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Tax Considerations When Buying An Aircraft

by Greg Reigel 29. September 2017 11:01
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Among the many factors aircraft buyers need to evaluate when they are considering purchasing an aircraft, one of the most important may be tax. Frequently aircraft buyers tell me they want to purchase an aircraft BUT they don’t want to pay any tax on the purchase. Unfortunately, while it certainly may be possible to reduce an aircraft buyer’s tax liability, it isn’t always possible to completely avoid all tax liability associated with the purchase of an aircraft.

Sales Tax

As you may know, most states charge sales tax on the purchase of tangible property, including aircraft. Ordinarily the seller is required to collect and remit sales tax to the taxing authority. So, one of the first tax issues an aircraft buyer must address is whether the state in which the buyer intends to take delivery of the aircraft has any applicable exemptions from that state’s sales tax. In the absence of an exemption, sales tax would otherwise be due on the purchase/sale with either the seller collecting and remitting the sales tax or the buyer paying the sales tax directly. And since a seller does not want to be responsible for the sales tax, the seller will require the buyer to provide satisfactory proof of an applicable exemption, usually in the form of a signed exemption certificate.

But keep in mind that in some states, such as South Carolina, the sales tax assessed on an aircraft transaction may be so minimal that it may not make sense to relocate the aircraft for delivery in another state with an acceptable exemption. Rather, it may be more economical and convenient to simply pay the sales tax on the transaction.

However, that is not the case, here are a few examples of sales tax exemptions an aircraft buyer may be able to use to avoid paying sales tax in the delivery state. But be aware that all states do not allow for all of these exemptions. So, an aircraft buyer will need to evaluate the tax laws for each state to determine what exemptions may be available.

Fly Away Exemption. One example of an exemption from sales tax on an aircraft purchase is the “fly away exemption.” If the purchased aircraft is sold/delivered in one state for use and registration in another state before any use of the aircraft is made in the delivery state then the purchase is exempt from sales tax. Some states with a fly away exemption will permit limited post-closing use of the aircraft in the delivery state for the purposes of (i) training, (ii) maintenance, repairs, completion etc., or (iii) to fly the aircraft out of the delivery state. However, each state has its own unique requirements to take advantage of the fly away exemption, including the acceptable documentation to support the exemption (which a savvy seller will require).

Sale for Resale Exemption. Many states also allow for a “sale for resale” or “purchase for resale” exemption from sales tax. This exemption applies to a buyer’s purchase of an aircraft for the purpose of leasing, rental, or reselling the aircraft to another person. Here again, states applying this exemption may have specific requirements in terms of what is considered a “sale” or “leasing”, as well as the qualifications of the buyer (e.g. requiring the buyer to have a valid sales and use tax permit). Additionally, although the buyer may avoid paying sales tax on the purchase price of the aircraft, the buyer would then be required to collect and remit sales tax on either the lease or rental price, or the sale price of the aircraft to another person (unless an exemption applies to that transaction).

Commercial Use Exemption. Other states provide an exemption from sales to air carriers that purchase an aircraft. This would include persons certificated by the FAA under 14 C.F.R. Parts 121, 125, 133 and/or 135 to operate an aircraft to transport persons or property. The exemption may also apply to the air carrier’s leasing of the aircraft as a lessee. In order to qualify for the exemption, and to satisfy the seller, the air carrier needs to issue an applicable tax exemption certificate detailing its status and tax-exempt use of the aircraft at the time of the transaction.

Casual/Occasional/Isolated Sale Exemption. This exemption applies to transactions in which the seller’s sale of the aircraft is a “casual” or “occasional” sale. A common form of “occasional sale” with respect to an aircraft is one made by a person who does not habitually engage in the business of selling taxable items (of any kind, not just aircraft) and who sells no more than two such taxable items during the preceding twelve-month period.

To document an exemption of this type, a purchaser should ask the seller to provide a signed statement that the transaction qualifies for the occasional sale exemption as defined by the delivery state’s statutes or regulations. However, buyers need to be careful. Oftentimes this exemption applies to sellers who habitually engage in business of selling taxable items of any kind, NOT just aircraft. So a seller that doesn’t habitually engage in the sale of aircraft but does sell other taxable items would likely not qualify for this exemption.

Use Tax

Use tax, which is different from sales tax (although often assessed at the same rate), is imposed by a state for use of any material, including aircraft, in that state. The tax applies to out-of-state purchases in transactions where sales tax is not collected, or is collected but is underpaid compared to the sales tax that would be paid in-state. In the aircraft scenario, use tax is assessed by a state into which the aircraft is relocated post-delivery when sales tax was either not paid, or under paid, in the delivery state.

When an aircraft is brought into a state and a nexus is established by basing the aircraft in that state or otherwise operating the aircraft within the state for a minimum amount of time or trips/departures, then use tax is imposed. For example, some states require that the aircraft be operated within the state for a minimum amount of time. Other states look to the percentage of operation within the state. The specific rules in each state must be analyzed to determine the state’s requirements for establishing that nexus.

Practical Application

So, how does an aircraft buyer take advantage of these exemptions to minimize or avoid paying tax on the purchase of an aircraft? Well, the buyer will need to consider a number of factors including where the aircraft’s pre-purchase inspection will be performed, where the buyer may want to take delivery, where the aircraft will be operated post-delivery, by whom it will be operated and in what manner. Based upon the answers to those questions, the buyer will then need to review the tax laws for the relevant states to determine what exemptions may be available. Let’s look at a couple of examples using Texas law:

Example 1 - An aircraft buyer takes delivery of an aircraft in a state with a fly-away exemption (so no sales tax is collected or remitted) and then relocates the aircraft to Texas. If the buyer can show that in the following 12 months the aircraft’s non-Texas (out-of-state) departures are more than 50% of the total departures, then no use tax would be assessed against the aircraft. (In this scenario it is wise for the buyer to add an extra stop on trips outside the state to meet the 50% requirement on an ongoing basis in order to prevent getting stuck at the end of year if the aircraft is down for maintenance and unable to “catch-up” on out-of-state departures.)

Example 2 - An aircraft buyer takes delivery of an aircraft in a state using a Texas sale for resale exemption (again, no sales tax is collected or remitted) and then relocates the aircraft to Texas. If the buyer leases the aircraft to one or more lessees, no use tax would be assessed against the aircraft. However, the buyer would need to collect and remit sales tax on the lease/rental rate, unless the leasing was exempt from sales tax (e.g. a lease to a Part 135 air carrier).

One other tax issue an aircraft buyer will also want to consider is whether the state in which the aircraft is to be located or operated will assess personal property or ad valorum tax on the aircraft. In some states this tax is assessed and paid on annual basis. It may be separately assessed by the state or county, or it may be included along with an aircraft’s annual registration. However, as with sales and use tax, some states also provide exemptions from personal property tax depending upon location and use of the aircraft.

Conclusion

Although taxes are a fact of life, in aircraft transactions they can be a very significant fact when a buyer is spending millions of dollars on an aircraft. Aircraft buyers need to analyze their situations to identify the strategies and exemptions that may allow them to minimize or avoid assessment of tax on their aircraft acquisitions. Buyers should also work with their aviation and tax counsel to properly structure their transactions in a way that accomplishes their goals and complies with applicable laws and regulations.


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Greg Reigel

Who is your boss? (For the Aviation Department)

by David Wyndham 12. September 2017 13:44
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If you are a new first officer, its obvious that your boss, on any given flight, is the Captain, the pilot in command. Then the day comes that you are on your first trip as a Captain. Yet, you still have a boss. Now it is whoever is sitting in the back of the aircraft, or the person who authorized the trip. You also have another boss, the aviation manager. That individual has a boss, typically the CEO. Even the CEO does not escape having a boss, someone to whom they are responsible. They have many bosses.

A CEO needs to be concerned with the shareholders and their returns.  He or she must listen to the Board of Directors, yet communicate effectively with employees.  The CEO who cannot inspire employees to further the corporation’s Vision and pursue its Mission will face difficulties in meeting corporate goals. For officials of public corporations, there are regulators who also have oversight.   Yes, a corporate CEO has many masters.

Like the CEO, the Aviation Manager also has many bosses, even if the Aviation Department’s sole purpose is to be the CEO’s transportation.  At the end of the day, it is the corporation and its shareholders who must be served. It is where they meet that the Aviation Manager can add value.

The Aviation Department must integrate with the corporate structure and understand how it supports external and internal business units within the entire enterprise.  While it is tempting to cater to the CEO, the enlightened Aviation Manager focuses on addressing the goals and objectives of the company as a whole.  Woe be the Aviation Manager who seeks only the favor of a single executive. A key to longevity of the Aviation Department is how well it is enmeshed into the activity of the corporation.

The Aviation Department benefit the entire corporation at three levels.

- The Shareholder Level: profits, market share, returns are examples.

- The Enterprise Level: quality, asset management, cost control.

- Executive/Employee Level: productivity, team collaboration, product development

One recent client’s experience shows all three levels being met by the effective utilization of the corporate aircraft. The company had a goal to double the number of retail locations in the Northeast US.  The Aviation Department used the corporate aircraft to transport corporate teams to the Northeast to oversee and manage the opening of the new locations and to coordinate the training needed for the new mangers and employees. It flew senior management to speak at the regional meetings. Other times they flew sales and marketing teams to train new employees at multiple sites over a few days.  

The aviation department benefited the corporation at all three levels. They helped meet Shareholder expectations by: increasing market share by opening new stores. At the Enterprise Level they helped the management teams maintain quality of service at the new locations. For the Employees, they helped maintain executive staff productivity while training new staff.

Here are a few tips.

Focus on Corporate Goals and consider how Aviation can help achieve those goals: Relate trip fulfillment to corporate goals.  For the retailer cited above, the utilization strategy was supporting trips to the Northeast US during the corporation’s expansion in that region.  The Aviation Department knew the corporate goals and developed tactics for how aviation personal and resources would support the company. Not all executives may readily see how aviation is able to help.

Use Key Performance Indicators (KPIs) to measure the efficacy and value-added nature of the Aviation Department. As a quick review, for a KPI to be valuable, it must be understandable, meaningful and measurable. In general, a KPI can follow the SMART criteria: Specific, Measurable, Achievable, Relevant, Time-based. Tie KPI’s into the utilization strategy to aid in the measuring of the benefits to the company. 

Beware of measuring activity rather than productivity. One client managed the flight schedule to maximize filling the seats on the aircraft traveling to their main operating locations. Sometimes that strategy meant coordinating trips to fill the aircraft seats. For the Aviation Department, they maximized the productivity of each trip (passengers carried), knowing that the productivity benefit to the company was maintained while managing costs. While hours flown is an important metric, the Aviation Department maximized measures of productivity that supported the executive team and thus the corporation.

With respect to costs, be sure to include costs that are avoided in terms of travel expenses such as overnight stays, lost worked time/productivity and other elements of inefficiency. Time saved results in money saved.

Throughout the process of helping met the company’s strategic goals, the Aviation Department will need feedback from the corporation’s executive leadership. In addition to focusing on corporate goals, feedback is essential to guide the Aviation Department in its quest to serve the many bosses who demand satisfaction. Doing so benefits the company, the shareholders, the employees, and of course, the aviation department.

 

 

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David Wyndham | Flight Department

Top Five Things to Look for in a Flight School

by Tori Williams 2. September 2017 11:00
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So you have finally decided that you will chase your dreams and get your pilot license. That’s great! The next big step in the process is to pick a flight school. However, with the number of flight schools around nowadays (sometimes multiples at single airports) it can be difficult to know which flight school to choose. Ultimately you will be giving a large amount of money to them, so it is very important you find the right fit for your goals and needs as a flight student.

In this article I would like to outline some of the most important things to look for in a flight school, to hopefully assist you in choosing the perfect fit. Sometimes it is worth driving to the next town over for your preferred flight school.

1. Availability of aircraft

One of the number one complaints I’ve heard from my flight student friends is that they are unable to schedule their flights when they need to because there is limited aircraft availability. Having too many students trying to fly too few aircraft can lead to a lot of frustration and unhappiness from all involved. Speak with current students and see how often they are able to fly. Is it flexible or will you be fighting for a plane when the weather is nice? Another important thing to think about is what you will be flying after you complete your training. Does the flight school offer rentals without instructors? Is there a local flying club that has ties to the school? Having a game plan for when you’re flying on your own will save you a lot of work once you achieve your goals to earn your license.

2. Experienced instructors

One of my pet peeves with flight instructors is when they are clearly just instructing to get the hours to move to the airlines. Although this is what the majority of instructors are doing, it doesn’t mean they get to be lazy or haphazard with teaching you. Watch out for instructors who do not take your training seriously, or will cancel your flight for the slightest inconvenience. A good instructor will tailor your lessons to your learning style, and will do the best they can to advance you through the lessons so you aren’t wasting money. Remember, no matter how nice the person is, you have the right to switch to a new instructor if you feel you are not making the progress that you should be.

3. Training Options

The training options that you look for in a flight school have a lot to do with what your personal goals are as a pilot. Do you intend to fly as a hobby or are you ultimately wanting to make a career out of it? There is a notable difference between a Part 61 and Part 141 certified flight school and it is up to you to decide which you prefer. This goes along with the availability of aircraft as well. Do you want to fly the classic Cessna 172 or are you looking for a more “mission-oriented” type of aircraft? Have an open mind about new aircraft if you’ve only ever experienced one type, but be picky if you need certain type ratings or endorsements for your ultimate aviation goals.

4. Good Maintenance

I can assure you that when I first started looking at flight schools, I didn’t think twice about how their maintenance was. However, once I started flying and planes continually went out of service for the most random things, I began to wonder how smoothly our maintenance department was operating. Ask any potential flight schools who is in charge of maintenance, how a student would report a discrepancy with the plane, and how quickly the turnaround time usually is if a plane does go down for maintenance. Keep in mind that aircraft have regularly scheduled inspections, and ask how long they usually take to complete them. You may be surprised to learn that they are not up to standards. Determining the airworthiness of a plane is ultimately up to the pilot in command, so knowing how well the maintenance has been kept up is important.

5. Safety Record

Even if all of the above features of your soon-to-be flight school appear to check out perfectly, safety should always be the number one concern for pilots. Closely tied to maintenance and instructor experience, the safety record of the flight school directly impacts you. Keep your ear to the ground for any stories of unsafe operations and be watchful for regulation compliance. If the flight school ends up getting shut down for operating unsafely, you may be questioned about it during an interview for an airline. In the short term, you won’t have access to the planes you were flying. Keep tabs on the history of the flight school and be cautious if anything seems off.

The time you spend comparing flight schools will always pay off in the end. Don't be afraid to be picky and ask the hard questions. Flight schools would not be around without students so make sure you do your due diligence in the beginning, and enjoy your time training. What do you look for in a flight school? Let me know in the comments below!

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Aviation Safety | Airports | Tori Williams



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