Buying a plane is not only expensive, but states usually want a cut by charging a sales tax or use tax on top of the purchase, increasing the upfront costs a buyer has to plunk down. Fortunately, smart tax planning can structure an aircraft acquisition so the state sales tax can be incurred over an extended period of time. A recently passed Texas bill (S.B. 1396) will allow certain in-state aircraft purchases to qualify for a resale exemption from sales tax, with the tax instead applied to later leasing contract payments.
Texas law allows buyers of certain tangible personal property to avoid paying sales tax on the purchase, if the sale is for resale. This exemption covers purchases made for the purpose of leasing. A common example is rental car agencies that buy an auto fleet for leasing to customers.
The sales tax exemption is also useful to purchasers of aircrafts in Texas, because the transaction can be carefully structured using a leasing arrangement so the buyer does not incur a significant sales tax liability at the time of purchase. By creating an entity that will purchase the aircraft with the sole intent of leasing it out to others (such as the entity’s owner), the sales tax liability can be shifted from the initial purchase to an incremental sales tax owed on the fair market value of the hourly flight costs, as they occur in the future.
Previous Texas guidance had prevented application of the resale exemption for aircraft purchases when the purchaser reserved certain rights and the ability to terminate an agreement at-will, because such arrangements failed to qualify as a true lease. These (failed) leases were utilized because the real owner of the aircraft wanted priority use of the plane when the need arose. Texas also imposed sales tax without an exemption where it determined the leasing company was not charging fair market value lease rates for use of the aircraft to so-called related parties.
The passage of S.B. 1396, changes all of that by giving aircraft purchasers more flexibility in their personal use of the plane. Effective Sept. 1, 2015, planes purchased with the main purpose of leasing to another person will qualify for the resale exemption as long as more than 50 percent of the aircraft’s departures within the first year of use are made by a lessee pursuant to a written agreement. This change allows purchasers to maintain the exemption even if they make use of the plane themselves, as long as the majority of leasing is made to other lessees (which can include related parties or affiliated entities without risking the exemption). It is very important, though, that the negotiated lease rates represent fair market value.
An attorney knowledgeable about aircraft leasing rules and state tax law can help purchasers fly through potential tax traps, to arrive at a favorable financial destination.