3. STATE SALES AND USE TAX

3.06 Use Tax Concerns of Purchaser

The same mobility which makes the sales tax so easy to avoid, makes the use tax more difficult to avoid. An aircraft can be subject to use tax in several states. Even if an aircraft is exempt in one state, it could be taxable in another.

Activities Subject to Tax

The states have taken a very liberal view of the amount and kind of usage which is subject to use tax. There are cases where an aircraft was subjected to use tax where the aircraft was based outside of the state and used only 17% of the time in the state.¹ In one extreme example, an aircraft was subjected to use tax where the only activity was the making of a maintenance flight.²

Additional Use Tax Exemptions

In addition to the normal sales tax exemptions, the following exemptions may apply for use tax purposes:

Temporary Use

Many states, either as a matter of law or policy, do not impose use tax on aircraft which are only located temporarily in the state.³ This particularly makes sense where the aircraft is not actually being used in the state, as in the case of an aircraft which is being repaired.

Aircraft Based Outside of the State

Some states have indicated that they will not impose use tax on aircraft which are based outside of the state.⁴ However, this may not apply where the user is a resident of the state.⁵

Purchase for Use Requirement

Since the use tax was originally enacted as a backstop to the sales tax, many states have incorporated the requirement that the property have been purchased for use in the state.⁶ Some states implement this requirement by creating a presumption that property used outside of the state for a certain period of time (e.g., 90 days) was not purchased for use in the state.⁷ However, this presumption can be defeated by a showing that the property was clearly intended to be used in the state , e.g. where the aircraft is to be used by a company which is headquartered in the state.⁸

Prior use in Another State

In the absence of a "purchase for use" requirement, prior use in another state will generally not exempt property from use tax, particularly in the case of business property.⁹ However, there are exceptions.¹⁰

Developing a Strategy

Fortunately, developing a strategy to evaluate the use tax exposure does not require an analysis of the laws of all fifty states. Instead, the planning efforts should be focused on the following states:

• The states where the aircraft will be used more than 10% of the time.
• The states where the aircraft might be based.

In analyzing the use tax laws, the following factors should be considered:

• Whether the state has a use tax.¹¹
• Whether aircraft are exempt.¹²
• Whether the state has a reduced tax on aircraft.¹³
• Whether the state has a useful exemption for commercial aircraft.¹⁴
• Whether a private leasing company can be used to avoid or defer taxes.

Once the laws have been reviewed, the decision can be made where to base the aircraft. This decision should take into account factors other than just the use tax. After all, the primary reason for purchasing an aircraft is for convenience. To take an extreme example, it makes no sense for a New York corporation to base their aircraft in Oregon in order to avoid the use tax. In many cases, there is only one practical place to base the aircraft. If that case, the tax planning must adapt to the laws of that state. In other cases, there may be a choice of locations.

Once the decision where to base the aircraft is made, steps should be taken to insure that there is no ambiguity:

• The aircraft should be registered in that state.
• The appropriate property or registration taxes should be paid.
• The aircraft should be hangared in that state.
• The aircraft should be insured in that state.

The worst thing that can be done is to create ambiguity about where the aircraft is based, since that gives several different states an argument for imposing the use tax.

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1. Superior Aircraft Leasing, 734 S.W.2d 504 (Mo. 1987); Frank W. Whitcomb Construction Corp., 479 A.2d 164 (Vt. 1984).
2. Lance Schubert, Docket No. 17761 (Wash. B.T.A. 1980).
3. See, e.g., Kans. Law 79-3704(a) [exempts use for 60 days or less by nonresident].
4. See, e.g., Xerox Corp., 71 AD 2d 177 ["use tax may only be imposed upo n an aircraft at the location at which the aircraft is hangered"]; TX Reg. 3.297.
5. See, e.g., George Sexton (Advisory Opinion), TSB-A-90(31)S (N.Y. 1990).
6. See, e.g., Calif. Law 6248.
7. See, e.g., Calif. Law 6248 [90 days].
8. American Airlines, Inc., 216 Cal App 2d 180 (1963) [parts stored and tested outside of California for as long as 292 days before being shipped for installation on aircraft in California].
9. Okla. Tax Comm'n, Order No. 88-05-17-17 (1988).
10. See, e.g., Kans. Reg. 92-20-13; Wyo. Reg. Sec. 3.
11. The following states do not have a use tax: Delaware (except for a use tax on leases), Montana, New Hampshire, Oregon.
12. Both Connecticut and Oklahoma have aircraft exemptions.
13. See, e.g., North Carolina and South Carolina.
14. See, e.g., Maryland and New York.