Can I really avoid paying California sales and use tax on my new airplane?

It's finally happened! You're about to take delivery of your new (or new to you) aircraft. It's an exciting time and you busy yourself with making arrangements for a hangar, pilots, mechanics, etc. There are a few final details to still work out: how will you take title to the aircraft, where will you take delivery, and when to pay the California sales and use tax. But wait, you've heard about lots of folks in California who have registered their aircraft to out-state corporations and somehow avoided paying the California sales and use tax, right? Maybe you should do the same thing? If you plan to use the aircraft in California, don't!

Regardless of what state you register your aircraft in, if you take delivery in California the California Board of Equalization will consider your aircraft purchased for use in California, which means your purchase will be subject to sales tax. Alternatively, if you take delivery in another state but bring the aircraft back to California within the first twelve months after you purchased it, the aircraft will be subject to California use tax (at the same rate as the sales tax).

This doesn't always mean that you have to keep your aircraft outside of California for twelve months after you purchased it to avoid paying the California sales and use tax. There are several exemptions that apply to rebut the presumption that your aircraft was purchased for use in California, including the commercial carrier exemption and the interstate commerce exemption, which are discussed below.

The commercial carrier exemption is the one that most people are familiar with. Generally speaking, if your aircraft is used in commercial carriage (charter) for more than fifty percent of the flight hours within its first twelve months of operational use and you receive in excess of $50,000 from charter operations (or 20% of the purchase price of the aircraft, if less) in such period, your aircraft will be exempt from California sales and use tax. Compliance with this exemption is a bit tricky though. In order to use the aircraft as a common carrier, it must be operated by and under the operational control of an air carrier (charter company) certificated by the FAA, and only flights with paying passengers or property on-board count towards the common carrier use. Empty flights on the way to pick up passengers, or to return to the base of operations after dropping passengers off do not count toward the fifty percent mark, even if those passengers are paying for the empty flights. Additionally, all of your use of your aircraft (which is personal use and not commercial carrier--unless you are a certificated air carrier) will count against meeting the fifty percent threshold of flights conducted as a commercial carrier.

The commercial carrier exemption is most easily qualified for if your aircraft is operated entirely by an air carrier during the first twelve months after purchase, since the only disqualified flights would be flights without passengers. If that is not feasible, and you want to use your aircraft for non-commercial carrier flights, you will need to carefully track the usage to make sure that the use is continuously well above the minimum fifty percent commercial carrier use.

If the requirements of the commercial carrier exemption are too rigid and your contemplated use is mostly for business, there is another and better alternative. The interstate commerce exemption, unlike the commercial carrier exemption, only requires six months to comply with. In order to comply with the requirements of the interstate commerce exemption, your aircraft must be delivered outside of California and used interstate (between two non-California states or a non-California state and a foreign country) for business purposes on at least one flight before its first entry into California. Once your aircraft first enters California, if it is used for business purposes on interstate flights for more than fifty percent of the flight hours within the following six months your aircraft will be exempt from California use tax. In order to be used for "business purposes" the aircraft must be engaged in the carriage of business officials on official business purposes. The qualifying flights must be between California and other states or between two non-California states, or between any state and a foreign country.

If you still plan to have some common carriage (less than fifty percent), keep in mind that only your interstate business flights would count toward the qualifying fifty percent mark, so again, careful tracking of flight usage is necessary to make sure that the use is continuously well above the minimum fifty percent interstate commerce use.

Keep in mind that with either exemption the requirements and rules to follow are quite complex and, as with all tax related matters, the devil is in the details. At a minimum, you will have to document use of each flight during the applicable test period in order to provide documentation to qualify for an exemption. For example, for common carriage flights, if the common carrier exemption is sought, you must demonstrate through credible documentation that all claimed common carrier flights were in fact conducted under authority by a certificated air carrier and carried paying passengers; and, for interstate business flights, if the interstate commerce exemption is sought, you must demonstrate the business purpose of the flight, which business officials were on board, what business they conducted at the destination, with whom they met at the destination, etc.

In any case, since the amounts at stake are usually quite large, it is quite likely that the California Board of Equalization will audit the operation of your Aircraft once it arrives within the state. The Board of Equalization receives a list of all new aircraft registrations from the FAA and vigilantly is on the lookout for newly registered aircraft flying into California in the first twelve months after registration. Proper planning in advance of first entry into California and for the likely audit is critical. You should engage an aviation attorney or tax consultant to make sure that your planned use initially complies and continues to comply on an on-going basis with the exemption that you select.

Eli Mansour is a partner with Luce, Forward, Hamilton & Scripps LLP and a member of its aviation practice area. He can be reached at [phone] or [e-mail]. Founded in 1873, Luce Forward is a full service law firm serving all of California with offices in San Diego, Carmel Valley/Del Mar, Rancho Santa Fe, Los Angeles, and San Francisco.