State Tax Laws for Boaters

For many of us our boats represent a sense of adventure hard to duplicate elsewhere in our lives. We purchased them with dreams of cruising to distant harbors and exploring waters far from home. Or many have purchased their boats to become their homes, freeing themselves of a permanent address. So what happens to the dream of cruising when you receive a letter from a state's tax authority stating you owe them taxes for using your boat in their waters?

All states require boats above a certain size to have some form of registration, although some may accept federal documentation in lieu of state registration. in addition to requirements for registration, many states require some sort of tax to be paid for boats purchased or used within the state.

There are three types of taxes which can be levied on boats by state and local governments; sales tax, use tax and personal property tax. Some states collect all three and some states collect none. This is further complicated by local county government's involvement in personal property taxes. Due to the potentially high cost of these taxes on expensive boats, many owners have gone to great lengths to minimize or avoid these taxes all together when purchasing their boats. as budget strapped states look for additional revenue, many have increased their patrolling of marinas looking for boats registered out of state. They are casting a wide net, looking for anyone suspect of violating their tax policy in hopes of catching the few that are. Unfortunately, a number of innocent boaters just out cruising or living aboard are being caught in that net in the process.

Because this can be such a complicated issue, we've asked an expert to contribute to this subject with us. Dirk Schwenk of Baylaw, LLC is an attorney based in Annapolis specializing in maritime law. Dirk has written extensively on boat tax policy and offers registration and tax consulting for anyone purchasing a boat.In our conversations with Dirk we learned there are two separate questions on this tax issue, one is: How to minimize or avoid paying tax on a boat when it is purchased? Which we are not addressing in this article. The other is assuming the boat was lawfully purchased and registered in a state, regardless of whether that state collects sales tax or not: How does a boater keep from paying the use tax while traveling to other states that may be attempting to collect taxes just for using the boat in that state's waters?

‍If our members want us to help them plan a summer cruise to New England or winter cruise to Florida, how can they know they are not going to be in violation of a state's use tax policy?

‍Use tax defies simple answers, because every state is different and most states treat their residents differently from the rest of the if you are truly cruising (in the sense of moving between various states every couple of months) and you do not have the boat in your state of residence (New Jersey, for example, asserts the right to tax a resident's boat on the first day it is in the state). I generally try to put my clients in a position where their boat is most often in a state that:

• 1) They like to cruise.
• 2) They are safe from tax because they either have paid some tax or because they have a definitive exemption.
• 3) If their plans change, they send me a quick email to go over their float plan. There are several states that have capped their use tax or have exceptions for boats that are not purchased there, so once established in such a location, a boat owner can feel secure that they will not be bothered. Florida can be very tax-friendly for people that are not residents, do not own real property or are otherwise not closely tied to the state.

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So if I understand your answer above correctly, a boater does not necessarily have to register their boat where they live and where it is registered can affect the ease with which they can travel from state to state?

‍Correct. Generally a boat must register in the state in which it is used most, so the boat's location is more important than the owner's location. For some boats, it is difficult to identify the main place of use, so i generally try to have those boats initially register in a location that has a connection to the boat and then change the registration if the boat later comes to rest in a particular state. I do not recommend that a boat be in the United States with no identified state it draws too many questions. For the very large vessel, a capped state like Florida or Maryland is a good option, since the tax amounts are not that large relative to the value of the vessel and they are desirable states in which to locate and do not have personal property tax. Depending on circumstances, Florida may not require any tax.

‍With the approach states are using, what should our members do if they receive a letter from a state attempting to collect a tax on their boat?

‍First they should look at it and see whether it is an assessment of tax (the equivalent of a tax bill) or a letter of inquiry. An assessment is much more serious and typically has a very short period in which it can be appealed. if it is an assessment for a significant amount of money, they should consider hiring counsel that specializes in maritime law. A letter is somewhat less serious and if there is a simple and honest answer (such as I keep my boat in Delaware), an owner can simply respond. counsel should almost certainly be consulted if there is a significant penalty (indicating that the assessor suspects fraud); if the amount of money at issue is fairly high (say over $10,000) or out of line with the value of the boat; or if the taxability of the boat is going to be a close call, and a slip of the tongue may be the end of the defense.

For those owners that will spend significant time in the Caribbean, offshore ownership is a topic that should at least be considered in making plans for the use and tax of the vessel. Additionally, any owners with a high value boat that has not paid any sales tax, they should have a tax plan before they are contacted by tax authorities, not after.

As you can see this can be a complicated issue with costly consequences if not managed properly. For additional information on individual state's policies, you can visit Dirk's website at baylawllc.com.