New California Budget and its Effect on
Sales/Use Tax on Boat Purchases
July 30 - Sacramento
As we understand it, Governor Arnold will sign a new state budget
tomorrow, one that will, as of October 2, change the rules on
'offshore deliveries' that, in the past, have been used to exempt
individuals from having to pay California sales or use tax on
the purchases of boats. Given a very quick reading of the pertinent
section of the new budget, Thomas Alston of Aero/Marine Tax Professionals
in Sacramento flash-analyzed it this way: If you are a California
resident, or if your property (boat) becomes subject to California
personal property tax during the first 12 months of ownership,
or if not a California resident, but if your boat is in California
more than half the time, you are required to pay either sales
tax or use tax.
In the past, if you kept your boat out of the state for the first
90 days after purchase, or if you kept it out of the state for
51% of the first six months, and met several other conditions,
the purchase was exempt from sales and use tax. Who is this new legislation going to affect and how? We're not
tax experts, but our guess is that it's going to have a much
greater effect on Southern California boat buyers, because it
was so much less expensive for somebody in Marina del Rey, Newport,
or San Diego, to run a boat down to Ensenada and leave it for
90 days than for somebody from Northern California. The boat
price at which it even began to make sense for a Southern Californian
was probably as low as $50,000, but for a Northern Californian
it didn't make sense up to $150,000 and maybe even more. And
even at those numbers it wasn't worth the pain for a lot of people.
Will there still be ways of getting around the sales/use tax?
It looks like there will be for the really rich - what else is
new? - and folks who are really taking off cruising for at least
a year and who will ultimately be selling their boat outside
of California. For about $4,000, moderately and really rich folks
can form an anonymous offshore corporation in places like the
Cayman Islands, British Virgins, Niue, the Seychelles, St. Vincent
and the Grenadines, and a host of other places, and have that
corporation buy the boat. Then for $12 a year, this foreign-flagged
boat can buy a U.S. cruising permit and be in the U.S. The problem
would be if the boat stayed in California for more than six months
a year. For lots of rich folks, this isn't a problem, as in any
event they would already use their boats in Mexico or the Pacific
Northwest for more than six months a year. For others, the '90-Day
Yacht Club' in Ensenada may become the 'six month parking lot'
in the winter for California boats.
The way we read the new budget, it would also be possible for
regular folks who are about to take off on a multi-year cruise
and plan to ultimately sell their boat outside of the state of
California, to avoid sales and use tax. They would need to establish
an out-of-state residence or perhaps a Nevada corporation - neither
of which is hard to do or expensive - to buy the boat and then
take delivery out of the state.
As we said in the beginning, the budget in which these changes
occur hasn't even been signed yet, and this is a flash-analysis.
It's a very complicated area of law, so if it might affect you,
we recommend that you consult a tax specialist, as one small
goof and you can be subject to back taxes, penalties, and all
sorts of other bad news. For example, if anyone did an 'offshore
delivery' within the last nine years, and did not file a California
tax return on that specific transaction and has not yet gotten
a letter of approval of that tax exempt status from the State
Board of Equalization on that purchase, they may still be liable
for all those taxes plus penalties and interest.
If you're looking for an expert on this entire topic, as well
as for taxes on planes, you might try Thomas Alston of Aero/Marine
Tax Professionals in Sacramento. We're not necessarily recommending
him, but believe he's a better place to start than looking up
'Legal Help' in the Yellow Pages.
Our parting advice is this: Financial experts say that while
it always makes sense to pay as little tax as you can, one should
never make a purchase or investment decision based on the tax
consequences alone. More on this subject later.