No matter what their size, aircraft are specialized and highly-engineered pieces of machinery with high price tags to match. Those high price tags bring along substantial sales tax amounts. Take a plane that cost $10 million. If it’s bought in a location where the sales tax rate totals 10%, you’re instantly adding another $1 million to the cost of purchasing the plane.
This is why it’s so important to do your sales tax research before you purchase a plane. If you managed to use that same plane in a location that only had a 9% sales tax rate, then you’d save $100,000. Every additional percentage point would drop the sales tax amount by another $100,000. If the plane cost $15 million, each percentage point would be $150,000, and the higher you go, the more of a difference a single percentage point makes.
No matter how wealthy you are, it’s worth it to find a way to minimize sales taxes. That’s where exemptions come in.
What are Fly Away Exemptions?
Fortunately, you don’t have to worry about doing strange things like buying the plane over the Atlantic or having the seller fly it to a no sales-tax state to get out of unnecessary sales tax. To avoid complications like these, many states have fly-away exemptions. Basically, these exemptions mean that sales tax isn’t charged on the sale provided the buyer flies the plane out of the state within a certain amount of time.
Fly-away exemptions are based on the idea that the buyer will take the airplane out of the state. For example, if you live in Nevada and buy an airplane in California, the idea is that you’ll take the plane out of California and base it in Nevada. In this case, the fly-away exemption means that you won’t be charged the California sales tax.
These same exemptions will often limit the amount of time that your airplane can be in the state for the first year after purchase. This keeps people from trying to get around sales tax by flying out of the state and immediately returning.
What About Casual Exemptions?
Many states have sales tax exemptions for casual, isolated, or occasional sales. Normally, the seller is liable for the sales tax. When you buy a plane from a dealer, they’re going to pay that sales tax to the state. Casual sales done by private parties, such as selling items at a yard sale, are much harder to police, so many states simply give them an exemption from sales tax.
That being said, this isn’t as handy for airplanes as one might think. Many states will have a maximum exemption limit, while others will specifically state that the exemption doesn’t apply to airplane sales. The state tax boards specifically target airplanes because they’re easy to track because they are required to be registered with the FAA and have high enough sale prices to make policing them worth the expense.
How Does Use Tax Fit In?
Sales tax is levied against the seller for sales of items within the state or local jurisdiction. Use tax is levied against the buyer. Most of us don’t hear about use tax because the two taxes are dollar-for-dollar mutually exclusive. For example, if you paid $100 in sales tax, then you can’t be charged $100 in use tax on the same purchase. Since these rates are the exact same within the same jurisdiction, simply paying sales tax covers any obligation.
Things get a little trickier when you start dealing with airplanes. These will often be bought in one jurisdiction and then travel to another, such as buying a plane in Oregon and flying to California. This is when the use tax kicks in. California will charge the buyer use tax on the airplane purchase. Since no sales tax was paid in Oregon (which has no sales tax), California can levy the full use tax amount.
When planning how to address the sales tax for your airplane purchase, remember to account for use tax.
What Other Exemptions Are There?
You might be surprised by how many exemptions there are. Here are just a few:
Common Carrier Exemption – Common carrier exemptions apply to transportation equipment used for hire. In some states, this only applies to commercial airlines. Other states allow charter operators who meet a certain threshold or are operating under specific regulations.
Resale Exemption – Sales and use tax are both taxes at retail, so wholesale purchasing is generally not subject to sales tax. This will obviously apply when the aircraft is purchased by a dealer, but can also apply when an aircraft is purchased for leasing to another. In this case, the tax may then be applied to the lease payments.
Interstate Exemption – Some states provide an exemption to both sales and use tax when the primary use of the aircraft is interstate commerce. There are degrees of use and time spent in-state that apply to this exemption, and it will vary from state to state.
Principal Use Exemption - In California if you take possession of an aircraft outside of California and it never enters CA within the first twelve months, no sales or use tax is due.