It’s safe to say that taxes are confusing. The federal government and state governments each have their own property, income, sales, use, and other taxes. Then each county and city have taxes on top of that. And the more money involved, the bigger the tax will be, and the more likely it is that the tax auditors will target you.
Airplanes are incredibly large purchases, so it’s no surprise that tax auditors are quick to turn their eye to aircraft, especially when it comes to sales or use tax. We talked to Tom Alston, the leading specialist in California sales and use tax for aircraft, about how airplane buyers can avoid getting hit with huge tax bills.
What is it that Aero & Marine Tax Professionals does? Can they really get you out of paying sales tax?
Tom Alston: We specialize in doing one thing: helping people who are subject to use tax assessment by the state of California to save money. Our pitch to the public says, “legally avoid sales tax,” but the truth is that it’s not possible to legally avoid sales tax. The industry just refers to it that way. But you can avoid use tax, which is the flip side of the same coin.
You see, a lot of people think use tax is property tax. It’s not. Sales and use tax are both based on the transaction and are the same rates. The only difference is who’s responsible for reporting and paying the tax.
When someone’s making a large purchase, and an aircraft is a huge purchase, what do they need to think about? And when should they get you on the phone?
TA: Usually, people call me at the tail end of the transaction. They have financing in place, insurance, and an aviation attorney. But that’s actually really late in the process. It’s much more ideal to assemble your entire team when you start even thinking of acquiring an aircraft, including attorneys and tax specialists.
You are known for holding seminars up and down the West Coast. Why would I attend?
TA: Most people in the audience know nothing about sales and use tax, so I approach it from there. I start by telling them that they need to protect themselves from taxing agencies. To do that, I go through circumstances to help them understand tax auditors. If I jump right into the potential traps and exemptions, it’s easy for the attendees to assume it doesn’t apply to them. Instead, I try to have them understand the guy who’s just been hired by the California Department of Tax and Fee Administration (CDTFA) and wants to be a hero. And he’s looking at the bullets in his gun belt to attack the mean, rotten taxpayers, those one-percenters who can afford to buy an airplane.
My goal is to help them shift their thinking—to understand how pieces of law can be used to attack people. A big part of that is taking them through the description of what constitutes California revenue, and how many different types there are.
There are two reasons for this approach. The first is that if I get them to understand that they’re under attack, they’re more likely to receive my information and view it intelligently as opposed to blowing it off. The second reason is that I want to make sure they know that being an out-of-state resident doesn’t make you immune.
See, most of out of state residents, if they’re attacked or assessed by the CDTFA, will take it to their out-of-state CPA, and he’ll tell them not to worry because they’re not a resident of California.
But there’s a big piece of missing data: CPAs are all IRS income tax specialists. So they’re operating off an income tax definition of what a resident that California is. What CPAs don’t know is that the state of California, for the purposes of sales and use tax, uses the definition of a resident from the Department of Motor Vehicles, which is very different.
There’s no way that they can know that without being, such as I am, an expert in sales and use tax. In fact, there’s a list from A through I of things that can make someone a California resident for the purpose of sales and use tax. It’s a way that they can trap people who bring their airplanes into California even though they’re not a resident of California. And that means they can use it to assess them for taxes.
Are the seminars the only way for them to reach you? Could they simply give you a call and get free information?
TA: I will talk to anyone about their concerns, whether they’re getting ready to buy an airplane or they’ve already bought an airplane and are thinking, “Oh, what do I do now?” That call is always free. The only time it becomes not free is if the caller and I discovered during the conversation that there’s something that I could do to help them. Then I tell them what I’m going to do for them and what I’m going to charge them. Even after that, they still get to decide whether to hire me or not. But I don’t charge them for that call.
Some airplanes can cost anywhere, let’s say, from half a million dollars up to tens of millions of dollars. With that in mind, how much money can you save buyers?
TA: It depends on the location and how much they’re going to pay. In California, the use tax rates will vary from county to county, anywhere from around 8% to around 10%. So the first thing is to find out where the buyer will hangar the airplane, which will establish the tax rate. I’ll also want to find out what they’re going to pay so I can make sure I give them the right value.
Let’s look at a buyer who’s getting a half-a-million-dollar airplane in San Francisco, where the use tax is 10%. The answer here is simple — it’s a potential $50,000 project. I like to explain it with this absurd example: if I make a strategy for you that costs $51,000 to avoid $50,000, then it’s not a very good proposition. The reality is, they have to know what I can save them before they can make a factual or logical assessment as to whether my services are valuable.
In this $50,000 example, what might it cost?
TA: If someone was coming in new, the purchase is far enough away, and, most importantly, they haven’t taken possession yet, then it would be $5,000.
We’re talking 10%?
TA: The easier way to figure it out is approximately 1% of the purchase price.
Let’s say I’m looking at buying an airplane. What team would I need to put together?
TA: First, you need a good broker who can go out and find the aircraft, because if you’re buying a half-a-million-dollar aircraft, there’s a pretty good chance it’s a used airplane. It might also be one of the factory guys in your state. But you have to find someone you trust, have a discussion with him, about how you’re going to be using it, and where 80% of your flights will occur. A good broker will be able to recommend the right type of aircraft, and then become your representative.
Anyone else who should be on the team?
TA: You want to have an aviation attorney who will oversee the contracts to make sure your side is represented and your interests are protected. Hopefully, they not only know contract law but also understand all the FAA rules and IRS rules so the ownership structure meets your IRS strategy goals. Next, you’ll need a CPA involved who’s done airplanes before because it’s a highly-specialized area. And if you’re in California, I should be on that team, because I’ll keep you out of trouble with the state.
And, if you’re thinking about being in and out of California, you also must think about getting the right California property tax people. I have access to those people, so I can pull them into the conversation.
Is there anyone you would recommend as your attorney team?
TA: I do a lot of work with Kevin Austin and Nathen Pietila at Aero Law Group. They have an office in Bellevue, near Seattle, and then Nate is in southern California in Orange County.
What makes Aero & Marine stand out among other specialists?
TA: My clients and my referral sources have my cell number. They can call me twenty-four hours a day and I’ll answer. When people have problems, they don’t have problems from nine to four Mondays through Thursdays, half days on Fridays, and never on the weekends. Problems can come up at off hours, so we’re never going to cut off people who have a problem, because we want to help them.