The Washington Department of Revenue (DOR) provided guidance on the sourcing of lease payments for non-transportation aircrafts, clarifying the tax implications for both lessors and lessees.
The primary property location of the aircraft determines the sourcing of lease payments, and intermittent use of the aircraft across states doesn’t change its primary location.
The guidance determined lease payments for non-transportation aircrafts are subject to retail sales and use tax, as well as retailing business and occupation (B&O) tax in Washington State.
This article explores key definitions, exemptions, and sourcing examples to help taxpayers navigate the complexities of leasing non-transportation aircrafts in Washington State.
Definitions
Common terms used throughout this article are defined as follows.
Transportation Equipment
An aircraft operated by air carriers that’s authorized and certified by the United States Department of Transportation (DOT) or other federal or foreign authority to engage in the transport of persons or property in interstate or foreign commerce.
Non-transportation Aircraft
Any aircraft that doesn’t meet the definition above for transportation equipment. A small, personal aircraft used for recreation or business purposes other than transportation of persons or property for hire is likely considered a non-transportation aircraft.
Primary Property Location
The location where the aircraft is primarily based or hangared and ready for use.
Intermittent Use of Aircrafts Across States
Intermittent use of an aircraft across states doesn’t change the primary property location of that aircraft during the lease period. This intermittent use includes flight time or any other time spent in a state other than the primary location state. There’s no apportionment of a non-transportation aircraft lease payment based on days in state and out of the state.
The lessor of a non-transportation aircraft won’t be required to collect Washington retail sales tax or pay retailing B&O tax if the primary location of the aircraft is outside the state. This is the case even if the lessee of the aircraft intermittently uses the aircraft in Washington.
However, a lessee who intermittently uses the aircraft in Washington will be responsible for reporting and paying use tax in the state. The lease payments won’t be subject to use tax if another exemption applies.
Sourcing Examples
Below are three examples of potential scenarios.
Example One
A taxpayer leases a non-transportation aircraft and hangars the aircraft in Seattle, Washington. The lessee flies the plane to Portland, Oregon for a business trip. The lessee remains in Portland for seven days, leaving the aircraft in Portland during the business trip. After the seven days in Portland, the lessee then flies the aircraft back to Seattle.
Because the aircraft is hangared and ready to use in Seattle, this is the primary property location. The business trip to Portland is intermittent use of the aircraft. This won’t affect the primary property location of the aircraft.
The full lease payments for the aircraft will be sourced to Seattle, Washington. The intermittent use in Portland, Oregon doesn’t create apportionment of the lease payments.
Example Two
The lessee of a non-transportation aircraft has business locations across the West Coast. In the past, the lessee has hangared the leased aircraft in Tacoma, Washington. The primary property location of the aircraft was treated as Tacoma. The lessee decides to move the aircraft to its business location in San Francisco, California. From now on, the aircraft will be hangared primarily at an airport near San Francisco.
Once the aircraft is hangared in California, the primary property location of the aircraft will change from Tacoma, Washington to San Francisco, California. This is because the move to California is more than just intermittent use.
After the aircraft’s primary property location is moved to San Francisco, any subsequent lease payments will be sourced outside of Washington. These lease payments won’t be subject to Washington retailing B&O or retail sales tax. The lease payments may separately be subject to California sales tax or use tax.
Example Three
The lessee of a non-transportation aircraft has a business location in Spokane Washington, as well as Boise, Idaho. The aircraft is hangared in Boise and therefore Boise is the primary property location of the aircraft.
For business, the lessee flies the aircraft back and forth between its Boise and Spokane business locations. The trips to Spokane are considered intermittent use.
Traveling to Spokane for intermittent use won’t alter the primary location of the aircraft. Because the aircraft’s primary property location isn’t in Washington, lease payments on the aircraft won’t be subject to Washington retailing B&O or retail sales tax.
While the payments aren’t subject to Washington B&O tax or sales tax, the lessee will be responsible for reporting and paying Washington use tax each month the aircraft is used in Washington. The Washington use tax will apply to the full amount of the monthly lease payment if the aircraft was used in Washington that month.
We’re Here to Help
For more information on lease payments on non-transportation aircrafts and relevant taxes, contact your Moss Adams professional.
Additional Resources
Special thanks to Audrey Aahl, tax staff, for her contributions to this article.