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