storing the aircraft or yacht outside California enough time to meet the requirements of California Sales and Use Tax Regulation 1620 (b) (3). The transaction can still be held taxable if the acceptable forms and documents which support the actual use of the property are not provided to the tax agency. The fact that in many cases the state does not question the transaction until after the aircraft or vessel is sold to another party makes it very difficult to gather the logs and receipts.

Some of the various types of exemptions that are available to the CPA’s clients are:

1.Common carrier (Aircraft only)
2.Interstate commerce
3.Purchased for out of state use
4.Purchase for resale
5.Occasional sale
6.Out of state buyer
7.Lease
8.Facts or circumstances defined in law which allows the purchase to fall outside the definition of sale or purchase for sales and use tax purposes.

Even though each state may have sections which relate to each of the above, you cannot presume that the details of the exemption are the same from state to state. For example, the language in certain sections of law in Nevada are exactly the same words used in California Sales and Use Tax, however, Nevada and California interpret the same language differently. You must research the cases to decipher each states pattern of decision making.

The important details actually depend on how the requirement by each state will impact the needs of the purchaser. Some questions that need to be asked of the clients so that the CPA can assist them to differentiate between the possible exemptions are:

1.Common Carrier (Aircraft only)
Do you really want strangers flying in your new aircraft? Exclusive use may void this exemption.
Are you contemplating a lease arrangement with a charter, or are you planning to acquire your own FAA certificate?
Are you aware that the documentation requirements and the term of the test period may be significantly greater than most other exemptions?

2.Interstate Commerce
Do you know how your specific state defines “interstate commerce?”
How do you calculate intrastate flights using this test?
Where must possession occur?
How are first use, first functional use, and operational use defined?
What are the procedural requirements of the test?

3.Purchased for out of state use
Where must possession or title occur?
How is first functional use defined?
How long is the test period?
What are the procedural requirements of the test?
How does the aircraft owner document periods of time when the aircraft is not in flight, or the vessel is moored?
What circumstances shorten the test period?
How does storage for shipment affect the exemption?

4.Purchase for resale
Can a purchaser of a single item claim this exemption, or must the owner be a registered dealer?
Can any use, other than bonafide demonstration and display be made?
What are the documentation requirements to support demonstration use?
How much use is too much to claim a resale exemption?
Can a charge be levied for a demonstration flight of an aircraft?
How does personal use affect the exemption?

5.Occasional use
Is this exemption available in the state the purchaser intends to claim this exemption?
What characteristics must the seller avoid, in order for the sale to qualify as an occasional sale?

6.Out of state buyer
Can an out of state buyer avoid sales tax on an aircraft or vessel? If so what are the requirements?
How long can an aircraft remain in state after the purchase before the transaction becomes taxable?
What if repairs or training are required?

7.Lease
Is it a lease to a common carrier?
Is it a lease to a flight school?
Is it a lease to a private party?
Is it a lease to a contract carrier?
How is the tax reported?
How does the purchaser insure that he can purchase the property ex-tax and pay based on the lease?
Is the tax assessed on the lessor or the lessee?

Based on my research, the types of failures that are inherent by using the possible exemptions are:

A.Common carrier (Aircraft only)
Many people believe that merely flying the aircraft in Part 135 qualifies for an exemption.
When the owner is in control of the aircraft, he may be causing a failure of the exemption by flying in Part 91.
When the owner leases an aircraft to a charter, he puts the control of the documents needed to support the exemption in the hands of another party.
Insufficient revenues may void the exemption.
All Part 135 flights do not qualify as common carrier flights.

B.Interstate commerce
Failure to keep exact logs
Failure to document commerce flights
Is the test accomplished by miles, hours, or days?

C.Purchased for out-of-state use
Failure to properly document location of the aircraft or yacht when title or possession is transferred
Failure to keep proper logs
Failure to document storage location and time
Inconsistencies in documentation
Failure to support intent
Registering an aircraft or yacht in Oregon, Nevada or to a Delaware corporation as part of a strategy to avoid tax, can incur a fraud penalty for evasion.

D.Purchase for resale
Making improper use of inventory
Charging for use
Personal use
Documenting demonstration and display

E.Occasional sale
This exemption is not available in all states.
Failing to support the status of the seller
Transferring debt between entities along with the aircraft or vessel

F.Out of state buyer
Failure to prove the legal status of the out of state resident
In state residency for the purpose of sales tax can require as little as a checking or savings account.

G.Lease
Failure to properly notify the state to be able to purchase ex-tax
Failure to understand against whom the tax is levied and how it impacts the client
Failure to understand whether it is a sales tax or use tax

When a purchase is of a fractional share of an aircraft it becomes almost impossible to use certain exemptions because of the needs of the other owners. A winning strategy can be implemented, but it requires the compliance of the fractional partnership.

If an aircraft strategy includes a 1031 like kind exchange, each possible exemption needs to be evaluated versus the four transactions required to complete each exchange. Each of the four transactions has it own tax exposure. When a reverse exchange is used, five transactions are created that need to be evaluated. A further complication is that some states will consider the qualified intermediary as a retailer of aircraft because it is engaged in the business of selling aircraft. It is fatal to forget that IRS rulings have no bearing on how each state views each transaction.

Armed with an understanding of the sales and use tax laws it is possible to create a strategy that legally avoids the sales and use tax. Acquiring sales tax advice from anyone, other than a sales tax expert is in most cases a waste of time and money. This area of tax law is too complex, the targets are constantly changing, and the potential tax assessment is very costly. Especially when you add the additional interest and penalties that can range from as little as ten percent for failure to file, up to a fifty percent penalty for registering an aircraft out of state in an attempt to evade tax.

Thomas A. Alston is CEO of AERO&MARINE Tax Professionals (www.aeromarinetaxpros.com). He has written sales and use tax articles for legal/professional publications. He’s publisher of “TAX MATTERS,” dedicated to keeping California owners of aircraft and vessels informed about taxes. AERO&MARINE Tax Professionals is the premier California sales and use tax consulting firm specializing in the area of aircraft, vessels and vehicles.

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