Does an Illinois aircraft dealer owe Use Tax when an inventory aircraft is used for demonstrations and remains unsold for more than 18 months?

Plain-English summary

An aircraft dealer owed Use Tax on original cost if a demonstration or interim-use aircraft remained unsold for more than 18 months. The 18-month period began when the dealer purchased the aircraft.

The dealer held aircraft as inventory, did not depreciate them, used them for demonstration flights and repositioning, and collected Retailers' Occupation Tax when they were sold. Slow sales meant some aircraft could remain in inventory beyond 18 months.

Demonstration use was initially exempt

Use Tax did not apply to a retailer's demonstration or interim use before sale when the aircraft was carried as inventory and ultimately sold or otherwise remained available for sale during the relevant period.

The exemption ended after 18 months

If the aircraft was not sold before the 18-month period expired, the retailer incurred Use Tax on original cost. No credit for that tax was allowed if the aircraft was later sold.

The later sale still created Retailers' Occupation Tax liability.

The older DuPage case did not change the result

The requester cited DuPage Aviation. The Department noted that the 1976 decision said there was then no valid rule restricting how long property could be held before Use Tax accrued. Illinois responded that this was no longer the case because the 18-month statutory provision had been in effect since 1994.

What this means for you

Aircraft retailers

Track the purchase date for every demonstration aircraft. Inventory accounting and continued availability for sale protect interim use only through the statutory period described.

Dealers selling after the deadline

The later retail sale does not reverse the Use Tax triggered at 18 months. The GIL says no credit is permitted, and the sale itself still produces Retailers' Occupation Tax.

Common questions

Q: When does the 18-month clock begin?
A: When the retailer purchases the aircraft.

Q: Is demonstration use exempt during the first 18 months?
A: Yes when the aircraft remains inventory and is ultimately sold or otherwise available for sale.

Q: What tax applies after 18 months without a sale?
A: Use Tax on the retailer's original cost.

Q: Is that Use Tax credited when the aircraft is later sold?
A: No.

Citations and references

• 35 ILCS 105/2 — demonstration and interim use of aircraft.
• 86 Ill. Adm. Code 150.306(c) — 18-month aircraft rule.
• DuPage Aviation Corp. v. Department of Revenue, 37 Ill. App. 3d 587, 346 N.E.2d 8 (1976) — older case distinguished because the later statutory rule changed the landscape.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0098.pdf

Original ruling text

ST 11-0098-GIL 12/09/2011 USE TAX
This letter discusses the application of the Interim Use and Demonstration Exemption to
aircraft. 86 Ill. Adm. Code 150.306(c). (This is a GIL.)

December 9, 2011

Dear Xxxxx:
This letter is in response to your letter dated November 3, 2011, in which you request
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
The purpose of this letter is to request clarification in reference to use taxes and the
application of Illinois law in this particular situation. We have reviewed the law in this
area and have come to our conclusions but wish to confirm with the Illinois Department
of Revenue what is required under the circumstances.
Our client is a regional distributor of aircraft and powered gliders (collectively—‘aircraft’)
under an exclusive distribution contract in a four-state region with the manufacturer.
Our client does not manufacture the aircraft—rather; the company simply purchases the
aircraft and gliders for sale to end users. The aircrafts [sic] are not used for personal
use by the company owners or employees. The aircrafts [sic] are hangared awaiting
sale. In some instances, the aircrafts [sic] are repositioned to other geographic regions
where there is a better concentration of potential buyers. While at the other geographic
locations, the client company may conduct demonstration flights for qualified prospects.
In some instances, two aircrafts [sic] will be flown to the geographical site for the
purpose of leaving one of the aircrafts [sic] behind for viewing by potential buyers. The
second aircraft is then used to transport the pilot of the first aircraft back to Illinois. The
aircrafts [sic] are also displayed at flight schools or other areas where potential buyers
are present. The aircrafts [sic] are recorded as inventory on the books of account of the
taxpayer and are not depreciated. Due to the overall downturn in the economy in
Illinois and across the country, sale of aircrafts [sic] is slow. There will be occasions

where the aircrafts [sic] are held for 18 months or longer awaiting sale. When sold,
ROT is collected and remitted to the Illinois Department of Revenue.
As we understand, the use of property by its owner for demonstration purposes is not
subject to UT or SUT, except that demonstration watercraft and aircraft used by a
retailer for more than 18 months are subject to use tax on the retailer’s original cost of
the watercraft or aircraft. An interim use exemption rule provides that UT and SUT are
not imposed on (1) the interim use of property by a retailer before the property is sold,
provided the property is carried on the books of the retailer or is otherwise available for
sale or (2) the physical incorporation of property (to the extent not first used for the
purpose for which it was purchased) as an ingredient or constituent into other property
which is sold in the regular course of business. See 35 ILCS 105/2; 35 ILCS 110/2; 86
Ill. Adm. Code 150.201; 86 Ill. Adm. Code 150.306.
We also understand that the interim use exemption may not be claimed if (1) title to the
item is held by any party other than the retailer, the manufacturer of the item, or a
captive finance company; (2) the retailer elects to claim an IRC Sec. 179 deduction on
the item as a depreciable business asset; or, (3) if the item is leased, the aggregate
gross receipts from leasing exceeds the retailer’s selling price of the item. See 86 Ill.
Adm. Code 150.306(a).
But then we read, 86 Ill. Adm. Code 150.306(c), which provides that a retailer, who uses
an aircraft for demonstrative or interim use for a period that exceeds 18 months, shall
pay Use Tax on the original cost of the aircraft, and no credit for that tax is permitted if
the aircraft is subsequently sold by the retailer.
This will confirm that our client company is a retailer and that the aircrafts [sic] are held
for sale in the ordinary course of business and carried on the books of account as
inventory; that title to the aircraft is held by our client company and no other; that no IRC
Sec. 179 deduction has been taken; and, that the aircraft are not leased. This will also
confirm that the aircraft are not used for any personal purposes.
With regard to the aircraft inventory held for more than 18 months while awaiting sale,
our client company is concerned that UT is applicable. Specifically, the client company
does not understand why it will be penalized for inability to turn aircraft within 18 months
given the current and projected state of the economy. Also, 86 Ill. Adm. Code
150.306(c) seems in conflict with DuPage Aviation Corporation v. Department of
Revenue, Appellate Court of Illinois, Second District, No. 74-80, 346 N.D. 2d 8, 37 Ill.
App. 3d 587.
We are interested in your opinion as to what the law requires of our client company
under these circumstances. If your conclusion is that they must pay Use Tax for
inventory held for a period of 18 months or more, we want to know this. If you agree
with the position that the holding of aircrafts [sic] for resale for a period of 18 months or
more is exempt from paying Use Tax, we want to know this as well.
Please advise us of your opinion.

DEPARTMENT’S RESPONSE:

The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property at retail to purchasers for use or consumption. 86
Ill. Adm. Code 130.101. In Illinois, a Use Tax is also imposed on the privilege of using, in this State,
any kind of tangible personal property that is purchased anywhere at retail from a retailer. 86 Ill.
Adm. Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois
Section 2 of the Use Tax Act states, in part:
"’Use’ does not mean the demonstration use or interim use of tangible personal property
by a retailer before he sells that tangible personal property. For watercraft or aircraft, if
the period of demonstration use or interim use by the retailer exceeds 18 months, the
retailer shall pay on the retailers' original cost price the tax imposed by this Act, and no
credit for that tax is permitted if the watercraft or aircraft is subsequently sold by the
retailer.”
35 ILCS 105/2. The 18-month statutory provision has been in effect since 1994. The 18-month rule
regarding watercraft and aircraft contained in Section 2 of the Use Tax is codified at subpart (c) of 86
Ill. Adm. Code 150.306. I would point out that DuPage was decided in 1976, and the court in its
decision noted “there was at the time of audit no valid rule or regulation of the Department of
Revenue which restricted the length of time property could be held before use tax liability would
accrue.” DuPage at 591. This is no longer the case.
Based upon statute and the rule, the demonstration or leasing of an aircraft by a person
primarily engaged in the business of selling such property at retail falls within the scope of the
demonstration use exemption from Use Tax provided that the aircraft is carried as inventory on the
books and ultimately sold, or is otherwise available for sale during the relevant period. The ultimate
sale of the aircraft subsequent to the demonstration use will result in Retailers' Occupation Tax
liability.
The 18-month period for demonstration or interim use of aircraft begins at the time of
purchase. Therefore, if an aircraft were not sold prior to expiration of the 18-month period, the retailer
would incur Use Tax liability on the aircraft pursuant. Based on the facts contained in your letter we
see no reason why the 18-month rule would not apply.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Associate Counsel
RSW:msk