With an upfront cost ranging between $2 million-$50 million, the purchase of an aircraft represents a significant investment. With sales tax rates ranging from 3%-10%, the sales tax liability on the purchase of an aircraft is a major cash outflow over and above the purchase price and adds no value to the aircraft. Leasing may be an option, however depending on how the lease is structured the purchaser may still need to pay all of the sales tax upfront. Good planning is key to conserving cash flow and getting the most value out of your purchase dollar.
Most states follow the rule that all transactions by which title or possession, or both, of tangible personal property, is or is to be transferred is subject to sales tax. As such, the state in which possession of an aircraft is taken, is the state which has the opportunity to tax the transaction first. Taking delivery of an aircraft in a state considered “aviation friendly” is an important part of the purchase planning of an aircraft. States are considered aviation friendly when their sales tax laws are such that they promote a healthy active aviation industry within their borders. One way they accomplish this is by minimizing the sales tax charged when a purchaser takes delivery of an aircraft within their borders. Below, I discuss some of the incentives an aviation friendly state provides to a purchaser of an aircraft and how the purchaser can take advantage of them.
States with No State Sales Tax:
Alaska, Delaware, Montana, New Hampshire, and Oregon are states without a state sales tax. These states are most preferred as a delivery state for aircraft as there is no state sales tax to be assessed upon delivery of the aircraft. Taking delivery of a purchase or lease of an aircraft in these states provides a purchaser the opportunity to manage their sales tax exposure to the fullest extent, since there is no state sales tax upon possession of the aircraft. It should be noted that some states have counties or cities who also levy sales taxes. If the county or city tax base is the same as the state, there should be no concern. However some states have counties or cities where the tax base is not necessarily the same as the state tax base. If this is the case, care should be taken to ensure delivery of the aircraft in the county or city with the lowest rate.
Exemption from Tax on Sale or Lease of an Aircraft:
States like Massachusetts provide an exemption for the sale or lease of an aircraft in their state. These states are preferred as a delivery state because while the state has a sales tax, they provide a specific exemption for the delivery of an aircraft in the states. Care here should be taken to ensure the state has not conditioned the exemption on an external event. For example, New Jersey exempts the sale of aircraft to an air carrier having its principal place of operations within New Jersey and engaging in interstate, foreign or intrastate air commerce.
Cap on Total Sales Tax Charged on Delivery of Aircraft:
South Carolina limits the total sales tax charged on the sale of an aircraft to $300 per transaction. North Carolina limits the total sales tax charged on the sale of an aircraft to $1,500. While these States tax the delivery of an aircraft in their state, they limit the amount of sales tax charged to a nominal amount per sale of aircraft. While not as ideal as the first two states, the amount of sales tax is nominal compared to most states and as such still permits the purchase of an aircraft without a significant outlay to the government.
Fly – Away:
This exemption is what I affectionately call “get out of dodge exemption”. In these states (i.e. Nebraska), they typically exempt the delivery of aircraft in the state if the purchaser is not a resident or domiciled in the state, will not register, hanger or base the aircraft in the state, and will fly the aircraft under its own power out of the state within a specified period of time. Furthermore, the purchaser will not bring the aircraft back into the state within a given period of time (six months to 18 months typical). An exception for maintenance is usually provided. You must keep good records of the sale and proof the aircraft left the state within a period of time. For example fuel purchases, runway fees example. If you plan on using the aircraft in a more limited capacity such as farming, or do not anticipate returning to the state of delivery, this exemption is one to consider.
While taking advantage of the various incentives discussed will preserve significant cash flow when purchasing an aircraft, it’s important to consider them in your overall aircraft purchase planning. If the aircraft is sitting in a state which taxes the entire purchase price, it will be necessary to ferry or position the aircraft into a state where you can take advantage of an exemption or an the sales tax upon delivery. The cost of positioning the aircraft into an aviation friendly state will diminish the upfront tax savings realized on the delivery. As such while taking delivery of the aircraft in a state which has no sales tax or exempts the transaction from sales tax is desirable, in practice it may not be realistic.
It also must be noted, absent a specific exemption, the state where the aircraft is registered, based or hangared, will have the opportunity to assess a use tax on the value of the aircraft. As such, in planning your aircraft purchase it will be important to understand the use tax exposure in the state you plan to base the aircraft.
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Other recent “Aviation Tax” posts by Guy Nevers, CPA, MT:
- Aircraft Maintenance; Big Dollars Mean Big Tax Headaches
- Aviation Sales Tax: It's All About "Location, Location, Location"
- Aviation Taxes: Welcome to the Aviation Tax Blog