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Washington State "Tax Avoidance" Rule Update
July 10, 2014
In an effort to resolve a budget deficit in 2010, the Washington state legislature passed a broad tax bill that included specific language designed to disregard the sale-for-resale tax exemption for certain transactions that the legislature identified as “unfair tax avoidance." The law identifies as potential “tax avoidance” any transaction or arrangement through which a taxpayer “attempts to avoid Washington sales or use tax by vesting legal title or ownership of the property in another entity over which the taxpayer effectively retains control.”
As a result of this broad language, the common ownership/operating structure where an aircraft is owned in a limited liability company or other special-purpose entity and leased to an aircraft operator is subject to the “tax avoidance law.”
Under this law, the Department of Revenue (DOR) is able to ignore the leasing structure that was created to achieve the sale-for-resale exemption when the aircraft was acquired. Assuming this structure meets the definition of "unfair tax avoidance," the sales/use tax of up to 9.5 percent will be assessed on the purchase price of the aircraft. There are also tax avoidance penalties equaling 35 percent of the unpaid tax, plus any penalties/interest resulting from the assessment.
Draft DOR Tax Avoidance Proposal
Since passage of the tax avoidance statute, the Pacific Northwest Business Aviation Association (PNBAA) and NBAA have been working to educate the DOR about the negative impacts of this law on the industry. Through PNBAA, a formal request was made seeking regulations that more precisely interpret the tax avoidance law as it applies to aircraft operations and also provide safe harbors.
After a series of meetings with industry, the DOR released a "pre-proposal" in June that represents the beginning of a rulemaking process to further define the tax avoidance rules. Although the rules are not fully developed yet, they include the incorporation of certain concepts and safe harbors designed specifically to address general business aviation operations. Most notably, under the leasing safe harbor, the proposed regulation will “not disregard title in or ownership of a controlled entity when substantially all use of the property is under a lease, at a reasonable rental value, by a substantive operation business, for bona fide business purposes.”
While significant progress has been made with the DOR, there is more work to be done. Changes should be made via the rulemaking process to further clarify and limit the potential impacts of the law and regulation to the business aviation community. Without further clarity and/or limits to the scope of the final rule, an aircraft that was validly purchased exempt from sales and use tax according to a statutory exemption may still be deemed “unfair tax avoidance” in a subsequent DOR audit.
The DOR held an initial public meeting on July 1 to begin the rulemaking process, PNBAA representatives participated in this meeting. While this was the first opportunity for the public to weigh in on the proposal, future opportunities are anticipated.
As it pertains to the business use of aircraft, the rulemaking process may involve several meetings with the DOR to better understand the regulatory framework impacting taxpayers, the specific language of the rule and corresponding examples, and a discussion of goals and concerns for both imposition and administration. Given the broad nature of the tax avoidance statute, the presence of the initial leasing safe-harbor represents a significant move forward in recognizing and understanding the legitimate and necessary uses of business aircraft.
NBAA will keep Members informed as the rulemaking moves forward and provide details on opportunities for participation in the process.For additional information, contact NBAA's Kristi Ivey at (206) 434-5688 or [email protected].