09-39 | Virginia Tax

Tax Type

Aircraft Sales and Use Tax

Description

Qualified Exchange Accommodation Agreement

Topic

Property Subject to Tax

Sale for Resale

Taxable Transactions

Date Issued

04-27-2009

April 27, 2009

Re: Ruling Request: Aircraft Sales and Use Tax

Dear *****:

This is in response to your letter in which you request a ruling on the application of the Virginia aircraft sales and use tax in a reverse exchange agreement structured as an exchange-last transaction involving your client (the "Taxpayer"). I apologize for the Department's delay in responding to your letter.

FACTS

The Taxpayer will enter into a Qualified Exchange Accommodation Agreement (the "Agreement") with a qualified Exchange Accommodation Titleholder (the "EAT") to assist the Taxpayer in the purchase of a replacement aircraft that will qualify for a § 1031 tax-deferred exchange for federal tax purposes.

Under the Agreement, the EAT will form a single member limited liability company (the "LLC") in which the EAT will own 100% of the membership interest. The Taxpayer will loan the LLC funds to acquire a replacement aircraft from an unrelated seller located in another state. The aircraft obtained by the LLC will be immediately transported to Virginia, where the LLC will apply to the Department of Aviation (the "DOAV") for and obtain a license to operate the aircraft. The LLC will lease the replacement aircraft to the Taxpayer for a term not to exceed 180 days.

Subsequently, the Taxpayer will transfer the relinquished aircraft to a third party buyer using a Qualified Intermediary pursuant to an Exchange Contract. The Qualified Intermediary will hold the proceeds from the sale of the relinquished aircraft.

After the reverse exchange transaction is completed, the EAT will transfer all of its membership interest in the LLC to the Taxpayer through the use of the Qualified Intermediary. The Taxpayer will pay the EAT for the LLC interest using: (a) proceeds held by the Qualified Intermediary from the sale of the relinquished aircraft and (b) an additional payment equal to the difference between the outstanding note balance from the acquisition of the replacement aircraft and the payment from the Qualified Intermediary on the sale of the relinquished aircraft.

The TP seeks confirmation from the Department of Taxation (the "Department") that the replacement aircraft will be subject to the aircraft sales and use tax only once and that the LLC, as owner of the aircraft, is liable for the two percent aircraft sales and use tax on the purchase price of the aircraft. In addition, you present a number of possible scenarios and the tax application to each in connection with the sale of the relinquished aircraft and seek confirmation from the Department of your conclusions.

RULING

Replacement Aircraft

Virginia Code § 58.1-1502 imposes the aircraft sales and use tax on the "retail sale" of every aircraft sold in the Commonwealth and upon the use in the Commonwealth of any aircraft required to be licensed by the Department of Aviation pursuant to § 5.1-5. For aircraft not sold in Virginia but required to be licensed for use in the Commonwealth, the tax shall be two percent of the sale price of the aircraft. If the aircraft is licensed in the Commonwealth six months or more after acquisition, the tax shall be two percent of the market value of such aircraft at the time it is licensed or two percent of the purchase price thereof, whichever is lower.

Virginia Code § 58.1-1506 provides that the two percent tax on the sale or use of an aircraft required to be licensed by this Commonwealth shall be paid by the purchaser or user of such aircraft and collected by the Commissioner prior to the time the owner applies to the DOAV for, and obtains, a license.

You are correct in your understanding that the LLC, as the purchaser of the aircraft, is subject to the two percent aircraft sales and use tax on the sale price of the replacement aircraft. The LLC will be required to pay the Department the two percent aircraft tax prior to the time it applies to the DOAV for a license for the aircraft.

Lease of the Replacement Aircraft

For purposes of the aircraft sales and use tax, a "sale" includes a lease or rental for a period of time substantially equal to the remaining life of the aircraft as determined at the beginning of the lease term or a lease or rental in which the aggregate payments substantially equal the value of the aircraft. The term "substantially equal" means "equal to or exceeds eighty percent" of the value of the aircraft at the beginning of the lease term. See Title 23 of the Virginia Administrative Code (VAC) 10-220-5.

The aircraft sales and use tax is generally imposed on the owner of the aircraft. In this case, the LLC will enter into a short-term lease with the Taxpayer. Because that lease is not a "sale," the LLC, as owner of the aircraft, is responsible for the aircraft sales and use tax. Based on the information provided, the LLC will pay the two percent aircraft sales and use tax on the purchase price of the aircraft at the time the aircraft is licensed in Virginia.

Sale of Relinquished Aircraft

Title 23 VAC 10-220-10 addresses the aircraft sales and use tax levied on the sale or use of an aircraft in Virginia. The two percent aircraft sales and use tax applies to aircraft sold and required to be licensed in Virginia. The tax is levied on the date the application is required to be made to the DOAV to obtain a license to operate the aircraft. No tax is applicable on aircraft not required to be licensed by the DOAV.

The application of the aircraft sales and use tax on the sale of the relinquished aircraft in Virginia depends on whether the aircraft is subject to licensing with the DOAV. If the transfer of title and possession of the relinquished aircraft occurs outside the Commonwealth, no taxable event occurs in Virginia. See Va. Code § 58.1-1506.

Transfer of LLC Interest to the Taxpayer

The Virginia Aircraft Sales and Use Tax Regulations set forth certain circumstances under which the transfer of an aircraft is not considered to be a sale. Title 23 VAC 10-220-5 3 states that the term "sale" does not include "[a]ny transfer of ownership or possession which is part of the sale of all or substantially all the assets of a business. The exemption applies only to aircraft upon which Virginia aircraft sales and use tax has been paid upon acquisition or use by the transferor and does not include nonlicensed aircraft held for resale by a dealer or manufacturer or any other aircraft held or used for exempt purposes by the transferor. The tax status of such aircraft will be determined by the transferee's purposes and use of the aircraft. For purposes of this chapter, the term "substantially all the assets" shall mean "eighty percent or more."

The EAT will transfer 100% membership interest in the LLC holding the replacement aircraft to the Taxpayer through the use of the Qualified Intermediary. In this case, the transfer of the LLC interest from the EAT to the Taxpayer represents 100% of all the assets of the LLC, i.e., the replacement aircraft. Because the LLC will have paid the aircraft sales and use tax on the acquisition of the aircraft, the transfer of the LLC interest to the Taxpayer will qualify for the exemption under Title 23 VAC 10-220-5 3.

This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and regulations cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this matter, please contact ***** of the Department's Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-1904333846.T

Rulings of the Tax Commissioner