AeromarineTaxPros.com: Is There a Legal Way To
Avoid Sales Tax?
by Thomas Alston
Every person who has contemplated an aircraft
purchase in the last few years has asked the question, "Is there a legal way to
avoid sales tax?" Most of these people ponder this question with the same
seriousness as "Will I win the Lotto tonight?"
Many people have heard the horror story of a friend
who tried one of those schemes and would wind up with penalties and interest
that doubled or tripled the tax. A few have been embarrassed when their
attorneys and CPAs laughed at them for asking the question.
People who purchase aircraft fall into one of the
following categories. 1. Those who hope they can avoid sales tax on their
upcoming purchase. 2. Those who pay the sales tax. 3. Those who tried and
failed to avoid sales tax on their last purchase. 4. Those who successfully
avoided sales tax on their last purchase. 5. Those who tried to avoid sales tax
on their last purchase by eluding the tax agency and are functioning under the
illusion theyll never get caught. 6. Those who have so much money theyd rather
pay the tax than think about dealing with a tax collector. 7. Those who believe
that only millionaires with a large staff of accountants and lawyers can
legally avoid sales tax. 8. Those who believe that professionals who claim to
be able to assist them to legally avoid tax operated out of a covered wagon
selling snake oil in a previous life.
The Supreme Court proclaimed that every citizen of
the United States has a right as well as an obligation to avoid taxes. What is
against the law is evading taxes. A quick reading of the dictionary should
point out the difference between "avoid" and "evade".
According to Websters New College Dictionary the
definitions of "avoid" include: 1. To keep away from: shun. 2. To keep from
happening. 3. Law. To annul or make void: invalidate.
According to Websters New College Dictionary the
definitions of "evade" include: 1. To escape or avoid by cunning. 2. a. To
avoid the performance of fulfillment of their responsibilities. b. To fail to
make payment of. 3. To avoid giving a direct answer to. 4. To elude or baffle.
Too many people have successfully "evaded" sales tax
on aircraft purchases by slight of hand and cunning. They have established a
culture that leads prospective buyers down the path to believing that only
those who participate in illegal schemes get away with not paying taxes. This
is so far from the truth that it should be out of sight for aircraft owners.
The true statement is anyone can successfully avoid
sales tax on an aircraft purchase. There is only one thing that a prospective
aircraft owner should have to consider when it comes to sales tax. Are the
steps necessary to legally avoid tax more costly than the tax?
At this point the federal government collects taxes
by primarily using an income tax, therefore the questions about sales tax are
related to different rules in every state.
For example, If you are considering a purchase of a
$200,000.00 aircraft and you live in a state that has a sales tax rate of
four-percent you are facing a tax of $8,000.00. The same purchase in a state
like California is subject to over $16,000.00 in tax. When you add on the city,
county and various other special districts it can go even higher. Conversely,
there are currently five states that have no sales tax. They are Alaska,
Delaware, Montana, new Hampshire and Oregon.
To further aggravate your search for information
each state has specialized rules about aircraft purchases. Some examples of
conflicting state rules are: 1. In Kansas some transactions between two people,
in which neither party is in the business of selling aircraft are exempt. In
California a transaction between two people, in which neither party is in the
business of selling aircraft, the buyer owes the tax not the seller. 2. In some
states, when a resident of that state buys an aircraft outside of the state
where he is a resident it is exempt of sales tax. However as soon as he brings
the aircraft into his state it is subject to use tax. The rules vary from state
to state as to the right of the purchaser to use his aircraft outside of his
state for a period of time that renders the transaction exempt. In some cases
it takes three months and in some states it takes twelve months. 3. Some states
only tax a purchaser on the difference between the sales price and the value of
the trade-in. Some tax the retail price of the transaction without regard to a
trade-in. 4. If a purchaser regisaters his purchase in one of the "sales
tax-free" states to avoid the sales tax he may be subject to a 50% penalty in
his home state. 5. If a purchaser is not careful about his method of taking
possession outside of his state of residency he may create a sales tax
liability in one state and a use tax liability in another.
It is this maze of confusing rules and inconsistent
requirements state by state that causes many people just throw their hands up
and pay the tax. They are very aware that they dont have to confront this issue
on most other purchases so they can become paralyzed by the fear that some
hidden danger will imperil them when they buy an aircraft.
It is this fear that agitates them to the point that
rational evaluation of facts dissipates. Normal clear thinking adults who
regularly make decisions about good and evil, where to spend their money, and
where to go on vacation, lose this innate ability when they think about taxes
on an aircraft purchase.
There isnt a plot by state agencies to attack
aircraft owners. The single issue that creates the confusion is the fact that a
transaction involving an aircraft isnt bound by the limitations that almost
every other purchase is. Obviously, you dont walk into Wal-Mart to buy a power
drill and think about taxes because of the low price. What isnt so obvious is
that the power drill cant change its physical location for the purpose of the
The truth is that a lot of the strategies used by
people to legally avoid sales tax on the purchase of aircraft are available on
a purchase of any kind of property. It is the mobility of the product as well
as the price that forces taxpayers into the box of thinking that the tax
exemptions are only available to limited products.
The mythology of sales tax exemptions further
confuses the issue. There are a significant number of people who perpetually
confuse potential buyers by repeating unsubstantiated stories. For example,
there is the arrogant blowhard who blithely proclaims "its simple all you have
to do park it out of state." Research indicates that he has heard stories from
other know-it-alls and repeats them without prejudice even though his
statements are totally false.
The only reason he gets away with it generally rests
in inconsistent enforcement of their own rules within the taxing agencies. This
does make it possible for Mr. Know-it-all to have some substantiated cases of
proof he is correct. The real reason may be because of fairly lengthy statutes
of limitations in some states it can take nearly a decade before the case is
actually challenged. Additionally if a state charges fraud, there is no statute
of limitations. As a matter of practicality it is possible if they discover an
aircraft transaction occurred that is outside the statute of limitations in
their state they will charge fraud so they can assess the tax.
The other historical problem is one of nomenclature.
People in the aircraft industry tend to use buzz words to communicate. These
buzz words have a tendency to stick when they are attached to certain subjects,
even though when compared to tax law they fail. The confusion the swirls around
the use of the term "Part 135 exemption" has trapped many aircraft owners into
interest and penalties.
When you mix an industry that misuses definitions
with horribly inconsistent tax code enforcement you can easily see the tax
traps that are set by the industry personnel for its own members. I have no
evidence of a plot by any tax agency against aircraft owners. Usually the
problems are creating by bad advice mixed with a flagrant desire to avoid taxes
of any nature.
The desire to avoid taxes is admirable, the ability
to get good sales tax information is blatantly non-existent. The problems
existence is simple to explain. Sales tax law is a highly specialized area that
doesnt attract much professional attention because the potential size of the
market is minuscule. Lawyers and C.P.A.s can afford to spend time learning
about IRS rules because most of the population of the U.S. pays income tax.
Further, many avenues of education exist for professional to learn about income
tax. None exist for sales tax, other than within the agency for its employees.
Sales tax is typically the responsibility of the
retailer, therefore the problem primarily exists only for the fraction of the
population that has sellers permits. For example, in California, with a
population nearing 40 million, the real market is less than 500,000 businesses.
The sad result is that professionals often advise
their clients to just pay the tax, or lead a potential taxpayer down a path
that results in additional tax. This doesnt happen because of incompetence. It
occurs because tax agencies often have a unique way of conflicting with their
own rules in order to collect taxes. If your lawyer or accountant doesnt have
the savvy of understanding how to get access to the inner workings of a tax
agency you can be at risk.
A simple reading of a tax code never is the only
place to gather understanding. A sales tax professional must be willing to
spend thousands of hours getting to know the nuances of each law and how an
agency historically has dealt with it. Upon studying the history of a tax
agency, a sales tax expert will be able to build an effective strategy even in
the face of diametrically opposed decisions by the tax agency on facts that are
the same. The cost for a taxpayer to educate himself sufficiently in the
nuances of sales tax laws will exceed the potential tax. The educational
process for a do-it-yourself sales tax expert is paved with failed attempts
that often times double and triple the original amount of tax due.
The most efficient and effective manner of legally
avoiding sales and use tax rests clearly in the decision to hire a sales tax
expert with a proven track record of victories for their clients before the
sales tax agency. Asking for client referrals is your best source of verifying
It shouldnt be a long drawn out process. Remember
there are very few firms in the entire country that specialize in sales tax
cases. A review of the yellow pages in all the major cities in the country may
reveal that several major metropolitan areas have none. It will still be worth
the long distance phone call to save yourself from overpaying your taxes.
Thomas A. Alston is the president of Aero &
Marine Tax Professionals, a division of MTE, Inc. He has successfully filed
hundreds of tax returns with the California State Board of Equalization. Mr.
Alston is Californias premier specialist in legitimate tax avoidance on
aircraft, vessels and vehicles, having published many articles on sales and use