One of the many elements a client needs to prepare for early in the process of acquiring a new aircraft is the imposition of state taxes. While not nearly as much fun as selecting the interior configuration or preparing for the first trip, careful planning on the front end of a transaction can help avoid surprise tax bills and added fines and penalties. It will also help ensure the aircraft is available to the new owner as expected. In Oklahoma, aircraft owners pay an excise tax and must register the aircraft with the state.

EXCISE TAX

Unlike most states, Oklahoma does not charge a sales tax on aircraft transactions. Instead, the state levies an excise tax of 3.25% of the purchase price of any aircraft when the transfer of legal ownership occurs in the state or the aircraft is used in the state.[1] This excise tax is in lieu of all other taxes on the transfer of ownership and is due at the time of initial registration of the aircraft in Oklahoma.[2] The state excise tax is also collected in lieu of county ad valorem property taxes.[3] It is important to note that the excise tax is applicable to both transactions that close while the aircraft is physically in Oklahoma as well as an aircraft brought into Oklahoma for use after being purchased by an owner. For evaluation purposes, “use” includes basing an aircraft in Oklahoma for a period of 30 days or more.[4] So that nonresident aircraft owners who choose to have maintenance performed in Oklahoma are not assessed the excise tax, periods of time when an aircraft is retained in the state solely for maintenance are not considered “use.”[5]

It is a common practice in the industry to close an aircraft transaction in a state with a “fly-away exemption” to aircraft sales tax. Fly-away exemptions are available in many states, and the brokers, dealers and advisors who work with aircraft purchasers often prefer to close in these states for a predictable and sales-tax-free closing day. But because the Oklahoma excise tax will be due upon bringing the aircraft into the state after closing, an Oklahoma aircraft owner may close their transaction in Oklahoma, pay the excise tax and avoid movement costs from the fly-away exemption closing location. This can be helpful if the parties are considering closing the sale in a state that otherwise has no connection to the transaction. If an aircraft is at an inspection facility as part of the prepurchase acceptance and the inspection facility is in a state with a fly-away exemption, this can be a convenient delivery location before moving the aircraft to Oklahoma after closing, where the new owner will pay the excise tax.

Beginning July 1, Oklahoma aircraft owners are now required to submit aircraft excise tax payments to Service Oklahoma through their online portal,[6] by mail[7] or at an in-person appointment.[8] Prior to this date, the excise tax was submitted directly to the Oklahoma Tax Commission.

While there may be compelling tax planning, business or liability reasons to own an aircraft that will be used in Oklahoma through an entity formed in another state, doing so does not, on its own, exempt the aircraft from the Oklahoma excise tax. Aircraft owners are sometimes tempted or advised to form a special purpose entity in a state with no aircraft sales tax, such as Montana.[9] Montana has become a popular state of registration for luxury automobiles and recreational vehicles for owners seeking to avoid sales tax,[10] and some Montana registered agent services specifically advertise registering an aircraft in Montana to “avoid potentially paying thousands in sales tax.”[11] But because the Oklahoma excise tax is assessed on the aircraft used in the state and not based on where the entity holding title to the aircraft was formed, using a special purpose entity in a tax-favorable jurisdiction does not create an exemption.

Oklahoma currently provides 17 legitimate exemptions to the aircraft excise tax.[12] Some of the more frequently used exemptions include inherited aircraft,[13] aircraft transferred between family members[14] and aircraft owned by a lender following a repossession.[15] Several of the exemptions apply to transfers of title between entities with common ownership or for the purposes of establishing a new entity,[16] but careful analysis should be made before determining if any specific transfer is exempt.

Oklahoma does have its own fly-away exemption to the excise tax,[17] but it is more limited than similar exemptions offered in other states. In Oklahoma, only an aircraft with a purchase price of at least $2,500,000 being sold to a non-Oklahoma resident who will immediately remove the aircraft from the state is afforded the Oklahoma fly-away exemption.[18]

Perhaps the most sought-after exemption is for an aircraft used in commercial operations.[19] To qualify for this exemption, the aircraft must be purchased or used by a commercial airline. For this purpose, the definition of “commercial airline” includes both the common carriers most associated with that term as well as certificated carriers offering charter flights under Part 135 of the Federal Aviation Administration regulations.[20] Prior to 2018, there was no threshold for how much flight activity needed to be made for commercial purposes to qualify for this exemption. During that time, it was not unheard of for an aircraft owner to place an aircraft on a certificated carrier’s “operation specifications,” which would allow the carrier to use the aircraft for commercial purposes but actually conduct little to no commercial charter flights. Through the 2018 Aircraft Excise Tax Charter Fairness Act, the Oklahoma Legislature amended the exemption to require at least 50% of flights each year be conducted for commercial purposes.[21] These flights must be true third-party commercial operations. Flights chartered by the aircraft owner or by the majority owner, if the title to the aircraft is held by an entity, are not considered commercial flights for the exemption calculation.[22] Aircraft owners who currently qualify for this exemption report their flight hours annually to Service Oklahoma to document their continued compliance.[23] If the aircraft owner or Service Oklahoma determines the exemption no longer applies because commercial flights were less than 50% during the year, the full excise tax is then due and payable.

If an owner takes their title to an aircraft outside of Oklahoma and later moves the aircraft into the state for use, the excise tax is due. Depending on the circumstances, a purchaser may be required to accept a title in a state where sales tax is due, and no exemption is available. Similarly, an aircraft owner may have initially based an aircraft outside Oklahoma and paid applicable sales and use taxes based on the initial home base. Oklahoma offers an exception to the excise tax if an amount greater than the Oklahoma aircraft excise tax has already been paid pursuant to the laws of another state.[24] If the amount paid to another state is less than what is due to Oklahoma as a result of moving the aircraft into the state, the amount paid to the other state may be deducted from the excise tax amount due to Oklahoma.

Failure to timely pay the excise tax can result in serious consequences to the aircraft owner, including seizure and sale by the state.[25] Short of a seizure, a delinquent taxpayer may find the state has placed a lien against the aircraft with the FAA.[26] Even if the state does not foreclose on the aircraft under the lien, the existence of the lien has the practical effect of keeping the owner from selling the aircraft or receiving insurance proceeds until the past due tax is paid and the lien is released. Paying the excise tax 30 days or more after its due date will also cost the aircraft owner a penalty of 10% of the tax amount,[27] and the total delinquent amount accrues interest at the rate of 1.25% per month until paid in full.[28]

OKLAHOMA AIRCRAFT REGISTRATION

In addition to the aircraft excise tax, Oklahoma aircraft owners must register their aircraft with Service Oklahoma annually.[29] Like the recent change in processing excise tax payments, state aircraft registration processing was moved from the Oklahoma Tax Commission to Service Oklahoma on July 1. After this date, all state aircraft registration documents, including renewals of current registration, will be sent to Service Oklahoma. This state registration is separate from the more familiar federal registration issued by the FAA under Part 47 of the FAA regulations, which is necessary to operate an aircraft under applicable federal and international law.[30] The Oklahoma aircraft registration functions more similarly to annual motor vehicle registration and is effectively an annual tax.

An Oklahoma aircraft owner should complete the relatively simple registration form[31] and return it to Service Oklahoma with the applicable registration fee and the applicable excise tax, if paying the initial registration fee, within 21 days of acquiring the aircraft or bringing the aircraft into the state for use. The registration fee ranges from $30 for very small aircraft to $22,500 for very large aircraft, with most falling somewhere in between. The fees are based on the type of propulsion system and the maximum gross weight of a particular aircraft. The current registration fees for a few popular aircraft models are: $52.50 for a Textron 172, $1,192.50 for a King Air 350 and $4,500 for a Citation CJ4.[32] If an aircraft first becomes subject to the Oklahoma registration fee after April 1, the owner will pay a prorated amount.[33] Beginning with the second calendar year of ownership in Oklahoma, the full annual registration fee is due Jan. 1 of each year and is subject to a nominal penalty of 20 cents per day if paid through the end of February but jumps to a penalty equal to the missed registration fee if paid on March 1 or later.[34] In addition to paying twice the registration fee that would otherwise have been due, failure to timely register the aircraft may result in the state placing a lien against the aircraft, like is done for unpaid excise tax.[35]

While not as extensive as the list for the excise tax, a few exemptions to the Oklahoma aircraft registration fee are available. These include an aircraft owned by the manufacturer, an aircraft owned by a charitable organization and used for charitable purposes, an aircraft owned by a nonresident who has registered the aircraft with their home state and an aircraft not holding a valid certificate of airworthiness issued by the FAA.[36] Aircraft owners also receive a 10% annual reduction in the registration fee for the first five years after the aircraft is manufactured.[37] This reduction is based on the age of the aircraft rather than the amount of time it has been owned, so purchasers of used aircraft should be aware of the applicable reduction before making the initial registration application. Owners of antique aircraft, as defined by the FAA,[38] and home-built aircraft pay only $10 for their annual registration fee.[39]

CONCLUSION

Compliance with the Oklahoma excise tax and aircraft registration requirements is not exceptionally complicated, especially when compared to other elements of the heavily regulated aviation industry, but it is vital. In practice, the Oklahoma Tax Commission was helpful and willing to answer questions regarding specific provisions and calculations when collecting the excise tax and processing aircraft registration was under their purview, and aircraft owners and practitioners can hope to receive the same treatment from Service Oklahoma going forward. With some attention to these issues before acquiring an aircraft, an Oklahoma aircraft owner can more easily include the payment and filing requirements in their closing plan and annual aircraft budget.

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ABOUT THE AUTHOR

Chad Gilson serves as an attorney at Gilchrist Aviation Law. He practices in various transactional matters related to the practice of aircraft title, registration, finance and leasing law.

 

 

 

 

 

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ENDNOTES

[1] 68 O.S. §6002.

[2] Id.

[3] 68 O.S. §2805 (1).

[4] 68 O.S. §6001.

[5] Id. at §6001 (4).

[6] https://oklahoma.gov/service/all-services/auto-vehicle/aircraft.html.

[7] P.O. Box 26940, Oklahoma City, OK 73126.

[8] 6015 N. Classen Blvd., Building 4, Oklahoma City, OK 73118.

[9] §67-3-201, 204, MCA.

[10] David Ericson, “How the Wealthy use Montana to Avoid Luxury Vehicle Taxes,” Montana Standard, (Sept. 8, 2023).

[11] All Day $49 Montana Registered Agent, https://bit.ly/4g4W6B8 (last visited March 1, 2024).

[12] 68 O.S. §6003.

[13] Id. at §6003 (12).

[14] Id. at §6003 (14).

[15] Id. at §6003 (14).

[16] Id. at §6003 (4), (6), (7), (8), (9) and (10).

[17] Id. at §6003 (16).

[18] Id.

[19] Id. at §6003 (5). See BMB Aircraft, LLC v. Oklahoma Tax Commission, 369 P.3d 60 (2016), where appellant unsuccessfully attempted to avoid paying $341,000 in excise tax on a new Cessna 560XL by leasing the aircraft to a company in the application process to become a certificated charter operator, but which company was not authorized to conduct commercial flights at the initiation of the lease.

[20] 68 O.S. §6001 (2).

[21] H.B. 2253, 2017 Leg., Reg. Sess. (Okla. 2017), amending 68 O.S. §6003.

[22] 68 O.S. §6003(5).

[23] Id.

[24] Id. at §6003 (11).

[25] 68 O.S. §6006.

[26] 68 O.S. §234 and Encumbrances Against Specifically Identified Aircraft Engines and Propellers, 14 C.F.R. §49.41(2024).

[27] 68 O.S. §217(C).

[28] Id. at §217 (A).

[29] 3 O.S. §254.

[30] Aircraft Registration, 14 C.F.R. §47 (2024).

[31] Service Oklahoma Form 13-34, available at https://oklahoma.gov/content/dam/service-oklahoma/Documents/mv-forms/13-34-17RegistrationofAircraftExciseTax.pdf.

[32] 3 O.S. §256 (A).

[33] Id. at §256 (B) and Form 13-34, reducing the percentage due by 25% for each fiscal quarter with no registration.

[34] Okla. Admin. Code §670:25-3-20(c)(2024).

[35] Okla. Admin. Code §670:25-3-40; 60 OK §234; and 3 OK §257.

[36] 3 O.S. §253.

[37] Okla. Admin. Code §670:25-3-3(b).

[38] Exhibition, antique and other aircraft: special rules, 14 C.F.R. §45.22 (2024).

[39] Okla. Admin. Code §670:25-3-2(c).