During a recent conversation with an aircraft broker in the Great Lakes area, he told me that he has no problems with the California tax people. He indicated he is confident that California’s attempts to tax out-of-state domiciled aircraft would be overruled in Federal court. Therefore, he feels like his clients are not in danger.
I reiterated California’s position that all aircraft are subject to assessment if they enter California at any time during the first twelve months, and are discovered by the tax people. I could sense resistance building in him as he became a bit emotional and restated that California State Law can’t overcome the federal court system. I brought up that if an aircraft enters California only once during the test period it is a bit like a needle in the haystack, but it is a technical possibility.
This only served to reignite his passion for his position. So, I backed off and instead tried to convince him of what my perception is regarding aviation sales tax in California – namely that California can and will do whatever it wants. Let’s say I am wrong - and he is right that an out-of-state resident will always win in Federal Court regarding this issue. The business that I created is based on eliminating a tax which adds to the cost of an aircraft or vessel. Therefore, it is my mission that my clients don’t waste money on taxes that they can legally avoid. (BTW - I also talk people out of hiring me when the tax savings don’t overcome the cost of the avoidance program.)
If an out-of-state aircraft owner is assessed tax by California, he is normally advised of this by mail from the California Board of Equalization (BOE). Let us say the owner asks his tax advisor and is told to ignore the letter because California has no legal right to assess the tax. The BOE, sometime later, then files a lien on the aircraft. The FAA always accepts and records the BOE liens on aircraft.
Now, the aircraft owner can be in violation of his finance agreement or his insurance policy. This creates some expense to justify the lien to his bank or the insurance company. This effort costs something, whether it is handled by a representative or the owner himself, even if it is just the annoyance factor for the taxpayer. If the aircraft is mid-sale the whole sales process can be held up at the time there is a willing buyer at an agreed price. This costs something.
Secondarily, by law this case cannot go to any civil court without giving the BOE an opportunity to go through all the evidence to make their interpretation. So this causes the taxpayer to circle back and have to go through the entire audit process anyway. This costs money and AGGRAVATION!
Let’s suppose that the BOE denies this claim for an exemption all the way through the process and the taxpayer goes to a public hearing before the elected Board members and they rule against him. According to the rules he can only pay the tax and take the BOE to court to claim a refund for the taxes paid. Be advised that even if the taxpayer wins at this point he will not be reimbursed for his legal costs – which translates into (you got it) – more money and more aggravation. And if the taxpayer loses at the state level and takes this case to federal court, he starts the legal billing all over again.
THIS IS BEGINNING TO COST AS MUCH AS THE AIRCRAFT. And that is why I feel my approach is the saner – as it will be lower cost compared to fighting the BOE – even if the taxpayer is right!
I finished the conversation with the broker (as I always do) with an offer to be of assistance should he have any future aviation tax questions. I told him, “Even if I am not an expert in what you need answered, I have been in this business long enough that I probably know the person who can help you”. He thanked me and seemed like he was a bit more relaxed so I added my comment, “You can also call me any time you want to argue with me about California Sales Tax.” He began laughing uncontrollably, mission accomplished. I had diminished the level of emotion that had begun to build a wall between us – and that is always the first step in finding a solution – in life – as well as aviation sales tax.
Other recent “Aviation Tax” posts by Thomas A. Alston:
- Aircraft Purchases: Why Many CPAs Get It Wrong
- Aviation Tax: Wrong Approach in California Can Cost Aircraft Owners
- Aircraft & Vessel Taxation: For Expense Documentation, Stick to Facts