Debunking Use Tax Myths
There is no shortage of rumors and myths out there on how not to pay California Sales and Use Tax on boat purchases. Almost every broker I talked to at the San Diego boat show last year had a different "theory" on how to avoid paying use tax. One suggested parking it in Mexico for 90 days, and yet another said, "just take offshore delivery and you'll be fine." A few suggested exploring out of state registration as a means of avoiding the tax. Many mixed and matched different aspects of each theory. A couple of yacht brokers even said not to worry about it, they can just roll the tax into the financing; how nice.
No Shortage of DIY Advice Out There
Boaters are notorious for providing "expert" advice on any and all matters. DIY sales and use tax advice is no exception; advice and rumors float around the marina as if they were scientific fact. Boaters dispense with this advice as if it were "free." But let us be clear, you will end up paying for it, with interest, when the tax man comes knocking on your door.
You are responsible. Acting on a rumor, or a half truth, will only leave you laying awake at night, wondering when the California Department of Tax and Fee Administration (CDTFA) will be calling. The CDTFA has upwards of ten years to pursue a claim against you. That is ten years of sleepless nights, and ten years of interest piling up. Without sound legal advice you will be left in the dark, wondering just how big of a mistake you made.
The truth is you cannot legally avoid paying use tax
The Truth About the Myths
You are thinking about buying a new boat, you have heard the whispers about how to not pay California Sales and Use Tax on the purchase. After asking around, the advice from your fellow boaters probably falls into two categories: registering the boat outside of California and/or offshore delivery. There is one crucial element these tactics are missing: the letter from the CDTFA acknowledging that the transaction is exempt.
As the buyer you are responsible for filing and paying California Use Tax on your vessel purchase. You are required to file the form with the CDTFA within twelve months of the transaction. If you do not file you could be charged with fraud and receive penalties up to 50% with interest. Even worse, the CDTFA uses your lack of filing as evidence of fraud.
California Use Tax cannot legally be avoided. We can create a non-taxable event. The code is specific about what constitutes a taxable transaction, and what does not constitute a taxable transaction. Parking the boat in Mexico for 90 days use to be a viable option, that is no longer the case. The code is constantly changing, the rumors are not.
Offshore Delivery Does Not Solve Every Problem
Location of delivery outside the territorial waters of California does not immediately create a non-taxable transaction. Offshore delivery has its place and may be part of a valid plan to not pay California Use Tax. Offshore delivery removes the actual sale of the vessel outside of the territorial waters of California, creating the potential for a non-taxable transaction. Offshore delivery may be a critical step in your strategy, but you are in trouble if it is your only step.
Most California boaters have heard various strategies claiming that avoiding California Sales and Use Tax is as easy as taking offshore delivery and parking the boat in Mexico for 90 days. The first major problem with this strategy is the California Tax Code now requires a year, not 90 days. Getting pass that small issue, assuming you can meet all the requirements for a tax exemption, and assuming you execute every step flawlessly, you still need to be able to prove every detail to the California Department of Tax and Fee Administration.
The difference here is generally referred to as the difference between the substance and the form of the vessel purchase. The substance is what actually happened, what you did to make the transaction tax exempt. The form is the documentation you have to prove that you performed offshore delivery and parked the boat in Mexico for a year. The form is itself composed of two distinct parts. Let's assume that getting, documenting, and archiving all the documents to prove you deserve an exemption was no problem. Let's assume you kept accurate records regarding the GPS coordinates of the delivery, the exact date the vessel entered Mexico, and so on. That's a great and necessary step, but only another small piece of the puzzle.
The CDTFA is going to review the sales agreement for the purchase of the vessel. If that agreement doesn't require delivery offshore and have proper designations of agency relationships the transaction will still be subject to California Use Tax. One line in the contract can be the difference between $100,000 tax bill from the State of California, or nothing. The contractual language is just as critical, if not more critical, than every other step in the transaction. It is the base which the rest of the strategy rests.
Registering the Boat Out of State is Fraud
If your register your vessel outside of the state of California for the purposes of avoiding California Sales and Use Tax you may be guilty of committing fraud. This applies whether you registered the vessel in your own name out of state, or whether you registered it in an out of state corporation/LLC. If the CDTFA determines you committed fraud, they can assess up to a 50% penalty.
The reason registering out of state does not defeat California Sales and Use Tax is twofold. First, use tax is levied because the item is determined to be purchased for use in the state by a resident. If the boat is used in California during the first 12 months after purchase the state may say it was purchased for use in California. The second problem, that causes even more headaches, is the State of California does not use a federal income tax definition of a resident, but instead uses the much more expansive definition contained in the California Department of Motor Vehicles Code. This means that even if you are not a resident of California in the traditional sense, you can still be responsible for California Sales and Use Tax.
Along the same lines, simply registering the vessel in an out of state limited liability corporation (LLC) will not prevent you from being subject to California Use Tax. If any of the owners or shareholders of the corporation are California residents, then use tax will still apply. Since California uses the DMV definition of a resident this casts a wide net over who is a resident.
The CDTFA has agents combing through the property tax records assessed on vessels. If you are mooring a vessel in a California marina they will find you.
But there is Hope!
Through the use of single asset entities we can structure the transaction so that no tax is owed. We can create a situation, where according to the law of California, you do not owe any tax. California Sales and Use tax are transaction taxes assessed on various transactions. We make it so your purchase of a boat is not one of those transactions.
We are here to Help
The experienced attorneys at p.Law are here to help. We are transaction experts with a thorough knowledge of California Sales and Use Tax law. We have the extensive knowledge required to defeat California Sales and Use Tax.
If you want to learn more about how we can save your clients almost 80% on their next boat purchase give us a call or click the button below.