Tax Base of Aircraft Acquired in Exchange Not Reduced for Like-kind Exchange from Indiana Sales Tax

A company that rents and leases aircrafts to other businesses was required to collect Indiana sales tax on the leasing of an aircraft it acquired in an exchange based on the total consideration the company provided for the aircraftwith a deduction for the value of a like-kind exchange. The rental company acquired a new aircraft in exchange for an old aircraft (valued at $432,700) and $1,092,300. The seller of the new aircraft had acquired it for the primary purpose of helping the rental company to facilitate an IRC §1031 tax-deferred gain.

A like kind exchange of property is exempt in Indiana. However, Indiana law states that a like kind exchange does not occur when one party to the transaction, through agreement or negotiation with the second party, acquires personal property for the primary purpose of exchanging that property for like kind property held by the second party. The new aircraft may have been acquired in order to qualify for a §1031 exchange, but a §1031 exchange can only happen if there is a like kind exchange. Therefore, the primary purpose of the seller acquiring the new aircraft was to exchange the plane for like kind property held by taxpayer (in order to qualify for a §1031 exchange). For that reason, the transaction does not qualify as a like kind exchange. As a result, the sales tax base of the transaction would not be reduced, and the full amount of consideration ($1,525,000.00, which is the value of the old plane plus the cash exchanged) given by the rental company would be the “net acquisition price.”

Since the rental company purchased the new aircraft with the intention of renting/leasing it, it was able to purchase the aircraft exempt from Indiana sales tax. In lieu of paying tax on the purchase price, the rental company must annually collect an amount equal to or greater than 7.5% of the net acquisition price from renting or leasing the new aircraft in order to qualify for the exemption. Tax is collected on the amounts collected for the rental of the aircraft. (Revenue Ruling No. 2015-20ST, Indiana Department of Revenue, July 14, 2016)

Posted on May 24, 2017