AircraftOwner Online

Many buyers seem to believe that they can avoid sales tax by forming a corporation, usually in Delaware, and having the corporation take title to the aircraft. The bad news is that this does not protect you from sales tax. The even worse news is that it may also cause your aircraft registration to be invalid, your aircraft being required to be operated under Part 135 of the Federal Aviation Regulations, and Federal Excise Tax being due on trips you make in the aircraft.

    As the states have been getting less and less income, they have tended to focus on unpaid sales taxes as a source for getting quick infusions of cash. The best place for the states to look is at “big-ticket” items, like aircraft and yachts. With advances in technology, it is easier than ever before for the states to find out when an aircraft has changed hands. In fact, the FAA actually sends each state a listing of the aircraft registered each month with addresses in that state.

    Since the Revenue Departments of the states are aware that aircraft may be registered in a state for the sole purpose of avoiding sales tax in the state where the aircraft is actually based, each state has composed teams of inspectors whose job is to go from airport to airport, and from fly-in community to fly-in community, logging aircraft that are on the ramp and in hangars. Some states, like Florida, if they see the same aircraft at the same airport on more than one visit simply presume that the aircraft is based at that airport and send a tax bill for “use tax’ (which is often the same amount as the sales tax would have been) and put the burden on the registered owner to prove that the aircraft is actually based out of state.

    The states also place substantial penalties on the failure to have paid taxes on a timely basis, so, in addition to the time, aggravation and expense of satisfying the state’s official inquiries, you are at risk for large penalties and interest payments if the state determines that you deliberately failed to pay the tax that was due.

    Many aircraft owners also feel that they can be protected from taxes by the corporate form of owner-ship. However, the owner of the corporation must be able to show that the corporation has some actual corporate purpose to benefit from the corporate veil. More importantly, the FAA has a different way of looking at corporate ownership of an aircraft. The FAA says that unless the corporation that owns the aircraft has a real business purpose other than just owning and operating the aircraft, such that the use of the aircraft is merely “incidental” to the business of the company, the company is actually engaging in the “commercial” use of the aircraft since it is serving no other purpose other than providing transportation by air to members of the corporation. Therefore, the FAA argues, the aircraft must be operated pursuant to the requirements of Part 135 of the Federal Aviation Regulations, and each failure on your part to comply with the requirements of Part 135, can subject you to a “civil penalty” in the amount of up to $11,000.00 per violation.

    The FAA also has a strict “citizenship test” which it uses for corporations. Unless the President of the corporation, AND at least two-thirds of the other officers and directors, AND at least 75% of the shareholders of the corporation are United States citizens, the corporation will NOT be deemed to be a “citizen” for registration purposes, and the FAA, DOT and Customs will all deem the N registration of your aircraft to be illegal, which can result in seizure and forfeiture of your aircraft, large fines, and even the possibility of jail time.

    There are ways to minimize the exposure to sales taxes, but they require complex planning prior to the closing of the sale. For most general aviation transactions, the most cost-effective thing to do is to find out what the taxes are and to pay them when they are due, rather than to try to avoid or minimize them. If a substantial amount of savings might be due, then consulting a good aviation attorney or accountant might be a very wise investment. But you should do this when you START the process of buying an aircraft, NOT when you are a day or two away from closing, as the process of minimizing these taxes is complicated and takes time.