By ASHLEY HAYES FORTE
Before you are cleared for takeoff in your new airplane, take some time to do a little pre-planning in regards to your tax liability. With a little bit of advanced planning, you can enjoy a stress-free purchasing process, leaving your tax concerns on the ground, where they belong.The best way to do that is to inform yourself early on about sales and use tax exposure and how it may affect your transaction.
[Editor's Note: While this deals with just one state, buyers need to be aware of the sales and use tax regulations in not only their home state, but also the state where they buy their aircraft.]
In Illinois, aircraft purchasers face the largest amount of turbulence from the Sales and Use Tax. In Illinois, depending on who the aircraft purchase is made from, the buyer will be subject to either the sales tax (referred to as the Retailers’ Occupation Tax in Illinois) (35 ILCS 120/1 to 120/14), the use tax (35 ILCS 105/1 to 105/22) or the aircraft use tax (35 ILCS 157/10-1 to 157/99-99).
In Illinois, if a purchase is made from an in-state dealer, the dealer will collect and remit the sales tax on the purchase. If a purchase is made from an out-of-state dealer, the use tax will be imposed. Finally, if a purchase is made from a private party, the purchaser will be taxed under the Illinois aircraft use tax.
In Illinois, the use tax and aircraft use tax rates are both 6.25% (plus any applicable local tax rate) of the purchase price or fair market value, whichever is greater, and becomes due when the aircraft is purchased or brought into the state for use. Because most other states have a sales and use tax, Illinois does allow for a credit for sales/use tax previously paid to another state. However, this credit may not satisfy the full amount of your Illinois liability. If a sales/use tax of 5% was paid in State X and you bring the aircraft into Illinois for use, you are still liable for 1.25% in use tax owed to Illinois.
Like all other states, Illinois offers limited exemptions to the use tax. One of the most common is known as the fly-away exemption, which allows for a new purchaser to move the aircraft out of Illinois within 15 days of purchase without incurring any liability.
Illinois also allows an exemption for aircraft acquired by a government agency or tax-exempt organization. If the aircraft is acquired by an in-state carrier, like an airline business or charter company for use transporting people or commodities in interstate commerce, no tax is owed.
If the aircraft is a gift to a surviving spouse or if the aircraft is only temporarily stored in Illinois after being acquired and primarily used outside of Illinois, no tax is due.
If the aircraft is in Illinois for the sole purpose of a pre-purchase inspection or a post-sale customization and not permanently registered in Illinois, no tax will be due if it is removed within 15 days of the work being completed.
Finally, if the aircraft is used for 50% or more in the production of agriculture (such as crop dusting), no use tax need be remitted.
For aircraft owners who are contemplating a move to Illinois on a permanent basis, there is an exemption for using the aircraft outside Illinois for more than three months. This exemption only applies to individuals moving to Illinois, not to businesses, leasing companies or lessees. An out-of-state credit for tax already paid will still be allowed for businesses, leasing companies and lessees though.
Once a determination has been made on whether the use tax is owed, it will be reported on one of two forms. If the aircraft was purchased from an in-state dealer, the dealer will collect the sales tax and report it on the dealer’s sales and use tax form.
If the aircraft purchase falls under the purview of either the use tax or the aircraft use tax, depending on who the purchase was made from, the tax will be reported on the RUT-25, Use Tax Transaction Return, or RUT-75, Aircraft/Watercraft Use Tax Transaction Return. Once a reporting obligation has been determined, the tax must be paid or an exemption claimed within 30 days from the purchase date or the date the aircraft is brought into Illinois.
If an aircraft is being temporarily stored in Illinois or is in the state for pre-purchase or customization purposes and the owner is concerned about being assessed a use tax, it may be wise to file a RUT-60, Certification for Aircraft Exemption.
If you don’t report your tax obligation, the state will not issue an Illinois registration for the aircraft. Failure to properly report the tax can mean a late filing penalty, plus a late payment penalty, plus a cost of collection fees on top of the original tax owed.
Additionally, failure to register the aircraft in Illinois is unlawful and can result in severe penalties. In the past, Illinois offered an amnesty program for taxes not previously paid. However, the most recent amnesty ended in 2011 and has not yet been renewed.
Although it is tempting to try to fly under the radar, Illinois, like many states, depends heavily on tax revenue and monitors the sales and transfers of aircraft carefully. The states receives copies of the bill of sale filed with the FAA and also closely monitors Flight Aware for new tail numbers showing up in the state.
So this year, be sure to stay in the clear and plan ahead when it comes to your tax obligations.
Ashley Forte works in the aviation practice of Chicago law firm Arnstein & Lehr.