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