What is Use Tax?
We’ve all heard of sales tax. In fact, most of us are so used to it that we barely notice the item at the bottom of our receipts. Use tax, on other hand, is unfamiliar to most people. Unfortunately, use tax can have just as much of a sting on big purchases.
What is Use Tax?
Use tax is applied to the use, storage, or consumption of tangible personal property in a state. Or, to put it more simply: if you plan to use something in the state, then you probably owe use tax on it.
If that sounds like sales tax, that’s because the two are very similar. Sales tax is owed by the seller, while use tax is owed by the buyer. Even if the buyer reimburses the seller for the tax, the seller is, ultimately, responsible for paying the sales tax to the state. The buyer is completely responsible for use tax. When you work with a licensed retailer, such as a dealer, then they are responsible for paying sales tax. Private parties, on the other hand, are usually subject to a use tax.
The two taxes are mutually exclusive, and usually the same rate within a state. Once you’ve paid sales tax, you can’t also be charged use tax for the item.
The exact rates and exemptions for use tax will vary widely by state, especially when you’re dealing with airplanes. For example, some states have a separate and lower rate for aircraft use tax, while others place a limit on the amount of use tax that can be levied.
Why Don’t We Pay It on Everything?
Technically, use tax can be charged when you buy a used car, fridge, TV, or any other item. It also can be charged when you buy personal property in one state and move it to another. Most of the time, the cost it would take to police the payment of the tax costs more than the state would collect, especially when it comes to proving the exact value of depreciated goods. So no, you don’t have to worry about getting a huge bill when you cross the state line with your U-Haul.
The exception is big ticket items THAT REQUIRE REGISTRATION. Buy a car in Oregon (where there is no sales tax) then drive it home to California (where there is both sales and use tax), and you’re liable for a pretty steep use tax. The dealer will report the sale to the state government, so you can be sure that you’ll get a bill. The same is true for the sale of other large items, including aircraft.
Fortunately, you don’t have to worry about being taxed twice. If you’ve already paid the sales tax in one state, then that will count towards the use tax in another state. For example, if you buy an airplane in Nevada (with a sales tax of 6.5%), then move it to California (with a 7.5% sales/use tax), then you’re going to need to pay the 1% difference. However you need to check each state’s rules. California requires that you pay the tax to the previous state before you enter California the first time to be able to claim credit for the tax being paid to the other state.
Where Use Tax Starts to Get Sticky…
Applying use tax to aircraft gets a little complicated due to the mobility of aircraft. Fortunately, the law has set out some levels before a use tax liability is triggered. Generally, an aircraft has to create a sufficient nexus or connection to a taxing state before any taxes are imposed. Most often, this means the state where you base your airplane.
That being said, keeping your aircraft in a state for an extended period of time may also trigger a use tax, even if you claim to base it in another state. There are notable exceptions. Several states have ruled that moving a plane to their state for pilot training, routine maintenance, and warranty work won’t trigger a tax liability.
Ultimately, aircraft owners need to be aware of the local use tax codes and the ramifications involved in where they locate their plane.
How Do They Track Use Tax?
It can be tempting to try to squeeze between the lines and avoid use tax, especially if you purchase aircraft from a private party. This will only end in a large use tax bill and additional penalties when its discovered. And you can be sure that the state governments will find out where you’re using your aircraft. They often send out local property tax personnel to gather tail numbers on unannounced visits.
With state deficits growing larger in recent years, many states have become more aggressive about pursuing use tax. Aircraft are an easy target for tax collectors, since they tend to have larger price tags (leading to larger tax bills) and are easier to track than other property.
What Can You Do About Use Tax?
The absolute best thing you can do is to consult a professional, and to do it as early as possible. In fact, the best time to contact a professional is when you first start considering purchasing a plane. Exemptions are scattered throughout the laws of the state that can be used to eliminate the amount you’ll owe in taxes, and a professional can help you find them.
For example, some states have an exemption to help you avoid sales tax if you take delivery of the aircraft out of the state or ship it out of the state within a specified time. You’ll still be liable for a use tax where the aircraft ends up, but this could be the better option if the purchasing state has a high sales tax. Another example is the interstate commerce exemption, one meant specifically for aircraft and other vehicles that are used principally in interstate or foreign commerce.
There are many more exemptions, and other actions that a professional can take to help you lower your tax obligations. Even if they lower your tax bill by 1%, that can be a substantial amount when you’re talking about aircraft.