Aircraft Sales and Use Tax Audits in Texas

Texas aircraft sales and use tax audits can expose owners and other parties to substantial liability. If an audit leads to allegations of intentional tax evasion or tax fraud, facing criminal prosecution could be a very real concern as well. As a result, when facing one of these audits, an informed and strategic approach is critical. Here are some key considerations:

Texas Aircraft Sales and Use Tax Audits Are Becoming Increasingly Common

The first key consideration is that aircraft sales and use tax audits are becoming increasingly common in Texas. This parallels an overall increase in sales tax-related scrutiny we have seen in recent years. The Texas Comptroller’s Office routinely conducts sales tax audits targeting several types of assets and businesses; and, when these audits uncover evidence (or apparent evidence) of noncompliance, the Comptroller’s Office does not hesitate to pursue levies, asset seizures, and other means of collection.

This means that if you are facing (or your company is facing) a sales and use tax audit involving one or more aircraft in Texas, responding to the audit needs to be your priority for the time being. As we noted above, avoiding unnecessary liability will require an informed, strategic approach, and it will be important to intervene in the audit process as early as possible.

These Audits Can Present Risks for Substantial Liability Exposure

In Texas, aircraft, aircraft parts, and related taxable services are subject to the state’s 6.25 percent sales and use tax, and local sales and use tax rates can be up to 2 percent of the price paid. With a potential combined sales and use tax rate of 8.25 percent, the tax owed on the purchase and sale of aircraft and related parts and services can be substantial.

This means that individuals and entities targeted in Texas aircraft sales and use tax audits can face substantial liability exposure. While those that have complied with Texas’s sales and use tax laws should not be at risk of facing additional liability, it is imperative not to make any assumptions in this scenario. All Texas sales and use tax audits pose risks, which means they require the full attention of targeted individuals and entities.

For individuals and entities that have not complied with Texas’s sales and use tax laws with respect to any aircraft (or related parts or services), understanding the risks of scrutiny from the Texas Comptroller’s Office is key. Once you know what is at stake, you can make informed decisions about how to respond to the situation at hand.

These Audits Can Target a Wide Range of Issues

Texas’s sales and use tax laws are complicated. As a result, determining an individual’s or company’s liability can be a complex process—particularly with regard to substantial assets such as airplanes and helicopters. With this in mind, some examples of potential issues that can arise during a Texas aircraft sales and use tax audit can include:

Origin and nexus-related issues
Transportation and storage-related issues
Issues related to aircraft leasing and rentals
Issues related to personal use of corporate aircraft
Maintenance and repair-related issues

These truly are just examples. Texas aircraft sales and use tax audits can involve many other issues. This is another reason why it is imperative not to make any assumptions about liability. If you can demonstrate full compliance with Texas’s sales and use tax laws, facing additional liability should not be a concern. However, if you cannot demonstrate full compliance, you will need to be prepared to effectively address all pertinent issues in order to favorably resolve the Texas Comptroller’s audit and mitigate your risk of facing additional scrutiny in the future.

Various Exemptions and Other Defenses to Liability May Be Available

While Texas’s sales and use tax laws impose strict and substantial liability with respect to most types of aircraft-related transactions, there are also several statutory exemptions. Demonstrating that one or more of these exceptions applies can be a key audit defense strategy in many cases.

The statutory exemptions that can serve as defenses in Texas aircraft sales and use tax audits include:

Exemption for certified and licensed carriers
Exemption for fractional ownership
Exemption for flight schools and instructional use
Exemption for agricultural use
The “fly away” exemption for aircraft used outside of Texas

Similar to other products, there is also an exemption for purchases from “occasional sellers,” and no sales tax is due on the sale, lease or rental of aircraft to foreign governments. While many of these exemptions are fairly straightforward, others may or may not apply depending on the specific circumstances—and this can lead to challenges during the audit process.

Targeted Individuals and Entities Must Take a Proactive Approach to Their Defense

Given the challenges involved in successfully defending against a Texas aircraft sales and use tax audit, individuals and companies targeted in these audits should take a proactive approach to their defense. Audit targets should not assume that the process will lead to an accurate determination of their liability. Instead, they should be prepared to affirmatively demonstrate compliance (to the extent possible) and to identify and challenge flaws in the audit process when they arise.

Unfavorable Texas Aircraft Audit Determinations Are Subject to Appeal

Finally, in addition to proactively responding to the Texas Comptroller’s audit, audit targets should also prepare for the possibility of needing to file an appeal. Unfavorable aircraft audit determinations are subject to appeal, and individuals and businesses will unfortunately need to file an appeal in many cases. Not only will raising issues during the audit process help mitigate against the risk of an unwarranted adverse outcome, but it will also help maximize the chances of filing a successful appeal if necessary.

Schedule a Confidential Initial Consultation with a Texas Sales and Use Tax Lawyer at Brown PC

If you need more information about defending against a Texas aircraft sales and use tax audit, we encourage you to contact us promptly. Call 888-870-0025 or contact us online to schedule a confidential initial consultation at Brown PC.

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