Just days before Christmas, my client, a young CEO of a hugely successful financial services business called me with exciting news: he decided to buy a plane. In fact, he was trying to close on the purchase by New Year’s Day, as he put it, “you know, to get the tax benefits”. After congratulating him on his pending purchase, and asking a few questions about the proposed transaction, I delivered a message that would change his holiday plans: there were no tax benefits – and if we don’t restructure this deal – he will be writing a huge tax check just in time for the holidays. Fortunately, the story did end well, the deal closed in January, no tax bill was due, and the plane was ready to fly to New Orleans for Super Bowl XLVII.
I have received similar calls, and delivered a similarly cautionary message a few times each year to clients. The reality is that tax issues persist in the private jet space. Whether the proposed acquisition or sale is a fractional interest through a NetJets purchase program, or a custom Gulfstream G550, the issues must be addressed in order to avoid a surprise tax bill. In practice, we run into a number of tax issues consistently: state sales and use tax, utilizing active/passive losses, business vs. personal use, and federal excise taxes. Below, I address a few of these topics briefly so that the readers of Chief Executive will not fall into the same traps that have caused my own clients so much aggravation and, sometimes, an unexpected tax liability.
State Tax Issues
The most prevalent issues in aircraft taxation relate to the imposition of state sales and use taxes. The general rule in most states is that the sale of tangible personal property will be subject to sales tax (usually 5-10% of the purchase price). Likewise, if a sale was not subject to sales tax in the state that the plane was sold, the state that the plane is flown to for its use will impose “use tax”. Moreover, each state has its own set of rules in defining what constitutes a taxable sale or use.
Various states have limited exceptions, for example, that sales tax is not imposed on sales when the plane will be used in “interstate commerce” or if the plane is held for “resale”. Other states have “fly-away exemptions” allowing planes sold in a state to avoid sales tax if it is immediately flown to its home state. Indeed, in the young CEO’s transaction above, moving the closing of that transaction from Nevada to Arizona (for a plane that would be stored on the east coast), saved more than $225,000!