| e everyday world of aircraft and yacht ownership, the | | | | How do you calculate intrastate flights using this test? |
| following story is played out from coast to coast. The | | | | Where must possession occur? |
| whispers in the crowds of prospective owners often | | | | How are first use, first functional use, and operational |
| are based on the age-old question, “is it really | | | | use defined? |
| possible to legally avoid sales tax, or am I risking | | | | What are the procedural requirements of the test? |
| embarrassment if I get caught trying?” The | | | | 3. Purchased for out of state use |
| stress often crashes into the life of the financial | | | | Where must possession or title occur? |
| personnel to find workable solutions after the client | | | | How is first functional use defined? |
| takes the survey of his friends on the golf course. | | | | How long is the test period? |
| The CPA cringes while he is instructed by his client to | | | | What are the procedural requirements of the test? |
| make the new deal work by tomorrow morning, and | | | | How does the aircraft owner document periods of |
| “oh, by the way, I don’t want to waste | | | | time when the aircraft is not in flight, or the vessel is |
| a nickel on tax.” He inherently knows that no | | | | moored? |
| matter how careful he is to explain every minute detail | | | | What circumstances shorten the test period? |
| of the strategy to Mr. Big, it is ultimately the owner | | | | How does storage for shipment affect the |
| who will demand that he be able to use his new toy | | | | exemption? |
| wherever and however he wants. He will end the | | | | 4. Purchase for resale |
| meeting by commanding the CPA to, “make it | | | | Can a purchaser of a single item claim this exemption, |
| work out, I’m sure you can find a way.” | | | | or must the owner be a registered dealer? |
| Many buyers listen to the free advice that comes | | | | Can any use, other than bonafide demonstration and |
| once they first enter the sales cycle. The sales person | | | | display be made? |
| who generally works with the belt and suspenders | | | | What are the documentation requirements to support |
| clients often take the most conservative approach and | | | | demonstration use? |
| advise against “risky tax schemes.” The | | | | How much use is too much to claim a resale |
| wheeler-dealer salesperson blabs on about the latest | | | | exemption? |
| trick and pats the back of his new client while he | | | | Can a charge be levied for a demonstration flight of |
| croons, “trust me, it is easy to get out of the | | | | an aircraft? |
| tax.” | | | | How does personal use affect the exemption? |
| Neither approach will serve the new owner very well. | | | | 5. Occasional use |
| The basic problem is that, unlike federal tax advice | | | | Is this exemption available in the state the purchaser |
| which is based on a code that applies everywhere in | | | | intends to claim this exemption? |
| the United States, sales tax laws depend on the | | | | What characteristics must the seller avoid, in order for |
| codes written in each separate state. Currently five | | | | the sale to qualify as an occasional sale? |
| states have no sales and use tax. However, that | | | | 6. Out of state buyer |
| leaves forty-five others that will require proper | | | | Can an out of state buyer avoid sales tax on an |
| research. Unless you have nothing to do but spend | | | | aircraft or vessel? If so what are the requirements? |
| your entire life doing sales and use tax research, it is | | | | How long can an aircraft remain in state after the |
| impossible to keep track of the constant changes | | | | purchase before the transaction becomes taxable? |
| state-by-state. The basic problem with implementing a | | | | What if repairs or training are required? |
| credible tax strategy for an aircraft or yacht purchase | | | | 7. Lease |
| is that the buyer must mesh the details of a strategy | | | | Is it a lease to a common carrier? |
| that reduces the income tax obligation, minimizes the | | | | Is it a lease to a flight school? |
| capital gains tax, reduces property tax and quite | | | | Is it a lease to a private party? |
| possibly eliminates the sales/use tax. | | | | Is it a lease to a contract carrier? |
| When you add “like kind” forward or | | | | How is the tax reported? |
| reverse exchanges and fractional share ownerships | | | | How does the purchaser insure that he can purchase |
| into the components of an aircraft strategy, you then | | | | the property ex-tax and pay based on the lease? |
| must consider how each piece of ownership or each | | | | Is the tax assessed on the lessor or the lessee? |
| transaction caused by the exchange through an | | | | Based on my research, the types of failures that are |
| intermediary may create a potential sales or use tax | | | | inherent by using the possible exemptions are: |
| assessment. | | | | A. Common carrier (Aircraft only) |
| With proper planning and research you can assist your | | | | Many people believe that merely flying the aircraft in |
| client to legally avoid sales/use tax on the purchase of | | | | Part 135 qualifies for an exemption. |
| an aircraft or vessel. However, it depends on how | | | | When the owner is in control of the aircraft, he may |
| much the purchaser values the money saved, versus, | | | | be causing a failure of the exemption by flying in Part |
| the effort required to go through the legal hoops to | | | | 91. |
| avoid the tax. If your client is an aircraft or yacht | | | | When the owner leases an aircraft to a charter, he |
| dealer, you can also help the business to bulletproof | | | | puts the control of the documents needed to support |
| their records from an audit by the Board of | | | | the exemption in the hands of another party. |
| Equalization. An effective strategy should include | | | | Insufficient revenues may void the exemption. |
| components that protect both the buyer and the seller. | | | | All Part 135 flights do not qualify as common carrier |
| Sales tax research must contain a foundation of a | | | | flights. |
| basic understanding of the law that will apply in all | | | | B. Interstate commerce |
| cases, they must be targeted to focus in on the exact | | | | Failure to keep exact logs |
| needs of the client. Once the foundation is established, | | | | Failure to document commerce flights |
| the client can then do a risk analysis of the available | | | | Is the test accomplished by miles, hours, or days? |
| options. In all cases the burden of proof rests with the | | | | C. Purchased for out-of-state use |
| taxpayer. | | | | Failure to properly document location of the aircraft or |
| In order to support a claim for an exemption two basic | | | | yacht when title or possession is transferred |
| things are required. It is essential that both the form | | | | Failure to keep proper logs |
| and the substance of the transaction are met. It is not | | | | Failure to document storage location and time |
| sufficient enough to actually do all the things the local | | | | Inconsistencies in documentation |
| law requires to exempt the transaction. It is equally vital | | | | Failure to support intent |
| that the taxpayer can adequately document the actual | | | | Registering an aircraft or yacht in Oregon, Nevada or |
| possession, storage and use of the property. For | | | | to a Delaware corporation as part of a strategy to |
| example, a taxpayer could read the laws in California | | | | avoid tax, can incur a fraud penalty for evasion. |
| that pertain to a purchase for out-of-state use. He | | | | D. Purchase for resale |
| subsequently actually does all the things that are | | | | Making improper use of inventory |
| required, including out of state possession, and using | | | | Charging for use |
| and storing the aircraft or yacht outside California | | | | Personal use |
| enough time to meet the requirements of California | | | | Documenting demonstration and display |
| Sales and Use Tax Regulation 1620 (b) (3). The | | | | E. Occasional sale |
| transaction can still be held taxable if the acceptable | | | | This exemption is not available in all states. |
| forms and documents which support the actual use of | | | | Failing to support the status of the seller |
| the property are not provided to the tax agency. The | | | | Transferring debt between entities along with the |
| fact that in many cases the state does not question | | | | aircraft or vessel |
| the transaction until after the aircraft or vessel is sold | | | | F. Out of state buyer |
| to another party makes it very difficult to gather the | | | | Failure to prove the legal status of the out of state |
| logs and receipts. | | | | resident |
| Some of the various types of exemptions that are | | | | In state residency for the purpose of sales tax can |
| available to the CPA’s clients are: | | | | require as little as a checking or savings account. |
| 1. Common carrier (Aircraft only) | | | | G. Lease |
| 2. Interstate commerce | | | | Failure to properly notify the state to be able to |
| 3. Purchased for out of state use | | | | purchase ex-tax |
| 4. Purchase for resale | | | | Failure to understand against whom the tax is levied |
| 5. Occasional sale | | | | and how it impacts the client |
| 6. Out of state buyer | | | | Failure to understand whether it is a sales tax or use |
| 7. Lease | | | | tax |
| 8. Facts or circumstances defined in law which allows | | | | When a purchase is of a fractional share of an aircraft |
| the purchase to fall outside the definition of sale or | | | | it becomes almost impossible to use certain |
| purchase for sales and use tax purposes. | | | | exemptions because of the needs of the other |
| Even though each state may have sections which | | | | owners. A winning strategy can be implemented, but it |
| relate to each of the above, you cannot presume that | | | | requires the compliance of the fractional partnership. |
| the details of the exemption are the same from state | | | | If an aircraft strategy includes a 1031 like kind |
| to state. For example, the language in certain sections | | | | exchange, each possible exemption needs to be |
| of law in Nevada are exactly the same words used in | | | | evaluated versus the four transactions required to |
| California Sales and Use Tax, however, Nevada and | | | | complete each exchange. Each of the four |
| California interpret the same language differently. You | | | | transactions has it own tax exposure. When a reverse |
| must research the cases to decipher each states | | | | exchange is used, five transactions are created that |
| pattern of decision making. | | | | need to be evaluated. A further complication is that |
| The important details actually depend on how the | | | | some states will consider the qualified intermediary as |
| requirement by each state will impact the needs of the | | | | a retailer of aircraft because it is engaged in the |
| purchaser. Some questions that need to be asked of | | | | business of selling aircraft. It is fatal to forget that IRS |
| the clients so that the CPA can assist them to | | | | rulings have no bearing on how each state views each |
| differentiate between the possible exemptions are: | | | | transaction. |
| 1. Common Carrier (Aircraft only) | | | | Armed with an understanding of the sales and use tax |
| Do you really want strangers flying in your new | | | | laws it is possible to create a strategy that legally |
| aircraft? Exclusive use may void this exemption. | | | | avoids the sales and use tax. Acquiring sales tax |
| Are you contemplating a lease arrangement with a | | | | advice from anyone, other than a sales tax expert is in |
| charter, or are you planning to acquire your own FAA | | | | most cases a waste of time and money. This area of |
| certificate? | | | | tax law is too complex, the targets are constantly |
| Are you aware that the documentation requirements | | | | changing, and the potential tax assessment is very |
| and the term of the test period may be significantly | | | | costly. Especially when you add the additional interest |
| greater than most other exemptions? | | | | and penalties that can range from as little as ten |
| 2. Interstate Commerce | | | | percent for failure to file, up to a fifty percent penalty |
| Do you know how your specific state defines | | | | for registering an aircraft out of state in an attempt to |
| “interstate commerce?” | | | | evade tax. |