DISCLAIMER While every effort has been made to ensure that the information contained in this document is 100% accurate, various interpretations do exist. This document should be used as a guide, as an initial resource, subject to verification, when researching the application of state taxes on any aircraft transaction. This document will be updated on an ongoing basis, so if you should note any discrepancies, or have any questions regarding the information, please contact Nel Sanders-Stubbs at nel@conklindd.com. Page 1
Copyright Notice The information contained in the State Tax Guide for General Aviation may be copied by aircraft manufacturers, dealers, distributors, brokers and operators for use in presentations and proposals for the sale or lease of aircraft to their customers provided: 1. No money is charged for providing the information; 2. The Conklin & de Decker Associates, Inc. copyright notice is retained in full on all copies; 3. The information copied comprises no more than 15% of the publication unless express prior written consent of Conklin & de Decker Associates, Inc. is received; 4. Only one copy of the information is made for each customer, and the cover sheet for the copy shall contain the notice in reasonable bold type: "The attached material is the proprietary information of Conklin & de Decker Associates, Inc., and cannot be copied, reproduced, transmitted or communicated in any medium without the express prior consent of Conklin & de Decker Associates, Inc." 5. No portion of the information shall be used as a general mailed, or other form of general advertisement or bulk communication, including without limitation over the Internet or other electronic media without the express prior written consent of Conklin & de Decker Associates, Inc. Page 2
FOREWORD Unlike Federal taxes where there is only one Federal government, understanding and working with state taxes poses other challenges. We are dealing with 50 states, with each of them having a different way of interpreting their own rules, much less considering the rules of neighboring states. When considering the application and impact of State taxes on aircraft ownership and operation we must not only look at Sales & Use Taxes, but also Aircraft Registration Fees, Personal Property Taxes, Fuel Taxes and others. Fuel Taxes Forty-seven (47) states impose a tax on fuel used in aviation, either in the form of an excise tax, sales tax or both. Texas, Connecticut and Rhode Island do not impose any tax on aviation fuel. There are some exemptions from these fuel taxes; however, they are usually limited to commercial operations, Federal and state governments and agricultural operations. It is always wise to check with a state regarding any fuel tax exemptions that may be available. Over half of the states dedicate all or a portion of the revenue collected from fuel taxes to an aviation/transportation fund to support general aviation and non-federally funded projects within the state. Aircraft Registration Fees & Personal Property Taxes While most entities are aware of the state and local sales taxes when purchasing an aircraft, aircraft registration fees and personal property taxes are often overlooked. Since these taxes and fees are imposed annually and can be significant, it is wise to understand how and when they are applied. Aircraft Registration Fees - Aircraft registrations fees are either annual or bi-annual fees. Most states impose either the aircraft registration fee or the personal property tax with only Virginia and Utah applying both. Colorado, Delaware, Florida, Maryland, New Jersey, New York, Pennsylvania and Vermont do not impose either. These fees are imposed by the state and over half the states dedicate the revenues to an aviation trust fund. Twenty-six states impose some form of an aircraft registration fee with eight states imposing this fee in-lieu of a personal property tax. While some states use the aircraft registration fees to keep track of the aircraft, other states derive significant revenue from these fees. Personal Property Taxes - Personal property taxes are an annual tax that are generally imposed by the county, borough or parish where the aircraft is domiciled, not necessarily where the aircraft is registered. Since these taxes tend to be significant, it is wise to take them into account when determining where to domicile or hangar your aircraft. In some states the assessment is on the full Fair Market Value (FMV) of the aircraft and in some cases it is imposed on a percentage of the FMV. Keep in mind when doing your tax planning that aircraft registration fees and personal property taxes are imposed annually, while state sales and use taxes are generally a one-time tax on the purchase of an aircraft. Sales/Use Taxes Sales and use taxes vary greatly from state to state, with four states not having a state sales/use tax, Alaska, Montana, New Hampshire and Oregon, but they may have a local tax. Connecticut does not impose any state sales/use tax on aircraft weighing in excess of 6,000 pounds and Massachusetts does not impose any sales/use tax on aircraft. As with personal property taxes, sales and use taxes are not usually dedicated to an aviation/transportation fund, with the exception of Virginia, Nebraska, North Dakota, South Carolina and Tennessee, which dedicate all or a portion of the tax. The sales tax applies to the sale of tangible personal property and services and aircraft are usually subject to the tax laws of the state in which the aircraft is domiciled. If the sale of an aircraft takes place in a state where there is a state Page 3
sales tax, then the seller can be required to collect and remit the tax. However, if an exemption applies the liability can shift to the buyer. But care must be taken by the seller to ensure that the property documentation (exemption certificate) has been filled out and properly filed with the state. A great deal is said about avoiding the sales tax by taking delivery of an aircraft either in a tax-free state or in a state with a fly away exemption. However, even though one may have avoided the state sales tax, it is now the use tax of the state where the aircraft is going to be hangared or domiciled that should now be of concern. A use tax normally applies to the use, storage or consumption of tangible personal property in a particular state. A use tax could be imposed on almost anything that might be brought into the state. Because the enforcement of such a tax is extremely difficult, most states chose to focus their efforts on big-ticket items, such as aircraft. Over 90% of the states have a compensating use tax as a backstop to the sales tax. So how does a state know if an aircraft is in their state? While many states may require an entity to register their aircraft in the state, other states obtain information from the FAA regarding where the aircraft is registered. And sometimes it is as simple as having a tax collector sit at the airport and take down N numbers so they can be crosschecked with state records. States are becoming more and more aggressive in collecting taxes on aircraft. Several states have exemptions from the sales/use tax centering on whether or not the aircraft is used in commercial transportation. This exemption centers around how much commercial (FAR Part 135 or Part 121) activity there is on the aircraft. In some states, the fact that it is licensed to fly commercial flights is enough, however in others it may have to be used exclusively in commercial activity in order to have the exemption. You should always remember that an exemption is going to be very narrow the need to understand all of the idiosyncrasies. Common Sales and/or Use Tax Exemptions Common Carrier - This exemption may be available when the aircraft is being used to transport persons and/or property for compensation or hire. However, some states require that the aircraft be used exclusively or significantly in commercial activity, whereas some states may only require that the aircraft be on an air carrier certificate. Fly Away - If a purchaser removes the aircraft from the state of purchase within a set period of time the sales tax may be avoided. However, sometimes a key distinction is made as to where delivery occurs, where the title is transferred or the intent of the parties. This exemption may be limited to nonresidents and often the aircraft cannot be brought back into the state for a certain period of time. Occasional/casual sales - This is an exemption for someone not engaged in the business of selling property. However, some states exclude aircraft from this exemption or limit the value of the sale. Related Party - If the sale of an aircraft does not fall within the definition of an occasional/casual sale it may still be exempt if the sale is between related parties (i.e., husband and wife, father and child, related and/or affiliated companies, etc.) Trade In Credit - Some states allow a credit for trade-ins, while some states exclude aircraft from this allowance. In addition, some states require that the trade in be of like kind or only involve two parties. What this means is that the tax is due on the difference between the value of the trade-in and the new aircraft. Sale for Resale -If the sale of the aircraft is for resale, the initial sale maybe exempt from the sales tax. However, in the case of sale for resale where the resale is a lease, some states may allow a tax to be paid on lease payments rather than on the full purchase price. FREQUENTLY ASKED QUESTIONS QUESTION #1 Delivery of an aircraft was made in a tax-free or low tax state; however, the aircraft is now domiciled in a state with a use tax, do I have exposure to the use tax? Page 4
More than likely the use tax will apply, unless there is a use tax exemption. If the delivery of the aircraft was in a low tax state and the tax was paid, there may be a credit allowed for that tax paid in your state. For example, you took delivery in a state with a 3% sales tax and your state has a 5% use tax, the tax owed to your state could be 2%, given the credit for the 3% already paid. QUESTION #2 If I purchase my aircraft in a casual/isolated sale, am I exempt from the sales and use taxes in my state? This exemption depends significantly on the rules in each state. Some states do exempt casual sales, while others do not. QUESTION #3 When I pay the sales tax, would I still owe a personal property tax? If your aircraft is domiciled in a state that has a personal property tax, the fact that the sales/use tax has been paid does not affect the application of the personal property tax. And remember, personal property taxes are annual taxes. QUESTION #4 If my aircraft is not based/domiciled within a particular state, can they still assess state sales and use taxes on my aircraft? You may get a letter saying that they have seen your aircraft in their state, what you need to do is provide the state with proof that you have paid the state sales/use, personal property tax and/or aircraft registration fees in another states or why you think you do not owe taxes to their state. If you cannot show that you are paying or paid taxes in another state, this state may enforce the payment of taxes in their state. The idea here is that taxes, whether they are sales or use, personal property or aircraft registration fees, taxes should be paid somewhere. QUESTION #5 How can I minimize my exposure to use taxes? One way would be to use the sale for resale exemption that exists in most states as an effective way to minimize your exposure to sales or use taxes. This can often times be accomplished by setting up a leasing company to own the aircraft and then lease the aircraft to the operating company. By doing this you can avoid the up front sales tax and pay the use tax on the lease payments over the period of the lease. However, some states will tax the full term of the lease. QUESTION #6 I am purchasing a share in an aircraft that is operated within one of the fractional programs. What is my exposure to state sales and/or use taxes? This is an area where there has not been any resolution. However, you must look at the facts, which are: 1) The aircraft are in and out of many states and therefore have exposure in many states; 2) Occasional flights in and out of some states may not be taxable; 3) Aircraft in interstate commerce are not exempt in all states. New York and Texas have made rulings on fractionally owned aircraft and have determined them to be involved in commercial activity and therefore exempt from the sales/use tax in the state. COMMON SCENARIOS SCENARIO #1 Company A (a Virginia Company) takes delivery of their aircraft (a Citation Excel) in Florida, however the aircraft is still under going some maintenance work in Ft. Lauderdale. After the work is completed, Company A brings the Page 5
aircraft into Virginia and domiciles/hangars the aircraft at Dulles International Airport. What is Company A's exposure to Florida and Virginia taxes? In Florida there is a "fly-away" rule that says if the aircraft is removed within 10 days of purchase the Florida sales & use taxes do not apply. In addition, regarding the maintenance, if the aircraft weighs more than 15,000 pounds or is removed from the state within 20 days there is no tax on the maintenance. However, Company now has exposure to the Virginia state tax laws. The aircraft will be subject to the 2% aircraft sales tax, a $5 aircraft registration fee and the personal property tax based on the county where the aircraft is hangared SCENARIO #2 Same scenario as #1, however, instead of bringing the aircraft into Virginia, Company A has affiliated companies in three (3) other states (Maryland, West Virginia and North Carolina). Where would be the best place to domicile the aircraft? With regard to Florida and Virginia, see Scenario #1. If the aircraft were to be domiciled in Maryland and the company is engaged in interstate commerce, the aircraft would be exempt from the state sales tax. In addition, Maryland does not have an aircraft registration fee or a personal property tax. If the aircraft were to be domiciled in North Carolina, the aircraft would be subject to the $1,500 state sales tax and the personal property tax based on the county where the aircraft would be hangared. If the aircraft were to be domiciled in West Virginia, there would be a 6% state sales tax and a personal property tax based on the county where the aircraft would be hangared. At first glance it appears that Maryland would be the state in which to domicile the aircraft, however, one more thing should be considered. Which affiliated company will be using the aircraft the most and how much repositioning would you have to do if the aircraft was domiciled in Maryland? SCENARIO #3 Company B (a Texas Company) takes delivery of their aircraft (a Citation X) in Kansas and takes the aircraft to Oklahoma to be hangared there. What is Company B's exposure to Kansas, Oklahoma and Texas taxes? In Kansas there is a "fly-away" rule that says if the aircraft is removed within 10 days of purchase the Kansas sales & use taxes do not apply. However, now Company B has exposure to the state tax rules in Oklahoma and Texas. If the aircraft is truly domiciled in Oklahoma then Company B should be very sure that the aircraft is registered in Oklahoma and the aircraft registration fees are paid. In addition, there is a 3.25% aircraft excise tax. Because Company B is a Texas company, Texas may ask for proof that the aircraft is truly hangared in another state and taxes have been paid there. Also, a look should be given to how many repositioning flights there are going to be and the cost of those to the company. SCENARIO #4 Company C (a California Company) takes delivery of their aircraft (a Hawker 800XP) in Oregon. However, this aircraft will be domiciled in California and will be on a Part 135 certificate. The owner will use the aircraft under FAR Part 91 and 135 and the aircraft will be chartered out to the general public. What is Company C's exposure to Oregon and California taxes? There is no state sales tax in Oregon so there is no state tax exposure in Oregon. On the other hand, California does have a significant state sales tax and personal property taxes. However, since the aircraft is going to be put on a Part 135 certificate it may allow Company C to be exempt from the state sales tax. California requires that the aircraft not only be used in 135 activity more than 50% of the time, but that there must be more than $50,000 or 20% of the purchase price of the aircraft, whichever is less, in income from the 135 activity. However, there will still be personal property tax due on the aircraft. Page 6
As you can see, when purchasing an aircraft you need to be aware of the state tax laws in more than one state. There is no substitute for good and thorough tax planning. STATE TAX PLANNING All of this is very confusing and therefore it is necessary to not only understand all of the taxes affecting aircraft ownership and operations in your state, but also the taxes in other states so that you do not find yourself paying a tax that is not necessary. Page 7
DEFINITIONS Ad Valorem Tax - A tax imposed on the basis of the monetary value of the taxable item. Air Carriers - Any citizen of the United States who undertakes directly, lease or any other arrangement, to engage in air transportation. Aircraft - Usually means any contrivance designed for powered navigation in the air except a rocket or missile. Airplane - Usually means a fixed wing, heavier than air vessel that is driven by propeller or jet and supported by the dynamic reaction of the air against its wings. Allocate - An allotment or apportionment; as an allocation of shares in a company. Appraise - To set a value; to estimate the worth of. Apportionment - Allotment of direct taxes on the basis of state population. Assess - To estimate the value (of property) for taxation. Aviation Gasoline - For use in aviation piston engines, commonly referred to as Avgas. Aviation Gasoline Tax - A tax imposed on gasoline used in aircraft. Based Aircraft - An aircraft permanently stationed at an airport by agreement between the owner and the airport management. Business Aviation - Operation of an aircraft for business purposes when the pilot also performs a business function. Capital Lease - Appears as a sale over time. Ownership may transfer at the end of the lease period. The interest may be deductible for tax purposes, but the lease obligation reduction is not. Casual Sale - A sale made by an entity not in the business of selling this type of property. Some states may not include aircraft from this exemption. Charter - Common Carrier -An aircraft that is used to transport persons and/or property for hire or compensation, usually under an FAA approved operating certificate. Corporate Aviation - The use of an aircraft by a company or business person for the transportation of people, cargo, mail or combination in furtherance of a firm's business, and which is flown by a professional pilot who received a direct salary or compensation for piloting. Depreciation - The reduction in the book or market value of an asset and the part of an investment that can be deducted from taxable income. Dry Lease - Refers to obtaining an aircraft only, while a wet lease relates to having an aircraft with other resources and support, such as crew. Page 8
Federal Aviation Administration (FAA) - Governs civil aviation and aviation-related activities. Federal Aviation Regulations (FARs) - Regulations established and administered by the (FAA). Fixed Based Operator (FBO) - An airport facility that serves the general aviation community by selling and repairing aircraft and parts, selling fuel, providing flight and ground school instruction. Fly Away Exemption - The premise is that no tax is charged if the purchaser removes the aircraft from the state after purchase, in some cases within a certain period of time. General Aviation - The portion of civil aviation that encompasses all facets of aviation except air carriers. General Aviation Airport (Public) - An airport that is used for public purposes, that is under the control of a public agency, and whose landing area is publicly owned. These airports service aircraft owned by private individuals or firms that are used primarily for business and recreational flying. Government Carrier - Involve military and other federal, state and local operators who have their own transport equipment. Government carriers provide services including firefighting, law enforcement, scientific research and development, flight inspection, surveying, powerline/pipeline patrol, aerial photography, pollution control, search and rescue, drug interdiction, agricultural application and transport of government personnel. Helicopter - An aircraft without wings that obtains its lift from the rotation of overhead blades Heliport - An area of land or water or any structure used for the landing and takeoff of helicopters. HUB (Air Traffic) - Cities and Metropolitan Statistical Areas requiring aviation services. May include more than one airport. Hubs fall into four classes as determined by the communities percentage of the total emplaned passengers by scheduled air carriers in the 50 United States. Hub-and-Spoke Network - A traffic system that feeds air traffic through small communities through larger communities to the passenger's destination via connections at the larger community. Income Tax - A tax levied on net personal or business income. A personal tax levied on annual income. Isolated Sale - See casual sales. Jet Fuel - A gas turbine engine fuel of the kerosene type, commonly referred to as Jet A. Jet Fuel Tax - A tax imposed on jet fuel. Labor/Services - In some states certain services, including repair work are exempt from tax if separately stated on the invoice. Large Hub - A community enplaning 1 percent or more of the total annual emplaned passengers. Lease - A contract granting use or occupation of property during a specified time for a specified payment. Local Taxes - Many states allow cities, counties and or specific districts to levy local sales and use taxes in addition to the state sales and use tax. Page 9
Millage Rates - An antiquated method of valuation that is a multiplier of a thousandth. (i.e., 6 mills =.006) Nautical Mile - A unit of distance measurement used in air navigation, it is equal to 1.15 statute miles. Non-hub - A community enplaning less than.05 percent of the total annual enplaned passengers. Non-resident - A non-resident person; one who does not reside in the State or jurisdiction. Occasional Sale - See casual sales. Person - Includes any individual, firm, corporation, co-partnership, join venture, association of persons, social club, limited-liability-company, estate, trust, etc. Personal Property Tax - A tax on tangible personal property. Registration Fees - A fee that is imposed on the registration of an aircraft within a state. This fee may be in lieu of a personal property tax. Resident - One who resides in a particular place permanently for an extended period of time. Sale - Usually means the transfer of title, exchange or barter, conditional or otherwise, of tangible personal property. Sales Tax - A tax that is imposed directly on sales and is due on the sales price. State Aviation Trust Fund - A dedicated fund that is used to support aviation within the state. Tangible Personal Property - Property which can be seen, weighed, measured, felt or touched, or is in anyway perceptible to the senses. Trade-In Allowance - Usually the tax is due on the difference between the value of the new item and the value of an item that is being traded in. However, some states require the trade-in to be of like kind. Use Tax - Use tax, or as it is also referred to, compensating tax, is a supplement to the sales tax. The sales and use taxes are generally mutually exclusive. Wet Lease - Those leases that relate to having an aircraft with other resources and support, for example crew, maintenan Page 10
OREGON SALES/USE TAXES -- No There is no sales tax in Oregon. LOCAL TAXES -- No SALES: N/A LEASES: N/A PARTS: N/A LABOR: N/A LEASES: PARTS: LABOR: AIRCRAFT REGISTRATION FEES -- Yes (ORS 837.040 & 837.005) Every Oregon resident who owns an aircraft that is based or flown in Oregon, or any non-resident who owns an aircraft based or flown in Oregon for 60 days or more per year, or any owner of an aircraft used for commercial operations in Oregon must register the aircraft with the OR Department of Aviation within 60 days of being subject to registration. The aircraft registration fees are calculated using the following fee schedule: TYPE OF AIRCRAFT Fixed Wing Single Engine $ 50 Multi-engine piston $ 75 Multi-engine turboprop $100 Turbojet $162 Helicopter Piston Engine $ 50 Turbine Engine $100 Lighter than air, home built, sail plane or gyrocopter $ 37 Ultralight aircraft $ 25 Ex-military multiengine or turbojet/ex-air carrier $187 Government or Public owned Registration required, but no fee due FEE PERSONAL PROPERTY TAX -- No The 1985 Legislature exempted aircraft from personal property taxation and imposed a penalty for not registering. Prior to this, aircraft not paying registration fees were subject to personal property tax. Assessors seldom caught aircraft not being registered and property taxes were often not imposed. 08/10/2009 Conklin & de Decker Associates, Inc. Page 1
OREGON However, air transportation and air express companies are assessed by the Department pursuant to ORS 308.515 on an allocation method (OAR 150-308.550(2)-(A)) JET FUEL TAX ORS 319.020(2) Excise Tax = $0.0100 Sales Tax = No Exemptions = The Federal government, the U.S. Military and export and international flight operations are exempt from the tax. AVIATION GASOLINE TAX (ORS 319.020(2)) Excise Tax = $0.0900 Sales Tax = No Exemptions = The Federal government, the U.S. Military and export & international flights are exempt from the excise tax. STATE AVIATION TRUST FUND -- Yes Dedication of Taxes Jet Fuel Yes Aviation Gasoline Yes Aircraft Registration Fee Yes Personal Property Tax N/A Sales Taxes No CONTACT INFORMATION Department of Revenue Craig Fisher, Manager Research Section TEL: 503-945-8384 Web Site: www.dor.state.or.us/ Department of Aeronautics Robert Hidley, Director Department of Aviation TEL: 503-378-4880 Web Site: www.avaition.state.or.us/ Email: robert.hidley@state.or.us 08/10/2009 Conklin & de Decker Associates, Inc. Page 2