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Former Governor Schwarzenegger signed the 2008 California Budget into law on September 23, almost three months after the legally mandated deadline for enacting the State’s annual budget. This exercise in democracy for 2008 included the closing of various so called “tax loopholes,” but the item of particular importance to the yachting community was the return of the “one year rule” relating to the assessment of sales and use tax on the purchase of vehicles, vessels, and aircraft. The legislative “trailer bill” was effective on September 30, 2008, and any contract entered into after that date for the purchase of a vehicle, vessel, or aircraft is subject to the new law.
This article is intended to provide a generic overview of the general features and requirements relating to the assessment of California Sales and Use tax on the purchase of a yacht. As a preliminary matter, we need to point out that this is a generic overview – – – It should NOT BE CONSIDERED A COMPLETE GUIDE. The Buyer’s obligation to pay Sales or Use Tax for the purchase of a Vessel is dependent on many things, including the intent of the Buyer to remain outside of California and the ability of the buyer to provide documentary evidence of the transaction. There are aspects of this discussion that may not apply to your transaction, and much of the analysis is subject to many variables that are simply too obscure to discuss in an overview such as this. And, this article does not cover LLC purchases, which are becoming increasingly popular for yachting transactions in California. Please contact us for more information. With that in mind, we can provide a general overview of the law.
The State of California will assess sales tax (for new vessels) or use tax (for used vessels) if the boat was (1) purchased in California; OR (2) purchased for “use” in California. California’s territorial boundary extends three miles into the ocean, so if the purchase can be structured to close more than three miles offshore (an “Offshore Delivery”), the buyer will satisfy the first prong of the test. The second prong involves a subjective analysis of the buyer’s intended use at the time of the purchase, which is a little more complicated.
A buyer’s true “intent” is impossible to determine through any objective test, so a “presumptive test” was established, where a buyer who could prove that the boat was used outside of California for a particular time period after the purchase was presumed to have purchased it for use outside of California. The 2008 legislation referenced above established a one-year time period for the presumptive test, though it does include a few options for shortening that period.
We should note that, regardless of the time period, the State will assess sales or use tax if the boat is purchased (1) in California or (2) for “use” in California. We should also note that this is not a black and white test, and the “presumption” can be defeated. It is possible for a buyer to comply with the calendar test and nonetheless be subject to the tax, if the California Department of Tax and Fee Administration (CDTFA) discovers facts that indicate that the buyer actually intended to use the boat in California.
The highlights of the one-year rule provide that a buyer will be presumed to have purchased the boat in California, and thus be subject to assessment of sales or use tax, if:
- For California residents, the buyer brings the boat into California within one year of purchase; or
- For non-residents, the buyer keeps the boat in California for more than six months during the first one year after the purchase; or
- For anyone, if the vessel is subject to the assessment of personal property tax at the county level during the first year after purchase.
There is one significant exception to the one year timetable. An owner may keep the boat in California during a repair, retrofit, or modification project, without affecting the one year analysis, so long as the boat logs less than 25 hours underway while it is in California.
Finally, we will note that a prospective purchaser of a boat who is concerned about the assessment of sales or use tax should contact us for more information. It is never a good idea to enter into a transaction based upon legal advice that is not crafted for your particular circumstances, but this is particularly true with a legal issue such as this which is so volatile and subject to intense political scrutiny.