Special thanks to Joseph X. Donovan, tax attorney at Sullivan & Worcester, for his contributions to this post.
In two decisions issued on the same day, the Maine Supreme Judicial Court has reached contrary conclusions on the taxability of aircraft purchased outside the state but used in Maine on more than a de minimis basis in the year following purchase.
In Blue Yonder, LLC v. State Tax Assessor, Dkt. No. BCD-10-3 (April 26, 2011), a Massachusetts-organized limited liability company (“Blue Yonder”) owned by a husband and wife purchased an aircraft in Minnesota, and the husband flew it to Massachusetts, where it was registered. No sales or use tax was paid in any state. The husband thereafter rented the aircraft from the LLC for business and personal use and also for use in so-called “angel flights,” delivering patients to places of care in Massachusetts.
During the first 12 months of ownership, the aircraft was present in Maine, where the husband and wife owned properties, about 21 days, or about six percent of the time.
The court first considered and rejected as controlling two exemptions: (1) a provision covering aircraft “purchased by a nonresident and intended to be … transported outside the State immediately upon delivery” (36 M.R.S.A. Sec. 1760(23-C)(C)); and (2) a provision covering sales with respect to which “the seller delivers the property to a location outside this State” (36 M.R.S.A. Sec. 1760 (82)). These exemptions, the court concluded, only apply in the case of in-state sales. This interpretation may open the court’s logic up to later constitutional challenge, because it is difficult to see how, under the Commerce Clause, a taxpayer can be better off, all other things being equal, just by virtue of a sale having taken place in the state.
This interpretation was not determinative of the outcome in the case, however, because the court went on to hold that Blue Yonder was entitled to claim exemption from tax under a provision that applied when property was “purchased and used by the present owner outside the State … [f]or more than 12 months.” 36 M.R.S.A. Sec. 1760(45)(B). The court reasoned that this exemption could not be conditioned on exclusive use outside Maine during the 12-month period, because the legislature would have expressly required such use if it so intended. Nor was it willing to adopt a bright-line number-of-days test. (The Maine Legislature subsequently did adopt a bright-line test, under which an aircraft may not be present in the state for more than 20 days during the 12 months after its purchase if it is to be exempt.) The court concluded, rather, that it was appropriate to adopt a requirement that the use outside the state be “sufficiently substantial” to make the imposition of the use tax “unjust.” Under this test, the court found Blue Yonder’s use of the aircraft outside the state for about 94% of the time to be sufficiently substantial for the exemption to apply.
In contrast, in Victor Bravo Aviation, LLC v. State Tax Assessor, Dkt. No. BCD-10-2 (April 26, 2011), during the year subsequent to its purchase, the aircraft in question was in Maine overnight on 121 occasions, and in Maine for the entire day on 89 days. Moreover, it was sometimes placed in a hangar owned by the taxpayer and located in Maine. On these facts, the court ruled that the aircraft was not used so substantially outside of Maine during the first 12 months of ownership that it would be unjust to impose the tax.
Readers may want to note that the Maine law at issue in Blue Yonder and Victor Bravo in at least two respects is eccentric, and not likely to be replicated in many states:
Ø The aircraft in both cases were rented or leased. In most states, the purchaser would have been entitled to buy the aircraft tax free for resale in the regular course of business, and then would have charged tax, if at all, on the rental or lease payments it received from its customers. Because Maine law generally treats a lessor as subject to tax on its purchases, the taxpayer in Victor Bravo, for example, was hit with a tax based on its entire purchase price, rather than just on the rental stream it collected with respect to Maine transactions.
Ø It is unusual for a court to adopt an ad hoc interpretation of use outside the state that is as generous to the taxpayer as the “sufficiently substantial” test applied in these cases. Rather, in many states, a similarly-situated taxpayer would run the risk that any use in the state beyond a de minimis level could trigger a tax.