One thing appears to be certain as the California Legislature forces the aircraft industry to suffer the loss of two forms of exemption that have been available to purchasers of aircraft for decades. The use of an aircraft as a common carrier will still be a legal from of exemption.
California Sales and Use Tax Regulation 1593 is the regulation that details what is required to support this type of claim for an exemption. This is the longest test period of all the possible exemptions. Regulation 1593 requires twelve months.
Unless the aircraft owner is also in possession of a common carrier certificate which is covered under California Sales and Use Tax Law Section 6366, he must enter into a lease with an organization that has a certificate. This lease is covered under section 6366.1. This is where the use of this exemption gets very tricky.
The California Sales and Use Tax Regulation covering this area is explained below. Regulation 1593 exempts from tax aircraft used in this state as a common carrier. The pertinent parts of the regulation are as follows:
“(a) DEFINITIONS. (2) ‘‘COMMON CARRIER.’’ As used herein, the term ‘‘common carrier’’ means any person who engages in the business of transporting persons or property for hire or compensation and who offers his or her services indiscriminately to the public or to some portion of the public.
(b) APPLICATION OF TAX. (1) AIRCRAFT. Tax does not apply to the sale of and the storage, use, or other consumption of aircraft sold, leased, or sold to persons for the purpose of leasing, to (A) a person who operates the aircraft as a common carrier of persons or property, provided:
1. the person operates the aircraft under the authority of the laws of this state, of the United States, or of any foreign government, and
2. the person’s use of the aircraft as a common carrier is authorized or permitted by the person’s governmental authority to operate the aircraft;”
(c) USE OF AIRCRAFT. (1) COMMON CARRIERS. In determining whether a purchaser or lessee of an aircraft is using that aircraft as a common carrier of persons or property, only that use of the aircraft by the carrier during the first 12 consecutive months commencing with the first operational use of the aircraft will be considered. This test period does not include, and is extended by, the amount of time, prior to the first use of the aircraft as a common carrier, during which the aircraft is in the physical possession of a repair station certified by the FAA or a manufacturer’s maintenance facility undergoing modification, repair, or replacement. The period of this extension/exclusion shall not exceed 12 months. If the purchaser does not own the aircraft for 12 consecutive months commencing with the first operational use, as may be extended as provided herein, then only the period of time commencing with the first operational use that the purchaser owns the aircraft will be considered.
(A) ‘‘Operational use’’ means the actual time during which the aircraft is operated in powered navigation in the air. Operational use includes positioning or repositioning aircraft by flying the aircraft from one point to another (‘‘ferry flights’’) except when such flights are solely for the purposes of having the aircraft repaired. Ferry flights solely for the purpose of transporting the aircraft to a repair location, or solely to return from a repair location, are not operational use, nor are test flights as described in subdivision (d)(2) or personnel training as described in subdivision (d)(4).
(B) If the aircraft is used as a common carrier for more than one-half of the operational use during the test period the carrier’s principal use of the aircraft will be deemed to be that of a common carrier except as provided in subdivisions (c)(1)(D) and (c)(1)(E). Each flight of the aircraft is examined separately for purposes of determining common carrier use. For these purposes, a flight is the powered navigation of the aircraft from one location on the ground or water to the first point on the ground or water at which the aircraft lands.
(C) A flight qualifies as a common carrier use of the aircraft for purposes of the exemption only if the flight is authorized or permitted by the governmental authority under which the aircraft is operated and involves the transportation of persons or property. Where the aircraft does not itself transport the person or property to a location on the ground (or water), the flight does not qualify as a common carrier flight for purposes of the exemption.
“COMMON CARRIER EXEMPTION CLAIM DOCUMENTATION REQUIRED FOR REVIEW
1. Copy of the operator’s (Aircraft Owner) Federal Aviation Administration (FAA) Part 135 air carrier certificate.
2. FAA registration documents identifying when the aircraft was added to Aircraft Owner fleet.
3. A list of the operators certified pilots.
4. Evidence of insurance coverage (a complete copy of the policy) for common carrier.
5. A complete copy of the aircraft flight logs during the first twelve months of operational use.
6. A summary which describes each flight during the first twelve months of operation.
7. Aircraft log books and receipts which support all non common carriage use (i.e.: personal use).
8. Aircraft log books, passenger briefing cards, FAA flight plans, trip logs, weight and moment sheets and other related evidence which supports common carrier flights and revenue.
9. Copies of operator’s customer revenue billings showing the amount charged on all charter flights, Federal Excise tax returns and customer contracts. Each flight which is claimed to be charter during the first twelve months of operational use must be supported by a corresponding invoice.
10. A complete copy of the aircraft or engine maintenance logs showing total engine hours recorded since the date of purchase.
11. A complete copy of the sales contract which verifies the purchase price, date and location of the delivery of the aircraft.
12. A complete copy of the lease agreement, if the aircraft was leased, to the actual operator.
13. A copy of all lease payment invoices made to lessor (owner) by the lessee (operator).
14. Copy of evidence establishing the pilot was an employee of the common carrier and listed as same in the provisions of the operational specifications.
15. FAA airman competency/proficiency check Federal Aviation Regulation 135 forms for all pilots flying this plane.
16. Copies of flight crew logs.
17. Copies of aircraft logs showing pilot training time, test flights, and maintenance ferry flights.
18. Each certificate holder shall prepare and keep current a manual setting forth the certificate holder’s procedures and policies concerning the operation of the aircraft which are acceptable to the FAA administrator. Please provide a copy of the said manual.
19. Provide a copy of the airworthiness certificate for the Citation.
20. The common carrier aircraft must be operated by a U.S. certified airman employed by the certificate holder. Please provide copies of employment agreements or payroll records of the certificate holder.
21. Provide a load manifest for each common carrier flight which must contain the following information:
A. Number of passengers B. Total weight of the loaded aircraft C. The maximum allowable take-off weight for that flight D. The center of gravity limits E. The registration number of the aircraft F. The origin and destination of the aircraft G. Identification of crew members and their crew position assignments H. The pilot in command and the second in command pilot
The documentation must establish that the principal use of the aircraft was as a common carrier during the first twelve months of operational use. Effective January 1, 1997, Section 6366 provides a rebuttable presumption that a person is not engaged in business as a common carrier unless the yearly gross receipts from such operations exceed twenty (20%) percent of the purchase price of the aircraft, or fifty thousand dollars ($50,000), whichever is less. Prior to January 1, 1997, a person was not considered engaged in business as a common carrier unless the yearly gross receipts exceeded ten (10%) percent of the purchase price of the aircraft, or twenty-five thousand dollars ($25,000), whichever is less.”
Example, John Q. Taxpayer purchases a used Falcon in the state of Texas for $9,000,000.00 and owns the aircraft in a Delaware corporation known as Falcon Leasing (FLN). FLN contracts with Western Charter Group (WCG), an organization at Van Nuys Airport with a legitimate Part 135 Carrier certificate to have operational control over FLN’s aircraft.
FLN operates within its understanding of Regulation 1593 and the scope of the lease agreement with WCG for one year (the test period), then FLN decides to remove the aircraft from Part 135 use and merely use the aircraft for its personal business use. In year three FLN is contacted by the California Department of Tax and Fee Administration (CDTFA) and a review of FLN’s exempt status is scheduled.
The CDTFA sends a list to FLN and requests the documents listed above.
In response to the onerous document request from the CDTFA, FLN contacts the office of WCG and discovers the phone number is disconnected. After a few weeks of panicked nervousness, FLN discovers that WCG went out of business and all of its records are unavailable. In this case, even though FLN met the substance of the transaction by operating the aircraft more than fifty percent of the time as a charter, the aircraft will be assessed a tax of approximately $720,000.00 (assuming a flat rate of eight percent.)
FLN’s failure to maintain control over the documents (the form of the transaction) has created a situation where the Falcon purchase is taxable.
My advice to all aircraft purchasers who intend to claim this type of exemption is: Do your homework.
1. Work with reputable charter companies. Make sure the charter company has been around for a long time, has good references, and has solid financial backing. In addition, even if you are secure with your choice of a charter operator. Require them to provide you with the required documentation on a monthly basis.
2. The most difficult part of your documentation request is section 12 of the list. The charter company must provide copies of every invoice they issued to their customers for every claimed charter flight. Often, charter companies are reluctant to make this information public. Make the charter company sign an agreement that guarantees you will receive the documents, otherwise your transaction will be taxed.