Eds. Note: This article originally appeared in the Waterway Guide as a feature for cruisers. http://www.waterwayguide.com/resources.php.   Updated to reflect Maryland’s cap – more here.

Dirk Schwenk, Esq., is a real estate and maritime attorney located in Annapolis, Maryland.  If you are interested in his non-tax practice, please see Baylaw, LLC. For issues specific to waterfront property, please see Waterfrontlaw.

In my last article, I wrote about Maryland, specifically Maryland’s boat tax, and while Maryland and the Chesapeake are fantastic cruising grounds, I do recognize that there are other states in the Union. Since many of you readers and many of my clients venture out in the world-visiting far flung locales from Maine to Florida, the Caribbean and far beyond-I am often asked about the tax implications of other jurisdictions. I take these inquiries to mean:

How can I legally avoid paying taxes on my boat?

There is of course no simple answer to the question. If there were, the tax authorities would close it. That’s what happened in the good old days when it was pretty safe to register a boat to Delaware, place it in Coast Guard documentation, and call it good.

After reading this, many folks will just want to buy their boat, pay the tax, and go cruising, and that’s great. Many boat taxes support boating related activities and needed facilities. Others purchasers, however, plan to leave the country, or keep the boat moving for a long time, and perhaps have a higher threshold for risk. Paying sales tax may not be desirable or necessary, and they may be willing to do what is necessary to organize their boating life in a way that is not subject to tax.

This article is the first step, and the easiest step in that direction.

Before we get into specifics, however, let’s go back to the beginning. What kind of tax are we talking about and who collects it? There is no federal vessel tax (and may the federal luxury tax stay good and dead!), so taxes are imposed at the state and local levels. Generally, there are three taxes of concern to boat owners: sales tax, use or registration tax, and personal property tax. Sales tax is imposed, if at all, at the time of purchase. Use tax is imposed by sales tax states on goods that were not taxed at the time of purchase. Personal property tax is an annual tax, payable every year, on property that is kept within a jurisdiction. This article will focus on sales tax.

It is hard to keep track of all of the state taxes, and nearly impossible to keep track of all of the county and municipal taxes. Not only are they all different, but they also all subject to change. BOAT/US provides a good general comparison of state taxes on its website www.boatus.com/gov/state_boat.asp but I understand that it is being updated now after several years without revision.

Below is a table that gives the bare-bones of the state taxes in the East Coast cruising grounds as they exist at the moment (revised 2016). It does not include many defenses, exceptions, exclusions, penalties, interest on late payments, and any number of other important details, nor is it legal advice, but it does provide a rough snapshot of the tax on the purchase of a boat.

Mr. Schwenk provides representation in purchase, sale and tax and also buyer’s broker (selling broker) services to select clients.  It is strongly recommended that you do not enter into a contract with dual agency (one broker as both listing and selling broker).  If you would like buyer’s representation – please email with the heading “Baylaw Buyer’s Broker” or use this link: dschwenk@baylawllc.com 

To return to the question-How can I legally avoid paying taxes on my boat-the middle column is the key. Sales tax is the tax on a purchase or transfer of a boat. If you want to avoid sales tax, the easiest option is to finalize your purchase in a jurisdiction that doesn’t tax the sale or caps the tax at a low number. This may mean driving to Delaware and choosing a boat at a Delaware dealer.

There are more sophisticated strategies as well, such as writing a contract that requires a Massachusetts boat to be purchased through a transaction that takes place New Hampshire. Or taking final possession and completing the purchase of a boat in international waters-this is where most of the big boats go. These latter items have their risks, however, particularly the fact that they make local tax authorities suspicious, even if the transaction is properly done. It does not help matters that some unscrupulous purchasers will fake an out-of-state or international transaction, and thereby paint legitimate purchases in a bad light.

Another very good option to avoid initial sales tax is to identify an escape clause in your local tax jurisdiction. In Maryland, for example, one need not pay sales tax on a boat that files a certification stating that it is going to leave the state within 30 days of purchase. Similarly, in Florida, a non-resident need not pay tax if the boat is taken to a different state shortly after purchase. If you anticipate taking your boat out of the country, using it in a state that does not have a sales tax, or actively cruising between lots of jurisdictions, avoidance of paying the initial sales tax can be a big cost savings. If nothing else, a boat can depreciate a good deal over the course of a few years.

I stated above that this article would address the first step in legally avoiding tax on a boat. Well, that was it. The first step is to legally avoid sales tax. Anyone that has been around boats, however, will recognize that this is just the beginning. Most sales tax states have two other closely related taxes, title tax and use tax. Use taxes were devised to take the profit out of going across state lines to purchase products, which is exactly the conduct we’re talking about here.

Use tax is usually imposed at the same rate as sales tax and is imposed when you bring the boat back into a state. Use tax must be of primary concern to anyone that has not paid sales tax. (If you have paid sales tax to a state however, you can rest easy, as sales tax is an offset to use tax). For Marylanders, use tax is the tax that a buyer will face on the boat purchased in Delaware and brought home on a trailer.

Future installments of this Waterway Law column will address use tax and personal property tax. These taxes are more complicated in their application than sales tax and take much more sophistication to legally avoid. Use tax is triggered by the use of the vessel and is subject to lots of argument about how much time triggers the tax as well as exceptions and defenses. Personal property tax is often collected by local counties or cities, and so it can be widely different even within a single state. There are no simple answers here.

In the meantime, if you are buying or have purchased a boat for a significant amount of money, you should seek specific legal advice about how to conduct your affairs. Avoiding sales tax is only the first step, but if done improperly, can bring far worse consequences such as penalties, interest, liens, etc. A good lawyer can provide advice about how to maintain your boat in a situation in which it does not owe tax, and if you follow that advice, you can save a significant amount of money.

Happy cruising!

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)

Editor’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.

By J. Dirk Schwenk

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.)

Dirk Schwenk’s note, December, 2009: On April 1, 2005, the Ocean City Dispatch picked up the story on the Kushell v. DNR decision. Boat owners should be aware that the statute was changed after this decision and no longer requires that a boat be purchased with the intent that it be used in Maryland waters.  If you receive an assessment in 2010, there remain significant other defenses to an assessment for vessel tax. 

High Court’s Boat Tax Ruling May Have Local Impact

Benjamin L. Mook, Editor

OCEAN CITY (05/01/2005) – A legal setback dealt to the Department of Natural Resources (DNR) this month over what amounted largely to comma placement could set a precedent for out-of-state boat owners who bring a vessel to the resort area.

The Maryland Court of Appeals ruled this month in the case of Charles J. Kushell IV v. Maryland State Department of Natural Resources. The case centered on the agencies efforts to collect over $14,000 in unpaid boat excise tax and penalties. Kushell bought The Genesis, a 58-foot Spindrift Motoryacht, in 1989, in California. He later moved to Maryland part-time, where he was targeted by the DNR’s boat tax enforcement division.

In Maryland, boats purchased in-state are subject to sales tax. According to the DNR, boats purchased outside the state, but used principally in Maryland are subject to a boat excise tax.

The DNR not only levies an excise tax of 5 percent of the fair market value, but also a 10 percent penalty and 18 percent back interest. The late penalty interest generally goes back three year, which is the statute of limitations.

This law was challenged by Kushell, who claimed he did not intend to use the boat principally in Maryland. Kushell and his attorney, Dirk Schwenk, argued that the wording of the legislation supported this belief.

The court’s opinion, written by Judge Irma S. Raker takes the argument further and is sprinkled with grammatical references highlighting the importance of comma placement in the vein of the bestselling book “Eats, Shoots and Leaves: The Zero Tolerance Approach to Punctuation,” by Lynne Truss.

“An actor playing Hamlet would hardly expect his audience to accept, ‘Or not to be: that is the question,’ as an inconsequential alteration,” Raker wrote in her opinion.

In the end, the Court of Appeals overturned the Anne Arundel Circuit Court, which favored the DNR.

Schwenk said this week the new ruling gives ammunition to boat owners who want to fight the DNR-imposed penalties. He said the ruling is especially important to the Ocean City and West Ocean City areas, which are home to private and commercial vessels that could be affected.

“The majority of the new cases I’ve been seeing have come from the Ocean City area,” Schwenk said. “DNR has targeted that area for enforcement.”

Locally, DNR has filed three boat tax liens in Worcester County Circuit Court since January. Two of the cases were filed this month alone, after the court’s decision.

The agency is seeking over $2,000 in unpaid tax from one boat owner and over $6,000 from another. It also levied a lien against a local commercial fishing company for over $20,000.

With the Maryland General Assembly now in its final stretch, the legislation will likely be addressed later this year. Schwenk said he hoped DNR would open the process up for comment when it addressed re-writing the law to meet the court order.

“Hopefully, this will be a cooperative process and everyone will be involved, and not just a rewrite of the same legislation that was overturned,” Schwenk said.

Dirk Schwenk’s note, December, 2009 — Since this article was written, there have been significant changes made to the Maryland boat tax statute.  The principal defense discussed in this article (purchasing a boat for use out of state) is no longer valid.  There are new exceptions to tax, however, including a legislative 90 day window in which to use Maryland waters.  If you receive a tax assessment in 2010, please call us immediately, as there is only 30 days in which to respond. 

_______________________________________

On March 28, 2005, the Annapolis Capital picked up the story on the Kushell v. DNR decision, putting the article on the front page.

Boat tax ruling could cost state $10 million annually
By ERIC HARTLEY, Staff Writer

It could be the most expensive grammar lesson ever.

A recent Maryland Court of Appeals ruling that hinged on the lack of a couple of commas in a state law – among other finer points of language – could cost the state $10 million a year in boat tax revenue, according to the lawyer who won the case.

And, the lawyer believes, the state could be forced to refund some tax money already collected.

State officials had no comment Friday or today on that possibility, but the head of a boating industry group agreed that many who have paid the tax might be looking for their money back

“We have several attorneys that have membership in Marine Trades, and I’m sure they’re thinking that,” said Susan Zellers, executive director of the Marine Trades Association Of Maryland.

Ruling that state law doesn’t allow the government to collect taxes on many boats bought out of state, the Court of Appeals on March 14 threw out a $14,304.54 tax bill sent to Charles J. Kushell IV, a Connecticut businessman who has kept a powerboat in Maryland part-time.

The effects of the ruling could be sweeping, said J. Dirk Schwenk, an Annapolis attorney who specializes in maritime law and represented Mr. Kushell.

“For every boat not purchased in Maryland, this case could have implications,” Mr. Schwenk said.

The state’s highest court held that the law only requires people to pay taxes on out-of-state boat purchases if they intended to use the boat mostly in Maryland when they bought it.

Judge Irma S. Raker wrote the court’s 20-page opinion, which reads at times like a grammar textbook. It includes such head-scratching phrases as “The issue is one of antecedents” and “In ordinary usage, modifiers refer to the nearest plausible antecedent.”

In layman’s terms, the ruling says the crucial phrase in the State Boat Act refers to what makes a boat taxable – “the possession within the state of a vessel purchased outside the state to be used principally in the state.”

The Department of Natural Resources argued it could levy the tax because Mr. Kushell was keeping the boat in Maryland more often than any other single place. Intent was irrelevant, DNR argued.

But in her ruling, Judge Raker wrote that DNR’s interpretation would only be right if the clause in the law read slightly differently – “the possession within the state of a vessel purchased outside the state, used principally in the state,” perhaps, or “the possession within the state of a vessel, purchased outside the state, to be used principally in the state.”

Adding commas or deleting the words “to be” are hardly minor changes, as Judge Raker noted in a footnote: “An actor playing Hamlet would hardly expect his audience to accept ‘Or not to be: that is the question’ as an inconsequential alteration.”

Mr. Kushell bought the boat in question, a 58-foot Spindrift Motoryacht called the Genesis, in 1989, when he was living in California. He kept it on the West Coast until 1996, when he started using it in Florida and the Bahamas.

Mr. Kushell started taking the boat to Maryland for the summer in 1997. He believed he didn’t have to pay tax on the boat in Maryland because if he kept it there less than six months a year, Maryland wouldn’t be considered the primary place he was using the boat.

At the end of 2001, Mr. Kushell was sent a bill for $14,304.54 in tax, penalties and interest. He paid it, but challenged the bill. An administrative law judge, the secretary of natural resources and a Circuit Court judge upheld the tax.

But after Mr. Kushell appealed to the Court of Special Appeals, the Court of Appeals decided on its own to take up the case and settle the issue. DNR officials had no comment on the case when called Friday and this morning.

Mr. Schwenk said the state collects about $25 million a year in boat taxes, about half from boats bought out of state. People who already have paid the tax could challenge the bill as Mr. Kushell did and – armed with the new court ruling – likely prevail, Mr. Schwenk said.

And the ruling could prevent the state from charging the tax in the future, though the General Assembly could change the law.

The case could also have another effect – drumming up business for Mr. Schwenk. Indeed, his public relations firm sent out a press release this week trumpeting the decision and its possible effects.

Mr. Schwenk said he hasn’t gotten any cases yet directly because of the ruling, but “I imagine we will.”