Strings attached
Turbine aircraft repairs may be tax exempt—but beware common pitfalls
By David J. Brennan Jr.
Business aircraft may be subject to two major types of state taxes: sales and use tax. Usually, a state will impose a sales tax on the purchase or repair of a turbine aircraft in the state. Conversely, a state may charge a use tax on the use or storage of a turbine aircraft in the state. (A use tax is similar to a sales tax except that when an item is purchased outside of the state, the state cannot impose a sales tax but can impose the use tax.)
However, a state will carve out certain exceptions to the general rule of a transaction being taxable. These exceptions are normally called exemptions. States usually hold that the burden of proving an exemption rests with the person claiming the exemption. If there is any doubt as to whether that person qualifies for the exemption, it will be disallowed. In other words, tax is due on the transaction.
One exemption some states allow is for the tax-free repair of a turbine aircraft. States wish to encourage high-valued repairs to spur economic benefits to the state. One way some states accomplish this goal is by allowing for the parts and/or labor associated with the repair of the turbine aircraft to be exempt from tax. Knowing the requirements of each state can mean the difference between not paying tax on the repairs or landing a sizable tax bill.
States are constantly prowling flight records to catch the slightest slip-up of a turbine aircraft owner.
States can wholly or partially exempt the parts and labor for the repairs. Sometimes, the tax exemption on the repair is a blanket exemption with no strings attached. Other times, there may be requirements that must be met, such as weight requirements or documentation needing to be kept. Knowing the specific requirements necessary to exempt the repairs can not only help with ensuring the state’s requirements are met, but also in case the repair facility has a misunderstanding on what qualifies for the repair.
One aspect to the sales tax implications some owners do not consider entails a potential tax assessment on the turbine aircraft entering the state. A state may be able to impose a use tax on the turbine aircraft’s value or purchase price upon entry into the state. The longer the turbine aircraft is in the state, the stronger the state’s position becomes to assess a use tax, assuming the tax is not due immediately upon entry. One common exemption available to turbine aircraft owners, at least in some states, is the turbine aircraft can be exempt from sales tax when in the state for repairs. Again, the burden is on the owner to prove the presence was for repairs. States may establish a general requirement that the owner keep sufficient documentation to prove the exemption. Whatever the requirements of the state, it is a good idea to over-document the time in the state for repairs and ensure copies are saved. Fail to keep the right documentation, and you will face a potentially crippling tax assessment.
States are constantly prowling flight records to catch the slightest slip-up of a turbine aircraft owner. Administratively, it is certainly more cost effective for a state to impose a tax on the turbine aircraft than on the value of the repairs. With budget shortfalls facing many states, the states are looking for any way to aggressively make up the shortfall. Do not fall victim to a baseless assessment, or to an assessment that otherwise could have been easily avoided.
David J. Brennan Jr. is an attorney at Moffa, Sutton, and Donnini, P.A. He focuses his practice on tax issues.
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