By Kimball Payne
February 4, 2011
RICHMOND – State lawmakers are inching toward scrapping the sales and use tax on some aircraft companies four the next four years, in the hopes that the new exemption could help a Peninsula company create jobs.
The proposal is specifically designed for Orion Air Group, a local company that provides services for the federal government and commercial aviation. Originally based in York, Orion moved its local staff into a new $4 million hangar at Newport News/Williamsburg International Airport in early January.
According to Jason Stickler, Orion’s in-house counsel, the current Virginia sales and use tax keeps the company from bringing more planes and employees to the Peninsula. It’s cheaper to keep them in a neighboring state and bring them in only when they have business.
“If we fly someone on the commercial side and they want to fly out of Newport News, we’ll have the support staff based in Hagerstown (Maryland),” Stickler said.
A flight from Hagerstown to Newport News take as little as 33 minutes; a flight from Edenton, N.C., is a mere 19 minutes.
Virginia currently imposes a 2 percent sales and use tax on airplanes in the state. That ranks somewhere in the middle of state averages, as some states collect no sales and use tax on aircraft while others charge rates as high as 6 percent.
Virginia falls into a disadvantage because nearby states – Kentucky, Maryland, Tennessee and West Virginia – offer exemptions on aircraft sales and use taxes if the planes are used in interstate or foreign commerce. North Carolina caps its aircraft sales and use tax at $1,500.
Orion’s fleet includes two jets that do military work that are worth about $36 million each. If Orion moved just one of those planes permanently to Virginia, it would take a one-time tax hit of $720,000.
So despite the new headquarters, Orion only keeps its three smallest and least expensive airplanes here because of Virginia’s tax rate.
“The current aviation tax in Virginia places us at a distinct disadvantage,” said Del. Glenn Oder, R-Newport News. “High-paying, quality jobs are not coming to Virginia because of our aviation tax structure.”
According to Orion, each of the company’s 14 planes requires pilots, maintenance technicians and support staff – the company pays workers an average yearly salary of $75,000. It employs 115 people across the county, with about 50 based in Virginia.
Oder is working on the tax-change proposal with Sens. Thomas K. “Tommy” Norment, R-James City, and John Miller, D-Newport News. It is co-sponsored by Peninsula Democratic Dels. Robin Abbott, Mamye BaCote and Jeion Ward, and has the support of Republican Gov. Bob McDonnell.
The exemption has been crafted so that only companies that invest heavily in “aviation related real estate” and create more than 50 jobs with high wages – one and a half times the local average – would qualify, alleviating concerns that every company with a corporate jet would apply for the break. Companies would have to be headquartered in Virginia and spend $4 million on publicly owned, public use airports.
Further, the proposal would allow the tax break to expire at the end of 2014.
Pitched as an economic development incentive, the proposal flew out of the House Finance Committee on a 19-2 vote this week. It has faced stronger opposition from Democrats in the Senate, though it did emerge from the Senate Finance Committee on an 8-4 vote.
Former Del. Tom Gear, R-Hampton, tried to pitch a similar tax break in 2010, but it died in the Senate.
Ken Spirito, executive director of the Peninsula airport, noted that the proposal could help all public use airports in Virginia. Spirito said the tax break would allow Virginia airports to compete for aircraft manufacturing companies and other related business.
“It puts us temporarily on the same playing field with other states,” he said “It could allow Orion to grow in the future.”
Stickler said the company is already moving toward the goal of creating 50 new jobs in Virginia.
“We already put a dent in that,” he said. “We were quickly running out of room in the space we had.”
According to the Virginia Department of Aviation, the airplane sales tax money is routed into the Aviation Special Fund, which is used to pay for infrastructure upgrades at airports throughout the state. It typically has a balance of $3 million to $8 million in any given year. A spokeswoman said the Department of Aviation supports the break.
Stickler said it’s unlikely that the firm’s priciest planes would move to Virginia in the near future, because they’re based in the Middle East working with the Air Force. But he said military contracts are short-term deals with no guarantees so the planes would have to come back to the United States eventually.
“I’d have a very large tax hit to bring that asset back here,” he said.
Stickler said Orion buys ultra-long-range jets designed for business travel, modifies them to meet specific military missions, then provides support for the planes once they’re operational.
“That’s been our niche to date,” he said.
Stickler said disclosure rules prevent him from discussing in detail the type of work that the military planes are used for, but he allowed that the company typically does “communications and surveillance” work and works largely with the Air Force.
“We work with a couple different branches, honestly,” he said. “We’re deployed around the world.”
It’s unlikely that the company would ever bring its entire fleet and staff to Virginia, Stickler said, because Orion benefits from having a commercial hub in Scottsdale, Ariz., and other outposts in Maryland and South Carolina. But he said that consolidating management and maintenance could be a boon for Virginia.
“We’ve grown at the rate that we’ve grown so far despite the economy,” he said.
Where does the tax money go?
The Virginia Aviation Special Fund, which comes from taxes on planes, pays for infrastructure upgrade at airports throughout the state. Here’s the average amount it has held over the past five years.
2009-10 – $8.3 million
2008-09 – $3.6 million
2007-08 – $5.3 million
2006-07 – $7.9 million
2005-06 – $6.5 million