Sales and use tax on aircraft can be a material number, and proper planning can be very valuable. I have written about some of the exemptions out there for sales and use tax in previous articles, like State Tax Exemptions and State Taxes –What to Know. This time around, I want to focus on sales for resale exemptions.
Due to FAA regulations, it is common to see an aircraft operated under a dry lease. For our purposes here, a dry lease is a lease of tangible property without an operator. In many states, this type of lease is subject to sales tax. Often, if an aircraft is purchased with the intent to be exclusively operated under a dry lease (or leases), the purchase can qualify as a sale for resale. This means that sales or use tax is not due on the original purchase of the aircraft, but instead, tax is due on the lease payments over time.
Each state has its own set of rules as to what qualifies as a sale for resale and how the tax is applied. In states that allow this type of exemption, the most common conditions are:
- The aircraft must be purchased exclusively for leasing.
- The purchaser must register with the state as a reseller and obtain a resale license prior to purchasing the aircraft.
- The lease must be treated as an arm’s-length transaction, meaning that a fair market rate is charged and the payments are collected on time.
It is especially important to review the rules and the validity of the lease if the lessor and lessee are related parties. Some states, like Colorado, will reject many leases between related parties and impose tax at the time of purchase. Other states, such as Wisconsin, will not recognize the lease if it is between an entity that is disregarded for income tax purposes and its parent.
If a sale for resale exemption is used, the aircraft must continue to be treated as leased property for as long as the aircraft is owned. If the usage changes and the aircraft is no longer leased, use tax will likely be due on its fair market value. If the aircraft’s home base changes to another state, you must re-evaluate whether the exemption still applies.
The takeaway here is that the sale for resale is a valid tax planning strategy in many states for many purchases. However, it will not always apply. Consult your aviation tax advisor early in the process to understand your options and maintain compliance.
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