Sales Tax Slice: Is Tennessee’s Drone Exemption at Odds with FAA Ban?

When most people hear the term "drone," they envision a futuristic military device operated in an overseas war zones. But drones, formally known as Unmanned Aerial Vehicles (UAVs), have a growing application in the civilian market in the United States. Models have been designed and built for a variety of uses, including film, agriculture, power line and pipeline inspection, police work and firefighting. UAVs are viewed by many as the new frontier of aviation. States are starting to take notice of this new technology and make adjustments to their tax policy.

In June 2014, Tennessee's Department of Revenue announced in Notice No. 14-05 that UAVs used for certain agricultural purposes qualify for a sales tax exemption. Tennessee now considers UAVs used in sowing, planting, growing, monitoring, managing or harvesting farm products and nursery stock to be an appliance that qualifies for the agricultural exemption. The state's tax break applies to the purchase of both unmanned aircraft and support equipment such as cameras, radios, joysticks and navigation antennas.

The department's announcement mirrors a drone exemption in proposed Tennessee legislation that is currently pending in a subcommittee. The only other recent attempt to pass legislation was last year in California, where lawmakers proposed a tax exemption for in-state companies producing drones.

While drones may be tax-exempt in Tennessee, their use is at odds with federal law. The Federal Aviation Administration (FAA) maintains a general ban on all commercial operation of UAVs due to concerns of collisions with commercial aircraft. The FAA published a Federal Register notice in 2007 that clarified the agency's policy.

According to the FAA notice and a news release, UAVs may not be flown for commercial purposes by claiming that you are operating according to the Model Aircraft guidelines (below 400 feet, three miles from an airport, away from populated areas.)  Commercial operation of a UAV is authorized only on a case-by-case basis. A commercial flight requires a certified aircraft, a licensed pilot and operating approval. Until June 10, 2014, only one operation had met these criteria, using Insitu's ScanEagle, but authorization was limited to the Arctic, far outside U.S. territory.

For years the FAA has been pressed by Congress and lobbyists alike to update UAV regulations. The FAA made a landmark ruling June 10, 2014, approving UAV manufacturer AeroVironment to fly the first commercial drone over U.S. territory. The authorization was given to survey BP pipelines, roads and equipment in Alaska. This landmark ruling has other UAV industries hungry for similar allowances. As of last week, the FAA is considering giving permission to seven filmmaking companies to use drones for aerial photography.

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Do you think Tennessee's sales tax exemption for agricultural use of drones will increase pressure on the FAA to authorize more commercial drone users?

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By Mark J. Kennedy

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