We have reviewed the May 2015 “Tax Avoidance Rules” (WAC 458-20-280 et seq.) adopted by the Washington Department of Revenue in response to the Washington State Legislature’s 2010 Tax Avoidance Legislation (RCW 82.32.655). It is our belief that the Department of Revenue both: a) went beyond the scope of the 2010 Legislation, and b) drafted very broad, unclear and self-serving language, calling into question the tax status of the majority of Business Aircraft based and/or operated in the State of Washington.
Under the new rules there are three ways that a Business Aircraft purchaser can confidently be in compliance in the State of Washington:
- Purchase a fractional interest from one of the established national fractional programs;
- Lease an aircraft from an established national financial institution, and pay taxes on those lease payments; or
- Purchase the aircraft and pay the applicable sales/use tax to the State of Washington on the entire value of the aircraft, with no subsequent lease to any other party.
Otherwise, a Business Aircraft owner could be subject multiple taxation, interest and significant penalties levied by the Department of Revenue who will be interpreting its own self-written rules. We do not believe that the safe-harbors contained in the new rules should be relied upon as they may only apply in a very limited set of circumstances. And, we do not recommend that you become a test case for the Department of Revenue’s enforcement.
The rules need to be changed by the Department of Revenue to conform to the legislative intent. Aircraft lessees who pay taxes on a fair market lease payment stream should not be treated as engaging in tax avoidance in the same manner as aircraft owners who illegally evade taxes by registering Washington-based aircraft to out of state corporations/addresses, the intended target of the legislation.
We are available to meet with our existing clients to review how the new rule might affect their tax status, to assess our client’s current exposure under the new rules and to formulate an action plan in response thereto.