Taxes & The Boat Owner
Whether the vessel you are buying is a commercial or pleasure vessel you will have to deal with a few tax issues when evaluating your purchase options.
Sales tax will be an issue in most major boating areas. California, Washington and Florida will always be imposing such a tax.
A sales and/or use tax is a tax calculated on the total value or purchase price of the vessel. The percentage varies from state to state but may also include some local or county assessment as well. Generally, sales tax is approximately 8% of the value of the vessel. If the vessel has a price of $400,000.00, you will be assessed approximately $32,000.00 in sales tax. Each jurisdiction will have very different rules and exceptions.
In this section we will deal with the general rules of taxation. It is important to remember that these rules are changed and modified by the legislature from year to year and you must consult someone qualified to make a determination as to the actual imposition of the tax. However, these are the general rules of which you must be aware.
The tax will be imposed upon vessel purchase in the state or imported into the state during the first year of ownership by a California resident with the intention of using the vessel in the state. The statute provides that out of state use in excess of 1 year from the date of purchase to the date of first entry into the state will be accepted as proof of an intent that the vessel was not purchased for use in California. Intent is the important issue and the tax authority may make a determination that other evidence outweighs the out of state use evidence. A non-resident may need only to keep the vessel out of state for 6 months. These time periods have changed over the years.
There are some things the tax collector will look at to impose the tax even though the vessel was out of the state for the proscribed time.
- While out of state did you use the vessel on a regular basis, rather than just leaving it in storage to meet the rule?
- Did you secure a slip or dock within the state at the time of purchase or before bringing the vessel back to California?
- Is California your principal place of residence?
- If the evidence displays that the overall intent was to use the vessel in California rather than elsewhere, you may be taxed.
There are a variety of exemptions from tax:
1. Purchase of a vessel from a parent, grandparent, grandchild, child or spouse.
2. Involuntary transfer of ownership by court order, lien or inheritance.
3. Dissolution of a corporation or partnership in which the vessel is an asset and is distributed to you on the basis of your ownership interest.
4. A new California resident is exempt if you can demonstrate that the vessel was purchased for use outside the state and was brought into this state as a result of an offer for a job transfer after the purchase was made.
5. Military personnel are exempt if the purchase was made before the date of notice of transfer into California.
6. Vessels purchased from the U.S. Government by way of a U.S. Marshal Sale; however, government sales for liens, etc. are not exempt.
7. Corporations and partnerships do not pay sales or use tax when the vessel is received as a gift where no compensation of any kind is paid or when the vessel is contributed in exchange for the first issue of stock in a new corporation.
8. Or when the vessel is transferred to a substantially similar corporation or partnership with no change in equitable ownership.
9. Or when the corporation received the vessel as an involuntary transfer by way of repossession or inheritance.
10. Vessels may be transferred into Revocable Living Trusts without paying tax.
11. Commercial Deep Sea Fishing Vessels are exempt where the principal use is deep sea fishing outside the territorial waters of California. To qualify you must produce $20,000 in gross receipts over a one-year period.
12. The vessel will be exempt if it operates in interstate or foreign commerce.
Generally, the buyer is required to report and pay the sales and use tax to the California Franchise Tax Board. If the purchase is through a California vessel dealer, the dealer must report the sales tax.
California Yacht Brokers may collect and report the tax. However, if the broker collects an incorrect amount, you will be billed for the difference. If the broker collects the tax but fails to report it to the Board, you will be given credit for the amount paid to the Yacht Broker.
Sales and Use Taxes may become major items in a decision to purchase a vessel by adding more than 8% to the total price. This issue may legally be minimized if properly handled and legitimately addressed. Avoidance of the sales tax illegally may result in a 50% penalty. Seek good advice in deciding how best to resolve this issue.