As I flip through the pages of aircraft publications I am often reminded of what my mentor used to tell me when I first begin to study sales and use tax law, if it walks like a duck, and quacks like a duck, it probably is a nuclear missile aimed at your bank account.
It doesn’t seem to matter whether your passion is cars, motorhomes, boats or airplanes, somebody from the five states in the United States that have no sales tax, comes along and sets up his covered wagon along side the road and begins selling you on the idea of avoiding sales and use tax. Every word in their ads tends to be one-hundred percent true yet the result can be disastrously false. The people knowingly have to be aware that they are misleading thier clients because more and more people are being taxed even after following the out of state Corporation or LLC process that they are sold. There can be good reasons to use an out-of-state structure but sales/use tax is NOT one of them.
There is nothing in the law that prevents you from opening up a corporation in one of these states, however, owning a corporation in a state that has no sales tax doesn’t preclude your corporation from owing sales/use tax in another state where you use or store your aircraft.
If your accountant advises you to use a corporation in a state other than the one you live in for IRS purposes, he probably knows what he is talking about. If your attorney advises you to use a corporate structure to minimize personal risk he also should know his area of expertise. However, if anyone leads you to believe that owning your personal property in an out of state corporation legally avoids your tax obligation in your home state where you store or use the property, you are being lead down a path of financial destruction.
It is my experience that there are many people walking the streets that believe by registering their new aircraft in the name of a Montana or Delaware corporation they have legally avoided sales and use tax in California. In fact, they believe it because they haven’t been caught yet. Their ignorance of the law will not be an acceptable defense when their case has to be defended. The fact that they have been told by fifty people in their flying club how their hangar neighbor didn’t pay sales tax doesn’t change the brutal truth. Every person who has used an out of state corporation or address to register their property is juggling a hand grenade with the pin pulled. In fact the longer they juggle it the more dangerous it becomes.
The ugly truth
California State Sales Tax Law Section 6485.1. 50 percent penalty. Any purchaser of a vehicle, vessel, or aircraft who registers it outside the State of California for the purpose of evading the payment of taxes due under this part shall be liable for a penalty of 50 percent of any tax determined to be due on the sales price of the vehicle, vessel, or aircraft.
Wait a minute you shout, “I did not intend to evade the tax”. You know that intent is a hard thing to prove.
The law requires that you file a use tax return in approximately one year from the date of purchase. When you fail to file one, they can presume you are evading the tax. They don’t have to prove you “intended to evade the tax”. They can presume by your failure to file your return for the purchase of the aircraft that you intended to evade the tax.