State and local taxes
By Jeff Wieland - December 1, 2008
Aircraft owners often take pleasure in contemplating federal aviation taxes. That’s because much federal tax planning in this area focuses on deductions and thus on taxes the aircraft owner might save. Comparable deductions are frequently available for state tax purposes, but when the spotlight shines on state tax it usually illuminates how much the owner must pay.
Here’s a look at the key state and local aviation and local taxes and some strategies for dealing with them:
Sales Tax
Sales tax is triggered by a transaction–the sale of an aircraft or aircraft parts, and in some states even labor performed on aircraft. The tax applies to gross receipts (the purchase price), but in most states you can reduce taxable basis by the price of a trade-in aircraft. Although it’s called “sales” tax, the buyer is generally responsible for paying it and the seller is responsible for collecting and remitting it to the state. A state’s ability to tax an aircraft sale relies on the presence of the aircraft in the state at the moment the transaction takes place.
When is that moment? Knowing when the transfer occurs is important for all sorts of reasons, not just sales tax, so an aircraft purchase agreement should specify how to determine when the transfer of title occurs. In my view, the logical moment to say it occurs is when the bill of sale is filed with the FAA Registry in Oklahoma City. The Registry will give you a filing time–say, 2:34 p.m. Central Time–so if the aircraft is in Iowa then, that state can charge sales tax, assuming no exemption applies.
The easiest way to avoid sales tax is to close when the aircraft is someplace where no tax applies. We’ve all heard stories about aircraft flying out over the ocean for a closing, but sales of aircraft that are to be U.S.-registered must close within the country. That’s because, until the aircraft is registered to the new owner–which will take at least a day or two–that owner lacks the authority to operate it outside the U.S.
Besides, an over-ocean closing for a U.S. aircraft is unnecessary. Several states (Alaska, Connecticut, Delaware, Massachusetts, Montana, New Hampshire, Oregon and Rhode Island) have basically no sales tax on business jet sales. I say “basically” because even in these states laws may have little quirks that result in tax on some aircraft transactions. In Alaska, for example, local sales taxes may apply, and Delaware has a little-known tax on leases. In addition, a few states have a minimal tax. South Carolina limits the tax to $300 and North Carolina caps it at $1,500. Again, you can take advantage of these low taxes by making sure your aircraft is in the state at the time of closing.
And that means all of it. Even if the airframe is in sales-tax-free New Hampshire at closing, if the engines are off-wing and being overhauled in a jurisdiction with a sales tax, there’s a potential for the state where the overhaul is taking place to charge sales tax on the value of the engines. That’s because title to the engines was transferred when they were in the overhaul state. Of course, you could just wait to close until the engines are back on the aircraft to avoid the tax, but if that’s not practical you may have to arrange a separate closing for the engines, which may involve moving them to a tax-free jurisdiction before their purchase is consummated.
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