The State of California will assess sales tax (for new vessels) or use tax (for used vessels) if the boat was (1) purchased in California; OR (2) purchased for "use" in California. California's territorial boundary extends three miles into the ocean, so if the purchase can be structured to close more than three miles offshore (an "Offshore Delivery"), the buyer will satisfy the first prong of the test. The second prong involves a subjective analysis of the buyer's intended use at the time of the purchase, which is a little more complicated.
A buyer's true "intent" is impossible to determine through any objective test, so a "presumptive test" was established, where a buyer who could prove that the boat was used outside of California for a particular time period after the purchase was presumed to have purchased it for use outside of California. For many years, the required time period was 90 days. Under that test, a buyer who could prove that he or she used the boat outside of California for more than 90 days during their first six months of ownership was "presumed" to have purchased the boat for use outside of California.
Over the years, it became very common - almost expected - that the buyer of a boat in Southern California that cost more than $100,000.00 would take advantage of this procedure and spend three months in Ensenada after the purchase. California taxpayers took exception to the use of Ensenada as a "90 day yacht club," and in 2004 the legislature enacted Senate Bill 1100 as a part of that year's state budget.
SB 1100 increased the 90 day period to one year, though it did offer several strategies for reducing that time period. The bill also included a "sunset provision," and when the law expired in 2007 the 90 day rule was reinstated. But in 2008, the budget negotiations took immediate aim at this perceived loophole, and we have now officially returned to the one-year rule.
We should note that this waffling back and forth on the time period has no effect on the basic structure of the law. The State will continue to assess sales or use tax if the boat is purchased (1) in California or (2) for "use" in California. The varying factor is the presumptive test for evaluating the buyer's intended use at the time of purchase.
We should also note that this is not a black and white test, and the "presumption" can be defeated. It was - and is - possible for a buyer to comply with the calendar test and nonetheless be subject to the tax, if the California Board of Equalization discovers facts that indicate that the buyer actually intended to use the boat in California.
The approach to the one-year requirement in 2008 differs from the 2004 approach in two ways. First, the new law has no "sunset" provision, and the new rules are therefore theoretically "permanent." Second, unlike the approach used in 2004 which provided a two month phase-in period before the law became effective, the 2008 modification to the law was effective immediately. Anyone who entered into a purchase contract after September 30, 2008, was subject to the one-year rule.
The highlights of the one-year rule provide that a buyer will be presumed to have purchased the boat in California, and thus be subject to assessment of sales or use tax, if:
For California residents, where the buyer brings the boat into California within one year of purchase;
For non-residents, where the buyer keeps the boat in California for more than six months during the first one year after the purchase;
For anyone, if the vessel is subject to the assessment of personal property tax at the county level during the first year after purchase.
There is one significant exception to the one year timetable. An owner may keep the boat in California during a repair, retrofit, or modification project, without affecting the one year analysis, so long as the boat logs less than 25 hours underway while it is in California.
