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The NBAA State Aviation Tax Report provides summary level information about a wide range of tax issues affecting general aviation at the State level. In addition to the broad categories of sales/use taxes and property taxes, each report summarizes generalized data regarding fuel taxes and aircraft registration requirements and fees.
Sales and Use Tax
Most states impose some form of a sales tax or transaction privilege tax. This tax arises from the event of a transaction within the state. Sales tax rates vary widely among the states but typically range between 4 and 6 percent. Within most states, the counties, districts, and some municipalities have the ability to impose a local sales tax in addition to the state sales tax. After the imposition of these local taxes, the combined rates may exceed 8 percent. Companies and individuals contemplating an aircraft purchase should carefully consider the sales tax ramifications early during the planning process to avoid adverse consequences.
Tax laws in most states also provide for a parallel taxing system imposed upon the consumption, use, or storage of an aircraft within the state. This tax is commonly known as the “use tax”. Use tax rules in most states typically tax transactions that escape tax under the sales tax rules; however, these taxes are mutually exclusive. If the sales tax applies, the use tax generally does not, and if the sales tax does not apply, the use tax most likely will.
Some state tax laws provide various exemptions from sales and use taxes. Since sales and use tax are transaction driven, the uses, conditions, or circumstances which may qualify the transaction for an exemption must generally exist for a specified period of time or “test period”. Several common forms of exemptions are outlined below:
- Fly Away: An exemption from sales tax for aircraft purchasers who close an acquisition in the state when the closing is immediately followed by the removal of the aircraft from that state on the condition that the aircraft not return to the state in which it was purchased for a specified period of time.
- Purchase for Resale/Lease: An exemption for the sale of an aircraft to a dealer who will hold the aircraft as inventory or to a special purpose leasing entity. In some states the leasing entity concept is used as a primary tax deferral strategy when outright exemption from the tax is not available.
- Commercial Operations: An exemption for aircraft used for “commercial use” purposes. In some states this exemption only applies to aircraft used in FAR Part 121 or 125 operations, while other states may allow this exemption for Part 135 operations as well.
- Interstate Commerce: An exemption for aircraft predominately used in operations that are simultaneously “inter-state” and “commercial”. A few states define “commercial use” to include ordinary business use.
- Casual/Occasional/Isolated Sale: Some states provide that a seller who is not a dealer and who only occasionally sells an aircraft may be exempt from the sales tax. However, Members should be aware that exemption from sales tax imposed upon the seller may not automatically extend to the use tax which may be imposed upon the buyer
Many states assess a property tax on the value of aircraft that have established “situs” or are habitually situated within their taxing jurisdiction. Situs is the place where property is situated for tax purposes. Generally, but not under all circumstances, the residence or domiciliary of the aircraft owner establishes the situs of the aircraft. Generally the assessment is made to the owner of record as of the lien date regardless of whether or not the aircraft is subsequently sold.
Recently some states have become more aggressive in the determination of situs. As personal property, aircraft are mobile and frequently have no single fixed location. Aircraft used in Part 91 operations usually establish situs at the home-base airport or hangar location where the aircraft is habitually returned at the conclusion of a trip. However, for aircraft used in Part 135 operations, determination of situs may be significantly more complicated. Each state has its own rules for the classification of aircraft and the determination of situs.
Another issue to consider is how states determine the taxable value of an aircraft. Most states base this on some derivative of fair market value, but some states begin the valuation with the aircraft’s costs. When the assessment is based on fair market value states prescribe an appraisal process using a recognized industry standard or valuation guide. Determination of the assessed value may lead to disagreement between the taxing authority and the taxpayer; however, state law generally provides for an appeals process.
An aircraft can be exempt from property tax by reason of its ownership, use, and/or type. For example, an aircraft held by a dealer as inventory is exempt by type. Aircraft owned by State or Federal governments or the agencies thereof are exempt from property tax by ownership.