California Sales & Use Tax - General Rules
As it Applies to Documented Commercial and Pleasure Vessels
The State of California imposes two types of taxes on the purchase and sale of watercraft. First is a sales tax that is imposed upon retailers of tangible personal property (watercraft) sold at retail. The second is the use tax that is imposed on consumers for the storage, use or other consumption in this state of tangible personal property purchased from a retailer.
Generally, either the sales tax or the use tax applies to all sales or purchases of watercraft within this state, except sales or purchases for resale and sales or purchases of property excluded items. Only one of the taxes will apply to each transaction.
Transactions between individuals or between individuals using a broker are subject to the use tax provision, unless the vessel is exempt.
The tax will not apply to vessels that are purchased or leased for:
- Use in either interstate commerce transporting persons or property for hire
- Foreign commerce
- Commercial deep-sea fishing
- Transporting persons or property to vessels or offshore drilling platforms, located outside of the territorial waters of this state
If the vessel does not fall into one of these general categories, it is subject to the use tax.
WHAT CONSTITUTES INTERSTATE OR FOREIGN COMMERCE?
By definition, "interstate" means commerce between two ports in two different states. Consequently, a ferry carrying passengers between San Francisco and Portland, Oregon would be engaged in interstate commerce.
Likewise, a vessel involved in transporting persons or property between San Diego and Mexico would be engaged in foreign commerce and exempted.
When a vessel is used for both "interstate", which is exempt, and "intrastate", which is not exempt, the Board of Equalization will look at the principal use. "Intrastate" refers to vessel traffic between two ports located within the state. In addition, a vessel which is used to convoy or aid the departure or arrival of vessels to or from points outside the state may be deemed to be engaged in exempt commerce and not subject to the tax.
There is a second test to determine if the principal use of the vessel is the transport of persons or property for hire. Of course, the vessel must be properly licensed for such use and possess a "coastwise" certificate from the U.S. Coast Guard.
To determine if the vessel is engaged in the "for hire" aspect of the exemption, the board will look at the first 12 months of operation. To be exempt, the vessel must show annual gross receipts for such use of more than 10% of the costs of the watercraft or $25,000, whichever is less.
COMMERCIAL DEEP-SEA FISHING
The use tax will not apply if the vessel is used in commercial deep-sea fishing operations outside the territorial waters of the state by a person who is regularly engaged in commercial deep-sea fishing.
However, there is a rebuttable presumption that you are not regularly engaged in deep sea fishing if your gross receipts from commercial deep sea fishing operations total less than $20,000 a year. The tax applies regardless of the gross receipts if the fishing occurs within the territorial waters of this state.
TRANSPORTING PERSONS OR PROPERTY TO VESSELS OR OFFSHORE DRILLING PLATFORMS
A vessel used in the transportation of persons or property to offshore drilling platforms are exempt if the offshore drilling platforms are located outside the territorial waters of this state.
Unless the vessel falls into one of these four categories, it will be subject to the sales or use tax.
OUT-OF-STATE VESSEL PURCHASES
A vessel will not be subject to the use tax if it is purchased out of state by a California resident, remains out of state, and is used by the buyer for 12 months prior to being brought into the state.
If a vessel is purchased out of state and is brought into the state within 12 months, it is presumed to have been purchased for use in the state and is subject to tax.
The key issue is use of the vessel for 12 months outside of the state. This excludes any period of storage, shipment or voyage into the state. To obtain this exemption you must document a full 12 month period of active use. Storing the vessel in a Mexican marina for 12 months may not be sufficient.
A vessel that is berthed within the state may qualify for out-of-state delivery if the sale and delivery of the vessel occurs offshore outside of the territorial waters of the state and the vessel proceeds immediately to a foreign or out-of-state port and remains out of state for 12 months or more.
The test for a non-California resident is 6 months rather than 12.
This delivery is subject to a variety of technical requirements and documentation.
HOW MUCH IS THE TAX?
The use tax is computed by addition of the State sales and use tax and any local or county enhancement. Generally, 8-1/4% except in certain counties where the tax is different. Check with the local Board of Equalization for the correct calculation.
The sales and use tax should be discussed thoroughly with your attorney and tax consultant prior to making your purchase.