| When Michael Thibodeau contacted the California | | | | alternate exemption. But in the middle of the filing |
| Board of Equalization (BOE) in search of advice, he | | | | process, the lead counsel for the BOE changed one of |
| thought he was taking a prudent action, one that would | | | | the definitions of a legal concept that's integral to that |
| ascertain whether he could bring a recently acquired | | | | particular exemption," says Alston. "I had dozens of |
| aircraft into the Golden State before the 90-day | | | | cases that were based on the original definition, so I |
| waiting period was up--and still qualify for a use tax | | | | argued against the change of interpretation. But the |
| exemption. Thibodeau never dreamt that the advice | | | | BOE attorney declared that the definition had always |
| he got would lead to a ruinous tax bill. | | | | been that way." |
| "Michael was a typical victim of a relationship that is | | | | The definition used by the BOE attorney alluded to the |
| often very adversarial," explains Tom Alston, President | | | | notion that aircraft of certain types are not designed to |
| of Aero & Marine Tax Professionals, a Sacramento, | | | | fly. "According to the attorney, we could not support |
| CA-based consultancy that specializes in advising | | | | that the Citation was designed, or designated, to fly |
| purchasers of aircraft and marine vessels on state | | | | was because Michael did not fulfill the qualifications for |
| sales and use tax exemptions. "People like Michael, | | | | 'first functional use' before the aircraft enters the |
| and even attorneys, CPAs and financial planners, often | | | | state," explains Alston. "The BOE attorney was altering |
| learn hard lessons when it comes to defending | | | | the definition of 'first functional use,' which up to that |
| themselves against the perspectives and findings of | | | | moment has always meant 'the purpose for which the |
| the BOE--even though they are seeking legitimate | | | | aircraft was designed.' Aircraft are designed to fly; |
| exemptions that are designed as incentives to | | | | therefore, the minute that you flew one, you met the |
| promote California business." | | | | definition of first functional use. It's been that way for |
| Thibodeau, a 30-year veteran pilot-for-hire and aviation | | | | 30-40 years. But, with the stroke of his pen, the |
| management consultant, handled the acquisition of a | | | | attorney decides, 'Nope, we've never done it that way.' |
| 1981 Citation CE-550 for three California-based | | | | What he said is that any aircraft that has jet engines |
| corporations in March of 2000. Possession of the | | | | or turbine engines or more than 6 seats wasn't |
| aircraft took place in Reno, NV. In order to qualify for | | | | designed to fly, it was designed to 'carry passengers.' |
| the California state use tax exemption, which would | | | | So, Thibodeau found himself in a double bind where, |
| amount to $177,000, the aircraft was delivered in Reno, | | | | not only did he get undocumented advice from the |
| and would be based there. | | | | BOE, but the agency was altering the meaning of a |
| Throughout the due diligence and transaction | | | | critical requirement. It seemed to him that, even though |
| processes, Thibodeau addressed all questions | | | | exemptions were created to foster business in |
| concerning California use tax, the exemption and other | | | | California--an intention that was indeed being |
| matters to the same official at the BOE's Consumer | | | | served--the BOE was going for the throat. |
| Use Section. "I thought it would be advantageous to | | | | Fortunately, Thibodeau indeed had a passenger on |
| talk with the same person, that it would establish a | | | | board when he flew the Citation into Sacramento, |
| relationship so that we wouldn't have to start from | | | | "officially making first functional use" as far as |
| scratch...," he explains. "Of course, I had read the BOE | | | | California was concerned. "This was a very fortunate |
| regulations concerning the sale and exemption ... But it | | | | coincidence," Alston says. "Lots of pilots, maybe most |
| was my first transaction of this type, and I wanted to | | | | of them, might not have a passenger on a trip to a |
| make sure that I verified all matters concerning the | | | | maintenance facility. But since there was a passenger |
| BOE--and that I got it from the horse's mouth." | | | | on board, we were able to secure the exemption." |
| It was then that the nightmare began. After hearing | | | | Alston adds that, as fortunate as the case turned, the |
| from a friend that it might be permissible to bring the | | | | Citation owners were lucky. He says that the time to |
| Citation into California for the sole purpose of | | | | get a tax specialist involved is early in the deal, before |
| service--without disrupting the use tax exemption | | | | the transaction is completed. |
| situation--Thibodeau decided to call his usual contact at | | | | "Hiring someone early means we can guarantee |
| the BOE. | | | | results, because we can control the situation" Alston |
| "My only intention was to get the service work at the | | | | says. "However, once the transaction is complete and |
| Sacramento facility over with," he says. The three | | | | some complication comes into play, we can't always |
| new owners, who employed a "substantial number" of | | | | guarantee the results. And that may very well cost |
| California workers, made frequent business trips to | | | | more because there is less control and more work. In |
| western Canada, Mexico and throughout the western | | | | short, our clients can save a lot on fees if they get us |
| U.S. | | | | involved at the very beginning, and they may well save |
| The BOE official told Thibodeau that it was permissible | | | | their skins if the BOE is involved." |
| to bring the aircraft into California and still qualify for the | | | | Michael Thibodeau now realizes that there is more to |
| exemption, as long as the trip was for service only. | | | | the tax exemption business than he thought. "I went to |
| However, after doing so, when he filed for the | | | | the wrong source when I went to the BOE," he says. "I |
| exemption at the end of 90 days, the sale was held to | | | | did what the BOE expert told me to do, but he was |
| be taxable. | | | | wrong,. The next time I will talk to Tom Alston before I |
| "... I was told by my contact that he did not recall the | | | | even get started on a deal.... I don't feel that the BOE is |
| conversation regarding the service trip to Sacramento. | | | | the kinder, gentler group of people to do business with. |
| I eventually talked to his supervisor, who told me that I | | | | Fortunately, I now have the gorillas I need to go up |
| had no proof of my conversations with the official, that | | | | against them." |
| I had nothing in writing. So here I am, trying to do the | | | | The next time could come soon. The owners of the |
| right thing, to go through the prescribed process, and | | | | Citation are considering selling it and buying a newer |
| now I'm facing a tax bill for $177,000." | | | | model. Yet, Thibodeau says he is still smarting from the |
| Thibodeau then contacted Tom Alston. Highly | | | | experience. "It was very tough on me. I faced a |
| experienced in aircraft tax matters concerning | | | | devastating tax bill. Also, I had to let the owners know |
| California's BOE, Alston felt sure that Thibodeau | | | | about the situation, and it could have made me appear |
| qualified for an exemption, but that it was a different | | | | incompetent. These are companies that I've had |
| one. | | | | business relationships with since 1990. Which shows |
| "So, we eventually filed the tax return, taking the | | | | you that there was even more than $177,000 at stake. |