|Aircraft Sales and Use Tax Reform in Florida: A Good Start|
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.
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.
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.
Generally, the new law should be a blessing to the fractional ownership market in Florida. It should also serve to raise revenue, not necessarily 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, in order to encourage more aircraft purchasers to take delivery in Florida. 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.