A Section 1031 Exchange can assist taxpayers to minimize their capital gains taxes when selling personal property for a gain, such as an aircraft, when they acquire another 'Like-kind' aircraft.    Other taxes, such as sales and use taxes, can create a significant liability for taxpayers as well.  It is critical that aircraft owners receive competent advice regarding the sales and use tax implications relating to the acquisition, sale, and use of an aircraft in various jurisdictions.

 

 

Sales Tax

 

The sale of business equipment such as aircraft can give rise to a sales tax liability.  Most states as well as some counties and cities assess sales taxes on the sale or other transfer of tangible personal property which occur within their jurisdictions.  Sales tax regulations are often complex and differ across jurisdictions.  It is critical, therefore, to obtain competent legal and tax advice well in advance of the closing.

 

As a general rule but subject to many exceptions, sellers of taxable assets are required to collect sales tax from the purchaser.  With aircraft, the taxing jurisdiction is generally the one in which the aircraft is located at the time of the sale.  Some jurisdictions consider aircraft to be located in their jurisdiction, and therefore subject to their tax laws, if they are in that jurisdiction’s air space at the time title passes.

 

Note that some states do not assess a sales tax on the sale of aircraft.  Massachusetts, for example, enacted a general exemption from sales tax for aircraft, engines, and replacement parts.  Other states may offer a ‘fly away’ exemption in the case of an aircraft that is removed from the state immediately or soon after the sale.  Aircraft sales in these states should not result in a sales tax liability.

 

When closing a Section 1031 Aircraft Exchange, the Qualified Intermediary will, on behalf of the aircraft owner, sell the relinquished aircraft and purchase the replacement aircraft.  It is important for the intermediary to work closely with the aircraft owner, as the owner will ultimately be responsible for the sales tax, if any, that is imposed on an aircraft purchased or sold by the Qualified Intermediary on behalf of the owner.

 

The principals of Beacon Exchange Company have significant experience in  structuring and closing Section 1031 Exchanges and in purchasing and selling aircraft.  This combined background in aircraft closings and Section 1031 Exchanges will provide aircraft owners with assistance in minimizing the potential tax liability associated with purchasing and selling a large capital asset.

 

 

Use Tax

 

Like a sales tax, a use tax is assessed by some states and other jurisdictions.  Use taxes are primarily put in place to prevent the avoidance of sales tax by assessing a tax on the in-state use of goods purchased outside the taxing state.  The tax is imposed on the privilege of using the aircraft in the taxing jurisdiction.  In most states, the sales tax rate and the use tax rates are the same. 

 

Exposure to use tax can occur in exchanges of aircraft when the aircraft is acquired without incurring a sales tax in one state and then used in another state.  If sales tax is paid on the acquisition, typically there is no exposure, or reduced exposure, to subsequent use tax in other states.  The reason is that, generally speaking, a sales tax paid on one jurisdiction is credited against a use tax in another location.

 

The use tax rules, like sales tax rules, are detailed and vary from jurisdiction to jurisdiction. It is imperative that potential use tax exposure be taken into account when planning and executing exchanges of aircraft, and when considering where the aircraft will be primarily based.

 

It also is important that aircraft owners and their qualified intermediaries in Section 1031 Exchanges understand the implications of sales and use taxes in aircraft exchanges, particularly when planning the ‘parking’ arrangements that are integral to reverse exchanges.

 

We invite you to contact us whenever you are considering a Section 1031 aircraft Exchange.