Welcome to Reed Smith’s semi-annual update on developments in state and local tax affecting the aviation industry. In this update, we will focus on some noteworthy sales and use tax law changes, cases, rulings, and guidance from the second half of 2018. For a copy of our 2018 mid-year update, visit www.reedsmith.com.
Arkansas holds that aircraft owner has responsibility for collecting sales tax on sale made through broker. In November of 2017, an Arkansas aircraft owner sold an airplane to a purchaser through a third-party broker. Ark. Code Ann. § 2652505 requires sellers of airplanes to register for a sales tax permit and to collect and remit tax on the sale. However, the aircraft owner did not do so here. The purchaser, who was registered for the state sales tax, did not pay sales or use tax on the purchase and did not provide any exemption certificate to the broker or aircraft owner. After receiving information from the Federal Aviation Administration (“FAA”) regarding the sale, the Arkansas Department of Finance and Administration (“DFA”) opened an audit that resulted in an assessment issued to the aircraft owner. The aircraft owner protested the assessment but the Administrative Hearings Division upheld the entire assessment.
In the protest, the aircraft owner claimed that the broker, who was engaged in the business of selling airplanes, should have properly collected the sale tax on the sale that it performed on the owner’s behalf. However, the Hearings Division disagreed, holding that Ark. Code Ann. § 2652505 makes the seller of an airplane strictly responsible for collecting and remitting sales tax. Thus, the aircraft owner’s use of a third-party broker did not relieve the owner from his tax obligations. Ark. Admin. Hearing Dec., Dkt. No 19024 (Sept. 10, 2018).
Reed Smith takeaway:
- This decision is an important reminder that when selling an aircraft, the purchase agreement should clearly state which party is ultimately responsible for any sales or use taxes arising from the sale. It is often the case that the sales and use tax burden is placed on the purchaser, who agrees to indemnify the seller for any sales or use tax the seller may incur on the aircraft sale. We also note that Ark. Code Ann. § 2652505(a), as interpreted in the above decision, appears to broadly require anyone selling an aircraft in Arkansas to register as a retailer/dealer in the state. It is not clear if this registration requirement extends to aircraft owners not engaged in selling aircraft or sellers availing themselves of the state’s “flyaway” exemption (Ark. Code Ann. § 2652451(a)). If so, this decision could have a chilling effect on aircraft sold in the state. Sellers (or purchasers) who find themselves in a similar situation as the aircraft owner in the above hearing decision should also make an effort to determine if the counterparty to the transactions has already been audited or assessed tax on the aircraft sale in order to avoid double taxation. Many states include guidance in the audit manual on how to avoid double taxation in similar situations.
Arkansas issues taxpayer friendly opinion on the flyaway and substantial completion exemptions. On October 23, 2018, the DFA issued an opinion regarding the applicability of the state’s sales tax exemptions for transfers of aircraft that are subsequently flown out of Arkansas for use outside the states. In this instance, the aircraft purchaser was a resident of a foreign country. The aircraft in question had a certified maximum takeoff weight of more than 9,500 lbs. and was delivered in “green condition” (which generally means that the aircraft does not have internal furnishings or exterior paint) at a location in Arkansas, where final completion of the aircraft was to occur. The completion activities in Arkansas included: structure installation, avionics/electrical fabrication and installation, upholstery fabrication, cabinet fabrication and finishing, exterior paint, interior installation and flight tests. Once the aircraft was completed, the buyer accepted the aircraft in Arkansas and subsequently flew it out of Arkansas for use and to be based outside the state. The aircraft was not expected to return to Arkansas, except for occasional maintenance.
The DFA concluded that the transaction was exempt under both the flyaway exemption and the state’s exemption for aircraft substantially completed in Arkansas. The flyaway
exemption (Ark. Code Ann. § 2652451) exempts the sale of an aircraft with a certified maximum takeoff weight of more than 9,500 lbs. that will be based outside Arkansas, as long as possession of the aircraft is taken in Arkansas for the sole purpose of removing the aircraft from the state under its own power or for temporary maintenance (and is removed upon completion of the maintenance). The substantial-completion exemption1 (Ark. Code Ann. § 2652505(c)) exempts the sale of new aircraft substantially completed within Arkansas when sold to a purchaser for exclusive use outside the state, notwithstanding that possession may be taken in the state for the sole purpose of removing the aircraft from the state under its own power. In addition to ruling that the flyaway exemption applied, the DFA concluded that the completion activities described above constituted “substantial” within the meaning of the exemption and thus, the sale of the aircraft would also be exempt under Ark. Code Ann. § 2652505(c). Ark. Opin. No. 20181005 (Oct. 23, 2018).