You want a Private Jet? Here’s What You Should Know About Taxes

Written by Tom Alston

In the everyday world of aircraft and yacht ownership, the following story is played out from coast to coast.  The whispers in the crowds of prospective owners often are based on the age-old question, “Is it really possible to legally avoid sales tax, or am I risking embarrassment if I get caught trying?”  The stress often crashes into the life of the financial personnel to find workable solutions after the client takes the survey of his friends on the golf course.


The CPA cringes while he is instructed by his client to make the new deal work by tomorrow morning, and “Oh, by the way, I don’t want to waste a nickel on tax.”  He inherently knows that no matter how careful he is to explain every minute detail of the strategy to Mr. Big, it is ultimately the owner who will demand that he be able to use his new toy wherever and however he wants.  He will end the meeting by commanding the CPA to, “Make it work out, I’m sure you can find a way.”


Many buyers listen to the free advice that comes once they first enter the sales cycle. The sales person who generally works with the belt and suspenders clients often take the most conservative approach and advise against “risky tax schemes.”  The wheeler-dealer salesperson blabs on about the latest trick and pats the backof his new client while he croons, “Trust me, it is easy to get out of the tax.”


Neither approach will serve the new owner very well.  The basic problem is that, unlike federal tax advice which is based on a code that applies everywhere in the United States, sales tax laws depend on the codes written in each separate state.   Currently, five states have no sales and use tax. However, that leaves forty-five others that will require proper research.  Unless you have nothing to do but spend your entire life doing sales and use tax research, it is impossible to keep track of the constant changes state-by-state. The basic problem with implementing a credible tax strategy for an aircraft or yacht purchase is that the buyer must mesh the details of a strategy that reduces the income tax obligation, minimizes the capital gains tax, reduces property tax and quite possibly eliminates the sales/use tax.

When you add “like kind” forward or reverse exchanges and fractional share ownerships into the components of an aircraft strategy, you then must consider how each piece of ownership or each transaction caused by the exchange through an intermediary may create a potential sales or use tax assessment.


With proper planning and research, you can legally avoid sales/use tax on the purchase of an aircraft or vessel. However, it depends on how much the purchaser values the money saved, versus, the effort required to go through the legal hoops to avoid the tax.  If you are an aircraft or yacht dealer, you can also bulletproof your records from an audit by the Board of Equalization. An effective strategy should include components that protect both the buyer and the seller.


Sales tax research must contain a foundation of a basic understanding of the law that will apply in all cases; they must be targeted to focus in on the exact needs of the client.  Once the foundation is established, the client can then do a risk analysis of the available options.  


In all cases the burden of proof rests with the taxpayer.


In order to support a claim for an exemption, two basic things are required.  It is essential that both the form and the substance of the transaction are met.  It is not sufficient enough to actually do all the things the local law requires to exempt the transaction.  It is equally vital that the taxpayer can adequately document the actual possession, storage and use of the property.  For example, a taxpayer could read the laws in California that pertain to a purchase for out-of-state use.  He subsequently actually does all the things that are required, including out-of-state possession, and using and storing the aircraft or yacht outside California enough time to meet the requirements of California Sales and Use Tax Regulation 1620 (b) (3). The transaction can still be held taxable if the acceptable forms and documents which support the actual use of the property are not provided to the tax agency.  The fact that in many cases the state does not question the transaction until after the aircraft or vessel is sold to another party makes it very difficult to gather the logs and receipts.


Some of the various types of exemptions that are available are:


  1. Common carrier (Aircraft only)
  2. Interstate commerce
  3. Purchased for out-of-state use
  4. Purchase for resale
  5. Occasional sale
  6. Out-of-state buyer
  7. Lease
  8. Facts or circumstances defined in law which allows the purchase to fall outside the definition of sale or purchase for sales and use tax purposes


Even though each state may have sections which relate to each of the above, you cannot presume that the details of the exemption are the same from state to state.  For example, the language in certain sections of law in Nevada are exactly the same words used in California Sales and Use Tax, however, Nevada and California interpret the same language differently.  You must research the cases to decipher each states pattern of decision making.


The important details actually depend on how the requirement by each state will impact the needs of the purchaser.  Some questions that need to be asked are:



  • Common Carrier (Aircraft only)


  • Do you really want strangers flying in your new aircraft?  Exclusive use may void this exemption.
  • Are you contemplating a lease arrangement with a charter or are you planning to acquire your own FAA certificate?
  • Are you aware that the documentation requirements and the term of the test period may be significantly greater than most other exemptions?



  • Interstate Commerce


  • Do you know how your specific state defines “interstate commerce?”
  • How do you calculate intrastate flights using this test?
  • Where must possession occur?
  • How are first use, first functional use and operational use defined?
  • What are the procedural requirements of the test?



  • Purchased for out-of-state use


  • Where must possession or title occur?
  • How is first functional use defined?
  • How long is the test period?
  • What are the procedural requirements of the test?
  • How does the aircraft owner document periods of time when the aircraft is not in flight or the vessel is moored?
  • What circumstances shorten the test period?
  • How does storage for shipment affect the exemption?



  • Purchase for resale


  • Can a purchaser of a single item claim this exemption or must the owner be a registered dealer?
  • Can any use, other than bona fide demonstration and display be made?
  • What are the documentation requirements to support demonstration use?
  • How much use is too much to claim a resale exemption?
  • Can a charge be levied for a demonstration flight of an aircraft?
  • How does personal use affect the exemption?


  1.  Occasional use
  • Is this exemption available in the state the purchaser intends to claim this exemption?
  • What characteristics must the seller avoid in order for the sale to qualify as an occasional sale?


  1.  Out-of-state buyer
  • Can an out-of-state buyer avoid sales tax on an aircraft or vessel? If so, what are the requirements?
  • How long can an aircraft remain in state after the purchase before the transaction becomes taxable?
  • What if repairs or training are required?


  1.  Lease
  • Is it a lease to a common carrier?
  • Is it a lease to a flight school?
  • Is it a lease to a private party?
  • Is it a lease to a contract carrier?
  • How is the tax reported?
  • How does the purchaser insure that he can purchase the property ex-tax and pay based on the lease?
  • Is the tax assessed on the lessor or the lessee?


Based on my research, the types of failures that are inherent by using the possible exemptions are:

A.   Common Carrier (Aircraft only)

  • Many people believe that merely flying the aircraft in Part 135 qualifies for an exemption.
  • When the owner is in control of the aircraft, he may be causing a failure of the exemption by flying in Part 91.
  • When the owner leases an aircraft to a charter, he puts the control of the documents needed to support the exemption in the hands of another party.
  • Insufficient revenues may void the exemption.

B.   Interstate Commerce

  • Failure to keep exact logs
  • Failure to document commerce flights
  • Is the test accomplished by miles, hours or days?

C.   Purchased for out-of-state use

  • Failure to properly document location of the aircraft or yacht when title or possession is transferred
  • Failure to keep proper logs
  • Failure to document storage location and time
  • Inconsistent documentation
  • Failure to support intent
  • Registering an aircraft or yacht in Oregon, Nevada or to a Delaware corporation as part of a strategy to avoid tax can incur a fraud penalty for evasion.


  1.   Purchase for resale
  • Making improper use of inventory
  • Charging for use
  • Personal use
  • Documenting demonstration and display

E.   Occasional sale

  • This exemption is not available in all states.
  • Failing to support the status of the seller
  • Transferring debt between entities along with the aircraft or vessel

F.  Out-of-state buyer

  • Failure to prove the legal status of the out-of-state resident
  • In state residency for the purpose of sales tax can require as little as a checking or savings account

G.  Lease

  • Failure to properly notify the state to be able to purchase ex-tax
  • Failure to understand against whom the tax is levied and how it impacts the client
  • Failure to understand whether it is a sales tax or use tax


Armed with an understanding of the sales and use tax laws, it is possible to create a strategy that legally avoids the sales and use tax.   Acquiring sales tax advice from anyone, other than a sales tax expert is in most cases a waste of time and money.  This area of tax law is too complex, the targets are constantly changing and the potential tax assessment is very costly. Especially when you add the additional interest and penalties that can range from as little as ten percent for failure to file, up to a fifty percent penalty for registering an aircraft out-of-state in an attempt to evade tax.


There is a tremendous amount of rumor swirling around the State of California since the regulations pertaining to vehicles, vessels and aircraft were drastically altered effective September of 2008 in a ploy by politicians to balance a budget with phantom record keeping.  Some people now believe there are NO legal ways to obtain an exemption. Others still advise their friends that the old 90 day exemption still exists.


Neither is correct.


The following is true. I will use an aircraft as an example, but the same applies to vehicles and vessels.


There used to be four methods of supporting a claim for an exemption. The first two were under a classification known as the “principal use test.” They were a 90 day test and a one-half of the first 6 month test. These two forms of test periods have been suspended. There is now only one test period for the principal use test. It is for 12 months immediately following the possession date.


If you are using the principal use test, then you must do the following:


  1. Take possession of an aircraft, vessel or vehicle outside of the State of California
  2. Make first functional use of that aircraft, vessel, or vehicle outside the State of California before it enters our state for the first time
  3. It must remain outside the State of California for at least 12 months before it enters the state for the first time, it would be exempt from tax.


Although that may seem onerous enough, there is actually more to it.


  1. You must be able to prove without a shadow of a doubt where the aircraft was located when the title transferred.


  1. The definition of first functional use depends on what type of aircraft you purchase.


  1. The burden of proof of providing documentation that supports the aircraft “never” landed inside California even once during the 12 months rests entirely on the taxpayer. For example, providing hangar receipts that the aircraft owner paid for a hangar in Medford, Oregon does not prove the aircraft was in the hangar.


  1. The documentation will have to support that the aircraft was used and not just stored during the entire year. If there is a long period in the last part of the test period where the property is merely stored and not flown, the auditor can attempt to throw out the storage time as “storage for shipment to California.” If the auditor is able to throw out the last six weeks of your test period and the aircraft enters California in the 13th month, it will be assessed tax.


Additionally, there are two separate ways the new regulation will be enforced. The type of enforcement depends on whether or not the taxpayer is a resident of California. The test period described above is for California residents.  If the owner of the aircraft is a non-California resident, the test period is based on the aircraft being stored and used outside California for more than half of the first year.


Before a new aircraft buyer runs out to create an out-of-state LLC or corporation to be able to cut the requirement to six months, here is some additional data. If the Board of Equalization (Board) discovers the owners or shareholders of an out-of-state company are California residents, they can decide to apply the 12 month requirement. The taxpayer is not the one who gets to decide whether he or she is an out-of-state resident.


The following is intended to give you an idea of how the state determines that a company or person was a California resident. It all starts with wording from the regulation.


An aircraft purchased outside of California after October 1, 2004 and brought into California within 12 months of its purchase was acquired for storage, use, or other consumption in California and is subject to use tax if any of the following occur:


  • The aircraft was purchased by a California resident (as defined in Section 516 of the CA Vehicle Code); or


  • The aircraft was subject to property tax in California during the first 12 months of ownership; or


  • The aircraft is used or stored in CA more than ½ the time during the first 12 months of ownership.


“Resident” means any person who manifests intent to live or be located in this state on more than a temporary or transient basis.


Presence in the state for six months or more in any 12 month period gives rise to a rebuttable presumption of residency.

The following are evidence of residency for purposes of vehicle registration:

  1. Address where registered to vote
  2. Location of employment or place of business;
  3. Payment of resident tuition at a public institution of higher education;
  4. Attendance of dependents at a primary or secondary school;
  5. Filing a homeowner’s property tax exemption;
  6. Renting or leasing a home for use as a residence;
  7. Declaration of residency to obtain a license or any other privilege or benefit not ordinarily extended to a nonresident;
  8. Possession of a California driver’s license;
  9. Other acts, occurrences, or events that indicate presence in the state is more than temporary or transient.


I tell all my prospective clients, “It does not matter that you are a resident of Ohio, take possession of your aircraft in Florida and register it in a Delaware Corporation. If the aircraft enters the State of California any time within the first 12 months, the state has the right to assess the tax on your purchase and you have the burden of proof to support a claim for an exemption. If the Board contacts you and you ignore them because you think you are an out-of-state resident, the Board will ultimately lien your aircraft or worse – raid your bank account.”




The good news is that there still exists an exemption that allows you to bring your aircraft into the State of California and it can be stored inside California and still support a claim for an exemption. It is known as the “commercial interstate flight hours test.”


The restrictions that apply to the principal use test do not apply to the commercial interstate flight hours test (such as California ownership, property taxes, etc.). There are three things you must do and they must be done in the following order:


  1. The purchaser must be able to document that he took title to the aircraft outside the State of California.


  1. The property must be first functionally used outside the State of California before it enters California the first time after the out-of-state possession occurs. (As was explained above, this depends on the type of aircraft.) Typically for this form of exemption an interstate flight for a business purpose with passenger on board who is not part of the flight crew is required.


  1.  It must be flown in interstate commerce for more than half of the flight hours accumulated after the date of first entry into California. Our firm raises the standard to 60%.


This means that if the purchaser has any business that requires him to fly outside the State of California, he is eligible to consider this form of exemption.


The test period is based on flight hours only and does not include the flight hours prior to entering California the first time. The flight hours commencing from the out-of-state possession point to the new destination for a business purpose, then on into California, are not part of the test period but are required in order to get into the test period.


For example, we will create a scenario to explain how it works: Dan Jones is in the manufacturing business and it is located inside California. He purchases a new Citation aircraft and takes possession in Kansas.  Mr. Jones is a passenger on the jet and his two pilots fly him from Wichita to Denver, Colorado to meet with a client who buys bolts from Mr. Jones’ manufacturing company. After the meeting in Denver, Mr. Jones is flown to Van Nuys, California aboard his new Citation.


The above steps are examples of out-of-state possession, first functional use, and date of first entry into California. The test period has been properly started, but no hours are calculated yet. Those hours start with the first flight after the date of first entry.


If the aircraft enters the state on March 15, 2005 the test period will end six months later on September 14, 2005. If the aircraft is flown 100 hours during the six months, the regulation requires at least half of the total hours are flown in interstate commerce. Our firm always insists on at least 60% to create a margin of error.


Obviously, this means that 40% of the hours can be a combination of personal or intrastate use. What may be less obvious is exactly how to figure which hours are on the “good side” of the test and which are on the “bad side.”


Definition of Commercial

The flight hours must be for a business purpose. They can be 100% Part 91 hours or a combination of Part 91 and Part 135.


Definition of interstate vs. intrastate


One needs a basic understanding of the definition of interstate and intrastate to start with. An interstate flight is one which commences in one state (or country) and ends in another. For example, flying from Van Nuys, California to Las Vegas, Nevada is an interstate flight. A flight from Van Nuys, California to Cabo San Lucas, Baja, Mexico also qualifies as an interstate flight.


An intrastate flight is one which commences and terminates in the same state. An example of an intrastate flight would be a flight from Van Nuys, California to San Francisco, California. Similarly, a flight from Reno, Nevada to Las Vegas, Nevada is an intrastate flight. For the purpose of this test period, all intrastate flights count on the “bad side” of the test.


What may not be so obvious is that there are three types of flights – not just two. All intrastate flights count on the bad side. All interstate flights for a business purposes count on the “good side.” Those are the easy ones to understand. However, there exists a third type and they all fall on the bad side of the test. Any interstate flight that is not supported with documents that establish a business purpose for the flight counts on the “bad side.” An example would be a flight from Van Nuys, California to Aspen, Colorado for skiing. Additionally, an interstate flight where the taxpayer fails to provide documentation to support the business purpose also moves those flight hours to the “bad side.”


How to calculate flight hours


Flight hours are not calculated by airspace. For example, during the old principal use test if an aircraft flew from San Diego, California to Medford, Oregon and the flight took three hours, two hours and forty-five minutes were calculated as being in the air space of California and fifteen minutes was considered to be out-of-state. When the aircraft is supporting a claim for an exemption using the commercial interstate flight hours test, the same three hour flight from San Diego to Medford counts on the “good side” of the test. This would also include the three hour return part of the round trip. As long as the aircraft owner can provide documentation from a third party that affirms there was a business reason for his flight to Medford, all the flight time counts as an interstate flight for a business purpose.


The basic difference between the principal use test and the commercial interstate flight hours test.


The principal use test is based primarily on location and storage.  It matters little “where” an aircraft is flown during the new principal use test as long as the flights occur outside of California.  Obviously, in order to complete a 12 month test, it is based on time. During that time the taxpayer must primarily prove where the aircraft was located every one of the 365 days. Aircraft spend most of their lives “on the ground.” Therefore, storage documentation becomes very important.  The taxpayer must prove where the aircraft is located every minute it is on the ground as well as in the air.


The commercial interstate flight hours test is based solely on the total flight hours during the six-month test period. Therefore, this test is based primarily on flight hours where the principal use test is based primarily on storage.


One of the perks of the commercial interstate flight hours test is that the aircraft could be hangared inside California every night of the test period at the airport closest to the owner’s home and still be exempt from tax. For example, returning to Dan Jones and his new Citation purchase. Presuming that Mr. Jones arrived at Van Nuys on March 15, 2005 (beginning of the six-month test period) the test period will end on September 14, 2005. During that time, Mr. Jones traveled exclusively between the home office of his company and the regional office in Seattle, Washington. He leaves Van Nuys every Monday morning and returns on Monday evening to Van Nuys. For the purpose of this example, no other flights are made, other than the weekly flights to Seattle.  This would mean 100% of the flight hours were for a business purpose. This exceeds our 60% requirement. It also means the aircraft was on the ground at Van Nuys every night of the test period during the entire six months. With proper documentation, this aircraft will support a claim for an exemption.


If one were to look at the same use of this aircraft from the point of view of the principal use test which is based primarily on storage, it would be taxable. Therefore, if you can support business use of an aircraft, this test is perfect for you.


For assistance on reducing or eliminating the sales tax on your next aircraft purchase, call the specialists on California and Arizona sales tax on aircraft purchases:


(916) 691-9192


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