1. STATE TAX PROBLEMS AND MYTHS
1.02 State Tax Myths
There are a number of tax myths that have been circulating in the industry (somewhat like the myth that the income tax is a "voluntary" tax):
- A Delaware corporation does not have to pay taxes.
- Aircraft used in interstate commerce are exempt from tax.
Many aircraft owners have been led to believe that putting their aircraft in a Delaware corporation will cause their aircraft to be exempt from all taxes. This is a myth. While Delaware might be considered a "tax haven", putting an aircraft in a Delaware corporation does not diminish the ability of other states to tax aircraft which are hangared or used in their state. To the contrary, the presence of a Delaware corporation is often a red flag to state tax auditors, since most companies putting their aircraft in a Delaware corporation have paid no tax on their aircraft.1
Aircraft Used in Interstate Commerce
Another persistent myth in the aircraft industry is that aircraft are not subject to tax if they are used in interstate commerce. This myth may have a couple of sources. First, in the first half of the century, the decisions of the United States Supreme Court indicated that the Commerce Clause prohibited the states from imposing a direct tax on "instrumentalities of interstate commerce", such as aircraft. However, subsequent decisions of the Court have not enforced this limitation.2 Second, in 1969 and in 1983, there were a couple of state supreme court cases which held that the Commerce Clause prohibited the states from taxing aircraft which had entered interstate commerce.3 However, this position was uniformly rejected by the other states.4 In 1987, the latter of the two courts changed their mind, leaving only the dated 1969 case.5 Since that time, the state courts have uniformly held that aircraft are taxable.6
- There may be non-tax reasons for incorporating in Delaware, such as a preference for the rules applicable to shareholders and directors, or the bankruptcy laws.
- See, e.g., Itel Containers, Int'l v. Huddleston, 507 U.S. 60 (1993).
- W.R. Grace Company, 258 A2d 740 (Md. 1969); L&L Marine Service, Inc., 647 S.W.2d 524 (Mo. 1983).
- Aspen Airways, Inc., 499 P.2d 636 (Colo. App. 1972); Sundstrand Corporation, 339 N.E.2d 351 (Ill. App. 1976); Kentucky Fried Chicken, Corp., Kent. BTA Dkt.No. K72R17 (1973); Onan Corporation, CCH ¶ 200-___ (Minn. Tax Ct. 1977); The Vector Company, Inc., 491 S.W.2d 612 (Tenn. 1973); Woods Corporation, 531 P.2d 1381 (Okla. 1975).
- Superior Aircraft Leasing, Inc., 734 S.W.2d 504 (Mo. 1987).
- See, e.g., Square D Company, 599 N.E.2d 1235 (Ill. 1992); The New York Times Company, Federal Express Corporation, 693 N.E.2d 682 (Mass. 1998).