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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