Purchasing an aircraft from a California seller - Can I still qualify for a tax exemption?
I received a call last week from a potential aircraft buyer. We discussed how he and his company could utilize the Interstate and Foreign Commerce Exemption and legally avoid California Sales and Use Tax on the aircraft purchase. He is looking at two possible aircraft. The first is brand new and directly from the manufacture and the second is listed by a California retailer based in Southern California. I explained that delivery had to take place outside of California in order to avoid the California sales tax and if he bought the aircraft from the manufacture, taking delivery at the factory would suffice. He asked if purchasing the aircraft from California would negate the possibility of qualifying for the exemption.
This is our topic for the week. “Can I purchase an aircraft from a California retailer or individual and still qualify for an exemption from the California sales and use tax?” The answer is yes, of course. Otherwise, I would have nothing to write about.
I believe it is important to note that while California’s sales and use tax are based on the same rates, they are applied differently. Sales tax is a tax on the retailer and the retailer has the option of being reimbursed from the buyer. Use tax is the responsibility of the buyer when items are either purchased from outside of California or purchased from a California seller that is not a retailer. Use tax is sometimes considered as complimentary to sales tax.
Purchasing an aircraft from a California seller does not prohibit you from qualifying for an exemption from BOTH the California sales and use tax. When buying from a California retailer, in order to legally avoid sales tax on the purchase of an aircraft, the sale cannot conclude while the aircraft is inside of California. Additionally, physical delivery must occur while the aircraft is outside of the state. When purchasing from a California seller that is not a retailer, the same rules apply in order to remain eligible for a use tax exemption.
As a buyer, several conditions must be made when negotiating the purchase. When claiming the exemption, the California State Board of Equalization (BoE) must be able to draw a clear conclusion that the sale was completed outside of California and that the buyer took possession of the aircraft while outside of the state. If the BoE is able to infer that the purchase took place in California, the auditor will deny the exemption and the buyer will owe use tax on the purchase.
In order to substantiate the closing took place outside of California; the purchase agreement must clearly identify the delivery to take place at a location outside of the state. The purchaser must not make final payment for the aircraft, insure the aircraft, or file the Bill of Sale and Registration while the aircraft is still located in California. As the buyer, you cannot pay for transporting the aircraft to the out of state delivery location and you must not travel aboard the aircraft while it is transported from California to the delivery location. Incorrectly handling one of these issues could allow an auditor to claim that the buyer exercised a right of ownership while the aircraft was in the state; therefore the purchase is subject to California tax.
California has a specific set of regulations that apply to the purchase of aircraft. As a buyer or a seller, you need to be certain that your tax advisors are keeping you well informed regarding the steps you must take to ensure your purchase remains tax exempt. Purchasing an aircraft from a California seller does not disqualify a buyer from a possible exemption. However, careful planning must take place to ensure the exemptions remain available.
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.