NAFA members Keith Swirsky and Ryan Swirsky with GKG Law discuss navigating multi-state aircraft use tax complexities.
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. These concerns often prompt 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 to close in a state with no sales tax, in a state with an applicable exemption from sales tax for their aircraft, in a low sales tax state such as the Carolinas, in a state with a fly-away exemption, or in a state where they have determined they would owe the complementary use tax if sales tax was avoided.
With respect to the latter point, most purchasers are aware that the state where they hanger their aircraft, if different from the state where closing occurred, will be owed use tax on the transaction, and 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 the 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.
The concept of nexus relates to the level of connection and presence between the taxpayer and the taxing jurisdiction. In order 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).
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 that 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 “big picture” of the flexibility of corporate aircraft utilization is paramount!
More information on GKG Law's Business Aviation Practice can be found here.
This article was originally published in GKG Law articles on May 9, 2019.