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Texas Lawyer:
By Nathan Haley

The state of Texas treats the sale of an aircraft as a taxable transaction subject to state and local sales tax just like the sale or purchase of any other piece of tangible personal property: An aircraft purchase is taxable unless entitlement to an exemption can be objectively established.

Commentary authored by Shackelford Melton & McKinley Attorney Nathan Haley and published in the Texas Lawyer Newspaper

Unlike most personal property, however, the sale of an aircraft tends to draw attention from various tax and regulatory authorities, and in Texas the sale or purchase of an aircraft will most certainly draw the attention of the Texas Comptroller of Public Accounts.

This was not always the case, as aircraft transactions in Texas often went unnoticed by the comptroller. The consequent lack of enforcement resulted in Texas aircraft owners and brokers ignoring Texas sales and use tax rules or, more commonly, not knowing that sales tax might apply.

But this dynamic changed when the comptroller announced in the May 2007 issue of The Texas Comptroller's Tax Policy News that the office's business activity research team (BART) would investigate whether owners of Texas-based aircraft had paid appropriate sales and/or use tax on their aircraft purchases from 2003 to the present. These efforts have been aided by easy access to aircraft owners' information contained in the U.S. aircraft registration database, and it appears that BART now investigates all aircraft newly registered in Texas.

One of the most misunderstood areas of Texas sales tax law technically is not sales tax but rather its counterpart — use tax. Use tax applies in lieu of sales tax to aircraft purchased outside Texas and brought into the state within one year of the purchase. For example, if a taxpayer closes on the purchase of an aircraft while located in Oregon (which has no sales tax) and then moves the aircraft to Texas within a year of its purchase, use tax will apply just as sales tax would have if the aircraft had been in Texas at the time of closing.

When faced with a sale or use tax bill from the comptroller, many Texas aircraft owners have sought to claim one of the sales tax exemptions provided by the Texas Tax Code. However, the exemptions commonly are misunderstood. Further, as BART auditors have become more familiar with common aircraft ownership structures, the comptroller has more aggressively attacked perceived weaknesses in those structures.

The "occasional sale" is perhaps the most commonly claimed exemption sought by Texas aircraft owners. It may be the most commonly denied exemption because of its strict requirements. For example, this exemption generally applies only where neither party holds a sales tax permit in any state and the seller has conducted no more than two sales of taxable items in the previous 12 months; where ownership of a company itself is involved; or where the sale of the aircraft was part of the sale of all of a business' operating assets.

Resale exemptions claimed in connection with leasing structures are more common with large turbine business aircraft, particularly in cases where title to the aircraft is held in a sole-asset LLC and leased by affiliated entities, although this structure and its variants can raise significant and misunderstood risk factors under certain Federal Aviation Administration rules, and further legal counsel as to those issues is recommended. BART takes a narrow and controversial stance, however, with respect to various aspects of such leasing (dealing with issues, for example, such as "profit motive" and "fair market value" rent), and it remains to be seen if it will succeed in basically establishing new standards not clearly contemplated under the applicable statute itself.

An exemption based on a variant of the resale/leasing structure concerns the lease of an aircraft to a certificated air carrier for use in charter operations under Part 135 of the Federal Aviation Regulations. Aircraft owners often mistakenly believe that merely placing the aircraft on the charter company's air carrier certificate exempts the initial purchase from sales tax when in fact only those Part 135 operations conducted by the charter company under its lease, not the owner's initial purchase, are exempt from sales tax. Further, any use of the aircraft under the FAA's noncommercial Part 91 rules may be considered taxable, and this noncommercial "divergent" use may trigger a disallowance of the commercial use exemption.

Finally, another important area for aircraft owners to be aware of is the comptroller's treatment of "like-kind exchange" transactions under Internal Revenue Code §1031. The Texas Tax Code does not provide a state tax equivalent of a §1031 exchange, nor does the Texas Tax Code expressly recognize §1031 exchanges. As such, the issue of whether the transfer of an aircraft's title through a §1031 exchange accommodator should be treated as a separate, taxable sale — and therefore what exemptions may apply as well — is still very much unresolved

In sum, the sale, purchase or use of an aircraft in Texas triggers a basic sales or use tax consequence, the Texas comptroller has become active in finding and auditing these transactions, and if the parties involved cannot clearly demonstrate that either the tax was paid or a valid exemption exists, those parties may face significant tax, penalties and interest.

Texans interested in purchasing an aircraft are well advised to be aware of, and plan for, all of the state tax consequences of their aircraft purchase before they receive the audit letter from the Texas comptroller that most surely will come.

http://www.law.com/jsp/tx/PubArticleTX.jsp?id=1202510983074

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