State Tax Planning Continues After Aircraft Acquisition

Oct. 17, 2016

Most aircraft buyers carefully plan their transaction, including sales and use tax implications, but after the closing, owners can be surprised to learn they owe additional taxes. How do you successfully manage state tax issues during the ownership cycle?

“This planning exercise occurs where the concentric circles of federal aviation regulations, federal income tax regulations and state tax law converge,” said George Rice of BIZJETCPA. “Many times the preferred federal structure will be in direct conflict with the best state tax solution. Planning is the art of finding the best compromise.”

If you aren’t tuned into various tax liabilities at the time of acquisition, you could be in for a big surprise.

If you close the transaction in a state with tax policies designed to attract aviation and plan to base and operate the aircraft in another state, you might be subject to additional taxes.

The relationship between sales and use taxes is often misunderstood. Sales tax is normally due in the state where the transaction closed, while use tax is imposed upon the use or storage of an aircraft within a certain state.

In some cases, if you paid sales tax in one state and another state claims you also owe use tax, you can receive a credit from the second state by proving you paid sales tax in the first state.

Property taxes are based on the value of aircraft that are based in a particular taxing jurisdiction. This can be challenging for an aircraft owner who spends part of the year at one location and another part of the year at a second location. Where is the aircraft’s location for tax purposes?

It’s an important question, as states with property taxes have various ways of determining aircraft value. Most states base the property tax on fair market value, while others base the tax on the aircraft’s cost. The difference in tax liability can be substantial.

Aircraft owners should also note that property taxes tend to be trailing, so it’s critical to address future property-tax liability in purchase and sale agreements.

Registration fees are another form of “tax” that are generally in lieu of property taxes. But some states impose both.

To lower your tax bill, determine what tax exemptions might be available. Some buyers may qualify for a flyaway exemption from sales tax by closing in one state and immediately relocating the aircraft to another state. Others may qualify for commercial-use or purchase-for-resale/lease exemptions.

“You need to be very mindful if you qualify for an exemption in your home state,” said Angel Houck of CliftonLarsonAllen LLP. “You have to do extra planning if the aircraft will stay in other states, or it can get expensive.”

Call your tax professional if your aircraft will be spending time in another state, especially during the first year of ownership.

Finally, experts recommend planning for future tax liability long before the acquisition and then reassessing the situation regularly.

“If you aren’t tuned into various tax liabilities at the time of acquisition, you could be in for a big surprise,” said Ed Kammerer, a partner at Hinckley Allen.

Learn more here.