Aug. 7, 2014
Reprinted with permission from the July 14, 2014 edition of Texas Lawyer© 2014 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.
State and local taxing authorities across Texas have focused on the aviation industry as a potential source of tax revenue. Looking at the numbers, it’s no surprise why: the aviation industry in the Lone Star State generates billions of dollars annually as measured by gross domestic product – a record $8.4 billion in 2011 – and ranks first in the nation for total direct air transportation sector jobs, with more than 153,000, according to the 2014 The Texas Aerospace & Aviation Industry report from the office of the Governor, Economic Development and Tourism Business Research. Further, according to FAA records, more than 29,000 aircraft are registered in the Lone Star State, second only to California.
Recently, these taxing authorities are focusing on the general aviation sector. General aviation includes, essentially, all flight activity outside the realm of scheduled commercial airline service, military and government operations. For example, general aviation aircraft include aircraft for corporate or business use, agricultural use, flight training and personal use.
An owner or prospective buyer of a general aviation aircraft in Texas must plan for potential exposure to two types of state tax: sales-and-use tax and ad valorem tax.
The Sales-and-Use Tax
The sales tax applies at the time of the initial purchase. Use tax applies in lieu of sales tax to aircraft purchased outside Texas and brought into the state within one year of the purchase.
With purchase prices for general aviation aircraft often reaching into the seven- and eight-figure range, the potential sales tax liability can be significant. Thus, sales-and-use tax often is the primary state tax focus of general aviation aircraft owners.
The state of Texas treats the sale of an aircraft as a taxable transaction subject to state and local sales tax, just like the sale or purchase of any other piece of tangible personal property; i.e., subject to tax unless the taxpayer can establish objection to entitlement.
Unfortunately, the Texas comptroller of public accounts’ interpretations of the statutes and rules establishing entitlement to statutory exemptions – such as resale, occasional sale or commercial use exemptions arising from the lease of an aircraft to a certificated air carrier for use in charter operations under Part 135 of the Federal Aviation Regulations – has changed dramatically over the last decade. It’s shifted from focusing on substance to focusing on form. Often, this heightened scrutiny of each general aviation aircraft transaction results in the office’s disallowance of taxpayers’ exemptions.
The Ad Valorem Tax
General aviation aircraft owners must plan for the annual ad valorem (business personal property) tax, which applies at the county level. Unless someone holds an aircraft exclusively for personal use, owners of general aviation aircraft in Texas are responsible for the ad valorem tax if: 1. The aircraft is used for a business purpose; 2. The owner is the legal owner of the aircraft on Jan. 1; and 3 The aircraft is based in Texas as of Jan. 1, of each calendar year (this includes any owner who sold its aircraft after Jan. 1 of a calendar year, but was the legal owner on Jan. 1 of that year).
Like the comptroller’s office, county appraisal districts across Texas have markedly increased their efforts to identify general aviation aircraft based in their respective jurisdictions and tax them accordingly. A general aviation aircraft owner bears an affirmative obligation to render the value of their aircraft to the appropriate county appraisal district no later than April 15 of each calendar year.
If an aircraft owner fails to timely render and the county has successfully identified the aircraft, the county appraiser most likely will subject the aircraft owner to a potentially significantly higher tax bill, as well as penalties and interest.
On top of its basic obligation to timely render, a taxpayer must render the right kind of information to the county. Failure to do so means the owner may lose any reduction in taxable value by virtue of statutory allocations for out-of-state or commercial use.
The governor’s signature of House Bill 585 on June 14, 2013, complicated this aspect by, among other things, requiring general aviation aircraft owners to submit an “application for allocation” form. That’s in addition to the traditionally required rendition form; these forms require almost identical information and may easily confuse preparers, yet preparers cannot combine them.
The Texas Property Tax Code provides a “commercial aircraft” value allocation formula, which applies to aircraft primarily operated by certificated air carriers in commercial operations, including in charter operations under Part 135 of the Federal Aviation Regulations. The commercial aircraft value allocation formula is the valuation method most desired by general aviation aircraft owners in Texas, as it results in a substantially lower taxable value relative to its counterpart “business aircraft” formula.
Unfortunately, the commercial formula is also the most often misunderstood by taxpayers, as well as by county appraisal districts. For example, some taxpayers mistakenly believe that it’s enough to merely lease their aircraft to a Part 135 charter operator but not actually conduct many – or any – flights that are commercial in nature under the Part 135 rules. In fact, the aircraft must have been “primarily operated” by the certificate holder during the course of the prior calendar year in order to receive the favorable commercial treatment.
Texas county appraisal districts can make mistakes, as well. For example, it can be tempting for them to develop “hybrid” valuation formulas for aircraft engaged in mixed commercial (Part 135) and non-commercial (Part 91) use. But the underlying statutes are clear that the law does not permit such a hybrid valuation.
Lawyers involved in aircraft transactions must be aware of the substantial risk of audit. Even if the parties involved have appropriate evidence that a valid exemption exists, those parties should expect, at a minimum, heightened scrutiny from the comptroller. Attorneys should prepare to dispute a potential tax assessment from the comptroller.
Counsel for Texas aircraft owners should remind their clients of their obligations with respect to ad valorem tax, particularly in light of recent changes to the property tax code, to ensure they have fully met those obligations substantively and in a timely fashion. Counsel for would-be buyers of aircraft should educate those clients about all of the state tax consequences of their aircraft purchase before they consummate their transaction.
Nathan S. Haley is an attorney in the aviation practice group at Shackelford, Melton, McKinley & Norton, LLP, in Dallas, and currently serves as the 2014-2015 vice-chair of the Aviation Section of the State Bar of Texas. His practice encompasses a broad range of regulatory, transactional, tax and commercial dispute resolution issues focused on the aviation industry.