Are you considering purchasing an aircraft for business purposes? Do you own an aircraft, but would like to purchase a new one? This article will address sale and use tax issues to consider when purchasing a plane, particularly in California.
When looking to acquire a business use aircraft, it is important to weigh various factors affecting sales and use taxes. Given California’s high sales and use tax rates, tax savings can be substantial. All aircrafts purchased and used in California will be subject to sales or use tax unless they are eligible for one of the following four exemptions:
Purchases for use outside of California
Sales tax is applied to licensed-dealer aircraft sales and is usually included in the purchase price of the aircraft. In contrast, use tax is applied to private party aircraft transactions. When the sale and purchase of the aircraft occurs in California, use tax is not required if the buyer immediately transports the aircraft out of state. Thus, the aircraft cannot be renovated, stored or used for any other purpose in California or it will be subject to use tax. Delays with transporting the aircraft out of the state are acceptable only if the delays result from the need to make functional repairs for the actual transport of the aircraft.
Use in interstate or foreign commerce
In order to qualify for this exemption, the aircraft must be delivered to the individual or business outside of California. Once purchased and received by the buyer, the aircraft may be moved into California. However, in order to remain compliant with this exemption, the buyer may only “functionally use” the aircraft for interstate commerce outside of California prior to each subsequent entry. This means that the business flights must involve multi-state travel that does not include California. Additionally, the aircraft must be used at least 50% for interstate commerce for six months after the aircraft first enters California. After the six month holding period, the aircraft will be exempt from California sales and use tax, and will be eligible for use as the individual or Company deems fit. Lastly, this exemption requires that the purchase occur outside of California, regardless of where the aircraft is delivered.
Use as a common carrier
To qualify as a common carrier, the aircraft must be used as a common carrier for more than 50% of its operational use during the first twelve months (consecutive) beginning on the date of initial use. A common carrier is defined by the California Board of Equalization (BOE) in Regulation 1621 as “any person who engages in the business of transporting persons or property for hire or compensation and who offers these services indiscriminately to the public or to some portion of the public”.
Purchases from a qualified family member as specified in section 6285 of the Sales and Use Tax Law
Unless the seller is engaged in the business of selling aircrafts, the Qualified Family Member exemption from sales and use tax will apply if the seller is the purchaser’s parents, grandparents, grandchild, child, spouse, brother, or sister. The exemption does not apply to step-parents or step-children if the natural parent or child is not involved. The exemption also does not apply to a sale between ex-spouses if the final divorce decree has been signed.
Please note that if you receive an aircraft as a gift, this is subject to gift taxation rules but not sales and use tax.
Purchasing an aircraft is an expensive endeavor and involves substantial tax and practical consideration. Understanding the nuances of aircraft ownership, acquisition and use can result in significant tax savings for the purchaser. For that reason, we recommend you contact us at 858-558-9200 with any questions or concerns regarding an aircraft you have already purchased, or are considering purchasing. We would be more than happy to discuss with you how we can be of service to you and your business.