California’s Outrageous and Abusive Practice of Taxing Transient Aircraft
A few years ago, I got a call from the owner of an aviation related business located in Arizona. He needed legal representation to fight the California Franchise Tax Board over a use tax issue. He had moved his company and his family out of California some years before and now based the aircraft at the Glendale airport, just outside Phoenix. He flew his company airplane for business, but seldom came to California because he just didn’t like flying here.
For a number of years, the AOPA has held its conventions on alternate coasts. One year it will be on the East coast and the next on the West coast. In recent years, the West coast venue has been Palm Springs. But when my client had his problem with the FTB, that venue was Palo Alto/San Jose.
During the convention about five years before he called me, he had flown his Piper twin into Palo Alto airport because he was an exhibitor at the convention. He set up his booth, displayed his goods, paid the California sales tax on the goods he sold at the show, loaded up and flew home. He never received any kind of communication from the California FTB.
Some years later, he wanted to sell the Piper twin and move to a more economical Mooney. He had the AOPA run a title search to be sure that the bank had removed the lien from his title when he paid the plane off. What he found stunned him: a tax lien by the State of California for almost $40,000. Yeah, forty. That is when he called me.
I called the FTB and was promptly informed that my client had “used” his airplane in California and he owed a “use tax.” No, they wouldn’t reconsider. No, there was no appeal and no, there wasn’t anything we could do about.
Use tax is a tax additional to sales tax. It is statute based, as are all taxes. Please see California Revenue and Taxation Code 6201. If you buy something in California, you pay sales tax on it, whether you intend to use it here or not. The tax ranges, depending on the county in which the sale took place, between 6.25% and 7.75%.
Use tax is imposed on personal property that is purchased outside California but which is purchased “for the purpose of” storage, use or consumption in California. Purpose is implied if it comes into California within a year after the purchase.
But, wait, you say, the client had owned the plane for many years, had flown it to the Los Angeles area a few times for one day at a time on business, but that “use” in California spanned a number of years and the aircraft certainly was not purchased “for the purpose” of “use” in California.
Well, the story gets even more interesting. It seems some FTB Nazi, who happened to know that the Convention was in town, knew that airplanes carry very high values and also knew that California doesn’t exempt “occasional” aircraft sales from its sales tax, decided to file illegal tax liens against all of the aircraft attending the convention. He simply took a clip board, walked the flight line writing down all the tail numbers, went back to his office and sent the lien forms to the FAA in Oklahoma City and never told the aircraft owners. The appeals time ran out, no one noticed and the liens stuck. In California, you can’t sue the government without their permission, which was refused. In addition, the judges here are paid by the same paymaster that pays the tax people. So, all of the force is in one direction – against the aircraft owner.
Did we ever solve the problem? Regrettably, no. My client died two years later, still not having sold the plane. His widow did get it sold, but at a horrible discount because of the tax lien. The new buyer paid the lien, penalties included.
So, what are the lessons from this little tragedy? They are many, but here are a few:
First lesson: They are tracking you. The hanger owners in California must report what aircraft are located in the hangers of their tenants once a year. If there is no aircraft and you are running an upholstery business out of your hanger, they will terminate the lease because the County tax collector wants the personal property tax and the land is leased from the County (usually).
Second lesson: All the gold in California is in a bank in the middle of Beverly Hills in the State of California’s name (to misquote an old song). Ever since Proposition 13, way back in the eighties, the state government of California has taken an adversarial stance regarding the taxpayers of this state and, especially, against business owners. I keep telling people that I am not wealthy, or anything close to it, because I own an airplane. Those things eat fuel faster than horses eat oats. And you don’t have to insure your horse. They keep telling me that I must be wealthy to own an airplane. Therefore, I shouldn’t feel too badly about being ripped off by the government. For instance, the R&T Code, Sections 6246–6248 actually state that it is “presumed” that things bought elsewhere but brought into California were purchased “for the purpose” of being used in California, and are, therefore, use taxable in California. A tourist visiting San Jose for 3 days in his airplane imposes a 7.25% tax on the airplane?
Third lesson: They don’t care if they break the law. They only care about extorting the money. I have actually had FTB personnel hang up on me is they disagreed with some legal position I was arguing, amiably, for a client. They are incorrigible, arrogant Gestapo who don’t care if they break the law. Unfortunately, the judges don’t care either.
Fourth lesson: Don’t fly your airplane in California. If you have to come here, ride the big bird and get out of town fast. Don’t even consider doing business here. It’s like walking into the twilight zone of stupidity in dealing with the state.
Fifth and last lesson: Beware.
JWH 7-‘08