Many companies with multiple facilities or customers in remote locations may decide to purchase an airplane for both business and personal use. While there are many benefits to aircraft ownership, there are potential sales tax implications to this purchase, depending on the structuring. Wipfli’s State and Local Tax experts frequently address numerous sales tax questions related to airplane purchases. Following are some of those most common questions and their answers.
Q: The airplane seller recommends transferring the airplane in Delaware to avoid sales tax. Is that accurate?
A: While tax would not be due on the purchase transaction because Delaware does not impose any sales taxes, the buyer likely would be subject to tax in the state in which the airplane is registered. Therefore, the additional cost of acquiring the airplane in another state is likely not necessary.
Q: Do I need to register my airplane for state purposes?
A: Yes, in addition to registering the airplane with the FAA, you need to register and title the plane in the state in which it is customarily kept.
Q: Why would I put the airplane in a separate entity than the operating entity?
A: Usually this may be done for legal liability purposes.
Q: Why would I want to lease the airplane from an affiliate?
A: Generally, there are a couple of reasons for leasing an airplane from an affiliate:
- Sales tax is deferred over the life of the airplane rather than an upfront payment being made.
- Sales tax is paid only on the rental receipts, so you may permanently avoid tax on some of the purchase price if the airplane is sold before the lease ends.
Q: What does the term “dry lease” refer to?
A: Dry lease commonly means a transfer of the airplane alone without any pilot.
Q: Why would a separate legal entity provide a dry lease to the operating entity?
A: Normally this refers to the way the airplane is operated for FAA purposes. An airplane operated under FAA Part 91 means the operating entity has “operational control” of the airplane because it provides the pilot.
Q: What are the sales and use tax implications of a “dry lease”?
A: Generally, the lessor can purchase the airplane tax free in states that recognize leases as sales. (Illinois is an exception.) Therefore, the lessor must charge tax on the lease of the airplane to the operating company.
Q: What is a “wet lease”?
A: A wet lease means the airplane owner also provides the pilot. This requires the operation of the airplane under FAA Part 135. This would cause the owner to be treated as a charter service and would require the collection of excise tax on the receipts between the parties.
Q: What are the sales and use tax implications of a wet lease?
A: Since the airplane is operated as a charter service, the receipts would be exempt in most states as a transportation service. Some states would allow the airplane owner an exemption as a “for hire” carrier.
Q: If the airplane is used throughout the country, in what state should sales tax be charged?
A: This can vary by states. States that have adopted the Streamlined Sales Tax Act normally would source all rentals to the state where the plane is regularly kept. However, other states may tax only the hours the airplane is used in their state. The definition of “in the state” has been subject to much litigation, and generally the time an aircraft spends in the air above a state is not considered “in this state.” Therefore, the hours in that case may be sourced by flight departures in the state.
Q: Do I owe sales and use tax in the hangar state if the airplane is serviced in another state that does not tax airplane repair services?
A: Usually states will allow a credit for any sales tax paid to the state of service. If no tax was paid, most states will argue that the “use” of the repair occurred in the state where the airplane was hangered.
Q: Do states have any exceptions to airplanes being subject to use tax when hangered in their state?
A: Some states allow an exemption if the airplane is purchased outside the state and the airplane does not enter the state for a specific period of time (e.g., 60 or 90 days).
Q: Can the entity owning the airplane be in a disregarded entity of the operating entity?
A: States that recognize every separate legal entity as a separate taxpayer would respect the transactions between the airplane entity and the operating entity. However, some states (e.g., Wisconsin) would treat this as used by the owner of the disregarded entity and ignore the transactions. Therefore, this use could void the resale for an airplane entity in a dry lease scenario. This means tax could be due on the original purchase price of the airplane when it is used by the owner.
Q: If the airplane entity is responsible for the upkeep of the airplane as part of its lease receipts, are the purchases of parts and service exempt from tax?
A: As long as the state respects the lease transactions, the purchases can be made exempt from sales and use tax.
Q: Who should be paying for the day-to-day to costs of the airplane?
A: We recommend that the operating entity pay for indirect costs associated with the airplane, like landing fees, fuel, catering, and other costs. Otherwise, the state could argue that these are additional lease receipts subject to sales and use tax.
Q: If an operating entity currently owns an airplane and is looking to do a like-kind exchange to acquire a new airplane, are there any tax implications?
A: There are specific income tax rules required for a like-kind exchange. Usually only trade-ins of existing airplanes to a seller who is selling the new airplane will reduce the sales tax in most states. If the new airplane is purchased from a third party, generally no credit will be given for the trade-in value of the old airplane.
The costs of acquiring and operating an airplane for business use are significant. Boutique firms can help companies address the income tax accounting of these transactions. However, the sales tax implications of the original purchase and the recurring transactions can also be substantial. Wipfli strongly recommends consulting with a state and local tax consultant to review and assist in the planning of these transactions. If you are considering the purchase of an airplane for business use, contact a member of Wipfli’s experienced State and Local Tax Team to assist with planning strategies to help ensure that you minimize the sales and use tax on your transactions.