NoN-CommerCial airCraft SaleS— PlaNNiNg StrategieS to eNSure faa

ComPliaNCe aNd miNimize taxeS

Kathryn Kisska-Schulz*Christopher M. Reimer**

Individualsandentitiespurchasing,owningandoperatingpersonalaircraftfornon-commercialusefaceamyriadofregulatorycomplianceissues,includingmeeting Federal Aviation Administration (FAA) and state and federal taxrequirements.Anaturalimpulseformanyclientswhenpurchasinganaircraftistoformanentitytotaketitletotheaircraft.Theuseofanentityseemslogicalfor (i) liability protection, (ii) administration and accounting, and (iii) taxminimization.Generally,clientsgravitatetowardsformingsuchanentityinstateswithoutsalesorusetaxtotakedeliveryoftheaircraft.Thisarticlediscussesthepotentialpitfallsofforminganentitytotaketitletonon-commercialaircraft.1ItpresentstheproperstepsnecessarytocomplywithFAAregulations,andreviewsthevarioustaxingschemesofcertainwesternstates.2

Wyoming LaW RevieW

Volume 10 2010 NumBer 1

*KathrynKisska-SchulzereceivedaB.S.fromRadfordUniversityin1996,aJ.D.fromtheUniversityofWyomingCollegeofLawin2004,andanLL.M.inTaxationfromtheUniversityofFloridain2005.SheisadmittedtopracticelawinWyomingandtheDistrictofColumbia.ShehaspracticedintheareaofstateandlocalsalesanduseandincometaxbothatDeloitteTaxLLPandLongReimerWinegarBepplerLLP.

** ChristopherM.ReimerisapartnerofLongReimerWinegarBepplerLLP.Hereceiveda B.S. in Accounting from the University ofWyoming in 2001, a J.D. from the University ofWyomingCollegeofLawin2004,andanLL.M.inTaxationfromtheUniversityofDenver in2006.HeisadmittedtopracticeinWyoming,Idaho,andColorado,aswellastheUnitedStatesTaxCourt.HeiscurrentlyactingastheinterimchairfortheWyomingStateBarTaxationcommittee,andrepresentstheWyomingStateBarinfrontoftheStakeholderLiaisonDivisionoftheInternalRevenueService.

1 See infranotes3–70,78–81andaccompanyingtext.

2 Seeinfranotes3–77,84–103andaccompanyingtext.

I. Part 91, Part 135 and the FlIght dePartment ComPany Problem

Part91oftheFAAregulationsgovernstheoperationofsmall,non-commercialaircraftintheUnitedStates.3MostclientswhopurchaseaircraftforpersonalorbusinessusefallwithintheparametersofcoverageofferedbyPart91.Inorderforanaircraftoperatortouseanaircraftforhire(i.e.,acommercialoperator),heorshemustobtainacommercial license,atwhichpointtheoperationofsuchaircraftisgovernedbyPart135oftheFAARegulations.4Part135providesasetof ruleswithmorestringentstandards forcommercialoperations thanPart91offersforcommuteroperations.

An aircraft commercial operator is a person hired for the sole purpose oftransportingpersonsorproperty.5Suchdefinitionraisesakeyissueinpersonalaircraftownership:Ifaclientestablishesanentitytoholdtitletoanaircraftforthepurposeofpersonaluseandthetransportationofownersandguests,isthatentity engaging in a “major enterprise for profit” as defined under Part 91?6AccordingtonumerousFAALegalInterpretationsandChiefCounsel’sOpinions,the answer is: Yes.7 Simply put, aircraft operations cannot be “incidental” toanyotheroperationifthesolepurposeoftheentityistoownandoperatetheaircraft.8 Although it is not defined in any regulation, the FAA refers to such

3 14C.F.R.§§91.1–91.1507(2008).

4 §§135.1–135.507.

5 §1.1.Acommercialoperatorisdefinedas:

[A]personwho,forcompensationorhire,engagesinthecarriagebyaircraftin air commerceofpersonsorproperty . . . .Where it is doubtful that anoperationisfor‘compensationorhire’,thetestappliediswhetherthecarriagebyairismerelyincidentaltotheperson’sotherbusinessoris,initself,amajorenterpriseforprofit.

Id.

6 See id.

7 See infranote9andaccompanyingtext;Letter fromChiefCounsel,FAA,toJosephA.Kirwan,Ogden,Newell&Welch,PLLC(May27,2005),availableathttp://www.faa.gov/about/office_org/headquarters_offices/agc/pol_adjudication/agc200/interpretations/data/interps/2005/Kirwan.rtf (last visited Nov. 21, 2009); David T. Norton, Don’t Put Your Client’s Shiny New Corporate Jet Into a Sole-Asset LLC,65Tex.BarJ.314,314(2002);JeffWieand,Your Client vs. the FAA:The Flight Department Company Trap,12ABABus.L.Today38,39(Mar./Apr.2003);see alsoLetterfromKennethP.Quinn,ChiefCounsel,FAA,totheHonorableWendellL.Wilkie,II, General Council, Department of Commerce (June 16, 1992), available at http://www.faa.gov/about/office_org/headquarters_offices/agc/pol_adjudication/agc200/interpretations/data/interps/1992/W.Willkie.rtf(lastvisitedNov.21,2009).

8 14C.F.R.§91.501(b)(5):

Operationsthatmaybeconductedundertherulesinthissubpartinsteadofthoseinparts121,129,135, and137of this chapterwhencommoncarriage isnotinvolved,include—... (5) Carriageofofficials,employees,guests,andpropertyofacompanyonanairplaneoperatedbythatcompany,ortheparentorasubsidiaryofthecompanyorasubsidiaryoftheparent,whenthecarriageiswithinthescope

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a singlepurpose entity as a “flightdepartment company.”9Thedeterminationthatanentityisa“flightdepartmentcompany”willremoveanoperationfromPart91tothemorestringentoperatingrulesofPart135.Forexample, intheFAA Assistant Chief Counsel Opinion (Opinion) issued on March 9, 2007,aprivatepartywished to forma limited liability company (Company) for thepurposeofowningandoperatinganaircraft.10TheowneroftheCompanymadecontributionstotheCompanywhichwereusedtopaythecostsofowningandoperatingtheaircraft.11Theaircraftwasusedsolelyforthetransportationoftheclient,client’sfamilymembers,andguests.12TheFAAdeclaredtheCompanya“flightdepartmentcompany”anddisallowedtheaircraft’soperationunderPart91.13TheconclusionmadebytheFAAwasthatcontributionsmadebytheclienttotheCompanyusedtofundtheoperatingexpensesoftheaircraftwereregardedas“compensation.”14Baseduponthisreasoning,clientsarebarredfromformingaspecialpurpose“flightdepartmentcompany”totaketitletoanaircraftbecausecontributionstotheentitytopayexpenseswouldbedeemedcompensation,andthusremovetheclientfromregulationunderPart91andintoPart135.15

The flight department company rule prohibits operation, not the mereownershipofaircraft forpersonaluseby individualsorthe jointownershipbyseveralentitiesleasingaircrafttothirdparties.16Therefore,aproperlystructuredjointownershiparrangementofanaircraftisapracticalsolutiontomeetingtheflightdepartmentcompanyrule.17UndertheadviceandoversightofanattorneyfamiliarwithFAAregulations,agroupofindividualclientscanjointlyownandoperate an aircraft for personal purposes without running afoul of the flight

of,andincidentalto,thebusinessofthecompany(otherthantransportationbyair)andnocharge,assessmentorfeeismadeforthecarriageinexcessofthecostofowning,operating,andmaintainingtheairplane,exceptthatnochargeofanykindmaybemadeforthecarriageofaguestofacompany,whenthecarriageisnotwithinthescopeof,andincidentalto,thebusinessofthatcompany....

9 LetterfromRebeccaB.MacPherson,AssistantChiefCounsel,FAA,toJamesW.Dymond,Esq.,Moore&VanAllen,PLLC(Mar.9,2007),available athttp://www.faa.gov/about/office_org/headquarters_offices/agc/pol_adjudication/agc200/interpretations/data/interps/2007/James%20Dymond.pdf(lastvisitedNov.21,2009)(respondingtoarequestforguidanceastowhethertheentityatissuewouldbea“flightdepartmentcompany,”Ms.MacPhersonreplies“Yes,asthatphrasehasbeenusedinFAAinterpretations.”).

10 Id.

11 Id.

12 Id.

13 Id.

14 Id.The term “compensation” is not defined in Part 91. However, the finding that theoperatorwasreceivingcompensationbroughttheoperatorwithinthedefinitionofa“commercialoperator”andoutofthePart91operatingrules.See14C.F.R.§1.1(definingcommercialoperator).

15 See supranote4andaccompanyingtext.

16 14C.F.R.§91.501(a)(“Thissubpartprescribesoperatingrules,...”)(emphasisadded).

17 See 14C.F.R.§91.501(b)(6).

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departmentcompanyproblem.Suchindividualclientscouldeachformanentitytoownaportionoftheaircraft,butthenewlyformedentitieswouldbebarredfrom“operating”theentityundertheflightdepartmentcompanyrule.Instead,themorepracticalsolutionforagroupofindividualclientswishingtojointlyownandoperateanaircraftissimplytoenterintoadryleasewithaseparateoperatingentity.18

II. Federal exCIse tax

A major tax concern of owning and operating a personal aircraft is theapplicationofthefederalexcisetax(FET).19PrivatebusinessaircraftoperatorsarerequiredtopayFEToneitherfuelorthetransportationofpersonsorproperty.20The FET applied to the transportation of persons or property is a percentagetaxontheamountpaidforcommercialtransportation,whiletheFETonfuelisacents-per-gallontax.21EffectiveOctober1,1999,theInternalRevenueCodeimposesa7.5%excisetaxupontaxpayersprovidingairtransportationservicestopersons.22

For the most part, private operators falling under the parameters of Part91 are subject to the fuel tax on non-commercial aviation, while commercialoperatorsoperatingwithintheparametersofPart135aresubjecttothetaxonthe transportation of persons or property. However, the status of commercialornoncommercialoperatorsdiffersfromtheindustrystatusfortaxpurposes.23Revenue Ruling 78-75 dictates that the status of an aircraft operator as a“commercialoperator”underFAAregulationsdoesnotdeterminethecommercial

18 See, e.g.,14C.F.R.§91.1001(b)(2)(“Adry-leaseaircraftexchangemeansanarrangement,documentedbythewrittenprogramagreements,underwhichtheprogramaircraftareavailable,onanasneededbasiswithoutcrew,toeachfractionalowner.”).

19 See generallyI.R.C.§4261(2006).

20 See Irs PublICatIon 510, exCIse taxes (InCludIng Fuel tax CredIts and reFunds)(RevisedApr.,2009),available athttp://www.irs.gov/pub/irs-pdf/p510.pdf (last visitedNov.21,2009).

21 ForahelpfulwebsitepertainingtotheFETasappliedtoaircraft,seeNationalBusinessAviationAssociation,http://www.nbaa.org.

22 I.R.C.§4261(a).

23 Asnotedinnote5,theFAAdefinestheterm“commercialoperator”as:

[A]personwho,forcompensationorhire,engagesinthecarriagebyaircraftinaircommerceofpersonsorproperty....Whereitisdoubtfulthatanoperationisfor‘compensationorhire’,thetestappliediswhetherthecarriagebyairismerelyincidentaltotheperson’sotherbusinessoris,initself,amajorenterpriseforprofit.

14 C.F.R. § 1.1 (2008). However, the Internal Revenue Service defined the term “commercialoperator”as:“Anyoneinthebusinessoftransportingpersonsorpropertyforcompensationorhirebyair.”I.R.C.§4041(c)(2006).

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ornoncommercialstatusoftheoperatorintheapplicationoftheaviationfuelandairtransportationtaxes.24

Generally speaking, when an individual owns his or her own aircraft andusesittoflypersonsforpersonalenjoyment,suchoperationoftheaircraftisnotdeemedataxableeventforpurposesofFET.25However,anycommercialoperationofanaircraft,includingflyingpersonsorpropertyforhire,forpayment,orforsometypeofservicerenderedinexchangefortheflightissubjecttoFET.26

In reality, there is afine line indeterminingwhether apersonal aircraft isoperatingasacommercialornon-commercialaircraftandsuchdeterminationisextremelyimportanttoaircraftownership.Ifanaircraftisnotflyingincompliancewith FAA regulations due to its lack of appropriate certification, the aircraft’sownerrunstheriskofheftyFAAfinesandaircraftinsurancecoveragecouldbedenied.TheFAA issuesfines for everyflight takenunder aPart 91 certificatewhenaPart135certificateisactuallyrequired.27Thedollaramountsofthesefinescanbeextraordinary.28Addinginsulttoinjury,thedenialofinsurancecoveragegenerallyarisesfromastandardclauseinaircraftinsurancepoliciesrequiringthatthe aircraft operate in compliance with FAA regulations in order to maintaininsurance coverage. Therefore, it is not only vitally important to determinewhetheraclientisactingasacommercialornon-commercialaircraftoperator,itisalsoessentialtodeterminewhethertheFETwillapplytosuchtransportationofpersonsorpropertyfortaxpurposes.

III. sales and use tax ImPlICatIons

In any outright purchase or leasing structure involving non-commercialaircraft, various state taxes play a significant role in logistical planning.29Specifically, the area ofmultistate sales anduse taxmustbe considered in thepurchaseorleaseofapersonalaircraft.Generally,salestaxisataxappliedatthe

24 Rev.Rul.78-75,1978-1C.B.340.

25 Rev. Rul. 84-12, 1984-1 C.B. 211 (stating that where there is no amount paid for airtransportation,theamountisnotsubjecttothepercentagetax).

26 See I.R.C.§4261(a) (stating ingeneral,anyamountspaid for theair transportationofperson are subject to tax). See generally Internal revenue servICe, Internal revenue servICe exCIse tax—aIr transPortatIon audIt teChnIques guIde (atg)(RevisedApr.2008),available athttp://www.irs.gov/pub/irs-mssp/air_transportation.pdf(lastvisitedNov.21,2009).

27 See14C.F.R.§13.305(d)(2009).

28 Id. (establishingfinesupto$11,000foreachviolationofanaircraftoperatingunderaPart91certificatewhenitshouldbeoperatingunderaPart135certificate).

29 Althoughnotdiscussedingreatdetailinthisarticle,taxesmustbeconsideredandaddressedat the state level, aswell as the local level,whenadvisingclientson thepurchaseor leaseof anaircraft.

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point of sale on tangible personal property and certain enumerated services.30Usetaxisgenerallyanexcisetaxappliedinlieuofsalestaxontheuse,storageorconsumptionofgoodswithinastate,regardlessofwhentheactualsaletookplace.31Usetaxisgenerallyimposedatthesamerateasthestate’sstatutorysalestaxrate.32Becausestatestatutesandregulationsregardingsalesandusetaxarenotuniversal,understanding thevarious state sales anduse tax implications isimperativewhendevisingplanningstrategiesforhighnet-worthsales.

In 2000, a nationwide effort to align the states’ sales and use tax ruleswas established via the Streamlined Sales Tax Project (SSTP).33 The SSTP’smain objective is to simplify and modernize sales and use tax collection andadministrationintheUnitedStatesbycreatingasetofuniversalrulescalledtheStreamlinedSalesandUseTaxAgreement(Agreement).34Asnoteverystatehasadopted themeasuresdrafted in theAgreement, anunderstandingof the salesandusetaxstatutesinallapplicablejurisdictionsassociatedwithasaleorleaseofpersonalaircraftisessential.

Becauseanaircraftistangiblepersonalproperty,statestendtoimposesalesand use tax on personal aircraft sales.35 Depending upon the state’s statutoryrequirement, sales tax is generally due based on the location of the sale.36Additionally,salestaxisimposedontheretailer,whichthenremitsthetaxdirectly

30 See, e.g.,Wyo.stat.Ann.§39-15-103(a)(i)(A),(J)(2009);Colo.Rev.Stat.§39-26-106(1)(a),(c)(2009);UtahCodeAnn.§59-12-103(1)(a),(b)(2009).Eachstatutediscussestheimpositionofsalestaxwithinthestate.

31 See Wyo.Stat.Ann.§39-15-103(a)(i),(c)(i).

32 See, e.g.,Wyo.Stat.Ann.§39-16-104(a)(2009)(imposingtheusetaxatthesamerateasstatesalestax).

33 For more information pertaining to the Streamlined SalesTax Project, see StreamlinedSalesTaxGoverningBoard,Inc.,http://www.streamlinedsalestax.org.

34 ThegoalofSSTPistounifystatesalestaxsystems.IntwoUnitedStatesSupremeCourtcases,Bellas Hess v. Illinois, 386U.S.753(1967) andQuill Corp. v. North Dakota,504U.S.298(1992),itwasdeterminedthatastatemaynotrequireasellerwithoutnexusinthestatetocollectsales tax on the sale.TheUnitedStates SupremeCourt found the existing sales tax system toocomplicatedtoimposeuponabusinesswhichlacksnexus.TheCourtfurtherdeterminedCongresshastheauthoritytoallowstatestorequireremotesellerstocollecttax.TheresultofthesetwokeycasesistheStreamlinedSalesandUseTaxAgreement(Agreement).ThepurposeoftheAgreementistosimplifytheadministrationofsalesandusetaxamongthestates.

35 See, e.g.,Wyo.Stat.Ann.§39-15-101(a)(ix)(2009)(defining“tangiblepersonalproperty”as all personal property that canbe seen,weighed, measured, felt or touched, or that is in anyothermannerperceptibletothesenses.Aircraftfallswithinsuchdefinitions);UtahCodeAnn.§59-12-102(108)(a)(i)(2009)(defining“tangiblepersonalproperty”asallpersonalpropertythatcanbeseen,weighed,measured,feltortouched,orthatisinanyothermannerperceptibletothesenses,adefinitionthataircraftfallwithin).

36 See, e.g.,Wyo.Stat.Ann.§39-15-103(a)(i)(A) (levying sales taxonevery retail saleoftangiblepersonalpropertywithinthestate).

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tothestate.37However,certainkeystatescanbeconsideredtaxfriendlyhavensforpersonalaircraftsales,andstrategicplanningutilizingthesestatescouldmeanlargetaxsavingstoanaircraftpurchaser.Fivestates—Alaska,Delaware,Montana,NewHampshireandOregon—donotimposesalesorusetaxonthesaleoftangiblepersonal property or certain enumerated services.38 Neither Massachusetts norRhode Island impose sales or use tax on aircraft sales.39 Depending upon theaircraft’sweight,ConnecticutexemptscertainaircraftfromsalesandusetaxandDelawareexemptscertainaircraftfromthestate’sgrossreceiptstax.40Further,anumberofstates,includingArizona,KansasandNebraska,havecertainflyawayexemptions,whichgenerallyallowthattitleofanaircraftcantransferwithinthestatewithnosalestaximposition,solongastheaircraftisremovedfromthestatewithinacertainspecifiedperiodoftime.41

Wyomingrequiressalestaxbeleviedonthepurchasepriceofeveryretailsaleoftangiblepersonalpropertyinthestate.42Wyoming’ssourcingstatutedetailsamyriadofsourcingrulesforvarioussalesoftangiblepersonalpropertywithininthestate.43Wyomingalsorequirespersonsstoring,usingorconsumingtangiblepersonalpropertyinthestatebeliableforusetax.44Usetaxisataxontheuseofgoodsorcertainserviceswithinastatewhensalestaxhasnotbeenpaid.45Thistaxisgenerallybasedonthefairmarketvalueofthepropertyatthetimeofsale.46ThesourcingruleforusetaxinWyomingisquitesimilartothesourcingruleforsalestaxinthestate,asitcoversvariousandspecifictransactionsuponwhichusetaxwouldbeimposed.47

37 See, e.g.,Wyo.Stat.Ann.§39-15-103(c)(i)(requiringeveryvendortocollectsalestax).

38 SeeAlaskaStat.§29.45.650–710 (2009);Del.CodeAnn. tit.30,§2909(l ) (2009);Mont.CodeAnn.§15-6-219(2007);N.H.CodeAdmIn.R.Ann.§§72:1–78,73:4(2009);Or.Rev.Stat.§307.190(2009).

39 Mass.Gen.LaWsch.64H,§6(vv)(2009);R.I.Gen.LaWs§44-18-30(56)(2009).

40 Conn.Gen.Stat.Ann.§12-412(99)(West2009)(exemptingfromsalestaxthesaleofaircraftweighing6,000poundsormore);Del.CodeAnn.tit.30§2909(l)(exemptingfromgrossreceiptstaxthesaleofaircraftweighing12,500poundsormore).

41 SeeArIz.Rev.Stat ann.§42-5159(B)(7)(b)(2009);Fla.Stat.Ann.§212.05(1)(a)(2)(West2009);Kan.Stat.Ann.§79-3606(k) (2009) (exempting fromsales taxanyaircraft soldinthestate(i.e.,titletransferringinKansas)ifthepurchaserisaresidentofanotherstateandtheaircraftisremovedfromKansaswithintendaysofthesale).

42 Wyo.Stat.Ann.§39-15-103(a)(i)(A).

43 Wyo.Stat.Ann.§39-15-104(2009).Sourcingistheprocessoftracingasalebythetypeandlocationofthesaleinordertodeterminewhatjurisdictionthetaxcollectedfromatransactionissubsequentlyowed.

44 Wyo.Stat.Ann.§39-16-103(a)(i)(2009).

45 See, e.g.,Wyo.Stat.Ann.§39-16-103(c)(i)–(ii)(extinguishingtheusetaxifthetaxpayerprovesthatsalestaxonthetangiblepersonalpropertywaspaidinanotherjurisdiction).

46 See, e.g.,Wyo. stat. ann.§39-16-103(b)(establishingthebasisofusetaxinWyoming).

47 Wyo. stat. ann.§39-16-104(2009).

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Manyjurisdictionstreattheleaseoftangiblepersonalpropertyasasalefortaxpurposes.48InWyoming,salestaxappliestothegrossrentalpaidfortheleaseoftangiblepersonalproperty,ifthetransferofpossessionwouldbetaxableuponsale.49 For sales tax purposes, Wyoming statutes further specify that leases ofaircraftrequiringrecurringperiodicpaymentsaresourcedtotheprimarypropertylocation.50Forleasesnotrequiringrecurringperiodicpayments,thepaymentissourced likea retail sale—at thebusiness locationof the seller.51 InWyoming,theusetaxstatutesalsospecifythatleasesofaircraftrequiringrecurringperiodicpaymentsaresourcedtotheprimarypropertylocation.52Forleasesnotrequiringrecurringperiodicpayments,thepaymentissourcedtothebusinesslocationoftheseller.53

TounderstandWyoming’ssalesandusetaxstatutesinapracticalscenario,considerabasicsaleofpersonalaircraft fromanaircraftbrokertoaWyomingresident.FortheaircraftsaletobetaxableinWyoming,titleoftheaircraftmusttransferinWyoming.54Toproperlyavoidsalestaxonthetransaction,aWyomingresident purchaser may structure the sale so that title of the aircraft transfersinasalestaxfriendlyhaven,suchasMontana,whichdoesnotimposesalesorusetax.55However,oncetheaircraftisbroughtbackintoWyomingforuse,thepurchaserissubjecttousetaxatthesamerateuponwhichsalestaxwouldhaveapplied,hadthesaletakenplaceinWyoming.56UsetaxinWyomingiscalculatedbaseduponwhenthetangiblepersonalpropertyisfirststored,used,orconsumedwithinthestate.57WyomingusetaxdoesnotapplytotangiblepersonalpropertywhichispurchasedandusedinanotherstatepriortoitsuseinWyoming.58

48 See Wyo.Stat.ann.§39-15-103(a)(i)(B);IdahoCode§63-6612(2)(h)(2009);ArIz.Rev.Stat.§42-5001(13)(2009).

49 Wyo.Stat.Ann.§39-15-103(a)(i)(B).

50 Wyo.Stat.Ann.§39-15-104(f )(ii)(A)(2009).NotethatwhileWyomingstatutesdonotdefine the term“recurringperiodicpayments,” it is arguable thatmonthlyoryearly installmentpaymentsforaparticulartermwouldqualifyasrecurringperiodicpayments(i.e.,$10,000paymenteachyearforaleasetermoftenyears).

51 Wyo.Stat.ann.§39-15-104(f )(ii)(B).NotethatwhileWyomingstatutesdonotdefinetheterm“recurringperiodicpayment,”itisarguablethatalumpsumpaymentmadeforaparticulartermwouldbedenotedasanon-recurringperiodicpayment(i.e.,$50,000paymentmadeforatenyearleaseterm).

52 Wyo.Stat.Ann.§39-16-104(e)(iii)(A).

53 Wyo.Stat.Ann.§39-16-104(e)(iii)(B).

54 SeeWyo.Stat.Ann.§39-15-103(a)(i)(A).

55 SeeMont.CodeAnn.§15-6-219.

56 SeeWyo.Stat.Ann.§39-16-104(a).

57 011-000-002Wyo. Code r.§4(i)(ii)(Weil2009).

58 §4(i)(v).

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In In re Ken Koster, aWyoming residentwhopurchasedanaircraftoutofstate foruseoutof statewasnot subject to salesoruse tax inWyoming.59 InKoster, the Wyoming resident purchased an aircraft with title transferring inMissouri,andtheaircraftwasneverdelivered,usedorstoredinWyoming.60TheWyomingBoardofEqualizationfoundthatsalestaxdidnotapplytothesaleoftheaircraft,astitletransferredoutsidethestateofWyoming.61Further,usetaxwasnotimposedbecausetheaircraftwasneverstoredorusedwithinthestate.62In instances similar toKoster, it isarguable that ifanaircraft ispurchasedandusedoutsideofWyoming,neithersalesnorusetaxshouldapplytoaWyomingpurchaser.However,specialcaremustbetakeninsituationswherethesaleofanaircraftoccursoutsideofWyomingbutuseofsuchaircraftmightoccurinsidethestate.

A. Advantages of Lease Transactions

InscenarioswherethesaleofanaircraftoccursoutsideofWyomingbutuseof the aircraftoccurswithin the state, it is advantageous to structure a leasingagreementusingtax-friendlystatesinordertoeffectivelyminimizeaWyomingresident’ssalesandusetaxobligations.

TounderstandtheimplicationsofWyoming’ssalesandusetaxstatutesinthisparticularfactualscenario,consideraleasingagreemententeredintobetweenanon-WyomingresidentbusinessentityandaWyomingresident.Inthisexample,abusinessentitysitusedinastatewithnosalestax(forexample,Montana)couldpurchaseanaircraftfromathird-partybrokerandsubsequentlyleasetheaircrafttoWyomingresidents,resultinginfavorablesalesandusetaxresults.63Insuchatransaction,titleoftheaircraftwouldsuccessfullytransferoutsideofWyoming,whileuseoftheaircraftbythelesseewouldoccurinWyoming.64Asnotedearlier,forpurposesofbothsalesandusetaxtheWyomingsourcingrequirementswithrespect to leases provide that recurring periodic payments are sourced to theprimarypropertylocation,whilepaymentswhicharenotrecurringaresourced

59 In re KenKoster,No.2004-132(Wyo.Bd.ofEqualizationAug.2005),available athttp://taxappeals.state.wy.us/images/docket_no_2004132.htm(lastvisitedNov.21,2009).

60 Id.at¶¶9–11.

61 Id.at¶¶30–40(order).

62 Id.

63 Forfavorableincometaxresults,thenon-residentbusinessentityshouldbeorganizedasapassthroughentityandtheWyomingresidentlesseesshouldbethemembers/partnersofsuchentity.Forexample,theMontanaentitycouldbesetupasaMontanaLLCandthemembersoftheLLCwouldbetheWyomingresidentswhowillultimatelyleasetheaircraftfromtheLLC.

64 TitleoftheaircraftwouldtransferinMontanauponthesalebythebrokertothebusinessentity.UpontheleasingarrangementbetweentheMontanabusinessentitylessorandtheWyomingresidentlessees,useofsuchaircraftwouldoccurinWyoming.

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to thebusiness locationof the seller.65Hence, structuring a leasing agreementbetween a non-resident lessor andWyoming resident lessees requiring a lumpsum,non-periodicpaymentcoveringatermofyearswouldresultintheleasingpayment sourced outside of Wyoming for both sales and use tax purposes.66Further,structuringatransactionutilizingaleasingagreementbetweenabusinessentitylessorandathirdpartylessee,ratherthanstructuringatransactionutilizinganoutrightpurchaseofanaircraftbyanentityforuse,isessentialinordertoavoidtheflightdepartmentcompanyruleimposedbytheFAA.67Theflightdepartmentcompanyrulebarsasingleindividualfromforminganentityforthesolepurposeofowning andoperating an aircraft, and alsodisallows a groupof individualsfrompoolingtheirfundstogethertoformaspecificpurposeentity.68

Iv. addItIonal ConsIderatIons

Otherplanningconsiderationsassociatedwiththesaleor leaseofpersonalaircraft include income and property taxes, as well as title and lien priorities.aPPendIxAbelowprovidesabriefoutlineoftheapplicablesales,use,incomeandpersonalpropertytaxratesincertainstateslocatedaroundornearWyoming.69

Income tax considerations must be accounted for with respect to the saleorleaseofpersonalaircraft.Incometaxisataxleviedonthegrossincomeofanindividualorbusinessentity.70Intheoutrightpurchaseofapersonalaircraft,thesellerwillbesubjecttofederaland,inmanycases,stateincometaxonthegrossincomereceivedfromthesaleofanaircraft.71Inathoughtfulleasingstructure,stateincometaxobligationscanbereducedoreliminatedifthelessor’sbusinessentityissetupinastatewhichimposesnoincometax.72

65 SeeWyo.Stat.Ann.§§39-15-104(f )(ii)(A)–(B),39-16-104(e)(iii)(A)–(B);see supra note38andaccompanyingtext.

66 Note, this scenario does not consider the income tax obligations a taxpayer may besubject to inanygivenstatewhere the lessorand lesseesare located.Athoroughunderstandingofaparticularstate’sincometaxrequirementswheresuchpartiesarelocatedisimperativetofullyunderstandthetaxconsequencesfacingthelessorandlesseesinanygivenscenario.Whileoutsidethescopeofthisarticle,properplanningcanalsoreduceoreliminateincometaxobligationswithrespecttosuchparties.

67 SeeMacPherson, supranote9andaccompanyingtext.

68 Id.

69 SeeinfraaPPendIx a, Western state tax matrIx.

70 I.R.C.§61(a)(2006)(defininggrossincomeasallincomefromwhateversourcederived).

71 Id. (defining gross income without differentiating between an individual or businessentity).

72 Sevenstates—Alaska,Florida,Nevada,SouthDakota,Texas,WashingtonandWyoming—impose no state income tax. Therefore, a tax planner advising a client about the various taximplications associatedwith the saleor leaseof anaircraftmustbeaware that certain states aremorefavorablethanotherswithrespecttosettingupabusinessentity.Note,however,thatwhile

184 WyomIng laW revIeW Vol.10

Propertytaxisanotherconsiderationtokeepinmindwhensellingorleasingpersonalaircraft.Propertytax,alsoreferredtoasanadvaloremtax,isataxontheassessedvalueof realandcertain tangiblepersonalproperty.73Property taxisdefinedasa“tax imposedbymunicipalitiesuponownersofpropertywithintheirjurisdictionbasedonthevalueofsuchproperty.”74Generally,propertytaxisimposedatthestatelevel,butcanalsobeimposedatthecityorcountylevel.75RegistrationoftheaircraftwiththeFAAat itspermanenthanger locationwilllikelydictatewhichstate’spropertytaxisapplicable.

Title and lien priority must also be considered in the sale or lease of anaircraft.Federallaweffectivelypreemptsastate’snormalmethodsofperfectionundertheUniformCommercialCode.76Toperfectanoutrightinterest,securityinterest,orlease,etc.,suchinstrumentmustbefiledwiththeFAA,whichactsasacentralrepositoryforalldomesticaircraftcommercialtransactions.77Inaddition,anyaircraftabletotransportmorethaneightpeopleissubjecttotheCapeTownTreatyadoptedbytheUnitedStates intheCapeTownTreatyImplementationActof2004.78ThistreatyrecognizestheInternationalRegistryofMobileAssets(InternationalRegistry)inDublin,Ireland,asthecentralregistryestablishingtitleandlienpriorityonaninternationallevel.79AnyownerofanaircraftcoveredbytheTreatyshouldregisterattheInternationalRegistryinadditiontoregistrationwithFAA.

ConClusIon

Transactions involving personal aircraft sales and leases are tremendouslycomplexandshouldonlybeimplementedaftercarefulconsiderationofall theapplicabletaxes,FAAregulations,andpriorityoftitleandliens.Whilethebasic

thesesevenstatesdonotimposeincometax,someofthemimposeotherapplicabletaxes,includingfranchisetaxesonbusinessentities,excisetaxesofaircraft,orBusinessandOccupation(B&O)taxontaxpayersengaginginbusinessactivitiesinthestatewhichmustbeconsideredintheplanningprocess.

73 SeeWyo.Stat.Ann.§§39-13-101(a)(ii),39-13-103(2009).

74 barron’s laW dICtIonary471(2ded.1984).

75 I.R.C.§164(2006)(permittingapersonaldeductionfromfederalincometaxesforstateandlocalincometaxesandtaxesonrealandpersonalproperty).

76 See,e.g.,Wyo.Stat.Ann.§34.1-9-311(a)(i)(2009)(indicatingthatthefilingofafinancingstatementattheWyomingSecretaryofStatedoesnotperfectasecurityinterestsubjecttofederallaw).

77 See49U.S.C.§§40102,44101–44112;see also14C.F.R.Parts45,47and49(2008).

78 CapeTownImplementationActof2004,Pub.L.No.108-297,118Stat.1095(2004)(codifiedat49U.S.C.§§40101note,44107,44108,44113(2006)).

79 Id.TheinternationalregistryissupervisedbytheInternationalCivilAviationOrganization(ICAO)andisbeingoperatedoutofDublin,IrelandbyAviareto,ajointventurebetweenSITA,anairtransportITserviceprovider,andtheIrishgovernment.SeeAviareto,http://www.aviareto.aero/(lastvisitedNov.21,2009).

2010 non-CommerCIal aIrCraFt sales 185

saleofapersonalaircraftfromabrokertoapurchaserinastatewithnosalestaxmayinitiallyseemappealing,tremendouspitfallscanoccurwithrespecttouseandincometaximplications.SuchasalemayalsorenderheftyFAApenaltiesandfees.80

Abetteralternativetopersonalaircraftownershipcomesintheformofadryleasefromabusinessentitylessortobusinessorindividuallessees,whichutilizesstrategic stateswithaircraft tax-friendly implications.81Because the structuringofsuchatransactionrequiresmeticulousunderstandingofvariousstateincometax, sales and use taxes, and property tax implications, as well as a thoroughunderstandingofFAAregulationsinordertoobtainthebestpossibleoutcomeforthetaxpayer,particularcareshouldbetakentounderstandallsuchissuespriortoimplementation.

80 See supranotes27–28andaccompanyingtext.

81 See supranotes29–70andaccompanyingtext.

186 WyomIng laW revIeW Vol.10

aPPendIx 1

Western state tax matrIx

arIzona

Sales/Use Tax Rate:82 5.6%83

Corporate Income Tax Rate: 6.968%84

Aircraft License and Registration Fees: $5registrationfee+licensingfee equalto½%ofFMVinlieuof personalpropertytaxes85

Colorado

Sales/Use Tax Rate: 3.0%86

Corporate Income Tax Rate: 4.63%87

Aircraft License and Registration Fees: None88

Idaho

Sales/Use Tax Rate: 6%89

Corporate Income Tax Rate: 7.6%90

Aircraft License and Registration Fees: $0.01perpoundnottoexceed$200 licensingfee91

montana

Sales/Use Tax Rate: 0%92

Corporate Income Tax Rate: 6.75%93

Aircraft License and Registration Fees: Registrationfeebasedontypeand weightofaircraftinlieuofpersonal propertytaxes94

utah

Sales/Use Tax Rate: 4.70%95

Corporate Income Tax Rate: 5%96

Aircraft License and Registration Fees: $25registrationfee+.4%(.004)of averagewholesalemarketrate licensingfee97

WashIngton

Sales/Use Tax Rate: 6.5%98

Corporate Income Tax Rate: 0%.B&Otaxappliesatvariousrates99

Aircraft License and Registration Fees: $15.00registrationfee+excisetax basedontypeofaircraft100

WyomIng

Sales/Use Tax Rate: 4%101

Corporate Income Tax Rate: 0%102

Aircraft License and Registration Fees: None103

2010 non-CommerCIal aIrCraFt sales 187

82 Statesalesandusetaxratesincludedinthismatrixdonotincludeapplicablelocalcityandcountyrates.

83 arIz. rev. stat. ann.§42-5010(A),(G)(2009).

84 arIz. rev. stat. ann. §43-1111(2009).

85 See arIz. rev. stat. ann. §§28-8324,-8325,-8335,-8336,-8342(2009).

86 Colo. rev. stat. ann.§39-26-106(1)(a)(I)(West2009).

87 Colo. rev. stat. ann. §39-22-301(I)(West2009).

88 SeeColo. rev. stat. ann.§§41-1-101to-108(West2009).

89 Idaho Code ann.§63-3619(2009).

90 Idaho Code ann.§63-3025(1)(2009).

91 Idaho Code ann. §21-114(b)(1)(2009).

92 Seemont. Code ann.§§15-68-101to-110(2007).

93 mont. Code ann.§§15-31-121,-403(2007).

94 Seemont. Code ann.§§67-3-201;67-3-206(2007).

95 utah Code ann.§59-12-103(2)(2009).

96 utah Code ann.§59-7-104(2)(2009).

97 utah Code ann.§§59-2-404(1)(b);72-10-110(2)(a)(2009).

98 Wash. rev. Code ann.§82.08.020(1)(West2009).

99 SeeWash. rev. Code ann.§82.04.220(West2009).

100 SeeWash. rev. Code ann.§§47.68.250,82.48.020(1),.030(1)(West2009).

101 Wyo. stat. ann.§39-15-104(a)–(b)(2009).

102 Wyo. stat. ann.§39-12-101(2009).

103 SeeWyo. stat. ann.§§10-1-101to10-6-104(2009).

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