CAA: GA News, "Taking advantage of the details in one state’s sales/use tax"

["Stephen Irwin" <Stephen.Irwin@pmail.net>]

Friday, April 14, 2000

Taking advantage of the details in one state’s sales/use tax
Guest Column
William Scherer
GA News


Have you ever heard the expression, “Surround yourself with legal and
financial experts and let them carry you to the bank”? Or how about,
“Knowledge is power”? If you’re thinking of buying or selling an airplane,
it behooves you to talk to an expert about your state’s tax laws. It could
keep thousands or even millions of dollars in your pocket.

Recently in the market for my first airplane, I had vaguely heard about a
regulation that would exempt me from the California sales/use tax. No one I
spoke with, however, could explain it.

With the tax in mind, I asked five California aircraft owners about the best
way to purchase an airplane. Believe it or not, I received five different
answers and bits of advice. The last guy simply said he “didn’t even want to
mess with it” and paid the sales tax. Confused, I went searching for an
expert.

First I called my CPA in Los Angeles. He told me it’s legal to avoid paying
the sales/use tax as long as I keep it out of California for 90 days or
more. When I asked him for more details and the intricacies involved, he got
somewhat vague. He’s a good CPA, but he isn’t an expert in the field of
airplanes and their tax regulations. It was also clear that the last thing
he wanted to do was refer me to a more knowledgeable CPA firm that might
steal my business.

My search took me to a couple of tax attorneys in my area, but they said
they weren’t knowledgeable about aircraft sales-tax regulations.

By now I’m sure you’re thinking, My goodness, just pay the stupid sales tax
and forget it. Well, that might be relatively painless if you’re buying a
J-3 Cub for $23,000, but what if you’ve worked hard all your life and you’ve
saved $150,000 to buy that T-210? Or what if you’re one of the principals in
a Silicon Valley IPO and you’re eyeing that used Gulfstream IV for $29
million? Eight percent of $29 million is $2.3 million. That’s a lot of
money.

So, where did I finally learn more about this mysterious sales/use
regulation?

Fortunately, in my search for the “Airplane Purchase Holy Grail,” a dealer
in San Jose put me in touch with a group in Sacramento called the Associated
Sales Tax Consultants. Its members are former auditors for the state’s board
of equalization.

The next week I found myself having lunch with Thomas A. Alston. To my
delight, I had finally discovered an expert in the field of airplanes and
tax regulations. The first thing I learned was that an airplane purchase can
truly be exempt from the sales/use tax. More importantly, it’s legal.

Section 6201 of the Revenue and Taxation Code, Regulation 1620, subdivision
(b)(3) states:

“Property purchased outside of California which is brought into California
is regarded as having been purchased for use in this state if the first
functional use of the property is in California. When the property is first
functionally used outside of California, the property will nevertheless be
presumed to have been purchased for use in this state if it is brought into
California within 90 days after its purchase, unless the property is used or
stored outside the state of California one-half or more of the time during
the six-month period immediately following its entry into the state.”

Alston quickly added that knowing about the regulation is not enough to
exempt yourself from paying the tax. The critical aspects are purchasing the
aircraft in the proper manner and leaving yourself a paper trail. The state
has eight years to question your purchase.

Some of the more interesting bits of information I picked up during our
lunch:

* Take delivery of your newly purchased aircraft out of state.

* If it needs paint or avionics or other work, wait for the exemption
periods to expire if you want to have it done in California.

* Rent an out-of-state hangar to keep your investment safe. Nevada is nice
but Oregon is nicer because there is no state sales tax there.

Alston also explained that a lot of California aircraft owners get into
trouble during the 90-day or six-month test periods.

If you bring your plane into the state during the first 90 days, you flunk
that test and must start the six-month period, which begins when your
airplane first crosses the border, not when the transfer of title takes
place. Once you are in the six-month test, it is imperative that you use
your plane out of state 51% of the time and be able to document it.

Alston said most people fall into trouble with California tax agents when
they are unable to prove they’ve earned the tax exemption. The burden of
proof is on the taxpayer. You have to prove on paper that you did everything
by the letter of the law. Buyers also trip themselves up when they neglect
to file the consumer use tax return to the board of equalization within a
year of their purchase.

This article is not meant to give legal advice, as I am not an attorney or a
CPA. I recommend getting expert legal advice from a sales-tax attorney or
with Tom Alston of the Associated Sales Tax Consultants in Sacramento
(916-369-1200).

The bottom line is the purchase procedure can be complicated and the paper
trail must be exact. Other negative aspects include a rather lengthy period
of time without your new airplane, which means you may have to deal with the
airlines, and fees are involved when you seek expert advice.

On the other hand, if you are purchasing an airplane for a large sum of
money, the extra cash you keep in your pocket may allow you to buy . . .
that second airplane.

***

William Scherer is a freelance aviation writer and aircraft owner in Aptos,
California.


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