Reed Smith Client Alerts

Welcome to Reed Smith’s semiannual update on state and local tax developments 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 first half of 2019, as well as Massachusetts corporate excise tax guidance on the treatment of like-kind exchanges after federal tax reform.1 For a copy of our early 2019 update, visit


Illinois Office of Administrative Hearings upholds aircraft use tax assessment against Nevada LLC.  The taxpayer, a Nevada LLC, was owned by individuals who also owned an aircraft repair company in Illinois. The taxpayer purchased an aircraft in California in 2008 and then delivered the aircraft to the affiliated repair company in Illinois for refurbishment. The taxpayer purchased the aircraft with the intent of repairing the aircraft and reselling it for a profit. After substantial repairs, the aircraft became airworthy in June 2010, and was ready for resale. Between August 2011 and May 2013, the aircraft engaged in 18 flights, 15 of which either originated or ended in Illinois. These flights were for demonstration purposes to market the aircraft to prospective buyers. The aircraft was eventually sold to a Texas buyer in December 2013. The aircraft was based in Illinois during refurbishment and while being held for resale.

The Illinois Department of Revenue (the “Department”) assessed aircraft use tax, interest, and penalties against the taxpayer because of its use of the aircraft in Illinois. The taxpayer challenged the aircraft use tax assessment on five separate grounds:

  • the “temporary storage” exception;
  • the purchase for resale exemption;
  • the aircraft was not “used” in Illinois;
  • the aircraft did not have substantial nexus with Illinois; and
  • the aircraft’s use fell within the “Safe Harbor Rule” under the interim and demonstration use exemptions for retailers.

The Office of Administrative Hearings (the “OAH”) upheld the Department’s aircraft use tax assessment. In reaching its conclusion, the OAH held that the temporary storage exemption under 35 ILCS 105/3-55(e) did not apply, because the taxpayer kept the aircraft in Illinois for more than five years, which was too long to qualify as “temporary storage”. In addition, even if the repair period was considered temporary, the OAH found that the aircraft was not used solely outside the state after the repair period ended, because the taxpayer used the aircraft to conduct demonstration flights originating or ending in Illinois following the repairs. The OAH also found that the resale exemption did not apply because the taxpayer was not registered as a retailer.