Colorado imposes sales and use tax on the purchase and use of aircraft in Colorado at a rate between 2.9% and 11.2%, depending on the specific county/city. That means for an aircraft costing $1M, a purchaser could be subject to a $100K+ tax bill, and for an aircraft costing $50M, a purchaser could be subject to a $5M+ tax bill. With appropriate tax planning, these tax bills can either be wiped out completely or at least significantly mitigated. Below are the common exemptions available to aircraft purchasers who purchase and/or hangar their aircraft in Colorado.
Colorado’s Fly Away Exemption
“Fly away” exemptions are frequently utilized to avoid the imposition of sales tax on aircraft. Depending on the state, the exemption ordinarily allows the aircraft purchaser a specific time frame to remove the aircraft to another jurisdiction. When the purchaser removes the aircraft from the taxing authority’s jurisdiction within the allowable window, the sale of the aircraft will be exempt from sales tax.
To qualify for Colorado’s fly away exemption, an aircraft must be:
- Sold to a non-Colorado resident;
- Moved from the state within 120 days after the day of sale;
- Not remain in Colorado more than 73 days in any of the three calendar years following the year in which the aircraft was removed from Colorado.
In order to claim this exemption, the aircraft purchaser must provide to the seller an affidavit stating the purchaser is not a resident of Colorado, and the purchaser agrees to pay sales tax if the purchaser does not remove the aircraft from the state of Colorado within 120 days or if the aircraft will be in the state of Colorado for more than 73 days in any of the three calendar years following the calendar year in which the aircraft was removed from Colorado.
Colorado’s Purchase for Resale (or Lease) Exemption
The purchase for resale exemption typically applies to aircraft purchased for subsequent resale (or lease, which is also considered a “resale” under Colorado law). In this type of transaction, the purchase of an aircraft followed by the subsequent sale or lease of the aircraft to a third party can significantly mitigate sales and use tax. In many states, this tax exemption presents a planning opportunity for aircraft owners to establish a special purpose entity (SPE) to hold title to the aircraft and lease the aircraft back to a separate individual, entity, or entities at arms-length. Under this exemption scenario, the SPE would not be liable to pay sales or use tax on the aircraft’s purchase but instead may collect and remit sales taxes from lessees on aircraft lease payments which are subject to sales tax.
Effectively, the tax benefit from this exemption comes from the ability to pay tax annually on lease payments over several years rather than up front in lump sum based on the entire aircraft purchase price. Break-even analyses we’ve conducted for clients show it can take greater than 10 to 15 years to pay the same amount of tax annually on lease payments as the amount of tax paid up front in lump sum. Thus, if aircraft owners believe they will be holding an aircraft for less than this amount of time, or if they simply believe the time-value and opportunity cost of retaining that money and putting it to work elsewhere would be greater than paying sales or use tax up front (as many of our clients do), this is a strong exemption that can lead to significant savings.
In Colorado, the tax treatment of lease payments is determined, in part, by the duration of the lease. If a lease is for a term of greater than 36 months, the lessor must collect all state and state-administered local sales taxes from the lessee on all payments made pursuant to the lease, and the lessor does not have an option to pay sales or use tax upon acquisition because the lessor’s acquisition of the property is considered a wholesale sale not subject to sales or use tax. If the lease term is 36 months or less, the lessor must pay sales and/or use taxes, as applicable, on the full purchase price the lessor paid for the acquisition of the property, unless the lessor received prior permission from the Colorado Department of Revenue to collect and remit all applicable sales taxes on lease payments, which if granted by the Colorado Department, obligates the lessor to collect sales tax on all leases made by the lessor.
While taking advantage of this exemption can prove lucrative, when done incorrectly, it can lead to significant negative legal consequences.
One common trap in Colorado is for purchasers not to consider the assessment of sales and use tax by “home rule” cities. As initial background, the state of Colorado administers local sales and use taxes for certain local jurisdictions such as counties and cities, and when administered by the state, such jurisdictions follow the exemptions noted above. However, home rule cities administer their own sales and use taxes, and such jurisdictions may or may not follow the state-administered exemptions noted above. Accordingly, purchasers would be wise not to overlook such jurisdictions or unbeknownst risk getting assessed sales or use tax by the local taxing authority.
A second common trap (commonly known as the “Flight Department Company Trap”) can arise if the new SPE, whose sole purpose is to own and operate the aircraft, purchases the aircraft, obtains insurance, hires the pilots, and operates the business flights under FAR Part 91 – the FAA considers these types of flights to be “wet leases” (or illegal charter flights) without the required air carrier certificate, subjecting the operator to fines up to $11,000 for each illegal flight, potentially triggering tax obligations, and potential loss of insurance coverage. Accordingly, special care should be taken to avoid each of the Flight Department Company Trap.
Conclusion
While Colorado’s fly away exemption and purchase for resale exemption are the two most commonly utilized exemptions to mitigate sales and use taxes applicable to aircraft in Colorado, other less commonly used exemptions may be applicable under certain circumstances. While inadequate planning can lead to significant tax exposure and legal liability, proper structuring and planning will lead to significant certainty related to limitation of liability and can save aircraft purchasers hundreds of thousands if not millions of dollars. Need help analyzing available tax exemptions in Colorado and structuring to avoid potential pitfalls? Bizjet Law assists aircraft buyers in Colorado and across the United States and would be glad to assist in your decision.
If you would like us to analyze tax saving opportunities for you, please call us at the number below or email us at Counsel@BizjetLaw.com.