Aircraft Sales and Use Tax Reform in Florida: A Good Start
by Steven M. Harper, Esq.
This article is not
intended, and should not be construed, as legal advice or as
a
comprehensive analysis of
the Florida sales and use tax provisions applicable to
aircraft
sales, and may not be
relied on as such. Because each aircraft transaction contains its
own
unique set of facts and
circumstances, it is important to consult with an
experienced
aviation taxation attorney
before proceeding with the purchase and sale of any
aircraft,
regardless of where the
closing takes place.
On May 27, 2010, Gov. Charlie Crist
signed Florida House Bill 173 into law as part of an
economic development passage
designed to spur economic growth in these uncertain times.
This new law, effective as of July
1, 2010, is a good sign that the movement for aircraft sales and
use tax reform in Florida is well under way, and provides a much
needed safe harbor for
nonresidents who purchase aircraft
out of state and fly into Florida within the first six months
after taking possession.
Florida’s Aircraft Sales and Use
Tax Regime
Under Florida law, sales of
personal property occur in the county where title passes from
the seller to the buyer. In the
context of aircraft sales, the sale occurs wherever the aircraft
is
physically located when the seller
delivers the bill of sale or other evidence of ownership to the
buyer. Thus, for example, even
though a purchase agreement is signed in Guatemala, the
purchase funds are wired from the
buyer’s account in the Bahamas to the seller’s account in
Bermuda, the bill of sale is signed
by the seller in the British Virgin Islands and delivered to
the
buyer in Panama, and the
registration documents are filed with the FAA in Oklahoma City,
the
seller will be required to collect
Florida sales tax if the aircraft is physically located in
Florida
when the bill of sale is
filed/delivered, unless an exemption applies.
Aircraft purchases that occur in
Florida are subject to sales tax in the amount of 6% of the
value (usually the sale price) of
the aircraft. In addition, each county in Florida is authorized
to
assess a local discretionary tax on
the first $5,000 of the sale price. The rate of the
discretionary
tax varies from county to county,
and ranges from 0% to 1.5%.
The sales tax and use tax are
designed to complement one another. The use tax was
created to tax those purchasing
items, such as aircraft, in a state with a lower tax rate, with
the
intent to bring such items in and
to use them, in Florida, tax-free. Under the statute, the use
tax
creates a presumption that items
brought into Florida within six months of the purchase date
were actually purchased for use in
Florida and should be taxed accordingly at the same rate as
the sales tax, i.e., 6% of the sale
price plus any discretionary tax.
There has in recent years been much
debate, and often recriminations and even downright
anger, among non-Florida owners who
bring their aircraft into the state within six months after
their purchase. The furor started
over reports that were being circulated among various aircraft
owners’ associations regarding the
negative experiences of persons who had brought their
aircraft into Florida shortly after
purchase. For example, according to one such report, a
nonresident who flew his
newly-acquired aircraft into Florida was allegedly assessed use tax
in
the amount of approximately
$80,000.00.
The New Law
As a result of the negative
publicity, together with the realization that the old law
simply
did not work as planned, the
Florida Legislature passed HB 173. The new law affects sales of
both whole and fractional ownership
interests in aircraft. It provides a limited exemption from
use tax for nonresidents who
purchase either a whole or fractional ownership interest in an
aircraft outside of Florida.
Nonresidents who fit this profile can now enter Florida with
their
aircraft for any reason within the
first six months after the purchase date, free of the use tax,
as
long as the total number of days
spent in the state is less than 21. On the 21st day, the exemption
will lapse, a presumption that the aircraft was purchased for use
in Florida will attach, and use tax will be assessed at an amount
which depends on whether the nonresident owns a whole or fractional
ownership interest in the aircraft.
While the new law provides a safe
harbor for nonresidents who own whole ownership
interests in aircraft, it does not
provide any relief in the form of a reduced tax rate or cap on
the
amount of tax payable on any given
transaction. Nonresidents who purchase fractional
ownership interests, however, are
afforded greater relief than those who purchase whole
interests. The new law imposes a
$300 cap on sales and use tax on purchases of fractional
ownership interests in aircraft. In
addition, under the new law no tax is imposed on the sale or
use of aircraft that are purchased
by fractional ownership programs for purposes of placing them into
their program to be sold, in fractional shares, to third parties.
Thus, a fractional ownership promoter can now purchase an aircraft
and take delivery in Florida and be completely exempt from sales
tax, but they must then charge their customers $300 in sales tax
for any sales of a fractional ownership interest in the
aircraft.
Does the new law go far enough?
Arguably not. Earlier versions of HB 173 included a
cap on aircraft sales and use tax
that would have applied across the board, and not just to
fractional interests. This
provision did not, however, make it into the final version that
was
passed by the Florida Legislature
and signed into law by Gov. Crist. Thus, the only benefit for
nonresidents who own full ownership
interests in aircraft is that they can fly into Florida for a
total of just under three weeks
within the first six months, free of the use tax. Because the
potential sales tax liability in
the event something goes wrong can be staggering, most aviation
attorneys will still likely advise
their clients to steer clear of Florida, to be on the safe side.
If
Florida were to impose a cap on
sales tax, however, as have other states, this may generate more
tax revenues.
For example, if someone is
purchasing an aircraft for $1 million, the Florida sales tax
would be $60,000, assuming closing
occurred in a county with no discretionary tax (for example,
Broward). However, South Carolina
has a $300 cap on sales tax for aircraft. Thus, even if it
were to cost an additional
$10,000.00 in fuel costs, crew expenses, hangar tie-down fees,
etc., to move an aircraft to South Carolina for a closing, the
owner would still end up saving $50,000.
The result is that Florida receives
no sales or use tax income from the sale. If Florida were to
impose a sales tax cap of, say,
$3,000.00, the owner would save on the cost of positioning the
aircraft in a more tax-friendly
jurisdiction, and Florida will have $3,000 more than it would
have
had if the closing had occurred in
South Carolina.
Enforcement
So what does this all mean? Can
nonresidents who purchase an aircraft on July 1
somewhere outside Florida fly in to
Florida on July 2 without being assessed a large use tax bill
so long as they do not remain in
the state for more than 20 days? Maybe, but then again, maybe
not.
In order to qualify for the new
safe harbor, and indeed for most exemptions under
Florida’s aircraft sales tax laws,
the owner of the aircraft may not be a Florida resident and may
not be engaged in Florida in any
employment, trade, business or profession in which the aircraft
will be used. If the owner is a
corporation, none of its officers and directors may be Florida
residents. If the owner is an
entity other than a corporation (e.g., partnership, trust, LLC,
etc.),
then no individual vested with the
authority to participate in the management, direction or
control of the entity may be a
Florida resident.
It is therefore important to
determine if the owner (or any individual vested with the
authority to participate in the
management, direction or control of the owning entity) would be
considered a Florida resident in
the eyes of the DOR. Under Florida law, any individual who
qualifies for homestead exemption
or voting rights or who maintains a “place of abode” in
Florida is a Florida resident. A
“place of abode” is a dwelling place maintained by a person, on
other than a temporary or transient
basis. The dwelling may be a house, apartment, mobile
home, motor home, boat, a room,
including a room in a hotel, motel or boarding house, or any
other structure. Other relevant
factors the DOR will consider in making this determination
include ownership of a Florida
residence, having Florida licenses (driver’s licenses or other
forms of licenses), and declaration
of Florida residency on any federal or state tax return,
whether or not such individual owns
an abode in Florida.
Retroactivity
This, of course, begs the question
of what would happen, hypothetically, if a review of an
aircraft’s log books by the DOR
revealed that the aircraft was purchased in prior years and had
entered Florida a few times within
the first six months after the purchase. Under current DOR
policy, enforcement would depend on
(a) the frequency and length of time spent in Florida and
(b) whether the statute of
limitations had passed. The statute of limitations is three years
from
the date the tax should have been
paid (i.e., the purchase date), unless the DOR determines that
fraud has been committed, in which case it reverts to the purchase
date, regardless of how much time has passed.
The DOR has not yet issued an
official policy regarding retroactivity in its enforcement
of the new law. However, some DOR
agents (whose names are being withheld because an
official policy has not yet been
released), are of the preliminary opinion that the July 1, 2010
effective date will be a bright
line, so that the law will most likely not be retroactive in
effect.
Thus, nonresidents who may have
purchased aircraft out of state before the effective date of
the
new law should consider staying out
of Florida for the first six months after the closing date.
What would happen, then, if an
owner who purchased an aircraft before the effective date
of the new law entered Florida
after July 1 but within the first six months after the
purchase?
Officially, nobody knows, but the
most likely scenario is that it will receive a letter from the
DOR demanding payment of the tax
and penalties. The owner could argue that the Florida
Legislature has spoken, and that
their intent was that the old law should not be enforced. The
DOR would most likely argue that
the law was what it was at the time, regardless of the fact
that
it has now changed, and the owner
must still be responsible for the tax and penalties. Ultimately,
this question may be left for the courts to decide.
Conclusion
Generally, the new law should be a
blessing to the fractional ownership market in
Florida. It should also serve to
raise revenue, not through an increase in sales tax collections,
but through an increase in collections through other avenues such
as tourism. The question still
remains, however, as to whether the
new law goes far enough, or whether a general sales tax cap should
have been imposed across the board, as was originally contemplated.
Hopefully the
Florida Legislature will continue
to revisit this issue and enact additional reforms. Until then,
those who do not meet Florida’s
definition of “Florida resident” can rest a bit easier when
they
fly into Florida, but should still
keep a watchful eye on the calendar.
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