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San Francisco Chronicle - Friday, June 11, 2004
Dems seek to tighten 'yacht tax loophole'
By Lynda Gledhill
Chronicle Sacramento Bureau
Sacramento -- In some boating circles it's called the "90-day yacht club," but it isn't a hangout for people who want to spend three months sailing. Rather, it's the nickname for a state tax code provision that lets boat buyers avoid paying sales tax on new purchases.
The transaction oftentimes involves a dash of high-seas drama: A boat buyer and seller sail five miles off the California coast into international waters where they seal their deal. The boat is then piloted to a dock outside the state, usually in Mexico, and left there for 90 days before it is brought back to California without the new owner having to pay sales tax.
One estimate puts the lost sales tax revenue at $55 million annually, and Democratic lawmakers have taken up a campaign to close what they call the "yacht tax loophole'' over the objections of Gov. Arnold Schwarzenegger, who wants to leave the tax code as it is.
"I find the loophole offensive," said Sen. Wes Chesbro, D-Arcata (Humboldt County), chairman of the joint budget committee, which voted Thursday to end the practice. "I don't get to drive the pickup I bought through any loophole."
Republican lawmakers and the Schwarzenegger administration are balking. They say forcing boat owners to pay sales tax after leaving their vessels outside the state for three months is actually a tax increase that will drive big purchasers out of California and hurt the economy.
The tax provision, which has been on the books for at least 40 years, applies not just to boats, but also recreational vehicles and planes when the items are kept out of state for 90 days. But yachts have received the most attention as an industry has sprung up in San Diego and Ensenada, Mexico, to accommodate the wait period.
In a budget year in which tax increases have been taken off the table by Schwarzenegger, Democrats see the yacht tax loophole as symbolic of the duplicity in Republicans' budget priorities.
They complain that the GOP is protecting those who can afford luxury vehicles such as yachts and planes when tuition is being increased on college students and health and human service programs are being cut.
The Board of Equalization estimates that closing the loophole could bring in $55 million -- enough money, Democrats argue, to offset higher tuition fees.
"This has to be juxtaposed with the other cuts we are being asked to make in this budget," said Assemblyman Darrell Steinberg, D-Sacramento.
Under the language adopted by the committee, owners would have to pay sales tax on any vehicle or vessel bought or used in the state. Owners could challenge the sales tax if they do not plan to use the item within California. The change was approved on a party-line vote but can still be the subject of budget negotiations.
Pat Garfield, president of Farallone Yacht Sales in Alameda, said on occasion a customer will request going through the process to take possession of a yacht offshore, something her business will accommodate.
"It's usually people buying higher-end boats," said Garfield, who added that they company refers customers to their attorneys or accountants when they inquire about the process.
But Garfield said she agrees with Republicans, who argued that changing the law would simply drive wealthy purchasers out of the state.
"You're talking about $2 (million) or $3 million dollar boats -- people are going to find a loophole," she said. "That will hurt us all." On a $1 million boat, the state average of an 8 percent sales tax would equal $80,000.
The Associated Sales Tax Consultants firm in Sacramento has an entire division dedicated to helping people legally avoid sales tax on their yacht and plane purchases.
"People turn to us rather than rely on salesmen," said Joe Micallef, president of the company. He says an average of 200 clients a year use their services.
Garfield's customers are referred to an attorney who has set up a Web site, www.offshoredelivery.net, "where you 'net' the savings." The attorney, Paul Trusso, did not return calls seeking comment on his practice.
Lawmakers who believe they will reap millions by closing the loophole will be sadly mistaken, said Skip Daum, lobbyist for the California Recreational Vehicle Dealers Association.
"If this budget appropriation goes through, people will not only buy elsewhere, they will get service and buy parts elsewhere," Daum said. "We're not collecting the sales tax, and then we also suffer the indignity of not having the vehicles worked on in California. We lose all the revenue."
Daum said recreational vehicles are a $2 billion industry in the state, and many of the more expensive vehicles are bought by retirees.
"The people who buy these things aren't dumb. They will go elsewhere," he said. Oregon does not charge any sales tax, he noted. "By requiring people to live out of state for six months, the state is driving them away.''
But Democrats insist it is time to put a stop to the practice and make people pay their fair share.
"This is not going to drive people to other states to buy their boats," said Sen. Dede Alpert, D-Coronado (San Diego County). "All this does is say the loophole of trying to keep it out of state for 90 days doesn't mean you don't owe sales or use tax on the boat."
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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.
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Audit Division