Introduction to Sales and Use Tax
Planning for sales and use tax before buying an aircraft can reap large savings.
Sales tax is a tax on gross receipts from the sale of goods. The only state that may impose sales tax on an aircraft transaction is the state where the aircraft is located when title and/or possession is transferred.
All but a few states have a general statewide sales tax. Oregon, Montana, Delaware, New Hampshire, and Alaska are the exceptions. Several states exempt at least some aircraft sales from the general state sales tax (Massachusetts, Connecticut, Rhode Island) or limit the tax on aircraft sales to a minimal amount (South Carolina $300 maximum, North Carolina $1500 maximum).
Use tax is a counterpart to sales tax. It is imposed on the possession, storage or use of goods in a particular state when the goods were purchased outside that state and either no sales tax was paid or less sales tax was paid than would have been imposed had the transaction occurred in-state. Use tax is designed to ensure that people do not avoid tax by going out-of-state to buy goods. Tax planning for aircraft is complicated by the fact that aircraft are mobile and use tax can be imposed by any state where the aircraft owner has a substantial connection.
Applying these basic concepts of sales and use tax to aircraft, it should be clear that merely buying an aircraft outside the home state and registering it to a Delaware LLC will not avoid the legal obligation to pay use tax when the aircraft is brought into its home state. Some aircraft owners have unlawfully avoided paying the use tax by adopting this strategy because, historically, some states did not efficiently collect use tax on aircraft. Better technology, enhanced inter-government communications, and a desire to step up enforcement as a result of state budget issues have come together in recent years to make “flying under the radar” more hazardous than ever.
There are often a number of ways to eliminate or reduce sales and/or use tax thorough proper planning before the transaction closes. Many states have specific exemptions that can be utilized, including exemptions for casual sales, leasing companies, common carriers, and users in interstate commerce. A trade-in credit may also reduce tax liability.
It is very easy to plan a transaction to avoid sales tax; take delivery of the aircraft in one of the states that does not tax aircraft sales, or in one of the states that has a “flyaway exemption” which allows a non-resident buyer to avoid sales tax as long as the aircraft is promptly removed from the state. Use tax is often more difficult to eliminate or reduce and is a key focus, and often the starting point, of designing an aircraft ownership structure.