The whole point of owning an airplane is the mobility that it gives you or your company. That mobility means many airplane owners find themselves straddling state lines when it comes to purchasing a plane or establishing its home base. The tax obligations of bridging states like this can be pretty substantial, and any potential aircraft buyer should make themselves aware of the hazards.
Use Tax vs. Sales Tax
When you purchase an airplane, that purchase is liable for sales tax or use tax just like any other purchase. I’ve written earlier articles here that go into more detail on each of these taxes, but here’s a quick sum up:
Sales Tax is paid by the seller to the state where the purchase was made. But in most states, the seller can reimburse himself by collecting the tax from the buyer at the time of the sale
Use Tax is paid by the buyer in the state where they plan to use the purchased item.
What Happens When the Rates Between States Are Different?
Things get more complicated when a purchase crosses state lines. While you can’t be charged what you already paid, the difference can be levied against you. For example, if you paid 6% sales tax in Nevada, but took the airplane across the border into California (7.5% sales tax), you can be charged the 1.5% difference as use tax. California requires you to pay the tax to the other state before you enter California for the first time or you will be charged the total tax in each state. Added to emphasize the dangers.
Unfortunately, it doesn’t work the other way. If you were charged 7.5% in California, then moved to Nevada, you wouldn’t get a 1.5% refund. So it’s a good idea to do what you can to lower the amount you pay in the first place.
Fly-Away Exemptions and Other Exemptions
There are ways to avoid the sales tax for the initial purchase. Many states have fly-away exemptions, where you aren’t charged sales tax if you purchase the plane, then leave the state within a certain amount of days. There are other exemptions, including exemptions for casual sales, aircraft meant for charter flights, and more. These can vary widely from state to state, and be more than a little confusing. Your best action? Consult a tax specialist to help you find the applicable exemptions.
A use tax won’t be levied against you unless you’ve established residency in that state, which makes it a key part of any multi-state aircraft purchase. It’s important to note that when we talk about residency, we’re not talking about where you live. The state residency of the aircraft is determined by where the airplane is hangared or is used. Every state uses different methods which can be as vague as flying the aircraft inside its borders.
Many aircraft purchasers can run afoul of this residency issue, especially if they live near the border of their state. For example, if you live in a no sales/use tax state like Oregon, but the nearest airport for your plane is in California, then you’re going to have to pay taxes per the California tax rate. Companies in particular need to be careful about this, since the location of a company-owned aircraft may end up being in a different tax jurisdiction than the company’s home base.
Use tax, sales tax, exemptions, and multi-state residency are all complicated enough, but it doesn’t stop there. Additional complications can arise from how the aircraft is purchased or used. Green aircraft, for example, are purchased as flyable air frames but need to be outfitted before they can be used. Often these are bought in one location, then flown to another state (or another country) to be outfitted. As you can guess, this kind of transaction can have a lot of jurisdictional tax complications.
Use tax can even rear its head several years later if you move the aircraft between states. An aircraft that’s purchased and used in a no sales tax state like New Hampshire or Delaware can still be hit with a use tax if it’s moved to New Jersey a few years later.
Those two examples are only the tip of the iceberg. Other specialized situations have their own complications that can be added to the sales tax and use tax mix.
Why You Need to Report Your Purchase When You Move
Now, we’ll be honest. We do often get asked why people have to report moving the aircraft between states at all. After all, the sale is reported when the ownership is transferred, but there’s nothing stopping you from moving to a different state and just not reporting it, right?
The truth is, you have a legal obligation to report it when you change your plane’s residency. If you’re inclined to bend the rules, then you should remember this: states make a point of tracking planes. Think about it for a second. Technically, we’re supposed to pay use tax on anything we purchase that crosses state lines. We usually don’t on small purchases because it’s not worth it for a government to go after use tax on a few hundred dollars.
Aircraft purchases can easily be in the millions of dollars. If an airplane cost $10 million, and the use tax difference is going to be 2%, then a state tax official only has to track down a single purchase to get the state $200,000 in taxes. Not only that, but all of the regulations around aircraft make it much easier to track their location and their flight patterns.
Any move will almost certainly get noticed eventually. Then you’ll not only have to pay the taxes, but you may have to pay severe penalties for not reporting it when you entered the state.
The Best Tax Defense is a Good Tax Offense
The absolutely best way to minimize your tax obligation is to use an airplane tax expert, and not just when the tax man comes calling. It’s best to consult with a tax expert when you first consider buying a plane. That way they’ll be able to give you a complete plan to navigate all of the complicated tax laws mentioned above.
Even saving a single percent on your use or sales tax can mean a substantial amount of money saved, so anything you can to minimize that can be well worth it.