Welcome to the 2018 midyear update on recent developments in state and local tax affecting the aviation industry. In this article, we will focus on some noteworthy sales and use tax law changes, cases, rulings and secondary legal guidance, as well as review a newly filed New Jersey corporate income tax case involving transfer pricing adjustments to the payments under an intercompany aircraft lease.
Arkansas exemption for parts applies to sale of aircraft for dismantling.
On Jan. 8, 2018, the Arkansas Department of Finance and Administration, or DFA, ruled that the sale of an aircraft that was delivered in Arkansas to be dismantled and parted out was exempt from sales and use tax under the state’s statutory exemption for commercial jet aircraft parts. This ruling follows a prior ruling reaching the same conclusion.
The transaction involved a nonresident leasing company, which sold a commercial aircraft to a nonresident domestic airline. The aircraft was delivered to a maintenance facility in Arkansas where title was transferred from seller to buyer. Once title transferred, the buyer entered into an agreement with the maintenance facility to dismantle the aircraft for its useable parts. The aircraft engines were immediately shipped out of Arkansas. The other useable aircraft parts were either stripped from the aircraft and then shipped to the buyer outside of Arkansas, left at the maintenance facility for refurbishment or repair, or stored at the maintenance facility until the aircraft parts were needed by the buyer.
The DFA concluded that the airline buyer was not acquiring an aircraft per se, but only the desired aircraft parts and components for subsequent incorporation into other commercial jet aircraft. The DFA analogized purchasing the aircraft to purchasing a container of assorted parts for refurbishment and incorporation into a qualifying aircraft, which transaction it viewed as clearly falling within the state’s aircraft parts exemption. Despite the fact that portions of the aircraft were not useable and would be sold for scrap metal, the DFA concluded that the non-useable parts had de minimis value and were also not the true object of the transaction.
Arkansas' fly-away rule is available for corporations based in foreign countries. The seller and buyer sought a ruling from the DFA concerning whether a foreign buyer was “a resident of another state” for purposes of the state’s fly-away exemption. The DFA ruled that the foreign corporate purchaser qualified for the fly-away exemption because the buyer was organized under the laws of a country comprised of sovereign units and these sovereign units fell within the dictionary definition of “state” (that is, a component unit of a sovereign nation in a federal system that is more or less independent and sovereign over its own internal affairs).