Title of Regulation: 23VAC10-220. Aircraft Sales and Use Tax (amending 23VAC10-220-5, 23VAC10-220-10, 23VAC10-220-20).

Statutory Authority: § 58.1-203 of the Code of Virginia.

Public Hearing Information: No public hearings are scheduled.

Public Comment Deadline: March 10, 2017.

Effective Date: March 27, 2017.

Agency Contact: Joe Mayer, Lead Policy Analyst, Department of Taxation, P.O. Box 27185, Richmond, VA 23261-7185, telephone (804) 371-2299, FAX (804) 371-2355, or email joseph.mayer@tax.virginia.gov.

Basis: Section 58.1-203 of the Code of Virginia authorizes the Tax Commissioner to issue regulations relating to the interpretation and enforcement of the laws governing taxes administered by the Department of Taxation. The Aircraft Sales and Use Tax is administered by the Department of Taxation pursuant to § 58.1-1503 of the Code of Virginia.

Purpose: This regulatory action is needed to remove references to a previous retail sales and use tax rate that provide no guidance regarding the aircraft sales and use tax. The regulatory action does not reflect any change in current tax policy and will have no impact on the administration of the aircraft sales and use tax. Removal of the retail sales and use tax rate from the regulation will eliminate confusion caused by listing the wrong rate in the regulation and will eliminate the need to update the rate in the event that it is changed again. The action does not have an impact on the health, safety, and welfare of the public.

Rationale for Using Fast-Track Rulemaking Process: Amending the Aircraft Sales and Use Tax regulation to repeal references to a previous retail sales and use tax rate that provide no guidance regarding the aircraft sales and use tax is expected to be noncontroversial and appropriate for the fast-track rulemaking process.

Substance: This action will amend 23VAC10-220-5, 23VAC10-220-10, and 23VAC10-220-20 to remove references to the previous rate of the retail sales and use tax.

The rate of the retail sales and use tax has been increased twice since the rate listed in the regulation, 4.0%, was in effect. The retail sales and use tax rate is currently 5.3% statewide, with an additional 0.7% state tax in the Northern Virginia and Hampton Roads Regions. Removal of the retail sales and use tax rate from the Aircraft Sales and Use Tax regulation will have no impact on the usefulness of the regulation. The listing of the retail sales and use tax rate provides no guidance regarding the aircraft sales and use tax. The retail sales and use tax rate is not necessary for any examples or explanation provided in the regulation. Removal of the retail sales and use tax rate from the regulation will eliminate confusion caused by listing the wrong rate in the regulation and will eliminate the need to update the regulation in the event that it is changed in the future.

The aircraft sales and use tax is generally imposed at the rate of 2.0% on the retail sale of every aircraft sold in Virginia and upon the use in Virginia of any aircraft required to be licensed by the Department of Aviation. However, commercial dealers may elect to pay the aircraft sales and use tax at the rate of 2.0% of the monthly gross receipts from the lease, charter, or other use of any aircraft licensed for commercial use instead. Revenues from the tax are deposited into a special fund within the Commonwealth Transportation Fund for the administration of aviation laws by the Department of Aviation; for the construction, maintenance, and improvement of airports and landing fields; and for the promotion of aviation.

The regulatory action does not reflect any change in current tax policy and will have no impact on the administration of the aircraft sales and use tax.

Issues: The primary advantage of this action for the public and the agency is that it will remove an incorrect listing of the retail sales and use tax rate that may cause confusion. As this regulatory action will repeal references to a former retail sales and use tax rate that provide no guidance regarding the aircraft sales and use tax, there are no issues or disadvantages to the public or the Commonwealth associated with this regulatory action.

Department of Planning and Budget's Economic Impact Analysis:

Summary of the Proposed Amendments to Regulation. The Department of Taxation (Department) proposes to amend its regulation for the Aircraft Sales and Use Tax to make clarifying changes and to remove references to a now obsolete retail sales and use tax rate.

Result of Analysis. Benefits outweigh costs for all proposed changes.

Estimated Economic Impact. The Department proposes several changes to this regulation that do not change current rules or practice. For instance, the Department proposes to reword the preface to the definition section of the regulation to make it more easily understandable. Changes such as these do not impose any costs on any affected entity but provide the benefit of additional clarity to interested parties reading the regulation.

Currently, this regulation states that the retail sales and use tax for aircraft is four percent. Department staff report, however, that this tax rate has increased twice in statute since it was listed in this regulation. The tax as mandated by the General Assembly is currently five and three tenths percent state wide with an additional seven tenths percent tax in the Northern Virginia and Hampton Roads regions. Because the tax rate listed in this regulation is obsolete, the Department proposes to remove it. No entity will incur any costs on account of this change. Removing this obsolete language will benefit interested parties by ensuring that the regulation does not cause confusion by representing that the tax rate is lower than it actually is.

Businesses and Entities Affected. These proposed regulatory changes will affect all entities who are subject to the Aircraft Sales and Use Tax. The Department reports that 228 entities paid this tax in fiscal year 2014, 226 paid it in fiscal year 2015 and 278 paid it in fiscal year 2016.

Localities Particularly Affected. No locality will be particularly affected by these proposed regulatory changes.

Projected Impact on Employment. These proposed regulatory changes are unlikely to affect employment in the Commonwealth.

Effects on the Use and Value of Private Property. These proposed regulatory changes are unlikely to affect the use or value of private property in the Commonwealth.

Real Estate Development Costs. These proposed regulatory changes are unlikely to affect real estate development costs in the Commonwealth.

Small Businesses:

Definition. Pursuant to § 2.2-4007.04 of the Code of Virginia, small business is defined as "a business entity, including its affiliates, that (i) is independently owned and operated and (ii) employs fewer than 500 full-time employees or has gross annual sales of less than $6 million."

Costs and Other Effects. No small businesses will be adversely affected by these proposed regulatory changes.

Alternative Method that Minimizes Adverse Impact. No small businesses will be adversely affected by these proposed regulatory changes.

Adverse Impacts:

Businesses. No businesses will be adversely affected by these proposed regulatory changes.

Localities. Localities in the Commonwealth are unlikely to see any adverse impacts on account of these proposed regulatory changes.

Other Entities. No other entities are likely to be adversely affected by these proposed changes.

Agency's Response to Economic Impact Analysis: The Department of Taxation agrees with the Department of Planning and Budget's economic impact analysis.

Summary:

The amendments amend the aircraft sales and use tax provisions by removing outdated references to the rate of the retail sales and use tax.

23VAC10-220-5. Definitions.

The following words, terms and phrases are defined herein for the tax imposed by Chapter 15 of Title 58.1-1501 of the Code of Virginia only and terms when used in this chapter shall have the following meanings unless the context clearly indicates otherwise:

"Aircraft" means any contrivance used or designed for and capable of untethered navigation or flight in the air carrying one or more persons at an altitude greater than twenty-four 24 inches above the ground, except such term shall not include a parachute or a "hang glider." (See § 5.1-1 of the Code of Virginia.)

"Commissioner" means the Tax Commissioner.

"Dealer" means any person the Tax Commissioner finds to be in the regular business of selling aircraft and who owns five or more aircraft at anytime during the calendar year which that are held for resale or used for compensation. For purposes of this chapter, the The term "owns" includes aircraft acquired under leases qualifying as sales as defined in this section.

"Gross receipts" means hourly rental, maintenance, and all other charges for use of such aircraft. Also, unless separately stated on the invoice, "gross receipts" includes all charges for services of pilots or instructors in such aircraft.

"Person" means every natural person, firm, partnership, association, corporation, or other entity.

"Sale" means any transfer of ownership or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of an aircraft, including transactions whereby possession is transferred but title is retained by the seller as security. For purposes of this chapter, the The term "lease or rental" shall be restricted to include only 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 payments during the term of the lease will substantially equal the value of the aircraft.

1. The remaining life of the aircraft shall be estimated in accordance with generally accepted accounting principles, considering factors such as physical deterioration, normal obsolescence, maintenance, and intensity of use.

2. For purposes of this chapter, the The term "substantially equal" shall mean "equal to or exceeds eighty percent." 80%."

3. For purposes of this chapter, the The term "value of the aircraft" shall mean the current market value of the aircraft in accordance with such publications or other data as are customarily employed in ascertaining the maximum sale price of an aircraft.

The same sale will not be subject to the tax more than once. However, unless it is an exempt transfer, each time a transfer of ownership or possession takes place, the new owner will be subject to the tax on the transfer.

As used in this chapter, the term "sale" "Sale" does not include the following:

1. Any transfer of ownership or possession which transfer is made to secure payment of an obligation.

2. Any transfer of ownership or possession which that is incidental to repossession under a lien and under which ownership is transferred to the lien holder, his nominee, or a trustee, pending ultimate disposition or sale of the collateral.

3. Any transfer of ownership or possession which that 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 The term "substantially all the assets" shall mean "eighty percent "80% or more."

4. Any transfer of ownership or possession by survivorship, inheritance, or gift. The exclusion from "sale" referred to in this paragraph subdivision 4 is limited to bona fide gifts without consideration. A gift for services rendered or any other form of consideration is a sale and is subject to Virginia aircraft sales tax.

5. Any transfer of ownership or possession from an individual or partnership to a corporation or from a corporation to an individual or partnership if the transfer is incidental to the formation, organization, reorganization, or dissolution of a corporation in which the individual or partnership holds a controlling interest. For purposes of this exclusion, a controlling interest means the ownership of at least eighty percent 80% of all outstanding shares of voting stock.

6. Any transfer of ownership from a partner to the partnership in which he is a partner will be deemed a taxable sale only to the extent of the aggregate interests of partners other than the transferring partner. Similarly, any transfer of ownership from a partnership to a partner will be deemed a taxable sale only to the extent of the aggregate interests of partners other than the transferee partner.

7. Any transfer of ownership or possession between affiliated corporations if Virginia aircraft sales and use tax or Virginia retail sales and use tax was paid on the acquisition or use of the transferred aircraft by the transferring corporation. For purposes of this exclusion, two or more corporations shall be deemed affiliated if (i) one corporation owns at least 80% of the outstanding shares of voting stock of the other or others or (ii) at least 80% of the outstanding shares of voting stock of two or more corporations is owned by the same interests.

Example 1: Corporation A purchased in 1980 an aircraft and paid Virginia aircraft sales and use tax on the purchase. In 1983, Corporation A acquired all of the capital stock of Corporation B and transferred its aircraft to Corporation B. The transfer would not be subject to Virginia aircraft sales and use tax because it would represent a transfer between qualified affiliates (parent owning as least 80 percent 80% of subsidiary).

Example 2: Corporation C purchased an aircraft in Delaware in March 1982. In June 1982, Corporation C acquired all of the capital stock of Corporation D, a Virginia corporation, and transferred its aircraft to Corporation D. The acquisition of the aircraft by Corporation D is subject to Virginia aircraft sales and use tax. While this would represent a transfer between qualified affiliates, Virginia aircraft sales and use tax was not paid on the acquisition of the transferred asset by the transferring corporation.

Example 3: Individual A owns 100 percent 100% of the voting stock of Corporation E and 85 percent 85% of the voting stock of Corporation F. Both corporations operate businesses in Virginia. In 1982, Corporation E transfers to Corporation F an aircraft which it had previously purchased and on which that it had paid aircraft sales and use tax. The transfer would not be subject to Virginia aircraft sales and use tax because it would represent a transfer between qualified affiliates (at least 80 percent 80% of the voting stock of each corporation is owned by the same owner) and because Virginia aircraft sales and use tax was paid on the acquisition of the transferred aircraft by the transferring corporation.

Example 4: Individual A is the sole owner of an aircraft. A transfers the aircraft to Partnership ABC in which he is a partner owning a 1/3 interest in the partnership property. A's 1/3 interest in the aircraft is not subject to tax since A is deemed to have retained 1/3 of his previous 100% ownership on which he had paid aircraft sales and use tax. The 2/3 interest in the aircraft owned by Partners B and C is subject to the aircraft sales and use tax. To the extent of this interest, a transfer qualifying as a sale took place.

Example 5: Partnership XYZ transferred its aircraft which that it had purchased and on which it had paid Virginia aircraft sales and use tax to Partner Z on January 1, 1983. Each partner is deemed to own a 1/3 interest in the aircraft. The taxable portion of the transfer is the 2/3 interest owned by Partners X and Y.

8. Transfer of aircraft repair parts, accessories, attachments, and lubricants, not included in the same transaction with the transfer of aircraft. Sales of all such tangible personal property are subject to the Virginia retail sales and use tax and reportable on Form ST-9, Dealer's Retail Sales and Use Tax Return.

"Retail sale," as used in this chapter, sale" means a sale to a consumer or to any person for any purpose other than for resale and includes any transaction the Commissioner commissioner, upon investigation, finds to be in lieu of a sale.

"Retail sale" does not include the mere transfer of titled ownership between husband and wife, where there has been no contractual consideration for the transfer and where no loss resulting from the transfer would constitute an allowable deduction for federal or state income tax purposes. No substantive change in equity ownership has occurred and the transfer is not subject to Virginia aircraft sales and use tax. Likewise, a similar transfer, as described above, to joint ownership with husband and wife would not be subject to tax as a retail sale.

"Sale price," as used in this chapter, price" means the total price paid for an aircraft and all attachments thereon and accessories thereto, without any allowance or deduction for trade-ins or unpaid liens or encumbrances, but exclusive of any federal manufacturers' excise tax.

"Attachments thereon" and "accessories thereto" as used herein mean all tangible personal property that is physically attached to the aircraft, including installation charges, or property that is customarily used in aircraft, whether or not affixed to the structure of the aircraft, and which that was transferred in the same transaction as the aircraft as a part of the aircraft sale. Such tangible personal property transferred other than in the same transaction with the aircraft will be subject to the four percent Virginia retail sales and use tax imposed pursuant to Chapter 6 (§ 58.1-600 et seq.) of Title 58.1 of the Code of Virginia.

Charges for lettering and get-ready charges (i.e., cleaning, washing, and preparing) are also included in the sale price when made in the same transaction with the aircraft transfer.

Charges for federal manufacturer's excise tax, insurance, and gasoline are excluded from the sale price, when separately stated on the invoice.

23VAC10-220-10. Tax levied.

A. Generally. The Virginia aircraft sales and use tax is imposed at the rate of two percent 2.0% upon the retail sale of every aircraft sold in this state the Commonwealth and upon the nonexempt use in Virginia of any aircraft.

B. Tax rate application. The tax is to be collected by applying the 2% 2.0% rate as follows:

1. Aircraft sold in Virginia. For aircraft sold in Virginia, the amount of tax is two percent 2.0% of the sale price of the aircraft. The tax is levied on the date the application was required to be made to the Department of Aviation to obtain the license to operate the aircraft. See 23VAC10-220-50.

a. The Virginia aircraft sales tax applies to all aircraft sold and required to be licensed in Virginia, including occasional sales. "Occasional sale" refers to means a sale of an aircraft by anyone not a dealer in aircraft. See 23VAC10-220-50 for information concerning payment of tax.

b. No tax is applicable to an aircraft which that is not required to be licensed by the Department of Aviation.

Example 1: Individual A purchased a plane in Virginia on January 1, 1983, and applied for a license to operate the aircraft on the same day. The purchase price of the plane was $12,000. The tax is levied on the date of purchase and A must pay the Virginia aircraft sales tax of $240 based upon the sale price.

Example 2: Individual B purchased a plane in Virginia for $25,000 on January 1, 1982, and stored the plane for use in Virginia while she took flying lessons. B applied to the Department of Aviation for a license to operate the aircraft on September 1, 1982. The tax is levied September 1, 1982, on the original purchase price of $25,000.

Note: 23VAC10-220-50 requires the aircraft sales and use tax to be paid prior to the time the owner applies to the Department of Aviation for and obtains a license to operate the aircraft. 23VAC10-220-20 requires the tax to be based upon the current market value of the aircraft if first used or stored for use in Virginia six months or more after its acquisition. The current market value is not applicable in the case at hand because the plane qualified as an aircraft when purchased on January 1, 1982, and was first stored for use in this state on that date, even though the aircraft was not required to be licensed until nine months later.

Example 3: Individual C purchased a plane kit in Virginia on June 1, 1982. The kit is subject to the 4.0% retail sales and use tax when purchased since the kit does not meet the definition of an aircraft at the time of purchase. When the kit is assembled, and qualifies as an aircraft, it is subject to the 2.0% aircraft sales and use tax on the assembled cost. See 23VAC10-220-30 D C.

2. Aircraft not sold in Virginia. For aircraft not sold in Virginia but required to be licensed for use in Virginia, the amount of tax is two percent 2.0% of the sale price of the aircraft, wherever sold; however, if the aircraft is not sold in Virginia and is first required to be licensed in Virginia six months or more after its acquisition, the tax is imposed at two percent 2.0% of the current market value of the aircraft if such current market value is less than the sale price of the aircraft including the cost of any modifications, improvements, or additions subsequent to initial acquisition. Also, see See 23VAC10-220-20.

a. The term "required to be licensed" as used in this section refers to the licensing provisions of Chapter 1 (§ 5.1-1 et seq.) of Title 5.1 of the Code of Virginia. Section 5.1-5 requires that before operating any aircraft, the owner must obtain from the Department of Aviation an aircraft license for such aircraft.

b. The term "current market value" as used in this section means an average value considering age, make, model, and included accessories in accordance with such publications or other data as are customarily employed in ascertaining the sale price of used aircraft.

c. The same transaction will not be subject to the tax more than once. However, each time a sale takes place, or an aircraft is brought into use in Virginia and required to be licensed, the new owner or new user in Virginia will be subject to the tax on the transaction.

d. The Virginia aircraft sales and use tax is not applicable to the use of any aircraft which that is not required to be licensed by the Department of Aviation.

3. Aircraft leased, rented, or chartered. Dealers in aircraft as defined in 23VAC10-220-5 may elect to license for commercial use one or more aircraft held for lease, rental, charter, or other compensatory use, without payment of the Virginia aircraft sales and use tax based upon the sale price, subject to certain requirements and restrictions as regulated.

Any person who revokes his election immediately becomes liable for the Virginia aircraft sales and use tax as regulated in Paragraph B above subdivisions 1 and 2 of this subsection.

C. Tax levy on lease or rental defined as sale. The Virginia aircraft sales tax is imposed upon the retail sale of an aircraft; however, the purchaser is responsible for payment of the tax. For purposes of a lease or rental defined as a sale under 23VAC10-220-5, the lessee or person renting the aircraft is deemed the purchaser of the aircraft and is responsible for payment of the applicable tax.

23VAC10-220-20. Basis of tax; estimate of tax; penalty for misrepresentation.

A. Basis of tax for sale or use. The Commissioner commissioner shall levy and collect tax for the use or sale of an aircraft upon the basis of the sale price of the aircraft.

1. Invoice required. Any person who sells an aircraft in Virginia must supply the buyer with an invoice signed by the seller or his representative. The invoice must state the sale price of the aircraft. The buyer must present the invoice to the Commissioner commissioner with his return and payment of the tax.

2. Basis of tax. The basis of the tax is the sale price, including any amount credited for trade-in or any other transaction of like nature, except that if the aircraft is first used or stored for use in Virginia six months or more after its acquisition, the tax will be based on the current market value.

a. Under the regulated definition of "aircraft," the six month six-month period referred to in this section begins only when a plane is capable of flight.

Example 1: Individual D purchased in Virginia on January 1, 1982, an inoperable wrecked plane. The aircraft was stored for repairs until September 1, 1982, when the aircraft license application was made. The aircraft sales and use tax is levied on the acquisition cost on September 1, 1982, when the plane qualified as an "aircraft." No credit is allowable for the 4.0% retail sales and use tax imposed pursuant to Chapter 6 (§ 58.1-600 et seq.) of Title 58.1 of the Code of Virginia paid on the purchase of repair parts.

Example 2: Individual E purchased an aircraft in Maryland on January 1, 1982, and used it in Maryland until September 1, 1982, when licensed for use in Virginia. The tax is levied on the current market value of the aircraft on September 1, 1982, since it was brought into Virginia for use more than six months after acquisition.

Example 3: On January 1, 1982, individual A purchased an inoperable wrecked plane in North Carolina and transported the wreckage to Virginia on the day of purchase. The plane was brought into Virginia for restoration and ultimate use in this state the Commonwealth. The repairs were completed and the aircraft license application was made on September 1, 1982. The tax is levied on September 1, 1982, on the original cost of the wrecked plane plus restoration cost. The plane did not qualify as an aircraft in Virginia until capable of flight and therefore the tax is levied at such date.

B. Basis of tax for monthly gross receipts return. An approved and registered dealer must submit monthly returns to the Department department and remit Virginia aircraft sales and use tax upon the gross receipts from the lease, rental, charter, or other compensatory use of any aircraft he elects to exclude from the sales tax at time of purchase. 1. For purposes of this section, the terms "lease" and "rental" refer only to leases or rentals not qualifying as sales under 23VAC10-220-5.

C. Invoice not available, assessment by Commissioner commissioner. Where the invoice is not available, or where the Commissioner commissioner has reason to believe the invoice does not reflect the true sale price, or the aircraft was purchased more than six months prior to its use or storage in Virginia, the Commissioner commissioner may assess the tax. Under these circumstances, the tax may be assessed in accordance with such publications or other data as are customarily employed in ascertaining the maximum sale price of aircraft.

D. Fair price for rental or use. If the Commissioner commissioner finds that a dealer has made a charge for the rental or use of an aircraft that is lower than the fair market value of such rental or use, he may estimate a fair price. An estimate of fair price as used here means in accordance with the cost of the aircraft, the cost of maintenance, the normal rental value as shown in similar transactions, or other relevant data. The amount by which the fair price estimated under this section exceeds the charge actually made by the dealer will be included in "gross receipts" as used in this section.

E. Misrepresentation. Any person who knowingly misrepresents on an invoice between buyer and seller, on any return, or to the Commissioner commissioner the value of an aircraft or the amount of tax due shall be, upon conviction, guilty of a Class 1 misdemeanor.

FORMS (23VAC10-220)

Dealer's Aircraft Sales and Use Tax Return, Form AST-2 (rev. 5/06).

Virginia Aircraft Sales and Use Tax Return, Form AST-3 (rev. 12/06).

Sales and Use Tax Certificate of Exemption (For dealers who purchase tangible personal property for resale, lease or rental), Form ST-10 (rev. 10/99).

Business Registration Application, Form R-1 (rev. 3/08).

Virginia Aircraft Sales and Use Tax Return, Form AST-3 (rev. 7/2012)

Sales and Use Tax Certificate of Exemption, Form ST-10 (rev. 9/2015) (For a Virginia dealer who purchases tangible personal property for resale, or for lease or rental, or who purchases materials or containers to package tangible personal property for sale.)

Retail Sales and Use Tax Return, Form ST-9 (rev. 3/2013)

Business Registration Application, Form R-1 (rev. 9/2016)