Flying Away from State Sales Taxes
On airplane purchases, these charges can total millions of dollars, but you might be able to legally avoid them by simply climbing aboard your new jet and taking off.
Sales taxes offer an easy way for states to raise revenue, and business jets are a favorite target. In some places, state and local sales taxes approach 10 percent, so the levy on a $40 million aircraft purchase can be almost $4 million. That’s a number sure to command the attention of both state revenue authorities and airplane buyers.
(Strictly speaking, states have no ability to charge sales tax on purchases that occur outside their borders. Instead, they often charge a compensatory “use tax” on property that is brought into and used in their states.)
Buyers have been known to go to great lengths to avoid sales tax when buying an aircraft, like closing when it is flying over the Atlantic Ocean, but elaborate safeguards are unnecessary. All you have to do is close the deal when the airplane is in a state that doesn’t charge sales tax on its purchase. Most states in New England fit the bill, as do several other states sprinkled throughout the country.
However, some states that charge sales tax on business jet purchases have exemptions that apply even when the aircraft is in the state at closing. Probably the most typical exemption is the “fly away.” The idea is simple: you avoid the tax by flying out of the state within a prescribed period of time allowed under state law. A fly-away exemption can also apply to maintenance accomplished in the state, which can be a significant benefit if, for example, you’re spending $2 million to refurbish your aircraft. (In the case of maintenance performed, the converse of a fly-away is what you might call a “fly out” exemption: when the work is done, you avoid the tax by flying out of the state and “accepting” and paying for the job in a jurisdiction with no sales tax. Only some states permit this.)
A fly-away exemption can be a great benefit for states where aircraft manufacturing, maintenance, repair and/or refurbishment facilities are located because it encourages airplane owners and buyers to patronize those facilities. For example, you could hire the Cessna Citation service center in Wichita, Kansas, to accomplish a pre-purchase inspection on an aircraft you’re buying, close right in Wichita when the work is done and then—taking advantage of the Kansas fly-away exemption—leave the state five days afterwards without incurring sales tax. A variation on this, available in some states, allows the aircraft to remain in the state after closing for additional maintenance without incurring sales tax as long as you fly out promptly after the work is completed.
You should carefully scrutinize fly-away exemptions before relying on them. Some apply only to non-residents (the state may require an affidavit in that regard) or to aircraft manufactured or completed in the state. Time periods for leaving the state vary greatly. Kansas allows 10 days; Colorado gives you 120. The event that starts the clock varies greatly as well. In Michigan, for example, you may be able to buy the aircraft and then make customizations, improvements and repairs before Michigan’s 15-day departure clock starts ticking.
Though buyers pay a lot of attention to how long the aircraft can remain in the state after a purchase, they often fail to ask when and for how long it can go back. The theory behind the exemption, after all, is that the aircraft isn’t being purchased for use in the state, so if you “fly away” and then sneak back a few days later, the exemption is unlikely to apply and you’ll owe the sales tax.
Once again, what you can get away with varies from state to state. Colorado says an aircraft you buy there can’t be in the state (at least while you own it) more than 73 days in any of the three calendar years after the calendar year when it flew away. (In case you’re not a math whiz, that’s 20 percent of the time.) Apparently, you can be in Colorado as much as you want in the calendar year when the purchase closes. California, on the other hand, takes the opposite approach: if you avail yourself of that state’s fly-away exemption, you can’t fly back in the aircraft to California for an entire year without forfeiting the exemption.
Georgia’s statute is even more draconian: the exemption applies if you purchase an aircraft from “a manufacturer or assembler” (Gulfstream comes to mind) “for use exclusively outside this state” when you remove it from Georgia “under its own power when the equipment does not lend itself more reasonably to removal by other means.” Fortunately, there is little doubt that it’s easier to fly a business jet out of Georgia than to tow it out on a highway. The language of the statute quoted suggests you can’t go back.
One reason not to return is that states tend to construe sales-tax exemptions narrowly, as illustrated by a letter ruling from the Illinois revenue authorities a few years ago. Since the Illinois fly-away exemption allows for 10 free days in the state in the year after flying away, an aircraft buyer planning to make his purchase outside Illinois argued that he should have the benefit of the same 10-day rule to avoid owing use tax. “The fly-away exemption,” he claimed, “arguably reflects a legislative determination that an aircraft that is flown into Illinois less than 10 days a year should not be subject to use tax regardless of where the aircraft is purchased.” Although the argument makes sense, the Illinois Department of Revenue disagreed, giving no better rationale than that the exemption was specific to the sales tax.
Finally, don’t base a sales-tax analysis solely on conversations with or emails or letters from state revenue officials (or other persons in the state) or anecdotal “evidence” attesting that sales tax won’t be due on an aircraft purchase, maintenance or refurbishment as long as you fly out of the state promptly afterwards. With a potential tax of as much as 10 percent of the purchase price (plus interest and penalties) at stake, it’s worth doing your homework before assuming an exemption will apply.
Jeff Wieand is a senior vice president at Boston JetSearch and a member of the National Business Aviation Association’s Tax Committee.