Navigating Multi-State Aircraft Use Tax Complexities see more
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.
IRS Record Keeping Requirements - Best Practices for Business Aircraft Owners see more
As the April 15 individual income tax return filing deadline approaches, it is important to think of ongoing requirements regarding recordkeeping to support any business related deductions claimed on your tax return including those relating to aircraft ownership and operations. As is the case with the governance of any operating business, owners of business aircraft must maintain adequate records to support the deductions claimed with respect to such aircraft. Furthermore, the records must be retained for a sufficient amount of time in the event they are needed in connection with an income tax audit.
As a general rule, business aircraft owners should retain tax records for a minimum of six years following the date that the owner files the income tax return to which those records relate. Normally, the typical limitations period prohibits the IRS from challenging the contents of a tax return more than three years after it is filed. However, in certain instances, such as where income is understated by a substantial amount, this time period can be expanded to six years. There are exceptions to these general rules, such as where a taxpayer engages in fraud or fails to file a tax return. In those situations, there is no applicable statute of limitations. Assuming that those exceptions do not apply, following the general six-year rule should be adequate.
Additional Rules of Thumb
In addition to these “rule of thumb” recommendations, business aircraft owners should keep all records relating to an aircraft, including those pertaining to the purchase and sale of the aircraft, until six years after the owner sells or otherwise disposes of the property. The purpose for such retention is to ensure that the owner can support the amount of any gain or loss reported as a result of the sale of its aircraft and any concomitant tax basis adjustments to the aircraft that affect the amount of such gain or loss.
Business aircraft owners also face certain unique tax record keeping requirements. For example, they must create and retain records relating to SIFL (Standard Industry Fare Level) income inclusion amounts and personal loss deduction limitations. (SIFL is an amount specified by the federal government to determine the value of personal travel on the company aircraft.)
These records include items that must be created contemporaneously with the flights to which they relate. If a business aircraft owner fails to create such records contemporaneously with the relevant flight, the IRS may have a basis to question or challenge the veracity of the information contained in those records during an audit by, for example, arguing that a business aircraft owner created records merely to support its tax position in an audit.
Records and Management Companies
A business aircraft owner should be able to access flight, financial and tax records relating to ownership and operation of its aircraft. If a business aircraft owner hires a management company to maintain certain records (e.g., flight logs, passenger manifests, flight-related activity and maintenance costs), the owner should ensure that its agreement with the management company gives it the right to access these records as necessary even after the termination of the agreement between the owner and management company. Among the recommended provisions to guarantee access to such records would be a covenant by the management company that it will retain those records for an adequate period of time after their creation.
A business aircraft owner should also ensure that certain records are created in a manner that will enable the owner to effectively utilize them in the event of a tax audit. This is especially true for records that are used as back-up to support SIFL income inclusion amounts and deduction limitations resulting from use of the aircraft for personal purposes and/or entertainment purposes.
Since the process can be complex, a business aircraft owner should consider retaining a qualified aviation tax consultant who has expertise in collecting and organizing the information needed to correctly calculate these items. Seeking legal counsel regarding record keeping will ensure that an owner of business aircraft is well prepared in the event of an IRS audit of the owner’s tax return.
For more information on this topic or other business aviation related tax needs, please contact Chris Younger at firstname.lastname@example.org.
This article was originally published by Christopher B. Younger with GKG Law on April 9, 2019.
GKG Law Successful in Vacating Aircraft Liens see more
NAFA member, GKG Law, writes about their success in vacating aircraft liens.
In August 2018, GKG Law reported on the risks posed by service providers filing liens on aircraft for amounts owed for storage, repairs, maintenance or other services relating to an aircraft. In that article, we noted precautionary measures that can be taken to minimize the risks posed by such liens, and that defenses may exist to such liens. GKG Law recently was successful in vacating such liens in a case filed in the United States District Court for the Eastern District of Virginia. In the case, the service provider filed two separate liens with the Federal Aviation Administration (FAA) and with Florida regulatory authorities asserting liens for approximately $450,000. We were successful in not only having both liens vacated, but our client also was awarded almost $50,000 in damages resulting from the invalid lien filings. The result highlights the fact that although lien statues may serve a valid purpose, such as ensuring that mechanics and other aircraft service providers are compensated for services they performed at the request of the aircraft owner or operator, aircraft owners are not defenseless when such liens do not have a valid basis or when the lien filings fail to comply with statutory requirements.
GKG Law’s extensive experience in all aspects of the business aviation marketplace makes it particularly suited to aggressively protect your rights in such commercial disputes. Please contact Brendan Collins at GKG Law if you would like to discuss any potential aircraft related disputes. Brendan may be reached by telephone at (202) 342-6793 or by email at email@example.com.
The original article was published by GKG Law on October 2, 2018.