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How To Avoid
Aircraft Sales & Use Taxes
BY DAVID OLIVIER
AVIATION MAGAZINE, GUEST COLUMN, NOVEMBER 2006
Only five states
do not have a sales tax -- Alaska, Delaware, Montana, New Hampshire and Oregon.
These states can seem attractive to a company in the process of purchasing an
expensive airplane. Many aircraft purchasers believe that buying an airplane in
such a state will save them sales tax dollars.
Buyer beware! If
you purchase an airplane in one of these states with the intent of having it
delivered to another state for storage or use, you could be in for a big - and
expensive - surprise.
Purchasing a plane
in Delaware and garaging it in New York could potentially subject you to a use
tax liability. The good news is, you can often have your cake and eat it too if
you know what you're doing. There are ways to structure a transaction to
legally avoid hundreds of thousands of dollars in sales and use tax. That's
where your Sales and Use Tax consultant comes in handy. A little bit of
proactive planning could save you tons of money.
Most states impose
a sales tax on the sale of tangible personal property and certain taxable
services. The sales tax is generally due when a sale takes place in a given
state. For example, if you purchase an airplane in New York for your personal
use you could be paying anywhere from 7% to 8% in sales taxes. If the airplane
costs $10 million you'll pay the state about $800,000 in sales tax.
States that impose
a sales tax usually impose a corresponding use tax. This tax is designed to tax
purchases that are made out-of-state for use in the state. A use tax will
generally be due when tangible personal property is used, consumed or stored in
the state and no sales tax has been collected.
In New York, a use
is generally defined as the exercise of any right or power over the tangible
personal property by the purchaser. Typically this will not apply to a
non-resident. A person or company carrying on a trade, business or employment
in the state is considered a resident.
Although brief or
occasional use should not subject the aircraft to use tax, it has been held
that the imposition of a use tax on a corporate aircraft does not impose a
burden on interstate commerce when a taxable moment or event occurs in a state
when the aircraft is at rest in the state.
Therefore,
registering the airplane in New York or merely storing the airplane in New York
could subject a purchaser to use tax. One may think registering the plane in
another state may do the trick, but as sizable amounts of money are involved
and sales tax is an important source of revenue for many states, New York and
other states routinely send Revenue Department officials into airports to look
for such aircraft.
A purchaser may
have saved on the sales tax upfront, but nine months down the road the aircraft
owner may receive a letter from the state inquiring into sales and use tax
liabilities. Now, instead of owing $800,000, you could find yourself also
paying interest and penalties to the state.
As stated
previously, there are ways of structuring a transaction that may allow a
purchaser to legally avoid paying sales or use tax in New York and other
states. There have been certain types of structures implemented in various
states by companies purchasing aircraft that have received favorable
administrative opinions and no corresponding sales and use tax
liabilities.
Every purchaser is
different. What's good for one may not be good for another. It makes sense to
do some proper tax planning when considering an airplane purchase. It could
potentially save you hundreds of thousands of dollars.
David Olivier
is the founder and Managing Principal of Olivier & Associates on Wall
Street. The firm specializes in Sales & Use Tax. David can be reached at
888-466-2829 or www.oatax.com.
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