Long gone are the days when a buyer could purchase an aircraft in a sole purpose Delaware entity, close in Connecticut, and ignore sales tax and use tax in other states with little chance of being audited. States have realized that an audit of a single business jet owner can yield a much larger potential sales or use tax payment than multiple audits of other businesses, so they are much more aggressive in auditing aircraft owners.
States Can Easily Determine Where Aircraft Are Located
The FAA Aircraft Registry database is available for download to allow a Department of Revenue to easily see which aircraft have a registration address in that state. State personnel are also known to visit airports frequented by business jet traffic and record the N-numbers of all aircraft observed there. Aircraft location information is also available to the public online from multiple flight tracking websites (see our post on minimizing public access to this information here). If Department of Revenue personnel determine that an aircraft has ties to the state that will often trigger a letter to the registered owner, requiring the owner to demonstrate that sales tax and use tax has been paid, or that the sale and use of the aircraft is exempt.
Advance Planning is Required for Many Sales Tax Exemptions
Waiting until a letter from a state Department of Revenue is received to address the applicability of sales and use tax may be too late. Many exemptions to sales and use tax require advance planning to meet their requirements. For example, the sale for resale exemption in many states requires the owner to be a registered retailer at the time of the purchase, and many exemptions based on the character of use have requirements applicable to the first flight, or to a period of use immediately following closing or the first entry into the state.
Sales Tax & Use Tax Planning May Be Required in Multiple States
While most owners are aware of the need to address sales tax in the state where the closing occurs, this is just one of the potential states that may attempt to assess sales and use tax on the aircraft. Most states have a use tax that applies to aircraft with a sufficient nexus to that state. There is typically sufficient nexus with the state where the aircraft will be based for the use tax to apply, so potential exemptions should be reviewed prior to closing, and in all cases prior to the aircraft entering that state. Owners should also review their planned use of the aircraft and identify any states where the aircraft will routinely be located to determine if that use may trigger use tax concerns in that state.
Lori N. McGee is a partner with the law firm of Jetstream Aviation Law and counsels clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com.