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Bump's World - January 2012
January 27, 2012
TAXES
Ever since the 1776 every politician running for office in America has promised 3 things. First is an improved economy with more jobs, second is eliminating political corruption, and last, but not least, lowering taxes. More than 336 years later we have an economy that is in the tank, more political corruption than ever, and the highest taxes.
When I started selling yachts in 1979, most customers created a Delaware Corporation in order to avoid paying Massachusetts Sales Tax. This was also common in most other states. The sales tax law said that items purchased in that state must pay that sales tax. The easy way to stay within the law, but avoid paying the tax was to have the transaction happen out of the state. Delaware has no sales tax, so by having a Delaware Corporation do the transaction in that state sales tax is avoided. Delaware is also a very easy state to form a corporation, you do not have to live in the state and a PO box is fine for an address. So for very little money and effort you could set up the corporation to own the yacht and have the transaction, at least on paper, happen there. Harbors all over the northeast were full off boats with Dover and Willington, Delaware displayed on their sterns as hailing ports. You could have just written "I did not pay my sales tax" on their sterns.
By 1981 the states recognized this loss of revenue and changed the definition of the tax to a "Sales and Use Tax". This was a huge change because now it was not only where you bought the yacht, but also where you used it. So your Delaware Corp yacht moored in Marblehead was in violation of the tax code and the state was due the then 5% sales tax.
There are 2 ways to have a legal registration of a yacht. The first is state registration, which in order to do you have the show proof of paid sales tax in order to get your registration. The second is documentation with the Coast Guard. Since this is a federal and not state registration no proof of paid sales tax is necessary in order to document your yacht. So if you chose to document you must go to the state and prove a purchase price of the yacht and pay the sales tax to the state on that amount. If you can not prove what you paid the state will assign you an apprised amount to pay the tax.
Once a year the Coast Guard sends a list to each state of yachts documented in address of those states. Most states will then send out a form letter saying they know you bought a boat that year and please send them a copy of your sales tax receipt. If you did pay and have the receipt you will not hear from the state again. If you did not pay and tell them you did not know you had to pay, they will send you a bill for the tax and a penalty for not paying on time. If you ignore the letter, about 6 months later you will get a bill of tax due, based on their apprised amount, interest, and a penalty. The problem with this bill is, even if you have paid the sales tax, you would have to pay this bill and file for an abatement. At this point the penalty and interest could equal or exceed the original tax. Trying to convince the dept of revenue that you did not know sales tax was due or that you forgot to pay etc. does not get much sympathy. Yacht owners are considered rich people who should be paying more anyway. Your government employee is not going to feel bad for the yacht owner.
Everyone knows that the rich don't pay enough or their fair share of taxes, so in the late 1980's the federal government initiated a luxury tax. The luxury tax has a 10% tax on yachts beginning at 100 thousand dollars. So a 200 thousand dollar yacht would pay an additional 10 thousand in luxury tax on top of the state sales tax.
The yacht industry at this time was headed for a major recession and this helped to make sure that the industry really collapsed. People stopped buying yachts. The few that did buy yachts now formed Bermuda Corporations so that the transaction happened offshore avoiding the sales and luxury tax. After the collapse of the industry in 1992 the luxury tax was repealed.
The state of Rhode Island has a large yacht industry and a lot of jobs were lost at this time. Rhode Island decided that not only was the luxury tax bad for the boat business, but the sales tax was also. In 1993 Rhode Island announced the repeal of sales tax on boats. So if you purchased your yacht in Rhode Island and kept it in Rhode Island there is no sales tax even if you live outside the state. So a Massachusetts or Connecticut resident could keep their yacht in Rhode Island and avoid any sales tax.
Recently Maine reacted to this situation by lowering sales states on yachts purchased in Maine by out of state residents to 2%. What they wanted to stop was someone buying their boat in Rhode Island, cruising to Maine in the summer and then taking the yacht back to Rhode Island for winter storage and claiming the boat principally resides in Rhode Island. By lowering the tax to 2% Maine hopes the owner with leave the boat in Maine year round so they get some tax revenue and the boat industry, yards etc., get some business.
New Hampshire has no sales tax on anything, however there are so few places to keep a boat there that it has never developed as a huge tax haven.
So Massachusetts has no sales tax to the north and no sales tax to the south on boats. How did they deal with this in order to help the yacht industry in Massachusetts? They raised the sales tax to 6.25% or about a 20% increase.
Connecticut reacted by imposing its own luxury tax. On over 100 thousand in purchase price Connecticut now charges 7% sate luxury tax. This will really help business.
Many states like Connecticut and New York now require you to state register even if you document. This insures them that you will pay the sales tax. In many harbors you must show proof of paid sales tax to get a mooring.
Now there are many people who live in Massachusetts, Connecticut, Vermont, and even New York, who claim to principally keep their yacht in Rhode Island.
Our famous State Senator even claimed to keep his yacht in Rhode Island.
Rhode Island has seen growth in its marinas and boatyards, even when the rest of the industry is shrinking. Yacht owners will always gravitate to ways to reduce their tax exposure. I know the government makes very good use of our tax dollars and I am very proud of every penny I give them.
Please mail comments to me at Bump@newwaveyachts.com
Bump Wilcox
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