Aircraft sales and use tax is one of the most complex and convoluted areas of tax law to understand. After throwing into the mix the mobility of aircraft and multiple states vying to tax the aircraft upon entry into the state, aircraft owners are left scratching their head with what to do next.
Before diving into this special “1% of 6% Rule,” we need to establish a few parameters. Generally, the purchase or use of an aircraft in Florida is subject to Florida sales or use tax. There are exceptions to this general rule, which are discussed in the “Additional Articles to Read” section at the end of this article.
If an aircraft is acquired for resale purposes, the purchaser (“ABC Co.”) must be registered with the Florida Department of Revenue for sales and use tax purposes prior to the transaction to purchase the aircraft exempt from Florida tax. There are ways to get around this provision if you are not registered at the time of the sale, but again this is a topic for another time. So, and for example, ABC has acquired an aircraft for resale purposes (to resell or dry lease the aircraft). What if business does not go according to ABC’s plans? Perhaps the aircraft resale market is going through a rough patch or the dry leasing is just not happening. ABC needs to generate revenues because it has certain fixed costs associated with the aircraft (e.g., various types of inspections). ABC decides it will become a Part 135 charter operator to supplement its revenues. In short, a Part 135 charter operator is the “Uber of the sky.” They do not dry lease the aircraft as Hertz would lease a car to its customers. These charter companies provide an “air taxi” service of transporting people from point A to point B.
Once ABC converts the aircraft to this “dual usage,” ABC faces a problem. Generally, use tax is due immediately on the aircraft once the aircraft is partly or fully converted to the dual usage of Part 135 charter operations. The reason is the general rule provides for items purchased exempt for resale purposes but used by ABC are subject to use tax payable by ABC. However, the “1% of 6% Rule” can kick in to save the day for ABC at this point.
The “1% of 6% Rule” is a provision only applicable to aircraft and is so nuanced that auditors will sometimes apply the general tax rule for dual usage of tangible personal property being completely unaware of the exception. Thus, it is up to you to bring the “1% of 6% Rule” to the auditor’s attention.
In short, this special rule allows for an aircraft dealer, which is registered with the Department for sales and use tax purposes, that purchased an aircraft exclusively for resale to be exempt from tax at the time of purchase; however, the aircraft dealer must pay a use tax computed on 1% of the aircraft’s value for each calendar month the aircraft is used by the dealer. The rule kicks in during the month in which the aircraft is first used for any purpose in which income is received by the aircraft dealer. It is also important to note the payment of this use tax DOES NOT offset any sales tax due on the dry lease of the aircraft. It is also irrelevant whether the aircraft is used in the air taxi business for a de minimus amount of time in a given month. The Department gives the option for the aircraft dealer to pay the full amount of tax in lieu of the monthly use tax.
Example: ABC purchases an aircraft for $1,000,000 on January 1, 2018. No sales or use tax is paid on the acquisition, because ABC is registered for sales and use tax purposes with the Florida Department of Revenue and has purchased the aircraft for resale purposes. ABC dry leases the aircraft to XYZ for $100 a month and collects $6 of sales tax per month for a total payment of $106. Thirty days after acquiring the aircraft, ABC realizes the $100 a month in rental income is insufficient to cover its expenses. ABC decides to use the aircraft in its air taxi business as well. The aircraft is used in the air taxi business in February 2018 for one hour, and half of March 2018. ABC must collect the $6 of sales tax for each month of the dry lease from XYZ. However, and because of the dual usage, ABC must also remit use tax of $600 ($1,000,000 * 1% * 6%) for the month of February 2018 and $600 for the month of March 2018.
In conclusion, the “1% of 6% Rule” provides a planning opportunity for certain situations. However, and in other instances, the provision can save an aircraft dealer potentially hundreds of thousands of dollars on an assessment. Having the knowledge of the provision can change the landscape for an aircraft dealer altogether. It truly can mean the difference between staying in business or shutting down.
About the author: David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate 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 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
ADDITIONAL ARTICLES TO READ
SALES TAX ON AIRCRAFT PARTS AND REPAIRS IN FLORIDA, published December 10, 2017, by David Brennan, Esq.
SALES TAX ON AIRCRAFT LEASING IN FLORIDA, published March 31, 2017, by David Brennan, Esq.
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.