In my last article, I covered the current environment for federal tax audits. In this article, we will shift gears and focus on some state enforcement actions. I’ve mentioned many times before that state and local tax matters are often not properly addressed, which can lead to a large surprise tax bill. The states have become much more savvy about non-compliance, with many jurisdictions actively seeking uncollected revenue from aircraft.
Many states are using information from the FAA registry, ADS-B data, FlightAware records, and other publicly available sources to identify aircraft that may have tax liability. In the past, some aircraft owners would register their aircraft in a tax-friendly state to avoid taxes in another state, and this worked for many years. However, with today’s technology and access to information, those days are coming to an end.
There are definitely states that are more active than others. Florida, California, Colorado, Pennsylvania, Illinois, Utah, Kentucky, Georgia, and Tennessee are among the most common states we see notices in. Some notices will be very generic, identifying the aircraft and asking if sales or use tax has been paid. Others will be in the form of an audit or a use tax return inquiry. In any case, it is very important that a response be sent promptly to avoid an incorrect tax assessment or a potential lien on the aircraft.
Some local jurisdictions – counties, cities, and townships – also levy taxes on aircraft. California, Georgia, and Texas are three states that tend to have very sophisticated local enforcement groups. In addition, counties in California conduct regular audits of aircraft on the property tax roll, so owners can expect to see an audit every 5 years or so.
We find that many aircraft owners ignore received notices, especially if they come from a state other than their home state. This can be a costly mistake, either resulting in additional penalties and interest on unpaid balances or in increased professional fees to fight an assessment or lien. It is important that any inquiry received be addressed immediately by an aviation tax professional familiar with the laws of the state.
So, what can you do if taxes are assessed? More to come in the next article…