Advice about taxes on vessels can save thousands of dollars.

“All you have to do is register the vessel outside of California and no tax is due.” One dealer told me. “If you register it anywhere outside of California the tax is avoided. That’s the long and the short of it.” Another said. One advised me to, “Dock the vessel in Ensenada for 90 days and the tax is avoided completely.” Another added. “All you need is a resale number to not be charged tax.”

It’s not a question of whether these people are lying or just trying to be a salesperson. They believe what they are saying and in the absence of an audit their advice will never be discovered to be wrong. It is a question of
whether a strategy to legally avoid or diminish taxes really exists. This means a strategy that will survive an audit.

Partial truths like the preceding comments have sent many taxpayers screaming. Every lawyer doesn’t know every law. Every accountant can’t possibly know every regulation
of every jurisdiction. What happens generally is that one taxpayer tries a strategy and it seems to work, he tells his friends and the rumor acquires the facade of fact. The basis for the kind of advice I received was probably born from the
above scenario.

The following examples are intended to illustrate the kind of “well intentioned” mistake that results in taxes being owed on vessel purchases:

A. A buyer is a resident of Oregon as well as California. The buyer purchases a vessel in and establishes he is a resident of another state. Under all circumstances the State of California can declare the buyer is a resident of California and demand the tax be paid.

In Garrett Corporation v. State Board of
Equalization (Board) the court said the word
“person” in section 6366 indicates a legislative
intent that individuals and corporations, whether
foreign or domestic, be subject to the same rule
with respect to the exemption involved, so the
word “resident” in the statute was not limited to a
domiciliary concept but contemplated any factual
place of abode or some permanency more than a
mere temporary sojourn.

B. A buyer owns a business and purchases a
vessel from Seller (a dealer or private party.) The
buyer provides a valid resale permit number to the
seller declaring that the vessel is for resale. Even
if the Board determined that the seller made a
“good faith” effort to verify the buyer’s
representation and the seller was not liable to
collect the tax, it doesn’t preclude the Board from
assessing use tax on the buyer if very specific
conditions are not met. In the opinion of the
Board, if the buyer converts the vessel to any use
other than being held for resale, it can’t be
considered to be “being held for resale.” The
conditions of their ability to assess use tax on the
vessel purchase are very specifically written out.

C. Another example would be where the
buyer actually takes delivery of the vessel outside
of California. Following the advice of “parking it”
for 90 days he pays dock fees and leaves it out of
state. Subsequent to the 90 days the buyer sails
the vessel into California and begins using it. The
Board will find this transaction to be taxable
The previous examples are just a few
cases where the taxpayers followed their available
advice. They were all assessed tax. The public
records are filled with many instances of vessel
purchases that have resulted in a tax liability. The
sad part is that in many cases a proper strategy
would have resulted in a non-taxable event.
Considering the price of watercraft, this can save
the buyer hundreds of thousands of dollars. What
is more important, a dealer that can provide the
proper tax strategy to his customers as part of his
“value-added service” has a significant price
advantage. The one who “knows it all” can put
himself and the purchaser in jeopardy.

There are a few experts who know the law as it relates to purchases of vehicles, vessels
and aircraft. If you follow the steps exactly as
they lay them out, you have a chance of saving all
or some part of the tax. If you think you know the
law, or if you try to use someone else’s strategy
that worked for their case you could be in for a
shock. Each transaction lives or dies on its own
merits. Only careful analysis can save you.
The mistake that is very common to all
taxpayers is not knowing the depth to which a tax
agency can create “loopholes” for them to collect
taxes. Most tax collection agencies view their
mission as “collect revenue from every
imaginable source.” Some agencies promote
personnel based on collection statistics. The
Senate hearings into IRS tactics has made this
clear.

Armed with this basic knowledge, the
aforementioned examples illustrate the depths to
which the Board of Equalization of the State of
California will go to collect money. The good
news is that in order to justify their collections all
agencies must create a very rigid set of policies,
manuals and reliance on previous decisions.
Their “methods of attack” create the best possible
defense. In their desire to define exactly the
guidelines that must be met, they inadvertently
give the taxpayer the method to develop a
defensible tax strategy.

The Supreme Court declared that it is the
duty of all taxpayers to aggressively pursue
methods of avoiding taxes. However, misapplying
rules isn’t a defense. The Justices merely
supported your right to avoid taxes. It is illegal to
evade taxes. They let you know that if you bother
understanding the rules you can “avoid” taxes.
“The legal right of a taxpayer to decrease the
amount of what otherwise would be his taxes, or
altogether avoid them, by means which the law
permits, cannot be doubted.”

SUPREME COURT OF THE UNITED STATES
GREGORY v. HELVERING

293 U.S. 465;

“Anyone may arrange his affairs so that his
taxes shall be as low as possible; he is not bound
to choose that pattern which best pays the
treasury. There is not even a patriotic duty to
increase one's taxes. Over and over again the
Courts have said that there is nothing sinister in
so arranging affairs as to keep taxes as low as
possible. Everyone does it, rich and poor alike
and all do right, for nobody owes any public duty
to pay more than the law demands."

Federal Appellate Judge Learned Hand

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