Category Archives: Tax Articles

2015 Maine Watercraft Tax Summary

The State of Maine imposes a 5.5% tax on sales and use of watercraft in the state.  The tax scheme is similar to most sales tax states.  The tax is imposed on boats purchased in the state, unless there is an exemption.  If a boat is purchased out of the state and brought in, it is potentially taxable if it is used enough in the State to justify the tax.  Knowing or intentional invasion of the tax is a class C crime, subject to penalty of up to $5,000, on top of the tax, penalty and interest.  Penalties up to 25% of the underpayment plus interest are also a possibility in the event of failure to pay.

There are a number of exceptions to the tax, with two that are most typical with boats being the exemption for non-residents and the the exemptions for boats used in international commerce.

1. Non-resident exemptions.

There is a good deal of confusion about the non-resident exemptions, because there are actually two types, and they have different requirements.  For boats purchased in the state by a non-resident, the boat must leave the state within 30 days.  For a boat purchased outside the state by a person that is not a resident, an exemption to use tax can be obtained if the boat was in Maine not more than 30 days in the 12 months following purchase, with the use being actual use of the vessel, not mere storage.

2. Interstate and Foreign Commerce

An exemption is also available for boats that are purchased and placed in interstate or foreign commerce, and which remain in commerce for at least 80% of the two years following purchase.  For these purposes, interstate or foreign commerce means carrying freight or passengers to and from jurisdictions (not just foreign waters) outside of Maryland.  (Note that USCG documented vessels cannot do this unless they have a commercial endorsement on the documentation).

This is current as of November, 2015.  This is a general overview of the law.  For answers to your specific questions, you must become a client and seek specific advice.  

Mr. Schwenk is a lawyer in private practice in Annapolis, Maryland.  He is a member of the board of the Marine Trades Association of Maryland, and has written extensively on issues on boat tax, maritime law and real estate, especially riparian rights.  

Choosing a Jurisdiction to Delay, Defer or Minimize Boat Tax

From a tax perspective, boats are unique.  There is no universal state titling system like for road vehicles, and they can move between jurisdictions unlike real property.   As a result, their mobility can be used to help arrange ones affairs to minimize or delay tax consequences.

In most states, laws concerning the sale of goods (including boats) are guided by the Uniform Commercial Code (UCC), which is a model code that seeks to make laws on the sale of goods as uniform as possible in all 50 states.  All fifty states have incorporated at least some parts of the UCC into their commercial code.  While the UCC does not address or control sales tax, in many states it will define the “sale” and that will give a strong indication about where the sale takes place.  In those states which have adopted the UCC’s definition of when a sale occurs, the buyer and seller have several ways in which they can dictate where the sale takes place, and thus where taxes must be paid.

Rule 1: The location called for in the contract controls.

The UCC provides “Title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.”  Md. Code Ann., Com. Law § 2-401.  The most important thing in working out the logistics of anything having to do with a contract for the sale of goods — including where it takes place– is the language of the contract itself.  Although this is the law, I do not recommend identifying a non-tax state in the contract, but finalizing the transaction with the boat in a taxing jurisdiction.

Rule 2: If there is not an express agreement, the sale happens where the boat is delivered.  

“Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place.” Md. Code Ann., Com. Law § 2-401.

If the contract does not specify where the sale is going to happen, then the location of the sale is generally determined by whether the location where the boat is delivered, notwithstanding the delivery of title documents elsewhere.  If the seller is responsible for delivery, then the sale occurs wherever the boat is delivered to the buyer.  If the buyer is responsible for delivery, then the sale happens where the boat is transferred to the buyer or to a shipping company at the direction of the buyer.  So, if the boat is built in North Carolina for a buyer located in Maryland, and the buyer goes to North Carolina to get the boat — the sale takes place in North Carolina.  If the contract calls for the dealer to deliver the boat to Maryland, however — the sale probably takes place in Maryland.

Rule 3: If the boat is staying put, the sale happens where the last key paper is delivered.

Unless otherwise explicitly agreed where delivery is to be made without moving the goods, (a) If the seller is to deliver a tangible document of title, title passes at the time when and the place where he delivers such documents and if the seller is to deliver an electronic document of title, title passes when the seller delivers the document; or (b) If the goods are at the time of contracting already identified and no documents of title are to be delivered, title passes at the time and place of contracting.  Md. Code Ann., Com. Law § 2-401.

If the boat is not being moved as part of the purchase contract, then the sale will happen when the seller gives the buyer the title documents — which generally does not happen until after payment is made (there are exceptions!).  The location is easy to determine if the seller and buyer are in the same location, and the buyer physically hands the seller the title documents.  If the seller is either mailing or electronically transferring the title documents, the law is a bit less clear.  The parties can still stipulate in the contract whether the sale is complete upon sending or receiving of the title documents, and the contract will control the location.  If the parties have not stipulated when the sale is complete, then it is like the sale happens where the buyer receives the contract, but Maryland has not addressed that directly.

It is also noteworthy that a Coast Guard Document (and the Bill of Sale that must be filed to transfer a documented vessel) are not considered to be title documents, at least by most Courts.  This means that a boat that has a state title may be treated differently from a boat that is Coast Guard Documented.

Final Thoughts

Buyers of high value boats that will not be used exclusively in a single jurisdiction can choose when and where a boat becomes taxable, and they can choose to pay low or no sales tax at initial purchase.  This is extremely important for purchasers that intend to leave the United States after purchase, since they can arrange their affairs to avoid taxation altogether.  As such, it is a time where a relatively small investment of attorney time can lead to big savings.

J. Dirk Schwenk is a Maryland Real Estate, Waterfront Property and Maritime Lawyer from Annapolis, Maryland.  He represents hundreds of boat owners from around the world in purchase and sale transactions.  He graduated cum laude (with honors) from the University of Maryland School of Law and has been in private practice in Maryland ever since.

Maryland 2013 – The Tax Cap Is Here – Use It NOW!

On July 1, 2013, a new cap on the amount of vessel sales and use tax will take effect, and the maximum tax that can be applied is $15,000.  This means that a boat of greater than $300,000 will achieve tax savings.  There is a 2016 sunset provision, but for at least the next 3 years, there is every incentive to purchase and homeport larger boats in Maryland.  Let’s hope that continues past 2016.   Let’s also thank the Marine Trades Association of Maryland who did much of the heavy lifting in the legislature to get this done.   The specific text of the bill as passed can be found HERE.

If you are a purchaser, seller, broker or dealer who has a transaction that you would like to close prior to July 1, 2013 — here is what you need to be able to get the benefit of the tax cap NOW.   There are two ways to do this:

1) arrange the transaction so that the closing takes place out of Maryland (so that tax is not payable at purchase).  Tax will be due when the boat is principally used in Maryland – likely 30 to 90 days from return.

There is a previous post on the details of arranging a transaction out of state HERE.  There are two quick ways to do this.  First, take the boat over the border to a non tax state (Delaware or Virginia (0$ for used boats, $2000 for new) and hold a closing in that jurisdiction – just make sure to document the location of the closing.  Second, if the boat is in Maryland and is not being moved for delivery, one can define the state of transaction in the contract.  The alternative state should be one that has a reasonable relation to the contract (like the state of residence of the purchaser, or the state where the documents are signed) and should be a non tax state.   Doing this creates a bit more hassle in the transaction, but it can save a lot of money for the purchaser.  Maryland brokers should hold the tax in this case, and submit after the boat returns and becomes taxable.

2) arrange the transaction so that the final closing is not until after July 1 (ie – place a modest holdback in the transaction payable after shakedown and commissioning).

Under the Uniform Commercial Code (which governs purchase and sale of products), the moment of sale can be defined by contract and the contract can be used to delay the final moment of sale to a point relatively late in the game.  So, for example, one can complete virtually the entire transaction, but define the date of sale by creating a hold-back from the total purchase price that is payable after, for example, a shakedown period of 60 days.   In this environment, that should be sufficient to reach the July 1, 2013 beginning date for the new cap.

A WORD OF CAUTION

Both of the strategies outlined above are completely legal and supported by the applicable provisions of the Uniform Commercial Code.   But, boat tax collectors are people, and not always guided by the black letter law.  So if a transaction feels like a Maryland transaction (ie all the people and the boat are in Maryland) they may be inclined to ignore mere words on a page.  For a high-value vessel, where the savings under the cap are significant, it is highly advisable that advice of counsel be sought to be certain that the benefits of the cap will be achieved.

Good Luck!

Dirk Schwenk

 

 

 

 

Which State Can Claim Tax? (Or, where did the sale take place?)

What State can claim sales tax or Where did the purchase occur?

The state in which a purchase takes place (if any) is crucial to trying to determine who might have a claim for sales tax, and therefore on how much the claim may be.  A good plan for boat tax should always start with being sure that the initial transfer takes place in a favorable location.  This analysis is often complicated by the fact that the owner may live in one state, the seller in another, and boat and broker may be in a yet a third (or fourth) jurisdiction.  So how does one go about answering this question?  The crucial fact to determine is when and where the contract of sale is complete.  For planning purposes, this is also a fact within the control of the buyer and seller.

In most states, laws concerning the sale of goods (including boats) are guided by the Uniform Commercial Code (UCC), which is a model code that seeks to make laws on the sale of goods as uniform as possible in all 50 states.  All fifty states have incorporated at least some parts of the UCC into their commercial code.  While the UCC does not address or control sales tax, in many states it will define the “sale” and that will give a strong indication about where the sale takes place.  In those states which have adopted the UCC’s definition of when a sale occurs, the buyer and seller have several ways in which they can dictate where the sale takes place, and thus where taxes must be paid.

Rule 1: The location called for in the contract controls.

The UCC provides “Title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties.”  Md. Code Ann., Com. Law § 2-401.  The most important thing in working out the logistics of anything having to do with a contract for the sale of goods — including where it takes place– is the language of the contract itself.

If the parties specify where and when the sale will take place, that usually determines where the boat is taxable.  Obviously, there are limits to this, one can’t say the transaction takes place on the moon, if the boat and everyone associated with it is in New Jersey.  Simply stating that a contract will be completed somewhere does not automatically make it so.  However, if the seller is in Pennsylvania and the buyer is in Maryland, and the contract states that the sale is to be completed in Pennsylvania upon the seller sending the boat or title documents to the buyer, then the sale took place in Pennsylvania.  Likewise, if the contract says that the sale will be complete upon the buyer receiving the boat or title documents  in Maryland, then the sale will be deemed to have occurred in Maryland.  If the boat is moved to Delaware for the closing, the sale takes place in Delaware.

Rule 2: If there isn’t an express agreement, the sale happens where the boat is delivered.  

“Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place.” Md. Code Ann., Com. Law § 2-401.

If the contract does not specify where the sale is going to happen, then the location of the sale is generally determined by whether the location where the boat is delivered, nothwithstanding the delivery of title documents elsewhere.  If the seller is responsible for delivery, then the sale occurs wherever the boat is delivered to the buyer.  If the buyer is responsible for delivery, then the sale happens where the boat is transferred to the buyer or to a shipping company at the direction of the buyer.  So, if the boat is built in North Carolina for a buyer located in Maryland, and the buyer goes to North Carolina to get the boat — the sale takes place in North Carolina.  If the contract calls for the dealer to deliver the boat to Maryland, however — the sale probably takes place in Maryland.

Rule 3: If the boat is staying put, the sale happens where the last key paper is delivered.

Unless otherwise explicitly agreed where delivery is to be made without moving the goods, (a) If the seller is to deliver a tangible document of title, title passes at the time when and the place where he delivers such documents and if the seller is to deliver an electronic document of title, title passes when the seller delivers the document; or (b) If the goods are at the time of contracting already identified and no documents of title are to be delivered, title passes at the time and place of contracting.  Md. Code Ann., Com. Law § 2-401 (West)

If the boat is not being moved as part of the purchase contract, then the sale will happen when the seller gives the buyer the title documents — which generally does not happen until after payment is made (there are exceptions!).  The location is easy to determine if the seller and buyer are in the same location, and the buyer physically hands the seller the title documents.  If the seller is either mailing or electronically transferring the title documents, the law is a bit less clear.  The parties can still stipulate in the contract whether the sale is complete upon sending or receiving of the title documents, and the contract will control the location.  If the parties have not stipulated when the sale is complete, then it is like the sale happens where the buyer receives the contract, but Maryland has not addressed that directly.

It is also noteworthy that a Coast Guard Document (and the Bill of Sale that must be filed to transfer a documented vessel) are not considered to be title documents, at least by most Courts.  This means that a boat that has a state title may be treated differently from a boat that is Coast Guard Documented.

Final Thoughts

For most boats, the State of transfer will be plain and the exact timing of the sale will not matter too much.  For a high value boat, however, selecting the State of transfer may be an easy way to avoid or defer a payment that can reach hundreds of thousands of dollars.  To be sure that things are done right, the contract should call for a specific state and for the sale to take place only at a specified moment, and the contract language should reflect the real-world actions of the parties.  If the contract does not specify, then care must be taken to have the boat (or the documents) change hands in the correct jurisdiction.  On a final note — I have never done a formal poll, but I imagine that most boat tax administrators believe that the boat’s location at the time of sale is the most important (or only!) fact concerning taxability.  For this reason, notwithstanding what the law says, I always pay close attention to where the boat is at time of closing.  Good luck, and feel free to shoot us an email if you have a question.

2012 Florida Tax Cap Update

In July, 2010 we discussed the fact that Florida had passed a tax cap limiting sales tax on boats to a maximum of $18,000.  Under Florida’s 6% scheme, that meant that boats of more than $350,000 could begin to realize tax savings, and big boats could really obtain significant savings.  Prior to the tax cap, Florida had a thriving offshore registration industry (where boats were flagged to offshore nations, and brought back to Florida under a cruising permit).  Offshore flagging was expensive to set up and maintain, and my prediction was that offshore flagging would be much less popular under the cap.  The original article — which also discusses Florida’s basic tax scheme — is here.

 

Florida’s Marina Industry Association and Yacht Broker’s Association were integral into getting the tax cap passed into law in 2010.  They effectively made the argument that capping taxes would bring more big boats to Florida and thereby increase work for brokers, yards, marinas, restaurants, etc., and it would probably increase tax revenue as well.  Legislative analysis indicated that tax revenue would go down in the first year after passage.  On March 1, 2012, however, they released the first study of the effects on tax revenue, with the study being conducted by Thomas J. Murray and Associates, Inc.  The study found that direct tax revenues increased  as a result of the tax by $13.46 Million.  It also found that the average sales price for boats closed in Florida increased to $907,002 — nearly twice the pre-cap average, and that the percentage of sales on which no tax was collected dropped dramatically.

In the press release issued by the MIA and Florida Yacht Brokers, the exact methodology of the study is not laid out, and clearly there is a strong incentive to justify the law.  Even so, however, even a very modest increase in tax revenue would be a major gain when one factors in the additional boats that would remain in Florida each year, and the revenues they spin off to marine businesses.  The $13.46 Million figure found in the study indicates that 747 more boats paid tax under the study than would have been expected to pay under the old scheme.   Florida’s legislators should be applauded for their forward thinking on a politically difficult tax question — and it will be interesting to see if other states follow suit.

 

Boat Tax 2007 Maryland Overview from Waterway Law

Eds. Note: This article was published in the online Waterway Guide, December, 2007. It is reproduced with thanks to Dozier’s Waterway Guide and Skipper Bob Publications.

Maryland’s winter of discontent

(because that’s when the taxman comes)

Waterway LawEditor’s note: With controversy roiling over South Carolina’s boat tax policy, we thought we would ask the experts from the Annapolis law firm of Baylaw, LLC to explain how taxes work in some of the big boating states along the Waterway.


Yes, its that time again, the winter ducks arrive, the cold fronts roll in, and Boat Tax Enforcement Division on the Maryland Department of Natural Resources wraps up its seasonal investigations and issues vessel tax assessments. You will know it if you get one, it says “Assessment of Tax” and it’s printed on colored paper. It notifies you that you have 30 days from its issuance to appeal or it becomes final-and you do not have much of a remedy if you do not agree with its contents. Do not dawdle, the 30 days is a real deadline.

For the uninitiated, this paper can be quite a shock. It is the culmination of an investigation which typically includes monthly surveys of your boats location, an analysis of its fair market value, and an investigation into its ownership, including the ownership of any corporation that may it may be titled to. For a $100,000 boat, the assessment is an unexpected bill for 5 percent of the value ($5,000) plus a 10 percent penalty ($500) plus interest running at 18 percent from the date that the boat became taxable, up to three years. 

Interest can easily eclipse the amount of the penalty, and so the bill can easily reach and surpass $6,000 on a $100,000 boat. Scaling up, the bill on a $1 million boat can easily reach and surpass $60,000. If for any reason the DNR believes that tax was avoided on the basis of fraud or gross negligence, the penalty will be 100 percent of the tax, and so the total assessment will be growing toward $12,000 or $120,000. 

Most boaters will not face such an assessment because they will have paid sales tax on their vessel at the time of purchase or they will have paid tax when they registered and titled the vessel. Such is the case for a runabout purchased from a Maryland dealer or titled with Maryland. There are, however, lots of boats that are not subject to sales tax at purchase, including boats purchased in non-tax states (i.e. Delaware or Rhode Island), boats purchased abroad, home-built boats and some commercial vessels. 

If those boats are federally documented, they are not subject to state titling laws, and they may not have been legally obligated to pay tax. This is the favorite bait of boat tax enforcement: the federally documented vessel that has not previously paid sales or use tax to any state. The second favorite bait? The boat that is registered to a non- or low-tax state such as Virginia, but that is principally used in Maryland. If you are in one of those categories (and you have not yet fallen asleep) you should definitely continue reading. 

Maryland taxes boats in three main instances, all of which are subject to certain caveats and exceptions. Those instances are:

1) a boat that is purchased in the State;

2) a boat that is titled in the state; and,

3) a boat that is principally used in the state during any particular calendar year, assuming that it is in the State more than 90 days in that year. 

The first item is pretty clear. If the money and the boat change hands in this state, it’s a Maryland purchase, if parts of the transaction take place out of state, well, it depends. The second item is clear. If you apply for a Maryland title (or you are required by law to do so), tax is due. The third item is the one that causes the most consternation for boaters -Principal Use. 

Under Maryland law a boat is in principal use in the state or territory of the United States in which it is used most during a calendar year. Thus if you use it 100 days in Maryland, 200 days in the BVI and 50 days in Florida, the state of principal use is in Maryland. BVI does not count (it’s not a state of the United States) (EDS NOTE — AS OF JANUARY, 2008, IT IS POSSIBLE THAT THE BVI AND OTHER NON-US JURISDICTIONS MAY COUNT — IF IT MATTERS TO THE ANALYSIS OF YOUR CASE, PLEASE CALL FOR SPECIFIC ADVICE), and Florida has less days than Maryland. 

Things get a bit tricky from that point, though. Days only count in Maryland if the boat is “in use.” In use does not mean its being used (in the sense of operating it), but means by definition any time that it is in the water or any time that it is kept in a structure in readiness for use. Thus (stay with me here) a boat that is in Maryland, outside, and out of the water is not in use; but a boat that is in the water but not being used, is in use. Also, it is generally recognized that a boat that is in the water but winterized is not in use for principal use analysis, but it is considered that a boat on a trailer, indoors or out, is in use. 

Confused? No worries … so is everyone else. 

So what should you do if you get an assessment, or perhaps more importantly, if you would like to avoid getting one? First, you should be aware that Maryland recently extended its cruising window to 90 days-if the boat was not purchased in Maryland, you can cruise for no more than 90 days without facing tax liability, even if you do not spend more time in another single state. 

Second, you should be aware that there are exceptions for boats that are out of the water, winterized, or undergoing significant repairs. The details of those exceptions will have to wait for another article, but they should be considered if the boat is going to be (or has been) in Maryland for an extended stay. Third, you can be sure to keep (and keep evidence of keeping) your boat in another state for more days than in Maryland. Finally, if you receive an assessment, be sure to act quickly. If you have good defenses, and you do not raise them in time, they will not be so good.

If you are going to need counsel-that is, if you may have a defense and there is a significant amount at issue-identify one who knows this area, hire them in time get an appeal in the 30 day deadline, and do so before contacting the DNR yourself. I often see people revealing facts that were better left unsaid, or paying tax that was not owed. A little bit of good advice can save a lot of heartache in the long run, it may also be able save money in any negotiation if tax must be paid. 

(This explainer comes courtesy of J. Dirk Schwenk.  He has been active in maritime and Admiralty law since 1999, is based in Annapolis, MD, and focuses on issues of concern for vessel owners, marine businesses and those that live, work and play on the water.)

MA.Waterway.Law.Maryland.Tax.htm

South Carolina Overview

Eds. Note: Boat tax is subject to change by state and local legislation and its application can change based on the facts.  Please call for advice concerning you individual matter.   

 

Vessel sales tax in South Carolina, is capped at ($300), and the corresponding use tax is at the same rate. Boats in South Carolina, therefore, are most at risk for the imposition of personal property tax.  Liability for South Carolina’s personal property tax arises when a boat is in the state for 60 consecutive days or 90 total days in a calendar year.   

 

SC Code Ann. § 12-37-714 provides:


(2) A boat, including its motor if the motor is separately taxed, which is not currently taxed in this State and is not used exclusively in interstate commerce, is subject to property tax in this State if it is present within this State for sixty consecutive days or for ninety days in the aggregate in a property tax year. Upon written request by a tax official, the owner must provide documentation or logs relating to the whereabouts of the boat in question. Failure to produce requested documents creates a rebuttable presumption that the boat in question is taxable within this State.

 The personal property tax rates are set at the County level.  Myrtle Beach (Horry County), for example, charges tax with respect to boats on 58% of the vessels value, at a rate of 10.5%.  If a boat were to become taxable in Horry County, it would be taxed at $6,142 per $100,000 of assessed value.   Because of the steep annual costs, an owner must carefully evaluate whether to keep a boat in this County.  This is particularly true for a boat that has previously paid a significant amount of sales tax to another state — such payments do not offset the South Carolina annual tax.  Personal property tax paid to South Carolina will also not reduce the amount of tax due to a sales tax state if the boat should be come taxable there at a future time.  

 

 

 

 

 

 

 

 

 

 

Boat Tax – Read This Before You Go To A Hearing!

Eds. Note: This article appeared in The Law Clerk, a publication of the Maryland State Bar Association, in May, 2005. Its author is Michael J. Jacobs, an attorney from Easton, on Maryland’s Eastern Shore, and the opinions expressed in this article are his. At Baylaw, LLC, we believe that many of the concerns with the process noted by Mr. Jacobs can be minimized with careful advanced planning, and by knowing when to recommend settlement as an alternative to litigation.  We do not recommend that anyone testify on behalf of themselves in boat tax cases — particularly attorneys with boats — unless they are represented by knowledgeable counsel.

Casenote.DNR.cases.5.11.05 – MSBA 2004/05 Law Clerk

Practice Tip

Sailing into the twilight zone of the Maryland vessel excise tax?  You’ll need more than running lights.

Schwartz v. DNR, Court of Appeals No. 94, September Term 2004, March 14, 2005 (Judge Raker with dissent by Judge Wilner).

Kushell v. DNR, Court of Appeals No. 96, September Term 2004, March 14, 2005 (Judge Raker).

     A client walks in the door, fuming at the assessment of the five percent Maryland vessel excise tax on his or her vessel pursuant to Natural Resources (DNR) Art. §§ 8-716 et seq.  The vessel was purchased in Maryland to be moved to permanent moorings at the client’s home in another state.  As such, it was not supposed to be subject to that tax.

However, as often occurs, the vessel had a number of serious operational problems, serious enough to prevent it from leaving Maryland until repaired.  Your client expected the dealer to remedy the problems.  And the dealer did so.  But it took some time to get the work done.

While the work was in progress, on 3 or 4 occasions, the Maryland Department of Natural Resources (DNR) made brief observations of the vessel while it was moored in Maryland waters undergoing repairs.  Those observations took about 10 to 12 minutes in toto.  That was, in fact, the total duration of the observations in theSchwartz case. 

Those observations will have been made by persons who likely have no meaningful expertise about the vessel involved.  The DNR observer likely did not try to determine why the vessel was moored there. 

Based on those events, the DNR determined that the vessel excise tax was due because those passing glimpses indicated that Maryland must be the state of principal use for the vessel, or more realistically, the DNR wished to force your client to prove otherwise.  Accordingly, the DNR issued a notice of assessment imposing the tax with interest and penalties. 

From that point on, immediately upon the issuance of that notice, there has been a lien on the vessel for the tax, interest, and penalties, a lien which has ‘the full force and effect of a lien of judgment.’  NR Art. § 8-716.1(f)(2).  Was your client planning to refinance the vessel?  Make sure that he or she discloses that judgment lien.

Did you believe that pursuant to fundamental due process requirements articulated by the Supreme Court in Sniadach v. Family Finance Corp., 395 U.S. 337, 89 S.Ct. 1820, 23 L.Ed. 2d 349 (1969), and by the Court of Appeals in Barry Properties, Inc. v. The Fick Brothers Roofing Company, 277 Md. 15, 353 A.2d 222 (1976), there could be no such judgment lien without notice and the opportunity for a hearing prior toimposition of such a lien?  Wrong.  In the three plus decades since Sniadach, the ‘ripple effect’ of the multitude of cases flowing from Sniadach and its progeny has yet to reach this Maryland law.

But wait.  You see that you should be able to help the client by denying liability within 30 days of the issuance of the notice and requesting a hearing before an administrative law judge (ALJ).  You note that if the vessel was held for maintenance or repair for 30 consecutive days or more, that time cannot be included in the calculation to determine the principal state of use.  NR Art. §§ 8-716(a)(3) & 8-701(n).  And that, of course, was the only reason that your client’s vessel was even in Maryland waters at the time the DNR wandered by.  Further, you see the obvious bases for solid constitutional challenges to various aspects of that tax.

So this should be fairly cut and dried process.  Want to bet?  Once you start the process of contesting liability for that tax, you have entered the twilight zone.  You are going to need more than running lights to find your way through the process.  That process may well take up to three years before you reach any reasoned resolution, if, in fact, you ever do reach a reasoned resolution.  In the meantime, the judgment lien for the tax will remain in effect, with interest accruing.

    How does the process work?  With the filing of the appeal, an ALJ will, in due course, conduct a hearing pursuant to the Administrative Procedures Act, State Government Art. §§ 10-201 et seq.  The DNR will establish conclusively that the vessel was in Maryland waters for the several minutes it took to make its passing observations of the vessel.  It will call as its experts, persons who will likely have little experience with or knowledge of such vessels.

You should be aware that to the extent that the ALJ bases his or her findings on the testimony of those DNR experts, at the judicial review stage, the qualifications of those experts will be difficult to challenge.  This is so because when you do reach the stage of judicial review, findings based in part on the DNR experts will, under Maryland law, be entitled to great deference.

Will your client’s case depend in part on witnesses you need to subpoena from out of state?  Forget it.  No subpoena is available for such witnesses.  And even if you submit their affidavits, notwithstanding that the setting is an administrative hearing with relaxed rules of evidence, the DNR will object due to the inability to cross-examine the witness.  The ALJ can be expected, in turn, to reject or ignore that affidavit evidence.  So your best hope is that your witnesses are in Maryland, or at least willing to cooperate in providing needed testimony.

You should be aware that it is your client’s burden to prove in the administrative process, that he or she is not liable for the tax.  As a practical matter, the DNR typically only has to prove that the vessel was in Maryland waters in order to get the tax affirmed through the administrative levels.  Your client, in turn, having had a judgment lien placed on his or her vessel without the opportunity for a hearing, will be required by the DNR and the ALJ that the tax is not, in fact, due.  Unless you can prove that, the lien will remain in effect.

You will likely need to review the prior administrative interpretations of the issues involved in your client’s challenge to the tax.  However, you will find that there is no index or reporting system which permits you to accomplish that short of trying to extract that information from the Office of Administrative Hearings (‘OAH’) in Towson.  Those efforts should be premised in part, on a Public Information Act (‘PIA’) request, so as to establish your legal entitlement to such information. 

But you still may encounter resistance from OAH to your accessing the public records consisting of prior ALJ decisions.  A better course will likely be to identify a colleague familiar with the decisions, to see if you can get an assist, to avoid a trip to the OAH in Towson. 

Even if you do access the prior ALJ decisions on the issues in your case, you will not get access to the interpretations of the Secretary of DNR on the multitude of ALJ proposed decisions.  Those rulings may well evidence the policies and practices of the DNR, considerations which may be important to the case.  A PIA request to the DNR may help with that.

How about the case law, the reported decisions illuminating the judicial interpretations of the tax and its procedures.  There are few reported decisions.  The two referenced cases are amongst those that do address the tax. 

The underlying reason for the lack of case law is cost-effectiveness concerns in reaching that stage of the process.  The length and lopsided nature of the procedures needed to even reach the courts, weighed against payment of the tax, create significant obstacles to any meaningful judicial involvement in the process.  That tends to explain why the ripple effect ofSniadach has yet to reach these statutes.

You likely plan to raise the obvious procedural and constitutional challenges pertinent to these lopsided proceedings.  To do that, you must keep in mind the jurisdictional requirement that your client must first exhaust his or her administrative remedies [see, e.g., Blumberg v. Prince Georges County, 288 Md. 275, 418 A.2d 1155 (1980)].  As futile as the effort may seem, those challenges need to be raised early in the administrative processes. 

A failure to do so may leave you with the need to ask for a remand once you finally do reach the courts.  Maryland Insurance Commissioner v. Equitable Life Assurance, 339 Md. 596, 664 A.2d 862, 872-877 (1995).  You should try to avoid that risk.

In order to exhaust administrative remedies, once the ALJ issues a proposed decision affirming the tax assessment and the procedures involved, in an abundance of caution, your client should submit exceptions to the proposed decision to the Secretary of the DNR prior to secretarial action to approve the proposed decision. 

You correctly believe the prospects are nonexistent that the Secretary will say that no tax is due.  But you still need to take that further time-protracted step in order to finally reach the stage of judicial review. 

In the judicial review process, the standard of review is set forth in State Government Art. § 10-222(h).  That standard is discussed, inter alia, in the Kushell andSchwartz decisions.

The decision in Kushell addressees a narrow issue.  There, the vessel owner had purchased the vessel outside Maryland for use outside of Maryland.  He had actually used the vessel for some time in California before moving to Maryland, bringing the vessel with him. 

In Kushell, the Court rejected the DNR 12-minute rule of tax liability (see, e.g., Schwartz, supra) on the basis that the statute did not permit such an assessment where the vessel was purchased outside of Maryland with the intent to use it in another state.  Accordingly, after three years and considerable legal effort and, presumably, expense, Mr. Kushell’s vessel was finally freed of the judgment lien but with no apparent relief to the vessel owner who had been subjected to the DNR proceedings.

The Kushell briefs did raise some of the constitutional challenges apparent in this lopsided process.  However, given the focus of the Court of Appeals on the inapplicability of the tax to the Kushell vessel, those issues were left for another day.

Dirk Schwenk from Annapolis was the successful attorney for Mr. Kushell.  Dirk notes that the implications of the Kushelldecision indicate that the following situations should be exempt from the tax: (EDS. NOTE: It is our understanding that legislation is to be introduced in the 2006 legislative session that will effect the holdings of Kushell v. DNR, by changing the key language. DO NOT rely on this concerning taxability of a vessel in the future)

1.   Federally documented vessels purchased elsewhere where the owner did not plan at the time of the purchase, to bring the vessel to Maryland.

2.   State numbered vessels purchased elsewhere and properly numbered in that other state, where the owner did not intend at the time of the purchase, to bring the vessel to Maryland.

Examples for both categories would include out-of-state residents relocating to or visiting Maryland, so long as the vessel was initially purchased for use in another state before it was later relocated to Maryland.

     The decision in Schwartz is of more interest, for both the issues it did address as well as the issues it sidesteps.  TheSchwartz decision was handled by Matthew Egeli, also of Annapolis.  It has marked parallels to the hypothetical case posed here.  In Schwartz, the Court was considering the more typical history of vessel use and the tax assessment process.

     The vessel had been purchased in Maryland for relocation and use in another state.  Accordingly, following DNR regulations, the purchaser had submitted to the DNR, a completed DNR form B-110.  The procedure gives rise to a procedural exemption so that the dealer is not required to collect the excise tax. 

However, after the sale, it became apparent that significant operational and stability concerns required that the vessel remain in Maryland for some time.  Accordingly, the vessel became subject to what might be called the DNR 12-minute rule of tax liability.  A three-year odyssey of administrative and judicial proceedings ensued, with the predictable administrative determinations taking up much of that time.

Somewhat atypically, the venue considerations allowed the judicial challenge to be filed in the Circuit Court for Queen Anne’s County.  That Court had found by a careful an obviously careful analysis, that the law did not permit the DNR form B-110 exemption, that the dealer should have been required to collect the excise tax for a vessel sold in Maryland. 

This was not an issue which had been raised by any of the parties in the earlier administrative proceedings.  On that point, you need to read the circuit court decision in the Schwartz case in order to understand that analysis.  The Court of Appeals’ opinion does not provide any detail on the analysis below by the Circuit Court.

Unexplained in Schwartz is the point that the issue decided by the circuit court had never been raised in the administrative proceedings below, but the issue of exhaustion of administrative remedies was not addressed.  Maryland Insurance Commissioner v. Equitable Life Assurance, supra.  Unexplained in the decision of the Court of Appeals, was why that requirement was not addressed.

As with Kushell, the Court of Appeals granted by-pass certiorari.  That grant ofcertiorari in the Schwartz case was apparently to consider the striking down of the long-standing DNR form B-110 exemption by the Circuit Court.  However, as noted in a forceful dissent by Judge Wilner, the decision sidestepped the lack of a DNR form B-110 exemption.  Instead, it then went through a painstaking analysis of the administrative record to affirm the imposition of the tax.

What is really going on in these cases?  Maryland marinas in the Chesapeake Bay and its tributaries are filled with literally acres of very expensive vessels.  These vessels feed an important industry group involved in the sale of those vessels for use in Maryland and elsewhere.  The DNR form B-110 exemption provides some administrative support for that industry group.

Maryland also has a viable and important vessel service and repair industry.  That industry group services vessels from outside the state which certainly do not wish to be assessed an excise tax simply because they chose to use Maryland services and facilities.  And certainly, the businesses providing repair and related services for vessels generate business and tax revenues for the state.

It is this industry group that would seem to be victimized by the DNR 12-minute rule of tax liability.  Fortunately for that group, it would appear that the out-of-state prospective users of that service industry are not aware that the price of using those Maryland service facilities may, by reason of the DNR 12-minute rule, include the excise tax.

The DNR has an advisory group which seeks, in part, to strike a balance between keeping those industry groups viable while still permitting the DNR to use its 12-minute rule, to run roughshod over fundamental due process and related concerns.

In this straining economy replete with state budget problems, it is would seem to be apparent that the courts will have a strong predisposition to upholding the tax wherever possible and with it, the DNR 12-minute rule. 

Witness the dissent in the Kushelldecision.  As Judge Wilner notes, the issue of cert-related concern was the exemption which would have been struck down by the circuit court ruling.  If the DNR form B-110 exemption were invalid, it is foreseeable that vessel sales and the related servicing of those vessels would be lost to Maryland. 

In his dissent, Judge Wilner states that if there is no exemption, then without regard to the intended ultimate use of the vessel, the dealers for all vessel sales in Maryland should collect the tax.  He notes, as well, that there may be economic hardship for the boating industry in Maryland, that legislative action may ensue.

The majority opinion sidesteps consideration of that prospective loss of the DNR form B-110 exemption, to hold that under the facts in that particular record, the DNR had properly assessed the tax.  In doing so, it avoids the risk of hardship to the involved industries and the risks inherent in the legislative process.  On that point, it would seem to be obvious that no vessel owner’s challenge to the assessment of the tax would be likely to take issue with the DNR form B-110 exemption.

Where does that leave you and your client in the client’s prospective challenge to the assessment?  It suggests a long and uncertain voyage through waters filled with unrevealed hazards in the form of unstated agendas and concerns not apparent on the surface of the statute and the regulations.  You’ll need more than running lights to detect those submerged obstructions.  Make sure that your client understands the course to be plotted.

Boat Tax 2010 – Maryland

Eds Note – Maryland passed a $15,000 tax cap in 2013.  Please see http://www.boattax.com/maryland-2013-the-tax-cap-is-here-use-it-now/ for details.

Thankfully for 2010, there have been very few changes to Maryland’s boat tax provisions.  The overall scheme remains the same: boats purchased in or principally used in Maryland are subject to a one-time tax of 5% of their fair market vale.  There are, of course, myriad exceptions, traps and defenses of which boaters should be aware.  Here are few of the most important.

  1. Boats Purchased in Maryland.  A boat purchased in Maryland is subject to tax unless the owner certifies on the Maryland’s DNR-B110 form that the boat is to be taken out of the state, registered and used in another jurisdiction within 30 days of the time that tax is due.  For most small boats, this simply means paying the tax on the day of sale.  For larger boats, there are many questions to consider, including whether a boat is in commissioning (if so, the time does not yet run), whether there has been a final sale (what if payment has been made but the boat has not yet been delivered to Maryland?) and whether of not to finalize a transaction in Maryland at all.  Some boat owners choose to conduct settlement in other jurisdictions so as to avoid the 30 day limit. 
  2. Boats Purchased Outside of Maryland.  If a boat is purchased in another jurisdiction, it is potentially subject to the 5% use tax.  Generally speaking, Maryland law recognizes a 90 day period in which a boat can be cruised without tax.  If the boat is in Maryland for more than 90 days, then it is taxable if it is in “principal use” in the state.  Principal use means that it is in Maryland more than it is in any other single jurisdiction.  Thus, if it is in Maryland 100 days, and the remaining time is split between the Virgin Islands, Florida and Maine, it is subject to tax in Maryland, because it was not in any other single jurisdiction more than it was in Maryland. 
  3. Boats under repair or listed for sale in Maryland.  There is a good deal of misinformation about these two exceptions to tax.  A boat that is held for maintenance or repair for a period of 30 days or more, on a schedule with boat repairers and that spends more for the repairs than it would for simple dockage may meet the repair exception – but it is not as simple as simply leaving it in a slip and having the bot tom periodically cleaned.  Similarly, for a boat to make the listed-for-sale exception, it is required to file a form with the DNR (your broker should provide this!) AND the boat cannot be used for personal use other than for sea trial for prospective purchasers.  We have had cases of liveaboards trying to claim their boat is listed for sale and not taxable – we do not recommend this. 
  4. Penalties and Interest.  As always, the most upsetting aspects of Maryland’s tax are the penalties and interest.  Every boat that fails to pay the tax within 30 days of the date that it is due is subject to a 10% tax.  If the DNR believes that fraud or gross negligence is indicated (such as when a boat is certified to leave the state within 30 days of purchase, but does not), then there is a 100% penalty.  Interest runs at 18% — and from the DNR’s perspective it is often running during a period that the boat owner is not even aware that he or she is going to be assessed for taxes. 
  5. Tax Assessments.  Maryland issues most of its boat tax assessments after it completes its annual investigations (approximately November 1), which means that many boat owners will get an unexpected bill during the first quarter of the year.  The most important thing to know about tax assessments is that THERE IS ONLY 30 DAYS TO RESPOND if one is going to appeal.  Ignoring the assessment will limit the defenses available, and may mean that there is not way to respond.  Assuming a timely response, assessments should be closely analyzed for the accuracy of the fair market value assigned to the boat and for the time period that the boat is said to have been in Maryland. 
  6. Text of the Maryland Tax Section in the State Boat Act.  Here are some of the key definitions and provisions from the Maryland State Boat Act, § 8-716. Certificate of title – Fees; excise tax.

(2) “Commissioning procedures” means the initial outfitting of a vessel immediately after the purchase of the vessel, including the installation of rigging, electronic gear, propulsion machinery, generators, or other related gear. 

 (3) “Fair market value” means: 

 (i) As to the sale of any vessel by a licensed dealer or a dealer licensed by another state or a foreign country, the total purchase price, as certified by the dealer on a form acceptable to the Department, less the value of any vessel that is traded in as part of the consideration for the sale, which trade-in value may not exceed the value for the trade-in vessel as shown in a national publication of used vessel values adopted by the Department; 

 (ii) As to any other vessel that is sold by any person other than a licensed dealer, the greater of: 

1. The total purchase price; or 

2. $100; or 

(iii) As to any other vessel that is sold by any person other than a licensed dealer, either: 

1. The total purchase price, if verified by means of a certified bill of sale approved by the Department, in which the actual price paid for the vessel is stated; or 

2. The valuation shown in a national publication of used vessel values adopted by the Department if a certified bill of sale does not accompany the application. 

(4) “Used principally in this State” means that this State is the state of principal use as defined in § 8-701(p) of this subtitle, except that in calculating where the vessel is used or used most, a vessel is not considered to be in use for any period of time that it is held for maintenance, repair, or commissioning for 30 consecutive days or more. 

 (5) “Sea trial” means a period of on-the-water operations, not to exceed 1 day, that is conducted: 

 (i) For the purpose of testing the effectiveness of specific maintenance, repairs, or commissioning procedures; or 

 (ii) For a vessel held for resale by a licensed dealer under this section. 

(7) (i) “Vessel” has the meaning indicated in § 8-701(s) of this subtitle. 

(ii) “Vessel” does not include a ship’s lifeboat, a vessel propelled only by sail, or vessel manually propelled. 

(c)  Levy and amount of excise tax; title tax in lieu of sales tax or use tax; owners prior to June 1, 1965 exempt.-  

(1) Except as provided in § 8-715(d) of this subtitle and in subsections (e) and (f) of this section, and in addition to the fees prescribed in subsection (b) of this section, an excise tax is levied at the rate of 5% of the fair market value of the vessel on: 

(i) The issuance of every original certifi cate of title required for a vessel under this subtitle; 

 (ii) The issuance of every subsequent certifi cate of title for the sale, resale, or transfer of the vessel; 

 (iii) The sale within the State of every other vessel; and 

 (iv) The possession within the State of a vessel used or to be used principally in the State. 

 (2) Notwithstanding the provisions of this subsection, no tax is paid on issuance of any certifi cate of title if the owner of the vessel for which a certifi cate of title is sought was the owner of the vessel prior to June 1, 1965, or paid Maryland sales and use tax on the vessel as required by law at the time of acquisition. The Department may require the applicant for titling to submit satisfactory proof that the applicant owned the vessel prior to June 1, 1965. 

(d)  Remittance of uncollected tax.- If the tax is not collected by a licensed dealer pursuant to § 8-716.1 of this subtitle, the owner, whether or not applying for the issuance of a title, shall remit the tax directly to the Department within 30 days of the date of sale or, in the case of a vessel purchased outside the State, within 30 days of the date upon which the possession within the State became subject to the tax. 

 (e)  When fee or tax not required to be paid.- A person is not required to pay the tax provided for in subsection (c) of this section resulting from: 

(1) A transfer between members of the immediate family as determined by Department regulations; 

(2) A transfer between members of the immediate family as determined by Department regulations of a documented vessel for which the transferor applied for and was issued a valid use sticker under § 8-712.1 of this subtitle; 

 (3) A transfer to a licensed dealer of a vessel for resale, rental, or leasing purposes; 

 (4) The holding of a vessel that is titled or numbered in another state or is federally documented, provided: 

(i) The vessel is held for resale or listed for resale by a licensed dealer; and 

 (ii) The vessel owner signs an affidavit that there will be no use of the vessel on the waters of the State other than for a sea trial; 

 (5) Purchase of a vessel by the State or any political subdivision; 

 (6) Purchase of a vessel by an eleemosynary organization which the Secretary has approved; 

 (7) The purchase within the State of a vessel if the owner paid or incurred a liability for the Maryland sales and use tax on the vessel prior to July 1, 1986; 

 (8) The possession within the State of a vessel which was purchased outside the State if the owner paid or incurred a liability for the Maryland use tax on the vessel prior to July 1, 1986; 

 (9) The possession of a vessel in the State that is not used or to be used principally on the waters of the State and for which the issuance of a title is not sought or required under this subtitle, except that: 

 (i) A vessel is not deemed used on the waters of the State if the vessel is used for 90 days or less of a calendar year; and 

 (ii) If a vessel is used for more days than 90 days in a calendar year, the period of 90 days shall be counted in the determination of principal use under this subtitle; 

 (10) The possession within the State of a vessel if the current owner, before July 1, 1986: 

 (i) 1. Was licensed by the Department to catch, for commercial purposes, finfish, eels, crabs, conch, soft-shell clams, hard-shell clams, oysters, or any other fish; and 

2. Used the vessel for any of the commercial fishing purposes described in item 1 of this item; or 

(ii) 1. Was licensed as a commercial fishing guide under the provisions of § 4-210 of this article; and 

2. Used the vessel as a charter boat with a license as provided in § 4-745(d)(2) of this article; 

(11) The possession within the State of a vessel that: 

 (i) Is owned by a nonprofit organization that: 

1. Is qualified as tax exempt under § 501(c)(4) of the Internal Revenue Code; and 

2. Is engaged in providing a program to render its best efforts to contain, clean up, and otherwise mitigate spills of oil or other substances occurring in United States coastal and tidal waters; and 

(ii) Is used for the purposes of the organization; 

 (12) The possession within the State of a vessel for a period of not more than one year if the current owner is a member of the armed services and is serving on active duty in this State; or 

(13) The sale of a vessel within the State if: 

(i) The vessel is purchased from a licensed dealer; 

(ii) The issuance of a title is not sought or required; 

(iii) The vessel is not used or to be used principally on the waters of this State; 

(iv) The vessel is duly registered in another jurisdiction within 30 days of the date of purchase; and 

(v) The dealer and the purchaser execute an agreement certifying the state of principal use for the vessel which is filed with the Department within 30 days of the date of purchase. 

(f)  Applicability to possession within the State of a vessel.-  

(1) This subsection applies to possession within the State of a vessel if: 

(i) The vessel was formerly: 

1. Titled or numbered in another jurisdiction; or 

2. Federally documented and principally used in another jurisdiction; 

 (ii) The present owner has paid a sales or excise tax on the vessel to the other jurisdiction; and 

 (iii) The jurisdiction to which the tax was paid would allow an exemption or credit under its sales or excise tax for excise tax on a vessel formerly paid to the State. 

(2) For a vessel described in paragraph (1) of this subsection: 

(i) If the rate of the tax paid to the other jurisdiction is not less than the rate under subsection (c) of this section, the tax imposed under subsection (c) of this section does not apply to possession of the vessel within the State; 

(ii) If the rate of the tax paid to the other jurisdiction is less than the rate under subsection (c) of this section, the rate of the tax imposed under subsection (c) of this section on possession of the vessel within the State is the difference between the tax rate paid to the other jurisdiction and the rate under subsection (c) of this section; and 

 (iii) The Department may require the taxpayer to submit satisfactory proof of the payment of a tax to another jurisdiction and the rate of tax paid and, where applicable, evidence of principal use of a federally documented vessel in another jurisdiction. 

(3) This subsection is applicable to any vessel incurring a liability for Maryland boat excise tax on or after July 1, 1986. 

 (g)  Tax credit.-  

(1) A person may claim a credit against any tax imposed under subsection (c) of this section on a vessel for sales tax the person has paid to the State, to another state, or to the District of Columbia on materials and equipment that are incorporated into the vessel, if: 

 (i) 1. The person is licensed by the Department to catch, for commercial purposes, finfish, eels, crabs, conch, soft-shell clams, hard-shell clams, oysters, or any other fish; and 

2. The vessel is to be used for any of the commercial fishing purposes described in item 1 of this item; or 

 (ii) 1. Was licensed as a commercial fishing guide under the provisions of § 4-210 of this article; and 

2. Used the vessel as a charter boat with a license as provided in § 4-745(d)(2) of this article. 

 (2) The Department may require a person claiming the credit allowed under this subsection to submit satisfactory proof of payment of the sales tax and that the materials or equipment have been incorporated into the vessel. 

(h)  Overpayment of tax.- If the Department determines there has been an overpayment of the tax on a vessel, or an overpayment has resulted for any other reason, the Department may submit the overpayment and supporting data whether accompanied by a written claim or not to the State Comptroller for refund to the appropriate person. 

 (i)  Vessel held for maintenance or repair.-  

 (1) For purposes of subsection (a)(4) of this section, a vessel is deemed to be held for maintenance, repair, or commissioning if: 

 (i) The maintenance, repair, or commissioning work is provided in exchange for compensation; 

 (ii) The maintenance, repair, or commissioning work is performed pursuant to a schedule preestablished with one or more marine contractors; and 

 (iii) The total cost of the maintenance, repair, or commissioning work is at least two times the reasonable current market cost of docking or storing the vessel. 

 (2) Time spent conducting sea trials shall be included when calculating the period of time a vessel is held for maintenance, repair, or commissioning under subsection (a)(4) of this section.  

Happy cruising.

 

J. Dirk Schwenk, Baylaw, LLC.

Boat Tax 2010 — How Long Can I Cruise?

Boaters coming in to Maryland regularly ask us how long can they stay without owing tax under the State Boat Act. The answer to this question is somewhat difficult to give, because there are a lot of factors both future (repairs) and past (location of purchase), that may affect the answer to the question. There are also ambiguities in the law that may be read differently by a judge than they are by this Firm or by the personnel at the Department of Natural Resources — not to mention that the personnel at the Department of Natural Resources, being human, sometimes are not 100% consistent as to their views on what the statute says. That said, here is the short answer, and the best answers that we can give without a 25 page legal brief. I include the actual text of the 90 day exception below, so you can see why we are hesitant to speak in absolutes.

It should be noted that if you have paid sales or use tax on your boat to another state, and paid at least 5% tax on the purchase, you will not likely owe Maryland anything. You should register with Maryland if you are staying on and cruise without significant concern if not.How Long?

1. You can cruise for 90 days in a calendar year in Maryland waters without tax consequences if your boat was purchased in another state and principally used or registered there prior to coming to Maryland. 2. We are hearing that brokers are saying that one can cruise Maryland for 90 days after purchase. By our reading, this is not what the law says, although it is true that the DNR does not generally issue assessments for tax on boats that are in Maryland less than 90 days. If it did, however, tax would probably be due.

3. The DNR generally takes the position that you can cruise for 90 days even if your boat was purchased in Maryland, so long as you did not owe tax when the boat was purchased. (Generally this means that the boat was purchased in Maryland, but left within 30 days and filed the DNR’s form B110 Affidavit of Out of State Use). WARNING: We are not aware of anyone that has tested the DNR’s patience by leaving on day 29 and returning on day 31, then staying for the remaining 90 days. If you do this, or something similar, you are in a gray area of the statute, and we do not make any promises about your outcome. WARNING: If it smells to the DNR that there was a fraud-ish effort to avoid tax (for example, if you are Maryland resident) then this general rule may not apply.

4. You can stay in Maryland more than 90 days in a calendar year without tax consequences, so long as you stay more days in another single jurisdiction. If you are in Maryland 100 days and in Florida 110 days, you are fine — but you may need to demonstrate this to Maryland’s DNR, and you will therefore need to be sure that you are on the right side of Florida’s sales and use tax. WARNING: If you are in the BVI, or some combination of other states (as opposed to a single state of the United States), then you need to be under 90 days. Editor’s note: if you have spent time in a jurisdiction other than a US State or territory, and this time matters in terms of whether the boat is taxable, please call for specific advice – analysis in this area of the law is currently in a state of flux.

5. International cruising permits — we do not presently have any public position on what to expect for such a boat. If the boat is here for an extended period, taxation is an issue. If you are in this position, you should call for specific advice.

Actual Text of the State Boat Act —

(c)(1) Except as provided in § 8-715(d) of this subtitle and in subsections (e) and (f) of this section, and in addition to the fees prescribed in subsection (b) of this section, an excise tax is levied at the rate of 5% of the fair market value of the vessel on: (i) The issuance of every original certificate of title required for a vessel under this subtitle;

(ii) The issuance of every subsequent certificate of title for the sale, resale, or transfer of the vessel; (iii) The sale within the State of every other vessel; and

(iv) The possession within the State of a vessel used or to be used principally in the State. (e) A person is not required to pay the tax provided for in subsection (c) of this section resulting from:

(9) The possession of a vessel in the State that is not used or to be used principally on the waters of the State and for which the issuance of a title is not sought or required under this subtitle, except that: (i) A vessel is not deemed used on the waters of the State if the vessel is used for 90 days or less of a calendar year; and

(ii) If a vessel is used for more days than 90 days in a calendar year, the period of 90 days shall be counted in the determination of principal use under this subtitle;

Happy cruising.

J. Dirk Schwenk, Baylaw, LLC.