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Contrary to What Is Being Said, There Is No Part 135 Sales Tax Exemption for Aircraft
By John Eberhard
During the everyday conversations of aircraft dealers, brokers and prospective buyers the belief is being enforced that a Part 135 exemption exists in California. This belief is dangerous and misleading. The applicable sections of the California Sales and Use Tax Laws and Regulations are 6366 and 6366.1. They do not mention Part 135. They state in pertinent part:
"6366. Aircraft sold to common carriers, foreign governments and nonresidents. (a) There are exempted from the taxes imposed by this part the gross receipts from the sale in this state of, and the storage, use or other consumption in this state of, the following:
(1) Aircraft sold to any person under authority of the laws of this state, of the United States or of any foreign government, or sold to any foreign government for use by that government out of this state, or sold to any person who is not a resident of this state and who will not use that aircraft in this state otherwise than in the removal of the aircraft from this state..."
"6366.1 Aircraft leased to common carriers, foreign governments and nonresidents. (a) There are exempted from the taxes imposed by this part the gross receipts from the sale in this state of, and the storage, use or other consumption in this state of aircraft are leased or are sold to persons for the purpose of leasing, to lessees using such aircraft as common carriers of persons or property under authority of the laws of this state, of the United States or of any foreign government, or any foreign government as lessees for use by that government out of this state, or to persons as lessees who are not residents of this state and who will not use that aircraft in this state otherwise than in the removal of the aircraft from this state..."
Regulations 1593 and 1610 which are the boards interpretation of sections 6366 and 6366.1 never mention the term Part 135. Unfortunately as the history of aircraft and sales tax unfolded in this state, the term Part 135 became synonymous with common carrier. This has led to many taxpayers attempting to support an exemption which doesn't exist. It is true that in order for an aircraft to qualify as being used in "common carriage" it can be operating in Part 135. However, it is not true that when a Part 135 pilot is in command of an aircraft, or that a qualified Part 135 organization is in control of the aircraft that the aircraft is operating as a common carrier.
Sections 6366 and 6366.1 offer legal exemptions for common carriers. The pitfalls for an individual are that the law requires the longest test period (twelve months), the federal requirements are cumbersome and because of the mythology, taxpayers can lose their claim because they are arguing their case incorrectly.
Use Tax Exemptions
In the absence of a transaction qualifying for an exemption because it meets the requirements as a common carrier, the only manner in which a California resident can purchase an aircraft exempt of sales and use tax is by taking possession out of state. However, merely accepting delivery in another state, or taking delivery and parking it in a hangar for several months seldom insure a situation where the transaction will be held as non-taxable.
Section 6201 of the Revenue and Taxation Code imposes a use tax on the storage, use or other consumption in California of tangible personal property purchased for storage, use or other consumption. The general test for determining whether property was purchased for storage, use or other consumption in California is set out in subdivision (b)(3) of Regulation 1620, which states as follows:
"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 this state."
Various statutes also create presumptions that property was purchased for storage, use or other consumption in this state. For example, Section 6246 of the Revenue and Taxation Code provides:
"It shall be further presumed that tangible personal property shipped or brought into this state by the purchaser was purchased from a retailer on or after July 1, 1935, for storage, use or other consumption in this state."
Once you establish the sales tax exemption by properly documenting the out-of-state delivery, it will be your responsibility to set up the factual circumstances and basis for you to be exempt of the use tax once the aircraft subsequently comes back into California.
The steps you need to take to establish the out-of-state exemption are as follows;
1. Maintain irrefutable proof of delivery.
2. Once you establish out-of-state possession, you have exempted the aircraft from California sales tax.
3. You must then establish the use tax exemption.
4. Maintain incontrovertible evidence of all movement of the aircraft.
5. Authenticate "first functional use" outside California
6. Use it outside of California for a period greater than 90 days prior to entry into California.
The official pamphlet put out by the Board of Equalization states this warning to all taxpayers attempting to use this exemption, "The staff should examine the functional use of the property outside California for the 91-day period to determine whether or not the use tax applies. Time when the property was not being used for the purpose for which it is designed should be excluded from the 91-day exemption." OR,
7. Use it outside California for a period greater than 50% of the 180-day test period which starts the first day it enters California if it is within the first 90 days of possession. OR,
8. Use the aircraft more than half the time in commercial interstate flight hours. This can be all Part 91 flight hours and each qualifying flight hour must have support that it is for a business purpose.
-- Thomas A. Alston
About the Author
Thomas A. Alston is the president of Aero & Marine Tax Professionals (http://www.aeromarinetaxpros.com). He has successfully filed hundreds of tax returns with the California State Board of Equalization. Mr. Alston is California's premier specialist in legitimate tax avoidance on aircraft, vessels and vehicles, having published many articles on sales and use tax.
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