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By Warren Alston, Aviation Tax Group, on May 20th, 2010
I received a call last week from a potential aircraft buyer. We discussed how he and his company could utilize the Interstate and Foreign Commerce Exemption and legally avoid California Sales and Use Tax on the aircraft purchase. He is looking at two possible aircraft. The first is brand new and directly from the manufacture and the second is listed by a California retailer based in Southern California. I explained that delivery had to take place outside of California in order to avoid the California sales tax and if he bought the aircraft from the manufacture, taking delivery at the factory would suffice. He asked if purchasing the aircraft from California would negate the possibility of qualifying for the exemption.
This is our topic for the week. “Can I purchase an aircraft from a California retailer or individual and still qualify for an exemption from the California sales and use tax?” The answer is yes, of course. Otherwise, I would have nothing to write about.
I believe it is important to note that while California’s sales and use tax are based on the same rates, they are applied differently. Sales tax is a tax on the retailer and the retailer has the option of being reimbursed from the buyer. Use tax is the responsibility of the buyer when items are either purchased from outside of California or purchased from a California seller that is not a retailer. Use tax is sometimes considered as complimentary to sales tax.
Purchasing an aircraft from a California seller does not prohibit you from qualifying for an exemption from BOTH the California sales and use tax. When buying from a California retailer, in order to legally avoid sales tax on the purchase of an aircraft, the sale cannot conclude while the aircraft is inside of California. Additionally, physical delivery must occur while the aircraft is outside of the state. When purchasing from a California seller that is not a retailer, the same rules apply in order to remain eligible for a use tax exemption.
As a buyer, several conditions must be made when negotiating the purchase. When claiming the exemption, the California State Board of Equalization (BoE) must be able to draw a clear conclusion that the sale was completed outside of California and that the buyer took possession of the aircraft while outside of the state. If the BoE is able to infer that the purchase took place in California, the auditor will deny the exemption and the buyer will owe use tax on the purchase.
In order to substantiate the closing took place outside of California; the purchase agreement must clearly identify the delivery to take place at a location outside of the state. The purchaser must not make final payment for the aircraft, insure the aircraft, or file the Bill of Sale and Registration while the aircraft is still located in California. As the buyer, you cannot pay for transporting the aircraft to the out of state delivery location and you must not travel aboard the aircraft while it is transported from California to the delivery location. Incorrectly handling one of these issues could allow an auditor to claim that the buyer exercised a right of ownership while the aircraft was in the state; therefore the purchase is subject to California tax.
California has a specific set of regulations that apply to the purchase of aircraft. As a buyer or a seller, you need to be certain that your tax advisors are keeping you well informed regarding the steps you must take to ensure your purchase remains tax exempt. Purchasing an aircraft from a California seller does not disqualify a buyer from a possible exemption. However, careful planning must take place to ensure the exemptions remain available.
Aviation Tax Group is an aviation tax firm whose main goal is to assist aircraft purchasers and owners to legally minimize their taxes. We advise clients how to legally avoid California sales and use tax through the utilization of any one of the available exemptions. We provide quality and professional service through our knowledge and experience regarding sales and use tax on the purchase of aircraft.
By Warren Alston, Aviation Tax Group, on May 13th, 2010
Imagine taking delivery of your newly purchased aircraft after weeks or even months of careful planning. On the advice of those involved in the transaction, you take delivery outside of California in order to avoid the California sales tax on the transaction. You follow the guidelines set forth in the California Sales and Use Tax Laws and Regulations in order to meet the California use tax exemption and eventually receive a letter from the State Board of Equalization stating your purchase is exempt and your file with the BoE is closed.
Then, some months later, you receive a letter from the state with which you took delivery, stating they were informed that you took delivery of an aircraft in their state and that you owe sales tax on the transaction. BAMN! All that work to legally avoid California sales and use tax, down the drain. How could this have happened?
In 2007, we worked with a client that purchased an aircraft from a California seller. Both parties were individuals and in an effort to keep the transaction as simple as possible, the seller completed a purchase agreement that was provided to him by his local FBO. The agreement clearly stated the transaction was between the two individuals, but the letterhead on the agreement was of the FBO. The agreement was signed by both individuals. The buyer took delivery from the seller in Nevada to avoid California sales tax and over the next 6 months qualified for an exemption from California use tax.
Following the filing of the tax return, we received a letter from California stating that exemption was granted and the file was closed. Two months later the client received a letter from the State of Nevada inquiring about the transaction. After speaking with the Nevada Department of Taxation, I learned that California had provided Nevada with a copy of the purchase agreement. Upon review of the agreement, Nevada made the assumption the aircraft was sold by a dealer and they wanted to collect tax on the purchase.
Fortunately, we were aware of the laws in Nevada prior to our client taking delivery and were able to clear up the matter. We went back to the seller and he provided a penalty of perjury statement explaining the agreement was between himself and the buyer and the FBO had no involvement in the transaction. The FBO corroborated the facts with a statement of their own. Nevada eventually agreed and the issue was closed.
While the requirements for qualifying for a California sales and use tax exemption are important, where you take possession can have a profound effect on the total tax exposure of the transaction. Most advisors will simply tell you to take possession in one of the five states that have no sales tax. Most will narrow it down to one: Oregon. They are right in doing so. However, what happens when it is not practical to move the aircraft to Oregon?
Understanding and recognizing the tax consequences of taking possession in a probable delivery state is the first step in preparing for closing on an aircraft. Some states have no tax while a few states allow for a fly-away1 exemption. Other states have an “occasional” or “casual” sale2 exemption and a couple of states have a very minimal tax. It is not necessary to understand the sales and use tax laws of all 50 states, but be certain that you know all of your available options.
Oregon is always the safest place to take delivery on the West Coast, but there are times when taking delivery in Arizona or Nevada are safe options. Florida has been vilified regarding the enforcement of their sales and use tax laws regarding aircraft. However, if you are a “true” non-resident of Florida, are purchasing an aircraft from a manufacturer or a dealer in Florida and have no plans on returning for at least 6 months, Florida’s fly-away exemption will work for you.
In a previous article, I discussed using the conservative method when applying tax codes. While this still holds true, conservatism shouldn’t to be confused with impracticality. Purchasing a Gulfstream from a New York seller and having the aircraft flown to Oregon to take delivery may not be the most sensible approach. Why not take delivery in Connecticut where the laws provide an exemption for aircraft greater than 6,000 lbs. MCTOW? Taking delivery in a state that has no sales tax is generally a safe approach, but it is not the only approach. Make sure your tax advisor gives you all of the available options so that you can make an educated decision on what is safe AND cost effective.
Aviation Tax Group is an aviation tax firm whose main goal is to assist aircraft purchasers and owners to legally minimize their taxes. We advise clients how to legally avoid California sales and use tax through the utilization of any one of the available exemptions. We provide quality and professional service through our knowledge and experience regarding sales and use tax on the purchase of aircraft.
If you are preparing to purchase or have purchased an aircraft and would like to find out how you can legally avoid the California sales and use tax, contact Warren Alston or Julia Chan at 916-930-6141.
- Fly-Away Exemption, whereby you close on the aircraft in a state, then fly the aircraft out of the state within a specified period of time.
- Occasional or Casual Sale is generally a sale in which an aircraft was not acquired by the seller for resale. In most cases the seller is regarded as a broker, dealer or manufacturer.
By Warren Alston, Aviation Tax Group, on May 6th, 2010
How does the saying go? Two things in life are certain: death and taxes! I certainly am not going to discuss death, so the topic has to be taxes. Most people cringe at the thought of paying taxes, but in order for this state of ours to provide any kind of services, some amount of taxes have to be collected. However, that is where the tax code comes into play. Even though some amount of taxes is unfortunately necessary, it is the right of each and every taxpayer to reduce his/her taxes to the minimum amount allowable by law.
Tax laws and regulations are quite complex regardless of whether you are working within federal or state guidelines. At last count, Title 26 of the Code of Federal Regulations is somewhere north of 13,500 pages and the California Revenue and Taxation Code can be found printed on as few as 2,500 pages. Tax law was not printed for the light reader, which is why taxpayers turn to experts like us, at Aviation Tax Group, to guide them through a specialized portion of the California Tax Code.
If you have ever taken the time to read any particular portion of the tax code you will find that in most cases two people can interpret the same sections differently. California Sales and Use Tax Regulations are no different in this respect. This is why we always recommend the conservative approach when applying tax code; especially when you are proactively preparing for the purchase of an aircraft.
As with many tax experts, our interpretations of the tax code comes from our years of experience in filing tax returns, claiming exemptions and handling audits for our clients. From those experiences we have formulated an expanded set of guidelines that, when followed, ensures that our clients greatly exceed the minimum requirements of the tax code and guarantees them an exemption. Examples of our expanded guidelines might include increasing “more than half” in the tax code to more than 60% for application or increasing a “12 month period” to 13 months for added security.
Creating a margin for error is paramount when dealing with the tax code and claiming exemptions from tax. Considering the recent decline in revenue to the State of California, auditors are aggressively attacking any claims for exemption that are not significantly substantiated. If you want to ensure your hard earned money stays in your pocket, always use the conservative approach to interpreting tax code and make certain that your tax advisor is on the same page. Pushing the envelope can only cost you more in the end.
Aviation Tax Group is an aviation tax firm whose main goal is to assist aircraft purchasers and owners to legally minimize their taxes. We advise clients how to legally avoid California sales and use tax through the utilization of any one of the available exemptions. We provide quality and professional service through our knowledge and experience regarding sales and use tax on the purchase of aircraft.
If you are preparing to purchase or have purchased an aircraft and would like to find out how you can legally avoid the sales and use tax, contact Warren Alston or Julia Chan at 916-930-6141.
By Warren Alston, Aviation Tax Group, on April 28th, 2010
Recently, I received a call from a potential client who was purchasing an aircraft. The call was like most others. The gentleman was referred by a trusted professional in the industry. I explained the available exemptions and we discussed which would work best for him and his company. We discussed how our firm could assist him throughout the process and ensure that he was able to legally avoid California sales and use tax on his purchase. It was the next part of the conversation that surprised me.
This was not this gentleman’s first aircraft purchase. As a matter of fact, he was stepping up from a twin-turbine aircraft to a jet. He explained to me that he was not aware of the available exemptions from California sales and use tax on his earlier purchase and he had paid the tax. Of course, he asked if we would be able to go back and get a refund on that purchase, but because the statute of limitations had passed in order to file a claim for refund, I explained we could not.
Had this been the first aircraft this company was purchasing, I would not have been surprised by this conversation. I frequently receive calls from first time buyers stating that an associate told them they could legally avoid California sales and use tax and to call us. However, this gentleman and his company had to have dealt with a salesperson or broker, possibly an attorney, their CPA, an insurance broker, a skilled professional pilot and many other individuals in the aviation community. Unfortunately, not once did the topic of sales and use tax come up in a manner in which this gentleman was advised to speak with a tax expert.
I write this article to remind those of you that are a part of the aviation community to not assume your friends and associates know all that they should when they are purchasing an aircraft; even if it is not their first purchase. Remind them to speak to an aviation attorney about their ownership structures and make sure they are not violating any FAA regulations. Remind them to speak to an aviation insurance broker to ensure they have the best coverage available to them at the best price. And yes, remind them to speak to an aviation tax expert to ensure they have an opportunity to legally minimize their taxes.
Fortunately, the gentleman from above crossed paths with an industry professional that advised him to contact us. Aviation Tax Group is an aviation tax firm whose main goal is to assist aircraft purchasers and owners to legally minimize their taxes. We advise clients how to legally avoid California sales and use tax through the utilization of any one of the available exemptions. We provide quality and professional service through our knowledge and experience regarding sales and use tax on the purchase of aircraft.
If you are preparing to purchase or have purchased an aircraft and would like to find out how you can legally avoid the sales and use tax on your purchase, contact Warren Alston or Julia Chan at 916-930-6141.
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