(The following is an excerpt from our 1031 Advisor newsletter located here )
Most practitioners are aware that income taxes on a Section 1031 Exchange of business assets can be deferred. However, in the arcane world of sales and use taxes, the states generally seek to impose sales taxes in full on the purchase and sale of (taxable) business assets rather than permitting a credit for the prior tax paid on the replacement property.
In the case of aircraft exchanges, these transactions are highly visible because they are reported to the states by the Federal Aviation Administration. Given the stark shortfall in tax collections, we have seen a marked increase in sales and use tax collection activity throughout the Midwest.
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