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October 31, 2018

When Is An Aircraft "Destroyed" Versus "Repairable"?

Unfortunately, these terms are not defined anywhere in the regulations. But, as you might expect, the FAA has a policy/opinion about what these terms mean. In fact, the FAA has issued Order 8100.19, Destroyed and Scrapped Aircraft which spells out what these terms mean and how they are to be applied by FAA inspectors. If an aircraft is capable of being repaired and returned to service after it was unserviceable due to wear and tear, damage, or corrosion then it is "repairable." But this means that when the repair is complete the aircraft to returned to service in "its original (or properly altered) condition that conforms to its type design."

The FAA clarifies further that an aircraft is only eligible for repair if it has at least one primary structure around which a repair can be performed. According to the FAA, it "considers an aircraft’s primary structure to be the structure that carries flight, ground, or pressurization loads, and whose failure would reduce the structural integrity of the aircraft." If only some, but not all, of the major structures of an aircraft are replaced, then that would still be considered a repair.

However, if all of an aircraft's primary structures must be replaced then the FAA does not consider the aircraft to be "repairable." Rather, in that situation the aircraft is being "replaced" after being "destroyed." And if the identification plate from the original aircraft was then placed on the "destroyed" aircraft that would violate 14 CFR § 45.13(e) ("No person may install an identification plate removed in accordance with paragraph (d)(2) of this section on any aircraft, aircraft engine, propeller, propeller blade, or propeller hub other than the one from which it was removed.”)

In order to comply with Section 45.13(e), the primary structure must be identifiable and traceable to the particular aircraft and its identification plate. As an example, if a heavily damaged aircraft is repaired by performing many major repairs on its fuselage and replacing all other primary structures that may be destroyed such as the wings and the empennage, that aircraft would not be considered destroyed because the fuselage is repairable. But if the fuselage of that aircraft also needed to be replaced along with the other primary structures, then the aircraft would be considered destroyed.

The Order also provides the following examples for use in determining if an aircraft is destroyed:

All primary structures of an airplane or glider, including the fuselage, all wings, and empennage are beyond repair.
The fuselage and tail boom of a rotorcraft are beyond repair.
Only the aircraft identification plate is reusable.

How is this determination made by FAA inspectors? Well, according to the Order, "FAA accident investigators will apply their specialized knowledge and expertise and follow the guidelines in this order when evaluating aircraft wreckage to determine whether an aircraft is repairable or should be declared destroyed."

Fortunately an aircraft owner can dispute a determination that an aircraft is destroyed by providing the appropriate FAA FSDO or ACO with a repair process that explains how the damaged aircraft can be repaired provided that at least one primary structure of the aircraft is capable of being repaired rather than requiring replacement. If you are faced with a situation where it is unclear whether an aircraft has been "destroyed" or is still "repairable", you will definitely want to consult the Order, as well as the aircaft's maintenance manual.

Posted by Greg

October 01, 2018

Using A "Fly-Away" Exemption To Avoid Paying Sales Tax On An Aircraft Purchase

When buying an aircraft, one of the issues a buyer must determine is whether the buyer will have to pay any sales tax on the transaction. As you may know, most states charge sales tax on the purchase of tangible property, including aircraft. In some cases, a buyer may be able to take advantage of an exemption such as a "fly-away exemption" to avoid having to pay sales tax to the state where the buyer takes delivery of the aircraft.

As an example, Texas provides a fly-away exemption when an aircraft is sold/delivered in Texas state for use and registration in another state before any use of the aircraft is made in Texas. Texas Tax Code ("TTC") Section 151.328(a)(4) exempts from sales tax aircraft "sold to a person for use and registration in another state or nation before any use in this state other than flight training in the aircraft and the transportation of the aircraft out of the state."

Use

In order to take advantage of this exemption, an aircraft sold in Texas may not be "used" in Texas after the buyer takes delivery of the aircraft. Unfortunately, the Texas Tax Code applicable to sales tax does not define what it means to "use" an aircraft in the state. However, TTC Section 151.011(a), which relates to the "use tax" in Texas, defines "use" as “the exercise of a right or power incidental to the ownership of tangible personal property over tangible personal property… ."

Additionally, TTC Section 151.011(f)(1) provides that "[n]either 'use' nor 'storage' includes the exercise of a right or power over or the keeping or retaining of tangible personal property for the purpose of: (1) transporting the property outside the state for use solely outside the state." So, at least in Texas, a buyer may be permitted limited post-closing use of the aircraft in Texas for the purposes of (i) training, (ii) maintenance, repairs, completion etc., or (iii) to fly the aircraft out of Texas.

Registration

The Texas fly-away exemption also requires that the aircraft be registered in another state or nation, but not Texas. So, while the transfer of ownership will be filed with the FAA, in order to satisfy the statute the aircraft also needs to registered in another state or country after it is removed from Texas.

To claim the fly-away exemption, the buyer must give the seller a Form 01-907, Texas Aircraft Exemption Certificate Out-of-State Registration and Use (“Exemption Certificate”). Both the buyer and the seller must sign the Exemption Certificate and the seller must send a copy to the Texas Comptroller’s office within 30 days of the sale’s occurrence in Texas. And in the event of a dispute with the Comptroller, the buyer has the burden of proving by clear and convincing evidence that the aircraft was not subject to Texas sales tax per TTC Section 151.328(a)(4).

It is important to know that, at least in Texas, each case is unique and even though it may appear that the buyer has satisfied all requirements of the fly-away exemption, the Comptroller could take a different view of the case. Although this may not be the case in all states, it is prudent for aircraft buyers in all states to work with their aviation and tax counsel to properly structure their transactions in a way that complies with/satisfies any requirements for taking advantage of a fly-away or any other type of exemption.

Posted by Greg

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