Last month we discussed exemptions from Sales and Use Tax for aircraft. Another big ticket item with special exemptions available is watercraft. Tax does not apply to watercraft which are leased or sold to persons for use in interstate or foreign commerce or commercial deep sea fishing.

Interstate or Foreign Commerce

The watercraft must be used principally more than half the time in interstate or foreign commerce involving the transportation of persons or property for hire. Also, unless the annual gross receipts from such use exceeds $25,000 or 10% of the cost whichever is less, the state makes a rebuttable presumption that the vessel does not qualify under this part. In the case of a lease, this test applies to the gross lease receipts of the lessor. The principal use test and the gross receipts test must be met for the 12 month period commencing with the first functional use of the watercraft. Also, all gross receipts can be included even those received for transporting persons or property for hire within the state. For example, we recently had a case with a San Diego company who operated a water taxi operation. This vessel would take persons to Mexico and to Catalina. The first test to pass is the principal use test. The hours logged during the first 12 months of use has to exceed 50% for the Mexican usage. Next, we needed to meet the gross receipts test. In determining the gross receipts test the revenue from both the Catalina and the Mexican excursions was counted.

Commercial Deep Sea Fishing

To qualify as an exempt commercial fishing vessel, the watercraft must be used in deep sea fishing operations principally outside the territorial waters of this state. “Outside the territorial waters of this state” means beyond the 3 mile limit. Also, there is a rebuttable annual gross receipts test of $5,000. Again, both the principal use test and the gross receipts test is measured during the first 12 months commencing with the first functional use.

There is nothing to stop a luxury yacht from qualifying as an exempt commercial deep sea fishing vessel or as a common carrier provided these requirements are met. Since only the first 12 months are subject to the rules, a planning opportunity exists. A buyer who qualifies needs to issue the seller a watercraft exemption certificate which can be found in Regulation 1594. Once it is determined that the watercraft qualifies, the component parts attached to the watercraft are also exempt. These parts include radio equipment, radar equipment, winches, anchors, lifeboats, attached furniture, curtains, etc.

Besides these exemptions, there is also an exemption from sales tax for any item delivered out of state by the seller and related exemption from use tax for any item used thereafter outside the state for a 90 day period. Accordingly, a yacht purchaser could take delivery of a yacht in Coos Bay, Oregon and proceed to take a 90 day cruise outside the territorial waters of this state. Once the yacht returns to California after this period of time, it is not subject to California tax.

San Diego Taxpayers Update

The State Board of Equalization has begun sending refunds of the San Diego Justice Facility Tax. This tax was imposed for the period January 1, 1989 to February 13, 1992 and was declared unconstitutional on February 14, 1992. A refund claim may be made by any purchaser who paid this tax either directly to the Board (use tax) or to a seller. This refund claim may be filed by December 31, 1994 and should be for a minimum of $25 ($5,000 worth of purchases).