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The Sacramento Bee - Monday, June 7, 2004
Luxury Purchase Loophole Targeted
Democrats want to block buyers of yachts and planes from navigating around sales and use taxes.

By Ed Fletcher
BEE CAPITOL BUREAU

For Doug Ament, a San Diego yacht dealer, it’s no big deal if a customer wants to avoid paying California sales tax on a high-priced purchase. He just makes the necessary arrangements: The buyer takes ownership offshore, then keeps the vessel out of California for 91 days and uses it before taking the boat home to the Golden State. Successful navigation of the state sales and use tax laws can pay off. A Santa Cruz shopper who buys a $200,000 yacht stands to save $16,000 by avoiding an 8 percent tax. “It’s just, ‘Where do you want to deliver it?’ “ said Ament, owner of San Diego’s H&S Yacht Sales. But those eyeing a new yacht, airplane or high-priced ride might need to act quickly if they want to take advantage of this legal maneuver. As lawmakers weigh changes to Gov. Arnold Schwarzenegger’s proposed state budget, Democratic legislators say this tax loophole ought to be closed, creating revenue that could offset proposed cuts to social programs. “Whether it is yachts or airplanes, we’re talking about big bucks,” said Sen. Deirdre Alpert, D-Coronado. “Why would we help people avoid taxes they owe?”

California requires those who purchase out-of-state products they intend to store or use in the state to pay a “use tax” equivalent to their local sales tax. The law is aimed at creating a level playing field for in-state and out-of-state purchases. In reality, however, it is rarely enforced except for transactions involving big-ticket items, and the 90-day threshold for out-of-state use has become a tool for those who want to avoid the tax. Changing the 90-day rule would allow the state to better enforce the intent of the existing law, Alpert said. The state has recently stepped up efforts to collect use tax - in part by asking taxpayers how much use tax they owe on state tax forms. Additionally, legislation signed earlier this year asks more businesses to collect sales taxes on Internet purchases. Democrats’ proposed new rule would create the assumption that Californians owe the tax if a purchased airplane, vessel or vehicle is subject to state property tax or registration requirements within the first 12 months of ownership. The tax would also apply if the airplane, vessel or vehicle is used or stored in California for more than six months of the first year of ownership.

Under the proposal, buyers likely would have to keep their purchase out of California for a year before bringing it home, said one tax consultant who regularly helps Californians avoid the tax. By collecting taxes from those who might otherwise avoid them, state and local governments stand to collect an additional $54.6 million annually, according to a state Board of Equalization estimate. But there are those, including state finance officials, who say changing the rules would hurt California businesses. “This kind of change in the rule would hurt California’s business and possibly our tourism dollars,” Mike Genest, Schwarzenegger’s chief deputy director of finance, told the high-powered budget conference committee last week.

Jon Coupal of the Howard Jarvis Taxpayers Association questions the impetus of Democrats’ proposed rule change. “I don’t think the motivation here is to stop cheats,” Coupal said. “I think the motivation here is to grab some more revenue.” Cris John Wenthur, senior partner at a La Jolla law firm that helps Californians steer clear of the tax, told lawmaker in a letter that rich Californians would opt to buy and keep their boats out of state if the rules are changed. “Any projected revenue from the proposed change (to the law) will be far outweighed by loss of jobs at all levels in the marine industry, loss of maritime and tourism business,” he wrote. But Joseph F.R. Micallef, president of Associated Sales Tax Consultants, said the rule change would temporarily hurt business more than it would hurt the California maritime businesses. Ensuring clients don’t pay more taxes than the law requires when buying airplanes and yachts is one of the Sacramento firm’s specialties. “I think it would leave a bad taste in the taxpayers’ mouths, but I don’t see it slowing down business,” Micallef said during a telephone interview from Dana Point, where he was drumming up business at a boat show.

Ament said he doesn’t advertise the tax break to people shopping for yachts, but he said people often ask about it. He said changing the rules will hurt his business. “It will absolutely affect my revenue,” Ament said. “It is like an 8 percent tax increase on those guys who were going to do an off-shore delivery.”

People shopping for recreational vehicles also are interested in knowing how they can avoid sales taxes, said Jim Wagner, manager and co-owner of Village RV of Sacramento. “People ask me about it all the time, and I discourage it all the time,” Wagner said. “I pay taxes in this state, and think everyone else should.” But Wagner admits he’s made out-of-state arrangements when buyers were “dead set” on doing it and said other RV dealers are quick to offer such deals.

Assemblyman Lloyd Levine, D-Sherman Oaks, who has been pushing an effort to close the tax loophole for two years, said the rich should have to pay the same taxes as Central California residents who can’t afford to store a yacht in Mexico. “This is about doing the right thing,” Levine said. “This is about wealthy individuals taking advantage of a loophole that the rest of us can’t.”

If you have any questions regarding this article, other sales and use tax issues, or want to know if you qualify for an exemption contact Joseph Micallef at (916) 369-1200 or visit us on the web at www.ASTC.com.