Beware of Hidden Business Jet Taxes

Most jet buyers have at least heard of the major taxes that go along with owning and operating a business jet: state sales, use, and property taxes; federal excise taxes on transportation and fuel; and federal income taxes on personal-use flights. But some stealthy taxes related to aircraft lie in wait for unsuspecting victims. Here are a few examples.

States with a tax-friendly reputation have the greatest potential to snare unsuspecting jet owners with surprise tax bills. Delaware, for example, is a famous tax haven, and not just for jets. The state is known for having no sales or use tax, so you’d think it would be a safe place to close an aircraft purchase tax-free. People fly to Wilmington from all over the country to close aircraft sales. But there is a little tax that many seasoned aviation professionals don’t know about: a levy of approximately 2 percent on payments of rent by lessees of tangible personal property—like business jets. 

An additional Delaware tax, called the “gross receipts tax,” may also be payable on wholesale and retail sales if the aircraft that changes hands has a maximum certified takeoff weight of less than 12,500 pounds. A Citation Sovereign would qualify for the exemption for heavier aircraft, but a Citation Mustang would not.

Oregon has long been the Delaware of the West Coast, with no sales or use tax on aircraft, which has made it a magnet for business jet closings. Yet once again there are hidden taxes. The state imposes a “corporate activity tax” (or “CAT”) on “commercial activity” by taxpayers doing business in Oregon that have sufficient contacts (or “nexus”) with the state. The levy on taxable commercial activity (including bringing a business aircraft into the state) is 0.57 percent of amounts greater than $1 million. “Commercial activity” can include the value of an aircraft transferred to Oregon within a year of being acquired outside the state. 

Doing Business in Oregon

In addition, the state has a “corporation excise tax” for the “privilege of doing business in Oregon” that is not limited to amounts above $1 million. The tax is significant; subject to an annual minimum, the rate is 6.6 percent for up to $1 million of net income and 7.6 percent for net income above that. To avoid such taxes, parties concerned about their nexus to Oregon have moved business jet closings to other jurisdictions, such as Montana.

If you lack nexus with Oregon and can dodge the excise and activity taxes, a natural place to close in the state is Portland International Airport (KPDX), where people who need to be on site for closing can easily get in and out on commercial flights. The seller’s pilots, for example, can position the aircraft to KPDX and then head over to the airline terminal to catch flights back home. The airport is also convenient for many Portland residents, who might think it a good location to base their aircraft.

The problem, though, is that the City of Portland imposes a 2.2 percent “business license” tax on net income from business activities conducted there, including rentals and sales. On top of that, Multnomah County, where the airport is located, has its own 1.45 percent business license tax. In each case, the first $50,000 is exempt, which won’t provide much comfort if the city and county come after you for taxes on your net income from aircraft leasing profits or sales. For this reason, many aircraft closings occur in nearby Hillsboro, which doesn’t have a business license tax and is outside Multnomah County. 

Speaking of cities and counties, aircraft buyers are often so focused on state sales taxes that they overlook taxes imposed by jurisdictions within states. Alaska, for example, has no state sales tax, but many of its boroughs and municipalities assess their own such taxes. Fortunately, there is generally a limit on what’s taxable; in Juneau, the amount subject to tax for a single item (such as an aircraft) is limited to $12,800, hardly a material sum in relation to a business jet. 

County and Municipal Taxes

In other states, however, taxes imposed by counties and municipalities can represent a significant burden; the all-in tax rate for Monroe, Louisiana, for example, is a whopping 12.95 percent. The state sales tax rate in Colorado—2.9 percent—is among the lowest in the country, but local sales taxes can drive this up significantly, and at different rates. The all-in sales tax rate in Parker, Colorado is 8 percent, while in Denver it goes up to 8.81 percent. Rates like these can add hundreds of thousands (or even millions) of dollars to a business jet sales tax bill, so it makes sense to choose your Colorado location carefully.

Aviation is an important industry in Oklahoma. The FAA aircraft registry is there, as are many prominent aviation law firms and escrow agents. Like most states, Oklahoma has a sales tax, but in lieu thereof (and of other state taxes except the annual aircraft registration fee) there’s a 3.25 percent excise tax on the transfer of ownership (or first registration) of an aircraft that is to be registered with the FAA. The tax is levied on the purchase price, and if there is no consideration paid for the transfer, on the aircraft’s fair market value. 

In some cases, this apparently applies even if the aircraft is transferred between related entities (for example, two subsidiaries of the same corporation, as noted in a 2016 ruling by the Oklahoma Tax Commission). If you’re not paying attention and fail to pay the tax within 20 days, Oklahoma imposes a 10 percent penalty, plus interest. Fortunately, there are various exemptions, and your transaction may be structured to qualify for one—assuming you realize that you need to take that step. Note that a wife can transfer her aircraft to her husband free of the excise tax as long as she doesn’t charge him anything (and vice versa).

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There are states that do not significantly tax aircraft buyers or owners. New Hampshire, for example, is noted for squeaking by without sales or income taxes. For revenue, it relies heavily on property taxes, but aircraft are not subject to property taxes in New Hampshire. There is a registration fee, but it’s relatively modest. For years, the state did have an unusual, unexpected, and potentially very expensive “aircraft operating fee” that applied to aircraft registered in the state, but to discourage aircraft owners from registering their aircraft in neighboring Massachusetts, New Hampshire recently did away with the operating fee. 

Similarly, presumably to discourage aircraft owners from registering aircraft with a maximum gross takeoff weight greater than 6,000 pounds in neighboring Connecticut, in 2015 New York extended its exemption for “commercial aircraft” from state and local sales and use tax to include “general aviation aircraft.” However, many aircraft buyers don’t realize that “ancillary property,” such as small appliances, linens, pillows and towels, and tableware, glassware, and cookware, is not exempt and remains fully taxable. Thus, you can close on a $40 million business jet purchase and owe no tax at all—except on the towels in the lavatories and the wine glasses in the galley. New York is unlikely to worry, however, that this annoyance will cause anyone to close on, or base their aircraft in, another state. 

In contrast to state taxes, you are not likely to encounter a federal tax that you or your tax advisors are not aware of, though the extent of the tax and its interpretation by the IRS may be at issue. (For example, you may not realize that the transportation excise tax may be due on amounts paid for a demo flight or under a time-sharing agreement). 

In the end, there’s no substitute for retaining experienced tax counsel who specializes in business aviation to make sure you don’t run afoul of IRS requirements.