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Confusion reigns at the California Board of Equalization
Recently California Sales and Use Tax Regulation 1620 (b) (4) was approved that gave California the appearance of becoming an aircraft friendly state when it comes to the application of sales and use tax. However, a civil war has broken out among various staff members over the new commercial flight hours exemption contained in the regulation.
The warring factions have divided the staff into two camps. One, that recognizes that “commercial” means “any business use,” the other believes that “commercial” means “the business of transporting passengers or property for hire.”
As is very typical when legal minds begin to interpret every syllable in every paragraph, many small battles break out over procedures and precedents. This war may take a longtime to resolve. During the process, all taxpayers need to protect themselves by adopting the most conservative approach when attempting to support a claim for an exemption. In the meantime we will be requesting a Business Tax Committee Meeting to assure taxpayers of the opportunity to give their testimony.
In a recent memo, written by Timothy Boyer, Chief Counsel of the Legal Division of the State Board of Equalization (Board), the battle lines have been drawn and the first skirmish is under way. It deals with the concept of functional use. By attacking the definition of functional use from a viewpoint that includes a definition of commercial that means “transporting passengers or property for hire,” it is the apparent hope of Mr. Boyer’s camp that the taxability of aircraft can be maximized.
The memo states that “the Board further regarded functional use as meaning use for which the property was designed, so that there was a difference between the use of property designed for personal use versus property designed for commercial use.”
He has apparently ignored a recent Decision and Recommendation issued by a Board attorney declaring that “all aircraft are designed to fly.” Therefore the act of flying an aircraft for any purpose meets the requirements of first functional use.
Mr. Boyer cites the information given out on the web sites of two American aircraft manufacturers. He suggest that two aircraft that are similar in size and capacity can be placed in opposite positions based solely on the wording the manufacturer uses to describe its products.
He cites one multi-million dollar propeller driven aircraft that is labeled as a “six-seater,” as being designed for personal use because the sales literature describes it as “the most exciting personal aircraft ever.” He cites another similar aircraft as being designed for commercial use simply because the sales literature states, “The aircraft can make a profit with less than four passengers.”
Mr. Boyer clearly ignores the due process argument that would ensue in court over his interpretation depending on sales literature. One would have to wonder what his position would become if every aircraft manufacturer removed all references to profit or commercial use from their web sites? While he begins his justification with an analogy of a 747 and argues it is obvious that it is designed for carrying passengers, his logic begins to wane when he attempts to use the amount of passengers as a guideline to establish the purpose for which it was designed. Similarly he ignores the fact that the 747 can be exempted as a common carrier and needn’t pay any attention to the new regulation.
Mr. Boyer’s camp in this battle has made a sweeping statement, “Jets are not designed and sold for personal use. The substantially greater cost in comparison to a similar size prop aircraft appears to be a significant reason the jet manufacturers design and market them for business use (the added difficulty of acquiring a license to fly a jet may also be a factor.)
He continues, “. . .we conclude that jets are designed and sold for business purposes, not for personal use.”
The memo goes on to say that the biggest problem the Board would have if they used the normally accepted definition of functional use of an aircraft which is that “they are designed to fly,” with a single type of aircraft, the precedent would be cast in stone. His fear, as outlined in the memo, is “If we were to reach such a conclusion for a particular aircraft in a particular case, it would have global application and we would have to apply that same conclusion in all cases involving that particular aircraft in that configuration.”
It sounds as if this position is designed to protect the tax revenue stream and ignore the actual use of the aircraft. It appears to be issuing a warning to all aircraft owners.
Later he apparently contradicts himself when he states:
“The other exception is based on the objective intent of the purchaser. Even if the aircraft is designed by the manufacturer for business purposes to carry freight or passengers, a particular person may purchase such business aircraft for personal use. When such is the case, we believe that it is appropriate to apply the rules for personal aircraft rather than business aircraft. The purchaser has the burden of proving that an aircraft designed for business use was actually purchased for personal use. So, for example, if a wealthy couple establishes that they purchased a small jet (and perhaps placed a jet pilot on retainer) for the purpose of flying themselves for personal purposes, we would regard them as having first functionally used the aircraft when they first fly the aircraft without regard to the purpose of that first flight.”
This could be an attempt to get people to ignore the 1620 (b) (4) exemption and use the principal use test contained in 1620 (b) (3). However, since the civil war in the Board over this issue erupted upon the approval of (b) (4), I suspect the rift goes deeper. I suspect that once this issue goes to court the “cat is out of the bag,” and California will truly be an aircraft friendly state.
I think the memo does reveal the confusion inside the Board. Not only does this memo reveal a bias against “wealthy” people, it attempts to draw some distinction between a small jet and a large one which contradicts the previous statement that all “jets are designed and sold for business purposes, not for personal use.”
Even though the confusion over the definition of “business use” and “common carrier use,” rages on and has erupted into a full blown civil war inside the Board it is not a safe time for the bystanders. Ultimately this war will be decided in the favor of taxpayers because it is the right thing to do. Any other position is a futile attempt to delay the inevitable. However, standing to close to the battlefield may cost taxpayers some unnecessary legal fees if they don’t protect themselves.
If you have any questions regarding this article, other sales and use tax issues, or want to know if you qualify for an exemption contact Joseph Micallef at (916) 369-1200 or visit us on the web at www.ASTC.com.
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Audit Division