Time Running Out

Do you remember a movie where the timer was ticking toward an explosion? The red digital display ticked down from nine to eight to seven. The timer faded and the new scene showed the hero picking at the lock in his handcuffs. A bead of sweat ran down his nose and splashed onto the cuffs.

The scene dissolved. Back to the timer. Seven to six, then five. Switch to the hero. The straightened piece of wire jammed between his teeth finally entered the lock. The cuffs popped open.

The timer dropped to four. The hero jumped to his feet, grabbed the wire cutters from his belt and dove head first across the floor.

The timer clicked down. Our hero grabbed two wires. One blue. One green. Then a flashback to a scene in bomb school, years earlier. Our hero was making goo-goo eyes at a voluptuous blonde in class, not paying attention. Back to the scene with the wire cutters. Another bead of sweat slid down the slope of his nose.

The timer counted down to one. Our hero remembered the color of the blonde’s eyes. He cut the green wire. The timer froze. The bomb was diffused.

How much drama would there be in a movie if the timer was ticking down in the bottom right hand corner of the scene while the hero ate a cheese sandwich? Imagine your comments leaving the theater after the final scene was a nuclear explosion destroying the good guys while the hero nibbled his lunch?

Everything in a movie is designed to increase tension. However, most of us spend most of our lives building a life that is free of tension. Unfortunately, in our desire to be free of stress, most of us hibernate in a cloud of ignorance.

Many aircraft owners hide from knowledge of California Sales and Use Tax Law and Regulations because it takes too much work to understand the complexities of the Board of Equalization (Board) and the way it works. However, my research indicates many aircraft owners are donating hundreds of thousands of tax dollars to the Board every year ... unnecessarily. Several times a year a taxpayer brings me a case that has been argued unsuccessfully for years by an attorney or CPA. During my review I find their representative was arguing the wrong point due to a lack of experience in sales tax law.

In December 2000 a new interpretation of Regulation 1620 was finally approved which established an exemption based on commercial flight hours. The good news is, this change is retroactive. Unlike in the movies, you can go back and force a new review of your previous case. If your fact pattern is right, you can actually get your money back. This is like being able to erase the explosion, deactivate the bomb, arrest the bad guy, and still have time for lunch.

The bad news is the public doesn’t know about the change. The Board staff sits inside the grey walls of government work and laughs as the timer runs out on your opportunity to get your money back. They are not required to notify the public by contacting all aircraft owners. The law requires taxpayers to keep themselves informed.

Therefore, it is incumbent upon you to call your tax expert and ask him if the following applies to your aircraft purchase.

Section 6201 of the Revenue and Taxation Code imposes a use tax on the storage, use or other consumption in California of tangible personal property. The general test for determining whether property was purchased for use in commercial flight time traveled in interstate commerce is set out in subdivision (b)(4) of Regulation 1620, which states as follows:

“(4) Purchase for Use in this State - vehicles and aircraft. A vehicle or aircraft purchased outside of California which is brought into California is regarded as having been purchased for use in this state if the first functional use of the vehicle or aircraft is in California. When the vehicle or aircraft is first functionally used outside of California, the vehicle or aircraft will nevertheless be presumed to have been purchased for use in this state if it is brought into California within 90 days after its purchase, exclusive of any time of shipment to California or time of storage for shipment to California, unless (A) the vehicle or aircraft is used or stored outside of California one-half or more of the time during the six-month period immediately following its entry into this state; or (B) if a vehicle, one-half or more of the miles traveled by the vehicle during the six-month period immediately following its entry into this state are commercial miles traveled in interstate commerce, or if an aircraft, one-half or more of the flight time traveled by the aircraft during the six-month period immediately following its entry into the state is commercial flight time traveled in interstate commerce. Such use will be accepted as proof of an intent that the property was not purchased for use in California.”

If your accountant and attorney give you a blank stare, don’t fire them. It is not their fault they don’t have enough time to study all the minutia involved in sales taxes. Their primary focus is aimed at federal taxation. Federal income tax rules apply to millions of people. Sales tax rules related to the purchase of aircraft in California affect less than three hundred people a month.

However, my warning to you is do not attempt to interpret the regulation on your own any more than you would attempt to diffuse a live bomb on your own. Call an aircraft sales tax expert who understands how to get the Board to reinterpret your documentation.

An informed aircraft expert will tell you that following a qualified review you may still get your money back even after:

• Failing to support a Part 135 claim for exemption because of too much owner or part 91 use.
• Failing a 90 day or six month principal use test because of too much storage time inside California.
• Paying tax on a transaction that is nine years old, but you appealed the tax and lost on appeal.

There are countless other possibilities as well. It takes a great many detailed questions to properly analyze your specific fact pattern. However, don’t presume you owed the tax. Don’t choose to hover in a cloud of denial and misunderstanding. Don’t sit and eat your cheese sandwich while the timer runs out on your money.

The place to get the key to opening the handcuffs and diffusing the tax bomb is from a qualified aircraft sales and use tax expert. A good one will also tell you that in the future you can purchase your next aircraft, store it inside California every night, fly it exclusively in Part 91 and still support your claim for an exemption from sales and use tax.