Aircraft Transactions Continue to Receive Heightened Scrutiny from State Tax Authorities

Originally published in the Journal of State Taxation on April 1, 2012

In this down economy, aircraft owners have heard politicians in Washington turning up the rhetoric, complaining about corporate aircraft "tax breaks" while the government continues to run at a deficit. Although it remains to be seen what changes will be forthcoming from Congress or Internal Revenue Service, it is clear that state taxing authorities continue to be focused on transactions involving business aircraft, making aggressive arguments to impose sales or use taxes and ad valorem property taxes on aircraft transactions. During 2011, there were a number of key court rulings and administrative decisions across the country that will have an impact on the aviation community. This article summarizes the recent published decisions involving the state taxation of aircraft transactions and highlights the practical state tax consequences that must be considered by owners and operators of business aircraft.

Tennessee

In a much-anticipated decision in Tennessee on the use tax exemption for aircraft sales and purchases, a Tennessee court ruled that a taxpayer’s purchase of an aircraft outside the state and subsequent transportation into the state is exempt from Tennessee use tax as a sale for resale when the aircraft was leased to a third party. In this case, the aircraft was leased to an affi liate of the taxpayer. The Tennessee Department of Revenue did not appeal. The case was tried on remand after the Tennessee Supreme Court reversed a summary judgment ruling in favor of the taxpayer that had been affi rmed by the Tennessee Court of Appeals.2 The Supreme Court found that there were genuine issues of material fact precluding summary judgment as a matter of law and remanded the case for trial on the merits.