1. STATE TAX PROBLEMS AND MYTHS

1.01 State Tax Problems

The aircraft owner is potentially liable for a wide variety of state and local taxes:

• sales and use tax
• income or franchise tax
• personal property tax
• registration tax

To make things worse, the implementation of these tax laws varies from state to state. For example, although almost every state has a sales tax, the tax may take the form of a license tax, a gross receipts tax, or a registration tax.

While these kinds of variations may not cause problems for someone who operates in a single state, a business aircraft is, almost by definition, a multistate asset. This means that the owner of a business aircraft is forced to contend with the tax laws of several states:

• The state where the aircraft is purchased.
• The state (or states) where the aircraft is based.
• The states where the owner is a resident or has facilities.
• The states where the aircraft is flown on a regular basis.
• The states where the aircraft is serviced.

Contrary to popular belief, there is no "magic fix". Putting the aircraft in a Delaware corporation will not avoid tax. An aircraft in interstate commerce is not automatically exempt. Even air carriers are not safe from tax.¹

Nevertheless, the variation in state laws and the mobility of aircraft makes for interesting planning possibilities. For example, state sales tax on an aircraft purchase can be easily avoided.

On the other hand, making the wrong choice can prove costly. For example, taking delivery of a leased aircraft in some states can cause all future lease payments to be taxed, regardless of where the aircraft is used.²

At the moment, there does not seem to be much likelihood that things will change. Many aircraft owners are content with the status quo, particularly owners located in states where aircraft are favorably treated. The states would have a difficult time working together to achieve uniformity because of variances in tax schemes, many of which are dictated by the state constitutions. Nor do the states appear to have an interest in abdicating their right to tax aircraft to the federal government. As any state legislator will tell you, taxes are too important a matter to be entrusted to the federal government.

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1. See e.g., Federal Express Corp., 693 N.E.2d 682 (Mass. 1998).
2. See e.g., Itel Containers, Int'l v. Huddleston, 507 U.S. 60 (1993).