Housekeeping Issues. Florida Sales and Use Tax Issues for Aircraft Owners. Copyright 2013 Wolcott Aviation Seminars, LLC

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1 Florida Sales and Use Tax Issues for Aircraft Owners December 12, 2013 Sue Folkringa, CPA, MBA Commercial Pilot, AS/MEL, Instrument Airplane Housekeeping Issues 2 Wolcott Aviation Seminars, LLC If you prefer to listen via phone, please dial: Access code Copyright 1

2 Today s Webinar: Today s webinar length will be approximately 1 hour in length Optional section to introduce a new product offering from Flight Tax Systems, LLC If you need assistance with accessing the webinar or with the course materials (866) Please ask questions during the webinar: 5 We get asked many questions during the webinar.. We try to answer all questions asked during the webinar If your question has not been answered by the end of the webinar, please don t disconnect when the webinar ends We may ask you to contact us after the webinar if your question is too complex to answer using the chat feature 6 Copyright 2

3 Wolcott & Associates, PA: What We Do We are an aviation dedicated firm of CPAs and accounting professionals Our clients are aircraft owners and operators, pilots, and owner pilots We specialize in the preparation of aircraft income tax returns, state tax matters, IRS audits, structuring aircraft ownership, and related aviation tax and financial matters We identify, protect and preserve tax deductions for your aircraft! 7 Reminders: You must be present for the entire program for CLE, CPE or an Attendance Certificate. Polls will be provided during the program to confirm attendance. Complete all polls for attendance credit. National Association of State Boards of Accountancy (NASBA) Group Internet Based Programs sponsor ID Florida Bar Association Continuing Legal Education Accreditation Provider # Reminders: 9 Copyright 3

4 Today s Webinar: Webinar will be approximately 60 minutes in length Course materials have been ed to you but in case you do not have them: Resource Library ID = Other resources noted within the webinar by xxxxx 10 Resource Lookup 11 Upcoming Webinars December 17, 2013: Business Use Individual-Owned Aircraft 12 Copyright 4

5 Following the webinar we invite you to join us for a 15 minute webinar on our aviation tax software called Flight Tax Systems. Flight Tax Systems software will track and calculate the tax reporting requirements explained during this webinar. Attendance is entirely optional. 13 Florida Sales and Use Tax Issues for Aircraft Owners Jed R. Wolcott, MBA Certified Public Accountant Keri Dowling, JD 14 Florida Aircraft Taxes Overview of Florida sales and use taxes for aircraft New - The infamous 6 month rule amended New - Mileage apportionment provisions Leasing rules and restrictions and use of the FL dealer s license New interpretation of lease vs. management agreements 15 Copyright 5

6 Enforcement is Increasing! More surveillance Cooperation with FAA FBO hangar and parking rolls Electronic tracking (FlightAware) Loopholes exist allowing DOR additional grounds for enforcement friends or colleagues reporting you to FDOR and/or FAA 16 Liability for Sales or Use Taxes on Aircraft in Florida Aircraft Purchased, Based, Leased or used in Florida are TAXABLE! Buyer, lessee or end-user pays the tax Tax is based on cost or lease payment No sales tax difference for recreational or business use aircraft The end user is responsible for the tax in a chain of taxable transactions Contractual obligations may shift between the parties, but the FDOR doesn t care 17 New Form for Reporting Aircraft Purchases DR-15AIR Sales and Use Tax Return for Aircraft. The form was released 08/2013 Form states: Use this form to report Florida s sales and use tax on the purchase of an aircraft when the Florida sales tax was not paid to the seller. Form provides a method for calculating the tax due The DR-15AIR should not be used if the purchaser or the seller is a Florida Reseller 18 Copyright 6

7 Aircraft Sales Taxes Applies to aircraft purchased in Florida [FL Reg. 12A-1.007, F.S ] Generally thought of as the filing of the BOS with the FAA, but not really - this means tendering the BOS to Buyer Location of aircraft at title change is key to state sales tax liability Florida tax rate is 6% + local option (to $5,000) Tax based on selling price Be wary of OVC and determining FMV Leases of aircraft purchased in FL are subject to tax Casual sales are taxable [F.S (1)(A)] Aircraft Use Taxes Think Consumed Applies to aircraft purchased outside of Florida and later brought to Florida within 6 months Use tax is the same 6% + local option Also applies to: Aircraft purchased from someone that is not a FL Reseller (ie, dealer) and delivery is in Florida Aircraft purchased in a foreign country and is brought into Florida at any time Other Florida Taxes No property tax on aircraft in Florida Income taxes generally do not affect aircraft Note: 5.5% Income tax on C-Corps Florida does not register aircraft Most states don t, so it s a good idea to get a hangar/tie-down agreement 21 Copyright 7

8 If You Owe Tax for the Purchase of an Aircraft: Calculate at 6% of taxable basis, plus local option (if applicable) Send payment accompanied by Form DR-15AIR the 20 th day of the month following the month of purchase [F.S (1)(b)] Failure to pay will result in assessment of back taxes, penalties and interest DOR may file tax lien with FAA 22 Fly-Away Exemption [F.S (1)(a)(2)] Only available to aircraft purchased in Florida and sold to non-resident Be wary of significant ties Applies only if reported by a FL dealer and is: Removed from Florida within 10 days -or- Immediately placed in DOR-registered repair facility and removed within 20 days after repair completed Buyer must provide dealer with signed & notarized Affidavit of Removal from State Form GT DOR has begun enforcing the sale by dealer requirement of the FL regulations 23 Aircraft Purchased in Florida and Not Removed Within 20 Days Sales Tax Applies to non-removal and/or not furnishing the department with required documentation of removal Or if no tax paid and buyer signed a fly-away exemption Owe original sales tax plus a 100% penalty if not timely removed [ F.S (1)(a)2.f(VIII)] Copyright 8

9 Aircraft Purchased Outside of Florida Sales Tax If aircraft is outside of Florida at time of purchase, and remains outside for 6 months, no sales tax is owed But this doesn t mean you never have to pay any tax (move to Fla.) If aircraft is purchased outside of Florida and brought in within 6 months, sales tax may be owed If buyer is a FL dealer, different rules apply If the aircraft is leased and based in Florida, lessor must collect use tax from lessee Applies to either resident or non-resident 25 Trade-In Allowance (Limited) A trade in allowance is deducted from the gross sales price (of tangible personal property) and only the net sales price is subject to FL sales tax Trade must be a single transaction Title to both aircraft must pass through and be reported by a Florida Dealer 1031 exchanges do not qualify for the Florida Trade In Allowance FL Reg: 12A-1.007(1)(b) Large-Aircraft Maintenance Exemptions Maintenance labor on aircraft +15,000 lbs MTOW is exempt [FS (7)(ee)] Replacement engines, parts and equipment on aircraft +15,000 lbs MTOW are exempt when installed in Florida [FS (7)(rr) ] MTOW = Maximum Take Off Weight 27 Copyright 9

10 Large-Aircraft Maintenance Exemptions Maintenance labor on helicopters +10,000 lbs MTOW is exempt [FS (7)(ee)] Replacement engines, parts and equipment on helicopters of +10,300 lbs MTOW are exempt when installed in Florida [FS (7)(rr)] MTOW = Maximum Take Off Weight 28 Aircraft Purchased for Use in a Rental Activity Aircraft purchased for exclusive use as a rental are not subject to sales tax on the purchase [FL Reg. 12A (14)(b)1] Providing that use tax will be paid by the renter All parties must be Florida dealers (except the renter) Tax liability shifts to the renter called a passthrough lease [FL Reg. 12A-1.071(21)] All use of the aircraft must be subject to a lease and is taxable 29 Florida Aircraft Taxes Overview of Florida sales and use taxes for aircraft New - The infamous 6 month rule amended New - Mileage apportionment provisions Leasing rules and restrictions and use of the FL dealer s license New interpretation of lease vs. management agreements 30 Copyright 10

11 6- Month Rule for Visiting Florida Finally Amended Old rule: Aircraft owned by non-resident that had not entered Florida during the first 6 months were presumed to have been purchased for use in another state therefore not subject to Florida tax DOR began applying that rule to aircraft that had not paid sales tax in another state and were visiting Florida within the first 6 months of purchase Became a big problem for visiting aircraft owners in recent years Month Rule for Visiting Florida Finally Amended [F.S (7)(ggg)] Effective July 1, 2010: Non-resident owned aircraft may visit Florida not to exceed 20 days during first 6 months of ownership One landing in Florida equals one day Clearing customs (only) does not constitute a FL day No restrictions for aircraft entering Florida for Flight Training Repairs and alterations Refitting or modifications purposes This rule does NOT apply to Florida residents NOTE: DOR has not issued rules for leased aircraft be aware! Assume if Lessee is Fla. based, the tax will be due 32 Aircraft that Violated the Six Month Rule Before July 1, day exemption is NOT retroactive DOR now says that the 6-month rule prior to July 1, 2010 only applies to aircraft where the owner has significant nexus to Florida Facts and circumstances will be considered It would appear that the old rules still apply; current position is not supported by FL Statute or Regulation 33 Copyright 11

12 New Rules Defining a Non-Florida Resident Has not made his/her principal place of domicile in Florida for 6 or more consecutive months Has not filed for homestead tax exemption on property in Florida and Has not declared themselves to be a Florida resident at the county clerk s office per F.S Has not registered to vote in Florida TIP #10A01-11 issued June 29, Florida Aircraft Taxes Overview of Florida sales and use taxes for aircraft New - The infamous 6 month rule amended New - Mileage apportionment provisions Leasing rules and restrictions and use of the FL dealer s license New interpretation of lease vs. management agreements 35 Part -135 Mileage Apportionment Apportionment basis is the ratio of Florida revenue miles to system-wide revenue miles applied annually to all aircraft in charter fleet Air carrier s sales and use taxes are reduced by the apportionment percentage, including leases Proration rate for the aircraft s first year is based on an estimate; subsequent year s based on actual mileages 135 operator must be a C-Corporation filing Florida F1120 to qualify 135 operator must apply by written request [Form DR16-A]; Note: be sure to do the calculation to make sure there is a savings before applying F.S Mileage Apportionment Copyright 12

13 P-135 Apportionment Calculation Step 1 Total annual miles (fleet) 1,000,000 Miles outside Florida 960,000 Florida Miles 40,000 Florida Apportionment 4% Step 2 Monthly lease payment $90,000 Florida sales tax %.06 Monthly sales tax 5,400 Florida Apportionment 4% Florida tax payment $216 F.S F.S Mileage Apportionment Mileage Apportionment Statute for Air Carriers have Changed Old rules limited mileage apportionment to Part 135, 129, and 121 operators only; applicants had to show FAA Air Carrier Certificate Part 91 operations (apparently) may now apply as an air carrier under this regulation Aircraft owner or lessee applicant must be taxed as C-corp. and file an annual Florida income tax return May result in a sales or use tax reduction to P-91 operators that have aircraft in leasing structures 38 Florida Aircraft Taxes Overview of Florida sales and use taxes for aircraft New - The infamous 6 month rule amended New - Mileage apportionment provisions Leasing rules and restrictions and use of the FL dealer s license New interpretation of lease vs. management agreements 39 Copyright 13

14 The Florida Resale Certificate Resale Certificate (also called dealer license/resellers/sale for Resale) is issued only to Florida resident s, upon submission of an application Entity must be registered to do business in Florida The Florida Resale Certificate permits a reseller to purchase an aircraft without paying sales tax, for the purpose of either: Reselling the aircraft Leasing the aircraft Conducting demo flights (be wary) 40 The Florida Resale Certificate Goods and materials purchased and consumed by a dealer are taxable. Includes: Shop supplies Software Furniture and fixtures Shop and office equipment Dealer is obligated to either pay sales tax at time of purchase, or include tax on monthly DR-15 filing 41 The Florida Resale Certificate If purchasing for resale, dealer must: Treat aircraft as resale inventory List aircraft as inventory on income tax returns Not depreciate (aircraft is no longer inventory once depreciation is taken) Unreimbursed demo and maintenance flights are ok Any use for payment subject to monthly sales tax payment of 6% of 1% of the cost of the aircraft If dealer-use tax is paid for 100 months, tax totals more than if paid at purchase 42 Copyright 14

15 FL Dealer Use Provision FL Dealer remits tax based on 1% of the cost of aircraft for each month used [FL Reg. 12A-1.007(10)(g)1] Straight Faced Test Example: Aircraft cost $1,000,000 Dealer monthly use rate X 1% Subtotal $10,000 Sales tax rate X 6% Tax per month for use $ If Purchasing Aircraft for Lease No tax is paid at closing Sales tax is deferred over life of the lease Lessee could pay more tax than if tax paid at closing Lease use must be exclusive Any untaxed use voids the deferral If there is untaxed use, DOR will charge 6% on original cost of the aircraft plus interest and penalty No credit given for tax paid on the lease 44 Types of Aircraft Leases Owner Leases: Owner leases to a 135 charter operator, flight school, or rental operator Registered Owner v. Beneficial Owner Can be a SPE Citizenship Requirements Operator - incidental to primary business purpose Cannot be an SPE No Citizenship requirements Buyer Leases: Buyers may defer sales tax by leasing to themselves Both are equally eligible to defer sales tax over the term of the lease Each type of lease has special rules and provisions 45 Copyright 15

16 Buyer Tax Deferral Lease Buyer creates a leasing company to own the aircraft Separate buyer-owned entity leases and operates the aircraft Defers sales tax over ownership period Buyer avoids paying sales tax at purchase, but pays sales tax on each lease payment May pay more sales tax if aircraft is owned for long period 46 Buyer Tax Deferral Lease (continued) Owner leases to operating company Lessee pays tax on monthly lease payment Owner Operating Company Dry Lease Aircraft LLC 47 Buyer Tax Deferral Lease (continued) Owner leases to operating company Pays tax on monthly lease payment Owner Operating Company Dry Lease Aircraft LLC 48 Copyright 16

17 Buyer Tax Deferral Lease (continued) Owner leases to operating company Pays tax on monthly lease payment Owner Operating Company Dry Lease Aircraft LLC 49 Buyer Tax Deferral Lease (continued) Owner leases to operating company Pays tax on monthly lease payment Owner Collects and Pays Sales Tax Operating Company Dry Lease Aircraft LLC 50 Beware of Owner-Use Violation All use of aircraft must be subject to tax 100% Often Missed 51 Copyright 17

18 Owner Lease to Flight School Aircraft purchased exclusively for lease to a flight school are taxable Buyer has the option: Pay sales tax on the purchase of the aircraft, or Charge use tax on the lease payments to the flight school Prepare separate invoices for aircraft and instruction Even better if aircraft rental invoice is directly from the aircraft owner 52 Owner Lease to Rental Operator Aircraft purchased exclusively for rental are tax exempt [F.S (13)] Aircraft rental is subject to use tax [F.S , ] Obligation to pay use tax is passed to the renter Aircraft owner must be a FL dealer Rental operator must be a FL dealer Rental operator must charge sales tax to renter Mixed use (part owner use, part leasing use) can be complicated Typically requires multiple leases Owner Lease to Rental Operator Renter is subject to tax Two step pass through lease Collection responsibility falls on rental operator to collect and remit 54 Copyright 18

19 Florida Aircraft Taxes Overview of Florida sales and use taxes for aircraft New - The infamous 6 month rule amended New - Mileage apportionment provisions Leasing rules and restrictions and use of the FL dealer s license New interpretation of lease vs. management agreements 55 Owner Responsible for Sales Tax when Aircraft is Operated Under a Management Agreement Problem occurs when a mgt. agreement is disguised as a lease Example: Owner provides aircraft to 135 or school If the agreement between the parties does not meet leasing criteria, DOR will treat transaction as management agreement No leasing deferral; owner is liable for sales tax at 6% Liability for sales tax 56 Leases vs. Management Agreements DOR is scrutinizing leases to see if they are actually management agreements or joint ventures Leases qualify for tax deferral provisions Management agreements and joint ventures do not qualify for leasing deferral RESULT: Owner is liable for tax on the cost of the aircraft when it is purchased for use in a joint venture or with a management agreement (i.e. 135 use, rental to a flight school, used in a rental operation, etc.) IRS v. FAA considerations management fees subject to FET - enforcement may be suspended, but it hasn t gone away 57 Copyright 19

20 Typical P-135 or Rental Management Agreement Structure Operator pays owner the revenue received from the use of the aircraft, less: Operator s commission Fuel, maintenance, parking, and other DOC s Operator sends owner check (or bill) at end of month This is a Management Agreement! Owner is liable for sales tax on the aircraft! 58 Typical P-135 or Rental Management Agreement Structure Example: Charter income $15,000 Management Agreement Less: Commission 1,500 Hangar 2,500 Fuel 5,500 Net amount due lessor 6, Elements of a Lease Shared risk between aircraft owner and operator Fixed monthly payments Long term; lease must have fixed termination date, cannot terminate at will; 1 year is okay Possession and control must shift to operator; owner must have limited authority or no authority over the use of the aircraft Operator pays expenses Think Ford pickup truck lease 60 Copyright 20

21 Rules Applying to all Leases Owning entity (lessor) must be registered to do business in Florida [FL Reg. 12A-1.056] Lessor entity must be a Florida Dealer before acquiring aircraft, otherwise penalties and interest will apply [F.S (9)(b)] Lease use must be exclusive! 61 Final Thoughts Apply for Annual Resale Certificate before buying an aircraft if you intend to rent or lease File timely monthly DR-15 Reports [Sales and Use Tax Returns] Lease use must be exclusive. All flights must be subject to use tax reporting Consult with your accounting and tax professionals PRIOR to purchasing, selling or leasing your aircraft 62 Thank You Very Much! Keri Dowling Air Law Office, P.A. President keridowling@airlawoffice.com Sue Folkringa, CPA, MBA Wolcott & Associates, P.A. Aviation Taxologist suef@aviation-cpa.com Jed Wolcott, CPA, MBA Wolcott & Associates, P.A. President jedw@aviation-cpa.com 63 Copyright 21

22 Flight Tax Systems, LLC Software for Aircraft Owners and Operators 2013 Wolcott Aviation Seminars, Seminars, LLC LLC 64 Flight Tax Systems Software for Aircraft Owners & Operators Entertainment Cost Disallowance Reporting Features Jed R. Wolcott, MBA Certified Public Accountant 65 Flight Tax Systems GENERAL FEATURES Prepares SIFL and cost disallowance reports that are ready to use to prepare the aircraft company or individual tax returns Internet-based; access anywhere there is web-access Multiple owners/one aircraft and multiple aircraft/one owner Fleet can include owned, fractional, and jet card aircraft. Federal Excise Tax reporting SEC incremental cost reporting State tax reporting Cost center reporting Fully annotated with links to the IRS tax code and regulations No date restrictions; input last year s flights as well as this year s flights 66 Copyright 22

23 SIFL IMPUTED INCOME REPORTING Point-to-point reporting Control and non-control employees Tracks guests by the employee that issues invitation Recognizes 50% seating capacity rules Follows international SIFL rules for flights lasting in excess of 7 days Recognizes children under age 2 Recognizes Bona Fide Security Plans Spousal travel reporting Fiscal and calendar year reporting 67 Flight Tax Systems ENTERTAINMENT COST DISALLOWANCE FEATURES Calculates the entertainment cost disallowance percentage by Occupied Seat Miles (OSM), Occupied Seat Hours (OSH), Flight-By-Flight Miles (FBM), and Flight-By-Flight Hours (FBH) Recognizes specified individuals & their guests Reports deadhead flights as required by the final regulations Aggregates fleet aircraft in any combination Reports Open Jaw flights No date restrictions; input last year s flights as well as this year s flights 68 Flight Tax Systems 69 Copyright 23

24 Flight Tax Systems 70 Flight Tax Systems 71 Flight Tax Systems SIFL Report SIFL Year to Date Summary Footnotes explain SIFL reporting rules 72 Copyright 24

25 Flight Tax Systems Entertainment Cost Disallowance Report Calculates entertainment cost disallowance under all four methods. Permits taxpayer to select the method that has the best results. 73 Flight Tax Systems Florida Mileage Apportionment Report Florida use % Used to reduce sales taxes on leasing to percentage of use in Florida. 74 Flight Tax Systems Florida Days Report 75 Copyright 25

26 Flight Tax Systems Florida Landings Report 76 Flight Tax Systems COST, BILLING AND SUPPORT Annual subscription is $3,995 (Enterprise version) Provides 12 months of program access Unlimited use; no date or aircraft restriction Custom programming and reports available Aviation CPAs from our parent company provide 2 hours of free support. We take you through setup and flight recording. Additional support available Call to sign up! 77 Thank You Very Much! Jed R. Wolcott, MBA Certified Public Accountant Flight Tax Systems, LLC 5525 NW 15 th Avenue, Suite 203 Fort Lauderdale, Florida jedw@aviation-cpa.com 78 Copyright 26