California Commercial Interstate Exemption

Alasdair Whyte
By Alasdair Whyte November 28, 2011 11:11

[nonmember]Tom Alston, President and CEO of Aero&Marine Tax Professionals, a California sales and use tax specialist, outlines the only exemption available for personal-use aircraft in the State of California.::join::[/nonmember][ismember]If you are going to
use your aircraft personally the only exemption available is the principal use
test. It is for 12 months immediately following the possession date.

In order to use the
principal use test, you must do the following:

1. Take possession of
an aircraft, vessel or vehicle outside of the State of California

2. Make first
functional use of that aircraft, vessel, or vehicle outside the State of California before it
enters our state for the first time

3. It must remain
outside the State of California for at least 12 months before it enters the state
for the first time, to be exempt from tax.

Although that may seem onerous enough,
there is actually more to it.

1. You must be able to prove without a
shadow of a doubt where the aircraft was located when the title transferred.

2. The definition of first functional
use depends on what type of aircraft you purchase.

3. The burden of
proof of providing documentation that supports the aircraft “never” landed inside
even once during the 12 months rests entirely on the taxpayer. For example,
providing hangar receipts that the aircraft owner paid for a hangar in Medford, Oregon
does not prove the aircraft was in the hangar.

4. The documentation
will have to support that the aircraft was used and not just stored during the
entire year. If there is a long period in the last part of the test period
where the property is merely stored and not flown, the auditor can attempt to
throw out the storage time as “storage for shipment to California.” If the auditor is able to throw
out the last six weeks of your test period and the aircraft enters California in the 13th
month, it will be assessed tax.

Additionally, there
are two separate ways the new regulation will be enforced. The type of
enforcement depends on whether or not the taxpayer is a resident of California. The test
period described above is for California Residents.  If the owner of the aircraft is a Non-California
Resident, the test period is based on the aircraft being stored and used
outside California
for more than half of the first year.

Before a new aircraft
buyer runs out to create an out-of-state LLC or corporation to be able to cut
the requirement to six months, here is some additional data. If the Board of
Equalization (Board) discovers the owners or shareholders of an out-of-state
company are California Residents, they can decide to apply the 12 month
requirement. The taxpayer is not the one who gets to decide whether he or she
is an out-of-state resident.

The following is intended to give you
an idea of how the state determines that a company or person was a California resident. It
all starts with wording from the regulation.


“Resident” means any person
who manifests intent to live or be located in this state on more than a
temporary or transient basis.

The following are evidence of residency
for purposes of vehicle registration:

(a) Address where registered to vote;

(b) Location of employment or place of business;

(c) Payment of resident tuition at a public institution of
higher education;

(d) Attendance of dependents at a primary or secondary

(e) Filing a homeowner’s property tax exemption;

(f)  Renting or
leasing a home for use as a residence;

(g) Declaration of residency to obtain a license or any
other privilege or benefit not ordinarily extended to a nonresident;

(h) Possession of a California
driver’s license;

(i)  Other acts,
occurrences, or events that indicate presence in the state is more than
temporary or transient.

I tell all my prospective clients, “It
does not matter that you are a resident of Ohio,
take possession of your aircraft in Florida
and register it in a Delaware Corporation. If the aircraft enters the State of California any time
within the first 90 days, the state has the right to assess the tax on your
purchase and you have the burden of proof to support a claim for an exemption.
If the Board contacts you and you
them because you think you are an out-of-state resident, the
Board will ultimately lien your aircraft or worse – raid your bank account.”


The good news is that there is an
exemption that allows you to bring your aircraft into the State of California, and it can be stored inside California and still support a claim for an
exemption. It is known as the “commercial interstate flight hours test.”

The restrictions that apply to the
principal use test do not apply to the commercial interstate flight hours test
(such as California
ownership, property taxes, etc.). There are three things you must do, and they
must be done in the following order:

1. The purchaser must be able to
document that he took title to the aircraft outside the State of California.

2. The property must be first
functionally used outside the State of California
before it enters California
the first time after the out-of-state possession occurs. (As was explained
above, this depends on the type of aircraft.) Typically for this form of exemption an interstate flight for a
business purpose with passenger on board who is not part of the flight crew is

3. It must be flown in interstate
commerce for more than half of the flight hours accumulated after the date of
first entry into California.
Our firm raises the standard to 60%.

This means that if the purchaser has
any business that requires him to fly outside the State of California, he is eligible to consider this
form of exemption.

The test period is based on flight
hours only and does not include the flight hours prior to entering California the first
time. The flight hours commencing from the out-of-state possession point to the
new destination for a business purpose, then on into California, are not part of the test period
but are required in order to get into the test period.

For example, we will create a scenario
to explain how it works: Dan Jones
is in the manufacturing business, and it is located inside California. He purchases a new Citation Aircraft
and takes possession in Kansas.
Mr. Jones is a passenger on the jet and his two pilots fly him from Wichita to Denver,
Colorado to meet with a client
who buys bolts from Mr. Jones’ manufacturing company. After the meeting in Denver, Mr. Jones is flown to Van Nuys, California
aboard his new Citation.

The above steps are examples of
out-of-state possession, first functional use, and date of first entry into California. The test
period has been properly started, but no hours are calculated yet. Those hours
start with the first flight after the date of first entry.

If the aircraft enters the state on
March 15, 2012 the test period will end six months later on September 14, 2012.
If the aircraft is flown 100 hours during the six months, the regulation
requires at least half of the total hours are flown in interstate commerce. Our
firm always insists on at least 60% to create a margin of error.

Obviously this means that 40% of the
hours can be a combination of personal or intrastate use. What may be less
obvious is exactly how to figure which hours are on the “good side” of the test
and which are on the “bad side.”

of Commercial

The flight hours must be for a business
purpose. They can be 100% Part 91 hours or a combination of Part 91 and Part

of intrastate vs. interstate

One needs a basic understanding of the
definition of interstate and intrastate to start with. An interstate flight is
one which commences in one state (or country) and ends in another. For example,
flying from Van Nuys, California
to Las Vegas, Nevada is an interstate flight. A flight
from Van Nuys to Cabo San Lucas, Baja,
Mexico also
qualifies as an interstate flight.

An intrastate flight is one which
commences and terminates in the same state. An example of an intrastate flight would
be a flight from Van Nuys to San
Francisco. Similarly, a flight from Reno,
Nevada to Las Vegas, Nevada
is an intrastate flight. For the purpose of this test period, all intrastate
flights count on the “bad side” of the test.

What may not be so obvious is that there
are three types of flights – not just two. All intrastate flights count on the
bad side. All interstate flights for a business purposes count on the “good
side.” Those are the easy ones to understand. However, there exists a third
type, and they all fall on the bad side of the test. Any interstate flight that
is not supported with documents that establish a business purpose for the
flight counts on the “bad side.” An example would be a flight from Van Nuys, California to Aspen, Colorado
for skiing. Additionally, an interstate flight where the taxpayer fails to
provide documentation to support the business purpose also moves those flight
hours to the “bad side.”

How to
calculate flight hours

Flight hours are not calculated by
airspace. For example, during the principal use test if an aircraft flew from San Diego to Medford, Oregon and the flight took three hours, two hours and
forty-five minutes were calculated as being in the air space of California and fifteen
minutes was considered to be out-of-state. When the aircraft is supporting a
claim for an exemption using the commercial interstate flight hours test, the
same three hour flight from San Diego to Medford counts on the
“good side” of the test. This would also include the three hour return part of
the round trip. As long as the aircraft owner can provide documentation from a
third party that affirms there was a business reason for his flight to Medford,
all the flight time counts as an interstate flight for a business purpose.

basic difference between the principal use test and the commercial interstate
flight hours test.

The principal use test is based
primarily on location and storage.  It
matters little “where” an aircraft is flown during the principal use test as
long as the flights occur outside of California.  Obviously, in order to complete the 90 day or
more than one half of 6 months test, it is based on time. During that time the
taxpayer must primarily prove where the aircraft was located every one of the 90
days. Aircraft spend most of their lives “on the ground.” Therefore, storage
documentation becomes very important. 
The taxpayer must prove where the aircraft is located every minute it is
on the ground as well as in the air.

The commercial interstate flight hours
test is based solely on the total flight hours during the six-month test
period. Therefore, this test is based primarily on flight hours where the
principal use test is based primarily on storage.

One of the perks of the commercial
interstate flight hours test is that the aircraft could be hangared inside California every night
of the test period at the airport closest to the owner’s home and still be
exempt from tax. For example: Returning to Dan
Jones and his new Citation purchase. Presuming that Mr. Jones arrived at Van
Nuys on March 15, 2005 (beginning of the six-month test period) the test period
will end on September 14, 2005. During that time, Mr. Jones traveled
exclusively between the home office of his company and the regional office in Seattle, Washington.
He leaves Van Nuys every Monday morning and returns on Monday evening to Van
Nuys. For the purpose of this example, no other flights are made, other than
the weekly flights to Seattle.  This would mean 100% of the flight hours were
for a business purpose. (This exceeds our 60% requirement.) It also means the
aircraft was on the ground at Van Nuys every night of the test period during
the entire six months. With proper documentation, this aircraft will support a
claim for an exemption.

If one were to look at the same use of
this aircraft from the point of view of the principal use test which is based
primarily on storage it would be taxable. Therefore, if you can support
business use of an aircraft, this test is perfect for you.


Alasdair Whyte
By Alasdair Whyte November 28, 2011 11:11

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