Principal Use Test Redefined
There is a tremendous amount of rumor swirling around the State of California since the regulations pertaining to vehicles, vessels and aircraft were drastically altered effective September of 2008 in a ploy by politicians to balance a budget with phantom record keeping. A political debate swirled around the fact that a special classification had been created for wealthy people.
Anyone who says that is ignorant of the law or just plain lying.
Regulation 1620 applies to all forms of tangible personal property and only the owners of certain vehicles, vessels and aircraft will be subjected to these new discriminatory rules.
Welcome to the fact that politicians have been getting new taxes assessed for years based on the promise that the taxes only apply to the rich. The IRS and the income tax was created in 1913 with the promise that it would never be more than 1% and would only apply to the rich (at the time that was over $100,000.00 in income). How has that promise been kept?
Some people now believe there are NO legal ways to obtain an exemption. Others still advise their friends that the old ninety day exemption still exists. Neither is correct.
There used to be four methods of supporting a claim for an exemption. The first two were under a classification known as the “principal use test.” They were a ninety day test and a one-half of the first six-month test. These two forms of test periods have been eliminated. There is now only one test period for the principal use test. It is for 12 months immediately following the possession date.
This means that if you:
1. Take possession of an aircraft, vessel, or vehicle outside of the State of California
2. Make first functional use of that aircraft, vessel, or vehicle outside the state of California before it enters our state for the first time
3. It must remain outside the State of California for at least twelve months before it enters the state for the first time, it would be exempt from tax
Although that may seem onerous enough, there is actually more to it.
1. You must be able to prove without a shadow of a doubt where the aircraft was located when the title transferred.
2. The definition of first functional use depends on what type of aircraft you purchase.
3. The burden of proof of providing documentation that supports the aircraft “never” landed inside California even once during the twelve months rests entirely on the taxpayer. For example: providing hangar receipts that the aircraft owner paid for a hangar in Medford, Oregon does not prove the aircraft was in the hangar.
4. The documentation will have to support that the aircraft was used and not just stored during the entire year. If there is a long period in the last part of the test period where the property is merely stored and not flown the auditor can attempt to throw out the storage time as “storage for shipment to California”. If the auditor is able to throw out the last six weeks of your test period and the aircraft enters California in the thirteenth month, it will be assessed tax.
Additionally, there are two separate ways the new regulation will be enforced. The type of enforcement depends on whether or not the taxpayer is a resident of California. The test period described above is for California residents. If the owner of the aircraft is a non-California resident, the test period is based on the aircraft being stored and used outside California for more than half of the first year.
Before a new aircraft buyer runs out to create an out-of-state LLC or corporation to be able to cut the requirement to six months, here is some additional data. If the Board of Equalization (Board) discovers the owners or shareholders of an out-of-state company are California residents, they can decide to apply the twelve month requirement. The taxpayer is not the one who gets to decide whether he or she is an out-of-state resident.
The following is intended to give you an idea of how the state determines that a company or person was a California resident. It all starts with wording from the regulation.
An aircraft purchased outside of California after October 1, 2004 and brought into California within 12 months of its purchase was acquired for storage, use, or other consumption in California and is subject to use tax if any of the following occur:
- The aircraft was purchased by a California resident (as defined in Section 516 of the CA Vehicle Code); or
- The aircraft was subject to property tax in California during the first 12 months of ownership; or
- The aircraft is used or stored in CA more than ½ the time during the first 12 months of ownership.
"Resident" means any person who manifests intent to live or be located in this state on more than a temporary or transient basis.
Presence in the state for six months or more in any 12-month period gives rise to a rebuttable presumption of residency.
The following are evidence of residency for purposes of vehicle registration:
– (a) Address where registered to vote;
– (b) Location of employment or place of business;
– (c) Payment of resident tuition at a public institution of higher education;
– (d) Attendance of dependents at a primary or secondary school;
– (e) Filing a homeowner's property tax exemption;
– (f) Renting or leasing a home for use as a residence;
– (g) Declaration of residency to obtain a license or any other privilege or benefit not ordinarily extended to a nonresident;
– (h) Possession of a California driver's license;
I tell all my prospective clients, “It does not matter that you are a resident of Ohio, take possession of your aircraft in Florida and register it in a Delaware Corporation. If the aircraft enters the State of California any time within the first twelve months, the state has the right to assess the tax on your purchase and you have the burden of proof to support a claim for an exemption. If the Board contacts you and you ignore them because you think you are an out-of-state resident, the Board will ultimately lien your aircraft or worse - raid your bank account.”
Aero & Marine Tax Professionals shows purchasers how to avoid aircraft tax and vessel tax in California and to make certain the full value of their next aircraft, vehicle, or vessel goes into their pocket--not the government's. They have successfully filed hundreds of tax returns with the California State Board of Equalization. Tom Alston, CEO and owner of Aero&Marine, has also published many articles on sales and use tax and sales tax exemption. His blog can be seen at http://www.aeromarinetaxpros.com/aero/articles