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Fractional Aircraft Owners Ready to Fight New Tax

A new state law allowing property taxes to be collected from partial owners of aircraft has met with resistance from the business aviation industry. Several of the larger fractional aircraft operators are banding together to challenge the law passed in August by the General Assembly. State law already collects property taxes from owners of personal aircraft and from charter aircraft operators. Fractional ownership is different in that it involves anywhere from two to 16 people owning a plane together, with access determined by how much the owner has paid in. These aircraft are operated and maintained by a manager as part of a larger fleet shared by all of the owners. One problem with the law, from the owners’ perspective, is that they can be taxed even if they do not use the plane in California. “It was implemented with little thought and great haste, with no industry input whatsoever,” said Stephen Hofer, an aviation law attorney with clients in the San Fernando Valley. For instance, the law states that fractional aircraft are those planes registered as such with the Federal Aviation Administration, but the FAA does not make a separate designation for fractional ownership, instead using a broader designation of “co-owned aircraft,” Hofer said. Los Angeles County Assessor Rick Auerbach countered that the process the legislature came up with is efficient and similar to that used to assess property taxes for commercial aircraft. The formula for fractional aircraft is based on the number of takeoffs and landings in the state in proportion to takeoffs and departures worldwide. As an example, Auerbach said that if 5 percent of a fleet is in the state then they will be assessed at 5 percent. “They should not be using California facilities and escaping taxation,” added Auerbach, who serves as chairman of the aviation advisory subcommittee for the California Assessors Association. California is the first state in the nation to pass this type of legislation. The bill was introduced by the senate’s Committee on Budget and Fiscal Review. An analysis of the bill by the State Board of Equalization concluded that an additional $9.6 million would come to the state from the tax, with about one-third of that amount coming from Los Angeles County. The law is of major concern to the four major fractional providers operating nationwide NetJets Inc., owned by Berkshire Hathaway Co.; FlightOptions, LLC; Flexjet, the fractional program of aircraft manufacturer Bombardier Corp.; and CitationShares LLC. FlightOptions, based in Cleveland, has been well aware of the law for some time and is working with other fractional operators to challenge it, said spokesman Dennis Baker. Baker did not name the other operators and did not have details on the challenge. In the meantime, the company is collecting a fee from its customers targeted to pay the property tax. The monies collected remain in an escrow account until the conclusion of the legal challenge, Baker said. “It’s already an expensive way to fly so for us to go to our customers and state there’s going to be an additional tax is bothersome from a business perspective,” Baker said. Because the operators have planes flying in and out of multiple counties, one assessors office will be designated as a lead office for each of the big four companies to which they will report all their aircraft activity. The first year of reporting may prove difficult for the operators, but there is no other way to do it, Auerbach conceded. “They are the only ones who have the information,” Auerbach said. “I could not conceive an easier way to do it.” Taxing fractional aircraft has been on Auerbach’s radar for at least two years. In April 2006, he wrote to the State Board of Equalization asking for an opinion on whether such aircraft were taxable. An equalization board attorney replied fractional aircraft could be taxed, citing case law that personal property involved in interstate travel may be subject to taxation by the state or states in which the property maintains a substantial presence. Another concern from the operators’ perspective is that other states may follow California’s lead or that the state could use the property tax as a way to open the door to imposing sales and use taxes on fractional aircraft. All states look for new sources of revenue and taxing fractional aircraft may sound appealing to them, said Mike Nichols, vice president of operations, education and economics with the National Business Aviation Association. The law specifies that a connection is established for a fractional aircraft by landing within the state, a provision that Nichols called a big stretch. There is a difference between, say, a major retailer flying employees to stores in California and, say, his coming to San Diego for a convention, Nichols said. “What is my connection to the state if I am there for professional development,” Nichols said. “Why should I be subject to the tax if I am not a California resident?”

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