NAFA member, Keith Swirsky, President of GKG Law, P.C., discusses how to navigate complexities of multi-state aircraft use tax.
Given the large amount of money involved with the purchase of corporate aircraft, many aircraft owners are rightfully concerned with sales tax and the complementary use tax. GKG Law’s Keith Swirsky and Ryan Swirsky explore.
The concerns over sales tax and complementary use tax often prompt aircraft owners to take into consideration ways to minimize or eliminate their tax liability on the purchase.
Most purchasers are aware that sales tax liability can be incurred based on the location of closing and will plan accordingly. Approaches include:
- Closing in a state with no sales tax;
- Closing in a state with an applicable exemption from sales tax for their aircraft;
- Closing in a low sales tax state (such as the Carolinas);
- Closing in a state with a fly-away exemption; or
- Closing in a state where complementary use tax would be owed if sales tax were avoided.
Strategies for Minimizing Use Tax Liability
With respect to the latter point, most purchasers are aware that the state where they hangar their aircraft, if different from the state where closing occurred, will be owed use tax on the transaction. Therefore, they will engage aviation tax counsel to implement strategies to minimize or eliminate use tax liability.
These strategies vary state by state, including the mechanics and requirements of seemingly similar structures. Common tax planning tactics include:
- Sales for resale;
- Interstate commerce exemptions;
- Casual or isolated sale exemptions; and
- Common carrier exemptions.
Having planned for sales and use tax based on where the closing for the aircraft occurred and where the aircraft will be based, many aircraft owners believe that their sales and use tax concerns have ended. However, this is not the case.
Multiple states can assert that complementary use tax is owed, even when such use tax is already being paid to another state!
Such a situation occurs when another state asserts that it has ‘nexus’ with the aircraft. Many complex issues, often with taxpayer-adverse consequences, can result in such a situation.
Understanding a State’s Nexus With the Aircraft
The concept of nexus relates to the level of connection and presence between the taxpayer and the taxing jurisdiction. For a state to impose its sales or use tax, the taxpayer must have sufficient nexus with that state.
The level of connection and presence required to establish nexus to assert use tax on an aircraft varies state-by-state and, unfortunately for the taxpayer, there is often a lack of clear guidance on what level of contact constitutes sufficient nexus.
As stated, the hangar location is sufficient to establish nexus. However, it is possible that landings in other states, even infrequently, can create nexus with such states. In this circumstance, other factors are generally required, with factors commonly considered including:
- Regularity of travel to the state;
- The total days in the state during a ‘testing period’; and
- Whether the taxpayer has other connections to the state (e.g. payroll, property, transactions, tax return filings, etc.).
Proper advance planning with experienced aviation tax counsel can mitigate such tax risk.
It is important to note that the ability to mitigate such tax risk will be severely compromised if such planning occurs after the aircraft has been operated, or more commonly, after receipt of a use tax bill from such other state(s).
What if Additional Use Tax Nexus Can’t be Avoided?
In the event additional use tax nexus is unavoidable, a taxpayer may be eligible to receive credit for taxes already paid to the original taxing state.
Generally, states give a credit for ‘like’ or ‘similar’ taxes paid to another state. So, assuming the taxpayer paid, or is paying (if a leasing structure) a meaningful amount of taxes to State A, the challenge is to convince State B that the taxes paid or being paid to State A are ‘like’ or ‘similar’ taxes.
It is equally important that the aircraft was not used in State B prior to being used in State A, in as much as State B can deny the credit on the basis that State A owes the credit and not State B.
While avoiding, or paying sales tax is relatively straightforward, use tax planning is complex and cumbersome. The tax planning intricacies should also factor in a healthy measure of practical guidance.
Once again, experienced aviation tax counsel should be engaged, in advance of the aircraft purchase. As always, the bigger picture of the flexibility of corporate aircraft utilization is paramount!
This article was originally published by AvBuyer on July 12, 2019.