Orange County Accountant

Often it is believed that simply purchasing an aircraft outside of California eliminates the sales and use tax liability.  There is a half truth here; properly purchasing an aircraft outside of California does eliminate the sales tax obligation, however, it does not eliminate the use tax. 

Many people do not know how, or where to begin when going through the California sales and use tax exemption process.  The simple answer is that you must take delivery of the aircraft outside of California.  However, there is more detail behind the simple answer.  For example, the contract of sale (purchase agreement) must specifically reference the location where the aircraft will be delivered to the purchaser outside the state.  

As standard practice, we advise that the delivery occur in Oregon.  Oregon is the closest, non-sales tax state in proximity to California that will not have a jurisdictional claim for sales or use taxes simply because the sale occurs there.  Therefore, Oregon is often times the most convenient location.  However, it may not be convenient in every situation.  There are a total of five non-sales tax states:  Oregon, Alaska, Montana, New Hampshire, and Delaware.  Many other states have guidelines for non-resident purchasers taking delivery within their state without fearing tax repercussions.  Be sure you know the rules.

To properly evidence the delivery outside of California, you must maintain a clear separation between the seller and the buyer.  To accomplish this, the seller will be solely responsible for transporting the aircraft to the out of state delivery location, and the buyer will be solely responsible for getting to the delivery location independent of the aircraft they are purchasing.  It is recommended that the buyer travel via commercial airlines to generate and obtain confirmation of the travel to the out of state delivery location.  In addition, the buyer must not exercise any right or control over the property until after it is delivered (test flights are ok, but insuring the property prior to delivery could pose a problem). 

Once the seller and buyer have converged upon the delivery location, it is now time to execute the paperwork.  They will execute the FAA Bill of Sale, FAA Registration, any delivery receipts prepared by the seller and a proper delivery document for California sales and use tax purposes.  This is referred to by many in the industry as a “6247 statement.”  Beware, some tax representatives will charge you for this form.  This form when properly and completely executed and notarized will evidence the out of state delivery.  The insurance on the property can become effective as of this day.

Upon completion of the delivery, it is recommended that you immediately purchase fuel for the aircraft, using a credit card.  Doing so will generate a receipt that will contain the date, location, tail number, and the buyers signature.  Keep copies of all your documentation; you will need it to support your exemption.

The out of state delivery is only a small part of the exemption process.  There are many factors which come into play when the Board of Equalization is determining where the “place of sale” was.  They will look at the contract of sale, insurance binder, evidence of delivery, evidence how the parties converged upon the delivery location, FAA Bill of Sale, FAA Registration, and other pertinent information to develop their conclusion as to where the delivery occurred.  If there are conflicting dates, locations, or details, they may conclude that the delivery occurred somewhere other than where you intended, and classify your delivery as “ceremonial.”  This means your delivery may jeopardize the availability of the sales and use tax exemption from the onset.

1. Service tax authorities, of late, have been issuing notices to various borrowers of External Commercial Borrowings (ECB?s) from foreign branches of Indian banks and holding them liable to pay Service tax from September 10, 2004 under section 65(12)(a)(ix) of the Finance Act, 1994 which covers ECBs.

According to the borrower, the responsibility of paying service tax is of the service provider which is the foreign branch of the Indian bank and, hence, the Indian bank having a permanent establishment in India, is supposed to pay and not the borrower.

The contention of the service tax authorities is partially correct after coming into effect of section 66A of the Finance Act, 1994 from April 18, 2006.

Until the coming into effect of section 66A, the liability and obligation to pay service tax was that of Indian bank and not that of the borrower. Contrary to the contention of the service tax authorities, even under rule 2(1)(d)(iv) of the said Rules, effective from August 16, 2002 and June 16, 2005 respectively, the borrower cannot be made liable for the payment of service tax.

2. Rule 2(1)(d)(iv) reads as follows

?Person liable for paying the service tax? means,?

(iv) in relation to any taxable service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India, and such service provider does not have any office in India, the person who receives such service and has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India.?

From the aforesaid provisions, it would be clear that until April 18, 2006, the requirement under rule 2(1)(d)(iv) was that only in case where the service provider did not have any office in India, the person receiving taxable service was liable for paying service tax involved. In the cited case, the Indian Bank having its registered and head office in India, and a branch in a foreign country cannot be said to be a service provider who did not have an office in India.

After coming into effect of section 66A, rule 2(1)(d)(iv), substituted with effect from April 18, 2006 by the Service Tax (Second Amendment) Rules, 2006, reads as follows

??Person liable for paying the service tax? means –

(iv) in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act, the recipient of such service;?

As such, until April 17, 2006, the borrower was not a ?person liable for paying service tax? within the meaning of the Act and the said Rules, including rule 2(1)(d)(iv) thereof.

It is relevant to note herein that the phrase ?does not have any office in India?, in rule 2(1)(d)(iv), stands omitted from the substituted rule. As such, with effect from April 18, 2006, in any case where the taxable service is provided or is to be provided by either a person who has established a business in a country other than India or has a fixed establishment from which the service is provided or is to be provided in a country other than India or has his permanent place or usual place of residence in a country other than India, the service recipient in India would be treated as if it has itself provided the service in India and, accordingly, it would be liable to pay the service tax and comply with all procedural and other requirements as specified in the Act and the said Rules. The respective clauses in section 66A (1) (a) are disjunctive and, hence, once any of the three alternatives contained therein are satisfied, the service recipient becomes liable to pay service tax on the taxable service involved.

Applying the aforesaid provision, since the service is being provided by foreign branch of an Indian Bank, the condition precedent laid down in section 66A(1)(a) is satisfied and, in the absence of the phrase ?does not have any office in India? in rule 2(1)(d)(iv), as recipient of the services, the borrowers would be liable to make payment of the service tax payable on the ?Banking and Other Financial Services?.

3. The fees paid or to be paid are liable to service tax under ?Banking and Other Financial Services? under the Act with effect from September 10, 2004. The liability to pay service tax for the period prior to April 18, 2006 would be that of Indian Bank and on and from April 18, 2006, would be that of the borrowers.