The general rule is aircraft are considered to be tangible personal property, which are subject to tax when purchased or used in Florida. See ss. 212.02(19), 212.05, and 212.06, Florida Statutes (“F.S.”). However, one way to avoid tax on the purchase or use of an aircraft in Florida is to purchase the aircraft for resale purposes. See s. 212.07(1)(b), F.S., and Rule 12A-1.039, Florida Administrative Code (“F.A.C.”). The resale provision covers a purchase for releasing purposes. See Rule 12A-1.039(1)(b)2., F.A.C. In order to purchase an aircraft for resale purposes, one must first be registered with the Florida Department of Revenue (“Department”) for sales and use tax purposes at the time of purchase.[1] If not, there is a process called inadvertent registration, which has the potential to cause any assessment against the aircraft to be substantially reduced.
If a lessor finds himself or herself with an inquiry or assessment from the Department concerning the purchase or use of a leased aircraft in Florida and the lessor purchased the aircraft before being registered with the Department, the lessor may wish to consider applying for inadvertent registration. Where the lessor has purchased an aircraft for leasing purposes but is not registered with the Department for sales and use tax purposes, the lessor may apply for inadvertent registration relief. At the most, there would be a mandatory penalty of the lesser of $5,000.00 or twenty percent (20%) of the tax that would be due. See s. 212.07(9), F.S.
For example, the Department may assess a lessor $1,000,000.00 of tax, $250,000.00 of penalty, and $100,000.00 of interest for a total assessment of $1,350,000.00. (These numbers are a very real possibility based upon the value of the aircraft!) If the aircraft was purchased for leasing purposes and inadvertent registration relief is applied for, the assessment is significantly reduced. Applying s. 212.07(9), F.S., the assessment would be $5,000.00 at the most! ($5,000.00 is less than 20% of the tax due, which would be $200,000.00.) This is a powerful relief provided by the Florida Legislature.
Now that we have the aircraft purchased exempt from tax, we should turn the discussion to the lease or rental of the aircraft. Leases or rentals of aircraft are subject to tax at a State rate of six percent (6%).[2] See s. 212.05(1)(a)1.a., F.S.; see also Rule 12A-1.071(20), F.A.C. The real question, though, is whether the transaction is a lease.
A “lease” is defined as the leasing of an aircraft, along with possession and use of the aircraft, by the lessee for a consideration, without a transfer of title occurring. See s. 212.02(10)(g), F.S. In aircraft terminology, this equates to a “dry lease” or “bare hull lease,” where only the aircraft is being leased. This type of transaction would be distinguishable from a “wet lease,” or a lease in which the aircraft as well as the pilot and crew are provided. In fact, Florida law states if the pilot and crew are provided and the “customer” of the aircraft does not pilot or take possession of the aircraft, then this is considered a nontaxable charter service. See Rule 12A-1.071(21), F.A.C.
Let’s assume the aircraft is being leased. A key point that should be made concerns fair market value leases versus the actual consideration (payment) of aircraft leases. Different from federal tax principals, Florida only taxes aircraft leases on the actual consideration. See ss. 212.02(16) and 212.05(1)(a)1.a., F.S. Thus, if the fair market value of the lease if $100,000.00 per month but the lease explicitly states a payment of $1.00 per month, then tax is only due on the $1.00 per month payment. This results in a whopping $0.06 of tax due, assuming no discretionary sales surtax (“county tax”).
It is easy to tax an aircraft lease where the aircraft is used exclusively in Florida during the leased period. The full lease price is properly and fully subject to Florida sales tax, unless an exemption applies. However, and if not used exclusively in Florida during the lease, taxing the lease of an aircraft can become tricky. Because aircraft fly worldwide, figuring the right amount of tax on the lease may seem daunting.
There are a few ways to apportion (“pro-rate”) the tax due on an aircraft lease. One way available is for air carriers. An air carrier, which uses mileage apportionment for Florida corporate income tax purposes, may use the mileage apportionment ratio determined via Chapter 220, F.S., in order to apportion its lease. See s. 212.0598, F.S. The statute also requires various other provisions to be met. But what if you do not file Florida corporate income taxes or meet all of the other statutorily-imposed requirements? Apportionment is still available, but not under this statute.
Florida has taken the position that “[r]ental amounts charged … while the [aircraft] is in Florida are taxable ….” See Rule 12A-1.071(4), F.A.C. However, the Florida Statutes and Florida Administrative Code do not define the word “charged,” though this word is used in the rule. Where a word is not defined by statute or the intent of the word is unclear, a court will resort to statutory construction and may determine the plain and ordinary meaning of the word from a dictionary. See Nehme v. Smithkline Beecham Clinical Labs., Inc., 863 So. 2d 201, 204-05 (Fla. 2003) (quoting Seagrave v. State, 802 So. 2d 281, 286 (Fla. 2001)).
According to Merriam-Webster’s online dictionary, the word “charged” is commonly known to mean the price demanded for something. Thus, putting this definition together with the Rule, one can reasonably conclude only the lease payments relating to the price demanded while the aircraft is in Florida will be subject to tax. The next question becomes how to evaluate the charges for the aircraft lease.
Aircraft leases come in all shapes and sizes. An aircraft lease can be based upon a flat daily/monthly rate, engine hours, flight hours, per mile, any combination of the previously mentioned, or some alternative methodology. The possibilities are endless. For purposes of this discussion, only a couple of methodologies will be reviewed.
First, let’s look at a flat-rate, daily lease. An aircraft is rented for ten days at a daily rate of $100.00 per day. Therefore, a total of $1,000.00 will be paid to lease the aircraft. If the aircraft is in Florida for only three days, Florida can only assess tax on $300.00 of the lease payments. Assuming no discretionary sales surtax (“county tax”) is at issue, then the total amount of tax due is $18.00 ($300.00 * 6%).
Second, let’s look at a lease that charges based upon the number of miles flown. An aircraft is rented for ten days and is charged $1.00 per mile flown. The aircraft is flown for 1,000 miles over the ten-day period. The total number of Florida miles flown is 450. Thus, Florida can only assess tax on $450.00 ($1 per mile * 450 miles flown in Florida) of the lease payments. Assuming no discretionary sales surtax (“county tax”) is at issue, then the total amount of tax due is $27.00 ($450.00 * 6%).
In some cases, a lessor of an aircraft does not wish to get into apportioning the lease. Logistically, it can be an administrative challenge. Another option available, is to obtain from the lessee a Direct Pay Permit. Like a resale certificate in that a resale certificate allows the holder to not pay any tax on the purchase, a Direct Pay Permit allows no tax to be charged or collected by the lessor.[3] Instead, the lessee is responsible for determining the amount of tax it owes and remitting the tax to the Department. The lessor should keep a copy of the Direct Pay Permit in its records.
In conclusion, one should first be registered with the Department for sales and use tax purposes in order to purchase an aircraft for leasing purposes. If not, one may wish to consider applying for inadvertent registration relief. Next, the individual will want to ensure the aircraft lease is a true lease of the aircraft. Then, the proper amount of tax on the lease of the aircraft should be collected and remitted by the lessor, unless the lessor receives, for example, a Direct Pay Permit.
About the author: David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is Florida tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. While working for the Florida Department of Revenue as a Senior Attorney, David focused on aircraft sales and use tax issues, among various other areas. You may contact David via email at DavidBrennan@FloridaSalesTax.com or 850-250-3830. You can read his BIO HERE.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Call our offices today for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Nehme v. Smithkline Beecham Clinical Labs., Inc., 863 So. 2d 201 (Fla. 2003)
ADDITIONAL AUTHORITY
No Florida Sales Tax On Aircraft Purchased By Non-Resident?, published November 6, 2016, by David Brennan, Esq.
Florida Airplane - Florida Use Tax Considerations, published January 9, 2017, by David Brennan, Esq.
AIRCRAFT AIRPLANE vs FLORIDA SALES TAX, published September 13, 2015, by Jerry Donnini, Esq.
FLORIDA USE TAX AUDIT LETTER?, published June 14, 2015, by James Sutton, CPA, Esq. and Jerry Donnini, Esq.
GO TO JAIL FOR NOT PAYING FLORIDA SALES TAX?, published November 3, 2013, by James Sutton, CPA, Esq.
FL TAX – VOLUNTARY DISCLOSURE CAN BE THE PERFECT SOLUTION, published October, 5, 2012, by Jerry Donnini, Esq.[1] In order to become registered with the Department, one must file Form DR-1, Florida Business Tax Application. The Form may be found at the following link: http://floridarevenue.com/Forms_library/current/dr1.pdf.
[2] Counties are authorized to charge a discretionary sales surtax, which is in addition to the State tax rate. See ss. 212.054 and 212.055, F.S. This discretionary sales surtax is up to an additional one and one half percent (1.5%) but is only applied to the first $5,000.00 of each lease payment. See Rule 12A-15.004(2)(b), F.A.C.
[3] In order to obtain a Direct Pay Permit, one must first be registered with the Department for sales and use tax purposes, via Form DR-1. Once approved, the next step is to file Form DR-16A, Application for Self-Accrual Authority/Direct Pay Permits Sales and Use Tax. The Form may be found at the following link: http://floridarevenue.com/Forms_library/current/dr16a.pdf.