Sales vs. Use Tax Explained — and How Smart Structuring Can Save You Thousands
Very simply put, a sales tax is a tax imposed at the time and location of purchase when you buy an aircraft. Use tax, on the other hand, is a tax imposed on the use of the asset. Structuring your purchase to avoid sales tax is only half of your state tax planning. Propper tax planning will also address use tax avoidance or deferral strategies.
Key Concepts:
| Topic | Explanation |
|---|---|
| State Jurisdiction | Each U.S. state has its own rules about aircraft sales and use tax. Some states are aggressive; others have partial or total exemptions. |
| Rates Vary | Can range from 3% to 10%+, depending on the state. On a $2 million aircraft, that’s $60,000–$200,000+ in tax. |
| Delivery Location Matters | You may reduce or avoid sales tax by taking delivery in a tax-friendly state (like Connecticut, Delaware, Montana, Oregon, or South Carolina). |
| Use Tax “Lookback” | States often audit aircraft owners whose aircraft enter the state’s airspace or are hangared at an airport in the state. |
| Nexus Triggers | Hangaring, maintenance, or frequent landings in a state can create tax liability, even if the aircraft was bought elsewhere. |
Smart Planning Moves That Can Cut Six-Figure Aircraft Tax Bills
- Fly-Away Exemption – Some states allow a temporary exemption if the aircraft is flown out of the state within a specific time (like 30 days) after taking delivery. Fly-away exemptions are often used to avoid sales tax by taking delivery in an aircraft-friendly state.
- Aircraft Leasing Structures – In some states, purchasing an aircraft for resale or leasing provides an exemption to sales or use tax. Frequently, aircraft transactions are structured so that the entity owning the aircraft will lease the aircraft to a related party who is operating the aircraft in furtherance of its business. In these cases, the monthly lease payments are taxed (instead of full purchase price), reducing the tax burden over time. However, sometimes this creates challenges with federal tax planning. Jetlaw can help you determine if this structure is appropriate for your ownership and operation.
- Resale or Dealer Exemption – Buying as a dealer or reseller (with intent to lease or resell) may exempt you from tax—if structured correctly.
- Out-of-State Registration – Don’t fall for the “out-of-state registration” trap. Some buyers register in Montana, Delaware, or Oregon, assuming that this structure avoids sales tax. However, if the aircraft is then based or used in another state, use tax may still apply.
- Commercial or Charter Use – If used in Part 135 aircraft charter operations, many states offer full or partial exemptions for commercial use. CAUTION: Some states limit commercial use exemptions to aircraft used in Part 121 air carrier operations. Do not assume that a commercial use exemption automatically includes Part 135 operations.
- Interstate Commerce Exemptions – Some states allow an exemption for sales and use taxes if the aircraft is engaged in interstate commerce, such as transporting people or cargo across state lines. Aircraft are frequently used for cross-border business, which is why interstate commerce exemptions are so important in aviation tax planning.
NOTE: Each state that offers an interstate commerce exemption has its own version of the exemption, and qualifying typically depends on the percentage of interstate use required, how long the state measures usage, and what type of commerce is required to qualify.
Avoid Costly Mistakes: Common Aircraft Tax Pitfalls to Watch For
- Audits Are Common – States like California, Texas, Florida, Pennsylvania, Illinois and New York are known for aggressively pursuing unpaid aircraft taxes. With technology like ADS-B that allows a state to track aircraft in real-time, aircraft owners and operators must be mindful of where the aircraft is being operated and based.
- Penalties & Interest – Failure to comply with sales and use tax requirements can result in hefty back taxes, penalties, and interest. Some states authorize a penalty equal to 100% of the amount of sales tax owed on the aircraft purchase. Jetlaw works proactively to help buyers and sellers mitigate this risk.
- Documentation is Critical – It is important to keep detailed logs of delivery, flight hours by state, business vs. personal use, etc. States routinely ask for proof that the aircraft was actually delivered in the state by requesting a fuel receipt or another form of evidence to substantiate the delivery location. Jetlaw will coach your team on exactly what records and receipts to keep to defend your tax position.