3 STATE SALES AND USE TAX
3.08 Other Sales and Use Tax Issues
Taxation of Repairs and Overhauls
Many states charge sales tax on the labor portion of repairs and overhauls. Aircraft owners might prefer not to have to pay the sales tax, particularly where the aircraft is based in a state which does not tax this labor, or does so at a much lower rate.
There are a couple of ways to avoid the tax:
- A leasing company can often be used to avoid tax on such repairs since, where the lessor is obligated to make the repairs, they are generally exempt under the resale exemption. The downside is that the overall lease payments must be increased to cover the cost of assuming this obligation.
- Particularly in the case of major repairs and overhauls, the customer might try to convince the repair company to hold off passing "title" to the parts and labor until the aircraft reaches the state where the aircraft is based. This would cause the transaction to be subject to sales tax in the state where the sale takes place, rather than the state where the services are performed.1
Maintenance Agreements and Extended Warranties
The proliferation of maintenance agreements and extended warranties has created a great deal of confusion among the states. About half of the states take the position that the payments are subject to tax, while the other half take the position that no tax is due until the repairs are performed. Even worse, there is one state which has taken the position that the payments under an engine power program are subject to tax, even where the engine repairs would be exempt from tax.2
Under these circumstances, there may be an incentive to avoid having to pay sales tax on the payments. The trick is to insure that the "sale" of the agreement takes place in a state which does not tax such payments. One problem is that, since there is no item of tangible property which changes hands, it may be difficult to determine the place of sale. Some steps which might be considered are signing the contract in, and arranging for payments to be sent to, a state which does not tax such payments.
- Wisc. Private Letter Ruling No. W9314001.
- Fla. Technical Assistance Advisement 97(A)-051.