| Often people ask my opinion of the various | | | | conducted. |
| exemptions that can be used to exempt an | | | | |
| aircraft from California sales and use tax. I | | | | A. Type of aircraft, registration numbers or |
| have a canned response that runs them briefly | | | | markings and serial numbers of each aircraft |
| through the available methods. Many times | | | | authorized for use must be listed. |
| they question why we dont propose using the | | | | |
| "Common Carrier" or "Part 135" exemption as | | | | 1. Copy of the operators (Aircraft Owner) |
| it is often referred to in the industry. | | | | Federal Aviation Administration (FAA) Part |
| | | | 135 air carrier certificate. |
| Aero & Marine Tax Professionals ( are experts | | | | |
| in helping people avoid paying sales tax on | | | | 2. FAA registration documents identifying |
| their aircraft purchases. | | | | when the aircraft was added to Aircraft Owner |
| | | | fleet. |
| If they insist I explain it to them, I start | | | | |
| by asking some simple questions: | | | | 3. A list of the operators certified pilots. |
| | | | |
| 1. Do you intend to place your aircraft on | | | | 4. Evidence of insurance coverage (a complete |
| charter because you want to generate some | | | | copy of the policy) for common carrier. |
| revenue to off set your costs? | | | | |
| | | | 5. A complete copy of the aircraft flight |
| 2. Do you think this exemption is a viable | | | | logs during the first twelve months of |
| method of legally avoiding California sales | | | | operational use. (Please note: copies of |
| and use tax? | | | | actual flight logs are required. Computer |
| | | | print-outs are not acceptable.) |
| If they answer yes to either question I | | | | |
| attempt to clarify their interest even | | | | 6. A summary which describes each flight |
| further. | | | | during the first twelve months of operation. |
| | | | |
| 3. Are you sure that you want someone else in | | | | 7. Aircraft log books and receipts which |
| control of your aircraft? | | | | support all non common carriage use (i.e. |
| | | | personal use). |
| 4. Are you sure that you want strangers in | | | | |
| your "new" (to you) aircraft? | | | | 8. Aircraft log books, passenger briefing |
| | | | cards, FAA flight plans, trip logs, weight |
| Once they convince me that they intend to use | | | | and moment sheets and other related evidence |
| the common carrier exemption they get "the | | | | which supports common carrier flights and |
| speech". | | | | revenue. |
| | | | |
| California Sales and Use Tax Regulation 1593 | | | | 9. Copies of operators customer revenue |
| is the regulation that details what is | | | | billings showing the amount charged on all |
| required to support this type of claim for an | | | | charter flights, Federal Excise tax returns |
| exemption. This is the longest test period of | | | | and customer contracts. Each flight which is |
| all the possible exemptions. Where Regulation | | | | claimed to be charter during the first twelve |
| 1620 uses 90 day and six month tests, 1593 | | | | months of operational use must be supported |
| requires twelve months. | | | | by a corresponding invoice. |
| | | | |
| Unless the aircraft owner is also in | | | | 10. A complete copy of the aircraft or engine |
| possession of a common carrier certificate | | | | maintenance logs showing total engine hours |
| which is covered under California Sales and | | | | recorded since the date of purchase. |
| Use Tax Law Section 6366, he must enter into | | | | |
| a lease with a organization that has a | | | | 11. A complete copy of the sales contract |
| certificate. This lease is covered under | | | | which verifies the purchase price, date and |
| section 6366.1. This is where the use of this | | | | location of the delivery of the aircraft. |
| exemption gets very tricky. | | | | |
| | | | 12. A complete copy of the lease agreement, |
| The California Sales and Use Tax Regulation | | | | if the aircraft was leased, to the actual |
| covering this area is explained below. | | | | operator. |
| Regulation 1593 exempts from tax aircraft | | | | |
| used in this state as a common carrier. The | | | | 13. A copy of all lease payment invoices made |
| pertinent parts of the regulation are as | | | | to lessor (owner) by the lessee (operator). |
| follows: | | | | |
| | | | 14. Copy of evidence establishing the pilot |
| "(a) DEFINITIONS. | | | | was an employee of the common carrier and |
| | | | listed as same in the provisions of the |
| (2) COMMON CARRIER. As used herein, the term | | | | operational specifications . |
| common carrier means any person who engages | | | | |
| in the business of transporting persons or | | | | 15. FAA airman competency/proficiency check |
| property for hire or compensation and who | | | | Federal Aviation Regulation 135 forms for all |
| offers his or her services indiscriminately | | | | pilots flying this plane. |
| to the public or to some portion of the | | | | |
| public. | | | | 16. Copies of flight crew logs. |
| | | | |
| (b) APPLICATION OF TAX. | | | | 17. Copies of aircraft logs showing pilot |
| | | | training time, test flights, and maintenance |
| (1) AIRCRAFT. Tax does not apply to the sale | | | | ferry flights. |
| of and the storage, use, or other consumption | | | | |
| of aircraft sold, leased, or sold to persons | | | | 18. Each certificate holder shall prepare and |
| for the purpose of leasing, to: (A) a person | | | | keep current a manual setting forth the |
| who operates the aircraft as a common carrier | | | | certificate holders procedures and policies |
| of persons or property, provided: | | | | concerning the operation of the aircraft |
| | | | which are acceptable to the FAA |
| 1. the person operates the aircraft under | | | | administrator. Please provide a copy of said |
| authority of the laws of this state, of the | | | | manual. |
| United States, or of any foreign government, | | | | |
| and | | | | 19. Provide a copy of the air worthiness |
| | | | certificate for the Citation. |
| 2. the persons use of the aircraft as a | | | | |
| common carrier is authorized or permitted by | | | | 20. The common carrier aircraft must be |
| the persons governmental authority to operate | | | | operated by a U.S. certified airman employed |
| the aircraft;" | | | | be the certificate holder. Please provide |
| | | | copies of employment agreements or payroll |
| (c) USE OF AIRCRAFT. | | | | records of the certificate holder. |
| | | | |
| (1) COMMON CARRIERS. In determining whether a | | | | 21. Provide a load manifest for each common |
| purchaser or lessee of an aircraft is using | | | | carrier flight which must contain the |
| that aircraft as a common carrier of persons | | | | following information: |
| or property, only that use of the aircraft by | | | | |
| the carrier during the first 12 consecutive | | | | A. Number of passengers |
| months commencing with the first operational | | | | |
| use of the aircraft will be considered. This | | | | B. Total weight of the loaded aircraft |
| test period does not include, and is extended | | | | |
| by, the amount of time, prior to the first | | | | C. The maximum allowable take off weight for |
| use of the aircraft as a common carrier, | | | | that flight |
| during which the aircraft is in the physical | | | | |
| possession of a repair station certified by | | | | D. The center of gravity limits |
| the FAA or a manufacturers maintenance | | | | |
| facility undergoing modification, repair, or | | | | E. The registration number of the aircraft |
| replacement. The period of this extension | | | | |
| exclusion shall not exceed 12 months. If the | | | | F. The origin and destination of the aircraft |
| purchaser does not own the aircraft for 12 | | | | |
| consecutive months commencing with the first | | | | G. Identification of crew members and their |
| operational use, as may be extended as | | | | crew position assignments |
| provided herein, then only the period of time | | | | |
| commencing with the first operational use | | | | H. The pilot in command and the second in |
| that the purchaser owns the aircraft will be | | | | command pilot |
| considered. | | | | |
| | | | The documentation must establish that the |
| (A) "Operational use" means the actual time | | | | principal use of the aircraft was as a common |
| during which the aircraft is operated in | | | | carrier during the first twelve months of |
| powered navigation in the air. Operational | | | | operational use. Effective January 1, 1997, |
| use includes positioning or repositioning | | | | Section 6366 provides a rebuttable |
| aircraft by flying the aircraft from one | | | | presumption that a person is not engaged in |
| point to another ("ferry flights") except | | | | business as a common carrier unless the |
| when such flights are solely for purposes of | | | | yearly gross receipts from such operations |
| having the aircraft repaired. Ferry flights | | | | exceed twenty (20%) percent of the purchase |
| solely for the purpose of transporting the | | | | price of the aircraft, or fifty thousand |
| aircraft to a repair location, or solely to | | | | dollars ($50,000), whichever is less. Prior |
| return from a repair location, are not | | | | to January 1, 1997, a person was not |
| operational use, nor are test flights as | | | | considered engaged in business as a common |
| described in subdivision (d)(2) or personnel | | | | carrier unless the yearly gross receipts |
| training as described in subdivision (d)(4). | | | | exceeded ten (10%) percent of the purchase |
| | | | price of the aircraft, or twenty-five |
| (B) If the aircraft is used as a common | | | | thousand dollars ($25,000), whichever is |
| carrier for more than one-half of the | | | | less." |
| operational use during the test period the | | | | |
| carriers principal use of the aircraft will | | | | In response to the onerous document request |
| be deemed to be that of a common carrier | | | | from the Board, KAL contacts the office of |
| except as provided in subdivisions (c)(1)(D) | | | | WCG and discovers the phone number is |
| and (c)(1)(E). Each flight of the aircraft is | | | | disconnected. After a few weeks of panicked |
| examined separately for purposes of | | | | nervousness KAL discovers that WCG went out |
| determining common carrier use. For these | | | | of business and all of its records are |
| purposes, a flight is the powered navigation | | | | unavailable. In this case, even though KAL |
| of the aircraft from one location on the | | | | met the substance of the transaction by |
| ground or water to the first point on the | | | | operating the aircraft more than fifty |
| ground or water at which the aircraft lands. | | | | percent of the time as a charter, the |
| | | | aircraft will be assessed tax of |
| (C) A flight qualifies as a common carrier | | | | approximately $160,000.00 (assuming a flat |
| use of the aircraft for purposes of the | | | | rate of eight percent.) |
| exemption only if the flight is authorized or | | | | |
| permitted by the governmental authority under | | | | KALs failure to maintain control over the |
| which the aircraft is operated and involves | | | | documents (the form of the transaction) has |
| the transportation of persons or property. | | | | created the situation where the King Air |
| Where the aircraft does not itself transport | | | | purchase is taxable. |
| the person or property to a location on the | | | | |
| ground (or water), the flight does not | | | | My advice to all aircraft purchasers who |
| qualify as a common carrier flight for | | | | intend to claim this type of exemption, is: |
| purposes of the exemption. | | | | Do your homework. |
| | | | |
| For example, John Q. Taxpayer purchases a | | | | 1. Work with reputable charter companies. |
| used King Air in the state of Texas for | | | | Make sure the charter company has been around |
| $2,000,000.00 and owns the aircraft in a | | | | for a long time, has good references, and has |
| Delaware corporation known as King Aircraft | | | | solid financial backing. In addition, even if |
| Leasing (KAL). Cal contracts with Western | | | | you are secure with your choice of a charter |
| Charter Group (WCG), an organization at Van | | | | operator. Require them to provide you with |
| Nuys Airport with a legitimate Part 135 | | | | the required documentation on a monthly |
| Carrier certificate to have operational | | | | basis. |
| control over KALs new aircraft. | | | | |
| | | | 2. The most difficult part of your |
| As of this moment, the insurance for the | | | | documentation request is section 12 of the |
| aircraft and the FAA maintenance requirements | | | | list. The charter company must provide copies |
| just accelerated the cost of operating the | | | | of every invoice they issued to their |
| aircraft. Unless KAL did an economic analysis | | | | customers for every claimed charter flight. |
| of this type of use, it may discover that the | | | | Often, the charter companies are reluctant to |
| additional operating costs may outweigh the | | | | make this information public. Make the |
| tax savings. | | | | charter company sign an agreement that |
| | | | guarantees you will receive the documents, |
| KAL operates within its understanding of | | | | other wise your transaction will be taxed. |
| Regulation 1593 and the scope of the lease | | | | |
| agreement with WCG for one year (the test | | | | 3. Do a complete economic analysis before you |
| period), then KAL decides to remove the | | | | decide. Consider the additional costs of |
| aircraft from Part 135 use and merely use the | | | | operation, and the effect of federal |
| aircraft for its personal business use. In | | | | depreciation before you decide to claim this |
| year three KAL is contacted by the Board of | | | | type of exemption. |
| Equalization (Board) and a review of KALs | | | | |
| exempt status is scheduled. | | | | If all the above requirements start to give |
| | | | you a headache, or begin to convince you that |
| The Board sends a list to KAL and requests | | | | youd rather buy a Volkswagen bus and then |
| the following documents: | | | | take a sip of cool ice tea and smile. |
| | | | Recently the Board has adopted Regulation |
| "COMMON CARRIER EXEMPTION CLAIM DOCUMENTATION | | | | 1620 (b0(4) which will allow you to use a |
| REQUIRED FOR REVIEW | | | | test period know as commercial interstate |
| | | | flight hours to exempt aircraft. It does not |
| 1. In order to qualify as a common carrier | | | | require the extra expense of operating as a |
| the air carrier certificate must be in the | | | | common carrier, the test period is on flight |
| name of the common carrier. | | | | hours only, and it is only six months long. |
| | | | Even if you want to use a Part 135 Carrier, |
| 2. A certificate holder under this part may | | | | you can exempt your aircraft in only six |
| not operate an aircraft under part 121 and | | | | months by using this new regulation. |
| part 135 of this chapter using a name | | | | |
| different than the business name appearing in | | | | Yes you can have the best of both worlds. You |
| the certificate holders provisions of its | | | | can have a reputable charter company operate |
| operations specifications. | | | | your aircraft and you dont have to meet the |
| | | | onerous requirements of the twelve month |
| 3. Aircraft Owner must obtain "operations | | | | test. |
| specifications" that prescribe the | | | | |
| authorizations, limitations, and procedures | | | | I will cover this new regulation in a future |
| under which each kind of operation must be | | | | article. |