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