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Sales and Use Tax When You Build a Homebuilt Aircraft An Overview
Almost every state has enacted a sales & use tax. Because these taxes are imposed and collected at the state level, and every state’s law is a little different, the following information is meant to give you a basic understanding of sales and use tax law. You will need to contact your state’s department of revenue (DOR) for specific information on your state’s rules.
What is Sales Tax?
Most people are familiar with the concept of sales tax. Each time you purchase tangible personal property (e.g. computers, furniture, cars, boats, aircraft) from a merchant in your state, the merchant collects sales tax and remits it to the state DOR.
What is Use Tax?
Although most people understand or at least are used to paying state sales tax, the state use tax is usually a completely foreign concept. A purchaser, be it an individual or business, owes use tax for “using, storing, distributing or otherwise consuming tangible personal property” in the state on purchases where sales tax was not collected. The use tax typically comes into play when you purchase something from an out-of-state merchant by mail order or over the Internet. Unless the out-of-state merchant has store locations in your state, they will not be responsible for collecting and remitting the sales tax to your state and therefore you become responsible for paying use tax on the item.
The theory behind the use tax is that a state does not want to put their in-state merchants at a disadvantage because they have to collect and remit sales tax so the use tax prevents a person from purchasing items from out of state to avoid sales tax. In reality, very few people pay the use tax owed on mail order purchases. (How many people do you know who have voluntarily paid use tax on catalog purchases of computers, clothing, etc.?). Since the state DOR has no way of knowing that you purchased something via the Internet or mail order, they have no way of catching that you did not pay the use tax. This is not the case for aircraft because you have to register the aircraft with the FAA.
Registering your homebuilt with the FAA
In order for you to receive your “N number” so that you can have your aircraft inspected, you must register your aircraft with the FAA. Once you register your aircraft, that information becomes public information. Your state DOR will regularly review the FAA’s list of registered aircraft to determine that they have collected sales or use tax on all aircraft registered in the state. If the state finds an aircraft registered on which no tax has been collected, they will notify the registered owner that tax is due. Typically, if you wait for the state to contact you the state will assess interest and penalties.
TIP: Make sure that you have paid your sales or use tax prior to registering your homebuilt aircraft with the FAA.
When do I need to pay use tax and how do I pay the use tax?
Most states will consider the receipt of the aircraft kit as the time you incur a use tax liability. You will need to check with your state as to when the tax must be paid. Some states have separate sales and use tax forms and these may be due on a monthly or quarter basis. Other states, such as Wisconsin, have added a line item to their personal income tax form where you can pay sales and use tax on out-of-state purchases.
Example: Harry Homebuilder lives in Wisconsin and orders a Van’s RV-8 on May 1st, 2003. Van’s aircraft is located in Oregon and therefore does not collect Wisconsin sales tax on the purchase. The kit arrives at Harry’s home on June 1st, 2003. Wisconsin has a use tax that applies to out-of-state purchases of tangible personal property that are “stored, used or consumed in Wisconsin”. When Harry files his Wisconsin 2003 personal income tax return in April of 2004, he can declare and pay his use tax on the kit purchase.
On May 15th, 2004, Harry purchases an engine and propeller from Van’s Aircraft. Again, when he files his Wisconsin 2004 personal income tax return in April of 2005, he can declare and pay the use tax owed on the engine and propeller.
What Items Purchased During the Construction of My Kit Are Subject to Use Tax?
If you are like most homebuilders, during the course of building your aircraft you will purchase a lot of items, (tools, engine, instruments, covering materials, interior, replacement parts, etc.) from catalog companies like Aircraft Spruce. Unless you live in the same state as the vendor, you probably won’t be assessed sales tax at the time of purchase. Theoretically, all of these items are subject to use tax. In reality, very few people pay the use tax owed on mail order purchases. (Again, how many people do you know who have voluntarily paid use tax on mail order purchases of clothing, computers, etc.?). Since the state DOR has no way of knowing that you purchased something via the Internet or mail order, they have no way of catching you. The state will routinely audit businesses for use tax omissions but individuals are just not worth the DOR’s time. The exception to this is big-ticket items like cars, boats and aircraft. Since all big-ticket items have to be registered or licensed, it is easy and worthwhile for the DOR to keep tabs on if the tax was paid.
Because homebuilt aircraft are somewhat of an unknown quantity to state revenue agents and there is no “blue book” value for a homebuilt, it will be up to you to decide what items to declare and pay use tax on.
TIP: You will not get away without paying either sales or use tax. Even though revenue agents are relatively uninformed about homebuilt aircraft, they can probably figure out that you bought a kit, engine and propeller to build the aircraft.