Missouri "Trade in" Exemption Not Available in Aircraft Deal

Nov 15th, 2013

The Missouri Supreme Court recently held that a taxpayer could not claim the "trade in" credit on a purchase of an aircraft because the taxpayer engaged in two separate transactions rather than one exchange.

The taxpayer bought a Cessna 525B aircraft (Plane 1) from the manufacturer. Two years later, the taxpayer sold a Cessna 525A aircraft (Plane 2) to a third party. When the taxpayer sold Plane 2, it used an intermediary. The taxpayer assigned the rights to the purchase of Plane 1 and the sale of Plane 2 to the intermediary. The intermediary therefore had title to each of the planes during the sale of Plane 2. In "exchange" for Plane 2, the intermediary "sold" Plane 1 back to the taxpayer. The intermediary then handed over title of Plane 2 to the third party. The intermediary had title to each plane for a few minutes only.

The taxpayer then claimed a credit based on the "trade in" exemption for its purchase of Plane 1. It claimed that it only owed use tax on the difference between the purchase price of Plane 1 and the sale price of Plane 2. The Missouri Department of Revenue disagreed.

Missouri provides an exemption for amounts "taken in trade as a credit or part payment on the purchase price." This means that tax does not apply to "the amount for which already-owned property is traded-in as a credit toward the purchase price of newly acquired property."

The Court determined that this exemption did not apply. The economic reality of the transaction was that the intermediary did not take Plane 2 in exchange for Plane 1. The intermediary merely acted as an agent to facilitate the taxpayer's transactions. Because the taxpayer engaged in two separate transactions, not a mutual exchange, the "trade in" exemption did not apply. The taxpayer was therefore not entitled to the credit.