3. STATE SALES AND USE TAX
3.07 Using a Leasing Company to Defer or Avoid Taxes
One commonly used technique to defer payment of sales and use tax is to create a leasing company. In most states, this allows for a tax deferral since the sale of the aircraft to the leasing company is exempt from sales tax as a sale for lease. Instead, sales tax is charged on the lease payments.
In certain situations, a leasing company can also be used to avoid payment of sales or use tax. For example, in many cases, a customer will purchase an aircraft with the expectation that the aircraft can be leased to a Part 135 operator. Even assuming that the lease payments made by the Part 135 operator are exempt from sales tax, the customer will have paid use tax on the entire aircraft, even though the customer is not using the entire aircraft. By creating a leasing company which leases to both the customer and the Part 135 operator, tax will be charged only on the lease payments made by the customer. For example, if the aircraft is leased to a Part 135 operator 50% of the time, then the customer will effectively pay sales tax on only 50% of the aircraft.1
Of course, there are situations where a leasing company is not a viable alternative. Some states do not allow for special treatment of leasing companies. Where the aircraft is acquired as part of a trade-in and the sales tax law allows for deduction of trade-ins, the amount of sales tax deferred might be much less.
- There are other ways to achieve the same result, such as having the Customer and the Part 135 Operator become joint owners of the aircraft. However, a lease is generally a simpler alternative.