group at GKG Law.
States are doing everything they can to audit aircraft purchases and deny the benefits of properly prepared [acquisition] structures. The myth out there is that you create a company to purchase the plane and then take delivery of that plane in a state without a sales tax, and you’re done. This is all a myth.
You can take delivery in a state without a sales tax, but once you move the plane to another state, that state will try to impose a use tax. The use tax is due where you hangar and maintain an aircraft or where you fly into on a regular basis.
States were more laissez-faire about collecting use taxes on aircraft, but in response to declining tax revenues, now they’re trying to find the planes and enforce the laws.
Acquisitions commonly involve leasing structures in which the client creates an entity that buys the plane in a sales-tax-free state and then leases it to the client’s business or to the client. The client pays tax on the lease payments. It can be an aggressive structure, in which the rent is low, or conservative, with a high rent. This way, the customer avoids paying a tax on the front end of the purchase. The average ownership is three to five years, so often the aircraft is disposed of before the full tax is paid. Once you dispose of the plane, you no longer have an obligation to pay the tax.
But a lot of aircraft owners haven’t paid any tax to anyone. There was no sales tax when the plane was delivered, and they’re not sending any money to the state where the plane is hangared because they have a valid exemption or because they have their head in the sand. But if you start using that plane in another state and you haven’t paid a tax to anyone, that state is going to say you clearly owe it a tax. States are trying to harmonize with each other so that someone is getting the money.
You want to be able to prove that you paid a tax to someone. If you’re paying some sales tax, you have a better chance of seeing a credit against those payments.