Be practical and informed in choosing your delivery location
Imagine taking delivery of your newly purchased aircraft after weeks or even months of careful planning. On the advice of those involved in the transaction, you take delivery outside of California in order to avoid the California sales tax on the transaction. You follow the guidelines set forth in the California Sales and Use Tax Laws and Regulations in order to meet the California use tax exemption and eventually receive a letter from the State Board of Equalization stating your purchase is exempt and your file with the BoE is closed.
Then, some months later, you receive a letter from the state with which you took delivery, stating they were informed that you took delivery of an aircraft in their state and that you owe sales tax on the transaction. BAMN! All that work to legally avoid California sales and use tax, down the drain. How could this have happened?
In 2007, we worked with a client that purchased an aircraft from a California seller. Both parties were individuals and in an effort to keep the transaction as simple as possible, the seller completed a purchase agreement that was provided to him by his local FBO. The agreement clearly stated the transaction was between the two individuals, but the letterhead on the agreement was of the FBO. The agreement was signed by both individuals. The buyer took delivery from the seller in Nevada to avoid California sales tax and over the next 6 months qualified for an exemption from California use tax.
Following the filing of the tax return, we received a letter from California stating that exemption was granted and the file was closed. Two months later the client received a letter from the State of Nevada inquiring about the transaction. After speaking with the Nevada Department of Taxation, I learned that California had provided Nevada with a copy of the purchase agreement. Upon review of the agreement, Nevada made the assumption the aircraft was sold by a dealer and they wanted to collect tax on the purchase.
Fortunately, we were aware of the laws in Nevada prior to our client taking delivery and were able to clear up the matter. We went back to the seller and he provided a penalty of perjury statement explaining the agreement was between himself and the buyer and the FBO had no involvement in the transaction. The FBO corroborated the facts with a statement of their own. Nevada eventually agreed and the issue was closed.
While the requirements for qualifying for a California sales and use tax exemption are important, where you take possession can have a profound effect on the total tax exposure of the transaction. Most advisors will simply tell you to take possession in one of the five states that have no sales tax. Most will narrow it down to one: Oregon. They are right in doing so. However, what happens when it is not practical to move the aircraft to Oregon?
Understanding and recognizing the tax consequences of taking possession in a probable delivery state is the first step in preparing for closing on an aircraft. Some states have no tax while a few states allow for a fly-away1 exemption. Other states have an “occasional” or “casual” sale2 exemption and a couple of states have a very minimal tax. It is not necessary to understand the sales and use tax laws of all 50 states, but be certain that you know all of your available options.
Oregon is always the safest place to take delivery on the West Coast, but there are times when taking delivery in Arizona or Nevada are safe options. Florida has been vilified regarding the enforcement of their sales and use tax laws regarding aircraft. However, if you are a “true” non-resident of Florida, are purchasing an aircraft from a manufacturer or a dealer in Florida and have no plans on returning for at least 6 months, Florida’s fly-away exemption will work for you.
In a previous article, I discussed using the conservative method when applying tax codes. While this still holds true, conservatism shouldn’t to be confused with impracticality. Purchasing a Gulfstream from a New York seller and having the aircraft flown to Oregon to take delivery may not be the most sensible approach. Why not take delivery in Connecticut where the laws provide an exemption for aircraft greater than 6,000 lbs. MCTOW? Taking delivery in a state that has no sales tax is generally a safe approach, but it is not the only approach. Make sure your tax advisor gives you all of the available options so that you can make an educated decision on what is safe AND cost effective.
Aviation Tax Group is an aviation tax firm whose main goal is to assist aircraft purchasers and owners to legally minimize their taxes. We advise clients how to legally avoid California sales and use tax through the utilization of any one of the available exemptions. We provide quality and professional service through our knowledge and experience regarding sales and use tax on the purchase of aircraft.
If you are preparing to purchase or have purchased an aircraft and would like to find out how you can legally avoid the sales and use tax, contact Warren Alston or Julia Chan at 916-930-6141.
1. Fly-Away Exemption, whereby you close on the aircraft in a state, then fly the aircraft out of the state within a specified period of time.
2. Occasional or Casual Sale is generally a sale in which an aircraft was not acquired by the seller for resale. In most cases the seller is regarded as a broker, dealer or manufacturer.