Northern Exposure – Tax Consequences of Cruising the Northeast States
Much of the allure in owning and operating a yacht is having the freedom to cruise and explore cruising destinations at home and abroad. As we all know, for many East Coast yacht owners, a popular cruising schedule is one that traces the Atlantic Coast from Florida to Maine in conjunction with the changing of the seasons. Yacht owners in numbers are bringing their yachts to their favorite cruising destinations in New Jersey, New York, Connecticut, Rhode Island, Massachusetts, New Hampshire, and Maine. Many of these yacht owners, however, may be visiting these destinations with the misplaced confidence that their yachts are not subject to potential use tax liability in the taxing jurisdictions of the Northeast.
It is clear that the revenue-starved taxing jurisdictions in the Northeast have become increasingly aggressive in pursuing use tax liabilities from vessel owners with foreign flagged yachts and yachts registered in other states only briefly visiting these states. Last summer, for example, marked an increase in state revenue agents, local marine patrols and US Customs inspectors acting in concert to detain foreign registered pleasure yachts in high profile New York and Long Island ports. Reports revealed that the inspections were thorough, bringing to light any number of issues in addition to use tax and state registration matters, such as the immigration status of foreign crew, handgun permits and vessel safety concerns.
Currently, the legislatures of Northeast states continue to enact revisions to their respective sales and use tax statutes concerning yachts, many of which from a tax perspective could be very expensive to yacht owners who unknowingly establish taxable nexus by their presence in these states. As such, the following considerations must be made prior to cruising into Northeast waters:
- The taxability of yachts and the applicable tax rate in the cruising jurisdiction of choice. As a general rule, Northeast states asserting tax jurisdiction will seek the balance of any sales or use tax which would be owed under their taxing authority, granting credit only up to the amount of taxes that may have been paid on a yacht in another jurisdiction (sales and use tax in New York, for instance, can be as high as 8.875%).
- The amount of time the vessel owner wishes to spend in any of the Northeast states. Yacht owners should appreciate the difference between registration requirements (many Northeast states do not require vessels be registered if used for fewer than a specific number of days) and use tax liability (Connecticut, as an example, asserts that use tax liability can arise for any use of a vessel within the state, no matter how brief).
- Whether the owner of the vessel, either individually or as a beneficial owner/officer of the vessel owning entity, has any connections with any of the Northeast states, such as a home, business, or summer slip/mooring agreements. The more connections an owner has to a state, the harder it can be to assert nonresident status in a tax audit, plus any assets within that state could be at risk.
- The amount of time that has passed from the date of the yacht purchase to the yacht’s first entry into any of the Northeast states. Certain states recognize that if a vessel was previously used in another state, the tax that may be owed in the new state can be calculated on the current (presumably depreciated) value of the vessel, not its original purchase value.
- For yacht owners who own their yachts through entities (e.g., corporations or limited liability companies), whether proper corporate formalities have been instituted and legitimate business practices have been followed. The more strictly corporate formalities have been adhered to, the less likely will a state be able to disregard the corporate entity and seek to assert tax liability against the individual.
Provided a thorough review of facts and circumstances has been completed, guidance and recommendations can be presented to a yacht owner to help minimize potential use tax liability and possible audit inquiry concerning the ownership and operation of their yacht in the Northeast states. As seasoned mariners are aware, the Northeast states contain many beautiful summer cruising destinations. With informed tax planning and guidance, these ports can be remembered for their beauty and not for any consequential tax or regulatory nightmares.
Bohonnon Law Firm
195 Church Street, 8th Floor
New Haven, CT 06510