Business Aviation Law Blog : Boston Aviation Lawyer & Attorney : Harry Ekblom : Sullivan & Worcester Law Firm : FAA Regulation & Aircraft Transactions

Florida has recently made changes to its sales and use tax laws that will affect - in a positive way - owners and operators of aircraft. 

Florida assesses a 6% sales tax on tangible personal property sold in Florida or used in Florida. The sale of an aircraft in Florida will attract Florida sales tax in the absence of an exemption. Although Florida does provide a number of aviation-related exemptions, there have been proposals to either cap or reduce the tax rate for aircraft to make Florida more competitive with neighboring states. Although the recent Florida amendments don’t go as far as some would have liked – they don’t, for instance, contain the broad tax cap that was sought and obtained by the yachting industry - they are helpful nonetheless. The amendments affecting aircraft (described in a recent Florida Department of Revenue publication) include:

• A cap of $300 on the tax that can be imposed on the sale or use of a fractional ownership interest in a fractional aircraft ownership program. Note that the fractional program must meet the requirements of FAR Part 91K, and also that the fractional program must have at least 25 aircraft in its fleet. In addition, the sale to or use by a fractional program manager operating a qualifying fractional program of any parts or labor used in the completion, maintenance, repair or overhaul of a fractional program aircraft also will be exempt from Florida tax (subject to registration and certification requirements).

• A 20-day use tax exemption. This exemption allows a nonresident of Florida to avoid Florida use tax on his or her aircraft, so long as the aircraft enters and remains in Florida for no more than a total of 20 days during the 6-month period after the date of its purchase.   Florida already presumes that an aircraft used in another state or territory of the United States or in the District of Columbia for six months or longer before being brought into Florida is not subject to use tax in the state. Under the new exemption, the number of days the aircraft remains in Florida only for flight training, repairs, alteration, refitting or modifications does not count against the 20-day limit. The 20‑day exemption was intended to address concerns that the lack of clarity in the Florida use tax law was deterring aircraft owners and operators from using their aircraft to visit Florida.

The Florida amendments came into effect on July 1, 2010.

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There have not been a lot of positive developments concerning the business aviation community in the recent past. So it was welcome news when, on June 30, 2010, the Federal Aviation Administration announced that it was considering a relaxation of its so-called (and long established) “Schwab Interpretation” under Part 91.501(b)(5) of Federal Aviation Regulations (the “FARs”).

Most business aircraft are operated under one of two regulatory regimes under the FARs – FAR Part 91 or FAR Part 135. Part 91 is applicable to general aviation not involving operations for compensation or hire, and is a less onerous regulatory regime than that applicable to air taxi or chartering operations (Part 135). The more relaxed rules applicable to Part 91 come with certain conditions, however. The underlying premise of Part 91 is that the need for regulatory oversight is reduced where an operator of an aircraft is using its aircraft for its own use or for the use of its guests, and not for compensation or hire. Available exclusions from the “no reimbursement” rule are narrow. 

One of the exclusions – referred to as the “intercompany exclusion” (FAR Part 91.501(b)(5)) – permits all costs of ownership, operation and maintenance to be reimbursed. However, a condition of the intercompany exclusion is that “the carriage must be within the scope of, and incidental to, the business of the company [i.e., the operator] (other than transportation by air).”   Moreover, the FAA has historically taken a narrow view of the meaning of this two‑part “scope of” and “incidental to” test.  In 1992, Charles Schwab & Co., Inc. requested an interpretation of Part 91.501(b)(5) that would have permitted Charles Schwab to reimburse the company for flight costs related to certain vacation trips made by Mr. Schwab. The request stressed the need for the company to maintain prompt communications with Mr. Schwab. The FAA was not, as it turned out, at all receptive to this request. It responded (more than a year after the request) that Mr. Schwab was travelling for pleasure and that this sort of carriage was not within the scope of or incidental to the business of Charles Schwab & Co. Reimbursement of these flight costs was not permitted under Part 91.501(b)(5).

Seventeen years later, with the encouragement of the National Business Aircraft Association, the FAA announced it was considering revising the Schwab Interpretation. In its June 30 announcement, the FAA stated that it had tentatively determined that a company could be reimbursed for the pro rata cost of owning, operating and maintaining an aircraft when used for routine personal travel by certain highly-placed officers and employees.  The FAA stated that it recognized that these individuals might be unable to reliably schedule personal travel due to the nature of their employment. For such an individual, it might make more sense for the company to provide the company aircraft than to reimburse the individual for the cost of the cancelled commercial airfare. The FAA reasoned that the ability of the company to modify travel plans on very short notice could render a particular flight both within the scope of and incidental to the company’s business.

The proposed interpretation addressed, without getting specific, the criteria that should be used to determine who is a “highly-placed officer or employee.” The FAA stated that a company that expects to take advantage of this interpretation should maintain and regularly update a list of individuals whose positions may require them to change travel plans on very short notice. The FAA indicated that this list may draw from the set of officers, directors and more‑than‑10% owners of a company, but that not all the officers and directors are likely to be subject to the high level of company interference with personal travel plans that is required. The FAA suggested that the company’s board (or equivalent body) decide who belongs on the list.

The proposed interpretation represents a substantial modification to the Schwab Interpretation – and, if ultimately adopted, could be of considerable help to members of the business aviation community.

You may ask why a highly-placed officer or director would seek the privilege of reimbursing his or her company for flight costs. Financial reporting is the principal reason. For public companies, the personal use of corporate aircraft may have to be disclosed in reporting executive compensation (at aggregate incremental cost). That is a disclosure that is likely to attract attention – usually not a good thing where personal use is involved. However, generally no compensation element needs to be reported where the individual is fully reimbursing the company for the cost of the flight – which the FAA’s proposed interpretation would permit. 

Comments on the FAA’s proposed interpretation are due by August 9, 2010.  

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On May 12, 2010, Sens. Kerry and Lieberman introduced a discussion draft of their long-awaited climate bill – the American Power Act. The bill would establish a program to reduce U.S. greenhouse gas (“GHG”) emissions 17 percent from 2005 levels by 2020, and 83 percent by 2050. The bill would mandate emissions limits on approximately 7,500 manufacturing facilities and power plants that emit more than 25,000 tons of GHGs annually. Companies covered by the legislation could achieve compliance by obtaining the free carbon emission allowances that would be distributed under the bill, or by purchasing such emission allowances as necessary.

The bill would apply to electric utilities, transportation fuels, including aviation fuel, and other refined oil products beginning in 2013, and to manufacturers in energy-intensive industries and natural gas distributors in 2016. Eventually, most regulated sources would purchase emission allowances or offset credits through federal auctions or a regulated market. Allowances for transportation fuels and other petroleum products would be purchased by refiners and fuel providers at a fixed price from the government. The bill would provide significantly more free GHG emissions allowances to covered sources than previous bills; free allowances would not be completely phased out until 2030.

Allowances would also be distributed to states that could sell the allowances to fund energy efficiency programs, adaptation programs, and research and development of new technologies. Beginning in 2026, consumers would receive a portion of the revenue raised from auctioning the allowances through energy bill discounts and rebates.

The bill would preempt state GHG cap-and-trade programs and all other state regulation of GHG emissions from stationary sources, but would allow states to continue to develop GHG emission standards for motor vehicles and other mobile sources. The bill would also prevent EPA from regulating GHGs under the Clean Air Act’s existing construction and operating permit programs. However, EPA would be permitted to regulate emissions from mobile sources, including aircraft, and set technology-based new source performance standards for sources with annual GHG emissions of less than 25,000 tons.

The Kerry-Lieberman bill also promotes investment in advanced vehicle technology and batteries, offshore drilling, nuclear power, and the development of carbon capture-and-storage technologies at coal-fired power plants. However, in response to the recent Deepwater Horizon oil spill, states would be allowed to veto new offshore drilling leases within 75 miles of their coast and drilling plans of neighboring states that could have negative impacts on them.

The bill recognizes the importance of developing a global framework for regulating GHG emissions from civil aircraft and specifically provides for allowances for international air carriers to compensate for compliance with foreign GHG reduction systems, such as the European Union Emissions Trading System, which will begin regulating carbon emissions from aircraft in 2012.

Although the bill is supported by a number of industry leaders and environmental organizations, it is not expected to pass the Senate.

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On April 28, 2010, the U.S. Environmental Protection Agency (“EPA”) published an Advance Notice of Proposed Rulemaking (“ANPR”) regarding lead emissions from piston-engine aircraft using leaded aviation gasoline. 75 Fed. Reg. 22,440 (Apr. 28, 2010). At this point, EPA is not proposing to regulate the use of leaded fuel, but is seeking comment on the data available for evaluating lead emissions, ambient concentrations, and potential exposure to lead from the use of leaded aviation gasoline. The ANPR also requests comment on approaches for phasing-down or eliminating leaded aviation gasoline. EPA will accept public comment on the ANPR through June 28, 2010.

Leaded aviation gasoline is used in general aviation aircraft with piston engines, which are typically used for instructional flying, air taxi activities, and personal transportation at around 20,000 airports in the United States. EPA estimates that the use of leaded aviation gasoline is responsible for approximately one-half of the nation’s air emissions of lead.

EPA is initiating the rulemaking in response to a petition submitted by Friends of the Earth in October 2006. The petition requested that EPA either (1) find that lead emissions from general aviation aircraft endanger public health and welfare and issue a proposed emissions standard, or (2) commence a study of the health and environmental impacts of lead emissions from general aviation aircraft if the Agency does not have sufficient information to make an endangerment finding.

After evaluating the comments received in response to the ANPR, EPA will determine whether emissions from aircraft using leaded aviation gasoline cause or contribute to air pollution which may be reasonably anticipated to endanger public health or welfare. If EPA makes an endangerment finding, the Agency has asserted that it would be required to establish an emissions standard for lead from piston-engine aircraft unless, in consultation with the Federal Aviation Administration, the proposed standard would increase noise and adversely affect safety.

The Aircraft Owners and Pilots Association (AOPA), the Experimental Aviation Association (EAA), the General Aviation Manufacturers Association (GAMA), the National Air Transportation Association (NATA), and the National Business Aviation Association (NBAA) issued a joint statement urging the industry to comment on the ANPR. The industry groups cited “the technical complexity and safety implications of removing lead from aviation gasoline since there is not a high-octane replacement unleaded avgas available today that meets the requirements of the entire [general aviation] fleet.”

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On April 24, 2010, Sen. Graham withdrew his support for the climate and energy bill he had been drafting with Sens. Kerry and Lieberman after Senate Democrats refused to commit to acting on the climate bill before addressing immigration reform. Therefore, the bill announcement, which was scheduled for today, has been postponed. Sens. Kerry and Lieberman have indicated that they will move forward with the bill.

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Since the United States did not enter into the Kyoto Protocol, efforts to reduce greenhouse gas (“GHG”) emissions from all sources, including aircraft, have been voluntary and largely a matter of public relations. A voluntary system, however, may soon be a thing of the past. Over the past year, Congress has considered legislation to create a mandatory cap and trade system for GHG emissions. Moreover, since Congress has been slow to issue a final bill, the Environmental Protection Agency (“EPA”) has begun the process of instituting a regulatory program to achieve emissions reductions pursuant to the Clean Air Act (“CAA”). Under either scenario, sources of GHGs would face the enforceable regulatory obligation of controlling carbon emissions.

In June 2009, the House of Representatives passed the American Clean Energy and Security Act of 2009 (“ACES”) (H.R. 2454). ACES would require GHG emissions to be reduced by 17% from 2005 levels by 2020, and over 80% by 2050, through a mandatory cap and trade system. The Senate version of the bill – the Clean Energy Jobs and American Power Act (S. 1733) – cleared the Senate Environment and Public Works Committee in November 2009, but no hearings or markups have yet been scheduled in the Senate committees on finance and agriculture. The Senate bill would require GHG emissions to be reduced by 20% from 2005 levels by 2020 and 83% by 2050, also through a mandatory cap and trade system. While ACES recognizes that GHG emissions from civil aircraft should be regulated on a global basis by the International Civil Aviation Organization, the Senate bill is silent on this issue.

Since the existing climate bill has stalled in the Senate, it has been reported that Senators Kerry, Graham, and Lieberman plan to introduce a compromise bill on April 26. The legislation is expected to include caps on GHG emissions from power plants beginning in 2012, a phase-in of emissions caps for the manufacturing sector, and a carbon tax on fuels.

Meanwhile, in December 2009, EPA published its final finding that emissions of six GHGs – carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride – endanger public health and the environment. 74 Fed. Reg. 66,496 (Dec. 15, 2009). The finding allows EPA to regulate GHG emissions from cars and light trucks and other mobile and stationary sources under the CAA, regardless of whether Congress enacts climate change legislation. Section 231 of the CAA specifically authorizes EPA to establish aircraft emission standards upon a finding that the emission of an air pollutant from aircraft engines endangers public health or welfare.

EPA’s finding has been extremely controversial. Sixteen petitions for judicial review have been filed in the D.C. Circuit Court of Appeals challenging the scientific basis for EPA’s endangerment finding. On April 15, 2010, the attorneys general from Virginia and Alabama filed a motion to compel EPA to reopen the endangerment finding and hold public hearings. In addition, legislation has been proposed in both the House and the Senate to prevent EPA from regulating GHG emissions. Nevertheless, EPA is proceeding to regulate GHG emissions and, on April 1, 2010, EPA and the National Highway Safety Administration announced a joint final rule to reduce GHG emissions and increase fuel economy for new cars and light trucks sold in the United States for model years 2012 through 2016.

EPA has previously promulgated regulations under CAA § 231, including emission standards for oxides of nitrogen (NO_x) and carbon monoxide. Under the CAA, emission standards can include operation and maintenance requirements and design, equipment, work practice or operational standards. The Agency has stated that CAA § 231 authorizes it to set “technology-forcing” standards as long as the standards give manufacturers sufficient lead time. Although several states and environmental organizations filed petitions for rulemaking seeking regulation of GHG emissions from aircraft in late 2007, EPA did not include such a rulemaking in its Fall 2009 Regulatory Agenda.

At this point, it is not clear whether, or how, GHG emissions from aircraft will be regulated. We can expect, however, that, unless Congress or the court steps in, EPA will continue to issue regulations to reduce GHG emissions from a variety of stationary and mobile sources.

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A recent post makes the economic case for fractional aircraft use.

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See a recent article in Barron's (April 18, 2009) "In Defense of Your Own Plane" for some reasons why owners of business aircraft may want to reconsider putting their aircraft up for sale.

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See the article dated April 15, 2009 in the online edition of The Wall Street Street Journal.  The article references an article in the St. Petersberg Times reporting on a proposal moving through the Florida legislature that would cap aircraft sales and use taxes at $25,000.   Incidentally, the Florida Senate Bill Analysis and Financial Impact Statement for this proposal (CS/SB 2376) provides a useful summary of Florida sales and use taxes relating to aircraft.

 

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