3. STATE SALES AND USE TAX

3.03 Sales Tax Concerns of Seller

In the case of aircraft, the sales tax is easily avoided by selecting the state in which the sale takes place. However, once a state is selected, careful attention must be paid to following the rules. Otherwise, there is a risk that the seller will end up having to pay the tax. Regardless of whether the sales tax is structured as an excise tax or a business license tax, the seller is made liable for the tax. Generally, the only way the seller can avoid liability for the sales tax is for the seller to obtain a valid exemption certificate.

Valid Exemption Certificate

In order to be valid, the exemption certificate generally must be:

• Signed and dated by the purchaser.
• Must state a valid exemption.
• Must be accepted in good faith.

Some states have preprinted exemption certificates which can be used. However, these are not available in every state. In other cases, the states have been known to use the exemption certificates to add provisions which are not required by the law. In these cases, the seller must draft an exemption certificate and hope that it is accepted on audit. Regardless of what happens, the seller is better off having an imperfect exemption certificate than having none at all.¹

Valid Exemption

The Seller should insure that the exemption claimed by the Purchaser is valid for that state. The Seller is presumed to have knowledge of the law. The Seller may have to make a judgement call where the exemption is based on a Court interpretation, particularly where the state tax Authorities do not agree with this interpretation.

Good Faith

The Seller must accept the certificate in good faith. This means that, where the purchaser says that the aircraft is going to be used for a specific purpose, the seller does not have a duty to investigate. However, this is not the same as "blind faith". The good faith defense would be cast in serious jeopardy if:

• The aircraft could not possibly be used for the purpose stated.
• The purchaser has engaged in overt conduct which makes the lie apparent.

Where the seller is a company, the person accepting the certificate is assumed to be aware of all facts which are known to other employees of the company.

Passing on Liability for the Tax

Where a sales tax takes the form of a business license tax, the only person liable for the tax is the seller. In order to make the purchaser liable for the tax, the sales contract should provide that the purchaser will reimburse the seller for this tax.

The Statute of Limitations

One of the risks of not collecting sales tax is that, if the seller is eventually forced to pay the tax to the state, the seller will not be able to obtain reimbursement from the purchaser because the statute of limitations has run.²

Aviation Mythology

There are a couple of aviation sales tax myths which should be mentioned:

• Isolated sales of aircraft are exempt under the casual sales exemption.
• A "hold harmless" agreement relieves the seller from liability for sales tax.

Isolated Sales of Aircraft

Although most states have a casual sales exemption, most are specifically not applicable to aircraft.

Hold Harmless Agreements

Some sellers are under the impression that liability for sales tax can be avoided if the purchaser provides the seller with a hold harmless agreement. While such agreements may be binding between the parties, they have no effect on the state tax authorities.

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1. See, e.g., Anchor Boats, Inc., Dkt.No.16991 (Wash. BTA 1978) [sale of boat taxed where seller failed to obtain certification that boat was sold to nonresident for use outside state, even though it was obvious that boat qualified].
2. Leisure Dynamics, Inc., 298 N.W.2d 33 (Minn. 1980).