April 17, 2015
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 identified 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 related to the LLC is subject to the “tax avoidance law.”
Under this law, the Department of Revenue (DOR) was able to ignore the leasing structure that was created for a variety of regulatory compliance purposes when the aircraft was acquired. Assuming this structure met 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.
Development of Final Rule
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” that represented the beginning of a rulemaking process to further define the tax avoidance rules. Following the release of this pre-proposal in 2014, NBAA continued working with the DOR during development of a final rule.
On April 2, the DOR issued a final rule that provides guidelines and safe harbor provisions for certain aircraft leasing structures and transactions involving use of the sale-for-resale tax exemption. In the final rule, the Washington tax exemption for aircraft purchased in a leasing company structure (i.e., where the aircraft is owned by a limited liability company or other special purpose entity and leased to a related party) could be invalidated if the DOR concludes that the structure is unfair tax avoidance. In the event the DOR categorizes the aircraft leasing structure as unfair tax avoidance, the taxpayer would be subjected to 9.5 percent sales or use tax, plus a 35 percent tax avoidance penalty, in addition to general interest and penalties.
The new rules, which become effective May 3, 2015 and are being applied retroactively through 2011, provide additional clarity regarding the scope of the legislation and guidelines the DOR will use in implementing the rules.&
Although the new rules provide additional guidance regarding the application of the tax avoidance law to typical business aircraft leasing company structures, the final rules still leave important questions and issues regarding the scope and application of the tax avoidance law unanswered. NBAA strongly advises members to consult with their transactional aviation counsel and/or tax advisors to determine the potential tax avoidance risks, and where appropriate, to reevaluate their aircraft ownership and operating structure in light of the new rules.
Review the final tax avoidance rule (700 KB, PDF)