| Every person who has contemplated an aircraft | | | | thinking adults who regularly make decisions about |
| purchase in the last few years has asked the | | | | where to spend their time and money, and where |
| question, "Is there a legal way to avoid sales | | | | to go on vacation, lose this ability when they think |
| tax?" Most of these people ponder this question | | | | about taxes on an aircraft purchase. |
| with the same seriousness as "Will I win the Lotto | | | | There isn't a plot by state agencies to attack |
| tonight?" | | | | aircraft owners. The single issue that creates the |
| Many people have heard the horror story of a | | | | confusion is the fact that a transaction involving |
| friend who tried one of those schemes and would | | | | an aircraft isn't bound by the limitations that |
| wind up with penalties and interest that doubled or | | | | almost every other purchase is. Obviously, you |
| tripled the original tax liability. A few have been | | | | don't walk into Wal-Mart to buy a power drill and |
| embarrassed when their attorneys and CPAs | | | | think about taxes because of the low price. What |
| laughed at them for asking the question. | | | | isn't so obvious is that the power drill can't change |
| People who purchase aircraft fall into one of the | | | | its physical location for the purpose of the |
| following categories. | | | | transaction. |
| 1. Those who hope they can avoid sales tax on | | | | The truth is that a lot of the strategies used by |
| their upcoming purchase. | | | | people to legally avoid sales tax on the purchase |
| 2 Those who pay the sales tax. | | | | of aircraft are available on a purchase of any kind |
| 3. Those who tried and failed to avoid sales tax | | | | of property. It is the mobility of the product as |
| on their last purchase. | | | | well as the price that forces taxpayers into the |
| 4. Those who successfully avoided sales tax on | | | | box of thinking that the tax exemptions are only |
| their last purchase. | | | | available to limited products. |
| 5. Those who tried to avoid sales tax on their last | | | | The mythology of sales tax exemptions further |
| purchase by eluding the tax agency and are | | | | confuses the issue. There are a significant number |
| functioning under the illusion they'll never get | | | | of people who perpetually confuse potential |
| caught. | | | | buyers by repeating unsubstantiated stories. For |
| 6. Those who have so much money they'd rather | | | | example, an arrogant individual proclaims "it's |
| pay the tax than think about dealing with a tax | | | | simple all you have to do park it out of state." |
| collector. | | | | Research indicates that he has heard stories from |
| 7. Those who believe that only millionaires with a | | | | other know-it-alls and repeats them without |
| large staff of accountants and lawyers can legally | | | | prejudice even though his statements are totally |
| avoid sales tax. | | | | false. |
| 8. Those who believe that professionals who claim | | | | The only reason he gets away with it generally |
| to be able to assist them to legally avoid tax | | | | rests in inconsistent enforcement of the taxing |
| operated out of a covered wagon selling snake oil | | | | agency's own rules. This does make it possible for |
| in a previous life. | | | | Mr. Know-it-all to have some substantiated cases |
| Justice Oliver Wendell Holmes of the Supreme | | | | of proof he is correct. The real reason may be |
| Court proclaimed that every citizen of the United | | | | because of lengthy statutes of limitations in some |
| States has a right as well as an obligation to avoid | | | | states can take nearly a decade before the case |
| taxes. What is against the law is evading taxes. A | | | | is actually challenged. Additionally if a state charges |
| quick reading of the dictionary should point out the | | | | fraud, there is no statute of limitations. As a |
| difference between avoid and evade. | | | | matter of practicality it is possible if they discover |
| According to Webster's New College Dictionary | | | | an aircraft transaction occurred that is outside the |
| the definitions of avoid include: | | | | statute of limitations in their state they will charge |
| 1. To keep away from : shun | | | | fraud so they can assess the tax. |
| 2. To keep from happening. | | | | The other historical problem is one of terminology. |
| 3. Law. To annul or make void : invalidate. | | | | People in the aircraft industry tend to use buzz |
| According to Webster's New College Dictionary | | | | words to communicate. These buzz words have |
| the definitions of evade include: | | | | a tendency to stick when they are attached to |
| 1. To escape or avoid by cunning. | | | | certain subjects, even though when compared to |
| 2. a. To avoid the performance of fulfillment of | | | | tax law they fail. The confusion around the use of |
| their responsibilities. b. To fail to make payment | | | | the term "Part 135 exemption," has trapped many |
| of. | | | | aircraft owners into interest and penalties. |
| 3. To avoid giving a direct answer to. | | | | When you mix an industry that misuses definitions |
| 4. To elude or baffle. | | | | with an inconsistent tax code enforcement you |
| Too many people have successfully "evaded" | | | | can easily see the tax traps that are mistakenly |
| sales tax on aircraft purchases by slight of hand | | | | set by the industry personnel for its own |
| and cunning. They have established a culture that | | | | members. We have no evidence of a plot by any |
| leads prospective buyers down the path to | | | | tax agency against aircraft owners. Usually the |
| believing that only those who participate in illegal | | | | problems are created by bad advice mixed with a |
| schemes get away with not paying taxes. This is | | | | flagrant desire to avoid taxes of any nature. |
| so far from the truth that it should be out of | | | | The desire to avoid taxes is admirable, the ability |
| sight for aircraft owners. | | | | to get good sales tax information is virtually |
| The true statement is anyone can successfully | | | | non-existent. The problem's existence is simple to |
| avoid sales tax on an aircraft purchase. There is | | | | explain. Sales tax law is a highly specialized area |
| only one thing that a prospective aircraft owner | | | | that doesn't attract much professional attention |
| should have to consider when it comes to sales | | | | because the potential size of the market is |
| tax. Are the steps necessary to legally avoid tax | | | | minuscule. Lawyers and C.P.A.'s can afford to |
| more costly than the tax? | | | | spend time learning about IRS rules because most |
| At this point the federal government collects | | | | of the population of the U.S. pays income tax. |
| taxes by primarily using an income tax, therefore | | | | Further, many avenues of education exist for |
| the questions about sales tax are related to | | | | professionals to learn about income tax. None |
| different rules in every state. | | | | exist for sales tax, other than within the agency |
| For example, If you are considering a purchase of | | | | for its employees. |
| a $2,000,000.00 aircraft and you live in a state | | | | Sales tax is typically the responsibility of the |
| that has a sales tax rate of four-percent you are | | | | retailer, therefore the problem primarily exists |
| facing a tax of $80,000.00. The same purchase in | | | | only for the fraction of the population that has |
| a state like California is subject to over | | | | seller's permits. For example, in California, with a |
| $160,000.00 in tax. When you add on the city, | | | | population nearing 40 million, the real market is |
| county and various other special districts it can go | | | | less than 500,000 businesses. |
| even higher. Conversely, there are currently five | | | | The sad result is that professionals oftentimes |
| states that have no sales tax. They are Alaska, | | | | advise their clients to just pay the tax, or lead a |
| Delaware, Montana, New Hampshire and Oregon. | | | | potential taxpayer down a path that results in |
| To further aggravate your search for information | | | | additional tax, interest and penalties. This doesn't |
| each state has specialized rules about aircraft | | | | happen because of incompetence. It occurs |
| purchases. Some examples of conflicting state | | | | because tax agencies often have a unique way of |
| rules are: | | | | conflicting with their own rules in order to collect |
| 1. In Kansas some transactions between two | | | | taxes. If your lawyer or accountant doesn't have |
| people, in which neither party is in the business of | | | | the astute understanding how to get access to |
| selling aircraft are exempt. In California a | | | | the inner workings of a tax agency you can be at |
| transaction between two people, in which neither | | | | risk. |
| party is in the business of selling aircraft, the | | | | A simple reading of a tax code is never the only |
| buyer owes the tax not the seller. | | | | place to gather understanding. A sales tax |
| 2. In some states, when a resident of that state | | | | professional must be willing to spend thousands of |
| buys an aircraft outside of the state where he is | | | | hours getting to know the nuances of each law |
| a resident it is exempt of sales tax. However, as | | | | and how the taxing agency has historically and |
| soon as he brings the aircraft into his state it is | | | | currently dealt with the issues. Upon studying the |
| subject to use tax. The rules vary from state to | | | | history of a tax agency, a sales tax expert will be |
| state as to the right of the purchaser to use his | | | | able to build an effective strategy even in the |
| aircraft outside of his state for a period of time | | | | face of diametrically opposed decisions by the tax |
| that renders the transaction exempt. In some | | | | agency on facts that are the same. The cost for |
| cases it takes three months and in some states it | | | | a taxpayer to educate himself sufficiently in the |
| takes twelve months. | | | | subtleties of sales tax laws will exceed the |
| 3. Some states only tax a purchaser on the | | | | potential tax. The educational process for a |
| difference between the sales price and the value | | | | do-it-yourself sales tax expert is paved with failed |
| of the trade-in. Some tax the retail price of the | | | | attempts that often times double and triple the |
| transaction without regard to a trade-in. | | | | original amount of tax due. The most efficient and |
| 4. If a purchaser registers his purchase in one of | | | | effective manner of legally avoiding sales and use |
| the "sales tax-free" states to avoid the sales tax | | | | tax rests clearly in the decision to hire a sales tax |
| he may be subject to a 50% penalty in his home | | | | expert with a proven track record of victories |
| state. | | | | for their clients before the sales tax agency. |
| 5. If a purchaser is not careful about his method | | | | Asking for client referrals is your best source of |
| of taking possession outside of his state of | | | | verifying the claims. |
| residency he may create a sales tax liability in one | | | | It shouldn't be a long drawn out process. |
| state and a use tax liability in another. | | | | Remember there are very few firms in the entire |
| It is this maze of confusing rules and inconsistent | | | | country that specialize in sales tax cases. A |
| requirements state by state that causes many | | | | review of the yellow pages in all the major cities |
| people just throw their hands up and pay the tax. | | | | in the country may reveal that several major |
| They are very aware that they don't have to | | | | metropolitan areas have none. It will still be worth |
| confront this issue on most other purchases so | | | | the long distance phone call to save yourself from |
| they can become paralyzed by the fear that | | | | overpaying your taxes. Of the firms that do |
| some hidden danger will imperil them when they | | | | specialize in sales and use tax matters, there is a |
| buy an aircraft. | | | | small portion of them who have worked for the |
| It is this fear that agitates them to the point that | | | | taxing agency or who have staff that has; |
| rational evaluation of facts dissipates. Normal clear | | | | beware their credentials. |