My company bought a private jet and immediately transferred it, tax-free, into a revocable trust for a diplomat's exclusive use, based at a Virginia-area airport -- does Virginia's aircraft use tax still apply?

Plain-English summary

A company organized outside the United States bought an aircraft on June 4, 2014. Less than a month later, on July 1, 2014, it transferred the aircraft -- without any money changing hands -- into a revocable trust, and under a separate Aircraft Service Agreement the plane was to be based at Washington Dulles International Airport for a beneficial owner's exclusive use. The aircraft was licensed with Virginia's Department of Aviation on July 31, 2014. After learning of the aircraft through the Department of Aviation, Virginia's tax Department assessed a 2% aircraft consumer use tax on the purchase price. The company fought the assessment on three separate grounds, and lost on all three.

The revocable trust transfer. Virginia does have a specific exclusion for aircraft transferred into a revocable inter vivos trust with no consideration exchanged, where the aircraft's owners and the trust's beneficiaries are the same people -- but that exclusion only removes tax on the TRANSFER itself, and only applies where Virginia's aircraft tax was ALREADY paid on an earlier acquisition or use of that aircraft. Here, the aircraft had never previously been taxed by Virginia -- it was purchased outside Virginia and had no Virginia tax history before this transaction. So while the July 1 transfer into the trust was itself untaxed, the company still owed the 2% consumer use tax once the aircraft became based and licensed for use in Virginia, since that was the FIRST point at which Virginia's tax attached.

The diplomatic exemption. Virginia exempts certain purchases by foreign diplomats and missions holding a specific State Department-issued exemption card, but that exemption is strictly non-transferable: the PURCHASE itself must be made by the person to whom the card was issued. Here, the purchaser was the corporate entity, not the individual diplomat who beneficially used the aircraft -- and simply enjoying exclusive personal use of something someone else legally owns and purchased doesn't create the kind of ownership the exemption requires.

Civil aircraft vs. public aircraft. The company also argued the plane wasn't a "civil aircraft" subject to Virginia licensing (and thus taxation) at all. Virginia defines "civil aircraft" as anything that ISN'T a "public aircraft," and the federal definition of "public aircraft" covers only aircraft owned by the government or used for commercial purposes. Since this was a privately-owned aircraft used for private (not commercial or governmental) purposes, it squarely fit the "civil aircraft" category -- meaning it had to be licensed in Virginia, and was therefore taxable.

With all three theories rejected, the Department upheld the assessment, with interest accruing until paid, and gave 60 days to pay before further interest would accrue.

What this means for you

Anyone transferring an aircraft into a revocable trust before or after bringing it into Virginia

The trust-transfer exclusion only shields the TRANSFER itself from tax -- it doesn't retroactively exempt an aircraft that has never actually been taxed by Virginia. If the aircraft's first taxable event in Virginia happens around the same time as the trust transfer, expect the Department to still assess tax based on that first Virginia-connected use or licensing, separate from the (exempt) trust transfer itself.

Diplomats, missions, or anyone structuring an aircraft purchase through a separate company or entity for a diplomat's use

Virginia's diplomatic sales/use tax exemption is strictly non-transferable -- the actual PURCHASE must be made directly by the individual or mission holding the exemption card. Buying through a separate corporate purchaser, even for that person's exclusive benefit, won't qualify for the exemption.

Owners of privately-used aircraft based in Virginia

A privately-owned aircraft used for personal (non-commercial, non-governmental) purposes is a "civil aircraft" under Virginia law, which means it must be licensed with the Department of Aviation and is subject to Virginia's aircraft sales and use tax when brought into and based in the Commonwealth.

Common questions

Q: I transferred my aircraft into a revocable trust with no money changing hands -- is that transfer taxable?
A: The transfer ITSELF generally isn't taxable under Virginia's specific trust-transfer exclusion, as long as the aircraft's owners and the trust's beneficiaries are the same people. But that exclusion only applies if Virginia tax was already paid on an earlier acquisition or use of the aircraft -- it doesn't exempt an aircraft that's never been taxed by Virginia before.

Q: Can a diplomat's tax exemption cover a purchase made by a separate company for that diplomat's benefit?
A: No. Virginia's diplomatic exemption requires the actual purchase to be made directly by the individual or mission holding the State Department-issued exemption card. It doesn't transfer to someone who merely benefits from or exclusively uses something purchased by someone else.

Q: What's the difference between a "civil aircraft" and a "public aircraft" under Virginia law?
A: A "public aircraft" is one owned by the government or used for commercial purposes; everything else -- including a privately-owned aircraft used for personal purposes -- is a "civil aircraft," which must be licensed with Virginia's Department of Aviation and is subject to the aircraft sales and use tax.

Citations and references

• Va. Code § 58.1-1502 (aircraft sales and use tax; 2% rate on aircraft licensed in Virginia but not purchased there)
• Va. Code § 58.1-1506 (tax paid by the purchaser/user, collected before DOAV licensing)
• Va. Code § 58.1-1501 (revocable inter vivos trust transfer exclusion, applicable only where Virginia tax was already paid on the aircraft's prior acquisition/use)
• P.D. 09-39 (4/27/2009) (trust-transfer exclusion limited to previously Virginia-taxed aircraft)
• 23 VAC 10-210-694 (diplomatic exemption; non-transferable, purchase must be made by the exemption cardholder)
• P.D. 15-155 (7/20/2015) (same, diplomatic exemption requirements)
• Va. Code § 5.1-5 ("civil aircraft" defined as any aircraft other than a "public aircraft")
• 14 CFR § 1.1 (federal definition of "public aircraft": government-owned or used for commercial purposes)

Subject

Consumer Use: Diplomatic Exemption Aircraft - Civilian vs. Public Exemption: Revocable Trust Transfer - Previously Taxed

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-80

Original ruling text

April 19, 2022

Re: § 58.1-1821 Application: Aircraft Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), in which you seek correction of the aircraft sales and use tax assessment issued for July 1, 2014. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a company organized outside of the United States. The Department received information from the Virginia Department of Aviation (the “DOAV”) regarding an aircraft that was purchased outside of Virginia and based at Washington Dulles International Airport. Following discussions with the Taxpayers representative, an assessment for aircraft consumer use tax was issued for 2% of the aircraft’s purchase price. The Taxpayer appeals, contending the aircraft in question does not meet the definition of a “civil aircraft” under the Code of Virginia . The Taxpayer further contends that the beneficial owner’s diplomatic exemption with regard to the Virginia retail sales and use tax is applicable and requests the assessment be abated.

DETERMINATION

Virginia Code § 58.1-1502 imposes the aircraft sales and use tax on the “retail sale” of every aircraft sold in the Commonwealth and upon the use in the Commonwealth of any aircraft required to be licensed by the Department of Aviation pursuant to Virginia Code § 5.1-5. For aircraft not sold in Virginia but required to be licensed for use in the Commonwealth, the tax shall be 2% of the sale price of the aircraft. If the aircraft is licensed in the Commonwealth six months or more after acquisition, the tax shall be 2% of the market value of such aircraft at the time it is licensed or 2% of the purchase price thereof, whichever is lower.

Application of Aircraft Consumer Use Tax

Pursuant to information provided by the Taxpayer to the auditor during the audit, the aircraft at issue was purchased by the Taxpayer on June 4, 2014. It was transferred to a Revocable Trust on July 1, 2014, without monetary consideration. Pursuant to the Aircraft Service Agreement, dated July 1, 2014, the aircraft was to be based at Washington Dulles International Airport. The aircraft was licensed with the DOAV on July 31, 2014.

Virginia Code § 58.1-1506 provides that the tax on the sale or use of an aircraft required to be licensed by this Commonwealth shall be paid by the purchaser or user of such aircraft and collected by the Commissioner prior to the time the owner applies to the DOAV for, and obtains, a license.

Virginia Code § 58.1-1501 defines a sale as any transfer of ownership of an aircraft by any means whatsoever but shall not include a transfer made to trustees of a revocable inter vivos trust when no consideration has passed between the grantor and the beneficiaries when the owners of the aircraft and the beneficiaries of the trust are the same persons. The exclusion applies only to aircraft upon which Virginia aircraft sales and use tax has been paid upon acquisition or use by the transferor. See Public Document (P.D.) 09-39 (4/27/2009). Therefore, while the transfer from the Taxpayer to the Revocable Trust on July 1, 2014, was exempt from tax pursuant to Virginia Code § 58.1-1501, the Taxpayer was required to remit the aircraft consumer use tax to the Department once the aircraft was located within Virginia at which time a license with DOAV was required.

Diplomatic Exemption

Title 23 of the Virginia Administrative Code 10-210-694 is the Department's regulation on the diplomatic exemption and sets out the following:

Pursuant to the provisions of the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular Relations, no sales or use tax is applicable to sales to or purchases by certain foreign diplomats or missions . Exemption cards are issued by the United States Department of State and bear a photograph and name of the diplomat eligible for exemption in the case of individual diplomat cards, and, in the case of mission cards, the person entitled to make official purchases for the mission. The extent to which an individual or mission is exempt from the tax is illustrated on the face of the card. In order to qualify for exemption, the purchase must be made by the person to whom the card is issued. No exemption certificate is required: however, the record of the sale must indicate the exemption card number of the purchase. [Emphasis added.]

Based on the above-cited regulation, in order to qualify for the exemption, a purchase must be made by the person to whom the tax exemption card is issued. See also, P.D. 15-155 (7/20/2015). In this instance, the aircraft was purchased by the Taxpayer, an entity separate and apart from the beneficial owner. The Taxpayer argues that the aircraft was purchased for the exclusive use of the beneficial owner, and should therefore enjoy the provided tax exemption. The Department disagrees. Exemptions enjoyed under 23 VAC 10-210-694 are not transferable. Income and property for which such an exemption is claimed must be owned by the individual entitled to the exemption. While the beneficial owner, here, may have enjoyed the exclusive benefit of the aircraft, that fact alone does not create lawful ownership, nor does it qualify such purchases for exemptions under 23 VAC 10-210-694.

Civil Aircraft vs. Public Aircraft

The Taxpayer further contends that the aircraft does not meet the definition of a “civil aircraft” under Virginia Code § 5.1-5 and is therefore not required to be licensed in Virginia thereby removing Virginia’s ability to tax the aircraft. Virginia Code § 5.1-5 defines a ‘civil aircraft” as any aircraft other than a “public aircraft”. Title 14 of the Code of Federal Regulations (CFR) 1-1.1 defines a “public” aircraft as one owned and used by the United States Government or used for commercial purposes. As the aircraft at issue is privately owned, it does not qualify and is therefore considered a “civil aircraft’ subject to licensure under Virginia Code § 5.1-5.

CONCLUSION

Based on the above-cited authorities, neither the diplomatic nor the trust transfer exemptions apply to this aircraft. Further, the Department finds that the aircraft does not meet the definition of a public aircraft under 14 CFR § 1-1.1. Accordingly, the assessment for aircraft sales and use tax is upheld. The Taxpayer will receive an updated bill with interest accrued to date. The bill should be paid within 60 days of the date of the bill to avoid accrual of additional interest.

The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1868.A

Related Documents

09-39

15-155