The tax man cometh: Can you hide?

What can you do to avoid paying sales tax – legally – on your new airplane?

“Don’t buy it,” jokes Ray Speciale, a pilot, lawyer and CPA with Yodice Associates, a Maryland law firm. Other than that, there’s “no surefire way” to beat the tax man, he says. “Often we hear you should incorporate in Delaware, but that isn’t as bulletproof as some people might think.”

Delaware is popular among airplane owners because it is one of only six states that do not have sales or use taxes for airplanes. (The others are Alaska, Massachusetts, Montana, New Hampshire and Oregon). If you buy a plane in one of these states, but operate it in your home state, which does have a use tax, you are subject to that tax, which usually ranges from 2% to 7% of the purchase price. “If you are registered in Delaware, they may not find out, but that doesn’t mean you aren’t legally liable,” Speciale warns, adding that many jurisdictions are sending tax officials out to airports to record tail numbers.

There are exemptions, however, such as one based on taxes paid to another state. Say you bought your plane in Iowa and paid a 4% sales tax there, then flew home to Indiana, which has a 5% sales tax. The courts have found that you only owe Indiana 1%, not 5%. If you do a lot of business across state lines you also may be exempt from taxes – but it usually has to be 50% of your business.

A good aviation lawyer or tax expert can help you find those exemptions, Speciale says. “When you buy an airplane, the tax bill can be $10,000 to $15,000, so it is worth the time with a lawyer or accountant to see if there are any exemptions worth pursuing,” he says.

Those professionals also can tell you the tax implications of owning the airplane in your own name versus creating a limited liability corporation (LLC) or a family trust. Another area to check into is income tax issues if you use the plane for business, as well as whether flight training expenses are deductible.

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