Dec. 20, 2016
Like many states, California assesses annual property tax on the value of aircraft located in its jurisdiction. Also, like most states, California’s tax code provides a “business inventory exemption” for property that is held for sale. Generally, this exemption has been applied to aircraft dealers of light, piston-powered aircraft.
In a recent Ventura County case however, NBAA Tax Committee Member George Rice successfully argued on behalf of a client that signing an aircraft listing agreement could allow the aircraft to qualify as business inventory during the time it was for sale.
Rice’s client owned a Gulfstream GV and signed a listing agreement with a local aircraft broker in the third quarter of 2010 to sell the aircraft. The aircraft was not sold until more than a year later, in the fourth quarter of 2011.
After a long legal battle, in September 2016, the Ventura County Appeals Board ruled that the aircraft did qualify as business inventory and ordered the assessed value for 2011 to be reduced to zero.
“With this decision, we now know for certain that owners of aircraft who have decided to sell, but who may not complete the sale in the current calendar year, can avoid the next year’s property tax bill, if they do it right,” said Rice, founder of aviation accounting firm BIZJETCPA.
By “do it right,” Rice means entering into a listing agreement that transfers care, custody and control of the aircraft to a broker and, once listed, treating the aircraft as inventory held for sale.
The provision of California law Rice applied in the 2011 case is based on the concept of consignment. To qualify for the business inventory exemption, an aircraft owner does not need to be in the business of selling aircraft (such as a broker or a dealer), but the owner must consign the aircraft to such a broker or dealer.
The California Board of Equalization Assessors Handbook states, “The business inventory exemption is available to owners who have validly put their vessel or aircraft up for consignment to a consignor.”
In legal terms, a consignor is a company that sells property and will be compensated for marketing and completing the sale, but does not take title of the property. Properly structured, “that’s exactly what an aircraft listing agreement does,” said Rice.
Treating the aircraft as “inventory held for sale” requires operating the aircraft in a consistent manner. The aircraft should be flown only for demonstration and maintenance flights, not for business trips or charter. Treating the aircraft in this manner also affects the owner’s federal and state tax filings for the aircraft. For example, depreciation of any remaining tax basis of the aircraft should be suspended when the listing agreement is signed.
After the Ventura County Appeals Board held in favor of Rice’s client, the aircraft owner received a full refund of all property tax paid for 2011, including interest. Although appeals board rulings cannot be cited as authoritative, nor do they establish precedence, tax advisors now have a pattern to follow in their efforts to make this exemption available to other aircraft owners in California.